Business law [4 ed.] 9780730363514, 0730363511

Table of contents :
Cover
Title Page
Copyright Page
Contents
Preface
About the author
How to use this text
Abbreviations
Cases
Statutes
PART 1 Foundations
CHAPTER 1 Business and the law
Introduction
1.1 Law and the business person
1.2 The nature of law
1.3 Justice, ethics and politics
In conclusion
CHAPTER 2 The Australian legalsystem
Introduction
2.1 The Australian legal system
2.2 The Australian Constitution
2.3 The executive government
In conclusion
CHAPTER 3 Politicians and judges
Introduction
3.1 The legislature
3.2 Parliament in operation
3.3 The judiciary
3.4 The doctrine of precedent
3.5 Alternative dispute resolution
In conclusion
CHAPTER 4 How to find, understand and use the law
Introduction
4.1 Finding the law
4.2 Reading the law
4.3 Thinking like a lawyer
4.4 Writing like a lawyer
In conclusion
PART 2 Legal consequences
CHAPTER 5 Deliberately causing harm
Introduction
5.1 Causing harm
5.2 Deliberately causing harm to person or property
5.3 Deliberately causing financial harm
5.4 The consequences of causing harm
In conclusion
CHAPTER 6 Carelessly causing harm
Introduction
6.1 Carelessly causing harm to person or property
6.2 Carelessly causing financial harm
In conclusion
CHAPTER 7 Contract law: formation of the contract
Introduction
7.1 Contracts
7.2 Requirement 1: agreement
7.3 Requirement 2: intention
7.4 Requirement 3: consideration
7.5 Formalities
7.6 Capacity to contract
7.7 Legality
In conclusion
CHAPTER 8 Contract law: terms of the contract
Introduction
8.1 Express terms
8.2 Terms implied by the court
8.3 Statutory terms
8.4 Disclaimers
8.5 Unenforceable terms
8.6 Non-contractual representations and promises
In conclusion
CHAPTER 9 Contract law: enforcement of the contract
Introduction
9.1 Entitlement to enforce
9.2 Unenforceable contracts: lack of consent
9.3 Remedies
9.4 The end of the contract
In conclusion
CHAPTER 10 Contract law: working with agents
Introduction
10.1 Getting someone else to do it
10.2 Scope of authority
10.3 The agent’s duties
10.4 The agent’s entitlements
10.5 Liability of agent and principal
10.6 Concluding the agency
In conclusion
CHAPTER 11 Dealing with consumers
Introduction
11.1 Protecting consumers
11.2 Dealing with consumers
11.3 Consequences of contravention
11.4 Consumer privacy
In conclusion
CHAPTER 12 Dealing with competitors
Introduction
12.1 Protecting competition
12.2 Dealing with competitors
12.3 Prohibited conduct
12.4 Consequences of breach
In conclusion
CHAPTER 13 Protecting IP
Introduction
13.1 Intellectual property law
13.2 Copyright
13.3 Trade marks
13.4 Patents
13.5 Designs
13.6 Breach of confidence
In conclusion
PART 3 Managing a business
CHAPTER 14 Managing a business: start-up
Introduction
14.1 Preparation
14.2 Licences and registration
14.3 Renting or buying the premises
14.4 Opening for business
In conclusion
CHAPTER 15 Managing a business: business ownership
Introduction
15.1 The sole trader
15.2 The partnership
15.3 The trust
15.4 The franchise
In conclusion
CHAPTER 16 Managing a business: companies and corporate governance
Introduction
16.1 The company
16.2 Corporate finance
16.3 Corporate governance
In conclusion
CHAPTER 17 Managing a business: making payments and recovering debts
Introduction
17.1 Making payments
17.2 Recovering debts
In conclusion
CHAPTER 18 Managing a business: insurance and taxes
Introduction
18.1 Taking out insurance
18.2 Paying tax
In conclusion
CHAPTER 19 Managing a business: employing workers
Introduction
19.1 Employee or independent contractor?
19.2 Employer obligations
19.3 Workplace conditions
19.4 Termination of employment
In conclusion
CHAPTER 20 Managing a business: closing down
Introduction
20.1 Financial difficulty
20.2 Personal insolvency
20.3 Corporate insolvency
20.4 Closing the business
In conclusion
EULA

Citation preview

4TH EDITION

BUSINESS LAW NICKOLAS JAMES

Business Law 4TH EDITION

Nickolas James

Fourth edition published 2017 by John Wiley & Sons Australia, Ltd 42 McDougall Street, Milton Qld 4064 Typeset in 10/12pt Times LT Std © Nickolas James 2010, 2012, 2014, 2017 The moral rights of the author have been asserted. National Library of Australia Cataloguing-in-Publication entry Author: Title: ISBN: Subjects: Dewey Number:

James, Nickolas. Business law / Nickolas James. 9780730328315 (ebook) Commercial business law — Australia. 346.9407

Reproduction and Communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of 10% of the pages of this work or — where this book is divided into chapters — one chapter, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL). Reproduction and Communication for other purposes Except as permitted under the Act (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher. The authors and publisher would like to thank the copyright holders, organisations and individuals for their permission to reproduce copyright material in this book. Every effort has been made to trace the ownership of copyright material. Information that will enable the publisher to rectify any error or omission in subsequent editions will be welcome. In such cases, please contact the Permissions Section of John Wiley & Sons Australia, Ltd. Cover image: © wavebreakmedia / Shutterstock.com Typeset in India by Aptara 10 9 8 7 6 5 4 3 2 1

CONTENTS Preface ix About the author  xiii How to use this text  xiv Abbreviations xvii Cases xxi Statutes xxvii PART 1

Foundations 1 CHAPTER 1

Business and the law  2 Introduction 3 1.1 Law and the business person  4 Law and personal life  4 Law and business  4 Law in the media  5 Law in popular culture  5 1.2 The nature of law  6 Defining law  6 The purpose of law  9 The categories of law  13 The changing law  17 1.3 Justice, ethics and politics  18 Law and justice  18 Law and ethics  22 Law and politics  24 Too much law?  25 In conclusion  27 Quiz 28 Exercises 29 Key terms  30 Acknowledgements  31 CHAPTER 2

The Australian legal system 32 Introduction 33 2.1 The Australian legal system  34 Key characteristics of the system  34 The history of the system  43 2.2 The Australian Constitution  50 Structure of the Constitution  51 Constitutional conventions  52 Federal and State relations  52

Regulating the Territories  58 Changing the Constitution  59 2.3 The executive government  60 The Governor-General and the State Governors 61 The Executive Council and the Cabinet  63 Challenging the executive government  64 Delegated legislation  68 In conclusion  70 Quiz 72 Exercises 73 Key terms  74 Acknowledgements 76 CHAPTER 3

Politicians and judges  77 Introduction 79 3.1 The legislature  79 The nature of parliament  79 3.2 Parliament in operation  84 How laws are made  84 Resolving deadlocks  88 Types of legislation  90 3.3 The judiciary  92 The Australian court system  92 Court processes  102 3.4 The doctrine of precedent  114 Do judges make law?  114 Precedent 115 Common law and equity  118 3.5 Alternative dispute resolution  119 In conclusion  120 Quiz 122 Exercises 123 Key terms  124 Acknowledgements  127 CHAPTER 4

How to find, understand and use the law  128 Introduction 129 4.1 Finding the law  130 Legal research  130 Primary legal materials  131 Secondary legal materials  135

4.2 Reading the law  136 The relevant elements  136 Interpreting the law  143 4.3 Thinking like a lawyer  159 Inductive and deductive reasoning  160 How to solve a legal problem  160 4.4 Writing like a lawyer  164 Legal writing  164 Drafting a letter  165 Drafting a simple contract  167 In conclusion  170 Quiz 171 Exercises 172 Key terms  173 Acknowledgements  175 PART 2

Legal consequences  176 CHAPTER 5

Deliberately causing harm  177 Introduction 178 5.1 Causing harm  178 Criminal liability  179 Tortious liability  180 Contractual liability  180 Statutory liability  181 Vicarious liability   181 5.2 Deliberately causing harm to person or property 182 Criminal liability  182 The tort of trespass  185 The tort of nuisance  190 The tort of defamation  194 5.3 Deliberately causing financial harm  199 Criminal liability  199 The tort of deceit  203 The tort of passing off  204 The tort of intimidation  204 The tort of interference with contractual relations 205 5.4 The consequences of causing harm  206 Criminal consequences  206 Civil consequences  206 In conclusion  209 Quiz 211 Exercises 212 Key terms  213 Acknowledgements 215 iv  CONTENTS

CHAPTER 6

Carelessly causing harm 216 Introduction 217 6.1 Carelessly causing harm to person or property 217 The tort of negligence  218 6.2 Carelessly causing financial harm  244 Harm to the person or property of a third party 244 Defective products  245 Negligent misstatement  245 In conclusion  248 Quiz 250 Exercises 250 Key terms  252 Acknowledgements 253 CHAPTER 7

Contract law: formation of the contract 254 Introduction 255 7.1 Contracts  256 7.2 Requirement 1: agreement  257 Offer 257 Acceptance 262 Conditional agreements  266 7.3 Requirement 2: intention  266 Presumptions 267 Preliminary agreements  269 ‘Mere puff’  269 7.4 Requirement 3: consideration  270 Consideration need not be adequate  271 Consideration must be sufficient  272 Deeds 275 Practical benefits test  275 Promissory estoppel  276 7.5 Formalities  278 7.6 Capacity to contract  279 Minors 280 Persons lacking intellectual capacity  282 7.7 Legality  283 Illegality under common law  283 Statutory illegality  283 In conclusion  284 Quiz 287 Exercises 288 Key terms  289 Acknowledgements 290

CHAPTER 8

Contract law: terms of the contract 291 Introduction 292 8.1 Express terms  293 In writing and signed  293 Reasonable notice  295 8.2 Terms implied by the court  298 8.3 Statutory terms  300 Contracts for the sale of goods  301 Terms that protect the buyer  301 Ownership, delivery, payment and acceptance  306 8.4 Disclaimers  310 Do disclaimers work?  310 8.5 Unenforceable terms  312 Terms limiting the court’s jurisdiction  313 Terms imposing an unreasonable restraint of trade  313 8.6 Non-contractual representations and promises 314 Parol evidence rule  315 Breach of collateral contract  316 Misrepresentation 316 Breach of the ACL  317 Unenforceable promises  318 In conclusion  318 Quiz 320 Exercises 321 Key terms  322 Acknowledgements 323 CHAPTER 9

Contract law: enforcement of the contract  324 Introduction 325 9.1 Entitlement to enforce  325 Privity of contract  326 Time limits  327 9.2 Unenforceable contracts: lack of consent 328 Mistake 329 Duress 331 Undue influence  333 Unconscionability 335 9.3 Remedies  338 Rescission 338 Damages 342 Equitable remedies  344 Statutory remedies  346

9.4 The end of the contract  347 Agreement 347 Frustration 347 In conclusion  349 Quiz 351 Exercises 352 Key terms  353 Acknowledgements 355 CHAPTER 10

Contract law: working with agents 356 Introduction 357 10.1 Getting someone else to do it  358 10.2 Scope of authority  361 Express actual authority  361 Implied actual authority  362 Apparent authority  363 Agency of necessity  366 Authority by ratification  366 10.3 The agent’s duties  367 Duty to follow instructions  368 Duty to communicate information  368 Duty to act personally  369 Duty of care  369 Duty to act in the best interests of the principal 370 Duty of confidentiality  371 Duty to account  371 10.4 The agent’s entitlements  372 Remuneration 372 Indemnity 373 Lien 373 10.5 Liability of agent and principal  373 Personal liability of agent  374 Vicarious liability of principal  375 10.6 Concluding the agency  376 Termination by the parties  376 Automatic termination  376 In conclusion  377 Quiz 379 Exercises 381 Key terms  382 Acknowledgements 384 CHAPTER 11

Dealing with consumers  385 Introduction 386 11.1 Protecting consumers  386 CONTENTS  v

11.2 Dealing with consumers  389 Consumer protection regulation  389 General protections  392 Specific protections  404 11.3 Consequences of contravention  417 Offences and penalties  417 Defences 418 Enforcement 418 General remedies  418 Consumer guarantees  419 Codes of conduct  421 Industry ombudsman  421 11.4 Consumer privacy  422 What is information privacy?  422 Information privacy protection  423 In conclusion  430 Quiz 431 Exercises 432 Key terms  433 Acknowledgements 435 CHAPTER 12

Dealing with competitors  436 Introduction 437 12.1 Protecting competition  437 12.2 Dealing with competitors  438 Competition regulation  438 Key concepts  440 12.3 Prohibited conduct  443 Cartel conduct  443 Other prohibitions  447 12.4 Consequences of breach  456 Remedies 456 Penalties 456 Authorisations and notifications  457 In conclusion  459 Quiz 461 Exercises 462 Key terms  463 Acknowledgements 464 CHAPTER 13

Protecting IP  465 Introduction 467 13.1 Intellectual property law  467 Rationale for protection  468 Commercialising IP  468 13.2 Copyright  469 What is copyright?  469 Requirements for copyright protection  470 vi  CONTENTS

Extent of copyright protection  474 Infringement 479 13.3 Trade marks  486 What is a trade mark?  486 Requirements for trade mark protection  487 Extent of trade mark protection  491 Infringement 492 Unregistered trade marks  494 13.4 Patents  496 What is a patent?  496 Requirements for patent protection  497 Extent of patent protection  501 Infringement 503 13.5 Designs  503 What is a design?  504 Requirements for design protection  504 Extent of design protection  505 Infringement 506 13.6 Breach of confidence  507 In conclusion  508 Quiz 511 Exercises 512 Key terms  513 Acknowledgements 514 PART 3

Managing a business  515 CHAPTER 14

Managing a business: start-up 516 Introduction 517 14.1 Preparation  518 Do some research  518 Protect the IP  519 Prepare a plan  519 Select a business structure  519 Raise some money  521 Take out insurance  522 14.2 Licences and registration  523 Registering the business name  523 Complying with licensing requirements  524 14.3 Renting or buying the premises  525 Property concepts  525 Buying and owning real property  528 Leases 534 14.4 Opening for business  539 Shop trading hours  539 Setting up a website  540

In conclusion  542 Quiz 544 Exercises 545 Key terms  545 Acknowledgements 549 CHAPTER 15

Managing a business: business ownership 550 Introduction 551 15.1 The sole trader  551 15.2 The partnership  552 Forming a partnership  553 Authority of partners  559 Liability of partners  563 Rights and duties of partners  565 Partnership property  569 15.3 The trust  571 Types of trust  572 Trustees and beneficiaries  573 15.4 The franchise  575 What is a franchise?  575 The Franchising Code of Conduct  578 In conclusion  582 Quiz 583 Exercises 584 Key terms  585 Acknowledgements 587 CHAPTER 16

Managing a business: companies and corporate governance 588 Introduction 589 16.1 The company  590 Key features of the company  591 Types of companies  592 How to form a company  594 16.2 Corporate finance  595 Borrowing by companies  595 Share capital  596 Issuing shares  597 Disclosure documents  597 Equity capital maintenance  598 Listing the company  599 16.3 Corporate governance  600 Company constitution  601 Company directors  602

Board meetings  604 Corporate contracting  604 Directors’ duties  606 Shareholders 611 In conclusion  616 Quiz 617 Exercises 619 Key terms  620 Acknowledgements 622 CHAPTER 17

Managing a business: making payments and recovering debts 623 Introduction 624 17.1 Making payments  624 Cash payments  625 Cheques and bills of exchange  626 Credit and debit cards  630 Electronic funds transfer  631 17.2 Recovering debts  634 The debt recovery process  635 Secured debts  638 Consumer credit  644 In conclusion  650 Quiz 652 Exercises 653 Key terms  654 Acknowledgements 656 CHAPTER 18

Managing a business: insurance and taxes  657 Introduction 658 18.1 Taking out insurance  658 Types of insurance  659 Insurance regulation  660 Insurance contracts  661 Dispute resolution  667 18.2 Paying tax  668 Forms of tax  669 Tax administration  673 Tax implications of different business structures 674 In conclusion  676 Quiz 677 Exercises 678 Key terms  678 Acknowledgements  679 CONTENTS  vii

CHAPTER 19

CHAPTER 20

Managing a business: employing workers  680

Managing a business: closing down 707

Introduction 681 19.1 Employee or independent contractor?  684 19.2 Employer obligations  687 Common law duties  687 Statutory entitlements and obligations  688 Fair Work Ombudsman  691 Tax and superannuation  691 19.3 Workplace conditions  692 Workplace health and safety  692 Workers compensation  695 Discrimination, harassment and equal opportunity 696 19.4 Termination of employment  700 Unfair dismissal  701 Unlawful termination  702 In conclusion  703 Quiz 704 Exercises 705 Key terms  705 Acknowledgements 706

Introduction 708 20.1 Financial difficulty  708 Receivership 709 20.2 Personal insolvency  710 Bankruptcy  710 Alternatives to bankruptcy  719 20.3 Corporate insolvency  722 Liquidation 722 Administration 729 20.4 Closing the business  731 Dissolving the business structure  731 Selling the business  735 In conclusion  737 Quiz 739 Exercises 740 Key terms  741 Acknowledgements 743

viii  CONTENTS

PREFACE When I began teaching business law at the University of Queensland in 1996, only a handful of ­Australian business law textbooks were available. These textbooks were often well written, comprehensive and scholarly, but none of them were well suited for the type of student who studies business law. They were usually stereotypical law textbooks: weighty bricks of dense monochromatic text, enormously detailed, and written in a formal language with a small font and no diagrams. The abilities and requirements of business law students were apparently assumed to be no different to those of students enrolled in a law degree. Of course, this was not, and is not, the case. Business law students have a number of typical characteristics which cannot be ignored by a business law teacher. •• For the majority of business law students, the business law course is their first exposure to the law and the first time they have been obliged to think deeply about the legal system. They, therefore, need a clear and accessible introduction to this entirely new discipline. •• Legal doctrine and legal reasoning are very different to the types of knowledge and skills business law students are expected to acquire in their other courses. Accounting, economics, business management, science, engineering and other non-law students are all learning how to think in a particular way in their other courses, and learning how to think like a lawyer is not something that comes to most of them naturally or easily. An ability to do so must be taught to them explicitly and not be viewed as something that business law students learn how to do behind the scenes or along the way. •• An increasing proportion of business law students are from overseas and/or non–English speaking backgrounds. A business law textbook must be written in a clear and comprehensible writing style, and cannot assume that Australian culture is one with which the students are intimately familiar. •• For many business law students, the business law course is not only the first but also the only time during their studies that they will be obliged to engage with the law. Their time studying business law is their only opportunity to acquire useful legal knowledge and skills. In addition to learning about basic legal doctrine, they need to acquire practical legal knowledge and develop practical skills that will serve them well in their other courses and in their future careers. Since 1996, every couple of years has seen the publication of one or more new business law textbooks, each of which has to a greater or lesser degree sought to address one or more of these issues. Today a course coordinator has more than 15 Australian business law textbooks to choose from. In 2010, I nevertheless decided to write my own because it was still the case that none of the business law texts available was entirely satisfactory. What is it about this resource that distinguishes it from the many other business law textbooks presently available? This textbook includes the following distinguishing features.

1. The range of topics We business law teachers have only 12, 13 or 14 weeks in which to teach our students everything they need to know about the law of business. Most business law textbooks assume that the best way to do this is to spend most of the semester teaching our students about the Australian legal system and the law of contract, and the rest of that time teaching about a small selection from a long list of other topics such as tort law, sale of goods, consumer protection law, competition law, business structures, property law, insurance law, and so on. The textbooks are organised accordingly: a set of core chapters about the Australian legal system and contract law, and a set of optional chapters on each of the other business law topics, giving the business law teacher the ability to choose which topics will be included and which will be ignored. A business law student, however, needs to know something about all of these topics, and reference to all of them can and should be included in a business law course. By identifying and omitting the sort of PREFACE  ix

legal doctrine that is really only of interest and relevance to students studying to become lawyers, it is possible to provide business law students with the breadth of coverage that they will need in order to be informed business practitioners. This resource is comprised of 20 chapters, and a business law teacher may elect to omit some of these chapters from their business law course. However, the level of detail in these chapters is such that it is in fact possible for all 20 chapters to be covered in a 13-week course. The following is one way in which this might be done. CHAPTER

WEEK

Business and the law The Australian legal system Politicians and judges How to find, understand and use the law

 1  2  2  3

Deliberately causing harm Carelessly causing harm Contract law: formation of the contract Contract law: terms of the contract Contract law: enforcement of the contract Contract law: working with agents Dealing with consumers Dealing with competitors Protecting IP

 4  4  5  5  6  6  7  7  8

Managing Managing Managing Managing Managing Managing Managing

 9 10 10 11 11 12 13

a a a a a a a

business: business: business: business: business: business: business:

start-up business ownership companies and corporate governance making payments and recovering debts insurance and taxes employing workers closing down

2. The organisation of topics A business law textbook is usually divided into chapters corresponding to the traditional doctrinal legal categories: contract law, tort law, agency law, company law and so on. It seems to me that these categories are of little or no relevance to business law students. Instead, they need to know the laws relevant to particular decisions, problems or situations. What is the relevant law if a person wants to start a business, or if they have caused someone harm, or if they have failed to keep a promise, or if their business is in financial difficulty? The chapters in this resource are therefore organised according to practical rather than doctrinal topics. The text is divided into three parts. The first part — titled ‘Foundations’ — contains four chapters intended to provide students with the fundamental knowledge and skills needs to understand business law in Australia: •• Chapter 1: Business and the law •• Chapter 2: The Australian legal system •• Chapter 3: Politicians and judges •• Chapter 4: How to find, understand and use the law. The second part — titled ‘Legal consequences’ — contains nine chapters exploring in detail the legal rules regulating common business practices, activities and problems: •• Chapter 5: Deliberately causing harm •• Chapter 6: Carelessly causing harm •• Chapter 7: Contract law: formation of the contract x  PREFACE

•• •• •• •• •• ••

Chapter 8: Contract law: terms of the contract Chapter 9: Contract law: enforcement of the contract Chapter 10: Contract law: working with agents Chapter 11: Dealing with consumers Chapter 12: Dealing with competitors Chapter 13: Protecting IP. The third and final part is titled ‘Managing a business’. It explores the practical legal consequences of particular aspects of owning and operating a business: •• Chapter 14: Managing a business: start-up •• Chapter 15: Managing a business: business ownership •• Chapter 16: Managing a business: companies and corporate governance •• Chapter 17: Managing a business: making payments and recovering debts •• Chapter 18: Managing a business: insurance and taxes •• Chapter 19: Managing a business: employing workers •• Chapter 20: Managing a business: closing down.

3. The inclusion of a chapter on legal skills The objective of a business law course is not simply to give students knowledge of Australian business law. Rather, the objective is to ensure that students acquire enough knowledge of the law of business that they can (1) recognise and solve simple legal problems, (2) recognise and organise their affairs in order to avoid more complex or serious legal problems, and (3) communicate effectively with legal practitioners about business law issues. Further, business law students need to not only acquire knowledge but also to develop certain skills: research skills, reading and interpretation skills, thinking skills and writing skills. Business students need to know more than what the law is, they need to know where to find it, how to read it and how to use it. This text includes an entire chapter — chapter 4 — devoted to the description and development of these important legal skills.

4. The writing style Many law textbooks are written in an extremely formal and technical style, a style with which law students are likely to be familiar but which business law students frequently find difficult if not impenetrable. This text is deliberately written in a style that is clear and accessible, proving that it is possible to explain doctrine and procedures accurately and in adequate detail without sacrificing readability.

Changes to the fourth edition I am satisfied that with the first edition we created a business law textbook that was engaging, informative, practical and ideally suited to the needs of the modern business law student. The second edition improved upon the first edition by updating the text to reflect subsequent changes in the law and by including additional features such as Caution! boxes and checklists to improve student comprehension of difficult concepts. The third edition of the text incorporated: •• more detail regarding the categories of law and the relationship between law and justice in chapter 1 •• more detail about the Australian Constitution, constitutional conventions, cross-vesting and criminal procedure •• a completely revised explanation of statutory interpretation •• new coverage of the ‘practical benefits test’ •• updated and expanded coverage of the Australian Consumer Law and new coverage of ‘cartel conduct’ •• incorporation of changes made by the Intellectual Property Laws (Raising the Bar) Act 2012 (Cth) and the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) •• updated coverage of franchising and trading hours PREFACE  xi

•• new coverage of personal property securities and the new ePayments Code •• revised coverage of modern awards, workplace health and safety, and workplace gender equality •• updated and expanded coverage of consumer credit, bankruptcy and liquidation •• a substantially expanded glossary of terms. This latest edition of the text includes a wider range of case summaries from all Australian jurisdictions, and updated online resources, hyperlinks, media items and case studies. Each chapter now begins with a specific chapter problem. The most significant change, however, is the expansion in the number of chapters. The Australian legal system has been expanded from one to two chapters; tort law has expanded from one to two chapters; and contract law has expanded from two to four chapters. Consumer law, competition law, business structures and corporate governance all now have their own chapters. During the development period for this resource, many colleagues provided guidance and input over the editions. I appreciate the feedback and ideas provided by each and thank Reeta Verma and Keith Kendall (La Trobe University), Sophie Riley and Jason Harris (University of Technology, Sydney), Fred Rollo (University of Sydney), Keturah Whitford (Australian National University), Michael Spisto and David Parker (Victoria University) and Kristy Richardson (CQ University). I am especially grateful to Charlotte Hayden, Robert Cooper, Alana Peters, Colin Fong, Kate Curnow, Suppiah Murugesan and Leanne Gordon, all of whom helped with research and the preparation of support materials for the various editions. I would also like to thank Lori Dyer (Publisher) at Wiley for steering this fourth edition to completion and publication, and Kylie Challenor (Managing Content Editor), Jessica Carr (Project Editor), Tara Seeto (Publishing Administrator), Renee Bryon (Copyright and Image Research Supervisor), Delia Sala (Graphic Designer) and Tony Dwyer (Production Controller) at Wiley for their invaluable support. Finally, I would like to thank my wife Rochelle for her patience, support and inspiration and for keeping me sane and centred. Thanks Ash! Nickolas James August 2016

xii  PREFACE

ABOUT THE AUTHOR Professor Nick James is the Executive Dean of the Faculty of Law at Bond University. He is a former commercial lawyer, and has been practising as an academic since 1996. His areas of teaching expertise include business and commercial law, ‘law in society’ and legal theory, company law, the law of succession and property law. He has won numerous awards for his teaching including a National Citation for Outstanding Contribution to Student Learning, and he is the author of three texts: Business Law, Critical Legal Thinking and The New Lawyer (with Rachael Field). He has written numerous journal articles, book chapters and conference papers in the areas of legal education, critical thinking and critical legal theory. Professor James is the Director of the Centre for Professional Legal Education, Editor-inChief of the Legal Education Review and a member of the Executive Committee of the Australasian Law Teachers Association (ALTA).

ABOUT THE AUTHOR xiii

HOW TO USE THIS TEXT This resource has been designed with you — the student — in mind. It is written in a clear, easy-to-read style with an emphasis on making law relevant to you. The design is our attempt to provide you with a resource that both communicates the subject matter and facilitates learning. We have tried to accomplish these goals through the following elements.

Johnny and Ash Chapters open and close with these fictitious characters and scenarios that contextualise law in everyday situations and introduce and resolve the legal topics addressed in each chapter.

Activity appears throughout the chapters and focuses on developing research, reflection and application skills. Revision questions provide an opportunity to revise key concepts before proceeding on in the chapter. These questions appear within and at the end of each chapter.

Checklist appears in some chapters to reiterate key legal concepts and processes.

Caution! draws your attention to important points of law that potentially can be misinterpreted or confusing.

xiv  HOW TO USE THIS TEXT

Law in context highlights a range of interpretations and perspectives of law in popular culture, media, ethics, politics and philosophy. Appears throughout all chapters.

Key terms are bolded where first mentioned and defined at the end of each chapter. Cases are relevant, interesting and provide a summary of the legal issues.

In conclusion provides an overview of all the key law concepts and principles in the chapter.

Johnny and Ash provides a resolution to the scenario introduced at the beginning of the chapter.

HOW TO USE THIS TEXT  xv

Quiz presents up to 20 multiple-choice questions in each chapter with the correct answer provided at the end of the chapter.

Exercises will help you learn the key concepts and require you to complete different tasks.

xvi  HOW TO USE THIS TEXT

ABBREVIATIONS Law report abbreviations The following list of law report series includes only those series referred to in the case citations throughout this textbook. There are many other law report series not included in this list. Abbreviation

Series title

Jurisdiction

Description

AC

Law Reports: Appeal Cases

UK

Decisions of the House of Lords 1891–present

ACTSC

Australian Capital Territory Supreme Court

ACT

Decisions of the ACT Supreme Court, published online

ACTLR

Australian Capital Territory Law Reports

ACT

Select decisions of the Court of Appeal and the Supreme Court of the ACT 2008–present

ACTR

Australian Capital Territory Reports

ACT

Decisions of the Supreme Court of the ACT 1973–present

AIPC

Australian Industrial and Intellectual Property Cases

Australia

Select intellectual property decisions of Australian courts 1983–present

ALJR

Australian Law Journal Reports

Australia

Select decisions of the High Court of Australia 1958–present

All ER

All England Law Reports

UK

Select decisions of the UK House of Lords, Court of Appeal and High Court 1558–present

ALR

Australian Law Reports

Australia

Select decisions of the High Court, Federal Court of Australia and the State and Territory Supreme Courts 1973–present

ANZ Insurance Cas

Australian and New Zealand Insurance Cases

Australia, NZ

Select insurance decisions of Australian and NZ courts 1979–present

App Cas

Law Reports: Appeal Cases

UK

Decisions of the House of Lords 1875–1890

ASAL

Australian Sales and Fair Trading Law Reports

Australia

Select sales and fair trading law decisions of Australian courts 1998–present

ASC

Australian Consumer Sales and Credit Law Cases

Australia

Select consumer sales and credit law decisions of Australian courts 1978–present

ATC

Australian Tax Cases

Australia

Select tax decisions of Australian Courts and Administrative Appeals Tribunals

ATPR

Australian Trade Practices Reports

Australia

Select trade practices decisions of the High Court, Federal Court of Australia and the State and Territory Supreme Courts 1974–present

Aust Torts Reports

Australian Torts Reports

Australia

Select torts decisions of Australian courts 1984–present (continued)

ABBREVIATIONS  xvii

(continued) Abbreviation

Series title

Jurisdiction

Description

BPR

Butterworths Property Reports

Australia

Select property decisions of Australian courts 1950–present

Ch

Law Reports: Chancery Division

UK

Decisions of the UK High Court — Chancery Division 1891–present

Ch D

Law Reports: Chancery Division

UK

Decisions of the UK High Court — Chancery Division 1875–1890

CLR

Commonwealth Law Reports

Australia

Authorised reports of decisions of the High Court of Australia 1903–present

CPR (2d)

Canadian Patent Reporter — Second series

Canada

Select patent decisions of Canadian courts 1971–1984

E&B

Ellis & Blackburn’s Queen’s bench Reports

UK

Decisions of the UK High Court — Queen’s Bench Division 1852–1858

EGLR

Estates Gazette Law Reports

UK

Select property law decisions of English and Welsh courts 1985–present

EngR

English Reports Online

UK

Select decisions of English courts published online

EOC

Equal Opportunity Cases

Australia

Select equal opportunity decisions of Australian courts 1984–present

ER

English Reports

UK

Select decisions of English courts 1220–1867

EWCA

England and Wales Court of Appeal

UK

Decisions of the UK Court of Appeal, published online

EWHC

England and Wales High Court

UK

Decisions of the UK High Court, published online

FCA

Federal Court of Australia

Australia

Decisions of the Federal Court of Australia, published online

FCAFC

Full Court of the Federal Court of Australia

Australia

Decisions of the Full Court of the Federal Court of Australia, published online

FCR

Federal Court Reports

Australia

Decisions of the Federal Court of Australia 1984–present

FLR

Federal Law Reports

Australia

Decisions of the Federal Courts other than the High Court 1956–present

HCA

High Court of Australia

Australia

Decisions of the High Court of Australia, published online

IPR

Intellectual Property Reports

Australia

Select intellectual property decisions of Australian Courts 1982–present

IR

Irish Reports

UK

Decisions of the superior courts of Ireland 1878–present

KB

Law Reports: King’s Bench

UK

Decisions of the UK High Court — King’s Bench Division 1901–1952

LGERA

Local Government and Environment Reports of Australia

Australia

Select local government and environmental law decisions of Australian courts 1988–present

xviii  ABBREVIATIONS

Abbreviation

Series title

Jurisdiction

Description

LJ Ex

Law Journal Reports: Exchequer

UK

Decisions of the UK High Court — Exchequer Division 1832–1846

LR CP

Law Reports: Common Pleas

UK

Decisions of the UK High Court — Common Pleas Division 1865–1875

LR Ex

Law Reports: Exchequer

UK

Decisions of the UK High Court — Exchequer Division 1865–1875

LR (NSW)

New South Wales Law Reports

NSW

Decisions of the NSW Supreme Court 1880–1900

LT

Law Times Reports

UK

Select decisions of the superior courts of UK 1859–1947

NSWADT

New South Wales Administrative Decisions Tribunal

NSW

Decisions of the NSW Administrative Decisions Tribunal, published online

NSWCA

New South Wales Court of Appeal

NSW

Decisions of the NSW Court of Appeal, published online

NSW Conv R

New South Wales Conveyancing Law Cases

NSW

Select conveyancing decisions of NSW courts 1980–present

NSWLR

New South Wales Law Reports

NSW

Decisions of the NSW Supreme Court 1971–present

NSWR

New South Wales Reports

NSW

Decisions of the NSW Supreme Court 1960–1970

NSWSC

New South Wales Supreme Court

NSW

Decisions of the NSW Supreme Court, published online

NZLR

New Zealand Law Reports

NZ

Decisions of the NZ Court of Appeal and High Court 1883–present

QB

Law Reports: Queen’s Bench

UK

Decisions of the UK High Court — Queens’s Bench Division 1891–present

QBD

Law Reports, Queen’s Bench Division

UK

Decisions of the UK High Court — Queens’s Bench Division 1875–1890

QCA

Queensland Court of Appeal

Qld

Decisions of the Qld Court of Appeal, published online

Qd R

Queensland Reports

Qld

Decisions of the Qld Supreme Court 1992–present

QSC

Queensland Supreme Court

Qld

Decisions of the Qld Supreme Court, published online

RPC

Reports of Patent, Design and Trade Mark Cases

UK

Select intellectual property decisions of UK Courts 1884–present

SASC

South Australia Supreme Court

SA

Decisions of the SA Supreme Court, published online

SASR

South Australian State Reports

SA

Decisions of the SA Supreme Court 1921–present

SR (NSW)

New South Wales State Reports

NSW

Decisions of the NSW Supreme Court 1901–1970

TasLR

Tasmanian Law Reports

Tas

Decisions of the Tas Supreme Court

TASSC

Tasmania Supreme Court

Tas

Decisions of the Tasmania Supreme Court, published online

TLR

Times Law Reports

UK

Select decisions of the superior courts of UK 1884–1952

UKHL

House of Lords

UK

Decisions of the House of Lords, published online (continued)

ABBREVIATIONS  xix

(continued) Abbreviation

Series title

Jurisdiction

Description

UKPC

Privy Council

UK

Decisions of the Privy Council, published online

VCAT

Victorian Civil and Administrative Tribunal

Vic

Decisions of the Victorian Civil and Administrative Tribunal 1998–present

VLR

Victorian Law Reports

Vic

Decisions of the Vic Supreme Court prior to 1885–1956

VLR[E]

Victorian Law Reports (Equity)

Vic

Decisions of the Equity Division of the Vic Supreme Court 1875–1884

VR

Victorian Reports

Vic

Decisions of the Vic Supreme Court 1957–present

VSCA

Victoria Supreme Court Appeals

Vic

Appeal decisions of the Victoria Supreme Court, published online

WAR

Western Australia Reports

WA

Decisions of the WA Supreme Court 1960–present

WASC

Western Australia Supreme Court

WA

Decisions of the WA Supreme Court, published online

WLR

Weekly Law Reports

UK

Decisions of UK superior courts 1953–present

WN

Weekly Notes

UK

Decisions of UK superior courts 1900–1952

Other abbreviations AAT

Administrative Appeals Tribunal

ABS

Australian Bureau of Statistics

ACCC

Australian Competition and Consumer Commission

ACL

Australian Consumer Law

AGIS

Attorney-General’s Information Service

AIRC

Australian Industrial Relations Commission

AMCOS

Australasian Mechanical Copyright Owners Society

APRA

Australian Performing Rights Association

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ASX

Australian Securities Exchange

auDA

Australian Domain Name Administrator

AUSTRAC

Australian Transaction Reports and Analysis Centre

BCA

Business Council of Australia

CAL

Copyright Agency Ltd

CCA

Competition and Consumer Act

EOWA

Equal Opportunity for Women in the Workplace Agency

ITSA

Insolvency and Trustee Service Australia

PPCA

Phonographic Performance Company of Australia

TPA

Trade Practices Act

TPC

Trade Practices Commission (now the ACCC)

WIPO

World Intellectual Property Organization

x x  ABBREVIATIONS

CASES A & M Records Inc v Napster Inc 239 F 3d 1004 (9th Cir, 2001)  Chapter 13 ACCC v Alice Car and Truck Rentals Pty Ltd (1997) ATPR 41–582  Chapter 12 ACCC v Cadbury Schweppes Pty Ltd (2004) ATPR 42–001  Chapter 11 ACCC v Chaste Corp Pty Ltd (in liq)[2005] FCA 1212  Chapter 12 ACCC v Dermalogica Pty Ltd (2005) 215 ALR 482  Chapter 12 ACCC v Jetplace Pty Ltd [2010] FCA 759  Chapter 11 ACCC v Powerballwin.com.au Pty Ltd [2010] FCA 378  Chapter 11 ACCC v Telstra Corporation Limited (2010) 188 FCR 238  Chapter 12 ACCC v Visy Industries Holdings Pty Ltd (No 3) (2007) 244 ALR 673  Chapter 12 Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250  Chapter 7 Adler v George [1964] 2 QB 7  Chapter 4 Agar v Hyde (2000) 201 CLR 552  Chapter 6 Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 112 ALR 353  Chapter 18 Allcard v Skinner (1887) 36 Ch D 145  Chapter 9 Anderson Ltd v Daniel [1924] 1 KB 138  Chapter 7 Ansett Transport Industries (Operations) Pty Ltd v Wardley (1984) EOC 92 003  Chapter 19 Anstis v FCT [2010] HCA 40  Chapter 18 ASIC v Adler (2002) 168 FLR 253  p. 622 ASIC v Hellicar [2012] HCA 17  Chapter 16 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322  Chapter 9 Australian Associated Motor Insurers Ltd v Ellis & Ellis (1990) 54 SASR 61  Chapter 18 Australian Securities and Investments Commission v Healey [2011] FCA 717  Chapter 16 Australian Securities and Investments Commission v Accounts Control Management Services Pty Ltd [2012] FCA 1164  Chapter 17 ACCC v Telstra Corporation Limited (2007) 244 ALR 470  Chapter 11

Australian Provincial Assurance Co Ltd v Coroneo (1938) 30 SR (NSW) 700  Chapter 14 Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479  Chapter 6 Australian Telecommunications Commission v Hart (1982) 65 FLR 41  Chapter 19 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34  Chapter 16 Balfour v Balfour [1919] 2 KB 571  Chapter 7 Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379  Chapter 8 Barton v Armstrong [1973] 2 NSWLR 598  Chapter 9 Battye v Shammall (2005) 91 SASR 315  Chapter 15 Beecham Group plc v Colgate-Palmolive Co (2001) 58 IPR 161  Chapter 13 Bettini v Gye [1876] 1 QBD 183  Chapter 9 Bevan v Webb [1901] 2 Ch 59  Chapter 15 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384  Chapter 15 Bisset v Wilkinson [1927] AC 177  Chapter 5 Bjelke-Peterson v Warburton [1987] 2 Qd R 465  Chapter 5 Blomley v Ryan (1956) 99 CLR 362  Chapter 9 Bojczuk v Gregorcewicz [1961] SASR 128  Chapter 7 Bolton Partners v Lambert (1889) 41 Ch D 295  Chapter 10 Bolton v Stone [1951] AC 850  Chapter 6 Bourhill v Young [1943] AC 92  Chapter 6 BP plc v Woolworths Ltd (2004) 212 ALR 79  Chapter 13 Brace v Calder [1895] 2 QB 253  Chapter 9 Bree v Lupevo Pty Ltd [2003] EOC 93–267  Chapter 19 Bridgewater v Leahy (1998) 194 CLR 457  Chapter 9 Buckenara v Hawthorn Football Club Ltd [1988] VR 39  Chapter 9 Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558  Chapter 8 Burger King Corporation v Hungry Jack’s Pty Limited [2001] NSWCA 187  Chapter 15 CASES  xxi

Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321  Chapter 15 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256  Chapter 7 Causer v Browne [1952] VLR 1  Chapter 8 Cehave NV v Bremer Handelsgesellschaft mbH; The Hansa Nord [1976] QB 44  Chapter 9 Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130  Chapter 7 Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 509  Chapters 5, 10 Chan v Zacharia (1984) 154 CLR 178  Chapter 15 Chapman v Hearse (1961) 106 CLR 112  Chapters 6, 15 Chaudhry v Prabhakar [1989] 1 WLR 29  Chapter 10 Clarendon Homes (Aust) Pty Ltd v Henley Arch Pty Ltd (1999) 46 IPR 309  Chapter 13 Coca-Cola Co v All-Fect Distributors Ltd (1999) 96 FCR 107  Chapter 13 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337  Chapters 8, 9 Cody v Live Board Holdings Limited [2014] NSWSC 78  Chapter 16 Commercial Bank of Australia v Amadio (1983) 151 CLR 447  Chapter 9 Commissioner of Taxation v Stone (2005) 215 ALR 61  Chapter 18 Commonwealth v Tasmania (1983) 158 CLR 1  Chapter 2 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594  Chapter 11 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541  Chapter 15 Cook v ACT Racing Club Incorporated and the Australian Jockey Club Inc [2001] ACTSC 106  Chapter 6 Cook v Cook (1986) 162 CLR 376  Chapter 6 Corpe v Overton (1833) 10 Bing 252; 131 ER 901  Chapter 7 Cox v Coulson [1916] 2 KB 177  Chapter 15 Crouch and Lyndon (a Firm) v IPG Finance Australia Pty Ltd [2013] QCA 220  Chapter 15 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949  Chapter 17 Cuisenaire v Reed [1963] VR 719  Chapter 13 x xii  CASES

Cundy & Lindsay (1877–78) LR 3 App Cas 459  Chapter 9 Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805  Chapter 8 Cutter v Powell (1795) 6 Term R 320; 101 ER 573  Chapter 9 David Jones Ltd v Willis (1934) 52 CLR 110  Chapter 8 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696  Chapter 9 Dawson v World Travel Headquarters Pty Ltd (1981) 53 FLR 455  Chapter 11 De Lasalle v Guildford [1901] 2 KB 215  Chapter 8 Deatons Pty Ltd v Flew (1949) 79 CLR 370  Chapters 5, 10 Degiorgio v Dunn [2004] NSWSC 767  Chapter 15 Derry v Peek (1889) 14 App Cas 337  Chapter 8 Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491  Chapter 13 Director of Consumer Affairs Victoria v AAPT Limited [2006] VCAT 1493  Chapter 11 Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd [2008] VCAT 2092  Chapter 11 Doherty v Traveland Pty Ltd (1982) 4 ATPR 40–323  Chapter 11 Donoghue v Allied Newspapers [1938] Ch 106  Chapter 13 Donoghue v Stevenson (1932) AC 562  Chapter 6 Dougan v Ley (1946) 71 CLR 142  Chapter 9 Dow Jones & Company Inc v Gutnick (2002) 210 CLR 575  Chapter 1 Durant v Greiner (1990) 21 NSWLR 119  Chapter 11 Eastman Photographic Materials Co Ltd v John Griffiths Cycle Corp Ltd (1898) 15 RPC 105  Chapter 13 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95  Chapter 7 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241  Chapter 6 Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375  Chapter 10 Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540  Chapter 15

Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109  Chapter 13 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22  Chapter 15 Fisher v Bell [1961] 1 QB 394  Chapter 4 Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215  Chapter 7 FNH Investments Pty Ltd v Sullivan [2003] 59 IPR 121  Chapter 13 Foakes v Beer (1884) 9 App Cas 605  Chapter 7 Forster & Sons Ltd v Suggett (1918) 35 TLR 87  Chapter 8 Fraser v Thames Television Ltd [1984] QB 44  Chapter 13 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480  Chapter 16 Frewin v Emmdale Sports Club & Anor [2004] NSWSC 860  Chapter 18 G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251  Chapter 8 Gerald Mahony v Dr Daniel J White T/A Catholic Education Office Sydney [2015] FWC 1593  Chapter 19 Gillette Australia Pty Ltd v Energizer Australia Pty Ltd [2002] 193 ALR 629  Chapter 11 Giumelli v Giumelli (1999) 196 CLR 101  Chapter 7 Given v Pryor (1980) 30 ALR 189  Chapter 11 Gold Coast Oil Co Pty Ltd v Lee Properties Pty Ltd [1985] 1 Qd R 416  Chapter 9 Goldberg v Jenkins & Law (1889) 15 VLR 36  Chapter 15 Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674  Chapter 7 Grant v Australian Knitting Mills Ltd [1936] AC 85  Chapter 8 Grant v Commissioner of Patents (2006) 154 FCR 62  Chapter 13 Great Northern Railway Co v Swaffield (1873–74) LR 9 Exch 132  Chapter 10 Hackshaw v Shaw (1984) 155 CLR 614  Chapter 6 Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145  Chapter 9 Hamilton v Lethbridge (1912) 14 CLR 236  Chapter 7 Handbury v Nolan (1977) 13 ALR 339  Chapter 8 Hardoon v Belilos [1901] AC 118  Chapter 15

Hart v O’Connor [1985] AC 1000  Chapter 7 Hartley v Ponsonby (1857) 7 El & Bl 872; 119 ER 1471  Chapter 7 Hartnell v Sharp Corporation of Australia Pty Ltd (1975) 5 ALR 493  Chapter 11 Harvey v Harvey (1970) 120 CLR 529  Chapter 15 Hawke & Sons (London) Ltd v Paramount Film Service Ltd [1934] Ch 593  Chapter 13 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298  Chapter 9 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465  Chapters 4, 6 Henderson v Pioneer Homes Pty Ltd (No 2) (1980) 29 ALR 597  Chapter 11 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 2) (1989) 40 FCR 76  Chapter 11 Hewson v Sydney Stock Exchange Ltd [1968] 2 NSWR 224  Chapter 10 Hill v Water Resources Commission (1985) EOC 92–127  Chapter 19 Hollis v Vabu Pty Ltd (2001) 207 CLR 21  Chapters 10, 19 Hurd v Zomojo Pty Ltd [2015] FCAFC 147  Chapter 16 Imbree v McNeilly (2008) 236 CLR 510  Chapter 6 Ingram v Britten [1994] Aust Torts Reports 81–291  Chapter 6 Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239  Chapter 7 John D Wood & Co (Residential & Agricultural) Ltd v Knatchbull [2002] EWHC 2822 (QB)  Chapter 10 John Fairfax and Sons Pty Ltd v Australian Consolidated Press Ltd [1960] SR (NSW) 413  Chapter 13 John McCann & Co v Pow [1974] 1 WLR 1643  Chapter 10 Johnson v Buttress (1936) 56 CLR 113  Chapter 9 Joyce v Morrissey [1998] TLR 707  Chapter 15 JT International SA v Commonwealth [2012] HCA 43  Chapter 13 Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520  Chapter 6 Kelly v Tucker (1907) 5 CLR 1  Chapter 15 Kelsen v Imperial Tobacco Co [1957] 2 QB 334  Chapter 5 CASES  xxiii

Kendall v Hamilton (1879) 4 App Cas 504 Chapter 15 King v AG Australia Holdings Ltd [2003] FCA 1420  Chapter 1 Kondis v State Transport Authority (1984) 154 CLR 672  Chapter 6 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115  Chapter 9 Koowarta v Bjelke-Petersen (1982) 153 CLR 168  Chapter 2 Koufos v C Czarnikow Ltd; The Heron II [1969] 1 AC 530  Chapter 9 Krell v Henry [1903] 2 KB 740  Chapter 9 L Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225  Chapter 6 L’Estrange v F Graucob Ltd [1934] 2 KB 394  Chapter 8 Latimer v AEC Ltd [1953] AC 643  Chapter 6 Law v Law [1905] 1 Ch 140  Chapter 15 Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661  Chapter 8 Leaf v International Galleries [1950] 2 KB 86  Chapter 9 Lee v Knapp [1967] 2 QB 442  Chapter 4 Lee v Lee’s Air Farming Ltd [1961] AC 12  Chapter 16 Lord Bernstein v Skyviews & General Ltd [1978] QB 479  Chapter 14 Louth v Diprose (1992) 175 CLR 621  Chapter 9 Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Insurance Cas 60–986  Chapter 18 Lumley v Wagner (1852) 1 De G M & G 604; 42 ER 687  Chapter 5 Lynch v Stiff (1943) 68 CLR 428  Chapters 15 Mabo v Queensland (No 2) (1992) CLR 1  Chapters 2 Makawe Pty Ltd v Randwick City Council [2009] NS WCA 412  Chapter 6 Manley v Alexander (2005) 223 ALR 228  Chapter 6 Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127  Chapter 15 Masters v Cameron (1954) 91 CLR 353  Chapter 7 McHale v Watson (1966) 115 CLR 199  Chapter 6 McWilliams Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 49 FLR 455  Chapter 11 x xiv  CASES

Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103  Chapter 15 Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580  Chapter 6 Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240  Chapter 13 Mirror Newspapers Ltd v Queensland Newspapers Pty Ltd [1982] Qd R 305 Chapter 13 Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254  Chapter 6 Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351  Chapter 10 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723  Chapter 7 Nagle v Rottnest Island Authority (1993) 177 CLR 423  Chapter 6 Narich Pty Ltd v Commissioner for Pay-roll Tax (NSW) [1983] 2 NSWLR 597  Chapter 19 National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251  Chapter 15 Nelson v Nelson (1995) 184 CLR 538  Chapter 15 Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273  Chapter 13 New South Wales v Commonwealth (1990) 169 CLR 482  Chapter 2 Newton-John v Scholl-Plough (Aust) Ltd (1986) 11 FCR 233  Chapter 5 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535  Chapter 8 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705  Chapter 9 NP Generations Pty Ltd v Feneley (2001) 80 SASR 151  Chapter 13 NV Philips Gloeilampenfabrieken v Mirabella International Pty Ltd (1995) 183 CLR 655  Chapter 13 Orb Holdings Pty Ltd v Lombard General Insurance Co Australia Ltd [1995] 2 Qd R 51  Chapter 18 Oscar Chess Ltd v Williams [1957] 1 WLR 370  Chapter 8 Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound No. 1) [1961] AC 388  Chapter 6 Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553  Chapter 5

Palermo v Palermo [No 2] [2014] WASC 6  Chapter 15 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711  Chapter 10 Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581  Chapter 9 Paris v Stepney Borough Council [1951] AC 367  Chapter 6 Perre v Apand Pty Ltd (1999) 198 CLR 180  Chapter 6 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537  Chapter 8 Petelin v Cullen (1975) 132 CLR 355  Chapter 8 Pfizer Overseas Pharmaceuticals v Eli Lilly & Co (2005) 225 ALR 416  Chapter 13 Phillips v Daly (1988) 15 NSWLR 65  Chapter 6 Placer Development Ltd v Commonwealth (1969) 121 CLR 353  Chapter 7 Plimer v Roberts (1997) 80 FCR 303 Chapter 11 Powell v Lee (1908) 24 TLR 606  Chapter 7 Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541  Chapter 10 Public Service Employees Credit Union Cooperative Ltd v Campion (1984) 56 ACTR 39  Chapter 7 R v Clarke (1927) 40 CLR 227  Chapter 7 R v Harris (1836) 7 Car & P 446; 173 ER 198  Chapter 4 Ramsgate Victoria Hotel Co Ltd v Montefiore [1866] LR 1 Ex 109  Chapter 7 Rank Film Production Ltd v Dodds [1983] 2 NSWLR 553  Chapter 13 Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; ASIC v Adler (2002) 168 FLR 253  Chapter 16 Re Garwood’s Trusts; Garwood v Paynter [1903] 1 Ch 236  Chapter 15 Re Gunns Plantations Limited (In Liquidation) (Receivers & Managers Appointed) [2015] VS C 102  Chapter 20 Re Mineworkers Pension Scheme Trusts; Cowan v Scargill [1985] Ch 270  Chapter 15 Re Warumungu Land Claim; Ex parte AttorneyGeneral (NT) (1988) 77 ALR 27  Chapter 4 Rentokil Pty Ltd v Channon (1990) 19 NSWLR 417  Chapter 6

Reynolds v Turner (1989) ASC 55–922  Chapter 8 Rixon v Star City Pty Ltd [2001] 53 NSWLR 98  Chapter 5 Roadshow Films Pty Ltd v iiNet Ltd (No 3) (2010) 263 ALR 215  Chapter 13 Robinson v Ashton (1875) LR 20 Eq 25  Chapter 15 Robinson v Graves [1935] 1 KB 579  Chapter 8 Romeo v Conservation Commission of Northern Territory (1998) 192 CLR 431  Chapter 6 Rookes v Barnard [No 1] [1964] AC 1129  Chapter 5 Rootes v Shelton (1967) 116 CLR 383  Chapter 6 Roscorla v Thomas [1842] 3 QB 234; 114 ER 496 Chapter 7 Rose and Frank Co v JR Crompton & Brothers Ltd [1925] AC 445  Chapter 7 Rowe v McCartney [1976] 2 NSWLR 72  Chapter 6 Said v Butt [1920] 3 KB 497  Chapter 10 Salomon v Salomon & Co Ltd [1897] AC 22  Chapter 16 Samuel Taylor Pty Ltd v Registrar of Trade Marks (1959) 102 CLR 650  Chapter 13 Seear v Cohen (1881) 45 LT 589  Chapter 9 Silservice v Supreme Bread Pty Ltd (1949) 50 SR (NSW) 207  Chapter 5 Smith v Anderson (1880) 15 Ch D 247  Chapter 15 Smith v Hughes [1960] 2 All ER 859  Chapter 4 Smythe v Thomas [2007] 71 NSWLR 537  Chapter 7 Snow v Eaton Shopping Centre Ltd (1982) 70 CPR (2d) 105  Chapter 13 Southwark LBC v Williams [1971] Ch 734  Chapter 5 Springer v Great Western Railway Co [1921] 1 KB 257  Chapter 10 Spyer v Phillipson [1931] 2 Ch 183  Chapter 14 Stanley v Powell [1891] 1 QB 86  Chapter 5 Steele v Tardiani (1946) 72 CLR 386  Chapter 9 Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168  Chapter 7 Sullivan v Moody (2001) 207 CLR 562  Chapter 6 Summers v Solomon (1857) 7 El & Bl 879; 119 ER 1474  Chapter 10 CASES  xxv

Sydney City Council v West (1965) 114 CLR 481  Chapter 8 Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177  Chapter 11 Tame v New South Wales (2002) 211 CLR 317  Chapter 6 Tarling v Baxter (1827) 6 B & C 360; 108 ER 484  Chapter 8 Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309  Chapter 9 Taylor v Johnson (1983) 151 CLR 422  Chapter 9 TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) (2005) 145 FCR 35  Chapter 13 The People (Director of Public Prosecutions) v Farrell [1978] IR 13  Chapter 4 Thomas v Thomas (1842) 2 QB 851; 114 ER 330  Chapter 7 Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41  Chapter 8 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163  Chapter 8 Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1  Chapter 11 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165  Chapter 8 Tooth v Laws (1888) 9 LR (NSW) 154  Chapter 10 Torpedoes Sportswear Pty Ltd v Thorpedo Enterprises Pty Ltd (2003) 132 FCR 326  Chapter 13 TPC v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299  Chapter 12 TPC v Email (1980) 43 FLR 383  Chapter 12 TPC v JW Bryant Pty Ltd (1978) ATPR 40–075  Chapter 12

x xvi  CASES

TPC v Massey Ferguson (Australia) Ltd (1983) 67 FLR 364  Chapter 12 TPC v Sony (Australia) Pty Ltd (1990) ATPR 41–031  Chapter 12 TPC v TNT Australia Pty Ltd (1995) ATPR 41–375  Chapter 12 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107  Chapter 9 Van den Esschert v Chappell [1960] WAR 114  Chapter 8 Virgin Enterprises Ltd v Klapsas [2002] AIPC 91–760  Chapter 13 Wakeling v Ripley (1951) 51 SR (NSW) 183  Chapter 7 Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388  Chapter 2 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387  Chapter 7 Watt v Hertfordshire County Council [1954] 1 WLR 835  Chapter 6 White v Bluett (1853) 23 LJ Ex 36  Chapter 7 White v John Warwick & Co Ltd [1953] 1 WLR 1285  Chapter 8 Whywait Pty Ltd v Davison [1997] 1 Qd R 225  Chapter 15 Willemstad (1976) 136 CLR 529  Chapter 6 Wilson v Horne (1999) 8 Tas R 363  Chapter 5 Windsurfing International Inc v Petit & Borsimex Ltd (1983) 3 IPR 449  Chapter 13 Woods v Multi-Sport Holdings Pty Ltd (2002) 208 CLR 460  Chapter 6 Yates v Jones [1990] Aust Torts Reports 81–009  Chapter 6 Zeccola v Universal City Studios Inc (1982) 67 FLR 225  Chapter 13 Zuijs v Wirth Bros Pty Ltd (1955) 93 CLR 561  Chapter 19

STATUTES Commonwealth A New Tax System (Goods and Services Tax) Act 1999 Acts Interpretation Act 1901 Administrative Appeals Tribunal Act 1975 Administrative Decisions (Judicial Review) Act 1977 Age Discrimination Act 2004 Anti-Money Laundering and Counter-Terrorism Financing Act 2006 Australia Act 1986 Australian Securities and Investments Commission Act 2001 Bankruptcy Act 1966 Bills of Exchange Act 1909 Cheques Act 1986 Commonwealth Acts Interpretation Act 1901 Commonwealth Volunteers Protection Act 2003 Competition and Consumer Act 2010 Competition Policy Reform Act 1995 Copyright Act 1968 Corporations Act 1989 Corporations Act 2001 Corporations Act 2001 Crimes Act 1914 Criminal Code Act 1995 Designs Act 2003 Disability Discrimination Act 1984 Disability Discrimination Act 1992 Electronic Transactions Act 1999 Euthanasia Laws Act 1997 Fair Work Act 2009 Fair Work Amendment (State Referrals and Other Measures) Act 2009 Family Law Act 1975 Federal Court of Australia Act 1976 Financial Transactions Reports Act 1988 Freedom of Information Act 1982 Health Insurance Act 1973 High Court of Australia Act 1979 Human Rights and Equal Opportunity Commission Act 1986 Income Tax Amendment Act 1936 Income Tax Assessment Act 1936 Independent Contractors Act 2006

Insurance Acquisitions and Takeovers Act 1991 Insurance Act 1973 Insurance Contracts Act 1984 Intellectual Property Laws (Raising the Bar) Act 2012 Judiciary Act 1903 Legislative Instruments Act 2003 Life Insurance Act 1995 Marine Insurance Act 1909 Motor Accidents Compensation Act 1999 National Consumer Credit Protection Act 2009 Patents Act 1990 Personal Property Securities Act 2009 Plant Breeder’s Rights Act 1994 Privacy Act 1988 Privacy Amendment (Enhancing Privacy Protection) Act 2012 Privy Council (Appeals from the High Court) Act 1975 Privy Council (Limitation of Appeals) Act 1968 Racial Discrimination Act 1975 Radio Licence Fees Amendment Act 2007 Safety, Rehabilitation and Compensation Act 1988 Sex Discrimination Act 1984 Tax Assessment Act 1936 Telecommunications (Interception and Access) Act 1979 Telecommunications Act 1997 Tobacco Plain Packaging Act 2011 Trade Marks Act 1995 Trade Practices Act 1974 Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 Work Health and Safety Act 2011 Workplace Gender Equality Act 2012 Workplace Relations Act 1996 Workplace Relations Amendment (WorkChoices) Act 2005

Australian Capital Territory Administrative Decisions (Judicial Review) Act 1989 Crimes Act 1900 Criminal Code 2002

STATUTES  xxvii

Discrimination Act 1991 Federal Magistrates Court Act 1999 Human Rights Act 2004 Jurisdiction of Courts (Cross-vesting) Act 1987 Legislation Act 2001 Limitation Act 1985 Sale of Goods Act 1954 Work Health and Safety Act 2011 Workers Compensation Act 1951

New South Wales Anti-Discrimination Act 1977 Contracts Review Act 1980 Crimes Act 1900 Interpretation Act 1987 Limitation Act 1969 Retail Trading Act 2008 Sale of Goods Act 1923 Subordinate Legislation Act 1989 Work Health and Safety Act 2011 Workers Compensation Act 1987 Workplace Injury Management and Workers Compensation Act 1998

Northern Territory Aboriginal Land Rights (Northern Territory) Act 1976 Anti-Discrimination Act Criminal Code Act 1983 Information Act 2002 Interpretation Act 1978 Limitation Act 1981 Rights of the Terminally Ill Act 1995 Sale of Goods Act 1923 Sale of Goods Act 1972 Water Act 1992 Work Health and Safety (National Uniform Legislation) Act 2011 (NT) Workers Rehabilitation and Compensation Act (NT)

Queensland Acts Interpretation Act 1954 Anti-Discrimination Act 1991 Carriage of Goods by Land (Carrier’s Liabilities) Act 1967 Criminal Code 1899 Information Privacy Act 2009

x xviii  STATUTES

Judicial Review Act 1991 Limitation of Actions Act 1974 Queensland Coast Islands Declaratory Act 1985 Sale of Goods Act 1896 Statutory Instruments Act 1992 Trading (Allowable Hours) Act 1990 Work Health and Safety Act 2011 WorkCover Queensland Act 1996 Workers Compensation and Rehabilitation Act 2003

South Australia Acts Interpretation Act 1915 Criminal Law Consolidation Act 1935 Equal Opportunity Act 1984 Limitation of Actions Act 1936 Racial Vilification Act 1996 Sale of Goods Act 1895 Shop Trading Hours Act 1977 Subordinate Legislation Act 1978 University of South Australia Act 1990 Work Health and Safety Act 2012 (SA) WorkCover Corporation Act 1994 (SA) Workers Rehabilitation and Compensation Act 1986

Tasmania Acts Interpretation Act 1931 Anti-Discrimination Act 1998 Criminal Code Act 1924 Judicial Review Act 2000 Limitation Act 1974 Personal Information Protection Act 2004 Sale of Goods Act 1896 Shop Trading Hours Act 1984 Subordinate Legislation Act 1992 Work Health and Safety Act 2012 Workers Rehabilitation and Compensation Act 1988

Victoria Accident Compensation (WorkCover Insurance) Act 1993 Accident Compensation Act 1985 Administrative Law Act 1978 Charter of Human Rights and Responsibilities Act 2006 Crimes Act 1958

Equal Opportunity Act 2010 Goods Act 1958 Information Privacy Act 2000 Interpretation of Legislation Act 1984 Limitation of Actions Act 1958 Occupational Health and Safety Act 2004 Racial and Religious Tolerance Act 2001 Subordinate Legislation Act 1994 Victoria Charter of Human Rights and Responsibilities Act 2006

Western Australia Criminal Code Act 1913 Equal Opportunity Act 1984 Interpretation Act 1984 Limitation Act 2005 Occupational Safety and Health Act 1984 Retail Trading Hours Act 1987 Sale of Goods Act 1895 Workers Compensation and Injury Management Act 1981

United Kingdom Australia Act (Cth) and Australia Act (UK) 1986 Australian Constitutions Act 1850 Australian Courts Act 1828 Colonial Laws Validity Act 1865 Commonwealth of Australia Constitution Act 1900 Constitution Act (NSW) 1902

Constitution Act (SA) 1856 Constitution Act (Tas) 1855 Constitution Act 1867 Constitution Act Amendment Act (Qld) 1922 Federal Council of Australasia Act 1885 Letters Patent 1787 Letters Patent 1803 Letters Patent 1814 Letters Patent 1836 Letters Patent 1859 New South Wales Act 1823 New South Wales Constitution Act 1842 New South Wales Constitution Act 1855 Offences Against the State Act 1939 Official Secrets Act 1920 Partnership Act 1890 Pharmacy and Poisons Act 1933 Privy Council (Appeals from the High Court) Act (Cth) 1975 Privy Council (Limitation of Appeals) Act (Cth) 1968 Road Traffic Act 1960 Sale of Goods Act 1893 South Australia Act 1834 Statute of Westminster (Imp) 1931 Statute of Westminster Adoption Act (Cth) 1942 Street Offences Act 1959 Victoria Constitution Act 1855 West Australia Constitution Act 1890 Western Australia Act 1829

STATUTES  xxix

PART 1 Foundations 1 Business and the law  2 2 The Australian legal system  32 3 Politicians and judges  77 4 How to find, understand and use the law  128

CHAPTER 1

Business and the law LEA RN IN G OBJE CTIVE S 1.1 In what ways does the law relate to business? 1.2 What exactly is meant by the word ‘law’ anyway? Why is it so important? What sorts of things does the law regulate? And why does the law keep changing? 1.3 Does the law have anything to do with ethics, justice, and politics?

JOHNNY AND ASH

[Johnny Bristol, 25 years old, scruffy and morose, sits by himself in a nearly empty bar nursing a beer. He looks up when a young woman calls his name as she approaches from the other side of the bar: Ashwina Redcliffe, smartly dressed and immaculately groomed.] Ash — Johnny! Hey, Johnny! Johnny — Hey, Ash. Ash — [She sits down at the table, carefully placing her glass of white wine on a coaster, and looks at Johnny.] Johnny Bristol, well, well, well. I haven’t seen you since high school. It’s been, what, seven years? I heard you moved to New Zealand. Johnny — I did. I’m back. I heard you went to law school. Ash — I did. And now I’m a lawyer. Working for Gibson & Gaiman in the city. Loving it. And doing quite well for myself, thanks. So what brings you back to town? Johnny — Well, my dad got sick last year, and so I came back to help mum look after him and to set up a business back here. You know The Lame Duck restaurant? Vegan restaurant over on Kerouac Avenue? I own the place now. Ash — Oh, I’m so sorry to hear about your dad. He’s a nice man. A friend of mine ate at The Lame Duck just last week. She had the tofu burger I think. Johnny — Yeah? What did she say about it? Ash — She said it was awful, actually. Sorry! [They both laugh.] Apparently the organic cola was wonderful though. Johnny — That’s a relief. [He pauses.] Things really aren’t going that well. I’m having heaps of problems just keeping the place running. I’m a good cook — well, I thought I was — but I’ve never run a business before. I’ve got suppliers who don’t do what they say they are going to do, employees who show up late if they show up at all, and a competitor who keeps stealing my recipes. My landlord wants to sell the building, and I don’t have enough savings to move to another location. Ash — Sounds like you need a friend to talk to. And a lawyer. Johnny — Thanks. I definitely need a friend. A lawyer, I’m not so sure. What do my problems have to do with the law? Ash — Are you kidding? It’s all about the law! How can you possibly run a business without being aware of the law? How can you play a game without knowing the rules? Here, let me get you another beer, and I’ll tell you a thing or two about the law. Johnny — Thanks, Ash, I guess you are right. I have always been more concerned with doing what is ‘right’ than with doing what is ‘legal’. I don’t know much about the law at all. Maybe that’s the problem. And the tofu burger, of course. Ash — Of course! Actually, you might be surprised how much you already know about the law  .  .  .

CHAPTER PROBLEM

As a business owner, Johnny is confronted by a number of challenges. As you make your way through this chapter, consider the reasons why a better understanding of business law might be helpful for Johnny. With which specific areas of the law should Johnny become more familiar? Is Johnny correct in thinking that questions about ‘what is right’ and questions about ‘what is legal’ are unrelated?

Introduction Ash is right. You can’t play a game without knowing and understanding the rules, and you can’t participate in business — whether as a business owner, manager, professional adviser or employee — without knowing and understanding the law. In this chapter we consider the law in a very general sense. CHAPTER 1 Business and the law  3

We explain the relevance of the law to business, what makes the law different from other types of rules and regulation, why it is important that the law keeps changing, and what the law has to do with ethics, justice and politics. After working through this chapter you will better appreciate the importance of the law and of being aware of your legal environment.

1.1 Law and the business person LEARNING OBJECTIVE 1.1 In what ways does the law relate to business?

Johnny may never have studied law or read a legal textbook, but there is little doubt that he already knows something about the law. He has encountered the law many times: in his personal life, in his business activities, in the media and in popular culture.

Law and personal life There are very few aspects of Johnny’s personal life that are not regulated by law, either directly or indirectly. His house was purchased in compliance with property laws and built in compliance with building laws. When he makes a cup of coffee for his breakfast, he has the coffee in his cupboard because he has entered into a contract for the sale of goods with his local supermarket, and he is able to access the electricity that powers the kettle because he has an ongoing contract with the power company. Driving to work in his car — the loan for which is regulated by consumer credit law — he is subject not only to statutory traffic laws but also the general duty to take care imposed by tort law. The music that he listens to on his smartphone is protected from unauthorised copying by intellectual property law, and consumer protection law regulates the advertisements he sees on television in the evening. Johnny already knows that different laws impact different aspects of his life in different ways. Some laws give him rights that he can enforce against others, and some laws impose obligations upon him to do or refrain from doing certain things. When some laws are broken (e.g. when a contract is breached) the person harmed may have the right to commence litigation against (or ‘sue’) the person who caused the harm for compensation. There are other laws (e.g. traffic laws) that, if broken, will lead to the police or some other government authority prosecuting the law breaker with a view to punishing them in some way. ACTIVIT Y 1.1 — REFLECT

List five ways that the law has impacted on your own life in the past 24 hours.

Law and business As a business owner, Johnny knows that he must pay income tax on his business earnings to the Federal government. He knows that as an employer he must pay payroll tax to the State government. He knows that as an owner of land he must pay rates to the local authority. Johnny is also aware of the many other Federal, State and local government laws he must comply with as a business owner: laws about licensing, advertising, industrial relations, workplace health and safety, and so on. He therefore knows that there are three levels of government in Australia: •• a Federal government that regulates national matters, •• State and Territory governments that regulate State and Territory matters, and •• local governments that regulate local matters. He knows that each government makes its own laws and has its own requirements. 4  PART 1 Foundations

Legal regulation sometimes seems to be more of a hindrance than a help to people engaging in business activities, but the law serves a very important purpose. Business would not be possible without a system of legal regulation. It is the law that ensures that promises are kept and agreements are enforceable. It is the law that tells business people what they can and cannot do in marketing and delivering their goods and services. And it is the law that enables business people to resolve disputes with customers, suppliers and competitors. ACTIVIT Y 1.2 — REFLECT

List three reasons why an understanding of the law is essential for the successful business person.

Law in the media Johnny hears something new about the law every day. Many of the news stories Johnny sees on the television and reads about in the newspaper and online are about the law or at least related to law. The government’s latest industrial relations reforms, the jailing of a prominent politician, and the investigation of an assault outside a nightclub all involve the legal system in some way. Johnny has seen many examples of politicians talking about new legislation either positively (if the politicians are members of the government) or negatively (if they are members of the opposition), lawyers and parties to litigation talking about controversial case law, police talking about criminal prosecutions, and a variety of bureaucrats and other people talking about legal problems, legal rules, legal investigations and legal solutions. After watching the news and current affairs programs Johnny knows that many people and organisations form a legal system: politicians, judges, lawyers, police, bureaucrats and citizens; and parliaments, courts, the police force, government departments and corporations. ACTIVIT Y 1.3 — RESEARCH

Go to a news website such as www.news.com.au or www.afr.com.au and make a list of today’s law-related items.

Law in popular culture It seems to Johnny that any night of the week he can switch on the television and watch stories about lawyers, law firms, prosecutors and police investigators, and the dramas associated with the practice of law and with police investigation: Suits, The Good Wife, Law & Order, Rake. And an enormous number of popular movies feature a lawyer as the principal character, or a trial as the central dramatic device, including Australian films such as The Castle, US films such as The Lincoln Lawyer, Erin Brockovich and The Firm, and Chinese films such as Lawyer, Lawyer. After seeing the law portrayed in films and on television, Johnny knows that the law is much more than a system of abstract rules and principles. It is something that manifests in and shapes the lives of real people. ACTIVIT Y 1.4 — RESEARCH AND REFLECT

Watch an episode of a television program that is related to the law in some way. In what ways are the law, the legal system or lawyers referred to, either directly or indirectly? Do you think the way the law is portrayed is realistic?

CHAPTER 1 Business and the law  5

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 1.1 In what ways does the law impact upon your personal life? 1.2 In what ways does the law impact upon business activities? 1.3 What can the news and other media stories tell you about the law? 1.4 What can popular culture tell you about the law?

1.2 The nature of law LEARNING OBJECTIVE 1.2 What exactly is meant by the word ‘law’ anyway? Why is it so important? What sorts of things does the law regulate? And why does the law keep changing?

Johnny already knows something about the law. But he is still not sure he understands the difference between law and other kinds of rules, why knowing about the law is so important, or why the law, apparently, keeps needing to be changed.

Defining law The question ‘What is the law?’ is much harder to answer than one might think. It is a question that legal theorists and philosophers have been debating for hundreds of years, and there is relatively little consensus. Here are just a few of the many possible definitions and descriptions of law. •• Law is a system of enforceable rules governing social relations and legislated by a political system. (Stanford Encyclopaedia of Philosophy) •• Law is the essential foundation of stability and order both within societies and in international relations. (J William Fullbright) •• Law: an ordinance of reason for the common good, made by him who has care of the community. (Saint Thomas Aquinas) •• The law is but words and paper without the hands and swords of men. (James Harrington) •• Law and order exist for the purpose of establishing justice, and   .   .   .   when they fail to do this purpose they become dangerously structured dams that block the flow of social progress. (Martin Luther King, Jr) •• In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets and steal loaves of bread. (Anatole France) •• The law is an ass, an idiot  .  .  .  (Charles Dickens) •• I am the law! (Judge Dredd) There is a distinction between ‘a law’ and ‘the law’: you would use the term ‘a law’ to refer to a particular legal rule, and you would use the term ‘the law’ to refer to the legal system generally. A simple and practical definition of the law is as follows: the law is a system of rules made by the state and enforceable by prosecution or litigation. The corresponding definition of business law is a system of rules regulating businesses and business activities made by the state and enforceable by prosecution or litigation. These definitions disregard questions of justice, ethics and politics, and focus upon what law is, without considering whether it is fair or right and without considering the political origins and implications of law. We consider the relationship between law, justice, ethics and politics in detail below. For now, we examine each of the elements of our simple definition in turn. 6  PART 1 Foundations

A system of rules Most people who attempt to define law will use the word ‘rule’ somewhere in their definition. A law is a type of rule. A rule is a statement of behavioural expectation; it tells people how they should or should not behave. There may or may not be negative consequences that flow from failing to comply with the rule. There are of course many different types of rule, including: •• the rules of a game, e.g. the rules of poker or cricket, •• the rules of an organisation, e.g. the membership rules of a football association or the internal governance rules of a corporation, •• moral rules, e.g. the rule that you should not tell lies, •• social rules, e.g. the rule that you should say ‘please’ when asking for something, •• mathematical rules, e.g. the rules regulating multiplication and division, and •• traffic rules, e.g. the rule that you should drive on the left-hand side of the road. Not all of these rules are laws. Traffic rules can be categorised as laws, but the rules of cricket cannot. The difference between legal rules (i.e. laws) and non-legal rules is not that only legal rules incur penalties; there are penalties incurred if you breach the rules of a game or of an organisation, and even the disapproval that follows from a breach of a social or moral rule can be seen as a type of penalty. The most appropriate way to distinguish between a legal rule and a non-legal rule is to consider the source of the rule.

Made by the state Legal rules are made by the state. Rules made by persons or organisations other than the state cannot be said to be laws. The term ‘state’ is used throughout this text, and is a very common legal term. In lower case, the term ‘state’ refers to the government generally. If it starts with a capital letter, the term refers to a State within a federation, e.g. New South Wales. In the context of our simple definition of law, the term has the former meaning: a law is a rule made by the government. In the context of the Australian legal system, a law is a rule made by either the legislature (the parliament) or the judiciary (the court system). The words ‘state’ and ‘government’ are often used interchangeably, although they do not mean precisely the same thing. The word ‘government’ refers to the group of individuals and institutions charged with constitutional authority to make, administer and interpret the law. The word ‘state’ can refer to either the government or to the governed territory (e.g. the State or the nation) as an organised political community. Another term used in similar contexts is ‘sovereign’. A sovereign is a supreme ruler of a state. In a traditional monarchy, the king or queen (or ‘monarch’) is the sovereign. In modern liberal democracies, including constitutional monarchies such as Australia, it is the parliament that is seen as sovereign — hence the term ‘parliamentary sovereignty’ (a term explained in more detail in a later chapter).

Enforceable by prosecution or litigation Legal rules are backed by the threat of punishment or coercion: if a person does not obey a legal rule, there will be consequences. If the legal rule is a rule of criminal law, a person who contravenes the rule may be formally accused by the state of having committed a criminal offence, a process known as prosecution. For example, if a person contravenes the criminal law prohibiting assault by punching a stranger in the nose, they may be charged and prosecuted, and if they are found guilty they will be subjected to a penalty such as a fine or imprisonment. If the legal rule is a rule of civil law, a person who contravenes the rule may be sued by the person they have harmed, a process known as litigation. For example, if a person contravenes the law of contract by failing to pay for a car that they have signed a contract to purchase, they may be sued by the seller; if the seller ‘wins’ the trial, the person may be obliged to provide a remedy to the seller such as the payment of monetary compensation. CHAPTER 1 Business and the law  7

LAW IN CONTEXT: LAW AND PHILOSOPHY

Natural law versus legal positivism Our definition of law as the set of rules made by the state and enforceable by prosecution or litigation disregards what law ought to be and focuses upon what law is. As such it is a ‘positivist’ definition of law, and can be contrasted with the sorts of definitions offered by natural law theory. Natural law theory and legal positivism are two of the major branches of the philosophy of law, or jurisprudence. Natural law theory In seeking to describe the nature of law, some legal philosophers insist that there is an intimate and necessary relationship between the law and a set of higher values. These higher values may be the ‘laws of God’, or they may be universal principles of morality and justice. This approach to defining law is often referred to as natural law theory. Advocates of a natural law approach insist that some things are objectively right or fair, that some things are objectively wrong or unfair, and that the law should be made, administered and interpreted in such a way that it corresponds with these objective standards. Some even go so far as to insist that if a law made by government (positive law) is inconsistent with these objective standards (natural law), the positive law does not have to be obeyed. The concept of natural law was very important in the development of the English common law. In the struggles between the parliament and the monarch (described in a later chapter), parliament often referred to the ‘fundamental laws of England’ that were said to embody natural law principles since time immemorial and to set limits on the power of the monarchy. Today natural law theory is relied upon by those seeking to establish a system of universal moral values according to which technically ‘legal’ wartime atrocities and other abuses of human rights can be objectively criticised and condemned. Legal positivism Legal positivists insist that one should focus not upon what the law ought to be, but upon what the law is. Consistency with universal standards of morality and justice — which may or may not exist — is not necessary. The only question one needs to ask about the law is whether or not it is a legitimate law; that is, whether it has been made properly and in accordance with requirements of the relevant constitution. The practical difference between a natural law approach and a positivist approach can be illustrated using a simple example. Imagine that you are driving a car along a motorway at a speed of 120 kilometres per hour, which is 20 kilometres per hour in excess of the 100 kilometres per hour speed limit. There are three cars in front of you driving in the same direction and at the same speed. All four cars drive past a police officer operating a hand-held speed camera. The police officer ignores the first three cars but pulls you over. When the police officer gives you a speeding ticket, you point out the injustice of the situation. You argue that although it is true that you were speeding, it is not fair that the other motorists will get away with something for which you are being punished. You argue that therefore you should not be given a speeding ticket. You are taking a natural law position; you are arguing that the law must be made and applied in accordance with universal principles of justice, including the principle that the law should be applied equally to all. The police officer, however, will be more likely to take a positivist approach and insist that since you have broken the law that limits the speed at which you are permitted to drive to 100 kilometres an hour, you should be punished, and universal principles of justice have nothing to do with it.

ACTIVIT Y 1.5 — REFLECT

Search the internet for a picture of a statue of lady justice, an important symbol of law and the legal system. What do you think is symbolised or represented by (a) the blindfold, (b) the scales, and (c) the sword?

8  PART 1 Foundations

The purpose of law We have considered the definition of law. We now consider the purpose of law: What does law seek to do? By understanding the wide range of possible uses to which laws are put, you will better appreciate the importance of law. In this section we explain six purposes of law (see figure 1.1).

Resolving disputes Business lives and personal lives are frequently characterised by conflict and by differences of opinion. A homeowner may not agree with their neighbour about the location of the boundary between their properties. A businessperson may not agree with one of their business competitors about whether or not it is appropriate for their advertising to refer to the competitor by name. Two motorists may disagree about who is responsible for a motor vehicle accident. The law provides a way for these disputes to be resolved. The parties to the dispute can refer to the relevant legal rules directly and, if the rules are clear enough, resolve the dispute themselves. If the application of the relevant rules to the dispute is not clear, the parties can seek legal advice. And if the legal advisers cannot resolve the dispute, the parties can take the dispute to court and resolve it by litigation.

... resolves disputes

... prevents the misuse of power

... maintains social order

Law

... stabilises the economy

... reinforces community values

... helps the disadvantaged

FIGURE 1.1

The purposes of law

CHAPTER 1 Business and the law  9

Maintaining social order Many people insist that laws are necessary to keep the peace and to prevent chaos and anarchy. They insist that laws maintain social order, because without law, everybody could be in perpetual conflict with each other. The philosopher Thomas Hobbes, for example, famously claimed that in the absence of law, existence would be a ‘war of all against all’. The strong would oppress the weak, and the able would oppress the less-abled. By establishing a clear set of standards with which everyone must comply, the law ensures that order is maintained.

Reinforcing community values The law is seen as necessary to preserve and enforce the community’s values. The members of any given community generally believe certain things to be right and other things to be wrong, and certain behaviours to be acceptable and other behaviours to be unacceptable. The purpose of law is to ensure that those community values are applied equitably and respected by all members of the community. For example, it is generally believed that businesses should behave honestly when dealing with consumers and that they should not take advantage of their superior bargaining position to deprive consumers of their rightful entitlements; therefore there are laws that oblige businesses to behave fairly and to refrain from certain kinds of conduct, including behaving in a manner that is misleading or deceptive. The nature of the relationship between law, values and ethics is considered in more detail below.

Helping the disadvantaged The law can be seen as a mechanism for ensuring that resources and opportunities are distributed fairly within a community. There are many within the community who for a variety of reasons — physical disability, intellectual disability, poverty, age, youth, illiteracy — are unable to fend for themselves as well as others, and the law is supposed to ensure that they are not disadvantaged. Tax laws, for example, seek to ensure that the wealthier members of the community pay more tax than the less-wealthy. Welfare laws seek to ensure that the disadvantaged are entitled to appropriate assistance. Anti-discrimination laws seek to prevent conduct that unfairly disadvantages those who are ‘different’. Without such laws, the strong would take advantage of the weak and the rich would take advantage of the poor, and the law therefore exists to ensure justice for all. The nature of the relationship between law and justice is considered in more detail later in the chapter.

Stabilising the economy Law plays an important role in maintaining the stability and growth of the economy. Changes to the law almost always have economic consequences. An obvious example is tax law: an increase in the rate of personal income tax will result in members of the community having less spending money, which will have an impact on prices, inflation and interest rates. A less obvious example is a change in the laws relating to civil liability: if the law makes it more difficult for victims to sue for compensation for personal injury, fewer compensation payouts will be awarded by the courts, which means that insurance companies will be required to pay fewer claims, which means that insurance premiums will be lower, which means that members of the community will have more spending money, and so on. The law is frequently used by governments to ensure that the economy is functioning efficiently, and if there is a problem with the economy the law is changed to address the problem. The economic impact of a law is often one of the primary considerations in deciding whether or not it should be enacted. The problem with such economic approaches to the law is that economic criteria — wealth maximis­ ation, cost reduction, market freedom and the like — are not the only criteria by which legal outcomes can be judged. An undue emphasis upon economic considerations may not ensure that the legal system benefits all members of the community appropriately or fairly. The relationship between law and politics is considered in more detail later in this chapter.

Preventing the misuse of power A consistent and transparent system of law ensures that the government cannot oppress members of the community. 10  PART 1 Foundations

Many countries, including Australia and other countries that identify as liberal democracies, seek to comply with the rule of law. This is the principle that governmental authority must be exercised only in accordance with written, publicly disclosed laws that have been adopted and are enforced in accordance with established procedure. As Aristotle put it, ‘it is more proper that law should govern than any one of its citizens’. A legal system that complies with the rule of law can be contrasted with a system where power is exercised arbitrarily, for example, in authoritarian, totalitarian or anarchic states. In a state that aspires to the rule of law, the government should not be able to exercise state power arbitrarily. For example, the police should be able to detain someone only if they are explicitly authorised to do so by law; they should not be able to detain a person simply because someone in a position of authority wants them detained. According to one legal theorist,1 a legal system that complies with the rule of law will have at least three important characteristics 1. The law will be applied equally to everyone, regardless of his or her social status, culture, religion or political beliefs. 2. The courts will uphold the legal rights of the citizens, including the right to personal freedom. 3. No person will be punished other than for conduct that is expressly made illegal. The rule of law is usually associated with a number of other important principles: •• The doctrine of separation of powers, according to which there must be a clear separation between those who make the law (the legislature), those who administer the law (the executive) and those who interpret the law (the judiciary). This is described in more detail later in the chapter. •• The principle that a person should not be tried more than once for a given crime (known as double jeopardy). •• The principle that a person who has been arrested must be told what crime they have been accused of, and be given a fair trial. LAW IN CONTEXT: LAW IN THE MEDIA

Magna Carta at 800: we are still enjoying the freedoms won Around 20 miles from central London, where modern-day government and democracy shape the lives of citizens throughout the United Kingdom, the Thames meanders peacefully through nondescript English countryside. This is just another part of the green and pleasant land that has come to define much of these shores. Except that there’s something rather different about this rural corner of England. These riverside fields at Runnymede are reputed to be the setting for one of the most significant moments in UK democratic and constitutional history. The National Trust labels it ‘the birthplace of modern democracy’, while an impressive monument commemorates a ‘symbol of freedom under law’. It was here, of course, that the Magna Carta is said to have been sealed on June 15  1215 under the title of the ‘Great Charter’. Bad King John The catalyst for Magna Carta was the tyrannical rule of King John and, in particular, his imposition of arbitrary taxes upon the barons. The sealing of Magna Carta marked the first time that the notion that an unelected sovereign should be restrained under law was officially recognised. From then on, the idea that citizens should not be subjected to the arbitrary rule of a tyrannical monarch but instead be ruled and governed upon foundations of accepted legal process and law had a legal foundation. This was, in essence, an evolution of the Aristotelian idea of the supremacy of law in preference to the supremacy of man. Such a concept is today known as the rule of law and Magna Carta is widely accepted as being the birth of such rule in the UK constitution. So, a big moment. Of course, understandings of the rule of law have altered and developed from that determined by King John’s subjection. Theorists and academics have, over the centuries, debated and set out contrasting views as to what Magna Carta means in practice.

1 A V Dicey, Introduction to the Study of the Law of the Constitution (10th ed., Macmillan, 1959).

CHAPTER 1 Business and the law  11

Adherence to the rule of law is now believed to demand more than due legal process in preference to arbitrary rule. It now (for example) demands the equal subjection of all people — whatever their rank or position — to the ordinary law of the land; the appreciation and protection of individual rights and liberties and the ultimate ability of all citizens to be able to conduct themselves freely in a system guided by law and legal principle. Modern Magna Carta To say that the modern UK constitution is one that adheres to the basic principles of the rule of law is to state the obvious. That said, the UK constitutional system is markedly different from that which prevailed in the early 13th century. Monarchical legal power is virtually, if not completely, non-existent. Legislative and executive functions are in a sense fused through an institution built upon democracy and universal adult suffrage. The needs of citizens are fundamentally more diverse and complex than they were 800 years ago. Consequently, the system involves a great deal more discretionary authority than traditional rule of law theorists might find acceptable. As well as this, competing interests and concerns of the state often demand difficult balances and compromises to be struck between pressing political matters and concerns on the one hand, and individual liberties and core values of due process on the other. Even these occurrences are carefully regulated and debated as part of a constitutional system that, while highly peculiar, is adaptable and flexible to the constantly shifting needs and concerns of society. The core values set out by the Magna Carta, therefore — due legal process over arbitrary power and the freedom to act within a system guided by legal principle — are still very much at the heart of our constitution, even if that system has evolved and changed beyond all recognition. Over the centuries most of the Great Charter’s clauses have been repealed. Only three of the original 63 clauses remain in force: those providing for the freedom of the Church of England; the protection of the liberties and free customs of the City of London; and the protection of individuals from imprisonment or punishment without due process. But the legacy of Magna Carta runs much deeper. The establishment of the rule of law at Runnymede 800 years ago went on to inspire and shape the development of the UK constitution and, indeed, the constitutions of democratic systems the world over. Source: John Stanton, 15 June 2015, http://theconversation.com/magna-carta-at-800-we-are-stillenjoying-the-freedoms-won-41928.

12  PART 1 Foundations

ACTIVIT Y 1.6 — REFLECT

How would your life be different in the absence of law? What is your opinion regarding the necessity of law?

The categories of law Earlier, law was defined as a system of rules. The law is more than a mass of unrelated and inconsistent rules. In this section we explain four ways in which laws can be categorised: •• substantive and procedural law, •• public and private law, •• civil and criminal law, and •• domestic and international law.

Substantive and procedural law The distinction between substantive law and procedural law is concerned with the difference between what the law is and how the law works. Substantive law is the system of legal rules that set out the rights and obligations of individuals and the state. It is substantive law that determines, for example, whether a contract exists, whether a person has committed a crime or whether a person is entitled to compensation because another person has defamed them. Procedural law is the system of legal rules that regulate legal process such as civil litigation or a criminal prosecution. It is procedural law, for example, that determines whether a defendant is entitled to a jury at their trial and whether they are entitled to appeal to a higher court.

Public law and private law The substantive law has traditionally been organised into two broad categories, public law and private law, each of which includes a number of subcategories (see figure 1.2). Public law is concerned with the relationship between the individual and the state. It is the set of legal rules that establish the rights and obligations of the individual when dealing with the state and the rights and obligations of the state when dealing with the individual. The main subcategories of public law are constitutional law and administrative law. Public law also includes criminal law and taxation law. •• Constitutional law regulates the relationship between the various arms of government and between the government and its citizens, and grants human rights and civil liberties to citizens. If you have been accused of having committed a criminal offence and you want to argue that the government did not have the power to make the law you have been accused of breaking, you could use constitutional law in establishing your defence. •• Administrative law regulates the administrative activities of the government. It allows citizens to hold administrative bodies such as local governments and government departments accountable for their actions, and gives citizens the right to seek judicial review of administrative decisions. If, for example, you have applied to a local government for development approval and the approval has not been granted, you could use administrative law to challenge the decision. •• Criminal law establishes criminal offences and the penalties for their infringement. If you were to physically assault another person, not only could that other person commence legal proceedings against you under the law of tort (see below), but you could also be prosecuted by the state for having committed a crime, and a hearing would be held to determine your guilt and the extent of your punishment. •• Taxation law is the law regulating the administration and collection of tax. If you are a business owner you may be obliged to pay a range of taxes including income tax, GST, fringe benefits tax and payroll tax. Each of these subcategories of public law will be considered in detail in coming chapters. CHAPTER 1 Business and the law  13

Constitutional law Administrative law Public law Criminal law

Taxation law

Tort law

Law

Contract law

Competition and consumer law

Private law

Property law

Commercial law

Employment law

Company and partnership law FIGURE 1.2

Categories of law

Private law is concerned with the relationships between persons within the community. It is the set of legal rules that establish the rights and obligations of individuals when dealing with or otherwise interacting with other individuals. Subcategories of private law include tort law, contract law, consumer law, competition law, property law, company law, partnership law, commercial law and employment law. Each subcategory will be discussed in greater detail in coming chapters. •• Tort law provides a remedy for those harmed by the acts or omissions of another. A tort is a civil wrong other than a breach of contract. The range of recognised torts includes trespass, negligence, defamation, nuisance and passing off. If, for example, you were injured or suffered loss as a result of another person’s carelessness you could use the law of torts to seek a remedy from that person. •• Contract law is the law regulating agreements and promises. A contract is a legally enforceable agreement. If you have made an agreement with another person, or you have relied upon a promise made by another person, and the other person has not done what was agreed or what they promised, you could use the law of contracts to seek a remedy from that person. 14  PART 1 Foundations

•• Competition law seeks to ensure that business organisations do not misuse their market power. •• Consumer law is the set of rules that seek to protect consumers from unfair commercial practices by business organisations. •• Property law regulates property rights in things (personal property) and land (real property). The law of personal property includes intellectual property law (the law regulating copyright, trademarks, patents, and so on). Real property law includes the rules regulating title to land, mortgages, leases and licences. If you want to buy a house it is real property law (as well as contract law) that will regulate the rights and obligations of the parties to the transaction. •• Commercial law regulates various commercial matters including agency, franchises, insurance and bankruptcy. •• Employment law regulates the relationships between employers and employees. If you want to negotiate the pay and conditions of work with your employees, the negotiations will be regulated by employment law. •• Company law and partnership law regulate the establishment, management and dissolution of corporations and partnerships. ACTIVIT Y 1.7 — APPLY

Which category or categories of the law would be the most relevant in each of the following situations? 1. The Federal Parliament has passed legislation establishing a new industrial relations regime. The Queensland government claims that the Federal Parliament does not have the authority to pass such a law. 2. A journalist has written a news story that contains defamatory allegations about you that are not true. 3. The Department of Transport has refused to grant you a driver’s licence. You believe that the decision maker was biased. 4. You have been charged with shoplifting. 5. One of your competitors is using a logo that looks substantially similar to your logo. 6. In breach of a written agreement, one of your suppliers has failed to deliver important supplies to your business on the agreed date.

Criminal and civil law Another way in which various laws can be categorised is according to whether they are criminal law or civil law. Just as the distinction between public and private law is usually applied to substantive law, the distinction between criminal and civil law is usually applied to procedural law. As explained in the previous section, criminal law establishes criminal offences and the penalties for their infringement. In a criminal trial, the dispute is between the state, represented by the prosecutor, and the individual. In this context, civil law equates with private law. In a civil trial, the dispute is between two or more individuals. We explain the differences between criminal and civil law in more detail later in the text.

Domestic and international law A fourth way to categorise law is according to whether a particular law is part of domestic law or international law. Domestic law (or municipal law) is the law that regulates persons within a particular jurisdiction such as a nation or a State. Most of the law considered in this text is Australian domestic law. In the present era of globalisation, however, it should come as no surprise that the law is itself undergoing a process of gradual internationalisation. The world is still a long way from having an international government and a truly international legal system, but there is a growing body of international law. There are two types of international law: public international law and private international law. CHAPTER 1 Business and the law  15

Public international law is the system of rules regulating the relationships between states. There is no international government, so the sources of public international law are custom and, increasingly, treaties and conventions between states. Australia has entered into nearly 1000 such international treaties and conventions, including the Vienna Sales Convention, which regulates the international sale of goods, and the Berne Convention, which regulates international protection of copyright. International treaties and conventions are not automatically law; strictly speaking they are not legally enforceable in Australia unless they are put into the form of legislation and passed by parliament. Institutions administering public international law include the United Nations, the International Court of Justice, the Inter­ national Labour Organization, the World Trade Organization and the International Monetary Fund. Private international law (sometimes referred to as ‘conflict of laws’) is the system of rules that determine which state’s laws should be applied to resolve a dispute between people in different states. The question may be settled on the basis of common practice or upon the terms of the agreement between the parties. With the development of the internet and the growing ease with which people can engage in international transactions, this is becoming an increasingly important area of law. Three issues must be addressed before an Australian court can resolve an international legal dispute. 1. Does the court have the basic jurisdiction to hear the case? 2. Which law should apply? 3. Is the court the most convenient and appropriate forum in which to resolve the dispute? An Australian court will only have basic jurisdiction to hear an international legal dispute if: •• the defendant (the person being sued) is present in the court’s jurisdiction when the statement of claim is served on them, •• the defendant submits to the court’s jurisdiction, or •• the court authorises someone to find and serve the statement of claim upon the defendant outside the jurisdiction. If an Australian court decides that it does have basic jurisdiction to hear an international legal dispute, it must then decide which law is to apply: Australian law or the law of the other state. This issue will be decided according to the type of claim being made. If the claim is in contract, the court will look to see if the parties to the contract have agreed in their negotiations which state’s law is to apply; if so, then usually that law will be applied. If the parties have failed to agree upon which law is to apply, then the court will consider which legal system has the closest connection with the contract. This will usually be the legal system in which the contract was formed. Australian courts have the discretion to refuse to hear a case or to send it elsewhere. This discretion is referred to as forum non conveniens (‘hear the case in the most appropriate forum’). In Australia, a court will only exercise this discretion and refuse to hear a matter if the Australian court is a ‘clearly inappropriate forum’ and a foreign court exists that has the power to hear the case instead.2 Dow Jones & Company Inc v Gutnick (2002) 210 CLR 575

Gutnick, a resident of Victoria, alleged that an article published in the US investors’ magazine Barron’s contained references to him that were defamatory. He commenced defamation proceedings against Dow Jones & Company Inc. (a US corporation and the publisher of the magazine) in a Victorian court. He argued that he had been defamed in Victoria because a number of Victorian residents subscribed to the internet version of the magazine. Dow Jones & Company Inc. argued that the article was published where its website is maintained: on servers located in New Jersey, in the United States. The court had to decide (1) whether it had basic jurisdiction to hear the case, (2) if so, which law should be applied, and (3) whether Victoria was an inappropriate or inconvenient forum. The court decided that (1) it did have basic jurisdiction to hear the matter since the article was in fact ‘published’ in Victoria whenever it was downloaded and read, (2) the relevant law was Australian law since the act of defamation occurred in Australia rather than in the United States, and (3) Victoria was not a ‘clearly inappropriate’ forum to hear the case.

2 Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538, 556.

16  PART 1 Foundations

ACTIVIT Y 1.8 — REFLECT

Identify three areas that, in your opinion, would benefit from the internationalisation of regulation, that is, the creation of a set of rules that could be applied and enforced regardless of jurisdiction.

The changing law Some categories of law remain stable for centuries but other categories change regularly. The law is a living, growing thing, sometimes changing slowly, at other times changing very quickly. There are many reasons why a particular law or category of laws might be changed. •• Political change — sometimes the law changes because of a change in government. Different political parties have different policies, and when a new political party takes control of government after an election, they will set about implementing their policies by changing the law. •• Fixing problems — sometimes laws are not applied or interpreted in the way in which the law-makers intended. Sometimes lawyers find loopholes in the law enabling them to circumvent the effects of the law. Law-makers occasionally have to vary or ‘amend’ a law to remedy its defects. •• Changing values — we explained earlier that laws are often intended to reflect particular social and moral values. Such values change with time, so the law must eventually be changed to keep pace with them. For example, the law once treated married women very differently from the way it treats them today: married women were not permitted to own property in their own name and the law did not recognise any ability on the part of a married woman to enter into contracts in her own name. This was a reflection of the dominant values within the community at the time. These values have of course changed, and the law today treats married women in the same way as everyone else. •• Lobby groups — sometimes the law is changed as a result of pressure exerted upon the government by certain groups within the community. These groups — sometimes called lobby groups — include employers, unions, students, environmental groups, churches and charities. As a result of a perceived inequity or injustice in the existing law, a lobby group or groups may call for the law to be changed. •• Changing technology — sometimes a change in technology will lead to a change in the law. Traffic laws became much more complex following the invention of the car, and air traffic regulations developed following the invention of the aeroplane. One of the most rapidly changing areas of law today is internet law, an area of law that did not even exist 20 years ago. Because law changes so regularly, it is important that you not only know what the law is today, but also where to find the law so that you can see if it has changed. In a coming chapter we will explain how to locate the law. CAUTION!

The law changes regularly. When you are looking up a legal rule, whether in the form of legislation or case law, you should always be aware of the possibility that the law has changed, and you should therefore make sure that your source is current.

ACTIVIT Y 1.9 — REFLECT

Consider the various categories of substantive law listed earlier. Which categories of law would you expect to change most frequently?

CHAPTER 1 Business and the law  17

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  1.5 What is the definition of law adopted in this text?  1.6 What is the difference between a legal rule and a non-legal rule?  1.7 What is the role of law in (a) resolving disputes; (b) keeping the peace; (c) enforcing community values; (d) stabilising the economy; and (e) helping the disadvantaged?  1.8 What is the rule of law?  1.9 What is the difference between substantive law and procedural law? 1.10 What is the difference between public law and private law? 1.11 What matters are regulated by private law? 1.12 What matters are regulated by public law? 1.13 What is the difference between civil law and criminal law? 1.14 What is the meaning of the term ‘jurisdiction’? 1.15 What are the differences between ‘public international law’ and ‘private international law’? 1.16 In what circumstances will an Australian court hear an international legal dispute? 1.17 Why is the law often changing? List and explain five reasons.

1.3 Justice, ethics and politics LEARNING OBJECTIVE 1.3 Does the law have anything to do with ethics, justice, and politics?

In this section we examine the relationships between law and justice, law and ethics, and law and politics (see figure 1.3).

Justice

Law Ethics

FIGURE 1.3

Politics

Law in context

Law and justice What is the relationship between law and justice? As explained earlier, some legal philosophers insist that law is necessarily a reflection of universal principles of justice, while others insist that questions of legality and questions of justice are not necessarily related. In any event, while a relationship between law and justice may not be necessary, it is at least desirable. Most people would prefer that legal rules and legal decisions be just. According to one scholar, ‘justice is the first virtue of social institutions, as truth is of systems of thought’.3 Justice, then, provides a standard against which particular laws can be measured. But what is justice? 3 John Rawls. A Theory of Justice (Oxford University Press, 1999).

18  PART 1 Foundations

Defining justice Justice can be understood most simply as fairness, such as fair compensation or punishment, a fair decision or a fair distribution of resources. The notion of fairness has influenced the development of business law in many ways. In the next chapter we describe how the Australian Constitution explicitly obliges the Federal government to pay ‘just compensation’ when it compulsorily acquires property. In a later chapter, we describe situations where a contract may be unenforceable because one of the parties has behaved unfairly. We will also explain that there are certain types of conduct that businesses are prohibited from engaging in because they are seen as unfair to consumers or to competitors. In another chapter we explain that if an employee is dismissed by an employer in unfair circumstances they will be entitled to reinstatement or to some other remedy. But what is ‘fair’? Who decides what is fair and what is unfair? There are a number of different ways one can think about the source of justice (see figure 1.4).

Divine command?

Consequentialism?

Natural law?

What is justice?

Mutual agreement?

FIGURE 1.4

Positive law?

What is justice?

•• Justice as divine command — justice is the authoritative command of a deity such as the Christian, Islamic or Jewish God. For example, if a person breaks a promise they should compensate the promisee because the Koran says so. •• Justice as natural law — justice is a universal and absolute concept, an objective standard against which all laws and legal processes can be judged. For example, if a person breaks a promise they should compensate the promisee because breaking promises is wrong, and people who do wrong should compensate those harmed by the wrongful conduct, and that is just the way it is. •• Justice as positive law — justice is whatever the law says. For example, if a person breaks a promise they should compensate the promisee because that is what the law of contract requires. CHAPTER 1 Business and the law  19

•• Justice as mutual agreement — justice is whatever the community agrees that it is. For example, if a person breaks a promise they should compensate the promisee because most members of the community agree that promises should be kept and that people who break promises should compensate the promisee. •• Justice as consequentialism — justice is the decision or action that has the best consequences in terms of total welfare. This is a pragmatic conception of justice. For example, if a person breaks a promise they should compensate the promisee because this is likely to deter others within the community from breaking promises, and this will benefit the entire community. ACTIVIT Y 1.10 — REFLECT

Why do you believe that a murderer should be punished? Base your answer on one or more of the above conceptions of justice.

Types of justice In this section we describe the three principal types of justice (see figure 1.5).

Justice

Distributive justice

FIGURE 1.5

Procedural justice

Retributive justice

Types of justice

Distributive justice

Distributive justice is concerned with the fair and proper distribution within a group or a community of things such as wealth, resources and power. Distributive justice is achieved when these things are distributed fairly and properly. The law is a means to ensure such a fair and proper distribution. But when is a distribution ‘fair and proper’? There are a number of possibilities. •• According to egalitarianism, resources should be distributed equally within the group or community, either in terms of equality of opportunity or equality of outcome. If you were distributing a chocolate cake among your friends according to the egalitarian notion of distributive justice, you would give each friend the same amount of cake. •• According to desert theory, resources should be distributed according to what each member of the group or community deserves, the basis of which is not equality but some other criteria such as need, talent or effort. If you were distributing a chocolate cake among your friends according to the desert theory of distributive justice, you could distribute the cake on the basis of need, and give the largest slice to the hungriest person, the smallest slice to the least hungry person and so on. Alternatively you could distribute the cake on the basis of effort by holding some kind of competition (such as a race) that results in a ranking of your friends, and giving the largest slice to the friend who is ranked first and so on. •• According to utilitarianism, resources should be distributed so as to maximise the total or average welfare across all members of the group or community. If you were distributing a chocolate cake among your friends according to the utilitarian notion of distributive justice, you would give the largest slice to the person who likes chocolate cake the most, the smallest slice (or no cake at all) to the person who likes chocolate cake the least and so on, thereby maximising the overall happiness of your group of friends. 20  PART 1 Foundations

ACTIVIT Y 1.11 — APPLY

Which theory of distributive justice is the most appropriate for the distribution of financial wealth within a community? Why are other theories not appropriate?

Retributive justice

Retributive justice is the ‘proper’ response to a wrongful act. The field of retributive justice is concerned with the appropriate responses to criminal and other harmful behaviour. When is punishment of a wrongdoer justified? What type of punishment is appropriate? Once again, there are many possible answers to these kinds of questions. •• According to desert theory, punishment should be decided according to what the offender deserves. Offenders must be dealt with as individuals, not as part of some calculation of overall welfare. Any benefits of the punishment for the community are not as important as the impact of the punishment upon the individual and achieving an appropriate balance between what the offender has actually done and the punishment the offender receives. •• According to utilitarian approaches to retributive justice, punishment is justified if it maximises the overall welfare of the community by deterring other offenders, rehabilitating existing offenders, or ensuring that the law is complied with. The effect of the punishment upon the individual is less important than the benefits of the punishment for the community.

ACTIVIT Y 1.12 — REFLECT

Make a list of the factors you believe should be taken into account by a judge in determining the sentence for a person found guilty of having committed a white-collar crime. How does your answer relate to the theories of retributive justice outlined above?

Retributive justice can be contrasted with restorative justice. Where retributive justice is concerned with how best to punish a person who has engaged in wrongdoing, restorative justice is concerned with restoring or healing the victim and reintegrating the offender into the community. Restorative justice initiatives often involve bringing the victim and offender together so as to give the victim the opportunity to express and process the harm they have suffered as well as educate the offender about the consequences of their behaviour. Procedural justice

Procedural justice is achieved if a person receives a fair hearing or trial. A legal system is said to be procedurally just if safeguards have been built into the legal system to ensure that a person being prosecuted for a crime or who is a party to civil litigation receives a fair hearing. Examples of such safeguards include: •• the requirement that a defendant be informed of the matters alleged against them, •• the requirement that each party be given the chance to test the evidence of their opponent by cross-examination, •• the right for a legal matter to be heard before a jury, •• the placing of the burden of proof upon the party bringing the action, •• the requirement that claims and allegations satisfy a certain standard of proof (usually ‘beyond reasonable doubt’ in criminal trials and ‘on the balance of probabilities’ in civil trials), and •• the requirement for unanimous jury decisions in criminal trials. To the extent that a legal system deviates from these and similar safeguards, the system cannot be described as procedurally just. CHAPTER 1 Business and the law  21

Law and ethics It is necessary to distinguish between law and ethics: making a choice that is legal is not the same as making a choice that is ethical. A legal choice is one that complies with the law. An ethical choice is one that is recognised as ‘good’ and ‘right’. Ethical standards are similar to legal rules in that both offer guidance in making decisions about how to behave. There are, however, a number of important differences between legal rules and ethical standards. •• If you want to know what is legal, you consult the law, but if you want to know what is ethical, you consult your own values and those of your family, your peers and your community. •• Unlike legal rules, ethical standards are not enforceable by prosecution or litigation (unless the ethical standards are also legal rules). Instead, ethical standards are ‘enforced’ through fear of shame, of a guilty conscience, or of losing acceptance within the community or profession, or through desire for the self-esteem, satisfaction and praise associated with being, or with being seen to be, a good person. A business organisation may be ‘pressured’ to be ethical by concern that the market will punish unethical behaviour: if customers and community become aware of unethical conduct on the part of a particular organisation or within a particular industry generally they may react to that awareness by withholding their custom and support for that organisation or industry. Pressure can also come from the government in the form of encouragement to establish and comply with voluntary codes of conduct such as the Code of Banking Practice as well as in the form of legislation which prohibits certain forms of unethical conduct such as consumer protection legislation. Where do ethical rules come from? Like questions about the origin of principles of justice this is a profoundly philosophical question to which there is no clear answer. Possible approaches to identifying the nature and source of ethical rules include deontological theories and consequentialism. •• Deontologicalism — ethical rules are universal rules ‘created by God’ or existing in nature. They apply to everyone, everywhere, all of the time. A person must comply with these rules regardless of the consequences. •• Consequentialism — unlike the previous type of theory, this type of theory emphasises the consequences of behaviour. The most well known example of consequentialism is utilitarianism: a person behaves ethically if they make decisions and choices that maximise the overall wellbeing of the greatest number. For example, imagine your sister cooks you some dinner. Your sister is a terrible cook and the dinner is awful, but she puts a lot of effort into trying to get it right. Your sister asks you what you think of the meal. How should you reply if you want to do the right thing? If you favour the deontological approach to defining ethical behaviour you might believe that it is always wrong to lie, and you will tell the truth regardless of the consequences. If you favour consequentialism or the utilitarian approach, you will be concerned about the consequences of your actions and give the answer which maximises overall wellbeing, which may require you to lie for your sister’s good. Other possible approaches to making and understanding ethical choices include virtue ethics and relativism. According to relativism, ethical values, rules and standards differ from time to time and place to place; there are no universal standards of right and wrong, and you should make the best decision possible in the particular circumstances of the ethical dilemma. According to virtue ethics, you should focus not upon the criteria for making ethical choices but upon the personal qualities of an ethical person. In the above situation you should respond to the question as a virtuous person would respond. LAW IN CONTEXT: LAW IN PRACTICE

How to be ethical In the world of business it is tempting to focus solely upon the bottom line and to direct your efforts towards making as much money as possible within the limits of the law. But there are substantial rewards associated with aiming for a higher standard and conducting business ethically, and not all of these rewards are financial ones: the respect of one’s colleagues and customers, the goodwill that

22  PART 1 Foundations

comes with being recognised as an honest and reliable business person, and the self-esteem associated with knowing that you are doing the right thing. Three character traits associated with being an ethical person are integrity, wisdom and moral courage. Integrity means wholeness or completeness. A person with integrity is a person who acts in accordance with their own beliefs and moral values; in other words, there is an admirable consistency between what they think, what they say and what they do. A person with integrity is honest, honourable and trustworthy, and can be relied upon to do what they promise to do. Wisdom refers to the intellectual and emotional resources required in order to make the right decisions and sound judgments. Wisdom is gained through both formal and informal learning. Formal learning gives the ethical person the knowledge, information and thinking skills they need to make ethical decisions. Informal learning is gained through practical experience in dealing with ethical problems, and through influence by and modelling of other ethical people. Moral courage is the willingness and ability to make difficult choices and to stand up to others in order to do the right thing. It is often difficult to do things differently to the way things have always been done, or to express a point of view that is at odds with majority opinion, but the ethical person does so anyway if they believe that tradition or common sense are unethical. There is usually a general correspondence between legal rules and ethical standards, but this is not always the case. Some conduct may be unethical but not illegal, or illegal but not unethical. For example, a business owner might become aware of a loophole in the local government’s environmental protection regulations that allows him to legally dispose of dangerous toxic waste by dumping it in a national park. If he is only concerned with compliance with legal rules he will dump the waste, but if he is also concerned with ethical standards he will have to think carefully about what he does.

ACTIVIT Y 1.13 — APPLY

Give another example of (1) conduct that is unethical but not illegal; and (2) conduct that is illegal but not unethical.

There may or may not be a necessary relationship between ethics and the law, but it is certainly desirable that, as far as is possible, the law reflect ethical values. Ethics often inform the development of new laws. And conduct that is ethical will usually satisfy the requirements of the law. CAUTION!

Just because a particular course of action is legal, it does not mean that it is the right thing to do.

LAW IN CONTEXT: LAW AND ETHICS

The cost of unethical corporate conduct In March 2001, HIH Insurance Ltd, Australia’s second-largest insurance company, declared itself insolvent and went into provisional liquidation with debts of $5.3 billion. In a period of catastrophic corporate collapses in Australia, the collapse of HIH is usually acknowledged as the worst. The consequences of the HIH collapse were widespread and devastating. Those directly affected included the many seriously ill and disabled Australians who no longer received payments under their income protection or medical insurance policies; the holders of insurance policies who suddenly found themselves uninsured for claims made by or against them; the retirees who had invested their superannuation or their life savings in HIH shares; and, of course, the numerous employees of HIH who lost their jobs because of the collapse. Many non-profit organisations, including charities and sporting clubs, were forced to shut down because they were unable to find or afford alternative public liability

CHAPTER 1 Business and the law  23

insurance. HIH was one of Australia’s biggest home-building market insurers and its collapse left home owners without compulsory home warranty insurance, the owners of residential dwellings without cover for defective building work, and builders unable to operate because they could not obtain builders’ warranty insurance. The cost to the building and construction industry was so substantial that State governments were forced to spend millions of dollars of public money to prevent further damage to the industry. The failure of HIH also contributed to what became known in Australia as the ‘public liability insurance crisis’, which in turn led to comprehensive and controversial legislative reform of Australian tort law: caps on damages awards were introduced, limitation periods were contracted, and greater proportionate liability by victims was implemented. In June 2001, the Prime Minister of Australia announced that a Royal Commission would be appointed to investigate the HIH collapse. The Royal Commission was directed to focus specifically on how the actions of HIH’s directors and officers contributed to the failure of HIH or involved undesirable corporate governance practices. The Royal Commission found that there were 56 breaches of the Corporations Act 2001 (Cth) and other legislation that should be referred to the Australian Securities and Investments Commission (ASIC) for further investigation. Following its investigation, ASIC commenced proceedings against a number of HIH directors. In March 2002, the court found that one of the directors, Rodney Adler, had contravened a number of civil penalty provisions of the Corporations Act. In May 2002, the court ordered that Adler be disqualified from being a director for a period of 20 years and that he and his own company, Adler Corporation, each pay pecuniary penalties of $450  000. Adler and his fellow director and former chief executive officer Ray Williams were also ordered to pay aggregate compensation of approximately $8 million to HIH. In February 2005, Adler pleaded guilty to four criminal charges: two counts of disseminating information knowing it was false in a material particular and that was likely to induce the purchase by other persons of shares in HIH, one count of obtaining money by false or misleading statements, and one count of being intentionally dishonest and failing to discharge his duties as a director of HIH in good faith and in the best interests of that company. (The duties of company directors will be considered in detail in a coming chapter.) In April 2005, Adler was sentenced to four-and-a-half years jail, with a non-parole period of two-and-a-half years. In handing down Adler’s sentence, Justice Dunford said: ‘The offences are serious and display an appalling lack of commercial morality  .  .  .  Directors are not appointed to advance their own interests but to manage the company for the benefit of its shareholders to whom they owe fiduciary duties  .  .  .  They were not stupid errors of judgement but deliberate lies, criminal and in breach of his fiduciary duties to HIH as a director’.4

Law and politics Law is often associated with politics, but law is more than mere politics. The law is the outcome of historical development, tradition, cultural values and community perceptions of justice and ethics. In fact, it is often tempting to keep questions about the law completely separate from questions of power and politics. However, the reality is that while the law is more than merely politics, the law is certainly shaped and influenced by power and politics. Particular laws are usually the expression of a political ideology, whether liberal, democratic, fascist or communist. Legislation is made by politicians to implement government policies and achieve political objectives. Case law is made by judges with political opinions and values, although judges are expected to set aside their own personal views on an issue and to apply the law objectively. Throughout this text we will occasionally refer to circumstances where political processes have influenced the development of business law.

4 Regina v Rodney Stephen Adler (2005) 53 ASCR 471.

24  PART 1 Foundations

LAW IN CONTEXT: LAW AND CRITIQUE

Law, politics and power According to some legal theorists, the law is inescapably political. Within a community, different points of view and different interests compete for dominance. The law is influenced by the preferences and perspectives of the dominant members of the community, and is used by those dominant members of the community to protect and enhance their own interests. This is not always obvious, however. Those using the law to exercise power and maintain dominance often portray the law as universal and apolitical rather than specific and ideological. They convince the rest of the community that the way they want things to be is the normal way, or the way things must always be. Law is used as a mask for power. For example, feminist legal theorists point to the fact that many laws were developed by legal institutions dominated by men — parliaments and courts — and that the law is inevitably biased in favour of the male perspective. This and other such perspectives on law can be contrasted with the more traditional and conservative perspectives on law. According to these perspectives, law is not a mask for the exercise of power. Rather, it is a neutral framework within which power is regulated or restrained.

ACTIVIT Y 1.14 — RESEARCH

Scan the online news headlines and locate a news item that you believe makes the link between law and politics explicit.

Too much law? In the past few decades there has been an explosive growth in the sheer quantity of laws in the form of legislation, regulations and by-laws, conventions and treaties, codes of conduct and judicial decisions. This growth has prompted claims that Australians are now over-regulated. Over-regulation (or ‘red tape’) is of particular relevance to business, especially small business. Many businesses struggle to comply with the enormous number of taxation, industrial relations, workplace health and safety, consumer protection, corporate governance and environmental protection laws. They complain that too much time is spent completing unnecessarily detailed paperwork and lodging numerous forms, reports and statements, and that the vast number of legal rules and regulations applying to businesses in Australia unfairly and inappropriately restrict them in their efforts to earn income and serve their customers. The Business Council of Australia (the BCA) periodically expresses its concerns about the volume of red tape and the associated compliance burden on Australian businesses and the community. In May 2005 the BCA published its Business Regulation Action Plan for Future Prosperity. The action plan claimed that the level of red tape in Australia was growing at three times the rate of economic growth, and that much of Australia’s business regulation was uncoordinated. It found that in the four years from 2000 to 2003 the Commonwealth Parliament passed as many pages of legislation as were passed in the entire period from 1901 to 1969. In 2003 alone Commonwealth and State governments passed more than 30  000 pages of new laws and regulations.5 The Commonwealth and State governments in recent years have been exploring ways to reduce the regulatory burden on Australian businesses. They are presently seeking to simplify the system of business law in Australia by either harmonising the various State laws, or through the States ceding (‘handing over’) power to the Commonwealth to create a single layer of regulation. ACTIVIT Y 1.15 — REFLECT

What are some of the consequences of over-regulation for small business?

5 Business Council of Australia 2005, Business Regulation Action Plan for Future Prosperity, p. 8, www.bca.com.au.

CHAPTER 1 Business and the law  25

LAW IN CONTEXT: LAW IN POLITICS

Abbott claims $700m in red tape savings for business [Former] Prime Minister Tony Abbott said his government would create ‘the biggest bonfire of regulations in our country’s history’ as it moved to cut A$700 million from business compliance costs. Abbott was outlining the regulations that would be targeted in the first of two annual ‘red tape repeal days’ scheduled for next Wednesday. He said there were nearly 10  000 unnecessary or counter-productive regulations that needed to go. ‘More than 50  000 pages will disappear from the statute books’, Abbott told parliament. The most significant savings had previously been announced and have little prospect of passing the current Senate. ‘Repealing the carbon tax removes over 1000 pages of primary and subordinate legislation and removes compliance costs from over 75  000 businesses’, Abbott said. The $700 million figure, quoted on the government’s Cutting Red Tape website launched by the government on Monday, included $85.3 million in savings from the repeal of the carbon tax, $10.5 million from the repeal of the mining tax, and $64 million in savings from changes to the Fair Work act. Last year the Coalition promised to reduce business compliance costs by $1 billion per year if elected. ‘Between 2007 and 2013, under the former government, some 21  000 new regulations found their way into national life’, Abbott said. But opposition leader Bill Shorten said the previous government had removed 12  000 redundant pieces of legislation and established a minister for deregulation  .  .  . Source: Kylar Loussikian, 19 March 2014, http://theconversation.com/abbott-claims-700m-in-red-tape-savings-forbusiness-24562.

There is also a widespread perception that there is a growing tendency in Australia to have recourse to litigation too quickly and too easily. It is claimed that this problem has arisen as a result of a number of developments in recent decades. •• Class actions — a class action is a single legal action that can now be brought on behalf of hundreds or even thousands of litigants or victims. Examples of class actions include legal actions by groups of consumers in relation to contaminated products, and by groups of shareholders in relation to corporate mismanagement. King v AG Australia Holdings Ltd [2003] FCA 1420

During an attempted takeover of GIO, the company and its directors told GIO’s shareholders that they should reject a takeover offer of $5.35 per share. Six months later, the company revealed that it had incurred losses of $2 billion, and the takeover offer was reduced to only $2.75 per share. The shareholders brought a class action against GIO and directors alleging that they had suffered financial loss as a result of misleading and deceptive or negligent statements by the company and its directors. After four years of legal proceedings in the Federal Court, the matter was settled by the parties resulting in a total payment of $97 million to more than 22  000 shareholders.

•• Conditional costs agreements — a conditional costs agreement is an arrangement between a lawyer and a client, whereby the client only has to pay the lawyer’s legal fees if the outcome of a legal action is favourable to the client. These arrangements are also known as ‘no win–no fee’ arrangements, and are claimed to encourage clients to engage in litigation by reducing the negative consequences of losing the legal action. •• Culture of litigation — the United States has for a long time had an overly litigious culture, and with the spreading of US values through its dominance of popular culture, Australians seem to be following in the footsteps of the United States and becoming increasingly willing to threaten, if not in fact commence, legal action to solve problems that in the past may have been resolved through other means, or ignored entirely. This community perception has been used to justify reforms to the law to make it more difficult for victims of harm to commence litigation, something that will be examined in a later chapter. However, many of these justifications lack merit. For example, Australian court statistics show no evidence of a ‘litigation explosion’. 26  PART 1 Foundations

The idea of a more litigious society is similar to the popular belief that crime is constantly rising: people continue to believe in it even though statistics have indicated the opposite for quite some time. There are many such myths and misunderstandings about the law; by learning more about the law in texts such as this you participate in the ongoing effort to educate the community about the truth about law and its role in society. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 1.18 What is ‘justice’? What is the relationship between law and justice? 1.19 What are the three types of justice? Explain each of these using examples. 1.20 What are the various theories of justice? Explain each of these using examples. 1.21 What are ‘ethics’? 1.22 What are the four main theories of ethics? Explain each of these. 1.23 What is the relationship between law and ethics? 1.24 What is the relationship between law and politics? 1.25 What are the consequences for small business of over-regulation?

In conclusion •• The law relates to real life in a number of ways: it affects your personal life and your business activities, and dominates the media and popular culture. •• ‘Law’ can be defined in many different ways. This text will define law as the set of rules made by the state and enforceable by prosecution or litigation. The law regulates your agreements, your responsibilities to others, your property rights and transactions, your public conduct, and your relationship with government. Laws are necessary to resolve disputes, to keep the peace, to enforce community values, to stabilise the economy and to help the disadvantaged. While the fundamental principles of the law remain relatively constant, particular legal rules change regularly. •• While a relationship between law, justice and ethics may not be necessary, it is at least desirable. Law is more than just politics, although law, politics and power are intimately related. •• The explosive growth in the number of legislative provisions in recent decades has prompted claims that business is now over-regulated. JOHNNY AND ASH

Johnny — So let me see if I understand all this. First of all, a lot of what I already know about the law is relevant and important: there are laws that give me rights and laws that impose obligations on me; there are different levels of government; and the legal system involves many different sorts of people such as lawyers, judges, politicians, juries and public servants. Ash — That’s right. See, not everything you watch on TV is complete rubbish. Johnny — And the difference between the law and other sorts of rules is that legal rules are made by the government and there are consequences if I break them: I might be prosecuted for committing a criminal offence, or I might be sued if I have caused harm to someone. Ash — Sometimes both. Johnny — Law isn’t the same thing as justice, but laws should be fair, just like they should be ethical and reflect community values. Ash — Laws don’t have to do any of these things, but it is better if they do. Johnny — I think I get it! The law is important! And there is way, way, way too much of it! Ash — Finally! But you are a long way from being ready to solve your legal problems. I’ve only told you about the idea of law in a general sense. Now I have to tell you more about how it works here in Australia  .  .  .

CHAPTER 1 Business and the law  27

QUIZ 1 A tort is

(a) a law made by parliament. (b) a legally enforceable agreement. (c) a harmful act that gives the victim a right to sue for compensation. (d) a rule made by a court of law. 2 If a person breaches a contract (a) the other party to the contract can sue them for compensation. (b) they will be prosecuted. (c) they will be punished. (d) all of the above. 3 Income tax on business earnings is payable to (a) the court. (b) the Federal government. (c) the other party to the transaction. (d) the State or Territory government. 4 The claim that an unjust law does not have to be obeyed is consistent with (a) legal positivism. (b) jurisprudence. (c) natural law theory. (d) the rule of law. 5 Who claimed that in the absence of law, existence would be a ‘war of all against all’? (a) Renee Descartes. (b) John Locke. (c) Thomas Hobbes. (d) Thomas Aquinas. 6 Which of the following is categorised as public law? (a) Contract law. (b) Constitutional law. (c) Property law. (d) Tort law. 7 ‘The main purpose of imprisonment is to warn other potential offenders of the consequences of breaking the law’. With which theory of justice is this statement consistent? (a) Egalitarianism. (b) Desert theory. (c) Utilitarianism. (d) Retributivism. 8 Ethics are (a) rules of conduct. (b) made by the state. (c) enforceable through litigation or prosecution. (d) all of the above. 9 The role of the executive arm of government is to (a) make the law. (b) administer the law. (c) interpret the law. (d) amend the law. 28  PART 1 Foundations

10 Which of the following statements is inconsistent with the rule of law?

(a) Political power must be exercised in accordance with written, publicly disclosed laws. (b) Parliament should where possible avoid making laws that are retrospective. (c) A person should not be treated differently by the legal system solely because of their religious beliefs. (d) If a person has been found not guilty of a crime but new evidence comes to light they should be tried a second time.

EXERCISES EXERCISE 1.1 — THE NATURE OF LAW

How will knowledge about the law generally, and about business law in particular, help you to succeed in your chosen career? EXERCISE 1.2 — THE NATURE OF LAW

It is said that, among other things, law preserves community values. Of course, there are many issues about which there is clear division within the community: questions about abortion, prostitution, drug use, capital punishment, the environment, tax, defence and immigration. The law must nevertheless take a position on each of these issues. If law is based on certain values, upon whose values are laws about these issues based? EXERCISE 1.3 – THE NATURE OF LAW

The definition of law offered in this chapter was described as ‘positivist’. What does this mean? Can you construct a definition of law that acknowledges law’s relationship with justice and morality? EXERCISE 1.4 – THE PURPOSE OF LAW

Identify three laws that have attracted media attention this week. For each law, identify what you believe to be the purpose or objective of the law. EXERCISE 1.5 — THE CATEGORIES OF LAW

Institutions administering public international law include the United Nations, the International Court of Justice, the International Labour Organization, the World Trade Organization and the International Monetary Fund. Give a brief description of the role of each of these organisations. EXERCISE 1.6 — JUSTICE, ETHICS AND POLITICS

Download a news item/story from a news site such as www.news.com.au that has some connection with the law and complete the following tasks. (a) Write a brief summary of the item/story. (b) Allocate the item/story to one or more of the categories of law identified in this chapter. (c) Describe the interactions between law, politics, justice and ethics within the item/story. EXERCISE 1.7 — LAW AND JUSTICE

Strict adherence to the rules of court procedure, particularly the rules of evidence, are usually justified by the claim that it is better that a guilty person walk free than that an innocent person be imprisoned unjustly. Do you agree with this claim? EXERCISE 1.8 — LAW AND JUSTICE

Locate a news item that describes a legal decision or new law that in your opinion is not just or fair. Upon which conception of ‘justice’ are you relying in your categorisation of the legal decision or new law as unjust? EXERCISE 1.9 — LAW AND ETHICS

What is the difference between conducting business legally and conducting business ethically? Do the two necessarily coincide? CHAPTER 1 Business and the law  29

EXERCISE 1.10 – LAW AND POLITICS

Identify at least two arguments in support of, and two arguments opposing, the feminist conception of law referred to in this chapter.

KEY TERMS case law  Law made by courts in accordance with the doctrine of precedent. Also known as ‘common law’. civil law  The set of legal rules and legal procedures that regulate the relationships between members of the community and enable them to resolve disputes. class action  Legal action brought against a defendant on behalf of a large number of plaintiffs with similar causes of action. conditional costs agreement  A costs agreement with a client that states that payment of the lawyers’ fees is conditional upon the client’s matter being resolved successfully. consequentialism  An ethical theory that emphasises the consequences of behaviour, e.g. utilitarianism. constitution  The set of rules determining how (a) a nation or state, or (b) an organisation such as a corporation will be governed. consumer credit  The provision of money or credit by a business to a consumer for non-commercial purposes and with the expectation of repayment at a later date. contract  An agreement between two or more persons that is legally enforceable. criminal law  The set of legal rules and legal procedures that facilitate the prosecution by the state of those accused of having committed a crime. defamation  A tort committed when one person publishes to a third party, in spoken or written form, a statement about another person that would damage the reputation of that person. deontologicalism  An approach to ethics according to which ethical rules are universal rules with which a person must comply regardless of the consequences. desert theory  The notion that resources should be distributed according to what each member of a group or community deserves. distributive justice  The fair and proper distribution within a group or a community of things such as wealth, resources and power. doctrine of separation of powers  The principle that the legislature, the executive and the judiciary should as far as possible remain functionally separate. domestic law  The law that regulates persons within a particular jurisdiction. egalitarianism  The notion that resources should be distributed equally within a group or community. ethics  (1) The study of the principles that guide people in choosing between what is right and what is wrong, in deciding upon the best course of action and in judging the actions of themselves and others. (2) These principles themselves. Federal  Pertaining to the nation of Australia, e.g. the Federal Parliament or Federal legislation. Also known as ‘Commonwealth’. intellectual property  A form of intangible creation such as the expression of an idea, a trade mark, a new technology or a design. jurisdiction  The extent of the power and authority conferred upon a parliament, a government body or a court. jurisprudence  The philosophical study of the meaning and nature of law. justice/Justice  (1) If in lower case, an extrinsic value concerned with how legal systems should be administered and how individuals should behave, and against which the law can be judged. (2) If capitalised, the title given to a judge in the High Court, the Federal Court, the Family Court or a State Supreme Court. law  A system of rules made by the state and enforceable by prosecution or litigation. legislation  Law made by parliament. Also known as a ‘statute’ or ‘Act of Parliament’. litigation  Legal proceedings brought by one member of the community against another. Also known as ‘civil action’. 30  PART 1 Foundations

lobby groups  A group within the community that exerts pressure upon the legislature to reform the law. local authority  A statutory authority such as a city council or a shire council that exercises legislative power delegated to it by a State or Territory government. Also known as ‘local government’. loopholes  A ‘flaw’ in a legal rule that, when the legal rule is interpreted literally, enables a person to circumvent the intended effect of the rule. natural law theory  A branch of jurisprudence that insists that there is an intimate and necessary relationship between the law and a set of higher values. private international law  The system of rules that determine which state’s laws should be applied to resolve a dispute between people in different states. Also known as ‘conflict of laws’. private law  The category of law concerned with the relationships between individuals within the community; it includes contract law, tort law and property law. procedural justice  A fair hearing or trial. procedural law  The system of legal rules that regulate legal process such as civil litigation or a criminal prosecution. prosecution  Legal proceedings brought in a court of law as a result of the state seeking to establish the guilt of a person charged with having committed a crime. public international law  The system of rules regulating the relationships between states. public law  The category of law concerned with the relationship between the citizen and the state; it includes constitutional law, administrative law, criminal law and taxation law. restorative justice  An approach to criminal justice concerned with restoring or healing the victim and reintegrating the offender into the community. retributive justice  A fair and proper response to a wrongful act. rule of law  The principle that governmental authority must be exercised only in accordance with written, publicly disclosed laws that have been adopted and are enforced in accordance with established procedure, and that all citizens, including those who make up the government, are ruled by laws rather than by personal discretion or arbitrary exercises of power. state/State  (1) If in lowercase, the government generally. (2) If capitalised, a State within a federation, e.g. New South Wales. statement of claim  A document setting out the plaintiff’s claim that commences a civil action. substantive law  The system of legal rules that set out the rights and obligations of individuals and the state. tort  A harmful act, other than a breach of contract, giving the victim a right to sue for compensation, e.g. trespass, negligence, defamation, nuisance and passing off. utilitarianism  The notion that decisions should be made or resources should be distributed so as to maximise the total or average welfare across all members of the group or community. white-collar crime  A crime committed by a person within a business or government organisation where the person takes advantage of their position to carry out the crime.

ACKNOWLEDGEMENTS Photo: © Michael Dechev / Shutterstock.com Photo: © David Smart / Shutterstock.com Article: © The Conversation, John Stanton, 15 June 2015, http://theconversation.com/ magna-carta-at-800-we-are-still-enjoying-the-freedoms-won-41928 Article: © The Conversation, Kylar Loussikian, 19 March 2014, http://theconversation.com/ abbott-claims-700m-in-red-tape-savings-for-business-24562 QUIZ ANSWERS

1. c  2. a  3. b  4. c  5. c  6. b  7. c  8. a  9. b  10. d CHAPTER 1 Business and the law  31

CHAPTER 2

The Australian legal system LEA RN IN G OBJE CTIVE S 2.1 What are the main features of the Australian legal system, and why is it so complicated given our relatively small size? 2.2 How does the Australian Constitution regulate the relationship between the Federal government and the various State and Territory governments? 2.3 What is the role of the executive government?

JOHNNY AND ASH

[Johnny and Ash are still together in the bar from chapter 1. The bar has become louder as the hour has become later and the occupants have become drunker. Ash and Johnny have moved to a quieter table at the back of the bar.] Ash — So, what do you know about the Australian legal system? Johnny — [He answers confidently.] I know enough. I know that it is a confusing mess. I know that there are too many rules, but nobody knows where they are or what they mean. I know we’ve got a bunch of politicians, a Prime Minister, premiers and ministers — too many if you ask me. I know that it costs an arm and a leg to take someone to court, and if someone else takes you to court you will probably lose both arms and both legs. What more do I need to know? Ash — Well, let’s see if you can answer four simple questions. Who is in charge? Johnny — That’s easy. The Premier. No, wait, do you mean just in this State or in charge of the whole country? If you mean the whole country, that would be the Prime Minister, right? Or is it the Queen? The Governor-General? The president? No, that’s not right  .  .  . Ash — Okay, stop. What about this one? What is the relationship between the Federal government and the various State governments? Johnny — I don‘t know. Don‘t the State governments just do what the Federal government tells them to do? Are the State governments sort of local branches of the Federal government? Ash — Uh-huh. Question three. What does the parliament do? Johnny — [He is starting to look confused.] The parliament? Is that the same thing as the government? I think I’ve seen shots of parliament on TV, a big room full of people shouting at each other. What do they do? Argue a lot, apparently. And shout annoying insults while someone is trying to make a speech. Seriously, I suppose they do something. Do they make law? Ash — I’m asking the questions. Question four. Do judges make law? Johnny — Do judges make law? I’ve never really thought about that before. I know judges make decisions. They decide whether or not someone should go to jail or whether or not they should pay millions of dollars to the person who is suing them. But I thought they found the law in the law books. Ash — The law books? Johnny — Yeah, the law books. You know, the big books where all the laws are written down? Big, old, dusty books  .  .  . Ash — Go and buy another round of drinks. We have a lot to talk about.

CHAPTER PROBLEM

As you make your way through this chapter, consider how you would answer the four questions asked by Ash. Try to answer them now, and then try again after reading this chapter. Compare your two sets of answers.

Introduction This chapter and the next present a comprehensive description of Australia’s legal system. Before looking at the particular laws that regulate business in Australia today, it is important that you learn about the regulatory environment within which those laws operate. You need to understand how the Australian Constitution sets out how the Federal system is to operate, and the important role played by each of the three arms of government: the legislature, the executive and the judiciary. After working through this chapter and the next, you will not only better understand Australia’s legal system, but you will also be able to better appreciate and understand what you read and see in the media about the statements and activities of parliaments, politicians and judges. CHAPTER 2 The Australian legal system  33

2.1 The Australian legal system LEARNING OBJECTIVE 2.1 What are the main features of the Australian legal system, and why is it so complicated given our relatively small size?

The nation of Australia, with its relatively small population of approximately 23 million people, has a surprisingly complex legal system. Australia is governed by a Federal, or Commonwealth, government located in the national capital of Canberra. (The terms ‘Federal’ and ‘Commonwealth’ are used interchangeably throughout this text.) Australia also consists of six States — New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia — and two major mainland Territories — the Australian Capital Territory and the Northern Territory — each of which has its own government. Within each State and mainland Territory there are various local governments, each with their own jurisdiction (except the Australian Capital Territory which has no separate local government). Some aspects of business law are regulated by Federal law; some aspects are regulated by State law; some aspects are regulated by a combination of the two; and some aspects are regulated by local government. Some laws are made by parliament; these laws are called legislation, statutes or Acts of Parliament. Other laws are made by judges; these laws are called case law or common law.

Key characteristics of the system Before you begin your step-by-step journey through the intricacies of the Australian legal system, you will in this section learn about the system as a whole. The six key characteristics of the Australian legal system are set out in figure 2.1.

A liberal democracy Australia is a liberal democracy. It is a representative democracy in which laws are made by, and the executive government consists of, elected representatives who exercise their power subject to the rule of law and to the various Federal and State constitutions. It is a ‘liberal’ democracy because of the emphasis placed upon individual freedom and other liberal values.

Liberal democracy

Responsible government

Common law legal system

Australian legal system Separation of powers

Constitutional monarchy

Federation

FIGURE 2.1

The six key characteristics of the Australian legal system

34  PART 1 Foundations

Democracy

Democracy is a form of government in which citizens have a say in the decisions that affect their lives, including participation in the proposal, development and passing of legislation. The democratic entitlement to participate in government (including voting in elections) may be limited to a relatively small section of the total population, such as wealthy males, or it can be extended to include all adult citizens regardless of wealth, gender or race. In Australia nearly all adult members of the community have the right to participate in the political process. Any Australian citizen aged 18 years or more can vote in an election as long as they are validly enrolled on the electoral roll and not disqualified from voting. Persons disqualified from voting in Australia include: •• persons in prison serving a sentence of 3 years or more,1 •• persons of unsound mind,2 and •• persons convicted of treason or treachery.3 Voting in Federal and State/Territory elections is compulsory. Representative democracy

Representative democracy is one of the possible forms of democracy. In a representative democracy the citizens vote for officials who represent them when engaging in the legislative (law-making) and executive (administrative) aspects of government. Representative democracy can be contrasted with direct democracy, where the citizens participate directly in the processes of government, including law making, changing the constitution and overriding the decisions of government officials. Australia has a system of representative democracy where the members of the various Federal and State parliaments are elected by the citizens of various electorates, and who represent those citizens when engaging in the processes of government. The Australian legal system also incorporates some aspects of direct democracy: Australian citizens are occasionally called upon to vote directly in referenda in order to decide whether a constitution should be amended (e.g. to transform Australia from a monarchy into a republic) or to express a community view about an important political issue (e.g. daylight saving). Liberal democracy

A liberal democracy is one of the possible forms of representative democracy. In a liberal democracy the will of the majority and the decision-making power of the elected representatives are constrained by the rule of law and by a constitution that emphasises and protects the individual rights and liberties of citizens. According to one scholar, the principal characteristics of a liberal democracy include the following. •• The citizens determine the outcomes of elections, and any group that complies with constitutional principles is entitled to form a political party and contest an election. •• The military and other democratically unaccountable institutions are subordinate to and answerable to the authority of elected representatives. •• Citizens have substantial freedom of belief, opinion, discussion, speech, publication, assembly, demonstration and petition. •• Executive power is constrained by government institutions such as an independent judiciary and parliament. •• Civil liberties are effectively protected by an independent and non-discriminatory judiciary whose decisions are respected and enforced by other arms of government. •• Citizens are politically equal under the law. •• Minority groups are not oppressed. •• The rule of law protects citizens from human right abuses. •• The constitution is supreme.4 1 Commonwealth Electoral Act 1918 (Cth) s 93(8AA). 2 Commonwealth Electoral Act 1918 (Cth) s 93(8)(a). 3 Commonwealth Electoral Act 1918 (Cth) s 93(8)(b). 4 Larry Diamond, Developing Democracy: Toward Consolidation (Johns Hopkins University Press, 1999) 7–8.

CHAPTER 2 The Australian legal system  35

A constitution is the set of rules determining how the state will be governed, and how and by whom the legislative, executive and judicial powers will be exercised. A constitution may be in the form of a written document, as in Australia, Canada and the United States. Other states have an unwritten constitution, such as the United Kingdom and New Zealand, where the constitution is composed of legislation, case law and custom. The constitutions of some states — such as the United States — include or are accompanied by a bill of rights. Other countries — such as Australia — do not have a written bill of rights and instead rely upon courts finding implied rights and civil liberties within the constitution.

A common law legal system There are, generally speaking, two main types of legal system: common law legal systems and civil law legal systems. Australia’s legal system is a common law legal system. The common law legal system is named as such because of the emphasis placed within the system upon ‘common law’. Common law, or case law, is law made by judges and is recognised in Australia as one of the two sources of law, the other being legislation (law made by parliaments). Many of the recognised laws in common law legal systems were established by judges in the course of resolving legal disputes and issuing detailed written judgments, a process described in more detail in the next chapter. The body of judicial decisions is called ‘common’ law because the rules established by judges are consistent across the relevant jurisdiction; that is, they do not vary from place to place or from person to person. The model of law in common law countries is the British model. Countries that were settled or colonised by the British — such as Australia — generally have a common law legal system. Civil law legal systems are the most common type of legal system. The primary source of law in civil law legal systems is legislation in the form of codes, statutes and constitutions. Case law is generally not recorded and is not recognised as a source of law. The model of law in civil law legal systems is the Roman model. Most countries in western Europe have a civil law legal system, as do those countries that were settled or colonised by western European countries including many countries in Central America and South-East Asia. Table 2.1 lists the countries with each type of legal system. TABLE 2.1

Legal systems of the world

Civil law

Common law

Religious law

Civil and common law

Civil and religious law

Common and religious law

Albania

American Samoa

Bangladesh

Botswana

Afghanistan

Bangladesh

Angola

Antigua and Barbuda

Gambia

Cameroon

Algeria

Brunei

Argentina

Australia

Ghana

Cyprus

Bahrain

Gambia

Andorra

Bahamas

Iran

Israel

Comoros

Malaysia

Armenia

Barbados

Libya

Jersey

Djibouti

Nigeria

Aruba

Belize

Mauritania

Lesotho

Egypt

Pakistan

Austria

Bhutan

Morocco

Malta

Eritrea

Azerbaijan

British Virgin Islands

Nigeria

Mauritius

Indonesia

Belarus

Canada

Oman

Namibia

Jordan

Belgium

Dominica

Saudi Arabia

Philippines

Morocco

Benin

England

Sudan

Saint Lucia

Oman

Bolivia

Fiji

Vatican City

Scotland

Qatar

36  PART 1 Foundations

Civil law

Common law

Religious law

Civil and common law

Civil and religious law

Bosnia and Herzegovina

Gibraltar

Yemen

Seychelles

Syria

Brazil

Ghana

South Africa

United Arab Emirates

Bulgaria

Grenada

Sri Lanka

Burkina Faso

Hong Kong

Swaziland

Burundi

India

Thailand

Chad

Ireland

Vanuatu

China

Jamaica

Zimbabwe

Congo

Kiribati

Cote D’Ivoire

Marshall

Cambodia

Islands

Cape Verde

Myanmar

Central African Republic

Nauru

Chile

New Zealand

Colombia

Northern Ireland

Costa Rica

Palau

Croatia

Pakistan

Cuba

Saint Kitts and Nevis

Cyprus

Saint Vincent and the Grenadines

Czech Republic

Singapore

Democratic Republic of the Congo

Tonga

Denmark

Trinidad and Tobago

Dominican Republic

Tuvalu

Ecuador

Uganda

EI Salvador

United States

Estonia

Wales

Common and religious law

Finland France Egypt Equatorial Guinea Ethiopia Gabon Guinea Guinea-Bissau (continued)

CHAPTER 2 The Australian legal system  37

TABLE 2.1 Civil law

(continued)

Common law

Georgia Germany Greece Guatemala Haiti Honduras Hungary Iceland Italy Japan Latvia Lebanon Lithuania Luxemburg Macau Mexico Mongolia Montenegro Netherlands Norway Panama Paraguay Peru Poland Portugal Romania Russia Sao Tome and Principe Serbia Slovakia Slovenia Spain Sweden Switzerland Taiwan Turkey Ukraine Uruguay Uzbekistan Vietnam

38  PART 1 Foundations

Religious law

Civil and common law

Civil and religious law

Common and religious law

It would appear that the distinction between common law legal systems and civil law legal systems is becoming less clear. Countries with civil law legal systems are increasingly recognising the importance of consistency in judicial decision making and the value of a system of binding precedent, while countries with common law legal systems are enacting more and more legislation such that members of the judiciary now spend most of their time interpreting and applying statutes. ACTIVIT Y 2.1 — REFLECT

Why does Australia’s legal system differ from the legal systems of other countries?

CAUTION!

The terms common law and civil law are both potentially confusing, because they can have different meanings depending on the context. ‘Civil law’, as used previously, refers to a type of legal system where the law is based primarily on Roman law. However, the term can also refer to one of the two fundamental categories of law within any legal system described earlier in the text: civil law and criminal law. ‘Common law’ is even more confusing, because it has more possible meanings. As used above, the term refers to a type of legal system based on British law, but the term is also used: • in an historical sense to refer to the law common to the whole of England as opposed to laws of only local application, • to refer to case law developed by the common law courts in England, as opposed to the courts of equity (this is explained in more detail in the next chapter), and • to refer to case law generally. Whenever you see the term ‘common law’ you should check the context carefully to ascertain the intended meaning.

A constitutional monarchy Australia is a constitutional monarchy. The head of state of the Commonwealth of Australia and of the various States is the king or queen of England. They are described as a constitutional monarch because they hold that position not by force of arms but according to the will of the Australian people as expressed in the Australian Constitution. (And they can therefore be removed as monarch by an amendment to the Australian Constitution.) The king or queen of England is represented in Australia by various Crown representatives: the Governor-General in the Federal government and the State Governors in the various State governments (see table 2.2). TABLE 2.2

Crown representatives

Jurisdiction

Crown representative

Website

Commonwealth

Governor-General

www.gg.gov.au

New South Wales

Governor

www.governor.nsw.gov.au

Queensland

Governor

www.govhouse.qld.gov.au

South Australia

Governor

www.governor.sa.gov.au

Tasmania

Governor

www.dpac.tas.gov.au/governor

Victoria

Governor

www.governor.vic.gov.au

Western Australia

Governor

www.govhouse.wa.gov.au

CHAPTER 2 The Australian legal system  39

ACTIVIT Y 2.2 — RESEARCH

Name and prepare a brief biography of (1) the present Governor-General of Australia, and (2) the present Governor of your State.

A constitutional monarchy is just one of many possible forms of government. The major forms of government are set out in figure 2.2.

Forms of government

Presidential systems

Monarchies

FIGURE 2.2

Parliamentary republics

Theocracies

One party states

Forms of government

•• Monarchies — a monarchy is a country where the head of state is a king or queen. There are two types of monarchy: constitutional monarchies and absolute monarchies. In an absolute monarchy the head of state is a king or queen who exercises executive power directly. Examples of absolute monarchies include the United Arab Emirates, Saudi Arabia and Brunei. In a constitutional monarchy, the head of state holds that position subject to the constitution and with the consent of the people, and exercises little or no actual political power. Executive power is usually exercised by a ministerial council led by a prime minister who is also leader of the legislature. Examples of constitutional monarchies include Japan, Malaysia, Cambodia and, of course, Australia. Commonwealth countries are constitutional monarchies where the head of state is the king or queen of England. Examples of Commonwealth countries include the United Kingdom, Australia and New Zealand. •• Presidential systems — a presidential system is a country where the head of state is a president rather than a monarch. There are two types of presidential system: full presidential systems and semi-presidential systems. In a full presidential system, the president is both head of state and head of the executive government, and there is no prime minister. Examples of full presidential systems include the United States of America, Indonesia and the Philippines. In a semi-presidential system, the president is head of state and exercises some executive power, but executive power is also exercised by a ministerial council led by a prime minister who is also leader of the legislature. Examples of semi-presidential systems include France, Russia and Pakistan. •• Parliamentary republics — in a parliamentary republic, the head of state is a president who exercises little or no executive power, and is primarily a figurehead. Instead, executive power is actively exercised by a ministerial council led by a prime minister who is also leader of the legislature. Examples of parliamentary republics include Italy, Singapore and East Timor. •• Theocracies — in a theocracy, the head of state is determined by the rules of the state religion. Examples of theocracies include Iran and Vatican City. •• One party states — in a one party state, political power is exercised by a single political party. Examples of one party states include China, the Democratic People’s Republic of Korea (North Korea), and Vietnam.

A federation Australia is a federation. This means that in addition to being the national government — referred to as either the Commonwealth government or the Federal government — there are various State 40  PART 1 Foundations

governments. The State governments are not subordinate to the Federal government. Rather, the two levels of government are ‘partners’, and power is shared by these governments in accordance with the Australian Constitution. In Australia, the Federal government is granted certain powers under the Australian Constitution, and the residual powers remain vested in the State governments. This can be contrasted with the alternative arrangement, such as the Canadian federal model, where certain powers are vested in the State governments and the residual powers are vested in the Federal government. A federal system of government can be contrasted with a unitary system of government, where a single government is responsible for the entire jurisdiction (although it may delegate some of its responsibilities to local authorities). New Zealand, for example, has a unitary system of government. Australia’s federal system is described in more detail later in this chapter.

Separation of powers Both the Federal government and the various State and Territory governments operate in a manner generally consistent with the doctrine of separation of powers. A distinction is usually made between the power to make law, the power to administer law and the power to interpret law (see figure 2.3). Legislative power is the power to make law. It is exercised by the legislature, which in Australia takes the form of the Federal Parliament and the various State and Territory parliaments. A parliament is a body of elected representatives that makes laws on behalf of the citizens. Most parliaments are bicameral, that is, they consist of two ‘houses’, each of which must vote upon and pass the law for it to be valid. The parliaments of Queensland, the ACT and the Northern Territory are unicameral, that is, they consist of a single house. Executive power is the power to administer the law. It is exercised by the executive, which in Australia consists of a Prime Minister and other ministers (within the Federal government), a Premier and other ministers (within the State governments) or a Chief Minister and other ministers (within the Territory governments). The role of the executive can best be understood as being responsibility for the day-to-day governance of the state. The executive proposes most of the legislation to be passed by the legislature, manages the state’s relationships with other states, and oversees the various departments of the public service. Judicial power is the power to interpret the law. It is exercised by the judiciary, that is, the system of courts. In some countries the power of the judiciary is limited to interpretation of the law made by the legislature, while in Australia and other common law legal systems the judiciary plays a more active role in the creation of law by way of the doctrine of precedent. In many countries the judiciary has the power to declare law made by the legislature to be unconstitutional and invalid.

Government

FIGURE 2.3

Legislature

Makes law

Executive

Administers law

Judiciary

Interprets law

The three branches of government

CHAPTER 2 The Australian legal system  41

The doctrine of separation of powers is the notion that the legislature, the executive and the judiciary should as far as possible remain functionally separate. This means that: •• the same person should not form part of more than one of the three branches of government, •• one branch of government should not control or interfere with the functioning of another branch of government, and •• one branch of government should not exercise a function of another branch of government. In most states the legislative, executive and judicial powers are separated into either two or three discrete bodies. In the United States, the legislature (the Congress), the executive (the President and the Secretaries of State) and the judiciary (the Supreme Court) are strictly separate. In Australia, on the other hand, members of the executive (the Prime Minister/Premier/Chief Minister and the other Ministers) are also members of the legislature (the parliament), which means that the legislature and the executive are not strictly separate. ACTIVIT Y 2.3 — REFLECT

How does the separation of powers protect the community from injustice and oppression?

It is important to distinguish the ‘separation of powers’ from the ‘division of power’ under Australia’s federal system of government described above. ‘Division of power’ refers to the division of law-making power between the Federal government and the various State governments. ‘Separation of powers’ refers to the separation of legislative, executive and judicial power between various bodies within each level of government (see figure 2.4).

Federal legislative power

Federal executive power

Federal judicial power

State legislative power

State executive power

State judicial power

Division of power

Separation of powers FIGURE 2.4

Division of power versus separation of powers

Responsible government The Australian legal system is similar to the British legal system in that it seeks to incorporate not only the doctrine of separation of powers but also the doctrine of responsible government. According to the doctrine of responsible government, the executive branch of government is responsible (accountable) to the legislature rather than to the monarch. In Australia, the ministers comprising the various Federal, State and Territory Executive Councils are elected representatives who are also members of the relevant parliament and as such are answerable to that parliament. As a consequence, the members of the executive government are ultimately answerable to the citizens who elected them; if the citizens are unhappy with the performance of the executive government generally or of particular members of the executive government, they can vote them out at the next election. This does mean, however, that the legislature and the executive are not completely separate. 42  PART 1 Foundations

In practice the accountability of the executive to the legislature manifests in several ways. •• Each Minister must report to the parliament about their executive decisions and about the performance of their department. This includes answering questions (during ‘Question Time’) about their performance from other members of the parliament, including members of the Opposition. •• While Ministers are officially appointed by the monarch (or the Governor-General/State Governor), they hold their position only while they have the ‘confidence’ of the lower house of the parliament. If the lower house passes a motion of ‘no confidence’ in the Minister they must resign from their position. •• While the monarch (or the Governor-General/State Governor) is head of state and officially in control of the executive government, they can act only through the Ministers who are, as explained earlier, members of the legislature. The head of state must act on the advice of the Ministers.

The history of the system In this section we begin our examination of the complexity of the Australian legal system by considering the historical development of that system.

Law and the first Australians In tracing the development of law in Australia it is necessary to acknowledge that for tens of thousands of years prior to British settlement there was in existence in Australia a sophisticated and effective legal system: the Indigenous Australian legal system. Features of this system included the following. •• The laws that regulated Indigenous behaviour were derived from ‘the Dreaming’. These laws determined what foods could be eaten and how the food should be shared, and what punishments should be applied if laws were broken. They set out the rules for family, marriage, social organisation, looking after land, ceremonies and rituals. •• Indigenous peoples were taught about these laws through stories, music, art, dance and other ceremonies. The most important thing they were taught was the appropriate way to behave towards the land and other people within the family. •• There were no formal governments or law courts. Instead, legal processes involved all members of the community. Disputes that could not be settled by the parties themselves were settled by elders. •• There were no jails. If a person engaged in theft, adultery, or unauthorised physical assault, or they neglected their family and clan obligations, they might be punished by ‘spearing’, or they might be obliged to compensate those they had harmed. •• Disputes between different Indigenous groups were settled by negotiation, ritual punishment or formal battles. Occasionally gatherings of Indigenous groups would take place, involving major ceremonies and the trade of materials and objects, the teaching of new songs and dances, and the settlement of disputes Unfortunately, the British did not recognise or acknowledge the Indigenous Australian legal system upon their arrival in the 1700s. The British were accustomed to associating a legal system with the presence of constitutions, courts, legislatures and legal documents, and confronted with the absence of these things in Indigenous society the British decided that the Indigenous Australians were uncivilised and undeserving of legal recognition.

British settlement The British colony of New South Wales was established on the east coast of Australia in 1788. The first Governor was Governor Arthur Phillip. Australia was declared to be terra nullius at the time the colony was established. Terra nullius means ‘empty land’ or ‘land belonging to no-one’; the Indigenous Australians were not recognised as ‘inhabiting’ the land in a legal sense because they did not have a system of private property and had not developed or built permanent structures on the land. This meant that Australia was deemed to have been settled by Britain rather than conquered or acquired by treaty. This distinction has important CHAPTER 2 The Australian legal system  43

consequences. When a new territory is conquered or acquired by treaty, the laws of the original inhabitants remain in place, subject to future alteration by the colonising power; but when a new territory is settled, the territory is regarded as previously unoccupied and the settlers bring with them the laws of their home country. As Sir William Blackstone explained in his 1765 commentaries on the Laws of England: If an uninhabited country be discovered and planted by English subjects all the English laws then in being which are the birthright of every English subject, are immediately there in force .  .  .5

This meant that in Australia the Indigenous legal system was ignored, and the British settlers brought British law with them; this is known as the doctrine of reception. This is why today the origins of Australia’s laws are traced back to the British legal system rather than the Indigenous legal system. More than 200 years later, in the decision of Mabo v Queensland (No 2) (1992) 175 CLR 1, the High Court of Australia finally rejected the fiction that Australia was terra nullius at the time of Britain’s colonisation, and acknowledged the prior existence of Indigenous customary law. This led to the recognition of native title in Australia. The High Court did not, however, reject the doctrine of reception. It confirmed that Australia was settled rather than conquered, and that Australia’s current laws derive their validity from the British legal system. Mabo v Queensland (No 2) (1992) 175 CLR 1

The Meriam people had occupied the Murray Islands in the Torres Strait between Australia and New Guinea since well before British settlement. In 1985 the Queensland Government sought to resolve uncertainty about the State’s ownership of the islands by enacting the Queensland Coast Islands Declaratory Act 1985. This Act sought to abolish any claims to ownership of the islands by the Murray Islanders. Three islanders, including Eddie Mabo, commenced a legal action challenging the validity of the Act, arguing that it was contrary to the Racial Discrimination Act 1975 (Cth) and therefore invalid under s 109 of the Constitution (see below). The Murray Islanders were successful and the Queensland Coast Islands Declaratory Act was subsequently repealed. In order to prevent further attempts by the Queensland Government to abolish any possible title of the Murray Islanders, a second legal action was brought by Mabo before the High Court in order to have the rights of the Meriam people formally declared. The High Court decided that: 1. the previous view that Australia was terra nullius at the time of British settlement was wrong, 2. as a result of their continuous and ongoing connection to and occupation of the land, the Meriam people had traditional title to the Murray Islands, which had survived British settlement, 3. other Indigenous Australians in a similar position could also have traditional title to their land formally recognised, 4. such traditional rights of ownership could be taken away at any time by express law to that effect, and 5. (by a narrow majority) where traditional rights of ownership were taken away by law, no compensation was payable. Unfortunately Eddie Mabo died before the High Court’s landmark decision was handed down.

Colonial government The New South Wales colony and the other colonies subsequently established in Australia were initially controlled directly, and rather strictly, by the British government as represented by the colonial governor. The governors applied British law to colonial problems and disputes as appropriate. It was up to the governor to decide which British laws were to be applied, and how. As time passed, however, the British government, by a series of legislative enactments, granted the Australian colonies increasing levels of independence (see table 2.3). 5 Sir William Blackstone, Commentaries on the Laws of England (Strahan, Cadell & Prince, 1783) 77.

44  PART 1 Foundations

TABLE 2.3

Important legislation pre-Federation

Date

Act

Effect

1787

Letters Patent and First Charter of Justice

• officially established penal colony of NSW under complete control of British Parliament • established NSW colonial court with limited civil and criminal jurisdiction

1803

Letters Patent

• officially established penal colony of Van Diemen’s Land (later called Tasmania)

1814

Letters Patent and Second Charter of Justice

• established Supreme Court of NSW with more extensive civil and criminal jurisdiction

1823

New South Wales Act (Imp) and Third Charter of Justice

• established NSW as a full colony • established comprehensive court system in NSW • established a Legislative Council consisting of NSW residents appointed by the Governor and empowered to make laws consistent with those of Britain (and subject to being overridden by the British Parliament)

1828

Australian Courts Act (Imp)

• increased the size of the Legislative Council • required the Governor to consult with the Legislative Council • provided that all British statutes and common law up to 1828 applied in NSW and Tasmania; British statutes passed after 1828 would only apply to NSW and Tasmania if expressly stated to do so

1829

Western Australia Act (Imp)

• established the colony of Western Australia with its own Supreme Court and Legislative Council

1834

South Australia Act (Imp)

• set out the conditions for establishing the province of South Australia with its own Supreme Court and Legislative Council

1836

Letters Patent

• established the province of South Australia, using the enabling provisions in the South Australia Act 1834 (Imp)

1842

New South Wales Constitution Act (Imp)

• increased the size of the Legislative Councils • required that two-thirds of the Legislative Councils be elected

1850

Australian Constitutions Act (Imp)

• established the colony of Victoria with its own Supreme Court and Legislative Council • gave the various Legislative Councils the power to create local parliaments that had the power to regulate the right to vote, grant membership of the Councils and make laws for the ‘peace, welfare and good government’ of the colonies • provided a basic format for the drawing up of colonial Constitutions

1855

New South Wales Constitution Act (Imp)

• transformed NSW into a self-governing colony • established a constitution for NSW • created a bicameral NSW Parliament consisting of a Legislative Assembly, a Legislative Council and the Governor as Crown representative

1855

Victoria Constitution Act (Imp)

• transformed Victoria into a self-governing colony • established a constitution for Victoria • created a bicameral Victorian Parliament consisting of a Legislative Assembly, a Legislative Council and the Governor as Crown representative

1855

Constitution Act (Tas)

• transformed Tasmania into a self-governing colony • established a constitution for Tasmania • created a bicameral Tasmanian Parliament consisting of a House of Assembly, a Legislative Council and the Governor as Crown representative

1856

Constitution Act (SA)

• transformed South Australia into a self-governing province • established a constitution for South Australia • created a bicameral South Australian Parliament consisting of a House of Assembly, a Legislative Council and the Governor as Crown representative (continued)

CHAPTER 2 The Australian legal system  45

TABLE 2.3

(continued)

Date

Act

Effect

1859

Letters Patent

• established the self-governing colony of Queensland with its own Supreme Court and Legislative Council

1865

Colonial Laws Validity Act (Imp)

• confirmed the ability of the colonial parliaments to amend their own constitutions • permitted colonial parliaments to amend or repeal pre-1828 British laws as far as they applied to the colony • declared that the colonial parliaments had no power to pass laws inconsistent with British laws directly applicable to the colony (i.e. the British government could still pass laws overriding colonial laws)

1867

Constitution Act (Qld)

• established a constitution for Queensland • created a bicameral Queensland Parliament consisting of a Legislative Assembly, a Legislative Council and the Governor as Crown representative

1885

Federal Council of Australasia Act (Imp)

• established the Federal Council of Australasia, which met every 2 years to pass laws on matters of common interest

1890

West Australia Constitution Act (Imp)

• established a constitution for Western Australia • created a bicameral Western Australian Parliament consisting of a Legislative Assembly, a Legislative Council and the Governor as Crown representative

ACTIVIT Y 2.4 — RESEARCH

Go to the Documenting Democracy website at www.foundingdocs.gov.au and look at the oldest document relating to your State or Territory. According to the site, what is the significance of this document?

Federation By the late 1800s, six relatively independent self-governing colonies existed on the Australian continent, each with its own constitution, legislature and court system. It was widely recognised that, given the similarities and the common interests of the six colonies, some form of unifying legal system should be established. The sources of pressure for unification included: •• the perceived need to defend the continent during wartime, •• trade disputes provoked by customs barriers between the colonies, and •• the need for a consistent and effective immigration policy. According to Sir Henry Parkes — the Australian politician often referred to as the ‘Father of Federation’ — in 1890: The great question to consider is whether the time has not now come for the creation of this Australian government as distinct from the local governments now in existence. In other words, to make myself as plain as possible, Australia has a population of three and a half millions; when they formed the great Commonwealth of the United States, the numbers were about the same, and surely what the Americans have done by war the Australians could bring about in peace without breaking the ties that hold them to the mother country. Believing as I do that it is essential to preserve the security and integrity of these colonies that the whole of their forces should be amalgamated into one great Federal army, whenever necessary — it seems to me that the time is close at hand when they ought to set about creating this great national government for Australia.6 6 C Cluff 2007, ‘Great rural speeches — Sir Henry Parkes’, ABC Rural, www.abc.net.au.

46  PART 1 Foundations

A National Australasian Convention was held in Sydney in 1891. Delegates from each colony met to draft a constitution for a proposed Commonwealth of Australia. Two more conventions were subsequently held in Adelaide and Sydney, and in 1898 a fourth and final convention was held in Melbourne to revise and update the proposed Constitution Bill. It was decided that, rather than abolish the colonial governments and replace them with a single Australian government, a federal model would be adopted. The colonial governments would remain, with their individual constitutions, legislatures and court systems, but each colony would become a State within a Federation and a new, Federal level of government would be created to exercise legislative, executive and judicial power in relation to issues of national importance. In 1899 a referendum was held, and a majority of the colonies voted in favour of federation. On 5 July 1900, the British Parliament passed the Commonwealth of Australia Constitution Act (Imp), and the Commonwealth of Australia came into existence on 1 January 1901. Each of the colonies, now States, gave up certain powers and rights to the new Federal government, and at the same time retained their individual identities and substantial legislative authority. The Colonial Laws Validity Act 1865 (Imp) initially ensured that the British Parliament still had the power to make law regulating Australia and to override laws made by the Australian parliaments. However, since 1900, Australia has continued to become increasingly independent (see table 2.4), and today, Federal, State and Territory governments in Australia are free from interference by the British Parliament. TABLE 2.4

Important legislation post-Federation

Date

Act

Effect

1900

Commonwealth of Australia Constitution Act (Imp)

• established Commonwealth of Australia • established Australian Constitution

1902

Constitution Act (NSW)

• established a constitution for NSW

1922

Constitution Act Amendment Act (Qld)

• abolished the Upper House of the Queensland Parliament (so that it is now a unicameral rather than a bicameral legislature)

1931

Statute of Westminster (Imp)

• permitted Australia’s Federal Parliament to assume ‘full legislative competence’ and, if necessary, override UK laws as far as they applied to Australia

1942

Statute of Westminster Adoption Act (Cth)

• repealed Colonial Laws Validity Act 1865 (Imp) as far as it applied to Federal Parliament; British Parliament no longer able to override Federal laws or make laws applying to Australia

1968

Privy Council (Limitation of Appeals) Act (Cth)

• abolished appeals from the High Court of Australia to the Privy Council in London on matters involving Federal law

1975

Privy Council (Appeals from the High Court) Act (Cth)

• abolished appeals from the High Court of Australia to the Privy Council in London on all matters

1986

Australia Act (Cth) and Australia Act (UK)

• repealed Colonial Laws Validity Act 1865 (Imp) as far as it applied to States; British Parliament no longer able to override State laws • authorised Australian parliaments to pass laws with extra-territorial application provided a sufficient connection exists between the territory and the subject of the law • abolished appeals from the State Supreme Courts to the Privy Council in London on all matters

ACTIVIT Y 2.5 — RESEARCH

Conduct some online research into Australia’s history and answer the following questions. 1. Who was Sir Samuel Griffith and what role did he play in the lead up to Federation? 2. Who was Australia’s first Governor-General? 3. Who was Australia’s first Prime Minister?

CHAPTER 2 The Australian legal system  47

Local government Local governments are established by State and Territory governments to take responsibility for community and local services. As such they are a branch of State or Territory government rather than a separate level of government in their own right. The first local government in Australia was the Adelaide Corporation, which was created by South Australia in October 1840. The City of Sydney and the Town of Melbourne followed in 1842. There are now 561 local governments in Australia in all States and Territories other than the ACT (see table 2.5). TABLE 2.5

Number of local governments

Jurisdiction

Number of local governments

Australian Capital Territory

—

New South Wales

152

Northern Territory

 21

Queensland

 74

South Australia

 64

Tasmania

 29

Victoria

 79

Western Australia

142

Local governments have a legislature and an executive but no judiciary. The legislature is a council of elected representatives led by a mayor, and the executive is a subset of the council comprised of key office holders. The responsibilities of local governments are defined by the State or Territory legislation that establishes them. These responsibilities are typically limited to the provision of community facilities such as libraries and parks, the maintenance of local roads, planning regulation, and the provision of local services such as waste disposal.

Political parties Although they are not expressly referred to in any of the Federal or State constitutions, political parties are an important feature of the political landscape in Australia. Most members of the Lower House and of the Upper House of the various parliaments are members of a political party and are elected to parliament based, not on their individual views and characteristics, but on the basis of their membership of that party. The main political parties in Australia are the Liberal Party and the National Party (which at present form the Liberal–National coalition), the Australian Labor Party, and the Greens (see table 2.6). TABLE 2.6

Australian political parties

Political party

Website

Australian Greens

www.greens.org.au

Australian Labor Party

www.alp.org.au

Liberal Party of Australia

www.liberal.org.au

National Party of Australia

www.nationals.org.au

48  PART 1 Foundations

LAW IN CONTEXT: LAW IN POLITICS

Why do Australians hate politics? While for some Australians the recent leadership spill will be viewed as a simple act of restorative justice, many others would have spectated on events in Canberra with an equal measure of indifference and disdain. Is it any wonder that Australians hate politics? In February of [2013] we asked a representative sample of 1377 Australians to consider various issues regarding Australian politics and their role in making democracy work. Our findings should give all democrats pause for thought. Australians feel they are observers rather than participants in formal politics. Nine in ten of those interviewed regard themselves as without influence over the federal government and seven in ten feel the same about other levels of government. There is widespread evidence of negative attitudes towards politics and politicians. comparable to those found in other democracies like Britain, the United States and Finland. Yet Australian negativity has emerged in a relatively well-off economic period. Over a quarter of Australians combine a specific set of negative attitudes towards politics and politicians. We are irritated by politicians talking rather than acting, annoyed with the compromises of politics, and supportive of a greater role for non-political actors in public decision-making. Other findings give reason for hope about the future of Australian democracy. Elements of malaise in Australian politics linger but the core issue appears to be with the politics currently on offer. We show that most Australians do not hold the ideals of the democracy in contempt. They show strong support for its processes such as consultation, compromise and democratic judgement. Citizens also display a considerable understanding of its complex processes and could be up for a more extended role if a different politics was on offer that was more participatory, open and perhaps local. Rather, democratic decline in contemporary Australian politics is increasingly attributed to the politicians. Our findings draw attention to two important issues for Australia’s political class. First, that citizens view politicians and democratic politics as one and the same — anti-politics equals anti-party politics. Also, the artificial separation of representative and participatory democracy has reinforced a culture of anti-politics at the heart of the Australian political system. Our findings show that citizens have complex feelings towards democracy. There is support for a new participatory politics, but with the aim of reducing representative democracy and developing a more integrated, inclusive and responsive system. The reform process would need to proceed on the basis of four fundamental principles — politicians as the key agents of change, non-partisanship, institutional strengthening and connecting the citizen with the Canberra village. The first principle assumes that politicians should act as the bridge between representative and participatory democracy. The second follows the understanding that anti-politics is about the health of Australian democracy and is a problem for all politicians regardless of party politics. The third principle is based on the idea that it makes sense to use existing parties which already have public legitimacy and trust to build the new politics. This would also show care from a financial perspective in an austerity climate. The fourth principle is rooted in the popular perception that the Canberra ‘bubble’ is disconnected from the everyday lives of Australian citizens, and changes are needed to bring Canberra closer to the people. The following reforms flow from these principles: including lay representation on parliamentary select committees; establishing public sector juries managed through the criminal jury system and chaired by MPs; providing advisory referenda through online petitions managed by a cross-bench committee of MPs; establishing a single-member constituency link to encourage greater MP responsiveness to community needs; and introducing a new localism starting with constitutional recognition for local government. The details of these reforms would need to be thought through carefully. Our research shows there’s need for reform although its outcome is of course a question of political choice. The proposals in our report are in keeping with our evidence about the multifaceted way Australians imagine their democracy. Citizens are clear about what they do not like about what’s currently on offer. The issue is whether elected leaders are listening. These leaders will have a critical role to play as agents of change, or else the reform process will be doomed to failure. Source: Mark Evans, 11 July 2013, http://theconversation.com/why-do-australians-hate-politics-15543.

CHAPTER 2 The Australian legal system  49

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  2.1 What are the three levels of government in Australia?  2.2 What are the six key characteristics of the Australian legal system?  2.3 What is a democracy?  2.4 What is representative democracy?  2.5 What is a liberal democracy?  2.6 What are the differences between a ‘common law’ legal system and a ‘civil law’ legal system?  2.7 What are the various meanings of the term ‘civil law’?  2.8 What are the various meanings of the term ‘common law’?  2.9 What is a constitutional monarchy? 2.10 What are the major forms of government? Explain each of these and the differences between them. 2.11 What is a federation and what is the relationship between the Federal government and the State governments in Australia? 2.12 What is the ‘legislature’ and what is its role? 2.13 What is the ‘executive’ and what is its role? 2.14 What is the ‘judiciary’ and what is its role? 2.15 What is the doctrine of separation of powers? 2.16 What is the doctrine of responsible government and how does it relate to the doctrine of separation of powers? 2.17 To what extent did the British recognise the Indigenous legal system? 2.18 What is terra nullius? 2.19 What is the doctrine of reception? 2.20 What was the significance of the Mabo decision in 1992? 2.21 What were the significant stages in Australia’s increasing independence from Britain in the years prior to Federation? 2.22 What is the Federal model adopted by the Australian colonies? Briefly explain this model. 2.23 What were the significant stages in Australia’s increasing independence from Britain in the years following Federation? 2.24 What is local government and how does it fit in with the Federal system? 2.25 What are the key responsibilities of local government? 2.26 What is the role played by political parties in parliament?

2.2 The Australian Constitution LEARNING OBJECTIVE 2.2 How does the Australian Constitution regulate the relationship between the Federal government and the various State and Territory governments?

In this section we examine the Australian Constitution more closely, focusing on the way in which it regulates the relationship between the Federal government and the various State and Territory governments. An understanding of this relationship is essential to having an understanding of business law in Australia. As you saw earlier, some aspects of business are regulated by Federal law and other aspects of business are regulated by State or Territory law, and it is important to understand the relationship between the two. ACTIVIT Y 2.6 — RESEARCH

Download a copy of the Australian Constitution from www.comlaw.gov.au and answer the following questions. 1. How often must the Federal Parliament sit? 2. What is the term of a senator, and when does the term commence?

50  PART 1 Foundations

3. How is the number of members of the House of Representatives determined? 4. Who is qualified to be a member of the House of Representatives? 5. Who is the Commander in Chief of the naval and military forces of the Commonwealth? 6. When do Justices of the High Court have to retire? 7. How does the Constitution provide for the government of the Territories?

Structure of the Constitution The Australian Constitution came into force on 1 January 1901. The Australian Constitution is in fact contained in section 9 of the Commonwealth of Australia Constitution Act 1900 (Imp), an Act of the British Parliament that became law on 9 July 1900. (9 July is now celebrated in Australia as ‘Constitution Day’, but it is not a public holiday, which is why you may not have heard of it.) Although contained in a British Act, the British Parliament no longer has the authority to amend the Australian Constitution, as a result of the passing in 1986 of the Australia Acts by both the Australian and British parliaments. The Australian Constitution is divided into eight chapters and contains 128 sections (see table 2.7). TABLE 2.7

Structure of the Australian Constitution

Chapter

Heading

Content

Chapter I

The Parliament

• Part I vests legislative power in the Federal Parliament. • Part II deals with the upper house of the Federal Parliament, the Senate. • Part III deals with the lower house of the Federal Parliament, the House of Representatives. • Part IV deals with eligibility for voting and election to parliament, parliamentary allowances, parliamentary rules and related matters. • Part V sets out the exclusive and concurrent legislative powers of the parliament.

Chapter II

The Executive Government

• Sections 61–62 vest executive power in the Governor-General acting on the advice of the Federal Executive Council consisting of Ministers of State who must also be Members of Parliament.

Chapter III

The Judicature

• Section 71 vests the Federal judicial power in the High Court of Australia and in other Federal courts. • Sections 73 and 75–78 set out the original and appellate jurisdiction of the High Court. • Section 80 guarantees trial by jury for indictable offences against the Commonwealth.

Chapter IV

Finance and Trade

• Section 90 grants exclusive power to the Federal Parliament over customs and excise duties. • Section 92 provides that ‘trade, commerce and intercourse among the States  .  .  .  shall be absolutely free’. (There has been considerable debate about the meaning of this particular section.) • Section 96 empowers the Commonwealth to make financial grants to the States ‘on such terms and conditions as the parliament thinks fit’.

Chapter V

The States

• Sections 106–108 preserve the State constitutions, the powers of the State parliaments, and State laws. • Section 109 resolves inconsistencies between Federal and State laws. • Section 111 allows a State to surrender part of a State to the Commonwealth. (This occurred, for example, when South Australia surrendered to the Commonwealth that part of the continent that became the Northern Territory.) • Section 114 forbids the States from raising military forces. • Section 115 prohibits the States from coining money. • Section 116 prohibits the Commonwealth from making any law for the establishment of a religion, imposing any religious observance, prohibiting the exercise of a religion, or imposing a religious test for a Commonwealth office. (continued)

CHAPTER 2 The Australian legal system  51

TABLE 2.7

(continued)

Chapter

Heading

Content

Chapter VI

New States

• This Chapter provides for new States to be appended to the Commonwealth. (No new States have been created since Federation.) • Section 122 establishes the Federal Parliament’s power to make laws with respect to the Territories.

Chapter VII

Miscellaneous

• Section 126 states that the seat of government of the Commonwealth (i.e. the national capital, Canberra) shall be located in NSW no less than 100 miles from Sydney. • Section 127 originally provided that Aboriginals were not to be counted in any Commonwealth or State census. This section was repealed in 1967.

Chapter VIII

Alteration of the Constitution

• Section 128 sets out how the Constitution may be amended.

Constitutional conventions The express terms of the Australian Constitution are supplemented by constitutional conventions. These are unwritten rules based upon decades of tradition that dictate how the Constitution should be interpreted and how it should operate in practice. It is constitutional convention, for example, that dictates that the leader of the political party with the most seats in the lower house should become the Prime Minister, the head of the Cabinet and the country’s political leader — in fact, the position of ‘Prime Minister’ is not explicitly referred to in the Australian Constitution at all. It is also constitutional convention that obliges the Governor-General to act on the advice of the Prime Minister when exercising his or her executive authority. Because they are unwritten, the precise content and scope of constitutional conventions are subject to considerable debate. There can be situations where the operation of the convention is unclear, where there is no generally agreed convention or where there are inconsistent conventions. Such a situation arose in 1975 when the Governor-General, Sir John Kerr, dismissed the Prime Minister, Gough Whitlam, after the Senate (which was not controlled by the executive government) blocked the passage of the Supply Bill in an attempt to deprive the Whitlam Government of the funds needed to govern. (A Supply Bill is a Bill authorising the expenditure of funds on government activities for a particular period.) The Senate’s actions were inconsistent with the convention that a Senate that is not controlled by the party that controls the House of Representatives should not block supply. Regarding the Governor-General’s dismissal of the Prime Minister — an action that is part of the recognised authority of a Governor-General — some argue that Kerr acted properly because it was consistent with the convention that a Prime Minister who cannot obtain supply should either seek a general election or resign; others argue that the dismissal of Whitlam was inconsistent with the convention that a person who retains majority support in the House of Representatives, as Whitlam did, is entitled to remain Prime Minister.

Federal and State relations The Australian Constitution sets out how legislative power is shared between the Federal Parliament and the various State parliaments (see figure 2.5). There are some matters in relation to which only the Federal Parliament may make laws; these are referred to as the exclusive powers of the Federal Parliament. There are other matters in relation to which only the State parliaments may make laws; these are referred to as the residual powers of the State parliaments. And there is a comprehensive list of matters in relation to which both the Federal and the State parliaments may make laws; these are referred to as concurrent powers. Disputes between the Federal and State governments about the interpretation of the Australian Constitution are resolved by the High Court of Australia under section 76 of the Constitution. 52  PART 1 Foundations

Federal Parliament

Exclusive powers

FIGURE 2.5

State parliaments

Concurrent powers

Residual powers

Sharing of legislative power

CAUTION!

The State governments are not answerable to the Federal government, as many people assume. Rather, the Federal and the State governments work together in partnership to make, administer and interpret law in Australia.

Exclusive powers The exclusive powers are those powers able to be exercised only by the Federal Parliament. The list of the exclusive powers in the Australian Constitution is relatively short. They include: •• the establishment of the seat of government of the Commonwealth and oversight of the Commonwealth public service,7 •• the imposition of customs and excise duties,8 •• the raising and maintaining of any naval or military force,9 •• the coining of money,10 and •• the government of the Territories.11

Concurrent powers Most of the powers granted to the Federal Parliament under the Constitution are concurrent powers. The concurrent powers are those powers able to be exercised by both the Federal Parliament and the State parliaments. At the time the Constitution was enacted it was not feasible for the new Federal Parliament to assume control of all the areas for which it was thought that Federal regulation would be appropriate, so it was decided to identify them as concurrent powers so that the States could retain control until such time as the Federal Parliament was in a position to assume control. Section 51 of the Australian Constitution sets out 40 concurrent ‘heads of power’. The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: (i) Trade and commerce with other countries, and among the States; (ii) Taxation; but so as not to discriminate between States or parts of States; (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;

  7 Australian Constitution s 52.   8 Australian Constitution s 90.   9 Australian Constitution s 114. 10 Australian Constitution s 115. 11 Australian Constitution s 122.

CHAPTER 2 The Australian legal system  53



(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 exchanging and promissory notes; (xvii) Bankruptcy and insolvency; (xviii) Copyrights, patents of inventions and designs, and trademarks; (xix) Naturalisation 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 authorise any form of civil conscription), benefits to students and family allowances; (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; (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. 54  PART 1 Foundations

In practice the most significant heads of power are: •• s 51(i) — interstate and international trade and commerce, •• s 51(ii) — taxation, •• s 51(xx) — corporations, and •• s 51(xxix) — external affairs; that is, the relationship between Australia and other countries. If the Federal Parliament has not legislated in relation to any of the matters listed in section 51, then that matter remains within the regulatory authority of the States. But if a State parliament has made a law in relation to one of these matters, and the Federal Parliament makes a law in relation to the same matter, then section 109 of the Australian Constitution 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.

If it appears that the Federal Parliament has intended that its law ‘cover the field’ it will override the State law. One Justice of the High Court explained the operation of the section as follows: If it appeared that the Federal law was intended to be supplementary to or cumulative upon State law, then no inconsistency would be exhibited  .  .  .  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 law discloses such an intention, it is inconsistent with it for the law of a State to govern the same conduct or matter.12

Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388

Wallis engaged Downard-Pickford (DP), a removalist company, to transport his goods. When DP caused damage to the goods, Wallis claimed compensation. Wallis sought to rely upon Federal legislation, the Trade Practices Act 1974 (Cth), which entitled him to compensation in full of $1663. DP sought to rely upon Queensland legislation, the Carriage of Goods by Land (Carrier’s Liabilities) Act 1967 (Qld), which limited DP’s liability to no more than $200. The High Court decided that the Queensland Act was inconsistent with the Federal Act and that under section 109 of the Australian Constitution the Queensland Act was invalid. Wallis was entitled to compensation in full.

In interpreting the wording of section 51 of the Australian Constitution, the High Court of Australia has often done so in a way that favours Federal legislation by declaring it to be valid, sometimes in surprising ways. Koowarta v Bjelke-Petersen (1982) 153 CLR 168

In 1982, the Queensland government challenged the constitutional validity of the Racial Discrimination Act 1975 (Cth), arguing that racial discrimination was not one of the powers listed in section 51 of the Australian Constitution. The High Court decided that the Act fell under the ‘external affairs’ power in section 51(xxix). Australia was a party to an international treaty that prohibited racial discrimination and therefore a law implementing the goals of the treaty was a law in furtherance of the external affairs power.

12 Ex parte McLean (1930) 43 CLR 472 at 483; (Dixon J).

CHAPTER 2 The Australian legal system  55

Commonwealth v Tasmania (1983) 158 CLR 1

In 1980, the Federal government sought to prevent the Tasmanian government from building a hydroelectric dam on the Gordon and Franklin Rivers in Tasmania. The Federal Parliament passed legislation prohibiting the project, and Tasmania challenged the constitutional validity of that legislation. The High Court decided once again that the Federal legislation was constitutionally valid under the external affairs power in section 51. Australia had ratified an environmental treaty, the UNESCO Convention Concerning the Protection of the World Cultural and Natural Heritage, in 1974, and this permitted the Federal Parliament to make laws on environmental matters.

ACTIVIT Y 2.7 — REFLECT

What are the consequences of the High Court’s reasoning in the above cases for the distribution of power between the Federal and State governments as set out in the Australian Constitution?

On the other hand, the High Court has also on occasion interpreted section 51 rather strictly. New South Wales v Commonwealth (1990) 169 CLR 482

In 1989, the Federal Parliament passed the Corporations Act 1989, an Act that attempted to establish a national scheme for the regulation of corporations in Australia. The States challenged the legislation in the High Court. The Federal government argued that the legislation was valid because it fell under the power set out in paragraph (xx) of section 51. The High Court decided that paragraph (xx) only allowed the Federal Parliament to make laws in relation to companies that had already been formed; it did not permit the Federal Parliament to make rules regulating the initial incorporation of companies. The court decided that the Federal legislation was therefore unconstitutional and invalid. [The States have since then voluntarily transferred to the Federal Parliament under section 51(xxxvii) the power to regulate corporations, which are now regulated by Federal legislation.]

Generally speaking, the High Court’s approach to interpreting the powers in section 51 has seen a steady expansion since Federation in the authority of the Federal government at the expense of the States. The Federal Government has also been able to extend the scope of its legislative power beyond the exclusive and concurrent powers set out in the Constitution through the use of section 96 of the Constitution. According to section 96, the Federal Parliament has the power to grant money to any State ‘on such terms and conditions as the parliament thinks fit’. This enables the Federal Government to make financial grants to the States — known as tied grants — conditional upon the States cooperating with the Federal Government’s policies in areas technically beyond the Federal Government’s legislative authority. It has, for example, allowed the Federal Government in recent years to influence State regulation of hospitals and schools, both of which fall within the residual powers of the States.

Residual powers Anything not expressly identified as an exclusive power or a concurrent power in the Australian Constitution is a residual power of the States. The residual powers of the States, therefore, include the power to make laws with respect to: •• education, •• health, •• criminal law, •• contracts and torts, •• transport, •• property and land, and •• local government. 56  PART 1 Foundations

This explains, for example, why each State has a slightly different schooling system — education is regulated by the States. Similarly, the road traffic rules differ slightly from State to State because transport is regulated by the States. ACTIVIT Y 2.8 — REFLECT

Why should matters such as defence, external affairs and marriage be placed within the jurisdiction of the Federal Parliament, and matters such as education and crime be left within the jurisdiction of the State parliaments?

Limitations The Australian Constitution places a number of important limitations upon the powers of the Commonwealth. The Commonwealth: •• cannot prefer one State over another in relation to taxation,13 •• cannot acquire property without just (fair) compensation,14 •• must try by jury a person charged with an offence under Commonwealth law and the trial must be held in the State where the offence was committed,15 •• cannot restrict free trade between the States,16 •• cannot prefer one State over another in relation to trade, commerce or revenue,17 •• cannot make any law establishing, imposing or prohibiting any religion,18 •• must prevent residents of States being discriminated against within other States,19 and •• must protect every State against invasion.20 The Australian Constitution also places a number of important limitations upon the powers of the States. The States: •• cannot levy customs and excise duties,21 •• must ensure that trade between the States is free,22 •• cannot raise military forces,23 and •• cannot coin money.24 The High Court of Australia has also stated that the Australian Constitution contains a number of implied limitations upon the powers of the Commonwealth. The Commonwealth: •• cannot make a law that discriminates against the States or impairs their continued existence,25 and •• cannot make a law that is in conflict with the freedom of communication about political, governmental and public affairs implied into the Constitution as a result of the system of government established by the Constitution.26

13 Australian Constitution s 51(ii). 14 Australian Constitution s 51(xxxi). 15 Australian Constitution s 80. 16 Australian Constitution s 92. 17 Australian Constitution s 99. 18 Australian Constitution s 116. 19 Australian Constitution s 117. 20 Australian Constitution s 119. 21 Australian Constitution s 90. 22 Australian Constitution s 92. 23 Australian Constitution s 109. 24 Australian Constitution s 115. 25 Koowarta v Bjelke-Petersen (1982) 153 CLR 168. 26 Australian Capital Television Pty Ltd & New South Wales v Commonwealth (1992) 177 CLR 106; Nationwide News Pty Ltd v Wills (1992) 177 CLR 1.

CHAPTER 2 The Australian legal system  57

Regulating the Territories The Australian Constitution empowers the Federal Parliament to make laws in relation to Territories that have been ‘surrendered’ by the States or that have otherwise been acquired by the Commonwealth.27 In addition to the two major Territories — the Australian Capital Territory (ACT) and the Northern Territory — there are eight other Territories: •• Ashmore and Cartier Islands, •• Christmas Island, •• Cocos (Keeling) Islands, •• Coral Sea Islands, •• Jervis Bay Territory, •• Norfolk Island, •• Territory of Heard Island and McDonald Islands, and •• the Australian Antarctic Territory. In relation to these ten Territories, the Federal Parliament can make laws on any subject; it does not share its law-making power with the State parliaments as it does in relation to the rest of Australia. The Federal Parliament has conferred a large degree of self-government on the two major territories, the ACT and the Northern Territory, and on Norfolk Island. In most respects, these Territories function similarly to the States, but the Federal Parliament can override any legislation of their parliaments. For example, in 1995 the Northern Territory Parliament legalised euthanasia in the Territory with the passing of the Rights of the Terminally Ill Act 1995 (NT). In March 1997, the Commonwealth passed the Euthanasia Laws Act 1997 (Cth). This law stripped the Northern Territory (along with the other self-governing territories) of the power to pass legislation on euthanasia. This resulted in the Northern Territory legislation being rendered ineffective, as it was no longer within the legislative competence of the Northern Territory’s Legislative Assembly. LAW IN CONTEXT: LAW IN THE MEDIA

Northern Territory could become Australia’s seventh state by 2018 The remote territory known for its crocodiles and steamy weather might finally lose its status as ‘second-class citizen’, becoming the country’s seventh state.  State leaders at the Council of Australian Governments meeting  on  Thursday unanimously  agreed with Northern  Territory Chief Minister  Adam Giles that the  territory  should become its own state by July 1, 2018, according to a communique issued by [former] Prime Minister Tony Abbott. Speaking from Sydney, Mr Giles said the Northern Territory was a ‘second class citizen’ that had a ‘second-tier status in the nation’. If the change occurs, Parliament House in Canberra could gain an additional number of politicians in the House of Representatives and the Senate. The state could even get a name change. The Territory, which has a population of 243 700, currently has two senators in Canberra: Indigenous Affairs Minister Nigel Scullion and Labor’s Nova Peris. It also has two members in the House of Representatives: Labor’s Warren Snowdon and the Country Liberal’s Natasha Griggs. Senator Peris said she backed a change, but only if it benefited everyone. ‘Aboriginal land  rights need to be protected, our children need to be educated, our  cost of living needs to be lower and our standard of healthcare needs to be higher. That’s what statehood needs to help achieve’, she said. But not all Australian leaders are in favour of the decision. Treasurer Joe Hockey scoffed at the idea when asked about it in Sydney on Thursday. ‘Haven’t we heard this before?’ he laughed. When told that the idea had unanimous support at COAG, Mr Hockey replied: ‘Look, I think we had a referendum not too long ago in the NT on that specific issue and they chose not to go down that path. So we’ll leave it at that.’

27 Australian Constitution s 122.

58  PART 1 Foundations

Northern Land Council president Joe Morrison also raised concerns about the security of land rights for Aboriginal people, who comprise 30 per cent of the population, if a referendum was to go ahead. ‘The reality is, there haven’t been any plans for [statehood] and 2018 is pretty ambitious’, he said. ‘There is a number of very important questions’, he said. ‘It’s one thing to say we’re going to go to a referendum, but it’s another to go to the public.’ In 1998, the Northern Territory held a referendum that was defeated by a 51.3 per cent ‘no vote’. The issue of statehood resurfaced in 2012, when Northern Territory leaders drafted a constitution that suggested the territory become a state. The plan was then put on hold. Professor George Williams from the University of NSW said the statehood proposal was a ‘sensible, overdue change’. ‘This is an issue that has kept popping up, but the difference this time is that they have nominated a date and that might finally invest the process with some urgency and purpose’, he said.  ‘Three years is not far away. What they need to do is generate popular  support, draft a constitution and negotiate with the Commonwealth.’ ‘If you’re living in the Territory you’re treated as a second-class citizen’, he said. And as for the new name of the state? ‘There was a process they ran to ask what the new name of the state should be and the most popular name was “State of the Northern Territory”’. Professor Williams said. ‘There were certainly some weird and wonderful suggestions, including Deathstar.  Surely,  there is room for imagination.’ Source: Sarah Whyte, 23 July 2015, http://www.smh.com.au/federal-politics/political-news/northern-territory-couldbecome-australias-seventh-state-by-2018-20150723-giino4.html.

The other seven territories are directly regulated by the Federal Government, usually through an Administrator.

Changing the Constitution The Constitution sets out how the Constitution can be amended.28 Changing the Constitution requires more than a simple Act of Parliament; otherwise any government would be able to restructure the entire legal system. The proposed amendment must: 1. be passed by an absolute majority of both Houses of Parliament, 2. be put to the Australian voters in the form of a referendum, and passed by a majority of voters, and a majority of the States, and 3. receive Assent. If the proposed amendment is passed by one House of Parliament, rejected by the other house, passed again by the first house after three months and rejected a second time by the other house, the Governor-General may nevertheless choose to put the proposed amendment to the Australian voters. Forty-four amendments to the Australian Constitution have been proposed since Federation, but only eight of these have been successful at referendum. •• 1906 — Section 13 was amended to alter the length and dates of senators’ terms of office. •• 1910 — Section 105 was amended to extend the power of the Commonwealth to take over pre-existing State debts to debts incurred by a State at any time. •• 1928 — Section 105A was inserted to ensure the constitutional validity of a financial agreement reached between the Commonwealth and State governments in 1927. •• 1946 — Section 51(xxiiiA) was inserted to extend the power of the Commonwealth Government over a range of social services. •• 1967 — Section 51 (xxvi) was amended to extend to Aborigines the power of the Commonwealth Government to legislate for people of any race, and section 127 (which stated that Aborigines were not to be counted in any Commonwealth or State census) was repealed. 28 Australian Constitution s 128.

CHAPTER 2 The Australian legal system  59

•• 1977 — This amendment formalised the convention that, when a casual vacancy arises in the Senate, the parliament of the relevant State, if it chooses to fill the vacancy, must choose the replacement from the same political party as the departing senator if that party still exists. •• 1977 — Section 128 was amended to allow residents of the Territories to vote in referendums and be counted towards the national total. •• 1977 — Section 72 was amended to impose a retirement age of 70 upon judges in Federal courts. The most recent attempt to amend the Australian Constitution was on 6 November 1999 when the Australian voters were asked to decide whether Australia should become a republic. The proposal was that the Queen be removed as head of state and that the Governor-General be replaced by a President appointed by a two-thirds majority of the Federal Parliament. That attempt was unsuccessful. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 2.27 Why is the Commonwealth of Australia Constitution Act an Act of the British Parliament? 2.28 How is the Australian Constitution structured? 2.29 What are ‘constitutional conventions’? 2.30 What are the differences between exclusive powers, concurrent powers and residual powers? 2.31 What are the exclusive powers of the Federal Parliament? 2.32 What are the concurrent powers set out in the Australian Constitution? 2.33 What happens if a Federal law and a State law conflict? 2.34 How has the external relations power in section 51 been used to expand the power of the Federal Parliament? 2.35 What matters fall within the residual powers of the States? 2.36 What limitations are imposed by the Australian Constitution upon (a) the Federal Parliament; and (b) the State parliaments? 2.37 How are the Territories regulated? 2.38 How can the Australian Constitution be amended?

2.3 The executive government LEARNING OBJECTIVE 2.3 What is the role of the executive government?

In this section we consider in detail the executive branch of government. The other two branches of government — the legislature and the judiciary — are considered in detail in the next chapter. Executive power is the power to administer the law, carry on the business of government, and maintain order and security. It is the executive branch of government that collects the taxes, pays the welfare, runs the hospitals and schools, maintains the roads and plans the cities. Strictly speaking, the executive branch of government includes the many thousands of employees working for the various departments of the public service. In practice, the term ‘executive government’ is usually intended to refer to the Ministers responsible for oversight of those departments of the public service, or even to the subset of those Ministers known as the ‘Cabinet’ (see below). Constitutionally, it is the monarch or their representative who wields executive power. For example, according to section 61 of the Australian Constitution: 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. 60  PART 1 Foundations

However, the monarch is obliged to act on the advice of the Ministers. According to section 62 of the Australian Constitution, the Governor-General acts on the advice of the Federal Executive Council consisting of the various Ministers: 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.

These Ministers are members of Parliament appointed by the Governor-General on the advice of the Prime Minister to administer the various departments of the Federal public service. Similarly, the various State constitutions vest executive power in the Governor as advised by an Executive Council consisting of the Premier and the Ministers. In the Northern Territory executive power is vested in the Administrator as advised by an Executive Council consisting of the Chief Minister and the other Ministers; in the Australian Capital Territory executive power is vested directly in the Executive Council. Constitutional convention requires that the Crown representative not only be advised by the Executive Council, but also must act on that advice. Thus, although executive power may be formally vested in the Crown representative, in practice it is the Executive Council and the public service that exercise executive power. This power is considerable. Not only is the executive branch of government responsible for the administration of the law on a daily basis, parliaments typically delegate to the executive government considerable law-making power of its own (discussed later in this chapter). As explained earlier, according to the doctrine of responsible government, the members of the executive are also members of the parliament and are answerable to the parliament. However, the party political system ensures that the members of the executive government have a significant influence in the parliament, at least in the Lower House. Consequently, and contrary to the doctrine of separation of powers, there is little effective separation between the executive and the legislature in Australia.

The Governor-General and the State Governors Under both the Australian Constitution and the various State constitutions, executive power is formally vested in the monarch and exercised by the monarch’s representatives in Australia: the Governor-General and the various State Governors. In practice the Governor-General and the State Governors do not participate in the political process. The Governor-General and the various Governors are appointed and removed by the monarch on the advice of the Prime Minister or relevant Premier. (The Prime Minister or Premier usually confers with the Leader of the Opposition to ensure that the chosen Crown representative is acceptable to both major political parties.) While there are no explicit qualifications for a Governor-General or State Governor, many appointees have legal or political backgrounds. The Crown representative is not appointed for a fixed period; rather, they hold office ‘at the Queen’s pleasure’. Most serve for about five years. The Crown representative plays two important roles. The first role is a ceremonial one: they represent the nation or the State at important functions, host visiting parliamentary and trade delegations, open important buildings, attend important community events, award honours and declarations, and so on. ACTIVIT Y 2.9 — RESEARCH

Read about the role of the Governor-General at www.gg.gov.au. What are the ceremonial duties performed by the Governor-General?

The second role is a legal one: they open and close parliamentary sessions, they grant Royal Assent to all new legislation, they approve the appointment of senior judges and other officials, and, in the case of the Governor-General, they are the formal Commander-in-Chief of the Australian armed forces. CHAPTER 2 The Australian legal system  61

The constitutional powers of the various Crown representatives can be divided into: •• formal powers, and •• reserve powers. The formal powers of the Governor-General and State Governors are those explicitly granted by the relevant constitution or by legislation, such as the power to call elections, appoint Ministers and judges, summon and dissolve parliament, pardon criminals and so on. The Australian Constitution grants significant executive powers to the Governor-General. The various State constitutions are less clear, and much less consistent, about the extent of the State Governors’ formal powers. ACTIVIT Y 2.10 — RESEARCH

What are the formal powers of the Governor of your State as set out in your State’s constitution?

As already noted, according to constitutional convention, the Governor-General and the State Governors act only on the advice of the relevant Executive Council in the exercise of their formal powers. The reserve powers of the Governor-General and the State Governors can be exercised independently of the advice of the Executive Council. These powers are not explicitly referred to in the constitution and exist as a result of convention. Because the reserve powers are unwritten there is wide disagreement about their nature and extent. The reserve powers of the Governor-General include: •• the power to appoint a Prime Minister, •• the power to dismiss a Prime Minister, and •• the power to refuse to dissolve the parliament when advised to do so by the Prime Minister. Apart from the first power, the reserve powers are rarely exercised, and only in extraordinary circumstances. In exercising their reserve powers, the Governor-General and the State Governors are expected to act in accordance with constitutional convention. For example, when appointing a Prime Minister, the Governor-General must appoint the parliamentary leader of the party or coalition of parties that has a majority of seats in the House of Representatives. This requirement is not set out in the Australian Constitution but it would be almost unthinkable for the Governor-General to do otherwise. ACTIVIT Y 2.11 — RESEARCH

Read about the role of the Governor-General at www.gg.gov.au. What are the ceremonial duties performed by the Governor-General?

LAW IN CONTEXT: LAW IN THE MEDIA

Cosgrove promises to listen but avoid public controversy Governor-General designate Peter Cosgrove wants to visit ‘stressed’ Indigenous communities in tandem with Australian of the Year Adam Goodes to see what their conditions are like. But Cosgrove, 66, whose long-expected appointment was formally announced today, indicated he would be careful to avoid political controversy, saying the governor-general’s responsibility was ‘to shine light but not to generate heat’. ‘You’ve got to listen a lot and take in everything that you see but you’re not a participant in the political process’, he told a joint news conference with prime minister Tony Abbott.

62  PART 1 Foundations

His caution was evident when asked his views on the monarchy and a possible future republic. Retiring governor-general Quentin Bryce spoke up for a republic late last year. ‘I’ve been labelled as a staunch this and that and a closet something else  .  .  .  I would say I’m a very staunch Australian.’ ‘The will of the people is always the overriding governor of what my responses will be. I’ve served a particular system since I was a lad. And if the Australian people retain that system, that will be my guiding light, and it is now. If they ever change at some future time, then the will of the people will prevail.’ Cosgrove made it clear he did not want to be typecast by his military background, which included serving as chief of the Australian Defence Force from 2002 to 2005. Cosgrove became widely known for his much praised role commanding the international force that oversaw East Timor’s transition to independence. While he was identified with the military and the centenary of World War 1 would be a special part of the social landscape, he stressed he would be a governor-general for every part of the community. His appointment saluted the men and women of the defence forces and he would visit them ‘but only as part of my duties in the wider community’. Goodes’ selection had reminded him of his own period as Australian of the Year when he had travelled widely in Australia and gained insight into ‘the strength and spirit of out communities, far and wide, large and small’. Asked what went through his head when first offered the post, Cosgrove recalled that he’d said over the years that he didn’t see himself as governor-general. ‘I thought, “wow, somebody else does!”’. When ‘there’s a call to arms, so to speak, as an old soldier, you just get on with it’. Abbott said: ‘General Cosgrove has dedicated his life to serving and supporting the Australian community’. He said the governor-general’s task was to ‘provide leadership beyond politics’. ‘The governor-general has important constitutional responsibilities, is looked to by community groups and their members throughout the length and breadth of our country for support and encouragement, and — in Sir Zelman Cowen’s words — can help to interpret our nation to itself.’ Acting Opposition leader Tanya Plibersek welcomed the appointment. Cosgrove takes office in March. Both he and Abbott paid tribute to Bryce, with the PM saying she had carried out her duties with ‘distinction and grace’. Source: Michelle Grattan, 28 January 2014, http://theconversation.com/cosgrove-promises-to-listen-but-avoid-publiccontroversy-22478.

The Executive Council and the Cabinet Given that the role of the Crown representative is largely a symbolic one, true executive power is exercised by the Executive Councils. Each Minister on the various Executive Councils is responsible for a particular portfolio and government department. Ministers responsible for the more important portfolios are called Senior Ministers. Ministers responsible for the less important portfolios are called Junior Ministers. A Minister may be a member of either House of Parliament. Members of the majority political party who are not allocated a ministerial position are known as backbenchers. The political party with next-to-largest number of seats in the Lower House is known as the Opposition. The Leader of the Opposition will appoint Shadow Ministers from within the Opposition Party to form a Shadow Cabinet to scrutinise and challenge the decisions and actions of the executive government. On a day-to-day basis, executive power is exercised not by the entire Executive Council/Governor in Council but by a subset of that council, consisting of the Senior Ministers and referred to as the Cabinet (see figure 2.6). It is the Cabinet that meets regularly to formulate government policy. Ministers who are not members of the Cabinet are described as being in the Outer Ministry. CHAPTER 2 The Australian legal system  63

Cabinet Senior Ministers Executive Council/Governor in Council Senior Ministers and Junior Ministers Executive government Executive Council/Governor in Council and public service FIGURE 2.6

The executive government

ACTIVIT Y 2.12 — RESEARCH

Go to the Australian Government Directory at www.directory.gov.au and prepare a list of the Federal ministers in (a) the Cabinet and (b) the Outer Ministry.

The policies and decisions of the Executive Council/Governor in Council and of the Cabinet are implemented by the various departments and agencies of the Federal, State or Territory public service. It is the public service that is the aspect of the executive government with which a businessperson is most likely to directly interact.

Challenging the executive government What can a person do if they are not happy with a decision made by a government department or agency? There are a number of ways that the person can challenge the decision.

Ombudsman The word ‘ombudsman’ means agent or representative of the people. An ombudsman is the link between the citizen and the bureaucracy of government. They investigate complaints about administrative actions and decisions made by government departments, statutory bodies, local authorities and certain commercial organisations. The Commonwealth Ombudsman liaises between the public and the Commonwealth bureaucracy. Each State and Territory also has its own ombudsman (see table 2.8). TABLE 2.8

Commonwealth and State/Territory ombudsmen

Jurisdiction

Ombudsman website

Commonwealth

www.ombudsman.gov.au

Australian Capital Territory

www.ombudsman.act.gov.au

New South Wales

www.ombo.nsw.gov.au

Northern Territory

www.ombudsman.nt.gov.au

Queensland

www.ombudsman.qld.gov.au

South Australia

www.ombudsman.sa.gov.au

Tasmania

www.ombudsman.tas.gov.au

Victoria

www.ombudsman.vic.gov.au

Western Australia

www.ombudsman.wa.gov.au

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Other ombudsmen are responsible for particular industries (see table 2.9). TABLE 2.9

Industry ombudsmen

Ombudsman

Website

Credit Ombudsman Service

www.cio.org.au

Fair Work Ombudsman

www.fairwork.gov.au

Financial Ombudsman Service

www.fos.org.au

Private Health Insurance Ombudsman

www.phio.org.au

Telecommunications Industry Ombudsman

www.tio.com.au

ACTIVIT Y 2.13 — RESEARCH

Visit the websites of (a) the Commonwealth Ombudsman; (b) the ombudsman of your State or Territory; and (c) one industry ombudsman, and prepare a brief summary of the services offered by each.

Freedom of information The Freedom of Information Act 1982 (Cth) gives individuals the right to access documents and information held about them by any Federal department or agency. Most Australian States and Territories have passed similar freedom of information (FOI) legislation, and have FOI websites (see table 2.10). TABLE 2.10

Freedom of information websites

Jurisdiction

Freedom of information website

Commonwealth

www.oaic.gov.au

Australian Capital Territory

www.justice.act.gov.au/protection_of_rights/ freedom_of_information

New South Wales

www.ipc.nsw.gov.au

Northern Territory

www.foi.nt.gov.au

Queensland

www.rti.qld.gov.au

South Australia

www.archives.sa.gov.au/content/foi-in-sa

Tasmania

www.ombudsman.tas.gov.au/right_to_information/ freedom_of_information_decisions

Victoria

www.foi.vic.gov.au

Western Australia

www.foi.wa.gov.au

LAW IN CONTEXT: LAW IN THE MEDIA

Information tied up despite FOI reform Reforms to Freedom of Information law in 2010 have proved ineffective, with delays continuing and complaints rising. The Department of Immigration, which receives more FOI requests than any other government department, is failing to handle 80 per cent of FOI requests within the statutory 45 calendar day time frame, Information Commissioner John McMillan revealed this week. In a report on the processing of non-routine FOI requests by the department, Professor McMillan found changes to the department’s handling of FOI requests were required, in addition to the recruitment of additional staff to help overcome unacceptable delays. There had been high hopes that the Federal Government reforms of FOI in 2010 would change attitudes towards information ownership said Johan Lidberg, senior lecturer in journalism at Monash University.

CHAPTER 2 The Australian legal system  65

‘This report is yet again pointing to a culture where a department doesn’t really see it as important to be information access facilitators. It’s way down their list of priorities, which is clearly not in the spirit of the Act’, Dr Lidberg said. In fact, getting interesting and sensitive documents today is much more difficult than the few years following the introduction of FOI said Bill Birnbauer, senior lecturer in journalism at Monash University, and one of the first reporters to use FOI when the legislation was introduced in 1982. ‘The various Acts specify that requests should be dealt with within 30 or 45 days — in my experience that’s fantasy world stuff and farcical in practice — it generally does not happen except for council requests’, Mr Birnbauer said. ‘My feeling is the whole process today is far more politicised, expensive, frustrating and that you almost have to be legally trained to know how to respond to knockbacks or request a review of a decision.’ Dr Lidberg said with no punitive tools or measures to wield, there was really no incentive for departments to follow the time frame requirements within the Act. ‘If governments cannot comply with these times, they should increase the resources for processing FOI claims, but, of course, it suits their purposes not to do that’, Mr Birnbauer said. Dr Lidberg said it would probably take a bill of rights in Australia to enshrine and make access to information easier. He also said the government should drop all exemptions, such as those that apply to entire agencies. ‘The fact that we have any exempt agencies at all sends the wrong signals.’ He pointed out that even the CIA was not exempt from FOI requests in the US, with important information emerging such as CIA interrogation manuals. Dr Lidberg would also like to see fees dropped from FOI applications. ‘I can’t see why the public and why citizens should pay to get access to information held on our behalf.’ Mr Birnbauer said FOI had always been a battle, but was a key to information that was otherwise not accessible unless someone blew a whistle. ‘It’s a rusty old key, and the only one we’ve got, so all journalists — in fact everyone — should use it.’ Dr Lidberg said with FOI an internal tool reliant on government agencies, whistleblower platforms like WikiLeaks were critical. ‘WikiLeaks and other mechanisms like that are really needed as a complement to FOI.’ Source: Charis Palmer, 28 September 2012, http://theconversation.com/information-tied-up-despite-foi-reform-9861.

Administrative Appeals Tribunal The Administrative Appeals Tribunal (AAT) was created by the Administrative Appeals Tribunal Act 1975 (Cth). The AAT hears appeals from the decisions of Federal government ministers, officials and agencies. However, the AAT is not a court. It is a part of the executive government and exercises administrative authority rather than judicial authority. In reviewing a decision, the AAT substitutes its own decision in place of the original decision. The Australian Capital Territory, New South Wales, Queensland, Victoria, Western Australia and the Northern Territory have equivalent tribunals. In South Australia and Tasmania the functions of the tribunal are performed by courts (see table 2.11). TABLE 2.11

Administrative appeals

Jurisdiction

Authority

Website

Commonwealth

Administrative Appeals Tribunal

www.aat.gov.au

Australian Capital Territory

ACT Civil and Administrative Tribunal

www.acat.act.gov.au

New South Wales

NSW Civil and Administrative Tribunal

www.ncat.nsw.gov.au

Northern Territory

Northern Territory Civil and Administrative Tribunal

www.ntcat.nt.gov.au

Queensland

Queensland Civil and Administrative Tribunal

www.qcat.qld.gov.au

66  PART 1 Foundations

Jurisdiction

Authority

Website

South Australia

District Court

www.courts.sa.gov.au/OurCourts/DistrictCourt/ Pages/Appeals-and-Tribunals.aspx

Tasmania

Magistrates Court

www.magistratescourt.tas.gov.au/divisions/ administrative_appeals_division

Victoria

Victorian Civil and Administrative Tribunal

www.vcat.vic.gov.au

Western Australia

State Administrative Tribunal

www.sat.justice.wa.gov.au

Judicial review The common law has traditionally offered remedies to those who have suffered damage as the result of an incorrect administrative decision. The remedy is for the court to issue a prerogative writ, which is an order of the court ordering an administrative officer or tribunal to act or to refrain from acting in a particular manner. The four types of prerogative writ are: •• habeus corpus (where a person imprisoning another is directed to bring that other person before a court of law), •• mandamus (where the court orders someone to perform their administrative duties), •• certiorari (where the court orders that a record of an administrative decision be produced), and •• prohibition (where the court prohibits an administrative officer or tribunal from exceeding its powers). Courts are given additional powers by the Administrative Decisions (Judicial Review) Act 1977 (Cth) to review decisions by Federal government bodies. Equivalent powers are granted in relation to administrative decisions in the Australian Capital Territory, Queensland, Tasmania and Victoria under the corresponding State or Territory legislation (see table 2.12). TABLE 2.12

Statutory judicial review

Jurisdiction

Legislation

Commonwealth

Administrative Decisions (Judicial Review) Act 1977 (Cth)

Australian Capital Territory

Administrative Decisions (Judicial Review) Act 1989 (ACT)

Queensland

Judicial Review Act 1991 (Qld)

Tasmania

Judicial Review Act 2000 (Tas)

Victoria

Administrative Law Act 1978 (Vic)

Under this legislation a court can review an administrative decision where: •• a breach of the rules of natural justice has occurred in connection with the making of the decision, •• procedures that were required by law to be observed in connection with the making of the decision were not observed, •• the person who purported to make the decision did not have the jurisdiction to do so, •• the decision was not authorised by the legislation in pursuance of which it was purported to be made, •• the making of the decision was an improper exercise of the power conferred by the legislation, •• the decision involved an error of law, •• the decision was induced or affected by fraud, •• there was no evidence or other material to justify the making of the decision, or •• the decision was otherwise contrary to law.29 The court may quash (cancel) the earlier decision, order the decision maker to remake the decision in accordance with the law, or make a new order declaring the rights of the parties, or ordering them to refrain from doing something or to perform some act.30 29 Administrative Decisions (Judicial Review) Act 1977 (Cth) s 5. 30 Administrative Decisions (Judicial Review) Act 1977 (Cth) s 16.

CHAPTER 2 The Australian legal system  67

Delegated legislation Many of the legal rules regulating business and personal lives today are not made by the Federal and State/Territory parliaments. Instead the parliament passes ‘parent legislation’ setting out the over­ arching principles and objectives of a particular regulatory scheme, and then delegates authority to make delegated legislation or ‘legislative instruments’ containing the detailed rules, regulations and by-laws to a branch of the executive government such as: •• the Governor-General/Governor, •• the Executive Council, •• an individual Minister, •• a local authority, •• a government department, or •• a government agency. (Parliaments also delegate to courts the authority to make their own rules regulating court procedures.)

Making delegated legislation The process by which delegated legislation may be created is set out in: •• the parent legislation itself, or •• legislation passed by the relevant parliament regulating the creation of delegated legislation (see table 2.13). TABLE 2.13

Legislation regulating creation of delegated legislation

Jurisdiction

Legislation

Commonwealth

Legislative Instruments Act 2003 (Cth)

Australian Capital Territory

Legislation Act 2001 (ACT)

New South Wales

Subordinate Legislation Act 1989 (NSW)

Northern Territory

Interpretation Act 1978 (NT)

Queensland

Statutory Instruments Act 1992 (Qld)

South Australia

Subordinate Legislation Act 1978 (SA)

Tasmania

Subordinate Legislation Act 1992 (Tas)

Victoria

Subordinate Legislation Act 1994 (Vic)

Western Australia

Interpretation Act 1984 (WA)

The most common form of delegated legislation is regulations. While the specific content of the regulations is usually determined by the government department or other branch of the executive to which authority has been delegated, the regulations are usually required to be tabled in parliament. This means that, in theory at least, the legislature retains some control over the creation of the delegated legislation. If the parliament decides that the regulations should be disallowed, they are effectively repealed and do not become law. Legislation in most Australian jurisdictions requires that the process of creating certain delegated legislation include the preparation of a regulatory impact statement and consultation with the public.31 Commonwealth delegated legislation commences on the day after registration of the delegated legislation in the legislative instruments register.32 State and Territory delegated legislation usually commences on the date specified in the regulations or on the date of publication of the delegated legislation in the Government Gazette.33 31 Legislative Instruments Act 2003 (Cth) pt 3; Legislation Act 2001 (ACT) ch 5; Subordinate Legislation Act 1989 (NSW) pt 2; Subordinate Legislation Act 1992 (Tas) ss 5, 6; Subordinate Legislation Act 1994 (Vic) pt 2. 32 Legislative Instruments Act 2003 (Cth) s 12. 33 Legislation Act 2001 (ACT) s 73; Interpretation Act 1987 (NSW) s 39; Interpretation Act 1978 (NT) s 63; Statutory Instruments Act 1992 (Qld) ss 32–34; Subordinate Legislation Act 1978 (SA) s 10AA; Subordinate Legislation Act 1992 (Tas) s 12; Subordinate Legislation Act 1994 (Vic) s 16; Interpretation Act 1984 (WA) s 41.

68  PART 1 Foundations

In most jurisdictions, delegated legislation is automatically repealed upon the expiry of a fixed period after being made. These automatic ‘sunset clauses’ are intended to avoid the unnecessary build-up of regulations by forcing the executive to periodically consider whether the continuation of the regulations is justified.34 Delegated legislation is also automatically repealed upon the repeal of the parent legislation, unless the delegated legislation is not inconsistent with the new legislation replacing the repealed legislation.35

Evaluating delegated legislation The need for delegated legislation seems unavoidable. Parliaments do not have the time or the expertise to debate and vote upon every rule and regulation deemed necessary in an ever more complex society. Complex and technical rules and regulations are best made not by politicians but by appropriately qualified experts. Government departments, courts and local authorities are usually closer to the problem that gave rise to the need for the new laws, and are thus better able to construct a solution. Rules, forms and procedures often require variation or correction, and it is much easier and quicker for the executive to amend a legislative instrument than it is for parliament itself to debate and agree upon amendments to legislation. However, there are some significant concerns about the nature of delegated legislation. One is the undemocratic nature of the process. Within a liberal democracy, laws are supposed to be made by elected representatives in a way that is open to public scrutiny, but when a parliament delegates law-making authority to the executive government, the laws are made by unelected officials, frequently behind closed doors and without consultation with members of the public. Clauses in legislation permitting the delegated authority to amend the parent legislation itself — ‘Henry VIII clauses’ — are particularly problematic. Delegated legislation is usually subordinate to the legislation under which it is enacted in the sense that the specific provisions in the legislative instrument must be consistent with the more general provisions in the parent legislation. It is possible, however, for the parent legislation to explicitly provide that the delegated legislation can contain provisions that modify the parent legislation. The process of delegating legislative authority to the executive also facilitates the making of more rules and regulations, and contributes to what was described in the previous chapter as the overregulation of business and of the community generally. LAW IN CONTEXT: LAW AND CRITIQUE

Executive dictatorship? According to the principle of responsible government, the executive government is answerable to the legislature. However, as a result of the party political system and political reality, it often appears that the parliament is the servant of the executive government. The political party with the majority of seats in the Lower House forms executive government. This means that in practice the members of the executive government are able to use their political majority to control the parliament. According to one commentator, supporters often describe the Australian Westminister system as ‘parliamentary democracy’ and ‘responsible government’. However, there are significant weaknesses in terms of its democracy. 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 executive dictatorship, with vast and often unchecked powers.36

34 Legislative Instruments Act 2003 (Cth) pt 6; Subordinate Legislation Act 1989 (NSW) pt 3; Statutory Instruments Act 1992 (Qld) pt 7; Subordinate Legislation Act 1978 (SA) pt 3A; Subordinate Legislation Act 1992 (Tas) s 11; Subordinate Legislation Act 1994 (Vic) s 5. 35 Legislation Act 2001 (ACT) s 83; Interpretation Act 1987 (NSW) s 30; Interpretation Act 1978 (NT) ss 4, 11; Acts Interpretation Act 1954 (Qld) ss 7, 19; Acts Interpretation Act 1915 (SA) ss 11, 16; Acts Interpretation Act 1931 (Tas) ss 4, 14–16; Interpretation of Legislation Act 1984 (Vic) ss 4, 15; Interpretation Act 1984 (WA) ss 3, 38. 36 Patrick O’Brian, ‘The Fatal Flaw: Has the Westminster System Produced a Form of Executive Dictatorship?’ Time (South Pacific Edition) (Sydney), 16 September 1991, 52–4.

CHAPTER 2 The Australian legal system  69

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 2.39 What is the role of the executive branch of government? 2.40 What is the Executive Council? 2.41 What is the role of the Crown representative within executive government? 2.42 What are the reserve powers of the Governor-General? 2.43 What is the Cabinet? 2.44 What is the public service? 2.45 How can a person challenge the decision of a government department or agency? 2.46 What is delegated legislation? What are its advantages and disadvantages?

In conclusion •• Australia is a liberal democracy, a constitutional monarchy, a common law legal system and a federation. The constitutional framework seeks to balance the doctrine of separation of powers and the doctrine of responsible government inherited from the British legal system. When the British first settled Australia, the settlers ignored the Indigenous legal system. The colonies were initially closely controlled by the British government but were gradually granted increasing levels of independence. Each colony eventually became a separate, self-governing legal system. The colonies united to form a federation in 1901, and today the Australian legal system is effectively separate from the British legal system. •• The Australian Constitution sets out how Australia’s federal system of government operates. Power is divided between the Federal government and the various State and Territory governments. •• The legal systems of the States, the Territories and the Commonwealth are administered by executive governments. According to the various constitutions, an executive government consists of a council of ministers who advise the Crown representative. The public service carries out the will of the executive government. JOHNNY AND ASH

[Johnny and Ash are sharing a taxi back to Ash’s apartment.] Johnny — It’s worse than I thought! I thought the law was complicated before I started talking to you. But there is so much that I don’t know. Ash — You must have learned something after our conversation. Can you at least answer those four questions now? Remember the first question: who is in charge? Johnny — Well, there is no simple answer to that question. In the Federal government and in the State and Territory governments, power is divided between the legislature, the executive and the judiciary. The legislature is the Parliament, and the Parliament makes the law. The executive is the executive government, the Prime Minister or Premier or Chief Minister and the ministers, and they run the State, the Territory or the country. And the judiciary, the court system, interprets the law. So I guess you could say that they are all in charge. Ash — Good answer. Okay, so question two: what is the relationship between the Federal government and the various State governments? Johnny — Well, that’s all set out in the Australian Constitution. There are some things that only the Federal government can do, there are some things that only the State government can do, and there are some things that they can both do, but if there is a conflict between Federal and State law, the Federal law will prevail. Ash — Good work. And question three: what does the Parliament do?

70  PART 1 Foundations

Johnny — The Parliament makes law, called legislation. Although I’m not really sure how they make law  .  .  . Ash — Don’t worry, you are doing really well. And after all those beers too. Last question: do judges make law? Johnny — Do judges make law? I don’t think so. It is the politicians who make the law, not judges. That is what the doctrine of separation of powers tells us. But I also recall you telling me that there are two types of law in Australia: statute law and case law. Now I’m confused again! Ash — Okay, it’s time to talk about politicians and judges.

CHAPTER 2 The Australian legal system  71

QUIZ 1 The term ‘common law’ refers to

(a) a legal system based upon the British system. (b) the law made by judges. (c) a form of case law, distinct from ‘equity’. (d) all of the above. 2 Which of the following statements is not consistent with the notion of liberal democracy? (a) Democratically unaccountable institutions are subordinate to the authority of elected representatives. (b) The judiciary and the parliament are answerable to the executive government. (c) The constitution is supreme. (d) Civil liberties are protected by an independent and non-discriminatory judiciary. 3 According to the doctrine of responsible government (a) the legislature and the executive must remain functionally separate. (b) settlers of a new territory bring with them the law of their home country. (c) members of the judiciary should be elected, not appointed by the executive. (d) members of the executive must also be members of the legislature. 4 In the decision of Mabo v Queensland (No 2) (1992) 175 CLR 1, the High Court of Australia (a) rejected the notion that Australia was terra nullius. (b) rejected the doctrine of reception. (c) decided that Australian law was no longer based on British law. (d) all of the above. 5 Local government in Australia (a) is regulated by the Australian Constitution. (b) is a separate, third tier of government. (c) exercises the powers delegated to it by the Federal Parliament. (d) exercises the powers delegated to it by the relevant State or Territory parliament. 6 According to the Australian Constitution the Federal Parliament can exercise (a) exclusive powers. (b) concurrent powers. (c) residual powers. (d) exclusive and concurrent powers. (e) concurrent and residual powers. 7 According to section 109 of the Australian Constitution, in the event of a conflict between a Federal law and a State law (a) the law passed first will prevail. (b) the law passed most recently will prevail. (c) the Federal law will prevail. (d) the State law will prevail. 8 For the Australian Constitution to be amended, the amendment must be passed by (a) at least 75 per cent of the members of both Houses. (b) at least 75 per cent of the Australian electorate. (c) at least 75 per cent of the States. (d) all of the above. (e) none of the above. 9 The Federal Executive Council does not include (a) the Prime Minister. (b) the Junior Ministers.

72  PART 1 Foundations

(c) the Cabinet. (d) the Governor-General. 10 An ombudsman is someone who investigates complaints made about (a) government departments. (b) local authorities. (c) commercial organisations. (d) all of the above. (e) none of the above.

EXERCISES EXERCISE 2.1 — THE AUSTRALIAN LEGAL SYSTEM

According to Justice Brennan in the Mabo case, the High 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’. What do you think he meant by this? EXERCISE 2.2 — THE AUSTRALIAN LEGAL SYSTEM

What is the Australian Law Reform Commission, and how does the work of the Commission relate to the matters addressed in this chapter? EXERCISE 2.3 — LOCAL GOVERNMENT

Locate the website for the local government in the area where you live and answer the following questions. (a) When was your local government established? (b) Is your local government called a city council, a shire council, a district council, a borough or some other term? (c) Who is your present mayor? (d) What services are provided by your local government? EXERCISE 2.4 — THE AUSTRALIAN CONSTITUTION

How is power shared by the Federal, State and local governments? If one level of government had to be abolished, which one would you abolish, and why? EXERCISE 2.5 — THE AUSTRALIAN CONSTITUTION

Why has political power since Federation generally shifted from the States to the Commonwealth? EXERCISE 2.6 — THE AUSTRALIAN CONSTITUTION

A number of websites are devoted to the republic issue. Sites such as that of the Australian Republican Movement (www.republic.org.au) support Australia becoming a republic, and sites such as that of Australians for a Constitutional Monarchy (www.norepublic.com.au) oppose such a move. Read these and other such websites and prepare a balanced answer to the question: Should Australia become a republic? EXERCISE 2.7 — THE EXECUTIVE GOVERNMENT

Describe three different circumstances in which you might decide to take advantage of ‘freedom of information’ laws to access specific documents or information. EXERCISE 2.8 — THE EXECUTIVE GOVERNMENT

Prepare a simple guide to appealing a decision of a government body by referring the matter to the administrative appeals tribunal (or equivalent body) in your State or Territory. CHAPTER 2 The Australian legal system  73

EXERCISE 2.9 — THE EXECUTIVE GOVERNMENT

The proliferation of delegated legislation has been criticised as contributing to the overregulation of business in Australia. Outline the arguments for and against a reduction in the overall quantity of delegated legislation. EXERCISE 2.10 — THE EXECUTIVE GOVERNMENT

What is ‘executive dictatorship’? Is it an unavoidable consequence of the Westminster system and responsible government?

KEY TERMS Administrator  The officer responsible for administering a Territory on behalf of the Federal government. Assent  The final stage in the passage of legislation, where the Crown representative formally approves the new law. Also known as ‘Royal Assent’. backbencher  A member of the majority political party who is not a Minister. bicameral  To be comprised of two parts; when used in reference to a parliament, indicates that the parliament consists of two Houses, an Upper House and a Lower House. Bill  A draft Act of Parliament. bill of rights  A document setting out the rights and liberties of citizens; may be constitutional or statutory. Cabinet  A subset of the Executive Council consisting of the Senior Ministers. case law  Law made by courts in accordance with the doctrine of precedent. Also known as ‘common law’. certiorari  A prerogative writ ordering that a record of an administrative decision be produced. civil law legal system  A type of legal system, based upon the Roman legal system, where the main source of law is legislation. common law  (1) Law made by the courts in accordance with the doctrine of precedent. Also known as ‘case law’. (2) The category of those case law rules and principles developed by the common law courts in Britain. common law legal system  A type of legal system, based upon the British legal system, where the two main sources of law are case law and legislation. Commonwealth  (1) Pertaining to the nation of Australia, such as the Commonwealth Parliament or Commonwealth legislation. Also known as ‘Federal’. (2) Pertaining to the Commonwealth of Nations, those countries where the head of state is the king or queen of England. concurrent powers  The legislative powers able to be exercised by both the Federal Parliament and the State parliaments. constitution  The set of rules determining how (a) a nation or state, or (b) an organisation such as a corporation will be governed. constitutional conventions  Unwritten rules based upon tradition that dictate how a constitution should be interpreted and how it should operate in practice. constitutional monarchy  A country where the head of state is a king or queen who holds that position subject to the constitution and with the consent of the people, and who exercises little or no actual power. Crown representatives  The monarch’s representative in government, e.g. the Governor-General in Federal government, and the Governor in State government. delegated legislation  Legislation made by a body other than parliament, and to whom the parliament has delegated law-making power. democracy  A form of government in which citizens have a say in the decisions that affect their lives, including participation in the proposal, development and passing of legislation. 74  PART 1 Foundations

direct democracy  A form of democracy where the citizens participate directly in the processes of government, including law making, changing the constitution and overriding the decisions of government officials; cf. ‘representative democracy’. doctrine of precedent  The principle that when deciding a question of law a court must do so consistently with the earlier decisions of higher courts within the court hierarchy. Also known as stare decisis. doctrine of reception  The principle that settlers of a new territory bring with them the law of their home country. doctrine of responsible government  The principle that the executive branch of government should be answerable to the legislature rather than the monarch. doctrine of separation of powers  The principle that the legislature, the executive and the judiciary should as far as possible remain functionally separate. equity  The category of case law rules and remedies based on fairness and justice, developed to supplement the common law. exclusive powers  The legislative powers able to be exercised only by the Federal Parliament. executive  The branch of government responsible for administering the legal system; in Australia the various executives take the form of councils of Ministers responsible for advising the relevant Crown representative. Executive Council  The council of Ministers responsible for advising the Crown representative regarding the exercise of executive power. federation  A system of government where legislative, executive and judicial power is shared between a national government and various State or regional governments; cf. ‘unitary system of government’. formal powers  Those powers of the Crown representative explicitly granted by the relevant constitution or by legislation; cf. ‘reserve powers’. Government Gazette  A weekly publication issued by the Attorney-General’s office containing important government notices. Governor  The Crown representative in State government. Governor-General  The Crown representative in Federal government. habeus corpus  A prerogative writ directing a government official to bring a detained person before a court of law. judiciary  The branch of government responsible for interpreting the law; in Australia the judiciary takes the form of the various court systems. Junior Minister  A Minister responsible for one or more of the less important portfolios. legislation  Law made by parliament. Also known as a ‘statute’ or ‘Act of Parliament’. legislature  The branch of government primarily responsible for making the law; in Australia, the legislature takes the form of the various parliaments. liberal democracy  A representative democracy in which laws are made by, and the executive government consists of, elected representatives who exercise their power subject to the rule of law and to the constitution. mandamus  A prerogative writ directing a government official to perform their administrative duties. Minister  A member of the Executive Council responsible for a particular portfolio and/or government department. monarchy  A country where the head of state is a king or queen. native title  Title to land based on a continuing traditional connection between the land and an Indigenous group. natural justice  Extra-legal principles of procedural fairness. ombudsman  A public official who investigates complaints about the government or an organisation. portfolio  A field of endeavour administered by a particular Minister, e.g. the foreign affairs portfolio. prerogative writ  An order of the court ordering an administrative officer or tribunal to act or to refrain from acting in a particular manner. CHAPTER 2 The Australian legal system  75

prohibition  A prerogative writ prohibiting an administrative officer or tribunal from exceeding its powers. Senior Minister  A Minister responsible for one or more of the more important portfolios. referendum  A vote on an issue or question by the electorate. regulation  A form of delegated legislation, often setting out procedural aspects of matters regulated in more general terms by parent legislation. representative democracy  A form of democracy where the citizens vote for officials who represent them when engaging in the legislative (law-making) and executive (administrative) aspects of government; cf. ‘direct democracy’. republic  A system of government where the head of state is not a monarch. reserve powers  Those powers of the Crown representative that can be exercised independently of the advice of the executive government; cf. ‘formal powers’. residual powers  The legislative powers able to be exercised only by the State parliaments. rule of law  The principle that governmental authority must be exercised only in accordance with written, publicly disclosed laws that have been adopted and are enforced in accordance with established procedure, and that all citizens, including those who make up the government, are ruled by laws rather than by personal discretion or arbitrary exercises of power. terra nullius  (‘empty land’ or ‘land belonging to no-one’) The categorisation of territory as unowned and therefore able to be settled peacefully. unitary system of government  A system of government where a single government is responsible for the entire jurisdiction (although it may delegate some of its responsibilities to local authorities); cf. ‘federation’.

ACKNOWLEDGEMENTS Article: © The Conversation, Michelle Grattan, 28 January 2014, http://theconversation.com/ cosgrove-promises-to-listen-but-avoid-public-controversy-22478 Article: © The Conversation, Charis Palmer, 28 September 2012, http://theconversation.com/ information-tied-up-despite-foi-reform-9861 Article: © Sarah Whyte, 23 July 2015, http://www.smh.com.au/federal-politics/political-news/northernterritory-could-become-australias-seventh-state-by-2018-20150723-giino4.html Article: © The Conversation, Mark Evans, 11 July 2013, http://theconversation.com/ why-do-australians-hate-politics-15543 Extracts: © Sourced from the Federal Register of Legislation at April 1 2016. For the latest information on Australian Government law please go to https://www.legislation.gov.au.

QUIZ ANSWERS

1. d.  2. b.  3. d.  4. a.  5. d.  6. d.  7. c.  8. c.  9. d.  10. d. 76  PART 1 Foundations

CHAPTER 3

Politicians and judges LEA RNIN G OBJE CTIVE S 3.1 What is the role of parliament? 3.2 How do parliaments make law? 3.3 How does Australia’s court system operate? 3.4 What role is played by judges in the development of the law? 3.5 What dispute resolution methods do not involve going to court?

JOHNNY AND ASH

[Johnny and Ash are in Ash’s living room, watching a late night movie. On the screen, Al Pacino, playing Arthur Kirkland in And justice for all, delivers his famous courtroom speech: What is justice? What is the intention of justice? The intention of justice is to see that the guilty people are punished and the innocent are freed. Simple, isn’t it? Only it’s not that simple. However, it is the Defense Counsel’s duty to protect the rights of the individual, as it is the Prosecution’s duty to uphold and defend the laws of the State. Justice for all. Only we have a problem here. And you know what it is? Both sides want to win. We want to win! We want to win regardless of the truth! And we want to win regardless of justice! Regardless of who’s guilty or innocent! WINNING is everything!  .  .  .] Ash — I love this film. Johnny — I know. Pacino is amazing. Is what he is saying true though? Ash — What do you mean? Johnny — Well, Pacino’s character in this film seems to be saying that what happens in a courtroom has nothing to do with finding the truth and or achieving justice. Instead, it’s all about winning the trial, at any cost. Is that any way to run a legal system? Ash — Well, the film does have a point. Courts in common law legal systems such as the US and Australia do adopt an adversarial approach to resolving disputes. The idea is that by requiring each party to compete with each other before an impartial judge, the judge is able to form a view as to who has the best case, and to therefore make a decision that will resolve the dispute, whether that involves determining the guilt or innocence of a person accused of committing a crime, or deciding whether a person being sued has committed a tort, breached a contract or so on. Johnny — And does it work? Ash — Well, the adversarial system is certainly not without its flaws, but it generally seems to work okay. Johnny — So it is up to the judge to decide who wins and who loses? Ash — Well, sometimes there is a jury involved as well, but most of the time it is a judge or judges who decide the outcome of a trial. Johnny — And they can pick whoever they like best as the winner? Ash — No, not really. Judges are constrained in their decision-making. Their decisions have to be consistent with the earlier decisions of other judges — this is called the doctrine of precedent. And of course the judges’ decision has to be consistent with the law, especially the law as set out in legislation. Johnny — That’s the law made by politicians, right? Ash — It is the law made by Parliament. Parliament is the ‘sovereign law-maker’, so any rules created by judges have to be consistent with the laws made by Parliament. Johnny — And Parliaments can make any laws they like? Ash — No. As I explained earlier, the power of the Parliament is limited by the relevant Constitution. Legislation has to be created in the manner described in the Constitution, and the law-making powers of the Parliament are limited by the Constitution. Johnny — And who decides whether or not a Parliament’s laws are consistent with the Constitution? Ash — Well that would be decided by a court of law. Johnny — What? Now I’m really confused! Ash — Okay, I will explain it all a little more slowly.

CHAPTER PROBLEM

As you make your way through this chapter, consider the relationship between politicians and judges. Are judges answerable to politicians, or are politicians answerable to judges? Reflect upon the doctrine of separation of powers explained in the previous chapter.

78  PART 1 Foundations

Introduction This and the previous chapter present a comprehensive description of Australia’s legal system. Before looking at the particular laws that regulate business in Australia today, it is important that you learn about the regulatory environment within which those laws operate. In the last chapter, we presented an overview of the Australian legal system, described the Australian Constitution, and explained the role played by the executive branch of government. In this chapter we examine in detail the roles played by the other two branches of government: the legislature and the judiciary. After working through this chapter, you will better appreciate and understand what you read and see in the media about the statements and activities of parliaments, politicians and judges.

3.1 The legislature LEARNING OBJECTIVE 3.1 What is the role of parliament?

As previously explained, legislative power is the power to make law. In Australia, this power is exercised by the various parliaments. For example, according to the Australian Constitution: 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 herein-after called ‘The Parliament’, or ‘The Parliament of the Commonwealth’.1

Similarly, the various State constitutions vest legislative power in the State parliaments (see table 3.1). But what exactly is a parliament, and how does it operate? TABLE 3.1

Parliaments in Australia

Jurisdiction

Parliamentary website

Commonwealth

www.aph.gov.au

Australian Capital Territory

www.parliament.act.gov.au

New South Wales

www.parliament.nsw.gov.au

Northern Territory

www.nt.gov.au/lant

Queensland

www.parliament.qld.gov.au

South Australia

www.parliament.sa.gov.au

Tasmania

www.parliament.tas.gov.au

Victoria

www.parliament.vic.gov.au

Western Australia

www.parliament.wa.gov.au

ACTIVIT Y 3.1 — RESEARCH

1. Visit the home page of the Federal Parliament and answer the following questions: (a) What is ‘Hansard’? (b) How do you correctly address the Prime Minister; a Senator; and a Member of the House of Representatives? (c) What is ‘Question Time’? 2. Visit the home page of your State or Territory parliament and answer the following questions: (a) Who is the Premier or Chief Minister? (b) Who is the Deputy Premier? (c) Who is the Treasurer? (d) Who is the Opposition Leader?

The nature of parliament In this section we describe the history and structure of parliaments in Britain and Australia. 1 Australian Constitution s 1.

CHAPTER 3 Politicians and judges  79

The history of parliament The supremacy of parliament as the ‘sovereign lawmaker’ within Australia and within other liberal democracies is the result of a long struggle between the English monarch and the English parliament. It is common to identify the year 1066 as the date that the present legal system in Britain commenced. This was the date of the Norman Conquest, when William the Conqueror established himself as King William I. The origins of parliament, however, go back even further than this. They can be traced back to the Great Councils of Anglo-Saxon England, which were assemblies of the king’s bishops, abbots and other leaders who met to discuss and debate important matters and to advise the king. The Norman monarchs continued the Great Council, which became known as the Curia Regis or King’s Council, and widened its membership to include powerful landowners.

The first monarchs exercised absolute power, but following the signing of the Magna Carta by King John in 1215, the power of the monarch was limited by the requirement that they summon and consult the Council prior to making certain laws, including tax laws. According to Article 14 of the Magna Carta: And for obtaining the common counsel of the kingdom anent the assessing of an aid (except in the three cases aforesaid) or of a scutage, we will cause to be summoned the archbishops, bishops, abbots, earls, and greater barons, severally by our letters; and we will moreover cause to be summoned generally, through our sheriffs and bailiffs, and others who hold of us in chief, for a fixed date, namely, after the expiry of at least forty days, and at a fixed place; and in all letters of such summons we will specify the reason of the summons. And when the summons has thus been made, the business shall proceed on the day appointed, according to the counsel of such as are present, although not all who were summoned have come.

In the late 1200s these meetings of the Council began to be referred to as the ‘parliamentum’, and to include two knights from each shire and two citizen representatives from each city and borough. In 1332 the knights and citizens began to meet separately from the barons and clergy. This eventually led to the bicameral British parliament (consisting of two Houses) that exists today. The parliament was initially subservient to the monarch, but over the years there was a shift in the balance of power. Civil war erupted in England between those loyal to the monarch and those loyal to the parliament. The monarch claimed the right to legislate by virtue of royal prerogative, and the parliament claimed that the monarch could only legislate with its consent. In the 1600s, King Charles I claimed a divine right to rule and dismissed the parliament. The parliament, however, refused to be dismissed and there was a revolt. Charles was tried, convicted of treason and executed. This was followed by decades of conflict, including a civil war and a republican dictatorship under Oliver Cromwell until his death in 1658. The monarch eventually returned, but it has been generally recognised since then that it is the parliament and not the monarch who is the sovereign lawmaker. A system of absolute monarchy had been transformed into a constitutional monarchy. 80  PART 1 Foundations

The notion of parliamentary sovereignty has been described as the right of the British parliament ‘to make or unmake any law whatever; and, further, that no person or body is recognised by the law  .  .  .  as having a right to override or set aside the legislation of the Parliament’.2 The notion has three important consequences. 1. The laws made by a parliament are not subject to any ‘higher law’ such as principles of morality, international law, or common law (the law developed by judges). 2. A parliament cannot make a law that binds future parliaments; that is, a parliament is always free to change its own laws. 3. No person, not even a judge or a member of the executive government, can override, ignore or disobey a valid law made by a parliament. Contrary to this notion of absolute sovereignty, however, there is an important limitation upon the power of parliaments in Australia: they must exercise their law-making power in accordance with the terms of the relevant constitution, and if they attempt to make a law in excess of their constitutional authority, that law may be declared to be unconstitutional and invalid by the courts.

The structure of parliament In England, the Curia Regis evolved into a bicameral parliament consisting of an Upper House and a Lower House. The Upper House (originally called the House of Tenants-in-Chief and Ecclesiastics) is now called the House of Lords and the Lower House (originally called the House of Elected Knights and Citizens) is now called the House of Commons. Most Australian parliaments have a similar structure to that of the British Parliament (see table 3.2). To become binding law, a draft law, referred to as a Bill, must be passed (approved by a majority) by both the Lower House and the Upper House of the parliament. This is known as the Westminster system — the British Houses of Parliament are located in Westminster, London. TABLE 3.2

The structure of parliament British Parliament

Federal Parliament

State parliaments

Territory parliaments

Crown

Queen

Governor-General

Governor

Administrator

Upper House

House of Lords

Senate

Legislative Council

—

Lower House

House of Commons

House of Representatives

Legislative Assembly

Legislative Assembly

Unlike the parliaments of the other States, the Queensland Parliament is unicameral; that is, it has only one house. Queensland abolished its upper house with the passing of the Constitution Act Amendment Act 1922 (Qld). Labor Party policy at the time was that upper houses should be abolished because they were undemocratic in that members were appointed rather than elected. When the Labor Party won the Queensland State Election it enacted its policy. (A referendum was not required because, unlike the Australian Constitution, the Queensland Constitution could be amended by legislation.) The parliaments of the ACT and the Northern Territory are also unicameral. Federal Parliament

In the Federal Parliament, the Lower House is called the House of Representatives and the Upper House is called the Senate. Each member of the House of Representatives is elected to represent a particular electorate or geographic region. Australia is divided into a number of electorates, each electorate containing approximately the same number of people. This ensures that Australian citizens have equal representation in the Lower House. 2 A V Dicey, Introduction to the Study of the Law of the Constitution (Macmillan, 10th ed., 1959).

CHAPTER 3 Politicians and judges  81

According to the Australian Constitution, the number of members of the House of Representatives must be approximately twice the total number of Senators. There are at present 150 members of the House of Representatives.

Members elected to the House of Representatives are appointed for a maximum period of three years, after which they must face re-election. The political party or coalition of political parties with the majority of members in the House of Representatives forms executive government. The Prime Minister is traditionally a member of the House of Representatives. Similarly, in State Parliaments, the Premier is traditionally a member of the Lower House. In the Federal Parliament, the Upper House is the Senate. The Senate is known as the State’s House. Each State has equal representation in the Senate: there are 12 senators from each State and there are two senators from each Territory, resulting in a total of 76 senators. Each senator is appointed for six years, although half the Senate is re-elected every three years. Because representation in the Lower House is based on population distribution, most members of the Lower House are from the most populous states, New South Wales and Victoria. The founders of the Constitution recognised the danger that the Lower House would favour those States, and the composition of the Upper House addressed that risk by giving the other States the opportunity to oppose any biased legislation. The Senate is also known as the House of Review. The executive government necessarily controls the Lower House but it does not necessarily control the Upper House, and while a law proposed by the executive government will almost automatically be passed by the Lower House, it will not necessarily be passed by the Upper House. The Senate effectively has the power to veto any law proposed by the executive government in the Lower House. As one famous Senator (Don Chipp, founder of the Australian Democrats Party) once put it, the role of the Senate is to ‘keep the bastards honest’. The Upper Houses in the State Parliaments play a similar role.

82  PART 1 Foundations

ACTIVIT Y 3.2 — RESEARCH

Visit the home page of the Federal Parliament and answer the following questions. 1. When and how often does the Lower House sit? 2. What is the role of the ‘speaker’, and who is the present speaker? 3. Who is the representative from your electorate? 4. How long is the term of a senator? 5. What is the role of the ‘president’? 6. Who is the present president? 7. Who are the senators from your State or Territory?

State Parliaments

In the State parliaments, the Lower House is usually known as the Legislative Assembly (it is called the House of Assembly in Tasmania and South Australia), and the Upper House is known as the Legislative Council. Table 3.3 sets out the number of representatives in each house of the various State and Territory parliaments. TABLE 3.3

Number of parliamentary representatives

Jurisdiction

Lower House

Upper House

Australian Capital Territory

17

—

New South Wales

93

42

Northern Territory

25

—

Queensland

89

—

South Australia

47

22

Tasmania

25

15

Victoria

88

40

Western Australia

58

36

The Crown representative

The Crown is represented in the Federal Parliament by the Governor-General, and in the State parliaments by the various State Governors. These Crown representatives are part of the legislature; a Bill does not become law until it receives the approval of the relevant Crown representative, a process referred to as Assent. The powers of the Crown representative were discussed in detail in the previous chapter. CAUTION!

In order to become binding law, a Bill must be passed by both the Lower House and the Upper House, and receive Assent.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 3.1 What is the role of the legislature? 3.2 What was the Curia Regis and how did it evolve into the parliament we recognise today? 3.3 How did parliament become the ‘sovereign law-maker’? CHAPTER 3 Politicians and judges  83

 3.4 What is the ‘Westminster system’?  3.5 What is the structure of (a) the British Parliament; (b) the Australian Federal Parliament;

and (c) the parliament of your State or Territory?  3.6 How are members appointed to the House of Representatives?

3.2 Parliament in operation LEARNING OBJECTIVE 3.2 How do parliaments make law?

In this section we describe how parliaments operate: how a Bill becomes a law, and what happens if there is a deadlock between the two Houses.

How laws are made To become law, a Bill must pass three ‘readings’ in each of the two Houses of the parliament and then receive Royal Assent (see figure 3.1).

Proposal

Drafting of Bill

Lower House

Commencement

Royal Assent

Upper House

FIGURE 3.1

The parliamentary process

Step 1: Proposal Most new laws are introduced into the parliament by a minister on behalf of the executive government. Pressure upon the executive government to introduce a new law or to change the existing law may come from a range of possible sources (see figure 3.2). The executive government itself will have policies that it wishes to implement in the form of legislation. Lobby groups within the community, such as unions, employer groups, students or environmental groups may call for the law to be reformed. Departments in the public service may have identified a problem with the existing law and the need for that law to be changed. Or the pressure may come from a law reform body, from the media or from a criticism of the existing law in a court judgment. Not all Bills are initiated by the executive government. Other members of the parliament are also entitled to introduce Bills. Such a proposal is called a Private Member’s Bill. However, unless the Bill has the support of the executive government, or the members of parliament are permitted by their party to vote according to their conscience rather than according to the directions of their party, the Bill is unlikely to succeed. In fact, since it is the executive government that controls the order of proceedings in Parliament, the Private Member’s Bill may not even be tabled. 84  PART 1 Foundations

Law reform body

Public servants

Lobby groups

Government policy

FIGURE 3.2

Proposal for new law

Media

Courts

Pressure to change the law

LAW IN CONTEXT: LAW IN POLITICS

Shorten puts pressure on Liberals over same-sex marriage Bill Shorten is acting to force the Liberals’ hand on gay marriage by giving notice he will move a private member’s bill in the House of Representatives on Monday. The opposition leader said in a statement: ‘I believe the time has well and truly come for the parliament to debate marriage equality’. Labor wants a debate to start in the House as soon as possible, although it would not seek to hasten a vote. It would want to be confident of the numbers. Deputy opposition leader Tanya Plibersek told the ABC: ‘Some time later a bill can be brought on for a vote.’ ‘We are very keen to make sure that during that … intervening period, the community has the opportunity to tell their members of parliament about their support for marriage equality.’ ‘We know from recent surveys, almost three-quarters of Australians are supporters of marriage equality, so having a few weeks intervening period certainly allows that period of community consultation.’ A looming debate would mean the Liberals would have to resolve the question of whether the issue should be a conscience one. The timing of a debate and a vote in the house would be in the government’s hands but it would face a backlash if it refused to let the bill move through the normal processes. Liberal minister Simon Birmingham and backbencher Warren Entsch have spoken out strongly this week in favour of a conscience vote. The Greens on Tuesday said its same-sex marriage bill would be brought on in the Senate for debate on June 18 with a vote on November 12. Shorten said his bill would not have the universal support of Labor colleagues. ‘It will challenge the deeply held personal beliefs of MPs and senators on both sides of politics. That is why Labor members have the freedom to vote their conscience — a freedom Tony Abbott is currently denying his party.’ Shorten said that for marriage equality to happen, ‘Tony Abbott has to give his MPs a free vote’. The same-sex marriage issue has picked up momentum in Australia after the big yes vote in the Irish referendum. Abbott has said that it will be up to the Liberal party room as to whether Liberals will have a conscience vote. At present Liberal policy is against gay marriage.

CHAPTER 3 Politicians and judges  85

The Shorten bill is being seconded by Plibersek. It is based on the bill she earlier had prepared, but had not introduced into the parliament. [Former] Communications Minister Malcolm Turnbull, a strong supporter of gay marriage, indicated this week that he thought ‘it becomes more likely all the time’ that a free vote would get up in the Liberal Party. ‘I’ve never seen a social issue on which public opinion has changed so quickly.’ Greens senator Sarah Hanson-Young said Abbott ‘continues to be lost in a time warp as Bill Shorten follows the Greens’ lead in bringing the marriage equality debate to the forefront of Australian politics.’ ‘Wonderful to see more MP’s pushing for marriage equality. We don’t actually need more bills in the parliament, but we do need more votes.’ Source: Michelle Grattan, 26 May 2015, http://theconversation.com/shorten-puts-pressure-on-liberals-over-same-sexmarriage-42373.

If it is the executive government that introduces a Bill, the Bill is almost certain to be passed by the Lower House, since the executive government is by definition the political party with a majority in that House. It is only if members of the majority party choose to ‘cross the floor’ and vote against the government Bill that the Bill will fail in the Lower House. This is an extremely rare occurrence. ACTIVIT Y 3.3 — RESEARCH

Visit the home page of the Federal Parliament. What is a ‘petition’ and how does a person arrange for a petition to be tabled in Parliament?

Step 2: Drafting of a Bill For a proposed new law to be discussed and voted on by Parliament, it must be in the form of a Bill. The Bill is prepared by the Office of Parliamentary Counsel, a team of government lawyers who specialise in the drafting of legislation. The Office of Parliamentary Counsel may also prepare an explanatory memorandum, summarising the new law and explaining the effect of each provision.

Step 3: Lower House Most Bills are first introduced in the Lower House. It is possible for a Bill to be first introduced in the Upper House, but this is relatively rare. In relation to the Federal Parliament, section 53 of the Australian Constitution provides that a Bill ‘appropriating revenues or money, or imposing taxation’ must first be introduced in the Lower House. To be passed by the Lower House, the Bill must successfully pass through three stages or ‘readings’ (see figure 3.3).

First reading

FIGURE 3.3

Second reading and debate

Three readings of a Bill

86  PART 1 Foundations

Committee

Third reading

The first reading is simply a formal reading of the Bill’s title by the Clerk of the House. There is no debate at this time. Copies of the Bill are made and distributed to the members of the House, and a date for the second reading is set. The second reading begins with the relevant Minister delivering a second reading speech that outlines the content and objectives of the Bill. At the end of this speech, proceedings are usually adjourned to give members time to consider the Bill. They will be given the explanatory memorandum to assist them. When the House resumes sitting, the members debate the Bill. The next stage is the committee stage. The Bill may be referred to the ‘Committee of the Whole’ consisting of all of the members of the House for a detailed examination of all of the clauses in the Bill. Alternatively the Bill may be considered by a Select or Standing Committee of some members of the House. Such committees are usually comprised of members from each of the major political parties, although the committee is typically controlled by the majority political party. The Chair of the Committee will then advise the House about the Bill. At the third reading stage, debate is restricted. If the motion that the Bill be read a third time is passed by the House, the Clerk of the House again reads the title of the Bill, and the Bill has successfully completed this stage of its journey. ACTIVIT Y 3.4 — RESEARCH

Visit the home page of the Australian Parliament — House of Representatives and locate a copy of the ‘House Order of Business’. Approximately how much time each week is set aside to consider (1) Government business; and (2) Private Member’s business?

Step 4: Upper House Once the Bill has been passed by the Lower House, it is introduced in the Upper House and goes through the same three stage process. If the Upper House requests amendments to the Bill, it is returned to the Lower House. If the Bill successfully completes the third reading stage in the Upper House, it has been passed by both Houses of Parliament.

Step 5: Assent A Bill that has been successfully passed by both Houses of Parliament is not law until it receives the Assent of the Crown, a step sometimes known as ‘formal assent’ or ‘Royal Assent’. For example, according to section 58 of the Australian Constitution: 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 assent, or that he reserves the law for the Queen’s pleasure.

In the States, Assent is granted by the Governor, and in the Northern Territory Assent is granted by the Administrator. In the Australian Capital Territory, where there is no Crown representative, Assent is replaced by notification in the Territory Gazette. Traditionally, the Crown representative acts on the advice of the executive government. It is unlikely that the Crown representative will withhold Assent once a Bill has been passed by both Houses of Parliament.

Step 6: Commencement It is important to know precisely when a new Act commences, since there may be questions about whether particular conduct is regulated by the new Act. Sometimes the legislation will expressly set out the date when it is to commence. For example, s 1.2 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) provides: (1) This Act commences on 1 July 2000. CHAPTER 3 Politicians and judges  87

The commencement date specified in the Act is usually a specific date after assent, but it is possible for legislation to be specified to be retrospective: that is, specified to commence on a date prior to assent, and even prior to the introduction of the Bill into parliament. An amending Act may, for example, be stated to commence from the date of the original Act being amended — especially if for some reason one or more of the provisions in the original Act have been found to be invalid or unlawful. Or a retrospective Act may be passed to reverse the wider implications of a particular judicial decision. For example, in R v Wakim; Ex parte McNally (1999) 198 CLR 511, the High Court found that Federal ‘cross-vesting’ legislation (see below), which had been intended to allow the Federal and Family courts to exercise State jurisdiction, was unconstitutional. This was a problematic decision, because the Federal and Family courts had for some years been exercising State jurisdiction, and the High Court finding cast doubt upon the legality of many of the decisions of the Federal and Family courts made during that period. The Federal Parliament addressed these concerns by passing legislation that retrospectively validated those decisions. Sometimes the legislation simply provides that it will commence on a date ‘to be fixed by proclamation’, which means that the executive government will decide later when the new law is to commence, and will announce the commencement date in the Government Gazette. If the legislation says nothing at all about its commencement date, its ‘default’ commencement date depends upon the jurisdiction (see table 3.4). TABLE 3.4

Default commencement date of legislation

Jurisdiction

Commencement

Authority

Commonwealth

28 days after Assent

Acts Interpretation Act 1901 (Cth) s 3A

Australian Capital Territory

Day following date of notification in the Territory Gazette

Legislation Act 2001 (ACT) s 73

New South Wales

28 days after Assent

Interpretation Act 1987 (NSW) s 23

Northern Territory

Date of notification in Territory Gazette

Interpretation Act (NT) s 6

Queensland

Date of Assent

Acts Interpretation Act 1954 (Qld) s 15A

South Australia

Date of Assent

Acts Interpretation Act 1915 (SA) s 7

Tasmania

14 days after Assent

Acts Interpretation Act 1931 (Tas) s 9

Victoria

Date of Assent

Interpretation of Legislation Act 1984 (Vic) s 11

Western Australia

28 days after Assent

Interpretation Act 1984 (WA) s 20

Unless the legislation contains a specific expiry clause, it will remain as law until it is repealed, that is, until the parliament decides to abolish the law or replace it with a new law.

Resolving deadlocks What happens if a Bill is passed by one House but rejected by the other House? In relation to the Federal Parliament, this problem is addressed by section 57 of the Australian Constitution. That section provides that if the Upper House fails to pass a Bill passed by the Lower House, and after three months the Bill is once again passed by the Lower House and rejected by the Upper House, the Governor-General is empowered to dissolve both Houses. This is known as a double dissolution. All members of Parliament are effectively dismissed and an election is held. If after the new parliament is appointed the deadlock reoccurs, the Governor-General can convene a joint sitting of both Houses. Were this to occur, the Bill would more than likely be passed, because the Lower House contains twice as many members as the Upper House. Double dissolutions are relatively rare. Political parties, whether in government or in opposition, prefer to have time to prepare for an election, and they are aware of how unpopular a surprise election would be. What is more common is the threat of double dissolution: a Bill is passed by the Lower 88  PART 1 Foundations

House, rejected by the Upper House, passed again by the Lower House and, at this point, members from both Houses start negotiating to avoid that final step and initiate a double dissolution. Double dissolutions have taken place six times since Federation. Two double dissolutions (1914 and 1983) resulted in a change of government. Three (1951, 1974 and 1987) saw the re-election of the same government. The double dissolution in 1975 was unusual: more than 20 double dissolution Bills had been stockpiled when the Senate ‘delayed’ three other money bills, including a key appropriation Bill. The Governor-General (Sir John Kerr) eventually dismissed the Labor Prime Minister (Mr Gough Whitlam) and asked the Liberal leader of the opposition (Mr Malcolm Fraser) to take over as Prime Minister on the condition that he would advise the Governor-General to dissolve both Houses and call an election. Fraser did so, and the election was won by the Liberal Party. The only occasion on which disputed legislation was subsequently enacted by a joint sitting of the Parliament was in 1974. LAW IN CONTEXT: LAW IN POLITICS

You don’t pull the double dissolution trigger when the gun is likely to backfire It was like watching the little kids taunting the big kid in the playground, after the Senate handed the government a trigger for a double dissolution by rejecting for a second time the bill to scrap Labor’s ‘green bank’. Opposition Leader Bill Shorten said if Tony Abbott wanted an election ‘he should bring it on’; Christine Milne said the Greens ‘are ready for an early election, if Tony Abbott has the ticker for it’. Deputy Liberal Leader Julie Bishop acknowledged the political reality. ‘Just because you are given a trigger, it doesn’t mean you have to pull it.’ Especially, she might have added, if there is a high risk of shooting yourself in the head. A little while ago, Abbott was throwing out veiled and not-so-veiled threats about another election if the Senate frustrated his program. Quite possibly he didn’t mean them then — though there were stories claiming he really did — but certainly he’ll be in no position in the foreseeable future to take such a gamble. Another election any time soon would drive a sour electorate to deeper anger and frustration. If the current polls were translated into votes, people would be taking their baseball bats to the government. Although, elections can be unpredictable. One has to remember that people are now primarily making judgements about the government, not a real-time decision about the government versus the opposition. A double dissolution might polarise the electorate — or alternatively cause people to lash out at the major parties, potentially to the benefit of Clive Palmer’s PUP. So with all Senate seats in contention, and thus a smaller quota, crossbenchers could still end up powerful in a re-elected upper house. The ‘trigger’ legislation — to abolish the Clean Energy Finance Corporation, which mobilises investment in renewable energy and lower emissions technologies — is really neither here nor there for the government, though it is pledging to reintroduce it soon so the new Senate can deal with it. Bills for budget measures are another matter. The levy on high income earners passed on Tuesday, but the reinstatement of fuel excise indexation, part of the planned savings in child care, and the promised financial break for states that sell assets and reinvest in infrastructure, are among the items at risk. How much the Senate will frustrate remains to be seen. There will be haggling with both the current upper house and the one that starts next month. Various other budget nasties that don’t start for a long while can wait in terms of their legislation. Then there is the paid parental leave scheme that many Coalition members would be happy to see voted down or hacked about. In the government’s mind, the most crucial measures are repealing the carbon tax and scrapping the mining tax. Abbott will on Monday reintroduce the carbon tax repeal legislation and, later in the week, the legislation to get rid of the mining tax. The bills will be ready to be considered quickly by the new Senate, which is being summoned for work from July 7 — much earlier than is usually the case when there is a Senate turnover.

CHAPTER 3 Politicians and judges  89

From what Clive Palmer has said, the repeal of these taxes should get through, although there might be some arm wrestling before that happens. His condition on the carbon legislation is that there should be a legal provision to ensure the savings are passed on to consumers; he says the mining tax repeal will only be passed if a benefit (associated with the original tax package) for children of defence personnel killed or badly injured in service is retained. The carbon and mining tax repeal bills would be double dissolution triggers if defeated. Abbott before the election gave firm undertakings that if he could not get the carbon tax abolition through he would go to a DD. This is the one issue in relation to a double dissolution on which he would look a wimp if he retreated. Double dissolution triggers can of course be kept in the back pocket, until the political climate improves. But any change in the weather looks a long way off (if it ever comes). And even then there would need [to] be a very good reason for the government to get the gun out. The expectation remains a 2016 election. Because the budget has been seen by voters as unfair and off key and the government’s general performance has been poor, Labor is able to have a great time playing the ‘say no’ game with impunity. But as time goes on, it will have to make careful judgements as to how it presents itself. For what it’s worth, ALP senator Mark Bishop, serving out his final fortnight, had some advice for his soon-to-be-former colleagues, when he delivered his valedictory speech on Tuesday. ‘I believe mere noise and total opposition to any and all government proposals will be ultimately self-defeating. Soon we need to prove our capacity to be in government in the short term.’ ‘I say unequivocally, let the major opposition party lead the debate and be the opposition party — isolating the rest.’ ‘I hold to the view that the party or parties that control a majority on the floor of the House should govern in both places. The same principle should have applied for the last six years and the same principle should apply again when we again occupy the Treasury benches.’ Source: Michelle Grattan, 18 June 2014, http://theconversation.com/you-dont-pull-the-double-dissolution-triggerwhen-the-gun-is-likely-to-backfire-28160.

A similar mechanism for resolving deadlocks can be found in the constitutions of New South Wales, South Australia and Victoria. The constitutions of Western Australia and Tasmania contain no such provision, and if a compromise cannot be reached, the Bill simply does not become law. Deadlock provisions are not necessary in Queensland, the Northern Territory or the ACT because they have only one House of Parliament.

Types of legislation Broadly speaking, there are five types of Act: •• original Acts, •• amendment Acts, •• repealing Acts, •• consolidating or reprinted Acts, and •• reviving Acts.

Original Acts An original Act is an Act passed about a particular matter for the first time: e.g. the Fair Work Act 2009 (Cth). An original Act may be taking over regulation of an area previously regulated by case law, or it may be completely replacing a previous Act. The Fair Work Act 2009, for example, replaced the Workplace Relations Act 1996 (Cth).

Amendment Acts It is often the case that the legislature must make changes to an original Act. These changes may be limited to the insertion, deletion or replacement of a few words, or may extend to the insertion, deletion 90  PART 1 Foundations

or replacement of entire Parts or Divisions. The changes may be necessary because the original Act has been found to have consequences unintended by the legislature, because the legislature wishes to extend the operation of the original Act, or because errors or loopholes in the original Act have been discovered. The Income Tax Amendment Act 1936 (Cth), for example, has been amended nearly 500 times since 1973. An Act that changes an existing Act is called an amendment Act. An amendment Act often contains in its title the name of the original Act and the additional word ‘Amendment’. For example, the Fair Work Act 2009 (Cth) was subsequently amended by the Fair Work Amendment (State Referrals and Other Measures) Act 2009 (Cth). Amendments to an original Act may also be contained in other original Acts or in ‘omnibus’ amendment Acts that make variations to multiple Acts simultaneously. When conducting legal research it is vital that you identify and take into account the most recent amendments to any legislation you are researching.

Repealing Acts A repealing Act is an Act that abolishes an existing Act. Where the Act being repealed is being superseded (replaced) by another Act, it is more common for a repealing provision to be included in the superseding Act. The Workplace Relations Act 1996 (Cth), for example, was largely (but not completely) repealed by the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 (Cth). Sometimes the repeal of an Act is effected by implication rather than expressly. If there is an inconsistency between an earlier Act and a later Act, the earlier Act is deemed to be repealed to the extent of the inconsistency. (This rule of interpretation will be explained in more detail later in the text.)

Consolidating Acts/reprinted Acts A consolidating Act is an Act that brings all the statute law in a particular area into a single Act or that consolidates an original Act with all of its subsequent amending Acts. The parliament repeals the original Act or Acts and their amendments and passes a single consolidating Act. It is relatively rare today for a parliament to take the time and make the effort to pass a consolidating Act. It is much more common for the government printer to themselves ‘reprint’ an Act to incorporate all of the amendments that have been made to that Act. ACTIVIT Y 3.5 — RESEARCH

Go to www.comlaw.gov.au and locate the latest version of the Fair Work Act 2009 (Cth). When was the Act most recently reprinted, and what amending Acts were incorporated into the reprint?

Reviving Acts A reviving Act is an Act that revives or restores an Act that is no longer current. The Act being revived may have been repealed by the legislature or it may have contained a ‘sunset clause’ — a clause that gives the Act a limited lifespan — and the legislature now wishes to extend the life of the Act. ACTIVIT Y 3.6 — REFLECT

Why would the legislature insert a ‘sunset clause’ into legislation?

CHAPTER 3 Politicians and judges  91

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  3.7 How are members appointed to the Senate?  3.8 What is the role of the Senate?  3.9 What is the role of the Crown representative in parliament? 3.10 How are new laws made by parliament? 3.11 What are the various sources of pressure for a new law? 3.12 What is a ‘Private Member’s Bill’? 3.13 What does the Office of Parliamentary Counsel do? 3.14 How is a Bill passed by the Lower House? 3.15 When does an Act passed by the Federal Parliament commence? 3.16 What happens if the Upper House refuses to pass a Bill that has been passed by the Lower House? 3.17 Name and describe five types of Act.

3.3 The judiciary LEARNING OBJECTIVE 3.3 How does Australia’s court system operate?

Judicial power is the power to interpret the law and to apply it in the resolution of particular disputes. Judicial power is exercised by the courts. According to section 71 of the Australian Constitution: 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 the Federal jurisdiction. The High Court shall consist of a Chief Justice, and so many other Justices, not less than two, as the Parliament prescribes.

Similarly, at the State and Territory level, judicial power is exercised by the State and Territory courts. It is the courts that are the source of case law. Case law consists of the recorded decisions of judges. It is often referred to as ‘common law’. The decisions of judges in courts other than the lower courts are usually recorded and published and, in accordance with the doctrine of precedent, these decisions are referred to and frequently followed by other judges. Over the centuries, this has led to the creation of a body of law made by judges. Not all case law is equal. The higher the court that made the decision is positioned within the relevant court hierarchy, the more authoritative is the decision. And, as explained below, a decision made by a court is ‘binding’ only upon other courts lower within the court hierarchy. The decision is not binding upon courts in other jurisdictions, although it may be persuasive. While many areas of law now consist almost entirely of legislation (law created by parliaments), there are still important areas of law that consist primarily of case law. Contract law is an example of such an area of law.

The Australian court system In Australia, each of the six States and two mainland Territories has its own court system, and there is also a Federal court system. Each of these nine court systems is organised into a court hierarchy. A hierarchical court structure is advantageous for a number of reasons. •• A hierarchical structure permits the courts to be linked by avenues of appeal. A party who is dissatisfied with the outcome of a particular trial can appeal the decision to a court higher within the hierarchy. 92  PART 1 Foundations

•• A hierarchical structure enables particular courts to specialise in particular types of trial, and facilitates the efficient allocation of legal resources. The lower courts deal with the less serious matters involving lower sums of money or less serious criminal acts. The higher courts with their more experienced judicial personnel can deal with the more complicated or more serious matters involving larger sums of money or more serious criminal acts. •• A hierarchical structure facilitates the operation of the doctrine of precedent, described in detail below. Put simply, the decisions of superior courts must be followed by lower courts where the facts of the cases are similar. In other words, superior courts establish precedents, which lower courts must follow.

Jurisdiction The term ‘jurisdiction’ here refers to the scope of a court’s authority. Original and appellate jurisdiction

Most courts exercise both an original jurisdiction and an appellate jurisdiction. A court is exercising its original jurisdiction when it hears and decides a dispute that is being heard and decided for the first time. A court that is exercising its original jurisdiction is described as a ‘court of first instance’. A court is exercising its appellate jurisdiction when it hears and determines an appeal from a court lower within the hierarchy. Appeals are made from lower ranking courts to higher ranking ones. The highest court to which a person can appeal in Australia is the High Court of Australia. Criminal and civil jurisdiction

Most courts in Australia have both a criminal and a civil jurisdiction — that is, the power to hear both criminal and civil trials. The distinction between civil law and criminal law was briefly described in the opening chapter. Criminal trials involve the prosecution of persons who have breached criminal law. Criminal law covers all crimes ranging from summary offences (minor crimes such as driving offences, minor theft and vandalism) to indictable offences (serious crimes such as murder, serious assault, rape, kidnapping and armed robbery, and which involve the right to a jury trial). A criminal trial is commenced by the Crown against a defendant. Civil trials involve persons suing each other under the civil law. Civil law includes contract law, property law and the law of torts. A plaintiff takes a defendant to court claiming that some loss or harm has been suffered because of the actions of the defendant, and if the plaintiff is successful, the court orders appropriate relief — for example, making the defendant pay compensation to the plaintiff. These and other important differences between civil and criminal trials are set out in table 3.5. These differences are examined in more detail when we explain civil and criminal procedure below. TABLE 3.5

Differences between civil and criminal trials Civil

Criminal

Parties

Plaintiff and defendant

Crown and defendant

Burden of proof

Plaintiff

Crown

Standard of proof

Balance of probabilities

Beyond reasonable doubt

Juries

Sometimes

Indictable offences only

Result

Proved/not proved

Guilty/not guilty

Outcome

Remedy

Punishment

The Federal court system The Federal court hierarchy is shown in figure 3.4. CHAPTER 3 Politicians and judges  93

High Court of Australia (Appellate jurisdiction)

High Court of Australia (Original jurisdiction)

Full court of the Family Court of Australia (Appellate jurisdiction)

Full court of the Federal Court of Australia (Appellate jurisdiction)

Family Court of Australia (Original jurisdiction)

Federal Court of Australia (Original jurisdiction)

Federal Circuit Court

FIGURE 3.4

Federal court hierarchy

The Federal court websites are set out in table 3.6. TABLE 3.6

Federal courts websites

Court

Website

High Court of Australia

www.hcourt.gov.au

Federal Court of Australia

www.fedcourt.gov.au

Family Court of Australia

www.familycourt.gov.au

Federal Circuit Court of Australia

www.federalcircuitcourt.gov.au

High Court of Australia

The High Court of Australia was established by section 71 of the Australian Constitution. The details of its constitution and operation were set out in the Judiciary Act 1903 (Cth), which was later replaced by the High Court of Australia Act 1979 (Cth). 94  PART 1 Foundations

The High Court consists of seven Justices appointed by the Governor-General on the advice of the Prime Minister. One of the seven Justices is appointed as Chief Justice of the High Court. The court is permanently located in Canberra, although it occasionally hears cases in other capital cities. The High Court does not hear jury trials.

In its original jurisdiction, the High Court sits as a single Justice to hear disputes about Federal law (relatively rarely these days since the creation of the Federal Court of Australia — see below), and sits as a panel of five to seven Justices to hear disputes relating to the interpretation of the Australian Constitution, including disputes regarding the constitutional validity of Federal legislation. It also hears trials that involve matters in which the Commonwealth (or a person on behalf of the Commonwealth) is suing or being sued, and disputes between the States. In its appellate jurisdiction, the High Court sits as a panel of three, five or seven Justices and hears appeals from the decisions of State and Territory Supreme Courts, from the Federal Court and the Family Court, and from any High Court Justice exercising original jurisdiction. LAW IN CONTEXT: LAW IN POLITICS

Two-for-one: a good new High Court judge, and a woman to boot The almost equal gender balance on the High Court of Australia has been restored with the announcement that Federal Court judge Michelle Gordon will replace Justice Kenneth Hayne. When she takes her seat on the bench in June this year as the 52nd justice of the High Court of Australia, she will return the number of women sitting on the High Court to three out of seven judges. Attorney-General George Brandis’ decision to appoint Justice Gordon suggests that the government may have taken heed of calls for gender diversity in appointments following criticism from some quarters that the court’s second woman judge, Justice Susan Crennan, was replaced by Justice Geoffrey Nettle. That the new judge is married to the judge she is replacing adds a novel and unprecedented dimension to the appointment. Perhaps unsurprisingly, those making judicial appointments have traditionally been loath to acknowledge that gender had any bearing on their decision. By focusing on claims of ‘merit’ rather than the need to redress almost 100 years of exclusion from legal authority, decision-makers have been disinclined to justify their appointments around the politics of difference and diversity. The government of the day is largely unfettered in making judicial appointments at the highest levels. Certainly there is nothing that legally compels the government to consider notions of diversity in making these historic appointments. In practice, the appointment is generally made by the government of the day, with the attorney-general directing the process in most cases and presenting a nominee to cabinet, then formally recommending the appointment to the governor-general. Justice Gordon is the fifth woman appointed to the High Court of Australia, and the third appointment by the conservative side of politics. Given Prime Minister Tony Abbott’s long-running ‘woman problem’, appointing a woman judge seems prudent especially in light of the criticisms which arose when Justice Crennan was replaced with a man. But does the appointment of Justice Gordon mean that the politics of gender inclusion is over? And should her familial connections have any bearing on her appointment? The credentials of the High Court’s newest judge Even if the government’s decision-making process was informed by considerations of gender, it preferred to construct the narrative of Justice Gordon’s appointment exclusively around her credentials.

CHAPTER 3 Politicians and judges  95

Similarly, in appointing Justices Crennan and Kiefel in 2005 and 2007 respectively, the then attorney-general, Philip Ruddock, was at pains to avoid any conversation about the importance of gender diversity in judicial appointments. The marital connection in this appointment is novel, but it certainly does not render the appointment a radical one. In fact, the inverse is true: the new judge’s career trajectory and connections clearly point to her status as a legal insider rather than outsider. Brandis downplayed Justice Gordon’s familial connections in justifying the judge’s credentials. He made the important point that: ‘It would, of course, in this day and age be outrageous for a person who was otherwise well-qualified for an appointment as Justice Gordon certainly is, to be disqualified on account of who they were married to.’ Divorced from gender and marital status, this is not a surprising appointment. Although Justice Gordon is, at 50, on the younger side (a positive in the government’s eyes, surely), her current position as a justice of the Federal Court of Australia and her commercial law background all underscore her suitability for appointment in the way that such appointments are traditionally framed. In justifying the appointment, Brandis emphasised that Justice Gordon would ‘bring great strength to the High Court of Australia on the basis of her enormous experience acting for both regulators and corporates’. In this instance, the government gets to have its cake and eat it too. It shores up its gender credentials by appointing a woman. But it gets to do so without any direct engagement with the importance of gender diversity in judicial appointments. The importance of gender diversity was completely absent in any of the political rhetoric that attended the government’s announcement of Justice Gordon’s appointment. So is gender now irrelevant? Hardly. Although women will make up 40 per cent of High Court judges come June, women have made up slightly less than 10 per cent of all High Court judges in the court’s history. Given that even a whiff of affirmative action can generate controversy (even where no such policy has been invoked), decision-makers remain disappointingly disinclined to engage in conversations about the importance of gender diversity. Appointments that redress that imbalance should be welcomed and the most recent appointment is no exception. But this appointment does not negate the need for continuing conversations around the importance of diversity, and about what diversity might truly look like in the High Court and other crucial senior positions. Source: Kcasey McLoughlin, 15 April 2015, http://theconversation.com/two-for-one-a-good-new-high-court-judgeand-a-woman-to-boot-40217.

ACTIVIT Y 3.7 — RESEARCH

Visit the High Court of Australia website at www.hcourt.gov.au. 1. Name the seven current High Court Justices. 2. Who is the current Chief Justice? 3. Do the Justices issue collective or individual decisions in trials? Federal Court of Australia

The Federal Court of Australia was established by the Federal Court of Australia Act 1976 (Cth) in order to relieve the workload of the High Court of Australia. It sits in all capital cities and elsewhere in Australia when necessary. In its original jurisdiction, the court sits as a single judge and deals with matters arising under Federal legislation such as consumer protection matters, competition regulation matters, intellectual property disputes and bankruptcy matters. Each of these matters will be discussed in coming chapters. In its appellate jurisdiction, the Federal Court sits as a Full Court consisting of three judges and hears appeals from the decisions of single Federal Court judges and from the Federal Circuit Court. Family Court of Australia

The Family Court of Australia was established by the Family Law Act 1975 (Cth). In its original jurisdiction, the Family Court sits as a single judge and hears matters relating to the divorce process, property settlements and the maintenance and custody of children. 96  PART 1 Foundations

In its appellate jurisdiction, the Family Court sits as a Full Court and hears appeals from a single judge of the Family Court, from the Federal Magistrates Court, and from State and Territory magistrates exercising family law jurisdiction. (The Family Law Act grants jurisdiction to State and Territory lower courts in matters relating to the custody of and access to children and maintenance.) Federal Circuit Court of Australia

The Federal Circuit Court of Australia was previously known as the Federal Magistrates Court. It was established by the Federal Circuit Court of Australia Act 1999 (Cth). The court was established to relieve the workloads of the Federal and Family courts and to provide an accessible alternative to litigation in those courts. The court shares jurisdiction with the Federal and Family courts over family law and child support, administrative law, admiralty law, bankruptcy, copyright, human rights, industrial law, migration, privacy and trade practices — although in practice 90 per cent of the court’s case load is in family law. The court operates less formally than the other federal courts, and uses streamlined procedures.

The State and Territory court hierarchies The State and Territory court hierarchy is set out in figure 3.5.

High Court of Australia (Appellate jurisdiction)

Court of Appeal/Full Court of Supreme Court (Appellate jurisdiction)

Supreme Court (Original jurisdiction)

District/County Court (Appellate jurisdiction)

District/County Court (Original jurisdiction)

Magistrates/Local Court (Original jurisdiction)

FIGURE 3.5

State and Territory court hierarchy

CHAPTER 3 Politicians and judges  97

The State and Territory courts websites are set out in table 3.7. TABLE 3.7

State and Territory courts websites

Jurisdiction

Courts websites

Australian Capital Territory

www.courts.act.gov.au

New South Wales

www.courts.justice.nsw.gov.au

Northern Territory

www.supremecourt.nt.gov.au

Queensland

www.courts.qld.gov.au

South Australia

www.courts.sa.gov.au

Tasmania

www.courts.tas.gov.au

Victoria

www.courts.vic.gov.au

Western Australia

www.courts.dotag.wa.gov.au

High Court of Australia

The High Court of Australia is the final Court of Appeal from the decision of any State or Territory court. It is therefore, technically, part of each State and Territory court system. In most courts, litigants are automatically granted a right of appeal but appeals to the High Court require special leave: an application must be made that establishes the importance of the dispute. The appeal will only proceed if the High Court is satisfied that the case will further the process of legal development and reform. The High Court of Australia was not always the highest appeal court in Australia. That court used to be the Privy Council, which sits in London and is comprised of members of the House of Lords. Appeals to the Privy Council from the High Court of Australia on Federal matters were restricted by the Privy Council (Limitation of Appeals) Act 1968 (Cth), and all appeals to the Privy Council from the High Court of Australia were abolished by the Privy Council (Appeals from the High Court) Act 1975 (Cth). Appeals to the Privy Council from State Supreme Courts were abolished by the Australia Act 1986 (Cth). Supreme Courts

The highest court within each State or Territory is the Supreme Court. In its original jurisdiction the Supreme Court sits as a single judge with an optional jury of four, six or twelve in civil matters and with a compulsory jury of twelve in contested criminal matters. The Supreme Court has an unlimited civil and criminal jurisdiction within the State or Territory, although in practice it only hears matters beyond the jurisdiction of the intermediate and lower courts as described below. In its appellate jurisdiction the Supreme Court is usually constituted by three judges. It hears appeals from other courts lower in the court hierarchy in the same State or Territory: from lower courts on points of law, and from intermediate courts on all issues. When hearing appeals, the Supreme Court goes by a variety of names depending on the jurisdiction. In the ACT, Queensland, Victoria and Western Australia it is called the Court of Appeal. In NSW and the Northern Territory it is called the Court of Appeal when hearing civil appeals and the Court of Criminal Appeal when hearing criminal appeals. In South Australia and Tasmania it is called the Full Court when hearing civil appeals and the Court of Criminal Appeal when hearing criminal appeals. Intermediate courts

Intermediate courts are called District Courts in New South Wales, Queensland, South Australia and Western Australia, and County Courts in Victoria. Intermediate courts do not exist in Tasmania, the Australian Capital Territory and the Northern Territory. Intermediate courts are presided over by a judge, with an optional jury of four or six in civil matters and with a compulsory (other than in Western Australia) jury of twelve in contested criminal matters. In its original jurisdiction, an intermediate court hears civil matters up to the relevant financial limit (see table 3.8), and criminal matters involving indictable offences other than the most serious crimes such as murder, which are dealt with by the Supreme Court. 98  PART 1 Foundations

TABLE 3.8

Intermediate courts: financial limits in civil matters

Jurisdiction

Financial limit in civil matters

New South Wales

Up to $750  000

Queensland

Up to $750  000

South Australia

Unlimited ($100  000 for personal injury matters)

Victoria

Unlimited

Western Australia

Up to $750  000 and unlimited personal injury and motor vehicle accident

In its appellate jurisdiction, an intermediate court sometimes hears appeals from the lower courts in criminal matters on issues relating to the sentence and questions of fact. (Appeals from lower courts on questions of law go directly to the Supreme Court.) Lower courts

Lower courts are called Local Courts in New South Wales and Magistrates Courts in the other States and Territories. The lower court is the most common type of court in Australia. All major cities and many small towns have a lower court, and if someone has been to court at some time in their life there is a good chance that it was a lower court. Lower courts are presided over by a single magistrate. The lower courts hear civil matters up to the relevant financial limit (see table 3.9) and criminal matters involving minor offences such as shoplifting and traffic offences. They occasionally operate as Coroner’s Courts and as Children’s Courts, Juvenile Courts (in the Northern Territory) or Youth Courts (in South Australia). They also hear: •• workers compensation claims, •• applications for restoration, cancellation or suspension of drivers licences, and •• bail applications. TABLE 3.9

Lower courts: financial limits in civil matters

Jurisdiction

Financial limit in civil matters

Australian Capital Territory

Up to $250  000

New South Wales

Up to $100  000

Northern Territory

Up to $100  000

Queensland

Up to $150  000

South Australia

Up to $100  000

Tasmania

Up to $50  000

Victoria

Up to $100  000

Western Australia

Up to $75  000

Lower courts also deal with committal proceedings. These are hearings relating to serious crimes in which the Magistrate decides whether or not the accused person should go to trial. Since criminal trials can be a lengthy and expensive process, a committal proceeding ensures that there is adequate evidence and that a conviction is likely before the actual trial commences. ACTIVIT Y 3.8 — RESEARCH

Visit the courts website for your State or Territory. What useful information about (a) the Supreme Court, (b) the District or County Court, and (c) the Magistrates Court or Local Court can be accessed from this site?

CHAPTER 3 Politicians and judges  99

ACTIVIT Y 3.9 — APPLY

Which courts have jurisdiction to hear the following cases? 1. You and your spouse want to divorce, and you are arguing about how to divide your property. 2. You are caught shoplifting and charged with theft. 3. You wish to sue another person for breach of the Copyright Act, an Act of the Federal Parliament. 4. You have been charged with murder. 5. You wish to sue someone to recover a $100  000 debt.

Cross-vesting In 1987 the Federal Parliament passed the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth). Mirror legislation was passed by each of the State parliaments. The effect of this legislation was to vest State courts with jurisdiction over Federal matters, and Federal courts with jurisdiction over State matters. This was done to address the jurisdictional problems that arose when a legal dispute involves both Federal and State law; instead of having to commence two separate legal actions in two separate courts, the litigants could have the matter heard by a single Federal or State court. In R v Wakim (1999) 198 CLR 511 the High Court decided that, to the extent that the legislation authorised the Federal courts to exercise State jurisdiction, the legislation was unconstitutional — since the Australian Constitution permitted Federal courts to exercise Federal jurisdiction only. This decision cast doubt over many of the decisions made by the various Federal courts since 1987, and the Federal Parliament urgently passed legislation to retrospectively validate those decisions. Since 1999 Federal courts have been unable to exercise State jurisdiction, but State courts continue to exercise Federal jurisdiction.

Specialised courts, tribunals and decision-making bodies The Federal, State and Territory governments have established various specialised courts to hear particular types of dispute, as well as various tribunals and other decision-making bodies that exercise non-judicial power (see table 3.10). Specialised courts have a much narrower jurisdiction than the more general courts in the various court hierarchies. Appeals can be made from the specialised court to one of the general courts, usually the State Supreme Court. Tribunals are administrative rather than judicial bodies. Tribunals can make decisions involving the application of the legislation they were established to administer, but they cannot make decisions about the validity of that legislation, since that is a judicial function. TABLE 3.10 Jurisdiction

Specialised courts and tribunals Specialised courts

Commonwealth

100  PART 1 Foundations

Tribunals and other bodies Administrative Appeals Tribunal Australian Competition Tribunal Australian Competition and Consumer Commission Australian Human Rights Commission Copyright Tribunal of Australia Defence Force Discipline Appeal Tribunal Defence Force Remuneration Tribunal Fair Work Australia National Native Title Tribunal Pharmaceutical Benefits Remuneration Tribunal Remuneration Tribunal Superannuation Complaints Tribunal Takeovers Panel Veteran’s Review Board

Jurisdiction

Specialised courts

Tribunals and other bodies

ACT Civil and Administrative Tribunal Australian Capital Children’s Court Territory Coroner’s Court Family Violence Court Galambany Circle Sentencing Court Industrial Court New South Wales Chief Industrial Magistrates Court Children’s Court Coroner’s Court Drug Court Land and Environment Court Youth Drug and Alcohol Court

Administrative Decisions Tribunal Dust Diseases Tribunal Guardianship Tribunal Independent Commission Against Corruption Industrial Relations Commission Judicial Commission of NSW Local Government Pecuniary Interest and   Disciplinary Tribunal Mental Health Review Tribunal Transport Appeal Boards Victims Compensation Tribunal Workers Compensation Commission

Northern Territory Family Matters Court Work Health Court Youth Justice Court

Northern Territory Civil and Administrative Tribunal Anti-Discrimination Commission

Queensland

Children’s Court Children’s Court of Queensland Coroner’s Court Land Court Mental Health Court Planning and Environment Court

Body Corporate and Community Management Commissioner Queensland Civil and Administrative Tribunal

South Australia

Coroner’s Court Drug Court Environment Resources and   Development Court Family Violence Court Industrial Relations Court Warden’s Court Youth Court

South Australian Civil and Administrative Tribunal Equal Opportunity Tribunal Industrial Relations Commission Pastoral Land Appeal Tribunal Police Disciplinary Tribunal Remuneration Tribunal Wardens Court Workers Compensation Tribunal

Tasmania

Victoria

Anti-Discrimination Tribunal Asbestos Compensation Tribunal Forest Practice Tribunal Health Practitioners Tribunal Mental Health Tribunal Mining Tribunal Motor Accidents Compensation Tribunal Resource Management and Planning Appeal Tribunal Workers Rehabilitation and Compensation Tribunal Children’s Court Coroner’s Court Drug Court Family Violence Court Koori Court Neighbourhood Justice Centre

Western Australia Aboriginal Community Court Children’s Court Coroner’s Court Drug Court Family Court Family Violence Court

Municipal Electoral Tribunal Victims of Crime Assistance Tribunal Victorian Civil and Administrative Tribunal

Salaries and Allowances Tribunal State Administrative Tribunal

CHAPTER 3 Politicians and judges  101

There are advantages in referring a dispute to a tribunal rather than a court: the tribunal hearing will often be cheaper, quicker, more private and less stressful than going to court, and proceedings tend to be less formal than courts, with fewer rules of legal procedure. Within each State and Territory there is also a ‘small claims’ court or tribunal that provides a cheaper, faster and less formal way of resolving civil disputes below the relevant financial limit (see table 3.11). The court is usually a division of the local court, and the tribunal is usually a Civil and Administrative Tribunal. TABLE 3.11

Small claims courts and tribunals: financial limits

Jurisdiction

Court/Tribunal

Financial limit

Australian Capital Territory

ACT Civil and Administrative Tribunal

$10  000

New South Wales

Small Claims Division of the Local Court

$10  000

Northern Territory

Small Claim in the Magistrates Court

$10  000

Queensland

Queensland Civil and Administrative Tribunal

$25  000

South Australia

Small Claim in the Magistrates Court

$25  000

Tasmania

Minor Civil Claim in the Magistrates Court

  $5  000

Victoria

Victorian Civil and Administrative Tribunal

No limit

Western Australia

Minor Case in the Magistrates Court

$10  000

Court processes In this section we describe the process of actually going to court, including the system of dispute resolution used in Australian courts, the people involved in the court system, and the steps involved in bringing a civil action.

The adversarial system Courts are primarily mechanisms for the resolution of disputes. Courts resolve disputes between: •• the Crown and a defendant regarding the guilt or innocence of the defendant (criminal trials), and •• a plaintiff and a defendant regarding whether or not the defendant is responsible for harm suffered by the plaintiff (civil trials). There are of course many ways to resolve a dispute. In the Middle Ages, trial by combat was a recognised form of dispute resolution. Each party was given a weapon and encouraged to fight it out with the other party until a winner could be declared by an impartial referee .  .  . or by the death of one of the combatants. Such a form of dispute resolution now seems strange. Why should an ability to fight well mean that a person has told the truth or that they have the better case? Nevertheless, the form of dispute resolution used in modern Australian courts has many similarities with trial by combat. The parties still fight it out until one of them is declared a winner by an impartial referee in the form of a judge. Instead of each party being given a weapon they are given a lawyer, but the principle is still the same: the winner of the contest is the winner of the dispute. This system of dispute resolution, used in courts in common law legal systems, is called the adversarial system. The adversarial system of trial requires that the parties conduct their case in a competitive manner. Provided they comply with strict rules of procedure and evidence, the parties have complete responsibility for and control over the conduct of the trial, including decisions about what evidence will be presented to the court. The judge takes the part of an impartial referee: they observe and listen to the proceedings, ensure that the rules of procedure and evidence are applied fairly and consistently, allow both parties to be heard and, unless there is a jury, decide the case. 102  PART 1 Foundations

The adversarial system can be contrasted with the inquisitorial system used in courts in civil law countries. Whereas the adversarial system is a contest between the parties, the inquisitorial system is an inquiry into the truth. The judge is a government official rather than someone appointed from the ranks of practising lawyers. They are an active participant in all stages of the proceedings, and involved in the investigation of the facts to arrive at the truth. They also determine the manner in which a case is to be conducted. Because of the more active participation of the judge, the parties have less control over proceedings. Inquisitorial approaches are used in Australia in non-judicial inquiries such as Royal Commissions, and in some courts such as the Coroner’s Court. ACTIVIT Y 3.10 — REFLECT

If you were wrongly accused of murder, would you prefer an adversarial trial or an inquisitorial trial? Explain your answer.

Court personnel The court system in Australia involves a wide range of people: judges, juries, lawyers and other court personnel. The judge

Australian courts are presided over by judges, except in the case of the lower courts, which as we explained earlier are presided over by magistrates. Judges are required to be independent and to act impartially and fairly in the process of adjudication. During a trial the judge: •• determines the relevant laws to be applied, •• ensures that the rules of evidence and procedure are followed, •• instructs the jury, if there is one, about their responsibilities, •• decides any questions of law and, in the absence of a jury, any questions of fact including the guilt or innocence of the accused in a criminal trial, and •• decides upon the level of damages in a civil trial and upon the sentence in a criminal trial. Judges are usually appointed by the Crown representative acting on the advice of the relevant Attorney-General. With a few exceptions, judges are appointed from the ranks of practising barristers. Judges hold office for different periods, depending upon the court. For example, High Court judges must retire at the age of 70, and Family Court judges must retire at the age of 65. Judges are independent of the executive government that appoints them. The executive government cannot tell judges how to decide cases, and cannot lower their salary. Judges are immune from liability arising from anything they might say or do while acting as judges. Apart from retirement, judges can only be removed from office in certain circumstances. For instance, section 72 of the Australian Constitution provides for removal of High Court and other Federal judges following approval by both Houses of Parliament on the grounds of ‘proved misbehaviour or incapacity’. In practice, removal from office is rare. ACTIVIT Y 3.11 — REFLECT

Why is it so important that judges be ‘independent of the executive government that appoints them’?

Different judges have different titles. A judge in the High Court, the Federal Court, the Family Court or the State Supreme Court is referred to as a ‘Justice’. The name is written as, for example, ‘Smith J’ (or in the plural as ‘Smith and Lee JJ’) and pronounced as ‘Justice Smith’. A judge in an intermediate court such as the District Court is referred to as ‘Judge’. The name is written as, for example, ‘Smith DCJ’ and pronounced as ‘Judge Smith’. The lower courts are presided over by magistrates. CHAPTER 3 Politicians and judges  103

LAW IN CONTEXT: LAW AND CRITIQUE

Australia is lagging behind the world’s best on judicial appointments reform Retired judge Kenneth Hayne recently told a conference audience that he had no warning of his appointment to the High Court in 1997. The federal attorney-general simply telephoned one afternoon to offer him the position, confirmed the appointment half an hour later, and it was publicly announced 20 minutes after that. Sometimes the process has been different — but it is typically mysterious. Apart from a statutory need to ‘consult’ their state counterparts for High Court appointments, the attorney-general has unlimited discretion in selecting who joins the federal judiciary. Occasionally, the attorney-general’s choice may be rolled by cabinet’s preference for another candidate. The last occasion on which we know that this occurred was the Howard government’s appointment of Ian Callinan, QC, instead of Attorney-General Daryl Williams’ recommendation of John von Doussa, QC, to the High Court in 1998. Either way, the public justification is invariably that the individual has been selected on ‘merit’ alone. But that rarely makes clear why one talented and brilliant lawyer is appointed over others at any particular time. Just how much longer can Australia’s method of appointing judges remain so opaque and informal? Restoring public confidence Public confidence in the courts as independent from the political arms of government is vital in a society that respects the rule of law. How persons are selected for appointment to the bench is an important way in which that confidence may be affected. It is no criticism of Australia’s judiciary to say that it would be preferable, both for them and the public, if they took office after a more transparent process. The crisis into which the Queensland legal system was plunged by the appointment of Tim Carmody as chief justice highlights the deficiencies of the old method of executive discretion. While that controversy appears to have been resolved with Carmody’s resignation in June, the lesson is that a more independent and considered process has a lot to recommend it. Generally, all states and territories have reformed their judicial appointments practices in some way over recent years. The Carmody affair perhaps reflects that Queensland has hardly been in the vanguard. But, at the Commonwealth level, things are actually in reverse. Attorney-General George Brandis dismantled reforms initiated in 2008 by the previous Labor government. He has never explained why selection criteria, advertising judicial vacancies and the use of advisory panels to assess potential candidates had to go. The Commonwealth’s method of appointing persons to the federal judiciary is now seriously behind domestic and international trends. In April, the Judicial Conference of Australia released a comparison of all Australian jurisdictions. Confronted with an almost total dearth of information to report about current Commonwealth practice, the JCA resorted to describing the abandoned Labor system. At the same time, it detailed various approaches of other Australian governments. Most have publicly available criteria identifying the qualities that make up ‘merit’. Many advertise vacancies and use advisory or selection panels, at least for lower courts. Some even interview prospective judges. What can Australia learn from overseas? The JCA report was essentially descriptive. But the Bingham Rule of Law Centre’s vast survey of practice across the Commonwealth group of nations goes much further. Published in July, the report identifies ‘best practice’ against a set of principles agreed upon by law ministers and endorsed by the Commonwealth Heads of Government Meeting (CHOGM) in 2003. Those principles provide that judicial appointments should be made: .  .  .  on the basis of clearly defined criteria and by a publicly declared process. Australia obviously falls at this first, very basic hurdle. So, there is no way it can demonstrate satisfaction of the further requirements agreed upon by CHOGM. These are that the ‘process’ of appointing judges should: ‘.  .  .  ensure equality of opportunity for all who are eligible for judicial office; appointment on merit; and that appropriate consideration is given to the need for the progressive attainment of gender equity and the removal of other historic factors of discrimination’.

104  PART 1 Foundations

We know where things stand in Australia on the last point. Before the 2013 election, Brandis was dismissive of taking any deliberate steps to improve judicial diversity. The Bingham report reveals that Australia is in a minority. The executive still has sole responsibility for making appointments to superior courts in just 18.7%, or nine out of 48, independent Commonwealth jurisdictions. In the rest, either a judicial appointments commission or the legislature has some say in selection. The presence of Canada and New Zealand among this minority gives little comfort. As the Judicial Conference of Australia report details, they both use selection criteria and have more transparent processes in place. Additionally, both countries are actively debating, and experimenting with, further reform. In Canada, this has included establishing ad hoc parliamentary committees to draw up shortlists of potential appointees. Australia’s federal government remains attached to an opaque system of appointments that is in retreat within the country and throughout the Commonwealth. The process is inadequate, indefensible and does a disservice to the individuals who are appointed under it. Source: Andrew Lynch, 13 August 2015, http://theconversation.com/australia-is-lagging-behind-the-worldsbest-on-judicial-appointments-reform-45833.

The jury

In the movies and on television most trials involve a jury, but the reality today is that very few trials involve a jury. Jury trials are available only in certain courts such as intermediate courts and Supreme Courts. They are not available in lower courts or in appeal cases. The use of a jury is intended to ensure that the outcome of the trial is determined by a group of the defendant’s peers. Jurors are selected randomly from the electoral roll. Jury duty is compulsory: a person who fails to report for jury duty after receiving an official request commits an offence. However, certain people are exempted from jury duty, including: •• convicted criminals, •• undischarged bankrupts, •• people who have difficulty reading, speaking or writing English, •• intellectually disabled people, •• lawyers, •• essential services workers such as fire and ambulance officers, •• people who live more than a certain distance from the court, •• professionals such as accountants and doctors who cannot leave their job for an extended period, •• people who are ill, pregnant or aged, •• people travelling interstate or overseas, and •• students sitting exams. The number of required jury members in a civil trial is usually six, and the number in criminal trials is usually twelve. Not everyone who is summoned for jury duty will end up on a jury. When a person arrives on the day of trial for jury duty, they are placed in the jury pool. Each potential juror may be challenged by one of the parties to the trial. Each party has a limited number of peremptory challenges (challenges without reason) and an unlimited number of challenges for cause (challenges for reasons acceptable to the judge). Before the trial commences, the judge explains to the jury the nature of their role. This is known as charging the jury. During the trial, the jury listens to the arguments and the evidence. At the end of the trial, the jury retires for deliberation. The jury considers the evidence presented and decides on a verdict. Jury deliberations are confidential; the jury is not required to present reasons for its decision. In a criminal trial, the jury can only find the defendant guilty if they are satisfied that the prosecution has CHAPTER 3 Politicians and judges  105

proved its case beyond all reasonable doubt. In a civil trial, the jury decides any questions of fact on the balance of probabilities. There are many arguments in favour of trial by jury. •• The jury is as an independent tribunal of non-professionals, which gives the impression of impartiality. •• The weight of responsibility for the decision is carried by more than one person. •• A jury comprises a cross-section of the community and its members have a variety of standards and attitudes. •• The jury is a safeguard against the abuse of judicial power. •• Evidence can be tested by the impression that it makes on a number of people with different points of view. There are also many arguments against trial by jury. •• The jury system is expensive to operate and increases the time taken to hear a case. •• Jury service imposes an unfair economic and mental burden on jurors. •• Jurors often find it difficult to understand and assess the evidence, to keep an open mind, and to concentrate, detect inconsistencies and follow legal arguments. •• Jurors may have difficulty in understanding the judge’s directions on principles of law. •• Jurors hold all their deliberations in secret and do not have to give reasons for their decisions. •• Jurors can be easily persuaded by convincing barristers. •• A jury is not truly a cross-section of the community. Many people are entitled to be exempted or excused. LAW IN CONTEXT: LAW IN THE MEDIA

Jurors and social media: is there a solution? actually excited for jury duty tomorrow  .  .  .  it’s gonna be fun to tell the defendant they’re GUILTY :P — Facebook post, 2010   Guilty guilty  .  .  .  I will not be swayed. Practicing [sic] for jury duty. — Twitter post, 2010 These are just two examples from the United States of jurors apparently prejudging the outcome of a criminal trial and communicating that fact on social media. In 2010, a juror in Victoria posted on Facebook that ‘everyone’s guilty’. The conduct was discovered early on in the trial and the jury was discharged, with the juror referred to Victoria Police for breaching the Juries Act (2000). But is social media use by jurors really that much of a problem? And what provisions can be put in place to ensure the continued fairness of the justice system? Current data There is no clear data on the use of social media by Australian jurors during trial and deliberations, although it has been described as ‘the elephant in the room’. There are over 12 million active Facebook accounts in Australia, and over two million Twitter and four million LinkedIn users. With so many social media users in Australia and the availability of mobile internet, it is easy for people to instantly access their social media accounts anytime or anywhere. Over 45  000 Australians are estimated to perform jury service each year, and as such it is highly likely that many jurors are social networkers. What are the impacts? There are four main ways jurors may use social media inappropriately. They can publish or distribute information about the trial; they can learn information about the case from a source outside of the court — which could increase applications to stay permanently the prosecution of criminal charges, and applications to terminate trials already underway. In addition, jurors can contact parties, witnesses, lawyers or the judge in the trial; and discuss the merits of the case or seek opinions from other people. At stake is the defendant’s right to a fair trial and confidence in the administration of justice. The cost implications are also significant: it is estimated that there were in excess of 4300 jury trials in Australia in 2011–12, and based on costs in NSW, the national cost of jury trials would be over A$240 million.

106  PART 1 Foundations

What can be done about it? In cases where courts detect instances of inappropriate social media use by jurors, they may elect to dismiss the juror or jury panel, or find the juror guilty of an offence. However, a recent report com­ missioned by the Standing Council on Law and Justice found that: .  .  .  the apparent reluctance of courts to refer cases of juror research for prosecution is perhaps indicative of a view that jurors should not be punished where they are genuinely trying to do their best. In this context, prevention is certainly better than the cure. The report recommended that there should exist ‘don’t research’ directions for jurors, and that these directions should specifically refer to social media, explaining why jurors should refrain from doing their own research and the consequences of doing so. The report also recommended research be undertaken with jurors as to the form of guidelines ‘most likely to be taken seriously’. Finally, they recommended that jurors receive training when they are empanelled. In addition, our research advocates exploring options to make it easier for jurors to notify the courts about their fellow jurors’ social media activity, ensuring ongoing judicial education about the issue and possible responses to it, and requiring jurors to sign a document promising not to use social media to discuss the trial or deliberations. On the last recommendation, it is noted that: .  .  .  jurors may take the instructions more seriously and they may be more likely to remember them if they see them in writing and promise to uphold them. We do not support removing electronic devices from jurors as already occurs in some jurisdictions. This measure may cause people to be less willing to serve on juries. A more nuanced approach is required, which recognises that jurors may use social media for some things but not others. Overall, social networking by jurors provides a novel challenge to the administration of justice and can have a significant impact on a defendant’s right to a fair trial. As technology changes and social media sites grow in popularity, courts will continue to face the challenge of adopting new rules to address the problems created by such technology. The courts need to find the appropriate balance between protecting the administration of justice and respecting jurors’ privacy, personal rights and freedom of information, as well as ensuring that members of the public are not dissuaded from participating in a vital part of the justice system. Source: Lorana Bartels and Jessica Lee, 31 July 2013, http://theconversation.com/jurors-and-social-media-is-therea-solution-15921.

In civil trials the decision of the jury is by majority. In criminal trials the decision of the jury was traditionally required to be unanimous, but in most States and Territories majority verdicts are now acceptable in relation to certain offences.3 The lawyers

In Australia, the legal profession has two branches: barristers and solicitors. •• Barristers (sometimes referred to as ‘counsel’) specialise in advocacy before the courts. If someone wants to bring or defend a legal action in a court of law, their barrister will represent their interests and argue on their behalf in court. There is a division between senior and junior barristers. Senior barristers are known as Queen’s Counsel or Senior Counsel depending on the State or Territory.4 They are eminent barristers who have obtained a high level of skill and expertise in a particular area of the law. They often appear in court with a Junior Counsel who performs many of the more routine duties such as preparing and drafting court documents.

3 Juries Act 1977 (NSW) s 55F; Juries Act 2000 (Vic) s 46; Juries Act 1927 (SA) s 57; Juries Act 2003 (Tasmania) s 43. There is no provision for majority verdicts in the Juries Act 1957 (WA), the Juries Act 1967 (ACT) or the Juries Act (NT). Unanimous verdicts are required for Commonwealth offences. 4 The title ‘Senior Counsel’ is used in the Commonwealth, the ACT, NSW, the Northern Territory, South Australia, Tasmania and Western Australia. Queensland and Victoria have reverted to the use of the older title ‘Queen’s Counsel’, and South Australia is considering the same change.

CHAPTER 3 Politicians and judges  107

•• Solicitors deal directly with members of the public. If someone wants to buy a house, start a new business, draw up a will, establish a trust, draft a contract, or get legal advice in relation to a dispute or other legal problem, they would approach a solicitor. Solicitors may operate within law firms or be employed by the government or a business organisation. If a person has a legal problem that is destined for the courts, their solicitor will usually brief a barrister to appear for them in court. In New South Wales and Queensland, legal practitioners must be either a solicitor or a barrister. In other jurisdictions, a legal practitioner is entitled to practise as both.5 Each state has an independent body responsible for the regulation and disciplining of lawyers (see table 3.12). Lawyers in the ACT and the Northern territory are regulated by their respective law societies. TABLE 3.12

Lawyer disciplinary bodies

Jurisdiction

Regulatory body

ACT

• Law Society of the ACT www.actlawsociety.asn.au

New South Wales

• Legal Services Commissioner www.lawlink.nsw.gov.au/olsc

Northern Territory

• Law Society NT www.lawsocietynt.asn.au

Queensland

• Legal Services Commission www.lsc.qld.gov.au

South Australia

• Legal Practitioners Conduct Commissioner www.legalcomplaints.com.au

Tasmania

• Legal Profession Board www.lpbt.com.au

Victoria

• Legal Services Board www.lsb.vic.gov.au • Legal Services Commissioner www.lsc.vic.gov.au

Western Australia

• Legal Practice Board www.lpbwa.org.au

ACTIVIT Y 3.12 — RESEARCH

Visit the website of the regulatory body in your State or Territory. What is the process for registering a complaint about a lawyer?

Other court personnel

Other court personnel include registrars, sheriffs, bailiffs, court reporters and judge’s associates. A registrar is an officer responsible for the management of the court registry. The registry keeps court files and records up to date and accepts documents for filing from legal practitioners and litigants who appear for themselves. A sheriff carries out various statutory and administrative duties including processing jury matters, issuing warrants of arrest, serving and executing writs, and processing persons appearing before the courts for trial and sentencing. A bailiff is an officer responsible for the orderly conduct of the trial. Other duties include attending to the needs of the jury, swearing in jurors and witnesses, and formally opening and closing the court.

5 See www.austbar.asn.au/the-profession.

108  PART 1 Foundations

A court reporter records the court proceedings word for word, usually on a computer or on audio equipment. A judge’s associate is a judge’s personal assistant, assisting the judge with their administrative work and legal research. They are typically a recent law school graduate.

Civil and criminal procedure The following section is a description of the processes of civil litigation and criminal prosecution, up to and including the trial. The starting point

In a civil dispute, the starting point is the decision by the plaintiff to litigate. The decision to sue someone is one that should not be made lightly. Litigation is a difficult experience both for those bringing the action and for those against whom the legal action is brought. Before taking a dispute to court, a person should give careful consideration to a number of factors. •• The evidence: will they be able to prove their side of the story? If the chances of success are low, it may be best to avoid court proceedings. If the chances of success are at best evenly balanced, they must be prepared for the possibility of an unsuccessful outcome and the need for further costly appeals. •• The cost: the costs of litigation can be extremely high, depending on the level of court and the complexity of the matter. •• The time: delays are commonly encountered in conducting court cases. It can take months, sometimes years, to finalise complex matters in the higher courts. •• The stress: the personal effects of litigation can often be very damaging. Business and personal relationships can be severely damaged and even destroyed. Litigation should be used only as a last resort, and alternative dispute resolution methods (see below) should be explored before commencing legal proceedings. However, if one or both of the parties is uncooperative, litigation may be unavoidable. If a person is determined to sue, they should see their solicitor and obtain formal legal advice. The solicitor will issue a formal letter of demand to the person being sued, and if this is not complied with, litigation will commence. In a criminal matter, the starting point is often the arrest of the person accused of committing a crime. If the accused person has been caught in the act or captured while trying to avoid being caught they will usually be arrested. In minor criminal matters — such as the non-payment of fines — an arrest is less likely and the accused person will simply be charged. If the accused person has been arrested and is being held in detention, they may be entitled to apply for bail. This is where a judge (or in some cases the officer in charge at a police station) agrees to release the accused person from custody pending trial. The accused person may be obliged to pay some kind of bond or surety to ensure that they show up for the trial, and they may be obliged to surrender their passport. If the accused person is not granted bail they will be held in custody until their trial. ACTIVIT Y 3.13 — RESEARCH

Visit the website of the local court in your State or Territory. What information is provided about representing yourself in court?

Commencing proceedings

Civil proceedings are commenced by a statement of claim, also known as a writ or summons. This is a document in which the plaintiff sets out the substance of their claim. A copy of the statement of claim is filed in the relevant court, thereby notifying the court that the legal action has commenced. Another copy of the statement of claim is served upon the defendant, notifying them that they are the subject of legal proceedings. CHAPTER 3 Politicians and judges  109

Service involves more than simply sending the statement of claim. The court will eventually need to be satisfied that the defendant in fact received a copy of the document. Service is a formal process of delivering a copy of the document to the defendant in such a way that the service can later be proven to the court. The defendant may respond to the statement of claim by preparing and issuing a defence. If so, a copy of the defence is delivered to the plaintiff and another copy is lodged with the court. The defendant may also claim some wrongdoing on the part of the plaintiff, in which case they will prepare and serve a counterclaim. If the defendant fails to file a defence, the plaintiff is entitled to go to court and seek default judgment, and the plaintiff will automatically win the trial by default. It is therefore vitally important that when a person is served with legal proceedings they respond appropriately. Criminal proceedings, on the other hand, formally commence when the accused person is charged with a specific offence or offences. The accused person, now a defendant, will plead either ‘guilty’ or ‘not guilty’ to each offence. If the defendant has pleaded not guilty, the subsequent trial is concerned with determining whether they are guilty of the offence and, if so, the appropriate sentencing. If the defendant has pleaded guilty, the trial will be concerned only with sentencing. In a criminal trial, a lawyer on behalf of the Director of Public Prosecutions — referred to as the prosecutor — represents the Crown. ACTIVIT Y 3.14 — RESEARCH

Who is the Director of Public Prosecutions in your State or Territory?

Pre-trial

While preparing for the trial, each party is entitled to know what the other party is planning to say and do. Each party is entitled to ask questions of the other party — known as interrogatories — that the other party must answer on oath. Each party is entitled to be given copies of relevant documents in the possession of the other party, a process known as discovery. Parties are also entitled to seek interlocutory orders from the court. Such an order may be sought if the other party is not cooperating with the interrogatory or discovery process. Or the court may be asked to grant an interim injunction, restraining one of the parties from acting in a particular way — for example, selling property or leaving the country — until the trial is concluded. Once they have obtained all the information they need to proceed with trial, each party issues a certificate of readiness which informs the court that they are ready to present their case. At this point a hearing date will be set. Most civil cases are settled during the pre-trial process. A prehearing conference is often held to encourage the parties to settle their dispute before trial. In a criminal dispute, the prosecutor may seek to persuade the defendant to plead guilty to a lesser offence than the one with which they were initially charged, in order to resolve the dispute more quickly. This process is known as plea bargaining. If the defendant has been charged with an indictable offence, a committal hearing is held prior to the actual trial. The committal hearing takes place in a Magistrates/Local Court, and determines whether the prosecutor’s case is strong enough to justify proceeding to full trial. If the magistrate decides that the prosecutor’s case is not sufficiently convincing, the matter is dismissed and the defendant is released from custody. The trial

A summary of the trial process is set out in figure 3.6. 110  PART 1 Foundations

Opening statement by plaintiff’s lawyer/prosecutor

Calling of plaintiff’s/crown’s first witness

Questioning of witness: • Examination in chief • Cross-examination • Re-examination

Calling and questioning of plaintiff’s/crown’s other witnesses

Opening statement by defendant’s lawyers

Calling and questioning of defendant’s witnesses

Closing addresses by plaintiff’s/crown’s and defendant’s lawyers

Summing up by judge to jury

Judgment

FIGURE 3.6

The trial process

Where the parties to a dispute do not agree on certain facts — such as whether or not a particular statement was made by one of the parties — these facts are referred to as facts in issue. For the plaintiff or Crown to bring a successful action against the defendant, they must prove the truth of their version of the main facts in issue. This requirement is known as the burden of proof. The minimum degree to which the truth of their version of the facts must be proven in order to satisfy the legal burden of proof is known as the standard of proof. It is the party who commenced the legal action — the plaintiff in a civil action and the Crown in a criminal action — who has the burden of proof. If the plaintiff or Crown is unable to establish the truth of their version of the facts, their legal action against the defendant fails. Note however that if particular issues are raised by the defendant, the onus of proving them shifts to them. In a civil trial the standard of proof is on the balance of probabilities. This means that the court must find that it is more likely than not that the truth of the plaintiff’s version of the facts is proven. In criminal trials the standard of proof is beyond all reasonable doubt. The court must find that there is a very high probability that the truth of the Crown’s version of the facts is proven and that there is virtually no reasonable explanation of events consistent with the accused being innocent. The criminal standard of proof is much higher than the civil standard of proof. The evidence

The trial will essentially be a series of arguments presented by each party’s lawyers in support of their client’s case. Each lawyer begins by making an opening statement, and then presenting evidence in support of their client’s version of the facts in issue. There are many types of evidence. •• Testimony is the verbal statement/s of a witness in court. As a general rule, testimony must be about the actual physical perceptions or observations of the witness. Only in limited instances is a witness permitted to state an opinion or draw an inference from basic facts. •• A document may be received into evidence as the words of the person who signed the document or adopted it as being correct in some other way. Usually the content of a document is incorporated in the testimony of a witness. •• Real evidence consists of objects that the court is asked to examine. Usually an object of real evidence is placed before the court after it has been identified in the testimony of a witness. CHAPTER 3 Politicians and judges  111

There is also a distinction between direct evidence and circumstantial evidence. •• Direct evidence consists of an eyewitness account of any fact in issue. It can also include the opinion of a witness in those circumstances where an opinion is allowed. •• Circumstantial evidence (or indirect evidence) is not evidence of the facts in issue, but of other facts from which the court may infer the evidence of a fact in issue. Sooner or later a case made up entirely of circumstantial evidence becomes enough to permit a court to conclude the existence of the facts in issue, even beyond reasonable doubt. The reception of evidence will depend on its relevance, admissibility and weight (see figure 3.7). Is the evidence relevant?

YES Is the evidence admissible?

YES The evidence will be allowed.

NO The evidence will not be allowed.

NO The evidence will not be allowed.

How much weight will the evidence be given?

How credible is the evidence?

FIGURE 3.7

What is the probative value of the evidence?

The receipt of evidence

•• Relevance: the general rule is that all evidence that is relevant to a fact in issue is to be received and all evidence that is not so relevant cannot be received. Most of the law of evidence is comprised of exceptions to the relevance rule, in the sense that some evidence which is relevant is not received for one reason or another. There are, however, no exceptions to the second aspect of the rule: if evidence is not relevant it cannot be received. •• Admissibility: evidence will only be admissible if it does not infringe any of the technical rules that may apply to it. There are an enormous number of technical rules of evidence; far too many to describe in this text. •• Weight: this is the extent that the evidence, once received, should be taken into account in deciding the facts in issue. Two key elements are considered in an assessment of weight. (a) Credibility relates to whether the evidence should be believed. This requires an assessment of the likelihood that the witness who gave the evidence has some motive to be dishonest, or is lying for no good reason, or is simply mistaken. (b) Probative value is the extent to which the evidence is helpful in deciding which version of the facts in issue is the best version. 112  PART 1 Foundations

One of the principal features of the adversary system is the general requirement that evidence be given orally through the testimony of witnesses. As a general rule, the parties and their lawyers will have to choose which potential witnesses they will call and which they will decline to call. If a particular witness is unwilling to come to court their attendance can be compelled through service of a subpoena upon them. The penalty for failure to comply with a subpoena is punishment for contempt of court. The parties and their lawyers will decide the order in which each party’s witnesses will be called so as to present the party’s case in the best possible way. The plaintiff’s/Crown’s witnesses are called first. Each of the witnesses is examined in three stages. 1. The first stage is called examination in chief. This is where the witness is questioned by the plaintiff’s lawyer/the prosecutor. The lawyer carefully draws out the evidence to be presented by the witness. However, the lawyer is not permitted to ask leading questions; that is, a question that suggests or presumes the answer. For example, a lawyer can ask ‘Where do you live?’ but not ‘Do you live in Brisbane?’ 2. The second stage is called cross-examination. This is where the defendant’s lawyer challenges the witness, questioning their claims and often seeking to undermine their credibility as a reliable witness. 3. The third stage is called re-examination. This is where the plaintiff’s lawyer/the prosecutor has the opportunity to clarify the witness’s evidence following the cross-examination. The third stage is optional, and may not be necessary. Once all of the witnesses for the plaintiff/Crown have given their testimony, the defendant’s witnesses are called. Each goes through the same three stage process: they are examined in chief by the defendant’s lawyer, cross-examined by the plaintiff’s lawyer/the prosecutor, and re-examined by the defendant’s lawyer. The trial concludes with a closing statement by the plaintiff’s lawyer/the prosecutor and by the defendant’s lawyer. The decision

If the case is tried before a jury, the judge summarises the evidence for the jury. The judge also explains the jury’s role in the case, any relevant legal issues, and the standard of proof. The jury then retires to reach a decision. If there is no jury, the judge makes a decision at the conclusion of the arguments by each lawyer. The judge may provide a decision immediately, but it is more likely that the judge will hand down the decision at some later time following due consideration. In a civil trial, if the plaintiff is successful, the remedies that might be awarded to them by the court include damages, an injunction, or an order for specific performance. (These remedies are considered in more detail in later chapters.) The remedies that may be awarded depend to some extent on what has been sought by the plaintiff in the statement of claim. In a criminal trial, if the Crown is successful, the court decides upon an appropriate sentence for the defendant. The sentence may be a fine, a community service order, confiscation of property, imprisonment or some other form of punishment. In a civil trial, the court usually makes an order for costs; that is, it decides whether the plaintiff and the defendant should pay their own legal costs or one party should pay the costs of the other. In most cases, the losing party will be ordered to pay the legal costs of both parties. The appeal

If a party is not satisfied with the outcome of the trial, they may have the option of appealing the decision to a court higher in the court hierarchy. In most instances, the appeal court is restricted to re-examining questions of law rather than questions of fact. On an appeal the party bringing the appeal is called the appellant and the other party is called the respondent. If the higher court agrees with the earlier decision of the lower court, the decision of the lower court is said to be upheld. If the higher court disagrees with the earlier decision and makes a new decision in favour of the other party, it is said to be reversed. CHAPTER 3 Politicians and judges  113

Appeals are usually heard by more than one judge. Each judge usually delivers their own individual judgment, although sometimes two or more judges may work together to deliver a joint judgment. If all of the judges arrive at the same decision by similar reasoning, they are said to have delivered a unanimous judgment. If the judges are divided, the decision made by the majority is called, unsurprisingly, the majority judgment and the decision of the minority is called the minority judgment or the dissenting judgment. (Cases are usually heard by an odd number of judges so an equally divided court is extremely rare.) ACTIVIT Y 3.15 — REFLECT

Should judges be compelled to deliver unanimous joint judgments? Why or why not?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 3.18 What is the role of the judiciary? 3.19 Why are courts organised into hierarchies? 3.20 What is the difference between original jurisdiction and appellate jurisdiction? 3.21 What is the difference between civil jurisdiction and criminal jurisdiction? 3.22 What are the hierarchies of the courts in (a) the Federal Court and (b) your own State or Territory? Briefly describe each of these hierarchies. 3.23 What is the difference between the adversarial and the inquisitorial systems of trial? What are the advantages and disadvantages of each? 3.24 What is the role of (a) the judge, (b) the jury and (c) the lawyer during a trial? Briefly outline each of these roles. 3.25 How are juries selected? 3.26 What are the advantages and disadvantages of the jury system? 3.27 What factors should be considered before commencing a civil action? 3.28 How is a civil action commenced? 3.29 What happens between the commencement of civil proceedings and the trial? 3.30 What is the process of a trial? 3.31 What is (a) the burden of proof and (b) the standard of proof? 3.32 What are the different types of evidence? 3.33 When will evidence be accepted by the court? 3.34 What is the process of questioning a witness?

3.4 The doctrine of precedent LEARNING OBJECTIVE 3.4 What role is played by judges in the development of the law?

In deciding disputes, judges do more than simply interpret and apply the law made by the parliament. Each time they express a legal rule they contribute to the growth of a body of law made by judges, known as ‘case law’ or ‘common law’.

Do judges make law? According to the doctrine of the separation of powers explained earlier, only the legislature makes law. The role of the judiciary is limited to interpreting the law made by the legislature and applying it to particular cases. However, the reality is that judges are frequently confronted by questions of law where 114  PART 1 Foundations

there is no relevant legislation. What do judges do in such situations? Do they simply use their discretion? If every judge was free to decide legal questions in any way they saw fit, the law would not develop or be applied with any consistency. One of the most important mechanisms in achieving a degree of consistency in case law is the doctrine of precedent, sometimes referred to by its Latin name stare decisis. Put simply, the doctrine requires that a judge who has to decide a question of law and who knows that the question has already been considered by an earlier court must decide the question in the same way as was done previously. As well as providing consistency, this practice makes the law relatively predictable. It is based upon the notion that fairness and justice require that similar decisions be made in similar situations, and similar problems should have similar outcomes. For example, imagine that Bilal has commenced a civil action against Kate in order to recover an outstanding debt. Kate’s lawyer argues that Kate does not have to repay the money allegedly owed to Bilal because Bilal has verbally promised to waive (forgive) the debt. Bilal’s lawyer argues that a promise to forgive a debt is not legally enforceable unless the promisee gives something in return, and since Kate has not given anything to Bilal in return for his promise, Bilal can break his promise and Kate cannot do anything about it. A question of law has arisen: Is a promise to waive a debt legally enforceable if nothing was given in return for the promise? There is no legislation which answers this question, so the judge will consider how other judges in the past have decided this question. (You will learn in a later chapter that the answer is no.)

Precedent The decision by an earlier judge about a question of law is called a ‘precedent’. Only intermediate and superior courts can establish binding precedents. The decisions of lower courts are not binding precedents.

Binding and persuasive precedents The doctrine of precedent does not require that judges be aware of the previous decisions of all judges everywhere. The doctrine is a little more precise than that, and makes a distinction between binding precedents and persuasive precedents. A binding precedent is a previous decision about a question of law that the judge must follow. A judge is only obliged to follow the decisions made by judges in higher courts within the same court hierarchy. This means, for example, that a judge in the District Court of Victoria is obliged to follow a decision made by the Supreme Court of Victoria but they are not obliged to follow a decision made by the Victorian Magistrates Court or a decision made by the Supreme Court of New South Wales. All Australian judges are bound to follow the decisions made by the High Court of Australia. Courts are generally not obliged to follow their own earlier decisions. The exception is if the earlier decision was made by a Full Court and the present case is being heard by a single judge of the same court; the single judge is obliged to follow the earlier decision. A Full Court is not obliged to follow the earlier decision of the same court, whether it was a Full Court or a single judge, and a single judge is not obliged to follow the earlier decision of a single judge of the same court. In practice, for the sake of consistency and fairness, a court generally prefers to follow earlier decisions of the same court. A persuasive precedent is a previous decision about a question of law that a judge may follow, but does not have to follow. Some precedents are more persuasive than others. The persuasiveness of a precedent depends upon the status of the court and the extent of the similarities between the judge’s legal system and the other legal system. For example, a judge in the Victorian District Court is not obliged to follow a precedent from the Supreme Court of New South Wales, but since the New South Wales and Victorian legal systems are so similar, the precedent from the Supreme Court of New South Wales will be highly persuasive. The legal systems of Australia and the United Kingdom are also very similar, so precedents from the higher courts in the United Kingdom are also persuasive. There are fewer CHAPTER 3 Politicians and judges  115

similarities between the Australian and the US legal systems, and so precedents from US courts are less persuasive. And there are very few similarities between the Australian legal system and the Chinese legal system, so precedents from Chinese courts are not very persuasive at all. A decision by a Full Court is more persuasive than a decision by a single judge. A joint judgment is seen as more persuasive than an individual judgment, a majority judgment is seen as far more persuasive than a dissenting judgment, and a unanimous judgment is the most persuasive of all. CAUTION!

The doctrine of precedent does not oblige a judge to follow the earlier decisions of all judges, only the earlier decisions of judges who are higher within the same court hierarchy. The decisions of other judges will not be binding, although they may be persuasive.

ACTIVIT Y 3.16 — REFLECT

Consider each of the following precedents. Decide whether each of them would be binding, highly persuasive, marginally persuasive or not persuasive on a judge in the District Court of New South Wales. 1. A decision made by the South Australian Supreme Court. 2. A decision made by the NSW Supreme Court. 3. A decision made by the British House of Lords. 4. A decision made by a US Supreme Court. 5. A decision made by the NSW District Court. 6. A decision made by the High Court of Australia. 7. A decision made by the NSW Local Court.

Distinguishing and rejecting precedent A judge is only obliged to follow a previous decision about a question of law if the material facts of the earlier case are the same as or similar to the material facts of the case before the court. It is of course very unlikely that precisely the same situation has arisen a second time, and the question is whether the differences between the present case and the previous case are sufficiently significant to justify deviating from the precedent. If the judge decides that it is appropriate to deviate from the precedent, this is known as distinguishing the precedent. During a particular trial, each party will present arguments as to which precedents — binding or persuasive — are most appropriately followed, and will argue that the precedents advocated by the other party should be distinguished. For example, following the earlier example of Bilal suing Kate to recover an unpaid debt, Kate’s lawyer may refer to an earlier decision by a higher court where the court decided that even if a promisee has not given anything in return for a promise to waive a debt, the person who makes the promise must nevertheless keep the promise. Bilal’s lawyer, however, points out that in the previous case the promisee relied upon the promise and used the money in such a way that the money could not be easily recovered, while in the present case Kate still has the money which she did not repay to Bilal. The judge relies upon the differences between the material facts of the previous case and the material facts of Bilal’s case to distinguish the previous case; the judge is no longer obliged to follow the precedent and is free to make a different decision. It is the ability of a judge to distinguish a precedent that gives the common law the ability to grow and change. Legal rules that find favour with contemporary courts can be applied to an ever-expanding range of situations; and legal rules that are no longer relevant to contemporary circumstances can be limited to particular situations through the strict application of the practice of distinguishing. 116  PART 1 Foundations

Judges also have the ability to overrule or reject previous decisions about questions of law, provided the precedents were established by courts at the same level or lower within the relevant court hierarchy. If an earlier decision is overruled — perhaps because the later court disagrees with the earlier court’s reasoning — the earlier decision is still binding on the parties to that particular dispute but the earlier decision is no longer a precedent that must be followed by other courts.

Judicial activism What if there is no relevant legislation and no relevant precedent? How then does a judge decide a question of law? Do they make up a new legal rule? Traditionally, judges insisted that they did not make law; they simply expressed and applied the existing law to particular situations. If asked which law they applied in the absence of relevant legislation or precedent, the judges would explain that they looked to the community and its own practices and traditions in identifying the law. In other words, the law already existed within the community, and the judges simply identified and applied it. Contemporary judges are more likely to admit that, in many situations, judges in higher courts do make law. In the absence of relevant legislation or precedent the judges will construct a new legal rule. Even when simply deciding how to interpret a particular legislative provision or to extend the application of a legal rule established by precedent to a new situation, judges are contributing to the growth of the law within a community. As Brennan J stated in O’ Toole v Charles David (1991) 171 CLR 232 at 267: Nowadays nobody accepts that judges simply declare the law; everybody knows that, within their areas of competence and subject to the legislation, judges make law. Within their 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 decisions of the higher appellate courts.

It has been claimed, however, that some modern courts have gone too far and have engaged in what is called judicial activism. For example, when the High Court of Australia in the Mabo case (described earlier in the text) reversed the categorisation of Australia as terra nullius prior to British settlement and recognised the existence of native title in Australia, it did so not on the basis of existing legislation or established precedent but on the basis of what it perceived to be international trends and contemporary values and standards of justice. Many critics of the decision claimed that the High Court had inappropriately created new law, something which would only have been appropriate if done by a democratically elected legislature: Law making is the province of democratically derived power, that is political power, and it ought to be unthinkable that those who make rules cannot readily be sacked. There is, thus, no place for philosopher kings and there ought to be no place for activist, unelected, unrepresentative, law making judges.6

The same critic goes on to say that although law making is controversial, as long as it takes place in the Parliament, the public are at least partly protected by their vote. On the other hand, others have defended such judicial decisions, explaining that while the courts are constrained by the doctrine of precedent and established legal principles, they also play an important role in ensuring that the law reflects contemporary standards and values: There is a legal counter-reformation under way. It is made up of those who denounce as ‘judicial activism’ the time-honoured role of judges to adapt and adjust the law to the age of cyberspace, the genome and global human rights. This counter-reformation should not be allowed to succeed. If it does, we will end up with our own disgraceful incidents of judicial witch-hunting, like those that have occurred in the United States. Alternatively, we may see the bullying of judges in an attempt to force them to draw

6 John Hyde, ‘Brennan’s Vision is Flawed’, 4The Australian (Sydney), 4 August 1995.

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back from honesty in the discharge of their functions, so as to avoid threatened political heat from people who prefer an inert judiciary: one that denies its legitimate creative role in defending justice. Somewhere between the spectre of a judge pursuing political ideas of his or her own from the judicial seat, irrespective of the letter of the law, and the unrealistic mechanic deified by the strict formalists, lies a place in which real judges perform their duties: neither wholly mechanical nor excessively creative.7 ACTIVIT Y 3.17 — REFLECT

What is your opinion about judicial activism? Should judges limit themselves to the interpretation and application of legislation and precedent, or is there a place for innovation and reform by judges?

Common law and equity Within the extremely large body of case law that has developed over the last few centuries, two important categories can be identified: common law and equity. An illustration of the differences between common law rules and the rules of equity is provided in relation to remedies. At common law, the principal remedy available to a litigant is the remedy of damages, that is, monetary compensation. Equity, however, recognises that monetary compensation is not always an appropriate remedy, and offers a range of alternative remedies including the injunction and specific performance. These remedies are discretionary; that is, they will only be granted if the court considers that common law remedies are not appropriate or adequate. LAW IN CONTEXT: LAW AND HISTORY

Common law and equity The distinction between common law and equity is best understood by briefly considering the history of the development of case law in Britain. Prior to the Norman Conquest in 1066, the law in England consisted of customary law. This law was administered in local courts and interpreted according to local custom. The geographic diversity of the population and the lack of communication between the courts meant that the law varied significantly from place to place. In the 1100s King Henry II began the practice of sending judges travelling around the country to administer royal justice. At first, the judges based their decisions upon local customary law. However, the practice of the judges in seeking to achieve consistency with previous decisions in accordance with the doctrine of precedent meant that in the 1300s a nationally consistent and authoritative set of rules and principles began to emerge. This set of rules and principles became known as the common law, and the courts in which it was administered were known as the common law courts. Unfortunately, the capacity of the common law for growth and expansion was restricted by procedural matters. A party to a trial could only obtain a remedy if their action was recognised as falling within a limited number of ‘forms of action’ recognised by the common law courts. The common law courts were reluctant to allow a new form of action because this might be seen as a form of law-making, something that was the function of monarch and not the courts. The common law consequently became rigid and inflexible and many legal problems that arose were unable to be resolved. Citizens unable to obtain a remedy from the common law courts would approach the monarch and seek royal justice directly. The monarch delegated responsibility for hearing such claims to the Lord Chancellor, the monarch’s chief adviser and the ‘keeper of the King’s conscience’. The Lord Chancellor would hear the dispute and make a decision based not upon common law rules and principles but upon his own ideas of fairness and justice. By the 1300s the Lord Chancellor had established his own court, which made decisions based upon ‘equity and good conscience’; this court

7 Justice Michael Kirby, ‘Judicial Power Requires Some Creativity’, The Australian Financial Review (Sydney), 28 November 2003, 56.

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became known as the Court of Chancery. Judges in the Court of Chancery began to have regard to their own previous decisions, and over time a complex body of rules and principles developed that became known as equity. Equity was not an independent body of rules and principles; it existed to supplement the common law and assumed the existence of the common law. In 1620, King James I decided that in the event of a conflict between a rule of equity and a common law rule, the rule of equity would prevail. By the 1800s, two functionally separate court systems existed side by side in England. Unsurprisingly, the existence of two separate court systems created a number of practical and procedural difficulties. These difficulties were resolved by the passage of the Judicature Acts of 1873. The Judicature Acts abolished the separate court systems and established a High Court of Justice, which was able to administer both common law and equity. It is important to realise that the two branches of case law were not combined or fused. Today, in both Britain and Australia, common law and equity continue to exist as separate branches of case law, but most judges can choose to apply the appropriate common law or equitable rule or principle in particular situations. Equity does not apply to all civil disputes, and it does not apply to criminal law.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 3.35 What is the doctrine of precedent and how does it operate? 3.36 What is the difference between a binding precedent and a persuasive precedent? 3.37 What does it mean to ‘distinguish’ a precedent? Illustrate your answer using an example. 3.38 What is ‘judicial activism’? 3.39 What is the difference between common law and equity and why is the distinction important?

3.5 Alternative dispute resolution LEARNING OBJECTIVE 3.5 What dispute resolution methods do not involve going to court?

Going to court is not the only way of resolving a dispute; in fact, as explained earlier, it should be a last resort. Other methods that can be used to settle disputes include negotiation, mediation, conciliation and arbitration. These methods are referred to collectively as alternative dispute resolution or ADR. ADR is becoming increasingly common in Australia and other countries because: •• it is generally cheaper, faster, more private and less stressful than going to court, •• in commercial situations, it is often less destructive to ongoing business relationships than litigation, and •• it relieves the pressure on, and therefore the costs of maintaining, the court system. Sometimes the court itself will require the parties to try other ways of solving their problems before it will hear the case. Negotiation involves the parties or their legal representatives engaging directly in order to find some form of mutually acceptable solution to their dispute. Negotiation normally requires that some compromises be made by both parties. Mediation requires the disputing parties to engage an independent third party (the mediator) to help them to arrive at an agreement acceptable to all parties. Such agreements are not legally binding. The role of the mediator is not to impose a solution but to help the parties to explore the options available to them. In some states, mediation centres have been established by the government to assist in the resolution of family and neighbourhood disputes. Conciliation is similar to mediation. The parties meet before a neutral third person called a conciliator. The conciliator will usually be skilled in the area of the dispute; for example, in the area of CHAPTER 3 Politicians and judges  119

industrial relations. They are more active than a mediator in that they will express an opinion about the relative positions of the parties and suggest possible solutions. Like mediation, any agreement reached between the parties is not legally binding. Arbitration is similar to going to court. The parties appear before an independent third person called an arbitrator who considers the merits of each case and then makes a decision that is binding on both parties. It is often used in industrial relations and building disputes. ACTIVIT Y 3.18 — RESEARCH

Go to the website of the Institute of Arbitrators and Mediators at www.iama.org.au and then answer the following questions. How does the site define (a) mediation, (b) conciliation, and (c) arbitration? According to the site, when should each of these forms of ADR be considered?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 3.40 What are the methods of settling disputes? List these methods and compare and contrast them in your answer. 3.41 Why is alternative dispute resolution an increasingly popular alternative to litigation?

In conclusion •• At each level of government, laws are made by a legislature in the form of a Parliament. •• For a Bill to become law, it must pass through three readings within each House of Parliament, and then receive Royal Assent from the Crown representative. •• The judiciary in the form of the court system interprets the law and applies the law to particular cases. •• Each legal system in Australia has its own court hierarchy. •• Civil proceedings are usually commenced by a statement of claim, and criminal proceedings are usually commenced with the accused person being charged with an offence. The trial itself is an opportunity for each party to present their side of the argument. The final decision is made by a judge and jury or by a judge acting alone. •• In reaching a decision, the court will decide any questions of law consistently with decisions made by other courts higher in the court hierarchy in accordance with the doctrine of precedent. •• Litigation is not the only method for the resolution of civil disputes; the alternatives include negotiation, mediation, conciliation and arbitration. JOHNNY AND ASH

[Johnny and Ash are still in Ash’s apartment. The movie has finished, and they are sharing a pot of tea.] Johnny — So let me see if I’ve understood this correctly. Judges aren’t answerable to politicians, and politicians aren’t answerable to judges. The politicians — well, the legislature — make the law. The judges — the judiciary — interpret and apply the law. They are two of the three ‘branches’ of government and they are supposed to stay separate. Ash — Wow, good work. And how does the legislature ‘make’ law? Johnny — The Parliament makes law called legislation. A proposal to make a new law is drafted into a Bill, and the Bill is then debated and voted upon by both Houses of Parliament. If the Bill is passed by both Houses of Parliament and receives Assent, it becomes law.

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Ash — You are doing really well. Parliaments make the laws, and judges interpret and apply the laws that they make. But do judges make law as well? Johnny — Yes, sometimes they do. There are situations where there is no legislation telling us what we can and cannot do, so judges have to come up with the rules themselves. Ash — That’s right. Judges make new law when they apply an old rule to a new situation, and when they decide how a rule in a statute is to be interpreted. There are some areas of law — like contract law — that are made up almost entirely of rules that have been developed by judges. It isn’t really consistent with the doctrine of separation of powers, but it happens quite a lot. So what happens if the politicians don’t agree with a law created by judges? Johnny — I’m not sure  .  .  .  Can they do anything? Ash — Well, Parliament is the sovereign law-maker, so if the judges develop a new legal rule that the politicians disagree with, the Parliament can pass legislation that overrides the common law. One last question: how do you sue someone? Johnny — [Laughing.] Get a lawyer! Although, of course, it is possible for me to represent myself. I would start by serving a statement of claim on the person I want to sue  .  .  . Ash — Actually, it might be a good idea to try and negotiate first, and explore some form of alternative dispute resolution. Johnny — Of course, but if nothing else has worked, I would serve my claim on the other side and give a copy to the court, and that will get the ball rolling. With any luck, I will settle the dispute before trial but if it gets to trial I will be given the chance to present my side of the argument and the judge will make a decision. And if I don’t like the result, and I have the time and money, I can appeal to a court higher up in the court hierarchy. Ash — Wow, you did really well. You must have been paying attention. Johnny — Yeah, I surprised myself! But will I remember any of this in the morning?

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QUIZ 1 According to the Australian Constitution, legislative power is exercised by

(a) the Parliament. (b) the Cabinet. (c) the Governor-General. (d) the High Court of Australia. 2 How many Senators are in the Senate? (a) One from each electorate. (b) Exactly half the number of members in the House of Representatives. (c) One from each State and Territory. (d) Twelve from each State and two from each Territory. 3 Most Bills introduced into parliament are (a) introduced into the Lower House first. (b) Private Member’s Bills. (c) not drafted by the Office of Parliamentary Counsel. (d) Consolidation Bills. 4 A double dissolution is necessarily followed by (a) a referendum. (b) a joint sitting of both Houses of Parliament. (c) an election. (d) Royal Assent. 5 In a civil trial (a) the party who commenced the action is called the plaintiff. (b) the burden of proof is on the Crown. (c) the standard of proof is beyond all reasonable probabilities. (d) if the defendant is found guilty they will be punished. 6 A claim that a business has breached the Copyright Act 1968 (Cth) is most likely to be heard by (a) the High Court of Australia. (b) the Copyright Court. (c) the Federal Parliament. (d) the Federal Court of Australia. 7 According to the adversarial system of trial (a) the parties have complete responsibility for the conduct of their case. (b) the parties decide what evidence should be put before the court. (c) the judge takes the part of an impartial referee. (d) all of the above. (e) none of the above. 8 When the decision of a court is appealed, the plaintiff in the original trial becomes (a) the defendant. (b) the appellant. (c) the respondent. (d) it depends upon which party brings the appeal. 9 A judge in the District Court of South Australia is obliged to follow a precedent established by (a) a judge in the Local Court of South Australia. (b) a judge in the High Court of Australia. (c) a judge in the Supreme Court of Queensland. (d) a judge in the Family Court of Australia. 122  PART 1 Foundations

10 The use in dispute resolution of an independent third person who considers the merits of

each case and then makes a decision is called (a) negotiation. (b) mediation. (c) conciliation. (d) arbitration.

EXERCISES EXERCISE 3.1 — THE LEGISLATURE

Explain the role played by each of the Houses in a bicameral parliament. What are the advantages and disadvantages of having a unicameral parliament? EXERCISE 3.2 — THE LEGISLATURE

How does party politics influence the law-making process in Australia? How would you improve the system? EXERCISE 3.3 — THE LEGISLATURE

What is ‘parliamentary sovereignty’? How did the parliament acquire more political authority than the monarch? EXERCISE 3.4 — THE LEGISLATURE

Select one of the six ‘double dissolutions’ of the Federal Parliament that have taken place since Federation. Conduct research to learn more about the circumstances of the double dissolution. What provoked the double dissolution? What was the outcome? EXERCISE 3.5 — THE JUDICIARY

Explain the difference between the standard of proof in a civil trial and the standard of proof in a criminal trial using an example. Why does this difference exist? EXERCISE 3.6 — THE JUDICIARY

What is the role of the jury in a civil trial? Should the use of juries in civil trials be abolished entirely? Why or why not? EXERCISE 3.7 — THE JUDICIARY

How are judges appointed in Australia? Should judges be elected by the public, like politicians? Why or why not? EXERCISE 3.8 — THE JUDICIARY

What is the doctrine of precedent and how does it operate in Australia? What are the advantages and disadvantages of the doctrine of precedent? EXERCISE 3.9 — THE JUDICIARY

According to the English philosopher and jurist Jeremy Bentham (1748–1832) in Volume V of his Works: ‘It is the judges that make the common law, just as a man makes laws for his dog. When your dog does anything you want to break him of, you wait till he does it and then beat him. This is the way you make laws for your dog, and this is the way judges make laws for you and me.’ Explain this claim in your own words. EXERCISE 3.10 — THE JUDICIARY

Prepare a table setting out the advantages and disadvantages of each method of dispute resolution including litigation and alternative dispute resolution. CHAPTER 3 Politicians and judges  123

KEY TERMS adversarial system  The system of dispute resolution used in courts in common law legal systems according to which each party argues their case before an impartial judge who decides the outcome of the dispute. alternative dispute resolution (ADR)  A range of non-litigious methods for resolving disputes, including mediation, arbitration and conciliation. amendment Act  An Act that changes an existing Act. appeal  An application to a higher court to review the decision of a lower court. appellant  A person who appeals a judicial decision, usually (but not always) the person who lost the original legal proceedings. appellate jurisdiction  The jurisdiction of a court to hear appeals from other courts that are lower in the hierarchy. arbitration  A form of dispute resolution where an independent and expert third party (an arbitrator) resolves the dispute. Attorney-General  The member of the Cabinet responsible for oversight of the legal system and the provision of legal advice to the executive government. bail  Payment of money as security for the release of a person from police custody pending trial. bailiff  A court officer who is responsible for the orderly conduct of courtroom proceedings. barrister  A type of lawyer; one who specialises in the representation of clients before courts and tribunals, as well as the provision of specialised legal advice. bicameral  To be comprised of two parts; when used in reference to a parliament, indicates that the parliament consists of two Houses, an Upper House and a Lower House. Bill  A draft Act of Parliament. binding precedent  An earlier judicial decision that a judge is obliged to follow. burden of proof  The obligation of one of the parties to a trial to produce sufficient evidence to establish their side of the argument. case law  Law made by courts in accordance with the doctrine of precedent. Also known as ‘common law’. certificate of readiness  A formal statement by a party to litigation that they are ready to proceed to trial. challenge for cause  A challenge with reasons made to the selection of a particular person as a member of a jury. charging the jury  The explanation by the judge to the jury of the nature of the jury’s role during the trial. circumstantial evidence  Evidence not of the facts in issue, but of other facts from which the court may infer the evidence of a fact in issue. civil trial  A trial resulting from one person suing another under civil law. committal proceeding  A preliminary proceeding held in a lower court to determine whether or not there is sufficient evidence to justify a full criminal trial. conciliation  A form of dispute resolution where an independent and expert third party (a conciliator) actively assists the parties to resolve the dispute. consolidating Act  An Act that brings all the statute law in a particular area into a single Act or that consolidates an original Act with all of its subsequent amending Acts. contempt of court  A failure to follow a court order or the direction of a judge. counterclaim  A claim by a defendant against a plaintiff. court reporter  The court officer responsible for recording the court proceedings. criminal trial  A trial involving the prosecution of a person who has been accused of contravening the criminal law. cross-examination  The questioning of a witness during a trial by the other party or their lawyer. Crown representatives  The monarch’s representative in government, e.g. the Governor-General in Federal government, the Governor in State government. 124  PART 1 Foundations

damages  Monetary compensation; a type of civil remedy. default judgment  Judgment automatically issued in favour of the plaintiff in the absence of a defence filed by the defendant. defence  A document prepared by the defendant in response to the plaintiff’s statement of claim in a civil action or the charges in a criminal action. defendant  The person against whom either a civil action or a criminal action has been brought. direct evidence  An eyewitness account of any fact that is in issue before the court. discovery  The process by which one party to legal proceedings acquires copies of documents in the possession of the other party. distinguishing  Emphasising the differences between the facts of an earlier case and the facts of the present case in order to justify a refusal to follow the precedent established by the earlier case. doctrine of precedent  The principle that when deciding a question of law a court must do so consistently with the earlier decisions of higher courts within the court hierarchy. Also known as ‘stare decisis’. double dissolution  The dissolving of both Houses of Parliament by the Crown representative. electoral roll  The official record of those residents within a jurisdiction who are entitled or obliged to vote. electorate  (1) Those residents within a jurisdiction who are entitled or obliged to vote. (2) A specific geographic region, the residents of which are entitled to send one or more representatives to represent their interests in parliament. equity  The category of case law rules and remedies based on fairness and justice, developed to supplement the common law. examination in chief  The initial questioning of a witness by the party that called upon them to present evidence. explanatory memorandum  A document summarising a new statute and explaining the effect of each provision. facts in issue  The facts disputed by the parties in legal proceedings. Governor-General  The Crown representative in Federal government. House of Commons  The Lower House of the British Parliament. House of Lords  The Upper House of the British Parliament. House of Representatives  The Lower House of the Federal Parliament. indictable offence  A serious criminal offence such as murder, manslaughter, rape or robbery, tried before a judge and jury. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. interim injunction  An order of the court restraining one of the parties from acting in a particular way until the trial is concluded, such as selling property or leaving the country. interlocutory orders  An order of the court sought before trial, e.g. where one party is not cooperating with the interrogatory or discovery process. interrogatories  Questions directed from one party to another prior to a trial that the other party must answer on oath. inquisitorial system  The system of trial used in courts in civil law legal systems according to which the judge plays a participatory, truth-seeking role. joint judgment  Judgment delivered by two or more judges writing together. judge  The person responsible for adjudicating a trial, including ensuring that the rules of evidence and procedure are followed, deciding any questions of law and (in the absence of a jury) deciding any questions of fact. judge’s associate  A recent law graduate serving as a judge’s administrative and research assistant. judgment  Decision of a judge regarding the outcome of a trial. judicial activism  Overt law making by a judge or judges. jury  A group of laypersons who decide questions of fact during a civil or criminal trial. CHAPTER 3 Politicians and judges  125

leading question  A question that suggests or presumes the answer. Legislative Assembly  The Lower House of the State or Territory parliament (ACT, New South Wales, Northern Territory, Queensland, Western Australia, Victoria). Legislative Council  The Upper House of the State parliament (New South Wales, South Australia, Tasmania, Western Australia and Victoria). letter of demand  A letter insisting upon payment of an outstanding debt or performance of an outstanding obligation by a fixed date. majority judgment  A decision regarding the outcome of a trial agreed to by more than half of the presiding judges. mediation  A process of dispute resolution where a third party (a mediator) assists the parties to settle the dispute themselves. minority judgment  A decision regarding the outcome of a trial agreed to by less than half of the presiding judges. Also known as a ‘dissenting judgment’. negotiation  A dialogue with the objective of resolving a dispute or reaching an understanding or agreement. Office of Parliamentary Counsel  Government lawyers that specialise in the drafting of legislation. order for costs  An order by the court determining whether each party should pay their own legal costs or one party should pay the costs of the other. original Act  An Act passed about a particular matter for the first time. original jurisdiction  The jurisdiction of a court to resolve a dispute being heard for the first time. overruling  A decision by a court not to follow a precedent established by another court. Also known as ‘rejecting a precedent’. parliament  A gathering of elected representatives, usually bicameral, which debates and votes upon new laws. peremptory challenge  A challenge without reason made to the selection of a particular person as a member of a jury. persuasive precedent  An earlier decision that a judge is not obliged to follow but is nevertheless likely to follow. plaintiff  The person who commences a civil action against another person. plea bargaining  Attempt by the prosecutor to persuade the defendant in a criminal trial to plead guilty to a lesser offence than the one with which they were initially charged, in order to resolve the dispute more quickly. precedent  (1) An earlier decision by a judge on a question of law that should be followed in the present circumstances for the sake of consistency. (2) A standard document used by lawyers as the basis for drafting new documents. prehearing conference  A meeting of the parties that is held before a trial to encourage the parties to settle their dispute before the trial. Private Member’s Bill  A Bill introduced into parliament by a private member rather than by the executive government. real evidence  Evidence in the form of objects that the court is asked to examine. re-examination  The stage of questioning a witness where the lawyer who conducted the examination in chief has the opportunity to clarify the witness’s evidence following the cross-examination. registrar  The public officer responsible for the management of a court registry or other government office. repeal  To abolish or withdraw legislation. repealing Act  An Act that abolishes an existing Act. respondent  A person against whom a judicial decision is appealed, usually (but not always) the person who won the original legal proceedings. retrospective  Something that is deemed to have commenced before it was actually created, e.g. retrospective legislation. reversed  Descriptive of a decision of a lower court that is not agreed with by a higher court on appeal. 126  PART 1 Foundations

reviving Act  An Act that revives or restores an Act that is no longer current. Senate  The Upper House of the Federal Parliament. service  Formal delivery of a document or notice. sheriff  The court officer responsible for processing jury matters, issuing warrants of arrest, serving and executing certain civil writs, and processing persons appearing before the courts for trial and sentencing. solicitor  A type of lawyer; one who provides legal advice and representation to members of the public. special leave  An application to the High Court for permission to appeal to that court. specific performance  A court order directing a party to fulfil their contractual obligations. standard of proof  The amount of proof required in a civil or criminal trial for the plaintiff or Crown to discharge their burden of proof. stare decisis  (‘to stand by things decided’) The principle that when deciding a question of law a court must do so consistently with the earlier decisions of higher courts within the court hierarchy. Also known as the ‘doctrine of precedent’. statement of claim  A document setting out the plaintiff’s claim that commences a civil action. subpoena  An order of the court directing a person to appear at the trial as a witness and/or produce documents. summary offence  A less serious criminal offence such as common assault, a traffic offence, or being drunk and disorderly, which is tried before a magistrate. testimony  The assertions of a witness in court. unanimous judgment  A decision at trial where all of the judges arrive at the same decision by similar reasoning. upheld  Descriptive of a decision of a lower court that is confirmed or agreed with by a higher court on appeal. veto  (1) A right to reject or override a decision or proposal. (2) To exercise such a right. Westminster system  The system of bicameral parliament based upon the British system of government. workers compensation  A form of compulsory insurance entitling an employee to compensation in the event of a work-related injury.

ACKNOWLEDGEMENTS Photo: © Georgios Kollidas / Shutterstock.com Photo: © Claudio Bertoloni / Shutterstock.com Photo: © Phillip Minnis / Shutterstock.com Article: © The Conversation, Michelle Grattan, 18 June 2014, http://theconversation.com/ you-dont-pull-the-double-dissolution-trigger-when-the-gun-is-likely-to-backfire-28160 Article: © The Conversation, Kcasey McLoughlin, 15 April 2015, http://theconversation.com/two-forone-a-good-new-high-court-judge-and-a-woman-to-boot-40217 Article: © The Conversation, Andrew Lynch, 13 August 2015, http://theconversation.com/australia-islagging-behind-the-worlds-best-on-judicial-appointments-reform-45833 Article: © The Conversation, Michelle Grattan, 26 May 2015, http://theconversation.com/shorten-putspressure-on-liberals-over-same-sex-marriage-42373 Article: © The Conversation, Lorana Bartels and Jessica Lee, 31 July 2013, http://theconversation.com/ jurors-and-social-media-is-there-a-solution-15921 Extract: © Australian Financial Review, Michael Kirby, 28 November 2003, ‘Judicial Power Requires Some Creativity’. QUIZ ANSWERS

1. a.  2. d.  3. a.  4. c.  5. a.  6. d.  7. d.  8. d.  9. b.  10. d. CHAPTER 3 Politicians and judges  127

CHAPTER 4

How to find, understand and use the law LEA RN IN G OBJE CTIVE S 4.1 How do you find the law? How do you locate case law, legislation and other sources of law? 4.2 Once you have found it, how do you read the law? What parts of a case report or Act of Parliament are important? How do you interpret a legal text? 4.3 How do you use the law? How do you think like a lawyer, and why is it useful to be able to do so? How do you solve legal problems? 4.4 How do you write like a lawyer? How do you write a legal letter, or draft a contract?

JOHNNY AND ASH

[Johnny and Ash are having a very late Sunday breakfast at a popular café near the river. Neither speaks while they wait for their order to arrive. Johnny glares at Ash. Ash calmly looks out across the water until Johnny breaks the silence.] Johnny — You know, all lawyers are thieves. Ash — [She does not respond immediately, instead allowing the statement to hang in the air between them. Johnny continues to glare at her. She smiles coolly, and eventually replies.] Well, that is certainly an interesting claim. I’m not sure it would hold up under scrutiny though. I imagine that there are some lawyers who are also thieves; in fact, I’ve met a few of them. But you are claiming that all lawyers are thieves. I’m certain that is not the case, since I myself am a lawyer and not a thief. Perhaps you would like to revise your claim in an effort to make it a little more accurate? Johnny — The law is there to help all of us, right? It applies to all of us, and we are all entitled to use the legal system to protect our rights. That’s what the ‘rule of law’ is supposed to be all about, right? So really, we shouldn’t need lawyers at all. We should be able to find out what the relevant law is ourselves, and exercise our legal rights, and represent ourselves in court. And the fact that lawyers make us think we can’t do any of those things ourselves, and that we have to pay lawyers stupidly large sums of money to do those things for us  .  .  .  Well, you are all thieves. I reckon. Ash — [She sighs.] We are not all thieves, Johnny. Life is complicated, and the law is complicated, and most people don’t have the time or the knowledge or the skills to solve complex legal problems. Nobody expects you to be able to build your own house, repair your own car or remove your own appendix. Going to a lawyer is like going to any specialist: you pay extra to get things done properly. [She pauses.] Having said all that, however, I do agree with the spirit of your complaint, if not the letter of it. Johnny — Ha! [He looks pleased with himself.] Ash — [She rolls her eyes.] There are many legal problems that arise that could have been avoided if the people in question had bothered to acquire some basic legal knowledge and practise some basic legal skills before making some pretty crucial decisions. I’m all in favour of encouraging members of the public — and especially businesspeople — to familiarise themselves with the law and have a go at navigating the legal system themselves. Now, I’m not saying they shouldn’t go see a lawyer when they are confronted with a complicated legal problem or serious legal issue, of course. But just as you are less likely to need to see a doctor if you have a healthy diet and exercise regularly, you are less likely to need to see a lawyer if you can practise some basic legal skills. Johnny — [He looks genuinely interested, and no longer annoyed.] What kind of skills?

CHAPTER PROBLEM

When it comes to solving legal problems, there are some things you can do yourself and some things you should ask a lawyer to do on your behalf. As you learn about each of the main legal skills in this chapter, decide when you should try to exercise the skill yourself and when you should ask a lawyer to do it for you.

Introduction Life in 21st century Australia is complex and dynamic. People live longer and more varied lives. They change homes, jobs, careers and partners more often. They travel further, and more frequently. Thanks to the internet, they regularly enter into new commercial and personal relationships with other people and organisations in other cities, states and countries. And they face a seemingly endless stream of new laws and regulations that impact directly upon their business lives and their personal lives. Johnny, like many people today, lacks the basic knowledge, skills and confidence to use the law and the legal system effectively. He has little interest in the law unless he is confronted with a serious legal CHAPTER 4 How to find, understand and use the law  129

problem, and when he does finally attempt to come to grips with the law, it is either too late or he ends up making a poor decision. What can Johnny do? He could rely upon lawyers to always take care of his legal problems for him, but lawyers can be expensive. Wouldn’t it be better if he could organise his business and his personal life in such a way that he avoided serious legal problems arising in the first place? With a little effort Johnny can acquire the necessary skills to find the law, to read and interpret the law, to reason legally and critically, and to produce simple but effective legal texts. Ash thinks that many legal problems are potentially avoidable, if only people would make the effort to acquaint themselves with the relevant law and legal procedures, and acquire some basic legal skills. In this chapter we explain four basic legal skills: legal research skills, legal reading skills, legal reasoning skills and legal writing skills. By the end of this chapter you will be better equipped to navigate the Australian legal environment. LAW IN CONTEXT: LAW AND POPULAR CULTURE

McLibel McLibel is a 1998 documentary directed by Franny Armstrong and Ken Loach. It tells the story of Helen Steel and Dave Morris, two environmental activists and anti-McDonalds campaigners who were sued by the fast food giant for defamation and decided to proceed to trial. They prepared their own defence and, despite their lack of legal expertise and experience, represented themselves in court, confronting McDonalds’ large team of professional lawyers. The trial became the longest running trial in British history. The documentary is well worth watching for a number of reasons: it is a revealing critique of the power of corporations, an exciting drama, and an insightful portrayal of the difficulties and possibilities associated with self-representation in court.

4.1 Finding the law LEARNING OBJECTIVE 4.1 How do you find the law? How do you locate case law, legislation and other sources of law?

To use the law to solve legal problems, you need to know where the law can be found. In this section we describe the process of locating the law, both in the form of primary legal materials such as case law and legislation, and in the form of secondary legal materials such as journal articles and legal encyclopaedias.

Legal research There is a lot of law out there, but how do you find it? The first set of skills you need is legal research skills: the ability to locate the law. With this ability you will be well on your way to being better able to apply the law to the solution of legal problems. Fortunately, the internet has made the process of legal research much faster and simpler not only for legal professionals, but also for non-lawyers. In conducting legal research you should first identify as clearly and as precisely as you can the nature of the legal issue or legal problem with which you are confronted. The process of identifying the issue is discussed in more detail under the heading ‘Thinking like a lawyer’ later this chapter. When you have identified the legal issue, you can use your basic knowledge of Australian law to determine the most likely legal fields of relevance — such as contract law, the law of negligence, consumer protection law, or company law — and then conduct further legal research to identify the precise legal rules and legal procedures. When conducting legal research you can use both primary and secondary legal materials (see figure 4.1). 130  PART 1 Foundations

Legislation Primary legal materials Case law

Sources of law

Law textbooks

Law journal articles Secondary legal materials Legal dictionaries

Legal encyclopaedias FIGURE 4.1

Primary and secondary legal materials

Primary legal materials are the direct sources of the law, that is, legislation (the law made by parliaments) and case law (the law made by judges). These materials comprise the law itself, rather than simply a description of it or an opinion about it. It is important that you know where to find, and how to read, primary legal materials. Secondary legal materials are those materials that do not comprise the law itself but instead explain and expand upon the primary legal materials. As such secondary legal materials are not binding law, but they can be persuasive. Examples of secondary legal materials include: •• law textbooks, •• law journal articles, •• legal dictionaries, and •• legal encyclopaedias.

Primary legal materials Primary legal materials are case law and legislation, both of which are often readily accessible online.

Locating legislation Legislation is the law made by a parliament. It is also referred to as statute law, or as an Act of Parliament. Legislation is the principal source of law: in the event of a conflict between a legislative rule and a case law rule, it is legislation that takes precedence. As demonstrated in later chapters, some areas of law are now almost entirely legislative, and case law does little more than provide instances of application of the legislation to particular circumstances. Consumer credit law is an example of one such area of law and will be discussed in a later chapter. Other areas of law are largely legislative but there are a number of important cases where the courts have interpreted and expanded upon a generally worded legislative provision, such as section 18 of the Australian Consumer Law. An Act of Parliament is usually referred to by its short title; for example, the Copyright Act 1968 (Cth). The date in the title is the year the legislation was passed, and the letters in the parentheses refer to which parliament passed the legislation — ‘Cth’ stands for ‘Commonwealth’. If the Act was passed by the New South Wales Parliament, the letters in the parentheses after the title would be ‘NSW’. CHAPTER 4 How to find, understand and use the law  131

When searching for legislation it is important that you check whether the Act in question has subsequently been amended or repealed. Parliament periodically issues consolidated versions of the legislation that incorporate the subsequent amendments, but care must still be taken to determine whether or not there have been other amendments since the most recent compilation. The traditional approach to locating legislation is to locate a hard copy of the relevant Act, which can be found in a law library, a State library or a court library. Today, however, it is much easier and much more common to locate legislation online. The State or Territory and Commonwealth parliaments all make their legislation available online (see table 4.1). TABLE 4.1

Legislation online

Jurisdiction

Website

Commonwealth (Cth)

www.comlaw.gov.au

Australian Capital Territory (ACT)

www.legislation.act.gov.au

New South Wales (NSW)

www.legislation.nsw.gov.au

Northern Territory (NT)

www.nt.gov.au/lant/parliamentary-business/legislation.shtml

Queensland (Qld)

www.legislation.qld.gov.au/

South Australia (SA)

www.legislation.sa.gov.au/

Tasmania (Tas)

www.thelaw.tas.gov.au/

Victoria (Vic)

www.legislation.vic.gov.au

Western Australia (WA)

www.slp.wa.gov.au/

ACTIVIT Y 4.1 — RESEARCH

Locate and download copies of the following Acts (you will refer to this legislation in later activities). 1. The Acts Interpretation Act 1901 (Cth) 2. The Interpretation Act of your State or Territory (listed in footnote 6).

Locating case law Case law (sometimes called ‘common law’) refers to the collective recorded decisions of judges. The decisions of judges in courts other than the lower courts are usually recorded and published and, in accordance with the doctrine of precedent, these decisions are referred to and frequently followed by other judges, leading to the creation of a body of law made by judges. Just as some areas of law are almost entirely legislative, other areas of law consist almost entirely of case law. Contract law is an example of such an area of law. Locating case law in hard copy

The decisions of judges are reported and published in bound volumes referred to as law reports. A large number of law report series are published in Australia and overseas: see the ‘law report abbreviations’ listed at the beginning of this text. Some of the more important case decisions may be published in more 132  PART 1 Foundations

than one law report series. Some law report series are the authorised series of a particular court, while others are published by commercial publishers and collate the case decisions concerned with a particular area of law. Law report series can be found in a law library. ACTIVIT Y 4.2 — REFLECT

Why are the decisions of judges in the lower courts generally not recorded and published?

To locate a particular case, you refer to the case citation. Here is an example of a case citation. Donoghue v Stevenson [1932] AC 562

‘Donoghue’ and ‘Stevenson’ are the names of the parties to the trial. If the case was being heard for the first time, the first name would be that of the plaintiff and the second name would be that of the defendant. If the case was one being heard on appeal, the first name would be that of the appellant and the second name would be that of the respondent. The ‘v’ is short for ‘versus’, but in relation to civil cases is pronounced ‘and’. The fact that ‘Donoghue’ and ‘Stevenson’ are the names of individuals tells you that this is a report of a civil trial rather than a criminal trial. If the report is of a criminal trial, the name of one of the parties would be ‘the Crown’, usually shortened to ‘R’ (for Rex if there was a king at the time, and Regina if there was a queen at the time). A case citation for a criminal trial would therefore look like this. R v Clarke (1927) 40 CLR 227

In a criminal case citation, the ‘R’ is pronounced ‘the Crown’ and the ‘v’ is pronounced ‘against’. There may be more than one plaintiff and/or more than one defendant. If the name in the citation is, for example, ‘Smith et al.’ or ‘Smith & Ors’ it means the parties are Smith and a number of other people. The date following the names of the parties is the year in which the case was decided, and the letters following the date are the abbreviation for the law report series in which the decision was published. If the date is in square brackets, as in the first citation, it means that the volumes of the law report series are organised by year. If the date is in parentheses (round brackets), as in the second citation, it means that the volumes of the law report series are organised by volume number, and this will be the number immediately following the date. The final number in each citation is the page number where the actual case report is located in the volume. To summarise: the case report Donoghue v Stevenson (pronounced ‘Donoghue and Stevenson’) can be found by locating the ‘Appeal Cases’ law report series in the law library, finding the ‘1932’ volume of that series, and going to page 562. The case report R v Clarke (pronounced ‘the Crown against Clarke’) can be found by locating the ‘Commonwealth Law Reports’ series in the law library, finding volume 40 of that series, and going to page 227. Locating case law online

Many courts in Australia and overseas now publish their decisions on their own official website. For example, decisions of the Supreme Court of Queensland can be accessed at www.courts.qld.gov.au. When courts publish their own decisions, they often make use of a simplified system of citation, such as the following. Whitehead v Griffith University [2002] QSC 153

‘Whitehead’ and ‘Griffith University’ are the names of the parties; ‘2002’ is the year of the trial; ‘QSC’ tells you that the trial was heard in the Supreme Court of Queensland; and ‘153’ is the citation number, a number that identifies a particular case in a particular year. However, the database of court decisions on a court website is often incomplete in that it only includes decisions made as from a particular date. For example, the Queensland Courts website only includes decisions of the Supreme Court (Trial Division) from January 2000. To locate older decisions you may need to search more widely. CHAPTER 4 How to find, understand and use the law  133

Fortunately case reports can often be located at one of the extremely useful, comprehensive and free general law websites provided as part of the Free Access to Law movement. This is the umbrella name for a collective of law projects across several jurisdictions that seek to provide free online access to legal resources including case law and legislation. Most of these projects use the name ‘Legal Information Institute’ prefixed by the name of the jurisdiction (see table 4.2). TABLE 4.2

Legal Information Institutes

Institute

Website

Asian Legal Information Institute

www.asianlii.org

Australian Legal Information Institute

www.austlii.edu.au

British and Irish Legal Information Institute

www.bailii.org

Canadian Legal Information Institute

www.canlii.org

Commonwealth Legal Information Institute

www.commonlii.org

Cyprus Source of Legal Information

www.cylaw.org

French Legal Information Institute

www.droit.org

Hong Kong Legal Information Institute

www.hklii.hk

Legal Information Institute (United States)

www.law.cornell.edu

New Zealand Legal Information Institute

www.nzlii.org

Pacific Islands Legal Information Institute

www.paclii.org

Southern African Legal Information Institute

www.saflii.org

World Legal Information Institute

www.worldlii.org

Irish Legal Information Institute

www.ucc.ie/law/irlii

Italian Legal Information Institue

www.ittig.cnr.it

Jersey Legal Information Board

www.jerseylaw.je

Philippine Laws and Jurisprudence Databank

www.lawphil.net

Uganda Legal Information Institute

www.ulii.org

134  PART 1 Foundations

ACTIVIT Y 4.3 — RESEARCH

Provide the full name and URL for each of the following case reports. 1. Donoghue v Stevenson [1932] AC 562 2. R v Clarke (1927) 40 CLR 227 3. Whitehead v Griffith University [2002] QSC 153 4. The 1951 decision of the House of Lords on the topic of negligence 5. The 2001 decision of the High Court of Australia on the topic of privacy

Secondary legal materials Secondary legal materials include: •• law textbooks, •• law journal articles, •• legal dictionaries, and •• legal encyclopaedias.

Locating secondary legal materials Law textbooks are available in law libraries and in many non-law libraries. Law journals, legal dictionaries, and legal encyclopaedias are available in law libraries. To locate these materials you simply use the library’s catalogue system. To locate material on a particular legal topic, you can also use one of the many legal databases typically accessible through a university library website. One such database is the Attorney-General’s Information Service (AGIS) at www.informit.com.au or via a library website, a database of law journals from Australia, New Zealand and the Asia–Pacific region. ACTIVIT Y 4.4 — RESEARCH

Use the AGIS website to locate a 2007 journal article on the topic of information privacy.

ACTIVIT Y 4.5 — REFLECT

To what extent should Wikipedia be used as a source of information about Australian law? What problems do you see associated with treating Wikipedia as a valid secondary legal material?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  4.1 Why is it important that a businessperson be able to conduct legal research?  4.2 What are primary legal materials?  4.3 What are secondary legal materials?  4.4 What is legislation?  4.5 Where and how do you locate a hard copy of legislation?  4.6 Where and how do you locate legislation online?  4.7 What is case law?  4.8 What is a ‘law report series’?  4.9 What is a ‘case citation’? How is it used to locate a hard copy of a case report? 4.10 Where and how do you locate a case report online? 4.11 What is AustLII? 4.12 Where and how do you locate secondary legal materials?

CHAPTER 4 How to find, understand and use the law  135

4.2 Reading the law LEARNING OBJECTIVE 4.2 Once you have found it, how do you read the law? What parts of a case report or Act of Parliament are important? How do you interpret a legal text?

Once you have found the law you have to be able to read the law, something that is not as straightforward as it might seem. The law is often difficult to read and interpret. Fortunately, however, guidance is available.

The relevant elements The starting point in learning how to read the law is coming to understand the relevant elements of legislation and of a case report.

Legislation There is a substantial degree of similarity between different statutes in the sense that statutes are generally comprised of the same elements and are set out in very similar formats. A complete (and unusually brief) Act of Parliament, the Radio Licence Fees Amendment Act 2007 (Cth) is set out in figure 4.2. RADIO LICENCE FEES AMENDMENT ACT 2007 (N0. 69, 2007) An Act to amend the Radio Licence Fees Act 1964, and for related purposes [Assented to 28 May 2007] The Parliament of Australia enacts: 1  Short title This Act may be cited as the Radio Licence Fees Amendment Act 2007. 2 Commencement This Act commences on the day after it receives the Royal Assent. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1 — Amendment Radio Licence Fees Act 1964 1 Subsection 4(1) (definition of gross earnings) After “service”, insert “or services”. [Minister’s second reading speech made in — House of Representatives on 28 March 2007 Senate on 9 May 2007] FIGURE 4.2

An example of an Act of Parliament

Number

The number of the Act is ‘No. 69, 2007’. This means that this Act was the 69th Act passed by the Commonwealth Parliament in 2007. Title and purpose

The long title of the Act is ‘An Act to amend the Radio Licence Fees Act 1964, and for related purposes’. The long title usually sets out the purpose of the Act. Many Acts now contain an explicit ‘purpose clause’ or ‘objects clause’ that does the same thing. According to section 1 of the Act, the short title is the Radio Licence Fees Amendment Act 2007. This is the title by which the Act is usually known and referred to. Date of assent

The Act was assented to on 28 May 2007. This is the date the Act received Assent from the GovernorGeneral. The date of assent is not the same as the date of commencement of the Act. 136  PART 1 Foundations

Enacting words

The words ‘The Parliament of Australia enacts’ are the enacting words. Enacting words are a formality and not necessary for the validity of legislation. The enacting words in Commonwealth legislation have been simplified in recent years. Previously, the enacting words would have been: BE IT ENACTED by the Queen, the Senate and the House of Representatives of Australia, as follows:-

The enacting words in the Commonwealth of Australia Constitution Act 1900 (Imp) were: 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 the present Parliament assembled, and by the authority of the same, as follows: Commencement

According to section 2 of the Act, the Act commences operation on the day after receiving Royal Assent; that is, on 29 May 2007. As explained in the previous chapter, not every Act contains an explicit commencement date. Sections, subsections and paragraphs

Acts are usually divided into numbered sections for convenience. The sections are numbered consecutively. If the Act is subsequently amended by the insertion of an additional section, then rather than renumber all of the sections the new section number will include a capital letter. For example, if two new sections are inserted between sections 14 and 15 of an Act, the new sections will be numbered ‘14A’ and ‘14B’, and if a new section is subsequently inserted between sections 14A and 14B, it will be numbered ‘14AA’. (One of the most regularly amended Acts, the Income Tax Assessment Act 1936 (Cth), actually contains a section numbered ‘159GZZZZE’.) When referring to a particular section it is common practice to shorten ‘section’ to ‘s.’ , and ‘sections’ to ‘ss.’ . For example, section 2 of the Act would be referred to as ‘s. 2’, and sections 3 to 7 of the Act would be referred to as ‘ss. 3-7’. Larger sections are usually divided into subsections and paragraphs. Subsections are usually consecutive numbers in parentheses; for example, ‘subsection 4(1)’. Paragraphs are usually lower case letters in alphabetical order, for example, ‘paragraph 4(1)(a)’. Sub-paragraphs are usually lowercase Roman numerals: for example, ‘sub-paragraph 4(1)(a)(ii)’. Parts and divisions

Larger Acts are usually divided into parts and divisions: a part may contain a number of divisions and a division will contain a number of sections. Marginal notes

Older Acts often included marginal notes. These were small notes that appeared in the margin of the page next to a section. They briefly described the contents of the section. Marginal notes were inserted by the government printer, not parliament, and as they were not an ‘official’ part of the Act they could not be used in interpreting the Act. Definitions sections

Many Acts contain a definitions section. This is a section early in the Act that sets out definitions of the terms frequently used in the Act, similar to a glossary. If when reading an Act you are unsure of the meaning of a term the first thing you should do is check the definitions section. Larger Acts may include a definitions section at the beginning of certain parts and divisions. Such definitions apply only to the appearance of the term being defined in that part or division. Definitions in an Act can be either comprehensive or inclusive. A comprehensive definition usually takes the form ‘X means Y’; in this case the description ‘Y’ is complete and anything that does not satisfy ‘Y’ is not ‘X’. For example, ‘corporation’ is defined in the Competition and Consumer Act 2010 (Cth) as follows: corporation means 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; CHAPTER 4 How to find, understand and use the law  137

(c) is incorporated in a Territory; or (d) is the holding company of a body corporate of a kind referred to in paragraph (a), (b) or (c).

A body corporate that does not satisfy one of the descriptions in paragraphs (a), (b), (c) or (d) is not a corporation within the meaning of the Act. An inclusive definition usually takes the form ‘X includes Y’; in this case, the description ‘Y’ is an example of ‘X’ but the definition of ‘X’ is otherwise left open and something that does not satisfy ‘Y’ may still be ‘X’. For example, ‘goods’ is defined in the Competition and Consumer Act 2010 (Cth) as follows: goods includes: (a) ships, aircraft and other vehicles; (b) animals, including fish; (c) minerals, trees and crops, whether on, under or attached to land or not; and (d) gas and electricity.

Things that do not satisfy any of the descriptions in paragraphs (a), (b), (c) or (d) may still be ‘goods’ within the meaning of the Act. Schedules

The content of legislation is often complex, and in an effort to simplify the layout of an Act a parliamentary draftsperson may move procedural provisions, such as fees and charges, forms, technical descriptions and lists, into a schedule to the Act. The schedules are typically located at the end of the Act. ACTIVIT Y 4.6 — RESEARCH

Download a copy of the Competition and Consumer Act 2010 (Cth) and answer the following questions. 1. What is the number of the Act? 2. What is the long title? 3. What is the object of the Act? 4. What is the commencing date? 5. What is the heading of Part V of the Act? 6. How many divisions are in Part V of the Act? 7. Which section is the definitions section? 8. How is the word ‘competition’ defined for the purposes of the Act? Is this a comprehensive definition or an inclusive definition?

Case reports A case report can be anything from half a page to more than 500 pages, depending upon how many judges are expressing their opinion and the complexity of the case itself. When a judge makes their decision, they do not simply give the decision; they also take the time to explain how they reached their decision. They explain which evidence was accepted, and why; which evidence was rejected, and why; which legal principles were relied upon in reaching the decision, and why; and which legal principles, although raised by the parties’ lawyers, were not relied upon, and why. If there is more than one judge, each judge may have reached their final decision by a different process of reasoning, and although occasionally judges provide joint judgments, they are just as likely to each provide their own individual judgments. Not all of the written decision is binding law. The only part of a judge’s written decision that becomes binding precedent is the actual reason for the decision about the main question of law, that is, the legal principle upon which the court’s final decision was based. This is known as the ratio decidendi, or simply the ‘ratio’. This might only be a sentence or a paragraph. The balance of the written decision, which makes up the majority of the written decision, is known as obiter dicta, or simply ‘obiter’. Obiter is not binding on other judges, but may be persuasive and may even become binding precedent if adopted and followed by later courts. 138  PART 1 Foundations

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

Hedley Byrne & Co Ltd (HB), an advertising agency, wished to check the financial position of a company, Easipower, before contracting with them. HB contacted Easipower’s bank, Heller & Partners Ltd (H&P), and asked them for their opinion. H&P responded with a letter headed ‘Confidential. For your private use and without responsibility on the part of the bank.’ The letter stated that in effect Easipower was financially sound. HB relied on the reference, and when HB lost money because Easipower was not financially sound, HB sued H&P in the tort of negligence. The court decided that H&P was not liable because of the disclaimer at the head of their letter of advice. However, the court went on to say that in the absence of such a disclaimer, in certain circumstances a person giving advice owes a person relying on the advice a duty of care.

The important point about the decision in Hedley Byrne v Heller is that the statement about the potential liability of advisers, although obiter dicta and therefore not binding on other courts, was in fact adopted by other courts and has since become law. The challenge when reading a case report is identifying the ratio of the decision. It is rare for the ratio to be clearly identified by the judge. A careful reading of the entire written decision is usually required. Fortunately, you will be assisted by the possibility that judges in subsequent cases have identified the ratio on your behalf. A text such as this will usually identify the ratio on the reader’s behalf when presenting case summaries. Figure 4.3 is an example of a relatively short case report. BAILII Citation Number: [1953] EWCA Civ 6 IN THE SUPREME COURT OF JUDICATURE COURT OF APPEAL Royal Courts of Justice, 5th February 1953 Before: LORD JUSTICE SOMERVELL, LORD JUSTICE BIRKETT, and LORD JUSTICE ROMER. Between THE PHARMACEUTICAL SOCIETY OF GREAT BRITAIN v BOOTS CASH CHEMISTS (SOUTHERN) LTD. (Transcript of the Shorthand Notes of The Association of Official Shorthandwriters Ltd., Room 392, Royal Courts of Justice, and 2, New Square, Lincoln’s Inn, London, W.C.2.) MR H. V. LLOYD-JONES, Q.C. and MR H. THOMAS DEWAR (instructed by Mr A.C. Castle) appeared as Counsel on behalf of the Appellants (Plaintiffs). MR G. G. BAKER, Q.C. and MR G. D. EVERINGTON (instructed by Messrs Masons) appeared as Counsel on behalf of the Respondents (Defendants). HTML VERSION OF JUDGMENT Crown Copyright © FIGURE 4.3

Case report example: Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd1 (continued)

1 British and Irish Legal Information Institute, The Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd. [1953] 1 All ER 482; [1953] EWCA Civ 6, www.bailii.org.

CHAPTER 4 How to find, understand and use the law  139

FIGURE 4.3

(continued)

LORD JUSTICE SOMERVELL: This is an appeal from the Lord Chief Justice on a Case Stated on an agreed statement of facts raising a question under section 18(1)(a)(iii) of the Pharmacy and Poisons Act, 1933. The Plaintiffs are the Pharmaceutical Society who were incorporated by Royal Charter. One of their duties is to take all reasonable steps to enforce the provisions of the Act. The provision in question is: Subject to the provisions of this part of this Act it shall not be lawful for a person to sell any poison included in Part I of the Poisons List, unless  .  .  . (iii) the sale is effected by, or under the supervision of, a registered pharmacist. The Defendants, Messrs Boots Cash Chemists (Southern) Limited have recently introduced into one or more of their premises what is called a self-service system. We have a number of photographs and one can see a number of articles such as toilet articles, laxatives, ointments and tonics, the kind of articles which one normally finds in one of Messrs Boots’ shops, laid out on shelves. The customer when he comes in is invited to take a receptacle and goes round and can choose the articles which he wants. He then goes to one of two desks at the end of the room, and there, admittedly, there is a registered pharmacist, able to carry out, subject to the point which I will mention in a moment, such duties as are involved in his position. It is not disputed that in a chemist’s shop where this system does not prevail a man may go in and ask a young lady, who will not herself be a registered pharmacist, for one of these articles on the List and the transaction may be completed and the article paid for, although the registered pharmacist, who will no doubt be on the premises, will not know anything himself of the transaction unless the assistant serving the customer, or the customer, requires to put a question to him. It is right that I should emphasise, as the Lord Chief Justice did, that these are not dangerous drugs. They are things which contain very small proportions of poison and I imagine many of them are the type of drug which has a warning as to what doses are to be taken. They are drugs which can be obtained under the law without a doctor’s prescription. The point which is taken by the Plaintiffs is this: It is said that the purchase is complete if and when a customer going round the shelves takes an article and puts it in the receptacle which he or she is carrying, and therefore if that is right when the customer comes to the pay desk, having completed the tour of the premises, the registered pharmacist, if so minded, has no power to say: “This drug ought not to be sold to this customer”. Whether and in what circumstances he would have that power we need not enquire, but one can, of course, see that there is a difference if supervision can only be exercised at a time when the contract is completed. I agree with the Lord Chief Justice in everything he says, but I will put it shortly in my own words. Whether that is a right view depends on what are the legal implications of this layout, the invitation to the customer. Is it to be regarded as an offer which is completed and both sides bound when the article is put into the receptacle, or is it to 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, coming up to the assistant and saying “I want this”? The assistant in 999 times out of 1,000 says “That is all right”, and the money passes and the transaction is completed. I agree entirely with what the Lord Chief Justice says and the reasons he gives for his conclusion that in the case of the 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 shop-keeper or someone on his behalf accepts that offer. Then the contract is completed. I can see no reason at all, that being I think clearly the normal position, for drawing any different implication as a result of this layout. The Lord Chief Justice, I think, expressed one of the most formidable difficulties in the way of the suggestion when he pointed out that, if the Plaintiffs are right, once an article has been placed in the receptacle the customer himself is bound and he would have no right without paying for the first article to substitute an article which he saw later of the same kind and which he perhaps preferred. I can see no reason for implying from this arrangement which the Defendants have referred to any implication other than that which the Lord Chief Justice found in it, namely, that it is a convenient method of enabling customers to see what there is and choose and possibly put back and substitute articles which they wish to have and then go up to the cashier and offer to buy what they have

140  PART 1 Foundations

so far chosen. On that conclusion the case fails, because it is admitted that then there was supervision in the sense required by the Act and at the appropriate moment of time. For these reasons, in my opinion, the appeal should be dismissed. LORD JUSTICE BIRKETT: I am of the same opinion. The facts with which we have to deal are very clearly stated in the agreed statement of facts. The argument upon those facts has been very clearly stated by Mr Lloyd-Jones. I think clearest of all was the Judgment of the Lord Chief Justice, with which I agree. In view of something which I said while the argument was proceeding, I should like to add that under section 25 of the Pharmacy and Poisons Act, 1933, it is the duty of the Pharmaceutical Society of Great Britain, by means of inspection and otherwise, “to take all reasonable steps to enforce the provisions of Part I of this Act” — that really deals with the status of the registered pharmacist — “and to secure compliance by registered pharmacists and authorised sellers of poisons with the provisions of Part II of this Act Part II of the Act, which is headed “Poisons” in section 18(1)(a)(iii), says “it shall not be lawful for a person to sell any poison included in Part I of the Poisons List, unless (i) he is an authorised seller of poisons; and …. (iii) the sale is effected by, or under the supervision of, a registered pharmacist”. This action has been brought by the Pharmaceutical Society in pursuance of that duty which is laid upon them by statute, and the precise point is set out in the subsection which I have read. The short point of the matter was, at what point of time did the sale in this particular shop at Edgware take place? My Lord has explained the system which has been introduced into that shop (and possibly other shops since) in March of 1951. The two ladies in this case, Miss Mainwaring and Miss Marrable, who went into that shop, each took a particular package containing poison from the particular shelf, put it into their basket, came to the exit and there paid. It is said upon the one hand that when the customer takes the package from the poison section and puts it into her basket the sale there and then takes place. On the other hand, it is said the sale does not take place until that customer who has placed that package in the basket comes to the exit. The Lord Chief Justice dealt with the matter in this way, and I would like to adopt these words: “It seems to me therefore, applying common sense to this class of transaction, there is no difference merely because a self-service is advertised. It is no different really from the normal transaction in a shop. I am quite satisfied it would be wrong to say the shopkeeper is making an offer to sell every article in the shop to any person who might come in and that he can insist by saying ‘I accept your offer’”. Then he goes on to deal with the illustration of the bookshop and continues: “Therefore, in my opinion, the mere fact that a customer picks up a bottle of medicine from the shelves in this case does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy. I daresay this case is one of great importance, it is quite a proper case for the Pharmaceutical Society to bring, but I think I am bound to say in this case the sale was made under the supervision of a pharmacist. By using the words ‘The sale is effected by, or under the supervision of, a registered pharmacist’, it seems to me the sale might be effected by somebody not a pharmacist. If it be under the supervision of a pharmacist, the pharmacist can say ‘You cannot have that. That contains poison’. In this case I decide, first that there is no sale effected merely by the purchaser taking up the article. There is no sale until the buyer’s offer to buy is accepted by the acceptance of the money, and that takes place under the supervision of a pharmacist. And in any case, I think, even if I am wrong in the view I have taken of when the offer is accepted, the sale is by or under the supervision of a pharmacist”. I agree with that and I agree that this appeal ought to be dismissed. LORD JUSTICE ROMER: I also agree. The Lord Chief Justice observed that, on the footing of the Plaintiff Society’s contention, if a person picked up an article, once having picked it up, he would never be able to put it back and say he had changed his mind. The shopkeeper would say: “No, the property has passed and you will have to pay”. If that were the position in this shop and similar shops, and that position was known to the general public, I should imagine the popularity of those shops would wane a good deal. In fact, I am satisfied that that is not the position and that the articles, even though they are priced and put in shops like this, do not represent an offer by the shopkeeper which can be accepted merely by the picking up of the article in question. I quite agree with the reasons on which the Lord Chief Justice arrived at that conclusion and which my brother Birkett has just referred to, and to those observations I can add nothing of my own I agree that the appeal fails. (Appeal dismissed with costs: leave to appeal refused)

CHAPTER 4 How to find, understand and use the law  141

The beginning of the case report sets out the following information. •• The court in which the case was heard was the Court of Appeal, Supreme Court of Judicature. This is a UK court. •• The date of the decision was 5 February 1953. •• The judges before whom the case was heard were Lord Justice Somervell, Lord Justice Birkett, and Lord Justice Romer. •• The names of the parties were the Pharmaceutical Society of Great Britain (the appellant, and the original plaintiff) and Boots Cash Chemists (Southern) Ltd (the respondent, and the original defendant). Each of the three judges gave a separate judgment. All, however, agreed on the ultimate conclusion that the appeal should be dismissed, and the reasons for each decision were largely the same. How would you work out the reason for the decision, the ratio decidendi? You would begin by identifying the material facts and the legal issue or main question of law. The material facts are that the Pharmacy and Poisons Act 1933 prohibits the sale of certain drugs unless the sale is effected by, or under the supervision of, a pharmacist. Boots Cash Chemists have set up their stores in such a way that customers select the goods they wish to purchase from the shelves and take the goods to the pay desk to pay for them. The legal issue is whether the contract between shop and customer is formed, and the sale takes place, when the customer selects the goods or when they take them to the pay desk. If it is when the customer selects the goods, then the sale is not taking place under the supervision of the pharmacist and the Pharmacy and Poisons Act 1933 is contravened. But if it is when the customer pays for the goods then the Act is not contravened. Each judge decided that the Act was not contravened, and the reason for their decision — the ratio decidendi — was this: (I)n the case of the 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 that he needs, the shop-keeper or someone on his behalf accepts that offer.

The rest of the decision of each judge, including the explanations of the consequences of their decision and the possible consequences of deciding that a contract is formed as soon as a customer takes the goods from the shelf, is obiter dicta. CAUTION!

Not all of the court’s written decision is binding law. Only the reason for the decision or ratio decidendi  is  binding on other courts. The rest of the written decision may be persuasive, but it is not binding.

ACTIVIT Y 4.7 — RESEARCH

Download the case Donoghue v Stevenson [1932] AC 562 and answer the following questions. 1. In what court was the case heard? 2. What was the date of the decision? 3. What were the names of the judges who heard the case? 4. What were the full names of the parties? Who was the appellant and who was the respondent? 5. What were the material facts of the case? 6. What was the main legal issue? 7. What was the decision of the court? 8. Focusing on Lord Atkin’s decision, what was the ratio decidendi?

142  PART 1 Foundations

Interpreting the law You have learned how to recognise the important elements of the legislation or case report. Now you must ensure that you are able to understand and interpret what you read.

The need for interpretation Legal writing is notoriously difficult to read and understand. Legal texts — particularly older texts — are often long, complex, repetitive, badly organised, unnecessarily elaborate and confusing. For example, a landlord may wish to impose upon a tenant the responsibility for keeping the leased property in good repair. The lease could simply state that ‘the tenant must repair the premises’. Legally, this would suffice: the word ‘premises’ would be defined elsewhere in the lease, and there is no need to define the term ‘repair’, as it is an ordinary English word the meaning of which has been explained in many judicial decisions. Yet consider the wording that appeared in the lease in the English case Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1980] QB 12 at 15: [The tenant shall] when where and so often as occasion requires well and sufficiently  .  .  .  repair renew rebuild uphold support sustain maintain pave purge scour cleanse glaze empty amend and keep the premises and every part thereof  .  .  .  and all floors walls columns roofs canopies lifts and escalators  .  .  .  shafts stairways fences pavements forecourts drains sewers ducts flues conduits wires cables gutters soil and other pipes tanks cisterns pumps and other water and sanitary apparatus thereon with all needful and necessary amendments whatsoever  .  .  .

The language used by judges in case decisions is often no less obscure in that it is frequently very formal and full of legal terminology. Older decisions with their outdated vocabulary can be particularly challenging. And judges and laypersons alike have been struggling with the language used in legislation for many years. Consider the following extract from the Income Tax Assessment Act 1936 (Cth): A car is a predecessor of a second car if a third car is a predecessor of the second car and the first-mentioned car is a predecessor of the third car (including a case where the first-mentioned car is a predecessor of the third car by another application or applications of this paragraph).2

The struggle to interpret legislation was colourfully described as follows by Harman LJ in Davy v Leeds Corporation [1964] 1 WLR 1218 at 1224–5: 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.

There are a number of reasons why the language in legal texts in general, and in legislation in particular, can be difficult to read. •• When legislation is drafted, it is often done in as detailed a manner as possible to make it more difficult for judges and citizens to misinterpret the parliament’s intentions. Language is, by its very nature, imprecise, and to avoid possible misunderstandings and misinterpretations legislation is drafted to be precise, which often leads to clarity being sacrificed. ACTIVIT Y 4.8 — REFLECT

In the words of one US judge, ‘few words possess the precision of mathematical symbols’.3 What does this statement mean in the context of interpretation of legal texts?

2 Income Tax Assessment Act 1936 (Cth) s 82KTJ (2)(b) (subsequently repealed). 3 Boyce Motor Lines, Inc. v. United States [1952] 342 US 337; (1952) 72 SCt 329.

CHAPTER 4 How to find, understand and use the law  143

•• Lawyers avoid having to draft completely new documents whenever possible, and prefer instead to use standard documents or ‘precedents’, modifying them as appropriate to suit the particular circumstances. The use of very detailed precedents covering a wide range of possible scenarios makes this process easier for the lawyer but often results in the creation of needlessly lengthy legal documents. •• Lawyers historically charged their clients on the basis of the length of a legal document, so the longer the document the more lucrative it was for the lawyer. Although this charging practice is no longer common, many precedents developed during the time when this practice was common are still in use. •• There are many Latin terms used in legal writing, such as ratio decidendi. This is because Latin was once the ‘language of learning’, and many of the terms developed during this time have been retained. There are also many French terms such as tort and chose. •• Many of the English terms used in legal language have meanings that are very different from their everyday meaning. Examples include ‘consideration’ (the price paid for another person’s promise), ‘frustration’ (an unforeseen event that brings a contract to an end) and ‘assault’ (the threat of physical harm, rather than the harm itself). In recent years there has been a ‘plain language movement’ that seeks to address many of these traditional problems with legal writing. These days, lawyers and parliamentary draftspersons are encouraged to use language that is clear, direct and simple, so that the reader will be able to understand a document quickly and easily, rather than waste time trying to make sense of it. Law reform commissions in a number of countries have issued reports urging the adoption of a plain language drafting style.  Parliamentary counsel in most Australian jurisdictions now, consciously, adopt a plain language style. And statutes in many jurisdictions now require certain documents to be in plain language; for example, consumer credit legislation requires contracts and notices by credit providers to be ‘easily legible’ and ‘clearly expressed’.4 ACTIVIT Y 4.9 — REFLECT

What are the advantages and disadvantages of a plain language approach to legal drafting of contracts and legislation?

Statutory interpretation A number of general and specific rules regarding the reading and interpretation of legal texts have been developed in the context of statutory interpretation (see figure 4.4). Statutory interpretation is the interpretation by the courts of legislation when called upon to decide whether or not the legislation applies to a particular set of facts or whether a particular statutory rule has been contravened. Many of these rules and principles apply not only to statutory interpretation but also to the reading and interpretation of other legal texts such as contracts.

Statutory interpretation

Literal approach

FIGURE 4.4

Contextual approach

Purposive approach

Common law presumptions

Rules of statutory interpretation

4 National Consumer Credit Protection Act 2009 (Cth) Schedule 1 (‘National Credit Code’) s 184.

144  PART 1 Foundations

Statutory rules

The interpretation of statutes and the analysis of case law should not be thought of as two separate activities. Case law plays an important role in the interpretation of legislation. Once a judge in a superior court has decided how a particular legislative provision must be interpreted, that interpretation becomes precedent and is therefore binding on all lower courts until overruled by a higher court. The importance of statutory interpretation to the modern practice of law cannot be overstated. Justice Leeming recently explained as follows: What is commonly thought of as ‘common law’, namely, the various bodies of judge-made law, including equity and admiralty, taught in law schools and written about in law books is and always has for the most part been sourced in statute and is unintelligible without reference to statute. Most of the time, as Windeyer J said, ‘it is misleading to speak glibly of the common law in order to compare and contrast it with a statute’. It is misleading because it distracts attention from what Gummow J called the ‘supreme importance of statute law’ in most areas of conduct (for example, taxation, company law, aviation law, occupational health and safety, industrial law, bills of exchange, family law, crime, consumer protection, migration, partnership, bankruptcy, real and personal property, assignment, defamation, not to mention civil and criminal procedure). As Finn J has said, ‘we live in an age of statutes and  .  .  .  it is statute which, more often than not, provides the rights necessary to secure the basic amenities of life in modern society.’  .  .  .  It is trite to say that most of what lawyers advise, counsel argue, and courts decide, is the construction and application of statutes.5

The literal approach The traditional approach to interpreting legislation is to focus upon the actual words used in the legislation and interpret them literally (the ‘literal rule’) unless a literal interpretation is clearly absurd or inconsistent with the rest of the statute (the ‘golden rule’). The literal rule

According to the literal rule, when reading a statute a court should interpret the statute literally, giving the words and phrases in the statute their ordinary and natural meanings. In attempting to ascertain the literal meaning of a word or phrase in a statute, it is not uncommon for a court to refer to a dictionary such as the Macquarie Dictionary or the Oxford English Dictionary. Reading something literally is very different from the way you would usually read a text. Normally when you read something like a book or a newspaper article you try to work out what the author intended or what they meant to say. When you read a text literally, you disregard what you think the author might have meant and you focus instead upon the actual words used. You ask yourself ‘what does this mean literally’, and in interpreting each word and each phrase you give them their ordinary, natural meaning. For example, consider the sentence: ‘Ray’s hands were as cold as ice’. You would normally interpret this to mean that Ray’s hands were rather cold, but not actually freezing cold; that is likely to be what the author intended. But if you interpret the sentence literally, it means that Ray’s hands were a temperature less than zero; that is, frozen solid. Sometimes, by reading a statute literally, a court ends up with an interpretation that is clearly not what the legislature intended. Here is a simplistic example. A statute states as follows: A motorist who exceeds the speed limit by between 1 and 10 kilometres per hour is to be fined $100, and a motorist who exceeds the speed limit by between 10 and 20 kilometres per hour is to be fined $200.

On a literal reading of the text, a motorist who exceeds the speed limit by exactly 10 kilometres per hour would not be fined at all.

5 Mark Leeming, ‘Theories and Principles Underlying the Development of the Common Law: The Statutory Elephant in the Room’ (2013) 36(3) UNSW Law Journal 1002, 1004–5.

CHAPTER 4 How to find, understand and use the law  145

The literal approach is the traditional approach to the interpretation of texts used by lawyers and judges. When lawyers speak of finding loopholes in a law they are referring to the practice of reading a legal text literally and looking for instances where, on such a literal reading, the law does not apply as intended, or at all. Fisher v Bell [1961] 1 QB 394

An English statute stated that ‘any person who sells, lends or gives a flick knife to any other person commits an offence’. Bell displayed a flick knife with a price tag in the window of his shop. The court decided that Bell had not committed an offence. It interpreted the statute literally, and decided that Bell had not actually sold a flick knife.

CAUTION!

When reading legislation or other legal writing, remember to begin by reading the text as literally as possible.

Lawyers and judges defend the literal approach to interpretation by arguing that it is the responsibility of the author of the statute to draft the text carefully, and if a literal reading reveals gaps in the law or leads to a result contrary to the author’s intention, it is the fault of the author, not the interpreter. According to Higgins J in Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920) 28 CLR 129: The fundamental rule of interpretation .  .  . is that a statute is to be expounded according to the intent of the parliament that made it; and that intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means in its ordinary and natural sense, it is our duty to obey that meaning, even if we think the result to be inconvenient or impolitic or improbable.

There are, however, instances where a literal reading leads to a clearly absurd result, or does not clarify the meaning of the text at all. A traffic sign with the words ‘no standing’ would, if interpreted literally, prohibit people remaining on their feet near the sign, but would not prohibit parking near the sign. In such circumstances you would turn to the golden rule. The golden rule

According to the golden rule, if reading a text literally leads to an absurd result, the court should modify the literal meaning so as to avoid the absurdity. In other words, when interpreting legislation the court should not be too literal. According to Lord Wensleydale in Gray v Pearson (1857) 6 HLCas 61, 106; 10 ER 1216, 1234: 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 with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified so as to avoid that absurdity or inconsistency, but no further.

For example, if you are about to cross the road at a pedestrian crossing, and the signal is flashing ‘don’t walk’, does that mean that it is okay for you to run or hop or skip across the road? After all, you would not be ‘walking’ in a literal sense. This would be an example of being too literal. ‘Don’t walk’ in this situation does not literally mean ‘don’t walk’, it means ‘do not attempt to cross the road’. 146  PART 1 Foundations

Adler v George [1964] 2 QB 7

Section 3 of the Official Secrets Act 1920, 10 & 11 Geo 5, c 75 (a UK Act) stated that it was an offence for any person to obstruct a member of Her Majesty’s forces ‘in the vicinity of any prohibited place’. Adler gained access to an RAF station — a ‘prohibited place’ within the meaning of the Act — and obstructed one of the security guards. He was charged with contravening s 3. Adler argued that he had not obstructed the guard ‘in the vicinity of’ a prohibited place, since he had actually obstructed the guard in the prohibited place. The court rejected such a literal approach, applied the golden rule and interpreted s 3 as meaning in or in the vicinity of a prohibited place.

Lee v Knapp [1967] 2 QB 442

Section 77 of the Road Traffic Act 1960, 8 & 9 Eliz 2, c16 (a UK Act) stated that ‘If in any case, owing to the presence of a motor vehicle on a road, an accident occurs whereby  .  .  .  damage is caused to a vehicle  .  .  .  other than that motor vehicle, the driver of the motor car shall stop  .  .  .’ .  Knapp was charged with contravening s 77 after leaving the scene of a car accident. Knapp argued that he did stop: he stopped momentarily when he collided with the other vehicle. The court rejected such a literal interpretation of the section, and decided that the word ‘stop’ should be interpreted as requiring the driver to stop at the scene of the accident for long enough to exchange contact details and other necessary information with the other people involved in the accident.

The golden rule is often used when there is an obvious error or omission in the text.

The contextual approach Taking a literal approach to the interpretation of legislation is not always effective. There are many, many words and phrases in the English language that have more than one literal meaning. Consider, for example, the following statutory provision: Spectators at a tennis match are not permitted to take glasses into the seating area.

Does the word ‘glasses’ refer to eyeglasses or drinking glasses? Interpreting the section literally is of no use, because the literal interpretation of the word ‘glasses’ includes both of those meanings. It would be helpful here if you were able to consider the context of the statutory provision. If you learned that the adjacent statutory provision referred to whether drinks should be served in glasses at tennis matches, you would know from the context that the word ‘glasses’ in the above provision referred to drinking glasses. In recent years the courts have tended to favour a more contextual approach to the interpretation of statutory provisions. According to this approach, rather than interpret the words used in an Act individu­ ally and in isolation from each other, a court should take into account the various contexts of those words. As the majority of the High Court explained in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 381, ‘the process of construction must always begin by examining the context of the provision that is being construed’. In the following sections we describe five contexts that should be considered when interpreting the words used in a statute: •• the immediate context, •• the Act as a whole, •• other legislation, •• the prior law, and •• the ‘mischief’ being remedied. Immediate context

The first context to consider when interpreting a word or phrase in a statute is the immediate context: that is, the other words and phrases used in the same section or surrounding sections in the Act. CHAPTER 4 How to find, understand and use the law  147

According to the rule of interpretation known as the context rule (sometimes referred to by its Latin name, noscitur a sociis), the meaning of a word or phrase is to be derived from its context. In the English case of Bourne v Norwich Crematorium Ltd [1967] 2 All ER 576, Stamp J explained the rule as follows: English words derive colour from those which surround them. Sentences are not mere collections of words to be taken out of the sentence, defined separately by reference to the dictionary or decided cases, and then put back again into the sentence with the meaning which you have assigned to them as separate words, so as to give the sentence or phrase and meaning which as a sentence or phrase it cannot bear without distortion of the English language. R v Harris (1836) 7 Car & P 446; 173 ER 198

Harris was charged with contravening an Act that made it an offence if ‘any person unlawfully and maliciously shall shoot at any person, by drawing a trigger, or in any other manner, attempt to discharge any kind of loaded arms at any person, or shall unlawfully and maliciously stab, cut or wound any person with intent in any of the cases aforesaid to maim, disfigure or disable such person or to do some other grievous bodily harm to such person  .  .  .  ’. Harris was accused of wounding another female by biting off the end of her nose. The court applied the context rule and decided that the word ‘wound’ in the above Act did not literally mean wound, but was limited by the context to wounding ‘inflicted with some instrument, and not by the hands or teeth’.

Another rule of interpretation that emphasises the importance of the immediate context of the words in a statute is the class rule. According to the class rule (also known by its Latin name ejusdem generis) where two or more specific words are followed by general words, the general words are limited to the class created by the specific words. For example, if you see a phrase such as ‘beer, wine, spirits and other liquids’ in a statute or legal document, you should interpret the word ‘liquids’ not literally, but as limited to the class established by the previous specific words ‘beer, wines, spirits’, that is, alcoholic beverages. The People (Director of Public Prosecutions) v Farrell [1978] IR 13

Section 30 of the Offences Against the State Act 1939 (Ireland) stated that a suspect could be detained for questioning at ‘Garda Síochána Station, a prison, or some other convenient place’. Farrell was detained in a police car for a number of hours. The court applied the class rule and decided that ‘some other convenient place’ was limited to some kind of building and therefore did not include a police car. The Act as a whole

A statutory provision should be interpreted in the context of the Act in which it appears. Recall the explanation of the literal rule offered by Higgins J (see above) in Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920) 28 CLR 129, 161-2 (emphasis added): The fundamental rule of interpretation .  .  . is that a statute is to be expounded according to the intent of the parliament that made it; and that intention has to be found by an examination of the language used in the statute as a whole.

For example, if a court is reading a section about ‘students’ in the University of South Australia Act 1990 (SA), it should interpret the word ‘student’ not as referring to literally any type of student but in the context of the Act as a whole and as, therefore, referring to University of South Australia students. When interpreting a statutory provision in the context of the Act as a whole, the court takes into account various elements of the Act including the long and short titles, the preamble, the objects clause, the definitions section, other sections of the Act, schedules to the Act and so on. Other legislation

If a word or phrase is defined or interpreted in a particular way in one statute, it is not necessarily interpreted as having the same meaning in another statute. However, where the parliament passes a 148  PART 1 Foundations

series of statutes all dealing with the same or similar subject matter, the court is likely to interpret words and phrases common to all of the statutes in a similar way. As Kirby P explained in Commissioner of Stamp Duties v Permanent Trustee Co Ltd (1987) 9 NSWLR 719, 724, ‘We should presume that Parliament intended its legislation to operate rationally, efficiently, and justly, together’. The prior law

The courts occasionally take into consideration the law that existed prior to the passing of the statute in question when interpreting a particular statutory provision. This is more likely to be the case when the statute has been passed to replace a body of common law rules; the court may in the event of uncertainty regarding the meaning of a particular statutory provision refer back to the common rules for guidance. The mischief being remedied

According to the mischief rule, in the event of an ambiguity in a statutory provision, the court should consider the problem or ‘mischief’ the statute was intended to address. The mischief rule was first stated in Heydon’s Case (1584) 3 Co Rep 7a, 7b; 76 ER 637, 638: [F]or the sure and true interpretation of all statutes in general, (be they penal or beneficial, restrictive or enlarging of the common law), four things are to be discerned and considered: 1st What was the common law before the making of the Act. 2nd. What was the mischief and defect for which the common law did not provide. 3rd. What remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth. And 4th. The true reason of the remedy; and then the office of all the Judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for the continuance of the mischief  .  .  .  and to add force and life to the cure and remedy, according to the true intent of the makers of the Act  .  .  . Smith v Hughes [1960] 2 All ER 859

According to the Street Offences Act 1959, 7 & 8 Eliz 2, c57 (a UK Act), it was a crime for prostitutes to ‘loiter or solicit in the street for the purposes of prostitution’. The defendants were calling to men in the street from balconies and tapping on windows. They claimed they were not guilty as they were not in the ‘street’. The court applied the mischief rule and decided that they were guilty because the intention of the Act was to remedy the mischief of harassment from prostitutes.

With the growing emphasis by the courts upon a literal approach, the mischief rule fell into disuse, but it has now been revived in the form of the purposive approach.

The purposive approach The third general approach to statutory interpretation is known as the purposive approach: when interpreting a statutory provision, the court should refer to the apparent purpose of the parliament when passing the statute. The first two approaches, the literal approach and the contextual approach, are common law rules, that is, they were developed by judges. This third approach was created and promoted by the legislature. Each parliament in Australia has passed an Interpretation Act that contains a number of rules relating to the interpretation of legislation (see table 4.3). When interpreting Commonwealth legislation you should refer to the Commonwealth Interpretation Act, when interpreting Tasmanian legislation you should refer to the Tasmania Interpretation Act, and so on. More will be said later about these Interpretation Acts, but for now the relevant provision is that relating to the purposive approach. The following is from s 15AA of the Commonwealth Acts Interpret­ ation Act 1901 (Cth): In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object underlying the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation. CHAPTER 4 How to find, understand and use the law  149

TABLE 4.3

Interpretation legislation

Jurisdiction

Legislation

Commonwealth

Acts Interpretation Act 1901 (Cth)

Australian Capital Territory

Legislation Act 2001 (ACT)

New South Wales

Interpretation Act 1987 (NSW)

Northern Territory

Interpretation Act 1978 (NT)

Queensland

Acts Interpretation Act 1954 (Qld)

South Australia

Acts Interpretation Act 1915 (SA)

Tasmania

Acts Interpretation Act 1931 (Tas)

Victoria

Interpretation of Legislation Act 1984 (Vic)

Western Australia

Interpretation Act 1984 (WA)

Similar provisions exist in each of the State and Territory interpretation Acts.6 ACTIVIT Y 4.10 — RESEARCH

Consult your State or Territory’s Interpretation Act, and locate the equivalent of s 15AA. Does the section in your legislation differ in any way from the section in the Commonwealth legislation? If so, how does it differ?

The purposive approach provisions in the various Interpretation Acts were enacted in the 1980s following public criticism of the courts for what were seen as inappropriately literal approaches to the interpretation of legislation — particularly taxation legislation. Use of the purposive approach

The purposive approach can be criticised as an inappropriate and possibly even unconstitutional (i.e. contrary to the doctrine of separation of powers) attempt by the legislature to intrude upon the judiciary’s role in the interpretation of legislation. Nevertheless, courts today are clearly willing to refer to the intentions of the legislature when interpreting legislation. Some insist that the purposive approach should be used only to resolve uncertainties or ambiguities in the text, and that where the words of the text are clear and unambiguous, the courts should continue to interpret them literally. In Re Bolton; Ex Parte Beane (1987) 162 CLR 514, the High Court said: It is always possible that through oversight or inadvertence the clear intention of the Parliament fails to be translated into the text of the law. However unfortunate that may be when it happens, the task of the court remains clear. The function of the court is to give effect to the will of Parliament as expressed in the law.

Others insist that the purposive approach has supplanted the literal approach and should be used even if there is no uncertainty or ambiguity. According to Dawson J of the High Court, writing with reference to the Victorian equivalent of s 15AA in Mills v Meeking (1990) 169 CLR 214, 235: [T]he literal rule of construction, whatever the qualifications with which it is expressed, must give way to a statutory injunction to prefer a construction which would promote the purpose of an Act to one which would not, especially where the purpose is set out in the Act. Section 35 of the Interpretation of Legislation Act must, I think, mean that the purposes stated in Pt 5 of the Road Safety Act are to be taken into account in construing the provisions of that Part, not only where those provisions on their face offer more than one construction, but also in determining whether more than one construction is open  .  .  .. 6 Legislation Act 2001 (ACT) s 139; Interpretation Act 1987 (NSW) s 33; Interpretation Act 1978 (NT) s 62a; Acts Interpretation Act 1954 (Qld) s 14a; Acts Interpretation Act 1915 (SA) s 22; Acts Interpretation Act 1931 (Tas) s 8a; Interpretation of Legislation Act 1984 (Vic) s 35(a); Interpretation Act 1984 (WA) s 18.

150  PART 1 Foundations

However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to effectuate those purposes and it must be consistent with the wording otherwise adopted by the draftsman. Section 35 requires a court to construe an Act, not to rewrite it, in light of its purposes.

According to Justice John Bryson, writing in 1992 with reference to the NSW equivalent of s 15AA: [T]he Purposive Approach is now appropriately ready at the lips of those interpreting legislation. But this is not to say at all that the courts do not have the concern which they always had, and should have, with literal meaning, the very text and the search for precision if it is to be found. The Purposive Approach has not led us into an era of clarity or ready solutions, and divisions of opinion and dissents continue. When counsel talk about the Purposive Approach, what they usually want is a small re-writing, a minor modification or a few extra words to smooth out a text that is fairly obviously awkward or incomplete. They do not usually ask for any sweeping change, and they hardly could. The courts’ response is highly particular to the statute and there is a close examination of its text. It is a human process, as it always will be; it is not a mechanical process. Section 15AA certainly has not brought in an age when the letter fades away and courts expound the spirit of the laws.7

A suggested relationship between the literal approach, the contextual approach and the purposive approach is set out in figure 4.5.

Read the statutory provision literally. Is there a single clear meaning?

YES

Consider the context of the provision. Does this context suggest a meaning that differs from the literal meaning?

NO

Consider the context of the provision. Does this context offer a single clear meaning?

YES

NO

YES

Consider the purpose of the statute. Does this purpose suggest a meaning that differs from the literal meaning? NO

YES

NO

Use the PURPOSIVE APPROACH and interpret the statutory provision so as to promote the purpose of the statute.

YES

NO

Use the CONTEXTUAL APPROACH and interpret the statutory provision in light of its context.

Use the LITERAL APPROACH and interpret the statutory provision literally.

FIGURE 4.5

Consider the purpose of the statute. Does this purpose suggest a meaning that differs from the contextual meaning?

Choosing the correct approach to statutory interpretation

7 Justice John Bryson, ‘Statutory Interpretation: An Australian Judicial Perspective’ (1992) 13 Statute Law Review 187, 195.

CHAPTER 4 How to find, understand and use the law  151

Difficulties in applying the various general approaches to the interpretation of legislation are avoided if the draftsperson is able to draft the legislation in such a way that the literal meaning of the statutory provisions are (1) consistent with the context of the provisions and (2) consistent with the purposes of the legislature. Fortunately, this is often the case. Ascertaining the purpose of a statute

How does a court determine the ‘purpose or object underlying the Act’ as required by the purposive approach? As explained earlier, sometimes the Act itself contains an object or purposes clause. For example, the following is the object clause from the Competition and Consumer Act 2010 (Cth): 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.8

Older legislation might contain a ‘preamble’ — that is, a passage that explains the circumstances in which the Act was passed and setting out its aims. The following is the preamble to the Commonwealth of Australia Constitution Act 1900 (Imp) 63 & 64 Vict, c 12: 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.

What if the object clause or preamble is not sufficiently specific? What if there is no object clause or preamble at all in the Act? In such a situation it may be useful to refer to something like the minister’s second reading speech in Parliament to discover what Parliament intended in passing the particular provision. The second reading speech is an example of extrinsic materials — that is, materials external to the legal document itself that assist in its interpretation. Traditionally, the courts refused to refer to extrinsic documents when interpreting legislation, insisting that the meaning of the Act should be found in the Act itself. In the 1970s and 1980s, however, some courts began to demonstrate a willingness to consult extrinsic materials. In 1983 the Federal Parliament sought to clarify the use of extrinsic materials in the interpretation of legislation with the enactment of s 15AB of the Acts Interpretation Act 1901 (Cth). This section states as follows: 1. Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material: (a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or (b) to determine the meaning of the provision when:    (I) the provision is ambiguous or obscure; or (II) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. 2. Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes: (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; 8 Competition and Consumer Act 2010 (Cth) s 2.

152  PART 1 Foundations

(c) any relevant report of a committee of the Parliament or of either House of the Parliament that was made to the Parliament or that House of the Parliament before the time when 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; (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; and (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. 3. In determining whether consideration should be given to any material in accordance with subsection (1), or in considering the weight to be given to any such material, regard shall be had, in addition to any other relevant matters, to: (a) the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; and (b) the need to avoid prolonging legal or other proceedings without compensating advantage.

The Interpretation Acts of the States and Territories (other than South Australia) contain a similar provision.9 The requirements of s 15AB(1) are set out in figure 4.6. Is the statute ambiguous or obscure?

YES

NO Does the ordinary meaning (taking into account the context and purpose of the statute) lead to a result that is absurd or unreasonable?

YES

NO

NO

Do the extrinsic materials confirm the ordinary meaning of the statute (taking into account the context and purpose of the statute)?

Do not consult extrinsic materials. FIGURE 4.6

YES

Consult extrinsic materials.

Use of extrinsic materials

9 Legislation Act 2001 (ACT) ss 141–143; Interpretation Act 1987 (NSW) s 34; Interpretation Act 1978 (NT) s 62B; Acts Interpretation Act 1954 (Qld) s 14B; Acts Interpretation Act 1931 (Tas) s 8B; Interpretation of Legislation Act 1984 (Vic) s 35(b); Interpretation Act 1984 (WA) s 19. In South Australia the use of extrinsic materials is governed by common law.

CHAPTER 4 How to find, understand and use the law  153

The courts are now willing to consult extrinsic material in cases where there is ambiguity, but they are used to provide assistance only. Where there is no ambiguity in the text, the courts allow the introduction of extrinsic materials to confirm meaning but not to challenge the clear meaning of the text. Re Warumungu Land Claim; Ex parte Attorney-General (NT) (1988) 77 ALR 27

In the 1980s the Waramungu Aboriginal Land Council made a land claim under the Aboriginal Land Rights (Northern Territory) Act 1976 (Cth). That Act stated that claims could not be made over roads. The land that was the subject of the claim contained a stock route — i.e a track along which stockmen moved sheep and cattle. Was the stock route a ‘road’? The court decided that it was not clear from the Act whether the term ‘road’ included a stock route, and that it was appropriate to ascertain the parliament’s purpose by referring to extrinsic materials. It referred to the minister’s second reading speech in which it was made clear that the Act was to exclude from land claims ‘roads over which the public has a right of way’. The court decided that this referred to the general roadway system, and did not include stock routes.

Common law presumptions When interpreting a statutory provision, there are certain presumptions that are typically made by the courts. In this section we examine fifteen such presumptions.   1. Words have their current meaning.   2. Words have their technical meaning.   3. Words have consistent meanings.   4. There is no surplusage.   5. The provision is constitutional.   6. The provision is consistent with international law.   7. The provision is not extra-territorial.   8. The provision is not retrospective.   9. The provision does not contradict established rights. 10. The provision does not bind the Crown. 11. Penalties have limited application. 12. Offences and penalties correspond. 13. Things not included are excluded. 14. Specific provisions override general provisions. 15. Later provisions override earlier provisions. All of these presumptions can be rebutted by a clear intention to the contrary in the legislation. 1. Words have their current meaning

Where the meaning of a particular word or phrase has changed over time, the court presumes that the meaning intended by the legislature is the contemporary meaning rather than the meaning applicable at the time the statutory provision was drafted.10 For example, according to s 51(v) of the Australian Constitution the legislative power of the Federal Parliament includes the power to regulate ‘postal, telegraphic, telephonic, and other like services’. At the time this provision was drafted in the late 19th century, television had not yet been invented, but, in Jones v Commonwealth (No 2) (1965) 112 CLR 206, the High Court decided that television broadcasting fell within the scope of s 51(v). 2. Words have their technical meaning

Where appropriate, words and phrases in a statutory provision are presumed to carry their technical meaning rather than their ordinary meaning.11 If a statute is intended to regulate a particular industry, 10 ICI Australia Ltd v FCT (1971) 46 ALJR 35 at 43; 2 ATR 672. 11 See, eg, Verge v Somerville [1924] AC 496 at 502 per Lord Wrenbury: ‘In fact, the legal meaning and the popular meaning of the word “charitable” are so far apart that it is necessary almost to dismiss the popular meaning from the mind as misleading before setting out to determine whether a gift is charitable within the legal meaning’.

154  PART 1 Foundations

profession, trade or field of endeavour, and the words and phrases used in the statute have a particular meaning within that industry, profession, trade or field of endeavour, the court presumes that those words and phrases were intended to have that particular meaning. 3. Words have consistent meanings

Where a statute uses the same word or phrase more than once, the courts presume that the legislature intended that the word or phrase have the same meaning each time.12 Conversely, where a different word or phrase is used, the courts presume that a different meaning was intended. (The Interpretation Acts of the Commonwealth, the Australian Capital Territory and Queensland explicitly provide that this is not necessarily the case.)13 4. There is no surplusage

The court presumes that every word in a statutory provision was intended by the Parliament to have some meaning.14 In other words, the court favours an interpretation of the statutory provision that does not render any of the words in the provision meaningless. 5. The provision is constitutional

Where two interpretations of a provision in a statute are possible, one which is in accordance with the Constitution and the other which would make the provision unconstitutional, the court presumes that the interpretation that would make the provision constitutional to be the one intended by the parliament.15 6. The provision is consistent with international law

If Australia is a signatory to an international agreement, such as a treaty or a convention, and has enacted domestic legislation to give effect to that international agreement, and there is ambiguity in the domestic legislation, the court can resolve that ambiguity by referring to the international agreement and assuming that the domestic legislation was intended to be consistent with the international agreement.16 7. The provision is not extra-territorial

The court presumes that the statutory provision was not intended to apply outside the limits of the relevant jurisdiction.17 This common law presumption is now contained in the Interpretation Act of each Australian jurisdiction except South Australia and Western Australia.18 8. The provision is not retrospective

We explained in the previous chapter that the legislature is empowered to pass legislation that is retrospective — that is, the legislation applies to circumstances that arose before it was passed. However, if the legislature wishes to pass legislation that is retrospective, it must make its intent explicit. In the absence of express words to the contrary, a court presumes that a statutory provision was not intended to apply to events that took place before the legislation was passed.19

12 Lennon v Gibson & Howe Ltd [1919] AC 709, 771 per Lord Shaw: ‘In the absence of any context indicating a contrary intention it may be presumed that the Legislature intended to attach the same meaning to the same words when used in a subsequent statute in a similar connection.’ 13 Acts Interpretation Act 1901 (Cth) s 15AC; Legislation Act 2001 (ACT) s 147; Acts Interpretation Act 1954 (Qld) s 14C. 14 Ditcher v Denison (1857) 11 Moore PC 325 per the Judicial Committee of the Privy council: ‘It is a good general rule in jurisprudence that one who reads a legal document … should not … impute — to its language tautology or superfluity’. 15 Commonwealth v Tasmania (Tasmanian Dam Case) (1983) 158 CLR 1 at 161-7 Per Murphy J: ‘An Act of Parliament is the authentic expression of the will of the people through their elected representatives. There is a strong presumption of the constitutionality or validity of every Act.’ 16 Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273 at 287 per Mason CJ and Deane J: ‘Where a statute or subordinate legislation is ambiguous, the courts should favour that construction which accords with Australia’s obligations under a treaty or international convention to which Australia is a party, at least in those cases in which the legislation is enacted after, or in contemplation of, entry into, or ratification of, the relevant international instrument. That is because Parliament, prima facie, intends to give effect to Australia’s obligations under international law.’ 17 Jumbunna Coal Mine NL v Victorian Coal Miners Association (1908) 6 CLR 309, 363 per O’Connor J. 18 Acts Interpretation Act 1901 (Cth) s 21(1)(b); Legislation Act 2001 (ACT) s 122; Interpretation Act 1987 (NSW) s 12; Interpretation Act 1978 (NT) s 38; Acts Interpretation Act 1954 (Qld) s 35; Acts Interpretation Act 1931 (Tas) s 27; Interpretation of Legislation Act 1984 (Vic) s 48. 19 Maxwell v Murphy [1957] HCA 7 at [7]; (1957) 96 CLR 261 at 267.

CHAPTER 4 How to find, understand and use the law  155

This common law presumption against retrospectivity operates in all Australian jurisdictions except the Australian Capital Territory, where the presumption is statutory.20 9. The provision does not contradict established rights

In the absence of a clear legislative intention to the contrary, the court presumes that the statutory provision was not intended to infringe established common law rights.21 In the Australian Capital Territory and Victoria (the only Australian jurisdictions with bills of rights), the bill of rights Acts state that, as far as possible, statutory provisions must be interpreted in a way that is compatible with human rights, while being consistent with the purpose of the provisions.22 10. The provision does not bind the Crown

A court presumes that, in the absence of a clear intent to the contrary, a statute is not intended to bind the Crown.23 In practice, it is not uncommon for legislation to contain a provision to the effect that the Crown is bound by the Act. 11. Penalties have limited application

Penal liability — that is, the imposition of a penalty upon a person such as a fine or imprisonment — is not inferred by the courts in the absence of clear and unambiguous words.24 Unless the statute clearly states otherwise, the court will favour a narrow interpretation of a statutory provision that imposes a penalty. In other words, when two interpretations are possible the court favours the interpretation that leads to the penalty being less likely to be imposed, or imposed upon a smaller class of people. There is a corresponding presumption that a beneficial statutory provision — that is, a provision that confers a benefit rather than imposes a penalty — should be interpreted broadly and in favour of the person to whom the benefit is granted. 12. Offences and penalties correspond

According to the rule reddendo singula singulis (‘give each to each’), where two offences are followed by two penalties, the first penalty is presumed to apply to the first offence and the second penalty is presumed to apply to the second offence.25 Consider, for example, the following statutory provision: Any person convicted of killing or mistreating a domestic pet shall be liable to a fine not exceeding $2000 or a fine not exceeding $1000.

The first fine will apply if the person is guilty of killing a domestic pet and the second fine will apply if they are guilty of mistreating a domestic pet. 13. Things not included are excluded

According to the rule expressio unius est exclusio alterius (‘the express mention of one thing is the exclusion of another’), if a statutory provision expressly states that it is to apply to certain specific things, then things that are not expressly included are presumed to be excluded.26 20 Legislation Act 2001 (ACT) s 75b(1). 21 Potter v Minahan (1908) 7 CLR 277, 304 per O’Connor J: ‘It is in the last degree improbable that the legislature would overthrow fundamental principles, infringe rights, or depart from the general system of law, without expressing its intention with irresistible clearness; and to give any such effect to general words, simply because they have that meaning in their widest, or usual, or natural sense, would be to give them a meaning in which they were not really used.’ 22 Human Rights Act 2004 (ACT) s 30; Charter of Human Rights and Responsibilities Act 2006 (Vic) s 32. 23 Bropho v State of Western Australia (1991) 171 CLR 1; Commonwealth v Western Australia (1999) 196 CLR 392, 410 (Gleeson CJ and Gaudron J). 24 Beckwith (1976) 135 CLR 569 per Gibbs J: ‘The rule formerly accepted, that statutes creating offences are to be strictly construed, has lost much of its importance in modern times. In determining the meaning of a penal statute the ordinary rules of construction must be applied, but if the language of the statute remains ambiguous or doubtful the ambiguity or doubt may be resolved in favour of the subject by refusing to extend the category of criminal offences […]. The rule is perhaps of last resort.’ 25 See, eg, Chelfco Ninety-four Pty Ltd v Road Traffic Authority [1985] VR 1 at 11. 26 ACN 074 971 109 (as Trustee for Argot Unit Trust) v National Mutual Life Association of Australasia Ltd (2008) 21 VR 351.

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For example, if a road sign states that parking is not permitted between 7.00  am and 7.00  pm, then by implication parking is permitted between 7.00  pm and 7.00  am. 14. Specific provisions override general provisions

According to the rule generalia specialibus non derogant (‘general things do not derogate from special things’), if there are two inconsistent statutory provisions, and one is general and the other specific, the specific provision is presumed to override the general provision.27 For example, if one provision refers to the owners of motor vehicles and another, inconsistent provision, refers to the owners of 4WDs, on a literal reading they both apply to the owners of 4WDs but according to the general and specific rule only the latter provision will apply. 15. Later provisions override earlier provisions

According to the rule leges posteriores priores contrarias abrogant (‘later rules take priority over earlier inconsistent rules’), a later law is presumed to override and automatically repeal to the extent of any inconsistency an earlier law on the same topic.28 There is an important exception to this rule and that is where it comes into conflict with the general and specific rule. If the earlier law is more specific than the later law, the earlier specific law will survive and the later general law will be interpreted as making an exception for circumstances covered by the earlier specific law.

Statutory rules We explained earlier that the Commonwealth, State and Territory interpretation Acts specify when legislation is to commence and clarify the circumstances in which it is appropriate to refer to the purposes of the parliament and to extrinsic materials when interpreting legislation. The various interpretation Acts also contain rules that make the interpretation of legislation simpler and easier. Many of these are definitions and commonsense provisions. For example, the Acts Interpret­ ation Act 1901 (Cth) s 18A states that where a word or phrase is given a particular meaning in a statute, other grammatical forms of that word or phrase have corresponding meanings. Section 36(2) of that Act states that where the last day of any period prescribed by a statute for the doing of anything falls on a Saturday, Sunday, public holiday or bank holiday, the thing may be done on the next day that is not a Saturday, Sunday, public holiday or bank holiday. •• ‘May’ and ‘shall’ — where the word ‘may’ is used in a statutory provision, the provision is discretionary.29 For example, if a statutory provision states that a person ‘may’ give notice in writing, the person can choose to either give notice in writing or give notice in some other format, such as verbally. Where the word ‘shall’ is used, the provision is mandatory.30 For example, if a statutory provision states that a person ‘shall’ give notice in writing, the person has no choice and can give notice only in writing. •• Gender and number — all of the interpretation Acts make it clear that if the words of a statute refer to a gender they should be interpreted so as to include the other gender, and if terms are expressed in the singular they should be interpreted so as to include the plural and vice versa.31 This means that, for example, the word ‘he’ in any Act should be interpreted as ‘he or she’, and the word ‘person’ in any Act should be interpreted as ‘person or persons’. 27 Smith v R (1994) 181 CLR 338 at 348 per Mason CJ, Dawson, Gaudron and McHugh JJ. 28 Goodwin v Phillips (1908) 7 CLR 1. 29 Acts Interpretation Act 1901 (Cth) s 33(2A); Legislation Act 2001 (ACT) s 146(1); Interpretation Act 1987 (NSW) s 9(1); Acts Interpretation Act 1954 (Qld) s 32CA(1); Acts Interpretation Act 1915 (SA) s 34; Acts Interpretation Act 1931 (Tas) s 10A(1)(c); Interpretation of Legislation Act 1984 (Vic) s 45(1); Interpretation Act 1984 (WA) s 56(1). 30 Legislation Act 2001 (ACT) s 146(2); Interpretation Act 1987 (NSW) s 9(2); Acts Interpretation Act 1954 (Qld) s 32CA(2); Acts Interpretation Act 1915 (SA) s 34; Acts Interpretation Act 1931 (Tas) s 10A(1)(a); Interpretation of Legislation Act 1984 (Vic) s 45(2); Interpretation Act 1984 (WA) s 56(2). 31 Acts Interpretation Act 1901 (Cth) s 23; Legislation Act 2001 (ACT) s 145; Interpretation Act 1987 (NSW) s 8; Interpretation Act 1978 (NT) s 24; Acts Interpretation Act 1954 (Qld) ss 32B, 32C; Acts Interpretation Act 1915 (SA) s 26; Acts Interpretation Act 1931 (Tas) ss 24, 24A; Interpretation of Legislation Act 1984 (Vic) s 37; Interpretation Act 1984 (WA) s 10.

CHAPTER 4 How to find, understand and use the law  157

•• Headings — all of the interpretation Acts state that part, division and subdivision headings are part of a statute and can be referred to when interpreting the statute.32 According to the Interpretation Acts of the Australian Capital Territory, the Northern Territory, Queensland and Victoria, section headings are also part of the statute, but in the Commonwealth, New South Wales, South Australia, Tasmania and Western Australia they are not.33 •• Marginal notes — according to the interpretation Acts of New South Wales, the Northern Territory, South Australia, Tasmania and Western Australia, marginal notes are not part of a statute.34 •• Footnotes and endnotes — all of the State and Territory interpretation Acts state that footnotes and endnotes are not part of the statute and cannot be referred to when interpreting the statute.35 •• Schedules — all of the interpretation Acts state that a schedule to an Act is part of the Act and can be used in the interpretation of the Act.36 •• Punctuation — the interpretation Acts of the Australian Capital Territory and Queensland state that punctuation is part of the statute; in South Australia and Victoria punctuation may be taken into account when interpreting the statute.37 ACTIVIT Y 4.11 — RESEARCH

Read the interpretation Act of your State or Territory. What other useful rules of interpretation are provided in the legislation?

Not all of the statutory rules of interpretation are set out in the Interpretation Acts. For example, many Acts and Regulations express monetary penalties in terms of ‘penalty units’. To find out what a ‘penalty unit’ is, you need to refer to s 4AA of the Crimes Act 1914 (Cth), which states that a penalty unit is $110. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 4.13 What are the various elements of an Act? 4.14 When does an Act commence operation? 4.15 What is the difference between a comprehensive definition and an inclusive definition? 4.16 What matters are usually included in a case report?

32 Acts Interpretation Act 1901 (Cth) s 13(2)(d); Legislation Act 2001 (ACT) s 126(1); Interpretation Act 1987 (NSW) s 35(1)(a); Interpretation Act 1978 (NT) s 55(1); Acts Interpretation Act 1954 (Qld) s 14(1); Acts Interpretation Act 1915 (SA) s 19(1); Acts Interpretation Act 1931 (Tas) s 6(2); Interpretation of Legislation Act 1984 (Vic) s 36(1); Interpretation Act 1984 (WA) s 32(1). 33 Acts Interpretation Act 1901 (Cth) s 13(2)(d); Legislation Act 2001 (ACT) s 126(2); Interpretation Act 1987 (NSW) s 35(2); Interpretation Act 1978 (NT) s 55(2); Acts Interpretation Act 1954 (Qld) s 14(2); Acts Interpretation Act 1915 (SA) s 19(2); Acts Interpretation Act 1931 (Tas) s 6(4); Interpretation of Legislation Act 1984 (Vic) s 36(2A); Interpretation Act 1984 (WA) s 32(2). 34 Interpretation Act 1987 (NSW) s 35(2); Interpretation Act 1978 (NT) s55(6); Acts Interpretation Act 1915 (SA) s 19(2); Acts Interpretation Act 1931 (Tas) s 6(4); Interpretation Act 1984 (WA) s 32(2). 35 Legislation Act 2001 (ACT) s 127(1); Interpretation Act 1987 (NSW) s 35(2); Interpretation Act 1978 (NT) s 55(6); Acts Interpretation Act 1954 (Qld) s 14(7); Acts Interpretation Act 1915 (SA) s 19(2); Acts Interpretation Act 1931 (Tas) s 6(4); Interpretation of Legislation Act 1984 (Vic) s 36(3); Interpretation Act 1984 (WA) s 32(2). 36 Acts Interpretation Act 1901 (Cth) s 1(b); Legislation Act 2001 (ACT) s 126(5); Interpretation Act 1987 (NSW) s 35(1)(b); Interpretation Act 1978 (NT) s 55(5); Acts Interpretation Act 1954 (Qld) s 14(5); Acts Interpretation Act 1915 (SA) s 19(1); Acts Interpretation Act 1931 (Tas) s 6(3); Interpretation of Legislation Act 1984 (Vic) s 36(2); Interpretation Act 1984 (WA) s 31(2). 37 Legislation Act 2001 (ACT) s 126(6); Acts Interpretation Act 1954 (Qld) s 14(6); Acts Interpretation Act 1915 (SA) s 19(1)(d); Interpretation of Legislation Act 1984 (Vic) s 35(b)(i).

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What is the difference between the ratio decidendi and obiter dicta? How do you identify the ratio decidendi? Why is legal writing often difficult to read? What are the objectives of the plain language movement? What is ‘statutory interpretation’? What is the literal approach to statutory interpretation, and why was it traditionally preferred by the courts? 4.23 What are (a) the literal rule and (b) the golden rule? How do they interact? 4.24 What is the contextual approach to statutory interpretation? What contexts should be considered when interpreting a statutory provision? 4.25 What are (a) the context rule, (b) the class rule and (c) the mischief rule? 4.26 What is the purposive approach to statutory interpretation? 4.27 Is the purposive approach consistent with the doctrine of separation of powers? 4.28 How does the purposive approach interact with the literal approach and the contextual approach? 4.29 What are extrinsic materials and when can they be used in statutory interpretation? 4.30 List the various presumptions made by the courts when interpreting legislation. 4.31 How do the various Interpretation Acts assist in statutory interpretation? 4.17 4.18 4.19 4.20 4.21 4.22

4.3 Thinking like a lawyer LEARNING OBJECTIVE 4.3 How do you use the law? How do you think like a lawyer, and why is it useful to be able to do so? How do you solve legal problems?

Legal reasoning is a way of thinking that is used by lawyers to solve legal problems, construct legal arguments or prepare advice about the legal consequences of a factual situation. Specifically, it is the process of identifying the legal rules of relevance to a particular legal issue that has arisen in relation  to a set of circumstances, working out how those rules apply to the circumstances and reaching a convincing conclusion. In order to engage in good legal reasoning you have to be able to set aside your intuitive or emotional response to a situation and think clearly and logically about the legal consequences of what is happening. ‘Thinking like a lawyer’ means keeping a cool and clear head, and speaking and behaving rationally when others around you may be panicking or overreacting. In some ways, legal reasoning is the same as any other form of good reasoning. Claims about the existence or otherwise of important facts must be supported by reliable evidence. The premises relied upon in constructing an argument must be sound and reasonable, and the conclusion propounded by the argument must follow logically and validly from the premises. On the other hand, there are features of legal reasoning that are unique to the discipline and practice of law. For example, the facts relied upon to support an argument may not be known for certain, and may instead be established ‘on the balance of probabilities’ (the civil standard of proof) or ‘beyond reasonable doubt’ (the criminal standard of proof). The premises in an argument may be contradictory, such as when there are conflicting precedents regarding a particular point of law. And the conclusion is not necessarily the only possible conclusion, or even the best possible conclusion, but instead the conclusion desired or needed in order to win a case. ACTIVIT Y 4.12 — REFLECT

How is ‘thinking like a lawyer’ different from ‘thinking like an accountant’ or ‘thinking like a layperson’?

CHAPTER 4 How to find, understand and use the law  159

Inductive and deductive reasoning Legal reasoning makes use of both inductive and deductive reasoning. The process of using a series of particular experiences to conclude the existence of a general rule or principle is called inductive reasoning. Inductive reasoning usually takes the following form. •• This ‘X’ is ‘Y’. •• This ‘X’ is ‘Y’. •• This ‘X’ is ‘Y’. •• Therefore all ‘X’s are ‘Y’. For example, if you reflect upon the fact that the last five times you drank a particular brand of cheap coffee you did not enjoy the taste and you predict that you will not enjoy the cup of that brand of cheap coffee now being offered to you, you are engaging in inductive reasoning. Judges and legal scholars use inductive reasoning when they posit the existence of a legal rule or legal principle from a series of particular case decisions. For example, in the famous negligence case of Donoghue v Stevenson [1932] AC 562 the court reviewed a series of earlier case decisions, all of which involved one person being obliged to compensate another for the consequences of their carelessness, and induced the existence of a general legal principle that a person owes a duty of care to those they can reasonably foresee as likely to be affected by their acts or omissions. Deductive reasoning is the process of using one or more general rules or principles to conclude or predict a particular experience. Provided the premises are true, a conclusion reached using deductive reasoning is always true. Deductive reasoning usually takes the following form. •• Rule: all ‘X’s are ‘Y’. •• This ‘Z’ is ‘X’. •• Therefore this ‘Z’ is ‘Y’. For example, consider the following facts. •• All houses built in Adelaide between 1910 and 1956 contain asbestos. •• Your Adelaide house was built in 1948. From these facts it is a simple process for you to reach (or infer) the following logical conclusion. •• Your house contains asbestos. Judges and lawyers use deductive reasoning when they use general legal rules and principles to resolve a particular legal problem. This is the type of reasoning we will demonstrate in the next section. ACTIVIT Y 4.13 — APPLY

Give a practical example of (a) inductive reasoning, and (b) deductive reasoning in a context other than a legal context.

How to solve a legal problem The four key steps in using deductive reasoning to solve a particular legal problem are set out in figure 4.7.

1. Identify the legal issue

FIGURE 4.7

Legal reasoning

160  PART 1 Foundations

2. Identify the relevant legal rules

3. Apply the rules to the facts

4. Reach a conclusion

Step 1: Identify the legal issue The first step to solving a legal problem is to clearly and comprehensively state the legal question that needs to be answered. An essential aspect of this step is the establishment of the material facts. In a legal dispute, if the parties can agree upon the material facts, the resolution of the dispute is made that much simpler. However, in practice, agreement upon the material facts is rare. In many hearings the court is concerned primarily with the establishment of the facts in issue, and the application of the relevant law will be relatively straightforward. Each party may present their own version of the facts and it is then the role of the court to decide which facts are proven. In deciding which facts to accept, the court will apply the (often extremely complex) rules of evidence, described briefly in an earlier chapter. When you are called upon to solve a legal problem, the process of identifying the issue is somewhat simpler. You will usually be given a set of uncontested facts, and then asked to identify which facts are relevant, and state the legal issue clearly and concisely. For example, here is a legal problem that you might be asked to solve: Gaia is a university student. While riding the ferry home from University one stormy evening, the ferry stops suddenly when it collides with one of the wooden pillars at the ferry terminal. A very large and slightly drunk man with red hair standing near Gaia’s seat falls on top of her, cracking one of her ribs and damaging her mobile phone. Gaia is in considerable pain and is very annoyed about the damage to her phone, and she swears at the man. Later, her anger shifts from the red-haired man to the ferry crew. She believes that the accident would not have occurred if the ferry crew had enforced the requirement that passengers remain seated until the ferry stops moving. However, when she later complains to the ferry company about the ferry crew’s conduct, they inform Gaia that it is common practice for ferry crews to allow passengers to stand and even move about the cabin while the ferry is moving. Does Gaia have a right of action against the ferry company?

The facts are uncontested. The material facts are as follows. Gaia was a passenger on the ferry. The weather was stormy. The ferry collided with the ferry terminal. The ferry crew permitted passengers to remain standing while the ferry was moving. A large, slightly drunk man fell on Gaia. Gaia was physically injured and her mobile phone was damaged. Ferry crews as a common practice allow passengers to stand while the ferry is moving. The following facts are not relevant: •• Gaia was on her way home from university. •• The man who fell on Gaia had red hair. •• Gaia was annoyed after the accident and swore at the man. The main legal issue is whether, by allowing passengers to continue standing while the weather was stormy, the ferry crew is legally liable for the accident that occurred. Subsidiary issues include whether or not the ferry company is liable for the actions of the ferry crew, and whether or not it is relevant that it is common practice for the ferry crew to allow passengers to stand while the ferry is moving. •• •• •• •• •• •• ••

ACTIVIT Y 4.14 — APPLY

Here is a simple legal problem: While shopping for groceries in her local supermarket on a Saturday morning, Catherine sees that the avocados are on sale for $1.00 each. She selects an avocado from the display, squeezes it gently and, satisfied as to its ripeness, puts it in her basket. A couple of minutes later she remembers that she already has three avocados at home in the fridge and she returns the avocado to the display. As she does so, Ross, the store manager, stops her and tells her that she cannot return the avocado because, by law, she is already contractually obliged to purchase it.

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Answer the following questions to help to identify the legal issue in this case. 1. Which facts are relevant? 2. Which facts are not relevant? 3. What is the legal issue?

Step 2: Identify the relevant legal rules The second step is the identification of the appropriate legal rules needed to resolve the legal issue identified in the first step. If the legal problem is being solved by a court of law, the relevant legal rules will be presented to the court in the form of legal arguments by each party’s lawyers relying upon statutory provisions and case law precedents. If the facts of the case are similar in all relevant respects to the facts of a binding precedent, or clearly fall within the ambit of the legislation, the judge is obliged to follow that precedent or statutory provision, even if they disagree with the legal rule. But if there is no binding case law precedent (because the facts of the present case are unique) or relevant statutory provision, the judge has greater discretion and in exercising that discretion will look to any persuasive authorities (see the previous chapter). If you are solving a legal problem, you will conduct legal research to locate the relevant legal rules. You will use secondary sources such as a textbook or a journal article to locate the most appropriate primary sources: case law and/or legislation. You will first seek to identify which of the broad categories of law will be relevant, such as contract law, tort law or consumer protection law. For example, in solving the ferry problem above, your basic legal knowledge might lead you to suspect that the correct form of legal action will be an action in the tort of negligence. You then narrow down your description of the relevant law by identifying the relevant legal rules. For example, you might conduct some legal research, and using your business law textbook as well as some additional online legal research, you prepare the following summary of the relevant law. When a person fails to take reasonable steps to prevent harm being suffered by another they may be liable in the tort of negligence. To successfully sue a defendant in the tort of negligence, a plaintiff must establish: 1. Duty of care: A defendant owes a duty of care to the plaintiff if the relationship between the parties falls within the established categories of duty of care. An occupier owes a duty of care to persons who come onto their premises (Australian Safeway Stores v Zaluzna). 2. Breach of duty: A defendant breaches their duty of care when they fail to do what a reasonable person would have done in the circumstances (Civil liability legislation). 3. Harm caused by breach: The defendant is only responsible for the harm if (1) the breach of duty was a necessary condition of the occurrence of the harm and (2) it is appropriate for the scope of the liability of the person in breach to extend to the harm so caused (Civil liability legislation). Employers are vicariously liable for torts committed by their employees while carrying out their duties (Hollis v Vabu Pty Ltd). Compliance with custom, standard practice or the relevant code of practice does not necessarily mean the defendant has not been negligent, and non-compliance does not necessarily mean the defendant has been negligent (Mercer v Commissioner for Road Transport and Tramways (NSW)).

Note that each statement of law must be supported by reference to a primary source of law: either a case or a statutory provision. You should ensure that each reference is to a source that is relevant: for example, if the problem is set in Western Australia you must refer to either Western Australian or Federal legislation and not to legislation from another jurisdiction. You should also ensure that each reference is to a current source; that is, to case law that has not been subsequently overruled or rejected, or to legislation that has not been subsequently amended or repealed. Note also that no reference is made to the problem itself at this stage; you are simply summarising the relevant legal rules. 162  PART 1 Foundations

ACTIVIT Y 4.15 — APPLY

Refer to activity 4.14 and to figure 4.3 (Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd), and state the relevant legal rule.

Step 3: Apply the legal rules to the facts The third step is the application of the relevant legal rules to the facts of the problem. In a trial, the court will decide how the law applies to the facts of the case. Similarly, in solving a legal problem, you will consider how each of the legal rules identified in the previous step applies to the facts of the problem before you. For example, you might write the following. 1. Duty of care: The ferry company is the ‘occupier’ of the ferry. The ferry company therefore owes a duty of care to the ferry passengers, including Gaia. 2. Breach of duty: Given the fact that the weather was stormy, a reasonable ferry crew would have insisted that passengers remain seated while the ferry is still moving. The ferry company has therefore breached its duty of care to Gaia. 3. Harm caused by breach: Gaia’s injuries and the damage to her phone were caused by the drunk man falling on her, which in turn was caused by the ferry crew’s careless failure to insist that the drunk man remain seated. Gaia’s injuries and the damage to the phone are reasonably foreseeable consequences of the ferry crew’s carelessness: it is appropriate for the scope of the ferry company’s liability to extend to such consequences.

As all three elements have been satisfied it would appear that the ferry company has committed the tort of negligence. The ferry company is vicariously liable for the actions of its employees, the ferry crew. The fact that it is common practice to allow passengers to stand while the ferry is moving is not relevant to the question of liability. ACTIVIT Y 4.16 — APPLY

Apply your answer from activity 4.14 (the legal relevant rule) to the facts of activity 4.14 (the avocado problem).

Step 4: Reach a conclusion The final step is reaching a conclusion. In a trial this will be the decision of the court as to the guilt or innocence of the defendant (in a criminal trial) or whether the plaintiff or the defendant has won the case (in a civil trial). The decision of the court will also include a decision about the sentencing of the defendant (in a criminal trial) or any remedy to which the plaintiff will be entitled (in a civil trial). When solving a legal problem, you conclude by stating clearly and concisely your answer to the legal question expressed when you identified the legal issue. You then briefly outline the consequences of that answer. In answering the ferry problem, you might conclude that: The ferry company is vicariously liable for the actions of the ferry crew. Because the ferry crew allowed passengers to continue standing while the weather was stormy, the ferry company has committed the tort of negligence and is legally liable for the accident that occurred. Gaia is entitled to recover from the ferry company compensation for her injuries and for the damage to her mobile phone.

Finally, note that for many legal problems that you are asked to solve at university, there is no ‘correct’ answer. The person assessing your answer is more likely to be looking to evaluate the quality of your legal reasoning skills rather than whether you have reached a particular conclusion. ACTIVIT Y 4.17 — APPLY

What is your conclusion to the problem set out in activity 4.14?

CHAPTER 4 How to find, understand and use the law  163

CHECKLIST

When solving a legal problem, complete all four of the following steps. ◼◼ Identify the legal issue. ◼◼ Identify the relevant legal rules. ◼◼ Apply the rules to the facts. ◼◼ Reach a clear and convincing conclusion.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 4.32 Why is it important to be able to ‘think like a lawyer’? 4.33 What is the difference between inductive and deductive reasoning, and how does each one relate to the law? 4.34 How do you solve a legal problem? Explain each of the following steps: (a) Identify the legal issue. (b) Identify the relevant legal rules. (c) Apply the legal rules to the facts. (d) Reach a conclusion.

4.4 Writing like a lawyer LEARNING OBJECTIVE 4.4 How do you write like a lawyer? How do you write a legal letter, or draft a contract?

The final skill you must master is the ability to express your understanding of law appropriately.

Legal writing In a university law course you are likely to be required to produce some form of legal writing. You may, for example, be required to write an essay, a research paper, an answer to a legal problem, an argument, a memorandum of advice or a case example. And in conducting a business or working as a professional you are likely to be required to produce other forms of legal writing, such as writing a formal letter or even drafting a simple contract. In this section we describe some of the features of good legal writing.

Formality and precision Legal writing is formal rather than conversational. The tone of the writing is serious, polite and respectful. You do not use informal terms such as: •• contractions such as ‘can’t’ or ‘wouldn’t’, •• slang or colloquialisms, or •• offensive terms. The following examples illustrate formal, standard and informal writing:38 Formal

‘In discussions yesterday, the Federal Cabinet focused on the formulation of amendments to the workers’ compensation legislation.’ Standard  ‘Cabinet ministers yesterday discussed how to word changes to the law on workers’ compensation.’ Informal ‘Yesterday, Canberra pollies worked on the new workers comp laws.’

38 Commonwealth of Australia, Style Manual for Authors, Editors and Printers (John Wiley & Sons, 6th ed, 200) 52.

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Legal writing should be formal writing. Legal writing uses more complex grammar and vocabulary, which may be slightly more difficult for the reader to comprehend, but is more precise.

Clarity On the other hand, legal writing should be clear. The recent ‘plain language movement’ was described earlier in this chapter. •• When writing a legal text in plain language, you should think about the structure and: –– group together related material, and –– if appropriate, use a numbering system that shows the hierarchy of the information. •• You should think about the content of each sentence and paragraph and: –– limit each paragraph to one idea, –– use short, clear sentences, –– link the ideas, and –– keep paragraphs short. •• You should think about the language used and: –– favour the ‘active’ voice (‘You must deliver the notice  .  .  .’) rather than the ‘passive’ voice (‘The notice must be delivered  .  .  .’), –– avoid ambiguity, and –– use ‘must’ if something is mandatory and ‘may’ if merely permissible, rather than using ‘shall’ or ‘can’. •• You should think about the choice of words and: –– use gender neutral language, –– use everyday words whenever possible, –– cut out unnecessary words, –– avoid jargon, technical words or ‘legal’ expressions (except when necessary), –– define technical words, and –– use acronyms sparingly, and only if the readers know what they mean. •• Finally, when designing the document, you should think about how to help the reader by: –– making important information easy to find (use headings and subheadings), and –– using a font (or handwriting) that is easy to read. ACTIVIT Y 4.18 — REFLECT

Think of at least three other writing practices that would enhance the clarity of a text.

Drafting a letter If someone owes you money and has not paid you, or if they have otherwise failed to perform some contractual obligation, you might first attempt to resolve the problem informally — by meeting, telephone or email — but if that does not work you might choose to write to them to formally demand that they perform their legal obligation. This is a form of legal writing. In complex matters you would have a legal professional draft and send the letter of demand, but in simple matters you might decide to write the letter yourself. In addition to the usual guidelines for the drafting of business letters, which are beyond the scope of this text, you should also consider the following elements.

Subject line The letter will include a subject line after the salutation, which briefly sets out the subject of the letter. For example: Subject line 1 Incorrect quantity of smartphones supplied Subject line 2 Financial situation of [name of the company] Subject line 3 Outstanding invoice for the amount of $1000.00 CHAPTER 4 How to find, understand and use the law  165

Background The first paragraph will briefly set out the background to the problem. For example: Background 1  I am writing to inform you that the goods we ordered from your company have not been supplied correctly. Background 2 I am a shareholder of your company and I am very concerned regarding recent newspaper reports about the company’s financial situation. Background 3 I am writing in relation to our outstanding invoice, dated 1 January 2016, for the amount of $1000.00. A copy of the invoice is enclosed.

Problem The second paragraph will set out the details of the problem. For example: Problem 1 On 1 January 2016 we placed an order with your firm for 1000 smartphones. The consignment arrived yesterday, but it contained only 100 smartphones. This error placed us in a difficult position because we were unable to fulfil all of our order commitments to our customers. Problem 2 In an article in the My Town Daily on 1 January 2016, it was suggested that the company has been insolvent for the last few weeks but that it has continued to trade. This would, of course, place the directors in breach of their duty under the Corporations Act. Problem 3 Payment of our invoice was required by no later than 18 January, but, to date, payment has not been received.

Solution The third paragraph will set out the proposed solution to the problem. For example: Solution 1 Solution 2 Solution 3

I am writing to ask you to please make up the shortfall immediately and to ensure that such errors do not happen again. Could I please ask you to look into these matters and report back to me. Please make payment in full by no later than 5.00  pm on Friday 25 January. You can pay the invoice by depositing the money directly into our account. The account details are on the invoice.

Warning If you require a prompt response, and informal efforts have been unsuccessful, it is a good idea to include a polite warning. For example: Warning 1 Warning 2 Warning 3

In the event that we do not receive a prompt response, we will consider looking elsewhere for our smartphones supplies. In the event that I do not receive a satisfactory response from you, I will be forced to report the matter to the Australian Securities and Investments Commission. In the event that we do not receive payment in full by that date, we will be instructing  our solicitors to commence legal proceedings to recover the outstanding amount.

Closing The letter of demand should conclude with a closing line. For example: Closing 1 Closing 2 Closing 3

I hope that such action will not be necessary. I look forward to hearing from you shortly. I look forward to receiving your payment.

166  PART 1 Foundations

An example of a letter of demand is set out in figure 4.8. Organicola Pty Ltd 14 Martens Street Up Town 1111 18 January 2016 Bob Recalcitrant 999 Stubborn Street Difficult 9999 Dear Mr Recalcitrant Outstanding invoice in the amount of $1000.00 I am writing in relation to our outstanding invoice, dated 1 January 2016, in the amount of $1000.00. A copy of the invoice is enclosed. Payment of our invoice was required by no later than 18 January but, to date, payment has not been received. Please make payment in full by no later than 5.00  pm on Friday 25 January. You can pay the invoice by depositing the money directly into our account. The account details are on the invoice. In the event that we do not receive payment in full by that date, we will be instructing our solicitors to commence legal proceedings to recover the outstanding amount. I hope that such action will not be necessary. Yours sincerely, Accounts manager Organicola Pty Ltd FIGURE 4.8

Example of a letter of demand

ACTIVIT Y 4.19 — REFLECT

Contrary to local by-laws requiring that public works commence no earlier than 8.00  am, council workers have been undertaking very loud road repairs in your street from 6.00  am every morning for the past week. You have complained to the on-site manager, but nothing has changed. Draft a simple letter to your local authority that sets out the problem and demands an appropriate solution.

Drafting a simple contract The law of contract is described in detail in coming chapters. In this chapter we describe the process of drafting a simple written contract. A contract is a legally enforceable agreement between two or more parties. When negotiating a sale, a business deal or a commercial arrangement, the negotiation process usually concludes with the parties committing to a binding contract. The contract contains the promises made by each of the parties. If one party fails to keep their promises, then they have ‘breached’ the contract and may be liable to pay the other party compensation, usually known as ‘damages’. Most contracts are not required by law to be in writing, but it is usually a good idea to carefully prepare a written contract that is signed by the parties. This will ensure that the parties are aware of their contractual obligations, the parties are conscious of the importance of the agreement, and the agreement is more easily enforceable by the parties. For example, Bilal goes to a party and meets Kate. Kate is interested in purchasing a large quantity of Johnny’s products. Eventually, Bilal agrees to provide Kate with 1000 units at a discounted price, and they shake hands. Bilal and Kate have created what is known as an oral contract. Kate has promised to order products and Bilal has promised to provide them at a discounted price. But is the agreement enforceable? In most States the agreement will be technically enforceable, but there will be practical difficulties. What if Bilal says he agreed to a 10 per cent discount and Kate insists it was 20 per cent? CHAPTER 4 How to find, understand and use the law  167

What if Bilal and Kate can’t resolve the disagreement and Kate insists that Bilal provide the discounted products? The dispute may have to be resolved by court proceedings. This problem would have been avoided if Bilal and Kate had prepared and signed a simple written contract. The more important the agreement the more advisable it is that it be evidenced in writing. Complex contracts should be drafted by legal professionals, but simple contracts can often be drafted by laypersons. The suggested steps for drafting a simple written contract are set out in figure 4.9.

1. Prepare an outline

2. Draft the contract

3. Test and revise the contract

6. Sign the contract

5. Settle the contract

4. Proofread the contract

FIGURE 4.9

Drafting a simple contract

Step 1: Prepare an outline Make a list of the topics you think should be included in the agreement, and then sort the various topics into a logical order. For example, you might make a list of all of your obligations and a list of the obligations of the other party, followed by a list of all of your rights and entitlements and the rights and entitlements of the other party. Make use of headings, subheadings and numbering to clarify the structure of the contract.

Step 2: Draft the contract Once you have a list of topics in a logical order, turn each topic into a substantive clause. In drafting each clause, bear in mind the points made earlier about legal drafting and the balance between formality and clarity. Use short, clear sentences. Include only one idea in each clause. Write in the present tense, using the active rather than the passive voice.

Step 3: Test and revise the contract This step is one of the most important. Test your contract by imagining every possible problem or disagreement that could arise and considering how the terms of the contract address and resolve the problem. If you can think of an eventuality that is not addressed by the contract, draft a new clause that covers that eventuality.

Step 4: Proofread the contract If a legal problem arises at a later date, the precise wording of the contract will become vitally important and the outcome of legal proceedings might depend upon the wording of a particular clause. You should therefore proofread your contract carefully.

Step 5: Settle the contract When you are satisfied that the contract adequately protects your own interests, send a draft of the contract to the other party so that they can provide their input. The objective is a fair and balanced contract. Further changes to the contract may be necessary.

Step 6: Sign the contract Once all of the parties are satisfied with the terms of the contract they should all sign the contract. Each party should retain a signed original, so preparation and execution of multiple copies will be necessary. See figure 4.10 for an example of a simple written contract. 168  PART 1 Foundations

Contract for the sale of goods This contract for the sale of goods is made on [date] between [name of seller] of [address of seller] (‘the Seller’) and [name of buyer] of [address of buyer] (‘the Buyer’). 1  Sale of goods The Seller must sell and deliver to the Buyer on or before [date] the following goods: [description of goods] (‘the Goods’). 2 Delivery The Seller must deliver the Goods to the Buyer at [delivery address]. 3  Sale price The Buyer must accept the Goods and pay $[price] for the Goods. 4 Payment The Buyer must accept and pay for the Goods at the time when, and at the place where, the Seller delivers the Goods to the Buyer. 5  Risk of loss The risk of loss to the Goods, regardless of the cause, will be on the Seller until the Goods have been delivered to and accepted by the Buyer. 6  Right of inspection The Buyer has the right to inspect the Goods upon delivery and, within [number of days] business days after delivery, the Buyer must give written notice to the Seller of any claim for damages on account of the quality of the Goods. The parties have executed this contract at [place of execution] on [date]. Buyer: _______________________________________ [signature] Seller: _______________________________________ [signature] FIGURE 4.10

Example of a simple written contract

CHAPTER 4 How to find, understand and use the law  169

ACTIVIT Y 4.20 — REFLECT

Draft a simple written contract to document an agreement between two people going on a first date.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 4.35 Why is it important to be able to ‘write like a lawyer’? 4.36 What does it mean to say that legal writing must be (a) formal and precise, and (b) clear? 4.37 In what circumstances might you be required to write a legal letter? 4.38 How do you structure the elements of a letter of demand? Explain each of the following elements when writing a letter of demand: (a) Subject line. (b) Background. (c) Problem. (d) Solution. (e) Warning. 4.39 What is a contract, and in what circumstances might you be required to write a contract? 4.40 What are the benefits of a written contract? 4.41 How do you structure a contract? Explain each of the following steps when writing a contract: (a) Preparing an outline. (b) Drafting the contract. (c) Testing and revising the contract. (d) Proofreading the contract. (e) Settling the contract. (f) Signing the contract.

In conclusion •• The primary legal materials are legislation and case law. Both can be located in hard copy and online. Secondary legal materials include textbooks, journal articles and legal encyclopaedias, which can be located in a law library or with the help of an online legal database. •• The elements of a statute include the long and short titles, the enacting words, the definitions section, marginal notes, parts and divisions, sections, paragraphs and sub-paragraphs. A case report consists of the ratio decidendi, which is binding law, and the obiter dicta, which is merely persuasive. When interpreting legislation and other legal texts, you will be guided by certain general approaches such as the literal approach, the contextual approach and the purposive approach as well as a range of specific rules such as the class rule. The Commonwealth and each State has an Interpretation Act that also assists in the interpretation process. •• When thinking like a lawyer, you usually engage in a form of deductive reasoning. When solving a legal problem, you first identify the legal issue, then identify the relevant legal rules, then apply the rules to the facts of the problem, and then reach a clear conclusion. •• When writing like a lawyer, you should seek to balance formality and precision with clarity. JOHNNY AND ASH

[By the time Ash finishes her explanation of legal skills, she and Johnny have eaten their meals and are walking together along the river, enjoying the mid-afternoon sunshine.] Johnny — So, I still don’t quite see why we need lawyers at all. Some of the stuff you just explained seems complicated, but not so complicated that with a little time and effort I couldn’t work it out for myself. Ash — Well, it’s like I said earlier. With some effort, and maybe some coursework, you could become sufficiently skilled to take care of most of your own legal affairs. But you could say the same thing about owning a car: with time and effort you could become sufficiently skilled to service and repair your own car, but frankly, who has the time? Most of us learn enough about our car to take care of the basics and avoid serious problems whenever possible, but when things do go seriously wrong, we take it to a specialist. Johnny — Still, the more I know about law, the less likely it is that I will get into legal difficulties and need a lawyer, right? So tell me more about business law  .  .  .

170  PART 1 Foundations

QUIZ 1 Which of the following is primary legal material?

(a) The Australian Law Journal. (b) A legal dictionary. (c) AGIS. (d) Donoghue v Stevenson [1932] AC 562. 2 If a parliament passes a statute that simply inserts into an earlier statute an additional section, that earlier statute is said to be (a) amended. (b) repealed. (c) consolidated. (d) distinguished. 3 In the case citation Cook v Cook (1986) 162 CLR 76, the ‘v’ is pronounced (a) ‘vee’. (b) ‘against’. (c) ‘versus’. (d) ‘and’. 4 If a Commonwealth Act does not include a clear commencement date, it is deemed to commence (a) on the date it receives Royal Assent. (b) 28 days after the date it receives Royal Assent. (c) on a date to be proclaimed. (d) on the first of January that follows the date it receives Royal Assent. 5 According to the golden rule of statutory interpretation, an Act should be interpreted literally (a) at all times. (b) unless a literal interpretation leads to an absurdity or inconsistency. (c) unless a literal interpretation is inconsistent with the purpose of the Act. (d) unless a literal interpretation leads to an impractical result. 6 The use of the purposive approach to statutory interpretation (a) has replaced the use of the literal rule. (b) was welcomed by judges. (c) is no longer common. (d) may require reference to extrinsic materials. 7 In the context of drafting legal documents, what does the word ‘precedent’ mean? (a) A standard document of general application that is modified to suit particular circumstances. (b) A previous decision of a court higher within the same hierarchy. (c) An earlier set of facts similar to the present set of facts. (d) A shorter, clear way of expressing the same idea. 8 Inductive reasoning is the process of moving from (a) general principles to particular conclusions. (b) general experiences to particular experiences. (c) particular observations to general principles. (d) particular information to general information. 9 Which of the following is the most formal version of the sentence? (a) Judges must make decisions consistent with the decisions of other judges who are higher in the same court system. (b) Judges are bound to follow the decisions of other judges. CHAPTER 4 How to find, understand and use the law  171

(c) Members of the judiciary are obliged to decide consistently with earlier decisions of other courts that are higher in the same court hierarchy. (d) Judges have to reach the same decisions as other judges. 10 Which of the following is written in the ‘active voice’? (a) The property must be repaired. (b) The tenant must repair the property. (c) Repair of the property must be undertaken. (d) The property shall be repaired promptly.

EXERCISES In February 2016, the Australian Federal Parliament appointed a special committee to look into the problem of cyber-bullying: the use of mobile phones by primary school children to send abusive text messages to their school mates. After months of serious investigation, the committee presented its report to Parliament. The following is an extract from the report: We have heard a great deal of evidence and we are satisfied that there is a need for strong legislation to protect Australian school children from cyber-bullying by their classmates. The proposed new Act will prohibit the use of mobile phones in the schoolyard and will target careless and irresponsible parents. None of the provisions of the proposed new Act will apply to children outside of school using mobile phones responsibly.

In August 2016, the Federal Parliament passed the Mobile Phone Bullying (Protection of Children) Act 2016 (Cth) (see figure 4.11). (Note: This is a fictional Act.) Mobile Phone Bullying (Protection of Children) Act 2016 No 28, 2016 An Act to Protect Primary School Children from Bullying through use of Mobile Phones [Assented to 28 August 2016] The Parliament of Australia enacts: 1  Short title This Act may be cited as the Mobile Phone Bullying (Protection of Children) Act 2016. 2  Sale or provision of mobile phones with consent Any shopkeeper, retailer, or wholesaler who sells or provides a phone to a child under the age of thirteen years without first obtaining the written consent of the child’s parent or guardian shall be guilty of an offence. 3  Irresponsible supervision of children If the teacher, parent or guardian of a child knowingly or carelessly permits the child to: (a)  use his phone while at school; or (b) use a phone to transmit a threatening, abusive or bullying text message to another child, he shall be guilty of an offence. 4 Penalties Persons found guilty of an offence under section 2 and section 3 of this Act shall be liable to a fine of not more than one hundred dollars or a fine of not more than one thousand dollars. FIGURE 4.11

Mobile Phone Bullying (Protection of Children) Act 2016

EXERCISE 4.1 — PRIMARY LEGAL MATERIALS

Describe the process of locating a copy of the Mobile Phone Bullying Act 2016 (Cth). EXERCISE 4.2 — THE RELEVANT ELEMENTS

Explain each of the elements of the Mobile Phone Bullying Act 2016 (Cth). 172  PART 1 Foundations

EXERCISE 4.3 — INTERPRETING THE LAW

The term ‘phone’ is not defined in the Act. How should the term be defined? In your answer refer to the rules of statutory interpretation. EXERCISE 4.4 — INTERPRETING THE LAW

What are the legal consequences of section 3 of the Act being written in the masculine gender? In each of the following circumstances consider whether the Mobile Phone Bullying Act 2016 (Cth) has been breached. Apply the rules of statutory interpretation as well as the legal problem solving techniques discussed in this chapter. EXERCISE 4.5 — INTERPRETING THE LAW

Spiro works in a shop that sells mobile phones. Twelve-year-old Richard wishes to purchase a mobile phone as a birthday present for his single mother. Spiro refuses to sell a phone to Richard without the written consent of a parent or guardian. Richard forges a letter from his mother and Spiro sells him a phone. EXERCISE 4.6 — INTERPRETING THE LAW

Jerry owns a small convenience store. On 1 October 2016, Jerry is looking after his 10-year-old niece, Sarah, while her parents are out of town. Jerry takes Sarah shopping at the local mall and he gives one of his mobile phones to Sarah in case they are separated. Sarah has the phone in her possession for three hours and then returns it to Jerry without using it. Jerry does not have Sarah’s parents’ written permission. EXERCISE 4.7 — INTERPRETING THE LAW

Selma is a teacher at Woodville Primary School. At 5.00  pm on 9 October 2016 Selma is leaving the school and she sees 10-year-old Lisa standing just inside the school gate looking very worried. When Selma asks Lisa what is wrong, Lisa explains that her mother was supposed to pick her up at 4.30  pm but has not done so. Selma gives Lisa her mobile phone and allows her to call her mother. EXERCISE 4.8 — INTERPRETING THE LAW

George teaches a first-year business law course at Woodville University. On 15 October 2016 while George is giving a lecture, he is aware of three young students in the back row who are giggling and playing with a mobile phone. George ignores them. One of the students, Kosmo, is 17 years old. During the lecture Kosmo sends an abusive message to his 15-year-old brother Newman. EXERCISE 4.9 — INTERPRETING THE LAW

On 20 November 2016, Elaine’s 12-year-old son Morton is sitting in the back seat of Elaine’s car while she drives home after picking him up from school. Morton receives a text message on his mobile phone from one of his classmates that insults his new hair cut. Morton forwards the text to his best friend Derek, who is also 12 years old. EXERCISE 4.10 — INTERPRETING THE LAW

Refer to the facts of exercise 4.9 and then, on Elaine’s behalf, write a letter demanding an apology from the parents of the classmate who sent the insulting text message to Morton.

KEY TERMS amend  To correct or change a document, e.g. a contract or a statute. case law  Law made by courts in accordance with the doctrine of precedent. Also known as ‘common law’. class rule  (ejusdem generis) A rule of statutory interpretation: where two or more specific words are followed by general words, the general words should be interpreted to accord with the class created by the specific words. CHAPTER 4 How to find, understand and use the law  173

context rule  (noscitur a sociis) A rule of statutory interpretation: the meaning of a word or phrase is to be derived from its context. contract  An agreement between two or more persons that is legally enforceable. deductive reasoning  The process of using one or more general rules or principles to conclude or predict a particular experience. doctrine of precedent  The principle that when making a decision, a court must do so consistently with the earlier decisions of higher courts within the court hierarchy. Also known as ‘stare decisis’. expressio unius est exclusio alterius  (‘the express mention of one thing is the exclusion of another’) A rule of statutory interpretation: if a statutory provision expressly states that it is to apply to certain specific things, then things that are not expressly included are presumed to be excluded. extrinsic materials  Materials external to a statute that assist in the interpretation of the statute. facts in issue  The facts disputed by the parties in legal proceedings. generalia specialibus non derogant  (‘general things do not derogate from special things’) A rule of statutory interpretation: if there are two inconsistent statutory provisions, and one is general and the other specific, the specific provision is presumed to override the general provision. golden rule  A rule of statutory interpretation: legislation should be interpreted literally unless such an interpretation leads to a result that is absurd or inconsistent with the rest of the document, in which case the literal interpretation should be modified to avoid the absurdity or inconsistency. inductive reasoning  The process of using a series of particular experiences either to infer the existence of a general rule or principle or to predict a new experience. law report  A published compilation of judicial decisions. legal reasoning  A way of thinking used by lawyers to solve legal problems, construct legal arguments or prepare advice about the legal consequences of a factual situation. leges posteriores priores contrarias abrogant  (‘later rules take priority over earlier inconsistent rules’) A rule of statutory interpretation: a later law is presumed to override and automatically repeal to the extent of any inconsistency an earlier law on the same topic. legislation  Law made by parliament. Also known as a ‘statute’ or ‘Act of Parliament’. literal rule  A rule of statutory interpretation: when reading a statute a court should interpret the statute literally, giving the words and phrases in the statute their ordinary and natural meanings. loophole  A ‘flaw’ in a legal rule that, when the legal rule is interpreted literally, enables a person to circumvent the intended effect of the rule. mischief rule  A rule of statutory interpretation: in the event of an ambiguity in a statutory provision, the court should consider the problem or ‘mischief’ the statute was intended to address. obiter dicta  (‘saying by the way’) That part of a judge’s decision other than the legal principle upon which the final decision is based. primary legal materials  The direct sources of law: legislation and case law. purposive approach  An approach to statutory interpretation according to which a statute should be interpreted so as to promote the purpose or object underlying the statute. ratio decidendi  (‘reason for the decision’) That part of a judge’s decision that sets out the legal principle upon which the final decision is based. reddendo singula singulis  (‘give each to each’) A rule of statutory interpretation: where two offences are followed by two penalties, the first penalty is presumed to apply to the first offence and the second penalty is presumed to apply to the second offence. repeal  To abolish or withdraw legislation. secondary legal materials  Legal materials that do not comprise the law itself, but instead explain and expand upon the primary legal materials. statutory interpretation  The interpretation by the courts of legislation when they are called upon to decide whether or not the legislation applies to a particular set of facts or whether a particular statutory rule has been contravened. 174  PART 1 Foundations

ACKNOWLEDGEMENTS Photo: © Housh / Shutterstock.com Photo: © Lichtmeister / Shutterstock.com Extracts: © Sourced from the Federal Register of Legislation at April 1 2016. For the latest information on Australian Government law please go to https://www.legislation.gov.au. Extract: © Mark Leeming, 2005. ’Theories and Principles Underlying the Development of the Common Law – The Statutory Elephant in the Room’ University of New South Wales Law Journal, 36. Extract: © ‘Statutory Interpretation: An Australian Judicial Perspective’ by Justice Bryson, Statute Law Review, 1992, Vol. 13, No. 1, pp. 187–208, by permission of Oxford University Press.

QUIZ ANSWERS

1. d  2. a  3. d  4. b  5. b  6. d  7. a  8. c  9. c  10. b CHAPTER 4 How to find, understand and use the law  175

PART 2 Legal consequences 5 Deliberately causing harm  177 6 Carelessly causing harm  216 7 Contract law: formation of the contract  254 8 Contract law: terms of the contract  291 9 Contract law: enforcement of the contract  324 10 Contract law: working with agents  356 11 Dealing with consumers  385 12 Dealing with competitors  436 13 Protecting IP  465

176  PART 2 Legal Consequences

CHAPTER 5

Deliberately causing harm LEA RNIN G OBJE CTIVE S 5.1 What are the legal consequences of causing harm to another person? What are the differences between criminal liability, tortious liability, contractual liability and statutory liability? 5.2 When will a person be legally responsible for deliberately harming the person or property of another? 5.3 When will a person be legally responsible for deliberately causing financial harm to another person? 5.4 What are the civil consequences of being found to have caused harm? What are the criminal consequences?

JOHNNY AND ASH

[Ash and Johnny are still walking beside the river. Johnny finishes a phone call and pushes his mobile phone back into his jeans pocket. He looks angry.] Johnny — I don’t believe it! Last night is the first Saturday night in months that I take the night off. I leave Cathy in charge of the restaurant. Cathy is my assistant manager. She’s got a bit of a temper, but she works hard and she knows what she is doing. Anyway, apparently some kid at one of the tables spills their soft drink on the floor. No problem there, it happens all the time. But half an hour later this old lady at another table gets up to go to the toilet, slips over in the spilled drink, and bangs her head on the floor. She is knocked out cold. Ash — Oh no! That’s awful! Johnny — Wait, it gets better. While waiting for the ambulance to arrive, the old lady’s son starts telling Cathy off. He is yelling at Cathy that it was her responsibility to clean up the spill, and so on. The son is a bit drunk, swearing and shoving Cathy around. So, Cathy punches the guy in the jaw. Ash — What? Your assistant manager punched a customer? Johnny — Knocked the guy out cold. I did say that Cathy had a temper. Anyway, now there are two people lying next to each other, unconscious on the floor. The ambulance takes them both away, and then the police arrive and take Cathy away, leaving my restaurant in the hands of my two waiters and two chefs. None of them know how to run a restaurant. I wish I hadn’t switched my phone off last night. Anyway, now I have to go in to work to sort out the mess. Not only do I have to do the accounts for last night, and make sure that my money is still all there, but I have to return phone calls from two different lawyers, both of whom are apparently threatening to sue me. As if I actually have any money. I don’t understand it. I wasn’t even there, what does any of this have to do with me? Ash — Well, there are many situations where the law makes us responsible for harm suffered by another person. And it isn’t only when we deliberately and directly cause the harm. We can be held responsible if we cause the harm indirectly, or if the harm is a result of our carelessness. Johnny — I still don’t understand why it’s my fault. Ash — Okay, let me explain  .  .  .

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Johnny should be legally responsible for Cathy’s behaviour.

Introduction In this chapter we consider the legal consequences of deliberately causing harm to another person. There are many ways one person can deliberately cause harm to another person. They can attack the other person physically (e.g. by punching them in the jaw), damage their personal property, disturb or annoy them at home, or say things about them to damage their reputation. They can cause the other person to suffer financial loss by stealing from them, lying to them or about them, or intimidating them. Each of these situations could lead to criminal prosecution and/or civil proceedings by the victim of the harmful conduct.

5.1 Causing harm LEARNING OBJECTIVE 5.1 What are the legal consequences of causing harm to another person? What are the differences between criminal liability, tortious liability, contractual liability and statutory liability?

Where one person’s conduct causes harm to another person and that conduct is not justified or excused by law, there will be legal consequences. In this section we briefly consider five types of legal liability: criminal liability, tortious liability, contractual liability, statutory liability and vicarious liability (see figure 5.1). 178  PART 2 Legal Consequences

Criminal liability

Tortious liability

Contractual liability Harmful conduct

Vicarious liability

FIGURE 5.1

Statutory liability

Forms of legal liability

CAUTION!

A single harmful act can give rise to more than one form of liability. For example, a breach of contract may also be a tort and a crime.

Criminal liability If someone has done something that causes harm to another person, and the harmful act is a crime, they will incur criminal liability. A crime is a harmful act that will lead to prosecution by the state and, eventually, punishment of the offender. Not all harmful acts are crimes, only those acts with relatively serious consequences. Taking the property of another without permission is a crime. Breaking a promise made to another person is a harmful act with legal consequences, but it is usually not a crime. Each Australian jurisdiction has its own criminal legislation (see table 5.1). In four jurisdictions — the Australian Capital Territory, New South Wales, South Australia and Victoria — the criminal law consists of a combination of criminal legislation and common law principles. In the other four Australian jurisdictions — Queensland, Western Australia, Tasmania and the Northern Territory — the parliaments have codified the criminal law; that is, they have passed comprehensive legislation that overrides the common law (although in Tasmania some common law principles remain). The Criminal Code Act 1995 (Cth) contains a model criminal code intended for adoption by the States and Territories with a view to achieving the harmonisation of Australian criminal law. This has yet to occur. CHAPTER 5 Deliberately causing harm  179

TABLE 5.1

Sources of criminal law

Jurisdiction

Source of criminal law

Commonwealth

Crimes Act 1914 (Cth) + Criminal Code Act 1995 (Cth)

Australian Capital Territory

Crimes Act 1900 (ACT) + Criminal Code 2002 (ACT) + common law

New South Wales

Crimes Act 1900 (NSW) + common law

Northern Territory

Criminal Code Act 1983 (NT)

Queensland

Criminal Code 1899 (Qld)

South Australia

Criminal Law Consolidation Act 1935 (SA) + common law

Tasmania

Criminal Code Act 1924 (Tas) + common law

Victoria

Crimes Act 1958 (Vic) + common law

Western Australia

Criminal Code Act 1913 (WA)

Within any particular Australian jurisdiction, criminal penalty provisions are often contained within a number of different Acts. For example, within each jurisdiction consumer protection legislation contains criminal penalties. Most jurisdictions have a separate Summary Offences Act.1 Criminal liability is considered in more detail later in this chapter and the next.

Tortious liability A harmful act may be a tort. The word tort is derived from the Latin word ‘tortus’, which means ‘wrong’ or ‘crooked’. A tort is a civil wrong; that is, it is an act that causes harm to another person and gives that person the right to commence litigation to recover compensation or some other civil remedy. Whereas criminal law is concerned with punishment of the wrongdoer, tort law is concerned with the provision of a remedy to the victim of the harmful act. There are other important differences between a tort and a crime relating to how an action is commenced, the standard of proof and the outcome of the proceedings (see table 5.2). TABLE 5.2

Differences between tortious liability and criminal liability Tortious liability

Criminal liability

Objective

Remedy

Punishment

Action commenced by

Plaintiff (victim)

Crown

Standard of proof

Balance of probabilities

Beyond all reasonable doubt

Outcome

Win or lose

Guilty or not guilty

A single harmful act may be both a crime and a tort. For example, if Johnny deliberately causes physical injury to another person, he commits the crime of assault and may be prosecuted by the state, but he also commits the tort of battery (see below), and the victim of his harmful act may commence a civil action against Johnny. Tort law is primarily case law, developed by the courts over hundreds of years. In recent years, however, a number of important pieces of legislation have added to, varied or abolished the case law principles, particularly in the areas of negligence and defamation. Tort law is considered in more detail in this chapter and the next.

Contractual liability A contract is a legally enforceable agreement. If a person who engages in harmful conduct has a contractual relationship with the victim of the harm, then the harmful conduct may give rise to contractual 1 Summary Offences Act 1988 (NSW); Summary Offences Act 1923 (NT); Summary Offences Act 2005 (Qld); Summary Offences Act 1953 (SA); Summary Offences Act 1966 (Vic).

180  PART 2 Legal Consequences

liability. For example, if a careless act on Johnny’s part causes harm to one of his customers, he not only commits the tort of negligence, he also breaches the contract that he has with the customer, giving rise to both tortious and contractual liability. Like tort law, contract law is concerned with the provision of a remedy to the victim of a harmful act. There are, however, important differences between contractual liability and tortious liability. Tortious liability can arise in the absence of a contract and even in circumstances where the parties are complete strangers, but contractual liability arises only if there is a contract in existence between the plaintiff and the defendant. Johnny owes tortious obligations to a wide range of family members, neighbours, acquaintances, strangers, fellow motorists, pedestrians, and other members of his community, but he owes contractual obligations only to a limited number of employees, customers and suppliers. Contractual liability is considered in more detail in coming chapters.

Statutory liability A harmful act may — in addition to being a crime, a tort and/or a breach of contract — contravene one or more statutes, giving rise to statutory liability. Many statutes impose legal liability. For example, if Johnny carelessly sells a defective product, he not only commits the tort of negligence and breaches the contract with the buyer, he also contravenes the Australian Consumer Law (ACL). Contract law and tort law are primarily case law, and typically prohibit general forms of harmful conduct such as dishonesty and carelessness. Statute law, on the other hand, is made by parliaments and prohibits specific types of harmful conduct such as engaging in pyramid selling, breaching copyright, or breaching a duty to avoid insolvent trading. In most instances contravention of a statutory duty will lead to prosecution or litigation by the relevant statutory authority. In some cases individuals affected by the contravention of statutory duty may be entitled to bring a private civil action. Statutory liability is considered in detail throughout the other chapters of this text. ACTIVIT Y 5.1 — APPLY

Prepare a table summarising the similarities and differences between criminal liability, tortious liability, contractual liability, and statutory liability.

Vicarious liability In some circumstances a person will be held liable for harm caused by another. This is known as vicarious liability. It arises most frequently within the relationship of employer and employee; for example, Johnny will be liable for any harmful conduct by his employees at the restaurant while the employees are carrying out their duties. If an employee is undertaking authorised work in an unauthorised or wrongful manner, the employer will still be vicariously liable for their actions. Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 509

The driver of a petrol tanker lit a cigarette while delivering petrol to an underground tank. The lit cigarette caused a fire. The court had to decide if the employer of the driver was liable for the damage. The employer argued that the driver was not permitted to smoke while delivering petrol. The court decided that the employer was nevertheless liable because, at the time, the driver was carrying out an authorised task.

However, if the employee is acting well outside the scope of their employment the employer will not be vicariously liable. CHAPTER 5 Deliberately causing harm  181

Deatons Pty Ltd v Flew (1949) 79 CLR 370

A bar attendant at a hotel got into an argument with a customer, Flew, about his continued use of bad language. The bar attendant threw a glass of beer at Flew’s face. Flew commenced legal proceedings against the owner of the hotel, Deatons Pty Ltd, claiming that Deatons Pty Ltd was vicariously liable for the bar attendant’s actions. The court decided that the bar attendant was not acting within the scope of their employment at the time of the incident and that, therefore, Deatons Pty Ltd was not vicariously liable for the bar attendant’s actions.

Most of the vicarious liability case law is concerned with the liability of an employer for the negligence of an employee. However, courts have also confirmed that an employer may be held liable for intentional harm caused by an employee, and even for crimes committed by an employee, if the employee’s misconduct is sufficiently connected to the risks inherent in the employer’s business.2 Note that an employer is not vicariously liable for the conduct of an independent contractor.3 Vicarious liability also arises in other contexts, including: •• the liability of a principal for the actions of their agent, and •• the liability of one partner for the actions of the other partners. ACTIVIT Y 5.2 — REFLECT

Refer to ‘Johnny and Ash’ at the beginning of this chapter. Is Johnny liable for Cathy’s conduct?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 5.1 What is criminal liability? 5.2 What is tortious liability? 5.3 What is contractual liability? 5.4 What is statutory liability? 5.5 What are the similarities and differences between these four forms of legal liability? 5.6 When is an employer liable for the conduct of an employee?

5.2 Deliberately causing harm to person or property LEARNING OBJECTIVE 5.2 When will a person be legally responsible for deliberately harming the person or property of another?

In this part of the chapter we focus on the legal consequences of deliberately causing harm to the person or property of another. Later in the chapter we consider the consequences of deliberately causing financial harm, and in a coming chapter we consider the consequences of carelessly causing harm to the person or property of another, and of carelessly causing financial harm (see figure 5.2). Deliberately causing harm to the person or property of another may give rise to criminal liability and/ or tortious liability.

Criminal liability Some (but not all) forms of harmful conduct will give rise to criminal liability. In this section we consider the range of criminal offences and defences only briefly as this is a business law text, and we are more concerned with civil law than with criminal law. 2 Lloyd v Grace, Smith and Co [1912] AC 716. 3 Hollis v Vabu Pty Ltd (2001) 207 CLR 21.

182  PART 2 Legal Consequences

Criminal liability

Tort of trespass Deliberately Tort of nuisance Harm to the person or property of another

Tort of defamation

Carelessly

Tort of negligence

Criminal liability Causing

Tort of deceit

Deliberately

Tort of passing off

Tort of intimidation Tort of interference with contractual relations

Financial harm

Harm to third party

Carelessly

Defective products

Negligent misstatement FIGURE 5.2

Consequences of causing harm

Criminal offences Criminal offences include: •• offences against the person, such as murder, manslaughter, assault, sexual offences and kidnapping; •• offences against property, such as stealing, robbery, burglary, forgery and corporate crime; •• offences against public order, such as treason and sedition; and •• offences against administration of the law and public authority, such as perjury and destroying evidence. CHAPTER 5 Deliberately causing harm  183

ACTIVIT Y 5.3 — RESEARCH

Download the criminal legislation of your State or Territory (see table 5.1). Locate definitions of (1) assault, (2) burglary, (3) sedition, and (4) perjury.

Criminal offences can also be classified as either indictable offences or summary offences. An indictable offence is a serious criminal offence such as murder, manslaughter, rape or robbery. If a person is charged with having committed an indictable offence, a committal proceeding is first held in a lower court to determine whether or not there is sufficient evidence to justify a full criminal trial. If the magistrate decides that there is sufficient evidence, the criminal trial proceeds in a higher court before a judge and jury. A summary offence is a less serious criminal offence such as common assault, a traffic offence, or being drunk and disorderly. If a person is charged with having committed a summary offence, the criminal trial is held before a magistrate in a lower court. Some indictable offences are dealt with ‘summarily’, that is, in a lower court. These are usually cases involving damage to property up to a certain monetary value. As a general rule, the defendant must consent to the matter being heard summarily.

Criminal guilt According to the common law, a person cannot be found guilty of a crime unless two things can be established: 1. a wrongful act (actus reus), and 2. a guilty mind, that is, intention, foresight, knowledge or awareness (mens rea). However, if the offence is created by legislation rather than common law, the legislation may not require the establishment of mens rea in order for the defendant to be found guilty. This is known as a ‘strict liability’ or ‘absolute liability’ offence. For example, if the defendant has been charged with driving a motor vehicle in excess of the speed limit, it is not necessary to establish that they did so intentionally; establishing that the defendant has committed the actus reus will be sufficient.

Criminal defences If a person is prosecuted for a crime, they are entitled first to rely upon the fact that the Crown must prove the accusation beyond reasonable doubt. The burden of proof is on the Crown, and the defendant does not necessarily need to raise any defence, although it is usually wise to do so. There is a range of defences that, although not involving a denial by the defendant that the criminal act took place, involve an assertion that one or more of the necessary elements of criminal guilt were not present. •• Self-defence — in appropriate circumstances, the use of force can be used in self-defence or in the defence of another person or property. The force must be reasonable and not excessive. The defence is generally not available if the defendant acted after the danger had passed or if they were motivated by revenge rather than self-protection. •• Insanity — the defendant could argue that some form of mental illness meant that they were unable to form the requisite criminal intention. However, if they are found not guilty on the grounds of mental illness they may be held in custody at a psychiatric institution. Generally they will be released only when it is found that they are no longer mentally ill or do not require detention. For this reason it is often preferable to rely upon other defences. •• Diminished responsibility — provision exists in New South Wales, Queensland, the Northern Territory and the Australian Capital Territory for the partial defence of diminished responsibility. The defence is established if it is shown that at the relevant time the defendant suffered from an abnormality of mind that impaired their understanding of right and wrong, their perception of events, or their capacity to control their actions. The defence can only be raised in the context of murder trials and has the effect of reducing liability from murder to manslaughter. 184  PART 2 Legal Consequences

•• Duress — if at the time the crime was committed the defendant’s will was ‘overpowered’ by compulsion or the will of another, they may be able to rely upon the defence of duress. •• Automatism — automatism is action without conscious volition. If at the time of committing the crime the defendant was not in conscious control of their actions, they will be entitled to an acquittal. At common law the automatism may be the result of intoxication; this has been overridden by legislation in most jurisdictions. •• Infancy — at common law, a child under 7 years of age is incapable of criminal intention, and for a child between 7 and 14 years, there is a (rebuttable) presumption that the child is incapable of criminal intention. A child over the age of 14 incurs criminal liability in the same way as an adult. Statutory amendments in each jurisdiction have raised the minimum age from 7 to 10.4 •• Necessity — this common law defence can be raised where the criminal act was necessary to avert a serious consequence and the act was in proportion and appropriate to the gravity of the danger. ACTIVIT Y 5.4 — REFLECT

Review ‘Johnny and Ash’ at the beginning of this chapter. What crime has Cathy committed? What defence might Cathy seek to rely upon?

In the remainder of this section we consider the civil consequences of deliberately causing harm.

The tort of trespass A defendant commits the tort of trespass if they intentionally or negligently interfere directly with the person or property of the plaintiff. There are three principal types of trespass (see figure 5.3): 1. trespass to land, 2. trespass to goods, and 3. trespass to the person.

Land

Trespass to goods

Goods

Conversion

Trespass

Detinue

Battery

Person

Assault False imprisonment

FIGURE 5.3

Types of trespass

4 Criminal Code 1995 (Cth) s 7.1; Criminal Code 2002 (ACT) s 25; Children (Criminal Proceedings) Act 1987 (NSW) s 5; Criminal Code 1983 (NT) s 38(1); Criminal Code 1899 (Qld) s 29(1); Young Offenders Act 1993 (SA) s 5; Criminal Code 1924 (Tas) s 18(1); Children, Youth and Families Act 2005 (Vic) s 344; Criminal Code Act 1913 (WA) s 29 para 1.

CHAPTER 5 Deliberately causing harm  185

Trespass is actionable per se, which means that there is no need for the plaintiff to prove actual loss or damage in order to commence a civil action against the trespasser. It is, however, necessary to prove that the interference was either intentional or negligent. If it was accidental the tort of trespass is not committed. Stanley v Powell [1891] 1 QB 86

Stanley and Powell were hunting together. Powell shot at a bird and missed, and the bullet ricocheted off of a tree and hit Stanley. Stanley sued Powell in the tort of trespass to the person. The court decided that Powell had not committed trespass because the interference was neither intentional nor negligent; it was accidental.

Trespass to land Most people are familiar with trespass to land. This type of trespass occurs if the defendant intentionally or negligently interferes directly with land in the rightful possession of the plaintiff without the plaintiff’s consent or other excuse. For example, Johnny commits the tort if he: •• enters Simon’s home without his permission, •• refuses to leave Simon’s home within a reasonable time of being asked to do so,5 or •• leaves rubbish or other objects on Simon’s property.6 CHECKLIST

The tort of trespass to land is committed by X if all of the following requirements are satisfied: ◼◼ X interferes with Y’s exclusive possession of land. ◼◼ X’s interference is direct. ◼◼ X’s interference is either intentional or negligent. ◼◼ There is no consent by Y or lawful justification for the interference.

There does not have to be physical contact with the land; interference with the airspace above the land will still be trespass.

5 Cowell v Rosehill Racecourse Co Ltd (1937) 56 CLR 605. 6 Bathurst City Council v Saban (1985) 2 NSWLR 704.

186  PART 2 Legal Consequences

Kelsen v Imperial Tobacco Co [1957] 2 QB 334

An advertising sign erected by Imperial Tobacco Co on their property projected into the airspace above a shop on Kelsen’s neighbouring property. The court decided that the sign amounted to a trespass to land.

It is not only the owner of the land who has the right to sue others for trespass. A tenant in rightful possession of land has the right to sue for trespass, including the right to sue the landlord if the landlord enters the land without permission or lawful excuse.7 A person who has not been previously invited to the property is not necessarily a trespasser. If the path or driveway leading to the entrance of the building is unobstructed, the entrance gates are unlocked, and there is no sign or other indication that visitors are forbidden entry, there is an implied grant of permission by the occupier of the property in favour of members of the public to use that path or driveway to communicate with or make a delivery to a person in the building.8 ACTIVIT Y 5.5 — REFLECT

Will trespassers be ‘prosecuted’?

Trespass to goods The three torts relating to interference with goods are: 1. trespass to goods, 2. conversion, and 3. detinue. Although they are separate and distinct torts, there is some overlap between the three forms. Trespass to goods is direct and intentional or negligent interference by the defendant with goods in the possession of the plaintiff without their consent. The plaintiff does not have to be the owner of the goods, as long as they have rightful possession of the goods at the time. For example, Johnny commits the tort of trespass to goods if, without Simon’s permission, he takes something from Simon or handles or uses something in Simon’s possession.9 It is not necessary to prove that the goods were damaged in any way. CHECKLIST

The tort of trespass to goods is committed by X if all of the following requirements are satisfied: ◼◼ X interferes with Y’s possession of goods. ◼◼ X’s interference is direct. ◼◼ X’s interference is either intentional or negligent. ◼◼ There is no consent by Y or lawful justification for the interference.

Conversion is intentional (and not merely negligent) interference with the goods of the plaintiff in a way that is inconsistent with their ownership or rightful possession of the goods. It will occur if the defendant wrongfully takes goods belonging to the plaintiff with the intention of keeping them. It will

7 Gifford v Dent [1926] WN 336. 8 Halliday v Nevill (1984) 155 CLR 1. 9 Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204.

CHAPTER 5 Deliberately causing harm  187

also occur if the defendant rightfully has possession of the plaintiff’s goods but does something with those goods without the plaintiff’s permission. For example, Johnny commits the tort of conversion if he has borrowed Simon’s car with his permission, but he: •• destroys the car,10 •• uses the car in a way which Simon has not authorised,11 •• refuses to return the car when Simon tells him to,12 or •• transfers or sells the car to another person without Simon’s consent.13 Wrongfully detaining the goods of another is called detinue. It will occur if the defendant rightfully has possession of the plaintiff’s goods but when the plaintiff demands that they return the goods, the defendant unreasonably refuses to do so. It differs from conversion in that it includes negligent as well as intentional detention of the goods. Thus, if Johnny borrows Simon’s car and then carelessly loses it, his failure to return the car to Simon when asked to do so will be detinue.14

Trespass to the person Trespass to the person is direct and intentional or negligent interference with the person (i.e. the body) of the plaintiff. The three forms of trespass to the person are: 1. battery, 2. assault, and 3. false imprisonment. Battery is intentional or negligent conduct that directly causes contact with the body of the plaintiff without their consent or lawful justification. If the defendant punches the plaintiff, pushes them, stabs them or shoots them they commit the tort of battery. Sometimes even the merest touch can be battery, such as an unwelcome hug or kiss. The courts have however made it clear that the plaintiff is not entitled to insist that no one ever touch them, and that a certain minimal level of physical contact is an unavoidable element of daily life.15 Rixon v Star City Pty Ltd [2001] 53 NSWLR 98

Rixon continued to play roulette at the Star City casino after being banned. A Star City employee confronted Rixon and detained him until the police arrived. When the employee confronted Rixon, the employee placed his hand on Rixon’s shoulder to get his attention. Rixon sued Star City in the tort of battery. The court decided that the physical contact was made to get Rixon’s attention and as such was ‘generally acceptable in the ordinary conduct of daily life’. Star City was not liable.

People who participate in contact sports are deemed to have consented to physical contact within the rules of the game. CHECKLIST

The tort of battery is committed by X if all of the following requirements are satisfied: ◼◼ X causes some sort of physical interference with the body of Y. ◼◼ X’s act is direct. ◼◼ X’s act is either intentional or negligent. ◼◼ There is no consent by Y or lawful justification for X’s act.

10 Hollins v Fowler (1874–75) LR 7 HL 757. 11 Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204. 12 Flowfill Packaging Machines Pty Ltd v Fytore Pty Ltd (1993) Aust Torts Reports 81–244. 13 Perpetual Trustees and National Executors of Tasmania Ltd v Perkins (1989) Aust Torts Reports 80–295. 14 John F Goulding Pty Ltd v Victorian Railway Commissioners (1932) 48 CLR 157. 15 Collins v Wilcock [1984] 1 WLR 1172.

188  PART 2 Legal Consequences

Assault is a threat that causes the plaintiff to anticipate direct, imminent and harmful or offensive contact with their person. If the defendant causes the plaintiff to reasonably believe that they are about to be subjected to a battery, the defendant commits the tort of assault. No physical contact needs to occur for this tort to be committed; it is the threat of physical contact. For example, if Johnny threatens to shoot Simon, or shakes his fist under Simon’s face in a threatening manner, he commits the tort of assault.16 If the defendant accompanies the threatening gesture with words that make it clear that the plaintiff is in no imminent danger — for example, if Johnny shakes his fist at Simon and says ‘If I was a violent man, I would hit you’ — the tort is not committed.17 However, if the defendant makes carrying out the threat conditional upon the plaintiff complying with the defendant’s demand — for example, if Johnny threatens to punch Simon unless Simon leaves the restaurant — the tort is still committed.18 It is not necessary that the defendant actually be able to carry out their threat; the question is whether the plaintiff reasonably believes that they are about to be physically attacked. If Johnny threatens to shoot Simon with an unloaded gun, but Simon does not know that the gun is not loaded, Johnny still commits the tort of assault. Similarly, it is not necessary that the defendant intends to actually carry out the threat; it is necessary, however, that the defendant intends the plaintiff to believe that the defendant is going to carry out the threat.19 CHECKLIST

The tort of assault is committed by X if all of the following requirements are satisfied. ◼◼ X causes Y to develop a reasonable apprehension of imminent physical contact. ◼◼ X’s act is direct. ◼◼ X’s act is either intentional or negligent. ◼◼ There is no consent by Y or lawful justification for the act.

ACTIVIT Y 5.6 — REFLECT

How does the tort of assault differ from the crime of assault?

False imprisonment is the total deprivation of the plaintiff’s freedom of movement without consent or lawful justification. It is not necessary that there be direct physical interference. There must, however, be no reasonable means of escape.20 If Johnny locks Simon in a room against his will, Johnny commits the tort of false imprisonment. Johnny also commits the tort of false imprisonment if Simon is a passenger in Johnny’s car and insists that Johnny stop the car to let him leave, and Johnny continues to drive at a relatively high speed; this is so even if the doors of the car are not locked. The restraint need not be physical — it may be psychological. If Johnny convinces Simon that he is legally authorised to detain Simon and that Simon has no alternative but to remain in Johnny’s custody, Johnny commits the tort.21

16 Stephens v Myers (1830) 4 Car & P 349; 172 ER 735. 17 Tuberville v Savage (1669) 1 Mod 3; 86 ER 684. 18 Rozsa v Samuels [1969] SASR 205. 19 Hall v Foncea [1983] WAR 309. 20 Burton v Davies [1953] St R Qd 26. 21 Symes v Mahon [1922] SASR 447.

CHAPTER 5 Deliberately causing harm  189

It is not false imprisonment if the plaintiff has consented to being detained. CHECKLIST

The tort of false imprisonment is committed by X if all of the following requirements are satisfied: ◼◼ X causes Y to be totally restrained. ◼◼ X’s act is direct. ◼◼ X’s act is either intentional or negligent. ◼◼ There is no consent by Y or lawful justification for the act.

Defences Defences to the tort of trespass include the following. •• Accident — the interference was neither intentional nor negligent.22 •• Consent — the plaintiff has either expressly or by implication voluntarily consented to the trespass.23 •• Necessity — the trespass was necessary to protect life, land or goods from imminent and real harm.24 •• Self-defence — the trespass (usually to the person) was reasonably necessary to protect the defendant or another from imminent physical aggression by the plaintiff, and was proportionate to the threat.25 •• Defence of property — the trespass (usually to the person) was reasonably necessary to protect the defendant’s land or goods from imminent harm by the plaintiff and was proportionate to the threat.26 Southwark LBC v Williams [1971] Ch 734

Williams was a homeless person found squatting in a house owned by the Borough. When sued for trespass he sought to rely upon the defence of necessity. The defence failed. As the court explained, if homelessness was recognised as a defence to trespass ‘no one’s house would be safe’ .

The tort of nuisance Nuisance is an act by the defendant that indirectly interferes with the plaintiff’s use and enjoyment of private or public land. There are two forms of nuisance: 1. private nuisance, and 2. public nuisance. There is an important difference between nuisance and trespass to land: trespass is direct interference with land in the possession of the plaintiff, and nuisance is indirect interference with the plaintiff’s use and enjoyment of land. If Johnny enters Simon’s home without his permission, he commits the tort of trespass. If Johnny plays loud music in his restaurant that disturbs his neighbours, he commits the tort of nuisance.

Private nuisance A private nuisance is an act by the defendant that indirectly interferes with the plaintiff’s use and enjoyment of private land. The interfering act does not need to be committed from the defendant’s land; it can be committed from the street or from airspace above the land.

22 Stanley v Powell [1891] 1 QB 86. 23 McNamara v Duncan (1971) 26 ALR 584. 24 Wilson v Pringle [1987] QB 237; Cope v Sharpe (No 2) [1912] 1 KB 496. 25 Fontin v Katapodis (1962) 108 CLR 177. 26 Norton v Hoare (1913) 17 CLR 310.

190  PART 2 Legal Consequences

CHECKLIST

The tort of private nuisance is committed by X if all of the following requirements are satisfied. ◼◼ X interferes with Y’s use and enjoyment of private land. ◼◼ Y has an interest in that land (e.g. they are the owner or a tenant). ◼◼ Y suffers actual harm or damage. ◼◼ X’s interference is indirect. ◼◼ X’s interference is either intentional or reckless. ◼◼ X’s interference is sustained and unreasonable.

Examples of acts that amount to private nuisance include: destruction of the plaintiff’s vegetation by noxious fumes,27 blocking of a watercourse causing flooding to the plaintiff’s property,28 excessive noise by the defendant,29 use of the defendant’s premises for prostitution,30 floodlights in the defendant’s backyard,31 and vibration from the defendant’s factory.32 The law does not allow someone to insist that they never be disturbed, and instead recognises that members of a community must be prepared to put up with some interference from their neighbours. It is only when that interference becomes unreasonable that the tort of nuisance is committed. The law seeks to balance the plaintiff’s right to undisturbed enjoyment of their property with the defendant’s right to undertake the activity causing the disturbance. In assessing the unreasonableness of the interference the court will take into account: •• the severity of the interference,33 •• the duration and time of day of the interference,34 •• the location of the plaintiff’s property (e.g. if it is in a residential area or an industrial area),35 •• whether the plaintiff is abnormally sensitive,36 •• whether the interference is deliberate and malicious,37 and •• whether the defendant took precautions to minimise the interference.38 •• •• •• •• •• ••

Public nuisance A public nuisance is an act that indirectly interferes with the plaintiff’s use and enjoyment of public land such as a street or a park. For example, if Johnny leaves a delivery of new furniture on the pavement at the front of his restaurant, he may commit the tort of public nuisance. A particular individual is entitled to bring a legal action against the defendant for public nuisance only if they can show that they have suffered loss over and above loss caused to members of the public generally.39 Public nuisance is more likely to lead to prosecution under the criminal law or to proceedings brought by the Attorney-General on behalf of the community.

27 St Helens Smelting Co v Tipping (1865) 11 HLCas 642; 11 ER 1483. 28 Thorpes Ltd v Grant Pastoral Co Pty Ltd (1955) 92 CLR 317. 29 Andreae v Selfridge and Co Ltd [1938] Ch 1. 30 Thompson-Schwab v Costaki [1956] 1 WLR 335. 31 Raciti v Hughes (1995) 7 BPR 14,837. 32 Sturges v Bridgman (1879) 11 Ch D 852. 33 Andrae v Selfridge and Co Ltd [1938] Ch 1. 34 Wherry v KB Hutcherson Pty Ltd (1987) Aust Torts Reports 80–107. 35 Sturges v Bridgman (1879) 11 Ch D 852. 36 Robinson v Kilvert (1889) 41 Ch D 88. 37 Hollywood Silver Fox Farm Ltd v Emmett [1936] 2 KB 468. 38 Painter v Reed [1930] SASR 295. 39 Walsh v Ervin [1952] VLR 361.

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CHECKLIST

The tort of public nuisance is committed by X if all of the following requirements are satisfied. ◼◼ X interferes with Y’s use and enjoyment of public land. ◼◼ Y suffers actual harm or damage over and above that suffered by members of the public generally. ◼◼ X’s interference is indirect. ◼◼ X’s interference is either intentional or reckless. ◼◼ X’s interference is sustained and unreasonable.

Silservice v Supreme Bread Pty Ltd (1949) 50 SR (NSW) 207

Queues of people lining up to buy bread from a shop owned by Supreme Bread were blocking access to a neighbouring shop owned by Silservice. Silservice sued Supreme Bread in the tort of public nuisance. The court decided that the interference was not unreasonable, and that Supreme Bread was therefore not liable, but went on to explain that a defendant will be liable if the crowd is attracted by something done by the defendant which is not necessary for the conduct of their business; or the defendant’s business premises are inadequate or not suitable to hold or control the likely crowds; or the defendant failed to use some reasonable means to minimise or prevent the damage to the plaintiff.

LAW IN CONTEXT: LAW IN THE MEDIA

Public park or private gym: boot camps or bloody nuisance? Fitness ‘boot camps’ are becoming an increasingly common feature within Australian parks. Typically, a personal trainer will charge a modest fee to instruct a small group that gathers in a public park to work out. Sessions usually last about an hour. But as boot camps have grown in popularity, some park users and residents have become annoyed by the noise and competition for space. People have called for the practice to be closely regulated or banned altogether. Is this fair and what are the alternatives?

192  PART 2 Legal Consequences

The problem with boot camps The trouble is that in some cities such as the Gold Coast, some park users and nearby residents are becoming fed up and complain their parks are ‘overrun’ by boot camps. They want their local councils to do something about it. Some boot camps have pumping music, training equipment and yelling instructors, which can disturb other park users and nearby residents. Some people also feel that businesses should not profit from public parks — at least not without giving something back to the community. The Santa Monica City Council in the United States is considering closing down ‘boot camps’ altogether, whereas the Gold Coast City Council, like some other Australian councils, is proposing to regulate them and charge instructors a fee for using public parks and reserves. Boot camp supporters argue that participants have a right to use public parks, because they pay council rates too. Boot camps also benefit society by making people fitter and healthier. Some have questioned the right of local authorities to regulate park uses. This raises some important questions: Why does conflict occur in parks? Who are parks for? Who should decide what is acceptable behaviour in a park? Do local councils have the right to regulate park use? What causes conflict in parks? Researchers have found that conflict can occur in parks for multiple reasons. Park users may see these spaces as appropriate for some activities but not others. Conflict can also occur because some park activities disturb or disrupt other park users, causing them to change the part of parks they visit, alter the time of day they visit, switch parks altogether, or switch the activities they undertake. Local residents can also be affected by high levels of park use. Is conflict in parks new? Conflict among park users is as old as parks themselves. Parks began as the hunting preserves of the social elite. Following the industrial revolution, when people flocked into cities from the countryside, urban reformers demanded private estates be opened to the general public to improve the life of residents. London’s favourite parks such as Hyde Park and Regents Park began this way. In the United States, park designers copied the European model and deliberately created ‘rural-like’ spaces in the city. These parks, which resembled landscaped gardens, were intended as places where people could escape the stresses of urban life, relax, and commune with nature, but also interact with each other. In principle, parks were democratic spaces. But park designers also regarded early parks as ‘civilised’ spaces for ‘passive recreation’ — activities such as running and ball-games were regarded as ill-mannered and inappropriate. Some early parks developed reputations as places where prostitution, gambling, drunkenness, and robbery were common. Park rangers and park police were created to regulate use, especially activities deemed immoral or offensive. Early Australian parks such as Sydney’s Hyde Park developed rules like ‘keep off the grass’ to prevent park users from damaging park facilities, but also prohibited rude language, gambling, climbing trees, playing musical instruments, bathing, washing clothes and even singing. Why and how are park activities regulated? Regulating activities within parks and managing the behaviour of park users has occurred since the first parks were created. Usually this is done by developing local laws with penalties that apply for breaching park rules. Some rules make perfect sense. Playing golf or flying model aircraft can present a safety hazard for park users. But other park rules can be discriminatory, excluding some racial or ethnic groups who enjoy particular activities. For example, Latinos in the USA have argued that prohibiting soccer excludes them from parks. There are alternatives. Researchers have shown that the design of parks can strongly influence how parks are used and can thus reduce conflict. Carefully designing the physical space of parks may encourage some activities but make other activities difficult or unappealing. Subtle design cues can promote better behaviour without the need for fines, penalties or long lists of rules. The space within parks can also be allocated for particular activities. Playgrounds, dog parks, skateboard parks and community gardens were once derided just as boot camps are today, yet they all have their place. And we can allocate activities according to time of day — designating places where activities are permitted at certain times but not others.

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So what should be done about boot camps? At face value, allowing boot camps in parks seems reasonable, especially in an era when public authorities are struggling to combat sedentary lifestyles and obesity. Researchers have found that parks can help people to be more physically active. Boot camps are common in parks in the United States, Canada and United Kingdom and are regulated through permits. Instructors are required to have insurance and must operate in designated spaces at specific times of the day. Many councils around the world are also installing fitness equipment in parks. So it seems like a logical step to add boot camps to park programing. At a time when planners and health officials are working to make parks livelier, more inclusive, and spaces that promote physical activity — boot camps surely have their place. If rock concerts, art exhibitions, movies and food festivals are appropriate in parks — why not boot camps too? Source: Jason Byrne, 25 January 2013, http://theconversation.com/public-park-or-private-gym-boot-camps-or-bloodynuisance-11664.

ACTIVIT Y 5.7 — REFLECT

Give examples of each of the following: 1. Harmful conduct that amounts to private nuisance. 2. Harmful conduct that amounts to public nuisance. 3. Harmful conduct that will not qualify as private or public nuisance and must be tolerated.

Defences Defences to the tort of nuisance include the following. •• Consent by the plaintiff — the plaintiff consented to the nuisance, either expressly or by implication.40 •• Statutory authority — legislation exists that permits the defendant to engage in the harmful conduct.41 •• Contributory negligence — the harm suffered by the plaintiff was at least partially the result of the plaintiff’s own carelessness.

The tort of defamation Defamation is the publication by the defendant to a third party, in spoken or written form, of a statement about the plaintiff that would damage the reputation of the plaintiff. At common law, a distinction was drawn between two forms of defamation: libel and slander. Libel was defamation in a permanent form, such as in writing or on film. Slander was defamation in a transient form, such as spoken defamation. Australian law no longer distinguishes between these two forms of defamation. Until recently, each State and Territory either had its own defamation legislation or relied upon common law principles. In 2005 and 2006, each jurisdiction adopted model defamation legislation.42

Elements of defamation The plaintiff must establish three things to successfully bring an action against the defendant in the tort of defamation.43 1. The defendant’s statement about the plaintiff was defamatory. 2. The defendant’s statement identified the plaintiff. 40 Kiddle v City Business Properties Ltd [1942] 1 KB 269. 41 Cohen v City of Perth (2000) 112 LGERA 234. 42 Civil Law (Wrongs) Act 2002 (ACT); Defamation Act 2005 (NSW); Defamation Act 2006 (NT); Defamation Act 2005 (Qld); Defamation Act 2005 (SA); Defamation Act 2005 (Tas); Defamation Act 2005 (Vic); Defamation Act 2005 (WA). 43 Consolidated Trust Co Ltd v Browne (1948) 49 SR (NSW) 86.

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3. The defendant’s statement was published to a third party. In addition, only a living plaintiff can sue for defamation — the dead cannot be defamed. A corporation can only sue for defamation if it: •• is a not for profit organisation, or •• has fewer than ten employees. Requirement 1: The statement was defamatory

The precise meaning of ‘defamatory statement’ is not set out in the defamation legislation, but it is usually interpreted by the courts as meaning a statement that: •• makes ordinary people think less of the plaintiff, •• causes people to shun or ridicule the plaintiff, or •• causes the plaintiff to be excluded from society. ACTIVIT Y 5.8 — REFLECT

What kinds of statements would be considered defamatory if made about: 1. a businessperson? 2. a university student? 3. an accountant? 4. a famous actor?

The defamatory imputation may be expressed clearly in the statement or implied by innuendo. Bjelke-Peterson v Warburton [1987] 2 Qd R 465

The leader of the Queensland Opposition claimed that certain government ministers had ‘their hands in the till’ . The court decided that this statement expressed by innuendo the claim that the ministers were corrupt and was, therefore, defamatory.

The defendant’s intended meaning is irrelevant. The court decides whether or not the statement is capable of being defamatory according to its ordinary and natural meaning (a question of law), and then decides whether, in the circumstances, the statement was in fact defamatory (a question of fact). Requirement 2: The statement identified the plaintiff

The defendant’s statement must identify the plaintiff. It is not necessary that the plaintiff actually be named, as long as the statement is one that can be reasonably identified as referring to the plaintiff. If it is an entire class of persons that has been defamed — e.g. by the statement ‘all lawyers are thieves’ — then, generally speaking, an individual who is a member of the class cannot sue the person who made the statement for defamation. If however the class has a limited membership, they may be able to sue if they can show that the statement can be reasonably understood as referring to each of the individuals in the class. For example, if a person makes the statement ‘all of the lawyers in this law firm are thieves’, one of the lawyers in the firm may be able to bring an action in defamation. The larger the class the less likely it will be that a member of the class can sue for defamation. Requirement 3: The statement was published

‘Publication’ in this context simply means communicated to someone other than the plaintiff. It does not necessarily mean published in a newspaper, book or magazine, although these things will usually qualify as publication. ‘Publication’ includes sending an email or a text message; broadcasting a television program; making an announcement at a lecture; and even talking to a friend. CHAPTER 5 Deliberately causing harm  195

CAUTION!

The requirement that a defamatory statement be ‘published’ does not mean that it must appear in a book, newspaper or magazine. ‘Published’ in this context simply means ‘communicated’, and includes any spoken or written statement made to or in the presence of another person.

For example, Johnny making a defamatory statement about Simon directly to Ash is ‘publication’, as is Johnny making a statement about Simon directly to Simon in the presence of Ash. Defamation proceedings can be brought not only against the original publisher, but also against anybody who publishes or republishes the defamatory material.44 CHECKLIST

The tort of defamation is committed by X if all of the following requirements are satisfied. ◼◼ X makes a statement about Y that is defamatory. ◼◼ The statement identifies Y. ◼◼ The statement is published to someone other than Y.

Defences The defamation legislation sets out a range of possible defences to the tort of defamation. •• Justification — the statement about the plaintiff is substantially true.45 •• Contextual truth — the defamatory statement carried, in addition to the defamatory meanings about which the plaintiff complained, one or more other meanings that are substantially true, and that the defamatory meanings did not do any further harm to the reputation of the plaintiff because of the substantial truth of the other meanings.46 •• Absolute privilege — the statement was made during parliamentary or judicial proceedings, regardless of their motives.47 •• Publication of public documents — the defamatory material was contained in a public document or a fair summary of or an extract from a public document.48 Public document is defined as including parliamentary reports, court judgments and other publicly available material. •• Fair reporting of matters of public concern — the defamatory material was contained in a fair report of any proceedings of public concern, including Parliamentary committees, commissions of inquiry, law reform bodies, local councils and a range of corporate, professional, sporting and recreational bodies.49

44 John Fairfax Publications Ltd v Rivkin (2003) 201 ALR 77; [2003] HCA 50. 45 Civil Law (Wrongs) Act 2002 (ACT) s 135; Defamation Act 2005 (NSW) s 25; Defamation Act 2006 (NT) s 22; Defamation Act 2005 (Qld) s 25; Defamation Act 2005 (SA) s 23; Defamation Act 2005 (Tas) s 25; Defamation Act 2005 (Vic) s 25; Defamation Act 2005 (WA) s 25. 46 Civil Law (Wrongs) Act 2002 (ACT) s 136; Defamation Act 2005 (NSW) s 26; Defamation Act 2006 (NT) s 23; Defamation Act 2005 (Qld) s 26; Defamation Act 2005 (SA) s 24; Defamation Act 2005 (Tas) s 26; Defamation Act 2005 (Vic) s 26; Defamation Act 2005 (WA) s 26. 47 Civil Law (Wrongs) Act 2002 (ACT) s 137; Defamation Act 2005 (NSW) s 27; Defamation Act 2006 (NT) s 24; Defamation Act 2005 (Qld) s 27; Defamation Act 2005 (SA) s 25; Defamation Act 2005 (Tas) s 27; Defamation Act 2005 (Vic) s 27; Defamation Act 2005 (WA) s 27. 48 Civil Law (Wrongs) Act 2002 (ACT) s 138; Defamation Act 2005 (NSW) s 28; Defamation Act 2006 (NT) s 25; Defamation Act 2005 (Qld) s 28; Defamation Act 2005 (SA) s 26; Defamation Act 2005 (Tas) s 28; Defamation Act 2005 (Vic) s 28; Defamation Act 2005 (WA) s 28. 49 Civil Law (Wrongs) Act 2002 (ACT) s 139; Defamation Act 2005 (NSW) s 29; Defamation Act 2006 (NT) s 26; Defamation Act 2005 (Qld) s 29; Defamation Act 2005 (SA) s 27; Defamation Act 2005 (Tas) s 29; Defamation Act 2005 (Vic) s 29; Defamation Act 2005 (WA) s 29.

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•• Qualified privilege — the statement was not motivated by malice, and the defendant had an interest or duty to make the statement to a person who had a corresponding duty to receive it.50 For example, if Simon was formerly Johnny’s employee, Johnny made a defamatory allegation about Simon’s reliability when asked if he would recommend Simon for a new position, and Johnny honestly believed the allegation to be true, he could rely upon the defence of qualified privilege. •• Honest opinion (fair comment) — the statement was: –– an expression of opinion rather than a statement of fact, –– made in relation to a matter of public interest, –– based on material that is substantially true, and –– honestly held.51 •• Innocent dissemination — the defendant published the defamatory material in their capacity as a subordinate distributor such as a bookseller or librarian, they neither knew nor ought to have known that the material was defamatory, and their ignorance was not due to their own negligence.52 •• Triviality — the circumstances of the publication were such that the plaintiff was unlikely to suffer any harm.53 LAW IN CONTEXT: LAW IN THE MEDIA

Hockey’s defamation win is dark news for democracy and free speech We should all be careful before saying anything that will hurt our politicians’ feelings: they might sue us for defamation. On Tuesday, Treasurer Joe Hockey was awarded A$200  000 damages against Fairfax Media in relation to a series of publications that focused on his political fundraising activities. That this case was brought at all is ridiculous. That Hockey won is absurd. His victory marks a dark day for freedom of speech in Australia. The decision In a lengthy decision, Federal Court Justice Richard White found that Hockey was defamed by a poster advertising the story’s headline, and tweets on Twitter linking to the articles. Significantly, the court found that the actual articles that the poster and the tweets related to were not defamatory. The means of publication proved critical. By the nature of the medium, the poster was brief. It contained the words: ‘Treasurer For Sale’. The tweets contained a similar message, but also a hyperlink to electronic versions of the Fairfax stories. The court accepted that these headlines were written merely to attract readers to the actual story. Nevertheless, it found that the meaning of tweets and posters may be determined in isolation, without reference to the story. The court awarded $200  000 in damages: $120  000 for the poster and $80  000 for two tweets. The award followed the usual principles for awarding damages in defamation cases. Among other reasons, the damages were awarded to Hockey as ‘consolation’ for the distress and hurt caused. Don’t newspapers have a defence in these kinds of cases? There is uniform law in Australia providing a defence of ‘qualified privilege’. The defence protects publishers like Fairfax Media that provide information to recipients (the public) who have some interest in receiving it.

50 Civil Law (Wrongs) Act 2002 (ACT) s 139A; Defamation Act 2005 (NSW) s 30; Defamation Act 2006 (NT) s 27; Defamation Act 2005 (Qld) s 30; Defamation Act 2005 (SA) s 28; Defamation Act 2005 (Tas) s 30; Defamation Act 2005 (Vic) s 30; Defamation Act 2005 (WA) s 30. 51 Civil Law (Wrongs) Act 2002 (ACT) s 139B; Defamation Act 2005 (NSW) s 31; Defamation Act 2006 (NT) s 28; Defamation Act 2005 (Qld) s 31; Defamation Act 2005 (SA) s 29; Defamation Act 2005 (Tas) s 31; Defamation Act 2005 (Vic) s 31; Defamation Act 2005 (WA) s 31. 52 Civil Law (Wrongs) Act 2002 (ACT) s 139C; Defamation Act 2005 (NSW) s 32; Defamation Act 2006 (NT) s 29; Defamation Act 2005 (Qld) s 32; Defamation Act 2005 (SA) s 30; Defamation Act 2005 (Tas) s 32; Defamation Act 2005 (Vic) s 32; Defamation Act 2005 (WA) s 32. 53 Civil Law (Wrongs) Act 2002 (ACT) s 139D; Defamation Act 2005 (NSW) s 33; Defamation Act 2006 (NT) s 30; Defamation Act 2005 (Qld) s 33; Defamation Act 2005 (SA) s 31; Defamation Act 2005 (Tas) s 33; Defamation Act 2005 (Vic) s 33; Defamation Act 2005 (WA) s 33.

CHAPTER 5 Deliberately causing harm  197

The defence protects a vital function in our democracy. A well-informed population makes public debate — and so our country — stronger. This is particularly important in respect of discussion of political issues. In this case, Justice White quoted a previous High Court decision, which held: The common convenience and welfare of Australian society are advanced by discussion — the giving and receiving of information — about government and political matters. So why didn’t the defence hold up this time? Because the Federal Court found that Fairfax Media’s conduct was not ‘reasonable’. Qualified privilege requires that the publisher was reasonable in its conduct in publishing the matter, in all of the circumstances. Fairfax Media argued that if it was reasonable to publish the articles, then it was also reasonable to draw attention to them with the posters and tweets. The court disagreed. Extraordinarily, Justice White proposed more ‘reasonable’ posters and tweets, which would have satisfied the defence of qualified privilege. ‘Access to treasurer can be bought’ could cost Fairfax nothing, but ‘Treasurer For Sale’? 200K. If this case holds up, we might expect some seriously boring newspaper headlines in the future. So will it be appealed? It is not yet clear if Fairfax Media plans to appeal. It has 21 days to decide whether it wants to. If it does decide to appeal, Fairfax Media faces further hurdles. The court made a number of findings just in case the matter is appealed. These included a finding that the defamatory publications were made with malice. Under the national legislation, a qualified privilege defence will be defeated if it is proven that the publication was ‘actuated by malice’. Defamation as a political weapon Media law academic David Rolph recognises that Australian politicians of all political stripes have been great consumers of defamation law. For example, earlier this year, former Queensland Premier Campbell Newman sued shockjock Alan Jones for defamation, but later dropped his case. Such claims are risky from a legal perspective. Journalists can claim a number of defences, and so there is a very real prospect that a litigious politician will lose. So why do they do it? A defamation case can be used as a political weapon. A rapid legal response to a negative publication can give a politician some legitimacy in dealing with the bad publicity. A victory in court adds weight to that legitimacy, albeit some time later. The law recognises that one of the purposes of awarding cash for defamation is so the defamed person can be vindicated in the eyes of the public. But this tactic reeks of desperation. Picking a fight with a media company should not be a politician’s priority. We deserve better One MP was quoted as saying: Politicians are fair game and people should be able to speak freely. I wholeheartedly agree. The elephant in the room in this case was the actual story that was being attacked. There is a legitimate need for a broader conversation about the role of money in Australian politics. It is a conversation that Hockey, apparently, would prefer that we not have. Media organisations ought to be able to instigate the debate without fear of reprisals by litigious politicians. The Australian people deserve a more robust debate. It is worth considering whether we should follow the US ‘public figure’ doctrine, which makes it harder for politicians to be successful in a defamation claim. The irony in all of this is the attention it has brought on the issue, and on Hockey. The public might have long forgotten Fairfax Media’s headline, but with this decision, the wound is re-opened. Google ‘Treasurer For Sale’, and see what happens. Source: Michael Douglas, 1 July 2015, http://theconversation.com/hockeys-defamation-win-is-dark-news-for-democracyand-free-speech-44129.

ACTIVIT Y 5.9 — REFLECT

In what circumstances can a comedian who makes fun of a well-known politician rely upon the defence of honest opinion?

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REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions.  5.7 What types of conduct are classified as criminal offences?  5.8 How are criminal offences tried?  5.9 What is the difference between an indictable offence and a summary offence? 5.10 What is a committal proceeding? 5.11 When is a person guilty of a criminal offence? 5.12 What are the defences available to a person accused of committing a criminal offence? 5.13 What is trespass? 5.14 What is trespass to land? Give some examples. 5.15 Who is entitled to sue for trespass to land? 5.16 Is every uninvited visitor a trespasser? 5.17 What is trespass to goods? Give some examples. 5.18 What is conversion? Give some examples. 5.19 What is detinue? Give some examples. 5.20 What is battery? Give some examples. 5.21 What is assault? Give some examples. 5.22 What is false imprisonment? Give some examples. 5.23 What defences are available to an action in trespass? 5.24 What is nuisance? 5.25 What is the difference between nuisance and trespass to land? 5.26 What is private nuisance? Give some examples. 5.27 What is public nuisance? Give some examples. 5.28 What are the defences to an action in nuisance? 5.29 What is defamation? 5.30 What is the source of defamation law in Australia? 5.31 What must a plaintiff establish to successfully sue in the tort of defamation? 5.32 What defences are available to an action in defamation?

5.3 Deliberately causing financial harm LEARNING OBJECTIVE 5.3 When will a person be legally responsible for deliberately causing financial harm to another person?

In the previous section we considered the legal consequences of deliberately causing another person to suffer personal injury or damage to their property. In this section we consider the criminal and civil consequences of deliberately causing another person to suffer a financial loss. Of course, business is often about making money for oneself at the expense of customers and competitors, but if a businessperson’s conduct crosses the line from entrepreneurial to harmful, both criminal law and civil law may become relevant.

Criminal liability We focus in this section upon two types of criminal activity leading to financial harm: 1. white-collar crime, and 2. cybercrime.

White-collar crime A white-collar crime is a crime committed by a person within a business or government organisation where the person takes advantage of their position to commit the crime. White-collar crime is notoriously difficult to detect, and many white-collar criminals are not prosecuted. CHAPTER 5 Deliberately causing harm  199

ACTIVIT Y 5.10 — REFLECT

Why do you think white-collar crime is so difficult to detect and prosecute?

Each of the following white-collar crimes may, if detected, lead to prosecution and punishment of the offender under the relevant Federal, State or Territory criminal law. •• Theft — taking another person’s money without their permission is theft. For example, an employee of Johnny’s who takes the restaurant’s takings for the month commits theft, as does an employee who takes stationery from the office cupboard without permission. •• Embezzlement — a person commits embezzlement if they fraudulently use or retain the money of another when that money has been entrusted to them. For example, a solicitor or accountant who uses money belonging to a client for their own purposes commits embezzlement. •• Bribery — giving a person money in return for some advantage or preferential treatment is bribery. For example, if the buyer of a house pays the real estate agent in return for the agent convincing the seller to agree to a lower price, the buyer has bribed the agent. •• Insider trading — a person with a connection to a company (e.g. a director or a professional adviser) who becomes aware of information about the company that is not publicly available and that has the potential to influence the share price of that company engages in insider trading when they profit from buying or selling shares in the company before the information becomes publicly available. •• Industrial espionage — the acquisition of confidential information about a competitor or their products or methods without their permission is industrial espionage. For example, an employee who sells confidential information about their employer to a competitor engages in industrial espionage. •• Money laundering — converting the proceeds of criminal activities into legitimate funds or property is money laundering. LAW IN CONTEXT: LAW IN THE MEDIA

White collar crime and metadata: beware of building a new honeypot With the struggle by law enforcement agencies to keep pace with new technologies has come calls by the agencies for additional investigatory powers. The call for communications service providers to retain two years of their customers’ metadata is simply the latest round in this debate. While much of the current discussion has centred on consumer data and policing agencies, the proposal also covers the communications of businesses, and the Australian Securities and Investments Commission (ASIC) is one of the agencies seeking access. Analysing two years’ retained metadata about your communications would give any law enforcement agency enormous insight into your life and, potentially, leverage over you. Using the data they could easily identify completely legal but otherwise embarrassing confidential events in your life, such as whether you have, for example, had an affair, an abortion, called a suicide help-line, a brothel or alcoholics anonymous. Having the power to analyse two years’ retained metadata about a business’ communications creates different risks: for example, knowing whether the senior executives of a listed company are talking often with a bankruptcy advisory firm or an investment bank’s mergers/acquisitions team could create enormously valuable trading opportunities prior to the release of that information to investors and the general public. The benefits of granting additional powers designed to increase the efficiency of law enforcement agencies need to be balanced against a range of risks, including the need to protect civil liberties and the possibility of unintended consequences.

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What ASIC wants The government’s current plan for data retention law includes provisions which would limit which law enforcement agencies could gain warrantless access to the retained metadata. In its submission to the Parliamentary Joint Committee for Intelligence and Security Inquiry into Data Retention, ASIC argued the proposed Bill would reduce its existing powers to access telecommunications data and stored communications for the purposes of investigating white collar criminal activities, such as insider trading, market manipulation and financial services fraud. Over the last five years, ASIC has secured convictions against 129 people for serious offences under the Corporations Act (including sentences of more than 13 years’ incarceration in some instances) and 2404 people for less serious offences, though it did not specify how many of these convictions depended upon evidence gained from metadata. ASIC currently has access to telecommunications data under sections 178–179 of the Telecommunications Interception Act. It claims it has used that information in over 80% of its insider trading investigations, including in the Lucas Kamay (NAB) and Christopher Hill (ABS) case. ASIC uses a variety of techniques to investigate white collar crimes, including data analytics of trading patterns. It also receives reports of suspicious trading activities from industry participants and the general public. Metadata is particularly useful for ASIC when seeking to identify potential suspects (and their accomplices) and their methods/patterns of communication, so that further surveillance of ongoing behaviour can be undertaken. While metadata itself does not definitively prove the identity of who was talking on a particular phone, typing a text message or sitting behind a keyboard, it can suggest who was most likely to have been doing those things (i.e. in many cases, the registered owner of the account). The actual identities of the participants can then be confirmed through follow-up surveillance. Metadata can provide information on the methods that two or more people are using to communicate (whether by landline, mobile phone, SMS, Skype, etc.). It can also provide a rich history of both patterns of communication (which devices are in contact with which other devices, when and how often) and interruptions to such patterns of communication, such as ceasing to communicate by mobile phone or changing phone SIMs, which could indicate the suspects believe they are under surveillance. In some trials, evidence of the timing of communications can be critically important. For example, when NAB trader Lukas Kamay received confidential information from Christopher Hill about yet-to-bereleased Australian Bureau of Statistics’ data, Kamay was able to profit by placing leveraged foreign exchange trades on the value of the Australian dollar. ASIC only became aware of this activity after it was tipped off by Kamay’s forex brokerage firm, Pepperstone Financial, and while access to metadata played a small part in the investigation, it was traditional surveillance which resulted in the convictions of Kamay and Hill. Access to retained metadata would grant ASIC the ability to search the history of patterns of conduct between suspects, such as whether they were repeatedly communicating and trading just prior to the announcement of market-sensitive information, even in situations where ASIC only became aware of the possibility of illegal activities well after they had actually occurred. It may also assist them to identify additional co-conspirators. A new honeypot? To be able to undertake such analysis, ASIC would need metadata to be retained from businesses as well as from individuals. Under the Bill, such metadata would be stored by communications providers, such as mobile phone companies and ISPs. This poses a risk for some businesses as their communications metadata contains highly valuable confidential information. In its drive to increase the effectiveness of its fight against white collar crimes, it is possible ASIC and the government may unintentionally increase the risk of such crimes occurring while also making them harder to detect. Communications service providers forced by the proposed legislation to store metadata are likely to provide security sufficient to protect against unauthorised access based upon the risk profile of their average customer, rather than for their most-at-risk customers. This raises the possibility of third parties seeking to gain unauthorised access to businesses’ financially sensitive information through their retained metadata, whether third party hackers using zero-day exploits, or trusted public servants (like Hill) looking to supplement their government pay cheques.

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Insider trading and market manipulation may become harder to detect because third party hackers will no longer need to directly attack listed companies and their advisers, but instead could indirectly gain information by attacking metadata repositories. If a communications service provider pooled all of its customers’ metadata into a single database, then this may represent the equivalent of an inadequately secured goldmine for white collar criminals. We should not rush to implement a system of metadata retention before all of the costs and benefits of such a proposal are fully considered. Source: John Selby, 27 February 2015, http://theconversation.com/white-collar-crime-and-metadata-beware-of-building-anew-honeypot-37891.

Cybercrime A cybercrime is a crime where a computer is used as a tool to commit an offence, or as a target of an offence, or as a storage device in relation to an offence. The Criminal Code Act 1995 (Cth) contains computer offences designed to address forms of cybercrime that impair the security, integrity and reliability of computer data and electronic communications. The Act provides for three serious computer offences. 1. Unauthorised access, modification or impairment with intent to commit a serious offence.54 The maximum penalty is equal to the maximum penalty for the serious offence. For example, a person who hacks into a bank computer and accesses credit card details with the intention of using them to obtain money will be liable for the penalty applying to the fraud offence the person was intending to commit. 2. Unauthorised modification of data, where the person is reckless as to whether or not the modification will impair data.55 For example, a hacker obtains unauthorised access to a computer system and impairs data. 3. Unauthorised impairment of electronic communications.56 This offence is designed to prohibit tactics such as ‘denial of service attacks’.

54 Criminal Code 1995 (Cth) s 477.1. 55 Criminal Code 1995 (Cth) s 477.2. 56 Criminal Code 1995 (Cth) s 477.3.

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The Act also provides for four other computer offences: 1. unauthorised access to, or modification of, restricted data,57 2. unauthorised impairment of data held on a computer disk etc,58 3. possession or control of data with intent to commit a computer offence, and 59 4. producing, supplying or obtaining data with intent to commit a computer offence.60

Other criminal penalty provisions There are many other statutes that impose criminal penalties for conduct that causes financial harm to another. Some examples are as follows. •• The Competition and Consumer Act 2010 (Cth) imposes substantial fines if a person intentionally breaches the consumer protection provisions or the competition provisions of the Act. •• The Privacy Act 1988 (Cth) imposes fines if a person misuses credit reporting information or the personal information of individuals. •• The Corporations Act 2001 (Cth) imposes fines and/or prison terms if a person breaches their duties to the company as a company director. •• If a person has been declared bankrupt, the Bankruptcy Act 1966 (Cth) imposes a penalty of imprisonment if they attempt to defraud creditors by fraudulently concealing property, disposing of property, leaving the country or failing to cooperate with the trustee in bankruptcy.

The tort of deceit If a person makes a false statement during contractual negotiations to induce the plaintiff to enter into a contract, they make what is called a misrepresentation. If the misrepresentation is fraudulent (i.e. deliberate), the person commits the tort of deceit. This will entitle the plaintiff to damages under tort law, as well as possible remedies under contract law. CHECKLIST

The tort of deceit is committed by X if all of the following requirements are satisfied. ◼◼ X makes a statement of fact to Y knowing that it is false. ◼◼ X makes the statement with the intention that it be relied upon by Y. ◼◼ Y relies upon the statement. ◼◼ Y suffers harm as a result of relying upon the statement.

A statement of opinion is not a statement of fact, and a person who shares an opinion that later turns out to be wrong has not committed the tort of deceit. However, if a person shares an opinion that they do not in fact hold, then they have made a false statement of fact and therefore committed the tort of deceit. Bisset v Wilkinson [1927] AC 177

Wilkinson agreed to sell two adjoining blocks of rural land to Bisset. During negotiations Wilkinson stated that he believed the land could hold 2000 sheep, if cultivated and used correctly. After purchasing the land Bisset discovered the land could not hold 2000 sheep. Bisset sued Wilkinson in the tort of deceit. The court decided that Wilkinson was not liable. He had made a statement of opinion and not a statement of fact. It was an opinion honestly and reasonably held; as Bisset was aware, the land had never been used for sheep farming in the past.

Misrepresentation and deceit are considered in more detail in later chapters. 57 Criminal Code 1995 (Cth) s 478.1. 58 Criminal Code 1995 (Cth) s 478.2. 59 Criminal Code 1995 (Cth) s 478.3. 60 Criminal Code 1995 (Cth) s 478.4.

CHAPTER 5 Deliberately causing harm  203

The tort of passing off A person commits the tort of passing off if they misrepresent themselves or their product as having some kind of connection with the plaintiff or their business. For example, if Johnny uses Simon’s trademark, distinctive packaging, name or likeness without Simon’s permission in order to sell Johnny’s own product, Johnny commits the tort of passing off. CHECKLIST

The tort of passing off is committed by X if all of the following requirements are satisfied. ◼◼ X makes a misrepresentation (expressly or by implication) that their goods or services are connected with Y or have Y’s endorsement or approval. ◼◼ The misrepresentation is made in the course of a trade. ◼◼ The misrepresentation is intended to deceive potential purchasers. Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553

Pacific Dunlop Ltd (PD) produced a television advertisement for Dunlop shoes based on a scene from the movie Crocodile Dundee. An actor dressed like the main character from that film is shown being confronted by a mugger in an alley while walking with his girlfriend. The girlfriend warns the actor that the mugger is wearing leather shoes, to which the actor responds ‘You call those leather shoes? Now these are leather shoes’, and points to his Dunlop shoes. Hogan, the actor and owner of the Crocodile Dundee character, brought a civil action against PD. The court decided that PD had committed the tort of passing off: the advertisement amounted to an assertion that Hogan and PD had entered into a commercial arrangement for the use of the Crocodile Dundee character.

In the absence of a misrepresentation the tort of passing off is not committed. Newton-John v Scholl-Plough (Aust) Ltd (1986) 11 FCR 233

Scholl-Plough Australia Ltd was the manufacturer of Maybelline products and ran a magazine advertisement that featured a model that looked like Olivia Newton-John. Below the picture of the model appeared the words ‘Olivia? No, Maybelline’ . Olivia Newton-John claimed that Scholl-Plough Australia Ltd had committed the tort of passing off. The court decided that Scholl-Plough Australia Ltd had not committed the tort of passing off because there was no misrepresentation: the advertisement made it clear that the picture was not of the plaintiff.

There is an overlap between the tort of passing off and statutory liability for breach of s 18 of the ACL, which prohibits misleading and deceptive conduct.

The tort of intimidation A person commits the tort of intimidation if they threaten to commit an unlawful act (including a tort or a breach of contract) in order to force the plaintiff to do something against their interest, or to force a third party to do harm to the plaintiff. Intimidation is both a tort and a crime. CHECKLIST

The tort of intimidation is committed by X if all of the following requirements are satisfied. ◼◼ X threatens to commit an unlawful act such as a crime, a tort or a breach of contract. ◼◼ The threat is made in order to force Y to do something against their interest or to force someone else to do harm to Y.

204  PART 2 Legal Consequences

Rookes v Barnard [No 1] [1964] AC 1129

The plaintiff resigned from the defendant’s union. The union threatened the plaintiff’s employer with an unlawful strike if he did not dismiss the plaintiff. The employer dismissed the plaintiff and the plaintiff commenced legal proceedings against the union. The court decided that the union had coerced the employer into doing something he would not otherwise have done by threatening to commit an unlawful act, which breached the contract between the union and the employer. This amounted to the tort of intimidation.

The tort of interference with contractual relations This tort is committed when one person knowingly induces another to break a contract with a third party. For example, if Matt has a contract with Simon, and Johnny knowingly induces Matt to break the contract, Johnny commits the tort of interference with contractual relations and he will be liable to Simon. CHECKLIST

The tort of interference with contractual relations is committed by X if all of the following requirements are satisfied. ◼◼ X makes a statement or takes an action intended to induce another person to breach a contract with Y. ◼◼ X’s statement or action in fact induces that person to breach the contract. ◼◼ Y suffers harm as a result of the breach.

Lumley v Wagner (1852) 1 De G M & G 604; 42 ER 687

Wagner, a well-known opera star, entered into a contract with Lumley to perform at Lumley’s theatre, and agreed not to perform elsewhere during the contracted period. Gye then convinced Wagner to enter into a contract to perform at another venue over the same period as the contract with Lumley. The court decided that Gye’s actions in inducing Wagner to break her contract with Lumley amounted to the tort of interference with contractual relations.

In the example described above concerning Matt, Simon and Johnny, if Johnny was not acting alone Simon may also be able to bring an action against Johnny under the secondary boycott provisions of Part IV of the Competition and Consumer Act 2010 (Cth). These provisions make it an offence for two or more businesses to pressure a third business to refuse to deal with a fourth business leading to a substantial lessening of competition. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 5.33 What is ‘white-collar crime’? 5.34 Using illustrative examples to explain each of your answers, what is (a) theft; (b) embezzlement; (c) bribery; (d) insider trading; (e) industrial espionage; and (f) money laundering? 5.35 What is cybercrime? Give some examples. 5.36 What are some other sources of criminal liability for financial harm? 5.37 What is the tort of deceit? 5.38 What is the tort of passing off? 5.39 What must a plaintiff establish to successfully bring an action in passing off? 5.40 What is the tort of intimidation? 5.41 What is the tort of interference with contractual relations?

CHAPTER 5 Deliberately causing harm  205

5.4 The consequences of causing harm LEARNING OBJECTIVE 5.4 What are the civil consequences of being found to have caused harm? What are the criminal consequences?

In this section we consider the criminal and civil consequences of a court finding that one person has caused harm to another person.

Criminal consequences Generally speaking, the objectives of criminal law are: •• punishment, •• deterrence, •• incapacitation, and •• rehabilitation. The criminal law seeks to achieve these objectives through the imposition of penalties upon the finding of guilt at a criminal trial. Criminal penalties range in severity, and include: •• warnings, •• fines, •• imprisonment, and •• the confiscation of criminal profits. Fines are by far the most common criminal penalty, and range from nominal penalties to penalties as high as $10 million for breaches of Part IV of the Competition and Consumer Act 2010 (Cth). ACTIVIT Y 5.11 — REFLECT

What are the issues that a judge must confront when deciding upon a criminal penalty for a corporation rather than an individual?

Civil consequences If in a civil action the court finds that the defendant has committed one of the torts described in this chapter (or the next), the plaintiff will be entitled to a range of possible remedies.

Damages Damages is an award of monetary compensation to the plaintiff. There are several forms of damages that the court can award. •• Ordinary damages — the purpose of an award of ordinary damages is to compensate the plaintiff for the loss or injury suffered as a result of the defendant’s harmful conduct. The objective is to return the plaintiff to the position they would have occupied if the defendant’s conduct had not taken place.61 Damages are assessed ‘once and for all’: the plaintiff is not able to return to court at a later date seeking further compensation, and it is therefore necessary to estimate any future losses the plaintiff may incur as a consequence of the harmful conduct. If the plaintiff’s property has been destroyed or damaged then the amount of compensation will be the cost of replacing or repairing the property. If the plaintiff has suffered personal injury then the amount of compensation will include: –– reimbursement of medical expenses, –– rehabilitation expenses, 61 Todorovic v Waller (1981) 150 CLR 402.

206  PART 2 Legal Consequences

–– the cost of personal care, –– compensation for pain and suffering, –– compensation for loss of amenities, and –– reimbursement for any lost income. If the injury is such that it will affect the plaintiff’s future earning capability then the damages award will include compensation for loss of future earnings. An award of damages following serious personal injury can therefore be substantial. LAW IN CONTEXT: LAW IN THE MEDIA

Fishing skipper wins $750  000 damages from former employer In August 2009 a fishing skipper was awarded $750  000 in damages from his former employer after his left hand was mangled in a boating accident. Glenn Hunter, 49, sued New Fishing Australia Pty Ltd after his left hand was crushed between a winch and a rope in a boating accident in October 2001. Justice Keiran Cullinane in the Townsville Supreme Court awarded Mr Hunter $751  668.05 in damages for loss of income in past employment, future employment, pain killers, surgery costs and financial assistance for ‘mowing a lawn’. Mr Hunter left school at age 16 to become a prawn fisherman, and spent until March 2005 in the fishing industry. Despite no qualifications in any other area, he was earning a gross annual income of about $140  000. Mr Hunter’s accident occurred in the Gulf of Carpentaria in Northern Territory waters when he was holding a rope on a winch that was held there by a cleat. The winch was stopped but began to move and as it rotated the plaintiff’s left hand became crushed between the winch and the rope. The injury required Mr Hunter to have his left index finger amputated, while other fingers required surgery. The court suggested easier occupations Mr Hunter may be able to take up until he was 67 years old, such as a car park attendant or storeman, and used the average wage of those jobs to calculate the damages payable. However Justice Cullinane said he doubted that a man of Mr Hunter’s ‘enterprise’ would ever be satisfied in such roles. ‘Overall he has lost the capacity to engage in the only work that he has for all intents and purposes ever engaged in,’ he said. The fact is he is now 49 years old and has no other qualifications. He must be regarded as having a substantial destruction of his earning capacity. Source: David Barbeler, ‘Fishing skipper wins $750  000 damages from former employer,’ AAP, 25 August 2009.

•• Nominal damages — if the plaintiff has successfully established that the defendant has breached a legal right but the plaintiff has suffered no compensable damage, then nominal damages will be awarded. For example, Simon may have established that Johnny committed the tort of trespass by walking across Simon’s lawn, but since Simon has not suffered any actual harm the court might award nominal damages in the amount of $1.00. •• Aggravated damages — if the defendant’s conduct is such that the plaintiff should be compensated for humiliation and emotional distress, then aggravated damages will be awarded. Aggravated damages are more likely to be awarded in respect of actions such as defamation or sexual assault. •• Exemplary damages — if the defendant has deliberately and maliciously disregarded the plaintiff’s rights and interests, then exemplary damages will be awarded. They are more than mere compensation; they are intended to punish the defendant and to act as a deterrent. The civil liability legislation in some jurisdictions now prohibits a court awarding aggravated or exemplary damages in negligence actions.62

62 Civil Liability Act 2002 (NSW) 21; Personal Injuries (Liabilities and Damages) Act 2003 (NT) s 19; Civil Liability Act 2003 (Qld) s 52.

CHAPTER 5 Deliberately causing harm  207

The plaintiff will be under a duty to mitigate their loss. This means that they are required to minimise their loss as far as possible.

Injunction An injunction is a court order whereby a person is required to do or refrain from doing certain acts. It will be an appropriate remedy if the defendant is committing a tort on an ongoing basis, such as nuisance, trespass or defamation. If the defendant fails to comply with the injunction they will face civil or criminal penalties. In some cases, a breach of an injunction will be considered a serious criminal offence leading to arrest and a possible prison sentence. An interim injunction is a provisional remedy granted to restrain activity (e.g. selling property or leaving the country) on a temporary basis until the court can make a final decision at trial. Before such an injunction will be granted it will be necessary for the plaintiff to prove the high likelihood of success of their case and a likelihood of irreparable harm in the absence of a preliminary injunction; otherwise the plaintiff will have to wait for the trial to obtain a permanent injunction. Unlike damages, an injunction is an equitable remedy and as such is granted at the discretion of the court, usually only when damages are shown to be inadequate or inappropriate. ACTIVIT Y 5.12 — REFLECT

In what circumstances will damages not be an appropriate remedy in a civil action?

Statutory remedies The plaintiff may not be restricted to the remedies provided by the law of tort. There are many statutory provisions that provide the victims of harm with a range of remedies, including: •• workers compensation legislation in each Australian jurisdiction, •• criminal injuries compensation schemes in each Australian jurisdiction, and •• motor accident compensation schemes in the Northern Territory, Tasmania and Victoria.

Time limits Legislation in each jurisdiction imposes time limits within which civil proceedings must be brought (see table 5.3). If the plaintiff attempts to commence legal proceedings after the relevant time limit has expired, the legal action is said to be ‘statute barred’. TABLE 5.3

Time limits for civil proceedings

Jurisdiction

Limitation legislation

Personal injury

Defamation

Other torts

Australian Capital Territory

Limitation Act 1985 (ACT)

3 years

1 year

6 years

New South Wales

Limitation Act 1969 (NSW)

3 years

1 year

6 years

Northern Territory

Limitation Act 1981 (NT)

3 years

1 year

6 years

Queensland

Limitation of Actions Act 1974 (Qld)

3 years

1 year

6 years

South Australia

Limitation of Actions Act 1936 (SA)

3 years

1 year

6 years

Tasmania

Limitation Act 1974 (Tas)

3 years

1 year

6 years

Victoria

Limitation of Actions Act 1958 (Vic)

3 years

1 year

6 years

Western Australia

Limitation Act 2005 (WA)

3 years

1 year

6 years

The date upon which time commences to run depends upon whether or not the tort is actionable without proof of damage. If the tort is one that is actionable without proof of damage, such as trespass, the time commences to run from the date the tort is committed. If the tort is one 208  PART 2 Legal Consequences

where proof of damage is required, such as negligence or nuisance, the time commences from the date the damage occurs. Note that in some situations damage or loss may not become apparent until some time after it has occurred and in these situations the court usually has a discretion to extend the time limit. Wilson v Horne (1999) 8 Tas R 363

As a child the plaintiff was subjected to sexual assaults by the defendant. Thirteen years later the plaintiff developed a stress disorder and sought to commence civil proceedings against the defendant, claiming both trespass against the person and negligence. The court decided that the action in trespass was statute barred because more than 6 years had passed since the tort was committed. However, the action in negligence was not statute barred because time did not commence to run until the damage occurred, and in this case, the damage occurred when the stress disorder developed.

The limitation legislation will usually permit a court to extend the limitation period if the court is of the view that the plaintiff has a reasonable chance of success and that it is just and reasonable in the circumstances. ACTIVIT Y 5.13 — REFLECT

Why does the law impose time limits within which civil proceedings must be brought?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 5.42 What is the purpose of imposing a criminal penalty? 5.43 What are the various forms of criminal penalty? 5.44 What is an award of ‘damages’, and what is it intended to achieve? 5.45 If a plaintiff has suffered personal injury as a result of the defendant’s conduct, how would an award of damages be calculated? 5.46 If a plaintiff has suffered property damage as a result of the defendant’s conduct, how would an award of damages be calculated? 5.47 What are the differences between (a) ordinary damages; (b) nominal damages; (c) aggravated damages; and (d) exemplary damages? 5.48 What is an injunction and when will it be appropriate? 5.49 What is an interim injunction? 5.50 What is the difference between a remedy under tort law and a statutory remedy? 5.51 What is the time limit within which an action must be commenced if the defendant has committed the tort of: (a) negligence; (b) defamation; and (c) passing off?

In conclusion •• If a person deliberately or carelessly causes harm to another person, there may be criminal consequences, tortious consequences, contractual consequences and/or statutory consequences. In this chapter we focus upon the possible criminal and tortious consequences of deliberate harm. If a person has committed a crime, they may be prosecuted and penalised. If they have committed a tort, the person harmed by the conduct may commence civil proceedings to recover compensation. It is possible for the same act to be both a crime and a tort. CHAPTER 5 Deliberately causing harm  209

•• If the defendant deliberately harmed the person or property of another person, the defendant may be found to have committed a crime such as assault or theft. Torts that involve deliberate harm to the person or property of another include the torts of trespass (direct interference with the person or property of another), defamation (publication of a defamatory statement about someone to a third party) and nuisance (indirect interference with another’s enjoyment of private or public property). •• Examples of deliberately causing financial harm with criminal consequences include white-collar crime and cybercrime. Torts involving the deliberate causing of financial harm include the tort of deceit (fraudulent misrepresentation), the tort of passing off (misrepresenting a business association), the tort of intimidation (threatening to commit an illegal act in order to pressure another to do something), and the tort of interference with contractual relations. •• If in a criminal trial the court finds that the defendant has deliberately or carelessly caused harm to another person, they may be punished by way of imposition of a warning, a fine, or imprisonment. If in a civil trial the court finds that the defendant has deliberately or carelessly caused harm to the plaintiff, they may be ordered to pay damages (monetary compensation) to the plaintiff. Alternatively, the court may grant an injunction ordering the defendant to refrain from causing such harm in the future. JOHNNY AND ASH

[Ash and Johnny are still walking beside the river.] Johnny — Okay, I understand that when one person deliberately causes harm to another person, they could be prosecuted for committing crime, or they could be sued for committing a tort. But what about Cathy punching that customer last night in my restaurant? Did she commit a crime or a tort? Ash — Well, both actually. She committed the tort of trespass to the person — specifically, the tort of battery — and that means the person that she harmed, the customer, will be entitled to commence legal proceedings against her and try to recover compensation in the form of damages. Johnny — That explains the call from the lawyer. Ash — But Cathy has also committed the crime of assault, which could lead to her being charged, arrested, tried, and, if she is found guilty, punished in some way. Perhaps a fine, perhaps even a jail term. Johnny — Can’t she use one of those defences you were talking about? Like self-defence? Or  .  .  .  what was it  .  .  .  ‘provocation’? Ash — It is rather unlikely that either of those defences will be successful. She will have to demonstrate that what she did was a reasonable response in the circumstances and, by the sound of things, what she did was quite an overreaction. Johnny — What about me? As Cathy’s employer, am I criminally responsible for what she did? Ash — I don’t think so. You are only vicariously liable for the actions of your employees if they are carried out within the scope of their employment duties. You could probably make a good argument that punching a customer was not within Cathy’s job description. Cathy will have to bear the consequences of that one herself. Johnny — Phew! Ash — You may, however, be responsible for some of the other things that happened last night. Johnny — What? I wasn’t even there! Ash — Let’s have a chat about the law of negligence  .  .  .  

210  PART 2 Legal Consequences

QUIZ 1 Which of the following forms of liability could lead to prosecution by the Crown?

(a) Criminal liability. (b) Tortious liability. (c) Contractual liability. (d) Statutory liability. 2 Which of the following is an example of an offence against public order? (a) Perjury. (b) Sedition. (c) Murder. (d) Forgery. 3 A defence of insanity may relieve a criminal offender from liability due to the absence of (a) motive. (b) evidence. (c) actus reus. (d) mens rea. 4 Leaving rubbish on another person’s property without their permission is an example of the tort of (a) private nuisance. (b) negligence. (c) trespass. (d) detinue. 5 An unwelcome kiss is an example of the tort of (a) conversion. (b) detinue. (c) assault. (d) battery. 6 Which of the following is not an element of the tort of private nuisance? (a) The defendant’s conduct is interfering with the plaintiff’s use and enjoyment of land. (b) The plaintiff has suffered loss over and above loss caused to members of the public generally. (c) The interference is sustained and unreasonable. (d) The plaintiff has suffered actual damage. (e) The defendant’s conduct was either intentional or reckless. 7 To satisfy the definition of defamation (a) the statement must have been intended to be defamatory. (b) the statement must be published in written form. (c) the statement must expressly name the plaintiff. (d) all of the above. (e) none of the above. 8 Embezzlement is (a) the conversion of the proceeds of criminal activities into legitimate funds or property. (b) fraudulently using or retaining the money of another when that money has been entrusted to the accused. (c) the acquisition of confidential information about a competitor or their products or methods without the permission of the competitor. (d) giving another money in return for some advantage or preferential treatment. CHAPTER 5 Deliberately causing harm  211

 9 Where the plaintiff has successfully established that the defendant has breached a legal right

but the plaintiff has suffered no compensable damage, the court is likely to (a) grant a permanent injunction. (b) grant an interim injunction. (c) award aggravated damages. (d) award nominal damages. 10 Which of the following acts contain criminal penalty provisions? (a) The Competition and Consumer Act 2010 (Cth). (b) The Corporations Act 2011 (Cth). (c) The Privacy Act 1988 (Cth). (d) All of the above.

EXERCISES EXERCISE 5.1 — TRESPASS TO LAND

Johnny’s neighbour Miles frequently expresses racist political views with which Johnny firmly disagrees. Miles has recently installed a flagpole in his front garden, quite close to the fence that runs along the border between Miles’ property and Johnny’s property. From this flagpole Miles flies a very large Australian flag. When the wind is blowing strongly from the south, the large flag extends into the airspace above Johnny’s property. After a particularly passionate argument about asylum seekers, Johnny demands that Miles take down the flag. Miles refuses, accusing Johnny of being unpatriotic. Can Johnny compel Miles to remove the flag? EXERCISE 5.2 — TRESPASS TO GOODS

The relationship between Johnny and his neighbour Miles has worsened considerably since their argument about Miles’ flag (see exercise 5.1). Miles leaves a letter in Johnny’s letterbox insisting that Johnny return the shovel Miles has allowed Johnny to borrow 12 months previously. Miles had never asked for the shovel to be returned before now, and Johnny had started thinking of the shovel as his own. Three months ago, Johnny loaned the shovel to his friend Randal, and Randal has since moved to another State, taking the shovel with him. Has Johnny committed the tort of trespass? EXERCISE 5.3 — TRESPASS TO THE PERSON

Johnny sees George, a young customer at Johnny’s restaurant, reach into the open cash register and grab a handful of notes while Stephen, the person serving him, is looking the other way. Johnny rushes up to George, grabs his arm, pulls the money out of his hand, pushes him into a chair, and orders him to ‘stay there until the police arrive, or I will lose my temper’. Thirty minutes later the police arrive and take George away for questioning. George has now threatened to sue Johnny in the tort of trespass to the person. Has Johnny committed the tort? When answering this question consider all three forms of the tort. EXERCISE 5.4 — PRIVATE NUISANCE

Elaine has opened a new steakhouse restaurant next door to Johnny’s vegan restaurant. Johnny is concerned that the smell of cooking meat wafting from the steakhouse is turning customers away from his restaurant. Can he establish that Elaine is committing the tort of private nuisance? If so, what remedy would Johnny be entitled to? EXERCISE 5.5 – DEFAMATION

Walter is Johnny’s accountant. While working on the accounts for Johnny’s restaurant The Lame Duck, Walter is interviewed by a journalist for the popular accounting magazine P&L Weekly. The journalist asks if Walter is working on any interesting projects. Walter explains that he cannot disclose the identity of his current clients, but that he is preparing accounts for ‘another restaurant unlikely to survive beyond 212  PART 2 Legal Consequences

the end of the year’. When the magazine is published it includes a photo of Walter working at his desk with The Lame Duck’s name clearly visible on his computer screen. Johnny wants to sue Walter in the tort of defamation. Is Johnny’s action likely to succeed? EXERCISE 5.6 — DEFAMATION

Robin writes a popular restaurant review blog for the local online city guide. Her latest blog includes the following: ‘By the way, I ate at a certain vegan restaurant on Kerouac Avenue last Saturday night. Whatever you do, do not order the tofu burger unless you happen to like eating something that tastes like the congealed leftovers of a liposuction treatment that is smeared between two slices of stale bread’. Johnny wants to sue Robin in the tort of defamation. Is Johnny’s action likely to succeed? When answering this question consider (a) the three elements of the tort, and (b) whether or not Robin can rely upon the defence of honest opinion. EXERCISE 5.7 – DECEIT

Consider the facts of exercise 5.6. A month after publication of Robin’s blog, Johnny is informed by a colleague of Robin’s that Robin in fact had a very enjoyable dining experience when she ate at Johnny’s restaurant, and that she wrote the negative review to support her friend Brandon, the owner of the vegan restaurant Simulacra and Johnny’s main competitor. Could Johnny sue Robin in the tort of deceit? Is it relevant that the comments in Robin’s review were an expression of opinion? EXERCISE 5.8 — PASSING OFF

Johnny has created a new vegan pizza with the toppings arranged into the shape of the bat-signal. It is called the ‘bat pizza’ and is very popular with the kids. Johnny has received a letter from lawyers acting on behalf of Time Warner Inc, the owners of the rights in The Batman™ comic book and movie character, accusing Johnny of committing the tort of passing off. Has Johnny committed the tort of passing off? EXERCISE 5.9 – INTIMIDATION

Consider the facts of exercise 5.8. The lawyers for Time Warner Inc have again written to Johnny, informing him that if he does not immediately desist from selling bat pizzas in his restaurant, they will be commencing civil proceedings against him. Johnny feels that he is being bullied by a large and powerful corporation, and wants to sue them in return for committing the tort of intimidation. Is Johnny’s action likely to succeed? EXERCISE 5.10 – INTERFERENCE WITH CONTRACTUAL RELATIONS

Vegan Lifestyle manufactures a popular range of tofu chicken products. Johnny has entered into a five-year contract with Vegan Lifestyle to be the exclusive distributor (in the State) of Vegan Lifestyle products in his restaurant The Lame Duck. Johnny has now heard that Brandon, the owner of the vegan restaurant Simulacra and Johnny’s main competitor, has been pestering Vegan Lifestyle in an effort to persuade them to permit Vegan Lifestyle products to be sold in his restaurant. Johnny would like to write to Brandon politely asking him to desist. Would it be appropriate to refer to Johnny’s legal rights in that letter? To which legal rights should Johnny refer?

KEY TERMS actus reus  (‘guilty act’) The physical act of committing a crime. aggravated damages  Damages awarded if the defendant’s conduct is such that the plaintiff should be compensated for humiliation and emotional distress. assault  A tort committed when one person unlawfully threatens another with imminent physical harm. Australian Consumer Law (ACL)  The law regulating consumer protection in Australia; a schedule to the Competition and Consumer Act 2010 (Cth). battery  A tort committed when one person unlawfully applies force to another person. CHAPTER 5 Deliberately causing harm  213

bribery  A crime committed when one person gives another money in return for some advantage or preferential treatment. burden of proof  The obligation of one of the parties to a trial to produce sufficient evidence to establish their side of the argument. committal proceeding  A preliminary proceeding held in a lower court to determine whether or not there is sufficient evidence to justify a full criminal trial. contract  An agreement between two or more persons that is legally enforceable. conversion  A tort committed when one person wrongfully deals with the goods of another in a way that is inconsistent with their ownership or rightful possession. crime  A harmful act or omission that will lead to the state commencing criminal proceedings and seeking to have the offender punished. cybercrime  A crime where a computer is a tool to commit an offence, is the target of an offence, or is the storage device in relation to an offence. damages  Monetary compensation; a type of civil remedy. deceit  A tort committed when one person makes a fraudulent misrepresentation to another. defamation  A tort committed when one person publishes to a third party, in spoken or written form, a statement about another person that would damage the reputation of that person. detinue  A tort committed when one person wrongfully detains the goods of another. embezzlement  The crime of fraudulently using or retaining the money of another when that money has been entrusted to the offender. exemplary damages  An award of damages to the plaintiff in an amount above and beyond mere compensation, intended by the court to penalise or punish the defendant. false imprisonment  A tort committed when one person unlawfully deprives another of their freedom of movement. independent contractor  A person who is contracted to provide services, but who is not an employee. indictable offence  A serious criminal offence such as murder, manslaughter, rape or robbery, tried before a judge and jury. industrial espionage  A crime committed when a person acquires confidential information about a competitor or their products or methods without their permission. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. insider trading  A crime committed when one person with a connection with a company acquires information that is not yet public about that company and then profits from that information by buying or selling shares in the company. interference with contractual relations  A tort committed when one person knowingly induces another to break a contract with a third party. interim injunction  An order of the court restraining one of the parties from acting in a particular way until the trial is concluded, such as selling property or leaving the country. intimidation  A tort and/or crime committed when one person threatens to commit an unlawful act to force another to do something against their interest. litigation  Legal proceedings brought by one member of the community against another. Also known as ‘civil action’. mens rea  (‘guilty mind’) The intention to commit a crime. misrepresentation  A false statement of fact made by one person to induce another person to enter into a contract. mitigate  To minimise or reduce; when one party is negligent or breaches a contract the other party is obliged to take reasonable steps to mitigate their loss. money laundering  The conversion of the proceeds of criminal activities into legitimate funds or property. nominal damages  A token amount of monetary compensation awarded to the plaintiff that merely affirms that the defendant was in the wrong. 214  PART 2 Legal Consequences

nuisance  A tort committed when one person indirectly interferes with another person’s use and enjoyment of private or public land. ordinary damages  An award of damages to compensate the plaintiff for the loss or injury suffered as a result of the defendant’s conduct. passing off  A tort committed when one person misrepresents themselves or their product as having some kind of connection with another person or business. per se  (‘by itself’) If an act is actionable per se, it is not necessary to establish loss or harm to bring the action. private nuisance  A tort committed when one person indirectly interferes with another person’s use and enjoyment of private land. prosecution  Legal proceedings brought in a court of law as a result of the state seeking to establish the guilt of a person charged with having committed a crime. public nuisance  A tort committed when one person indirectly interferes with another person’s use and enjoyment of public land. statute  A law made by parliament. Also known as ‘legislation’ or an ‘Act of Parliament’. summary offence  A less serious criminal offence such as common assault, a traffic offence, or being drunk and disorderly, which is tried before a magistrate. theft  A crime committed when one person takes another person’s money or property without their permission. tort  A harmful act, other than a breach of contract, giving the victim a right to sue for compensation, e.g. trespass, negligence, defamation, nuisance and passing off. trespass  A tort committed when one person interferes directly with the person or property (real or personal) of another. trespass to goods  A tort committed when one person interferes directly with the personal property of another. trespass to land  A tort committed when one person interferes directly with land in the rightful possession of another. trespass to the person  A tort committed when one person interferes directly with the person of another. vicarious liability  Liability for the conduct of another. white-collar crime  A crime committed by a person within a business or government organisation where the person takes advantage of their position to carry out the crime.

ACKNOWLEDGEMENTS Photo: © J.D.S / Shutterstock.com Photo: © Monkey Business Images / Shutterstock.com Photo: © skyfotostock / Shutterstock.com Article: © Jason Byrne, 25 January 2013, http://theconversation.com/public-park-or-private-gymboot-camps-or-bloody-nuisance-11664 Article: © Michael Douglas, 1 July 2015, http://theconversation.com/hockeys-defamation-winis-dark-news-for-democracy-and-free-speech-44129 Article: © John Selby, 27 February 2015, http://theconversation.com/white-collar-crime-andmetadata-beware-of-building-a-new-honeypot-37891 Article: © David Barbeler, ‘Fishing skipper wins $750 000 damages from former employer,’ AAP, 25 August 2009. QUIZ ANSWERS

1. a  2. b  3. d  4. c  5. d  6. b  7. e  8. b  9. d  10. d CHAPTER 5 Deliberately causing harm  215

CHAPTER 6

Carelessly causing harm LEA RN IN G OBJE CTIVE S 6.1 When will a person be legally responsible for carelessly harming the person or property of another? 6.2 When will a person be legally responsible for carelessly causing financial harm to another person?

JOHNNY AND ASH

[Ash and Johnny are still walking beside the river, discussing the events of the previous evening.] Ash — Okay, let’s recap. Last night you left your assistant manager Cathy in charge of your restaurant while you took the evening off. A child seated at one of the tables spilled their soft drink on the floor. Half an hour later another customer, an older woman, slipped over in the spilled drink, and was knocked unconscious when she banged her head on the floor. While waiting for the ambulance to arrive, the older woman’s son confronted Cathy, and Cathy punched him, knocking him unconscious as well. Johnny — It was quite a night. Ash — We have already established that Cathy committed both a tort and a crime by attacking the male customer. We have also established that it is unlikely that you would be held liable for her criminal actions. Johnny — Of course I’m not responsible for what happened last night. I wasn’t even there. What does any of it have to do with me? Ash — Well, it is your restaurant. Johnny — I know. But I wasn’t there last night, I didn’t spill the soft drink, and I didn’t punch the guy in the jaw. As far as I am concerned, if a person slips over it’s their own fault for not looking where they are going, and if a person gets punched in the jaw then it’s probably their own fault for being a jerk. I still don’t get it. Why are they coming after me? Ash — As we have already discussed, there are many situations where the law makes us responsible for harm suffered by another person, even if we did not deliberately and directly cause the harm. We can be held responsible if we cause the harm indirectly  .  .  .  or if the harm is a result of our carelessness. Johnny — How is anything that happened last night the result of my carelessness? Ash — Let’s talk about the law of negligence.

CHAPTER PROBLEM

Johnny was not present when the older woman slipped over in his restaurant. As you make your way through this chapter, consider whether Johnny should be legally liable for the harm suffered by the older woman.

Introduction In the previous chapter we considered the legal consequences of deliberately causing harm to another person. In this chapter we consider the legal consequences of carelessly causing harm to another person. There are many ways one person can carelessly cause harm to another person. They can carelessly cause the other person to suffer loss or damage to their person or property, e.g. by leaving a spilled drink on the floor of a busy restaurant. They can cause the other person to suffer financial loss by giving them careless advice or selling them a defective product. Each of these situations could lead to civil proceedings by the victim of the harmful conduct.

6.1 Carelessly causing harm to person or property LEARNING OBJECTIVE 6.1 When will a person be legally responsible for carelessly harming the person or property of another?

It is obvious that a person who deliberately causes harm to another person should be held legally responsible for the consequences of their actions. But what if the harmful act was not deliberate? Will the person still be liable? In this section we consider the tort of negligence in detail. CHAPTER 6 Carelessly causing harm  217

The tort of negligence A person commits the tort of negligence if a careless act by the person causes harm to another. Negligence is by far the most common tort: most acts that cause harm to other people are the result of carelessness rather than intent. Most car accidents and other personal injuries, for example, are the result of negligence. The law of negligence traditionally consisted primarily of case law rules. Since the civil liability reforms following the ‘insurance crisis’ (see below) the law of negligence is now a combination of case law and statutory rules. LAW IN CONTEXT: LAW AND POLITICS

The insurance crisis Many individuals and businesses manage the risk of being the subject of negligence litigation by taking out insurance, in particular public liability insurance. This is insurance that provides protection against claims arising from personal injury or property damage caused to third parties by the negligent actions of the insured. The beginning of the 21st century saw a dramatic increase in insurance premiums generally and in public liability insurance premiums in particular. Insurance became so expensive that many charitable and community organisations, as well as service providers such as doctors, were unable to afford it and had to limit their activities accordingly. Many blamed the insurance crisis upon the legal system. It was claimed that the rise in insurance premiums was the inevitable result of a rise in insurance payouts by insurance companies, and these payouts were in turn the result of lawyers actively and inappropriately encouraging clients to commence proceedings for personal injury and claim substantial damages, the tendency by courts to award substantial damages to plaintiffs, and fundamental defects in the law of negligence that made it too easy for plaintiffs to recover compensation. Others pointed out that lawyers have an obligation to advise their clients of all legal avenues available to them, that courts award damages in accordance with well established principles (described later), and that plaintiffs in personal injury cases are not given any special treatment by the courts. It was also pointed out that insurance premiums were more likely to have risen because of a decline in the profits made by insurance companies in recent years as a result of natural disasters, corporate collapses, terrorist incidents and a global downturn in the economy. Nevertheless in 2002, in response to the insurance crisis, the Commonwealth and State ­Attorneys-General commissioned a review of the law of negligence chaired by Justice Ipp. The Ipp Report recommended certain changes to the law, and the State and Territory governments subsequently passed legislation that reformed the law of torts generally and the law of negligence in particular.1 Most of these reforms are described in the following pages. Their general intent is to make it more difficult for plaintiffs to recover compensation from defendants. The reforms apply regardless of whether the action is brought for breach of duty under tort law, contractual duty or statutory duty.

LAW IN CONTEXT: LAW IN THE MEDIA

Why McDonald’s scalding case could be a storm in a coffee cup Revelations an Adelaide woman, Jessica Wishart, is suing a McDonald’s franchise for scalds she received from coffee purchased at the restaurant have provoked outrage in the media, and inevitable comparisons with the American case of Stella Liebeck. These comparisons have been accompanied by calls for law reform, and commentary ridiculing the plaintiff for making such a frivolous claim — accusations frequently directed against Liebeck.

1 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); Wrongs Act 1958 (Vic); Civil Liability Act 2002 (WA).

218  PART 2 Legal Consequences

Liebeck became one of the urban legends of tort law after she was awarded US$2.9 million for burns she received from a spilt McDonald’s coffee over 20 years ago. The case has been frequently used as a rallying point for critics of the negligence regimes in Australia and elsewhere. But as with many urban legends, the Liebeck decision is frequently misunderstood. There are many reasons why we shouldn’t panic and assume the Liebeck decision is likely to influence an Australian court in the event it considers the current claim. First, in the US, negligence claims are often heard by a jury. A jury of peers — everyday people — were the ones who decided to award Stella Liebeck damages. In Australia, negligence claims are decided by a judge. Secondly, of the $2.9 million originally awarded, $2.7 million were punitive — damages intended to punish the defendant, McDonald’s — for their conduct, rather than directly compensate the plaintiff for harm suffered. The jury took exception to the fact McDonald’s had received hundreds of complaints from consumers who had suffered burns previously, and refused to respond. Also, the plaintiff offered to settle her claim early on, seeking compensation for medical expenses alone — about $10  500. McDonald’s declined her offer to settle and dragged the matter out to litigation. Punitive damages are not available in Australia in negligence claims. However it is interesting to note that so much of the undeniably large payout awarded by the jury — 257 times what the plaintiff originally sought — is attributable to the fact the jury didn’t like the way McDonald’s ran its business, including its litigation. Food for thought. And of the compensatory damages awarded, a 20% discount was applied on the basis of contributory negligence by the plaintiff. Thirdly, the trial judge reduced the jury’s award of damages to $640  000, and the parties then settled before an appeal against the decision was heard. The settlement figure was confidential, as they usually are, but it’s a fair bet that it was still more than the $10  500 in medical expenses the plaintiff originally sought. Similar claims have been heard since Liebeck, both in the US and in other jurisdictions, and have met with mixed results. In the UK case of Bogle and Ors v McDonald’s Restaurants Limited, the UK  High Court considered claims brought by a group of 36 plaintiffs — mostly children — who had suffered personal injury caused by the spilling of hot drinks served by McDonald’s restaurants while in the restaurant, as opposed to this happening in a drive-through, as with Liebeck’s claim. The Court stated that ‘Persons generally expect tea or coffee purchased to be consumed on the premises to be hot  .  .  .  persons generally know that if a hot drink is spilled on someone, a serious scalding injury can result’ and found that McDonald’s was not liable. Similar decisions have been reached in other cases in other jurisdictions, including the US. What this demonstrates is that courts decide each case on its facts, and, at the present time, the facts of the Wishart case have not been established. Jessica Wishart may have a legitimate claim against McDonald’s, or she may not. Extensive media discussion, and clamouring for torts reform, does not assist the legal process in determining what the facts of her particular claim are, and establishing whether her claim should be upheld. Australian torts law has already undergone extensive reform in response to perceptions that we are becoming increasingly litigious. Independent research doesn’t support that belief, and, attention-grabbing headlines to the contrary, the legal system we have generally does a pretty good job of balancing the interests of plaintiffs and defendants. So rather than reaching for the panic button and declaring that Jessica Wishart’s claim is proof that the sky is falling, we should all take a deep breath and a cold shower — or have a nice warm cup of coffee — and let the legal system do its job. Source: Wendy Bonython, 23 April 2013, https://theconversation.com/why-mcdonalds-scalding-case-could-be-astorm-in-a-coffee-cup-13688.

CHAPTER 6 Carelessly causing harm  219

For a legal action in the tort of negligence to succeed, the plaintiff must establish three things on the balance of probabilities: (1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty of care, and (3) the defendant’s breach caused the plaintiff to suffer harm. Even if all three requirements are satisfied, the defendant may be able to reduce their liability or even avoid liability entirely if they can establish certain defences. CHECKLIST

The tort of negligence is committed by X if all of the following requirements are satisfied. ◼◼ X owes Y a duty of care. ◼◼ X breaches the duty of care. ◼◼ X’s breach causes Y to suffer reasonably foreseeable harm.

We now consider each of these requirements in turn.

Requirement 1: a duty of care Whether the defendant owed the plaintiff a duty of care is a question of law. The onus is on the plaintiff to establish the existence of the duty of care. In most cases establishing the existence of a duty of care will be relatively straightforward, provided that the relationship between the parties falls within the established categories of duty of care. It is, for example, well established that: •• motorists owe a duty of care to other road users,2 •• doctors owe a duty of care to their patients,3 •• solicitors owe a duty of care to their clients,4 •• manufacturers owe a duty of care to people who use their products,5 •• occupiers owe a duty of care to people who come onto their premises,6 •• architects owe a duty of care to the people who occupy the buildings they design,7 •• agents owe a duty of care to their principal, •• directors owe a duty of care to the company, and •• employers owe a duty of care to their employees. If the relationship between the parties is not one that falls within the established duties of care, then to establish the existence of a duty of care the plaintiff must show two things: (a) that it was reasonably foreseeable that the defendant’s act or omission could cause harm to someone in the plaintiff’s position, and (b) that the salient features of the case are consistent with the existence of a duty of care (see figure 6.1). Reasonable foreseeability

To establish the existence of a duty of care, it must be shown that at the time of the incident it was reasonably foreseeable that the defendant’s conduct could cause harm to someone in the plaintiff’s position. According to Lord Atkin in Donoghue v Stevenson [1932] AC 562, at 580: 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.

2 Imbree v McNeilly (2008) 236 CLR 510. 3 Rogers v Whitaker (1992) 175 CLR 479. 4 Hawkins v Clayton (1988) 164 CLR 539. 5 Donoghue v Stevenson [1932] AC 562. 6 Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479. 7 Voli v Inglewood Shire Council (1963) 110 CLR 74.

220  PART 2 Legal Consequences

Does the relationship between the plaintiff and the defendant fall within one of the established categories of duty of care?

YES Duty of care established

NO Was it reasonably foreseeable that the defendant’s conduct could harm the plaintiff?

YES Are the salient features of the case consistent with the existence of a duty of care?

YES Duty of care established

FIGURE 6.1

NO No duty of care

NO No duty of care

Requirements for a duty of care

According to Lord Atkins’ ‘neighbour principle’, whatever a person is doing, they owe a duty of care to those people they can reasonably foresee as likely to be affected by their conduct. When a person is driving their car, they owe a duty of care to those people they can reasonably foresee as likely to be affected by their driving: the passengers in the car, the other motorists on the road, pedestrians and cyclists. As the owner of a restaurant, Johnny owes a duty to those people who come into his restaurant to ensure that it is safe for visitors. Local authorities owe a duty to members of the public to ensure safety in public places. School authorities owe a duty of care to their students while they are under the school’s control. Donoghue v Stevenson (1932) AC 562

May Donoghue met a friend at a café. The friend ordered and paid for a bottle of ginger beer for ­Donoghue. When the bottle arrived, the waiter poured a portion into a glass tumbler. Donoghue drank the contents of the tumbler. When Donoghue’s friend poured the rest of the bottle into the tumbler, the remains of a partially decomposed snail fell out. The ginger beer had been packaged in an opaque bottle, and therefore the presence of the snail had not been evident to Donoghue or the staff at the café. Donoghue suffered from shock from the nauseating sight of the snail. She also suffered severe gastro­ enteritis as a result of consuming the ginger beer. She sued the manufacturer of the ginger beer,

CHAPTER 6 Carelessly causing harm  221

David Stevenson, for £500 in damages. Did Stevenson owe a duty of care to Donoghue even though there was no contract between them, and there was no fraud? The court decided that when an article of food, medicine or the like is sold by a manufacturer to a distributor in circumstances which prevent the distributor or the ultimate purchaser or consumer from discovering by inspection any defect, the manufacturer is under a legal duty to the ultimate purchaser or consumer to take reasonable care to ensure that the article is free from any defect likely to cause injury to health.

As a result of this decision, it is now accepted that all manufacturers owe a duty of care to the customers who use their products. The Australian Consumer Law also creates statutory product liability for loss caused by defective goods, but without proof of negligence. These statutory provisions are examined in a later chapter. If the harm to a person in the plaintiff’s position was not reasonably foreseeable, the defendant will not owe the plaintiff a duty of care. Bourhill v Young [1943] AC 92

A motorcyclist collided with a motor vehicle as a result of the motorcyclist’s careless riding. The plaintiff was standing approximately 10 metres from the point of impact on the far side of a stationary tram. She did not see the accident, but she heard the accident and saw its aftermath. She suffered nervous shock and sued the motorcyclist in the tort of negligence. The court decided that it was not reasonably foreseeable that the conduct of the defendant could cause harm to someone in the position of the plaintiff and that, therefore, the defendant did not owe the plaintiff a duty of care.

It is not necessary to show that the defendant actually foresaw that their conduct could harm the plaintiff. It need only be shown that a reasonable person in the defendant’s situation would have foreseen the possibility of harm. And it does not need to be shown that the harm actually suffered by the plaintiff was reasonably foreseeable, only that some kind of harm to someone in the plaintiff’s position could be caused by the defendant’s conduct. Chapman v Hearse (1961) 106 CLR 112

Chapman was injured in a motor vehicle accident as a result of his negligent driving. Cherry stopped to assist him. While attending to Chapman’s injuries on the road, Cherry was struck and killed by a car driven by Hearse. Cherry’s estate sued Hearse for damages in negligence. Hearse claimed that Chapman had also been negligent and was partially responsible for Cherry’s death. To succeed, Hearse needed to establish that Chapman owed a duty of care to Cherry — that is, that a driver owes a duty of care to the people that might stop to assist them in the event of an accident. The court decided that even though the precise chain of events leading to Cherry’s death was not reasonably foreseeable, it was reasonably foreseeable that if Chapman was involved in a car accident someone might stop to assist him and that person might themselves be injured or killed. Therefore, Chapman owed Cherry a duty of care.

Salient features of the case

It is not enough to show that it was reasonably foreseeable that the defendant’s conduct was likely to cause harm to the plaintiff. The plaintiff must also show that the salient features of the case are consistent with the existence of a duty of care. This means that the court will consider the relationship between the parties and other features of the case and then compare those features with the salient (i.e. relevant) features of other cases where a duty of care has been found to exist. 222  PART 2 Legal Consequences

Sullivan v Moody (2001) 207 CLR 562

The plaintiff was accused by his wife of the sexual abuse of their child. The child was examined by a doctor who reported his suspicions of abuse to the Department of Community Welfare. The Department of Community Welfare investigated the allegations against the plaintiff and concluded that the alle­ gations could not be proved. The plaintiff sued both the doctor and the Department of Community Welfare, claiming that as a result of the allegation by the doctor and the investigation by the Department of Community Welfare, he had suffered shock, distress and psychiatric harm. Was the plaintiff owed a duty of care by (1) the doctor and (2) the Department of Community Welfare? In other words, does a doctor owe a duty of care to the parent of a child patient, and does a statutory authority owe a duty of care to an alleged perpetrator of child abuse? After taking the salient features of the case into consideration the court concluded that the plaintiff was not owed a duty of care by either the doctor or the Department of Community Welfare.

In the above case, in deciding whether or not such duties of care existed, the court took into account the following salient features. •• The need for coherency in the law: if the law of negligence could be used to prevent others from passing on adverse information about the plaintiff, it would come into conflict with the law of defamation. •• Conflicting duties of care: if a doctor owed a duty of care to the parent of a patient, it could come into conflict with the paramount duty owed by the doctor to the patient. Similarly, if a public authority responsible for child welfare owed a duty of care to an alleged perpetrator of child abuse, it would compromise its duty to protect the child. •• The possibility of indeterminate liability: if the Department of Community Welfare’s duty of care extended to the parents, it could also extend to other family members, teachers, or anyone accused of child abuse. Other salient features of the case that may be taken into account by a court include: •• the control the defendant has over the situation and the relative vulnerability of the plaintiff,8 •• the relative knowledge and experience of the parties, •• the type of harm suffered by the plaintiff and any relevant moral or ethical questions,9 and •• the need for people to take personal responsibility for their own actions.10 Makawe Pty Ltd v Randwick City Council [2009] NSWCA 412

Makawe sued Randwick City Council (RCC) after the basement car park of an apartment building it owned flooded. Makawe alleged that RCC had breached the duty of care it owed Makawe when it approved the construction of the car park at a time when the council was in possession of information which showed that the water table in the area was at about the same level as the proposed basement floor slab. The trial judge decided that RCC did not owe Makawe a duty of care, and in making its decision focused upon three salient features: control, vulnerability and reliance. Makawe appealed, arguing that in focusing upon those three salient features the trial judge had disregarded other salient features, namely concerns about the indeterminacy of the class to whom a duty is owed, reluctance to impose a duty that would interfere with legitimate competitive conduct, and the need to resist the imposition of a duty of care that would intrude into another area of law. The Court of Appeal upheld the decision of the trial judge, confirming that RCC did not owe Makawe a duty of care. The court explained how the various salient features should be weighed against each other, and confirmed that a court should

 8 Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254.  9 Harriton v Stephens (2006) 226 CLR 52. 10 Cole v South Tweed Heads Rugby League Football Club Ltd (2004) 217 CLR 469.

CHAPTER 6 Carelessly causing harm  223

consider all of the salient features: ‘It is true that the authorities do not prescribe the relative importance of any of the salient features. That is precisely the point of the “salient features” test. That an order of importance is not prescribed does not mean that each does not have to be considered separately, with an eye to its relative importance in the case in question. Indeed, I can see no way that the test can be applied other than to consider each of the elements separately, with an eye to its relative importance for the circumstances of the case in question. To borrow a concept from the criminal law, once all of these salient features have been identified, and considered, the exercise involves a synthesis of those considerations and their relative importance.’

CAUTION!

When solving a negligence problem and seeking to establish the existence of a duty of care, you only need to consider ‘reasonable foreseeability’ and ‘salient features of the case’ if the relationship between the parties does not fall within one of the recognised categories of duty of care. If the relationship does fall within one of these categories — e.g. motorist and passenger — you need only cite the relevant case law authority to establish the existence of the duty of care.

An existing relationship between the plaintiff and the defendant where the defendant has assumed responsibility for the plaintiff is likely to give rise to a duty of care. Tame v New South Wales (2002) 211 CLR 317

Mr and Mrs Annetts’ 16-year-old son left the family home to work for Australian Stations Pty Ltd (AS) as a jackaroo at a cattle station in Western Australia. Before her son left home, Mrs Annetts phoned AS and was assured that her son would work under constant supervision and would be well looked after. AS assigned the son to work alone as caretaker at a remote station. In December 1986 a police officer phoned the Annetts and informed them that their son was missing. In April 1987 the Annetts were informed that the vehicle driven by their son had been found bogged in the desert. Later that day his body was found. The Annetts sued AS claiming that their son had died as a result of the negligence of AS and, as a result, they had suffered an ‘entrenched psychiatric condition’. The court decided that there was a relationship between the Annetts and AS of such a nature as to give rise to a duty of care.

LAW IN CONTEXT: LAW IN THE MEDIA

Blame falls on drinkers in High Court judgment 11 In November 2009 the High Court ruled that publicans have no general duty of care to protect patrons from the consequences of getting drunk, thus shifting responsibility for the safety of drunken patrons towards ‘the drinker, rather than the seller of drink’. The High Court unanimously decided to overturn a decision of the Tasmanian Supreme Court that a publican who returned motorcycle keys to a drunken patron, who then died in a crash, had breached their duty of care. The patron, Shane Scott, had been drinking at a country pub when rumours emerged of a police breathalyser nearby. A workmate suggested that he lock his motorbike in the hotel storeroom. The publican, Michael Kirkpatrick, agreed and Mr Scott gave him the bike keys. After drinking seven or eight cans of Jack Daniels and cola, Mr Scott asked to have his bike back. Mr Kirkpatrick said that after Mr Scott had insisted he was ‘fine’ to drive, he had returned the bike. About 10 minutes

11 CAL No 14 Pty Ltd v Motor Accidents Insurance Board (2009) 239 CLR 390.

224  PART 2 Legal Consequences

after leaving the pub, Mr Scott’s was killed in an accident. He died with a blood alcohol concentration of 0.253. Mr Scott’s wife and the Motor Accident Insurance Board argued that Mr Kirkpatrick had been negligent in serving Mr Scott too much alcohol and in failing to stop him riding away on his bike. The High Court ruled that outside exceptional cases, hotel owners and licensees ‘owe no general duty of care at common law to customers (requiring) them to monitor and minimise the service of alcohol or to protect customers from the consequences of the alcohol they choose to consume. That conclusion is correct because the opposite view would create enormous difficulties  .  .  . relating to customer autonomy and coherence with legal norms. Expressions like ‘intoxication’, ‘inebriation’ and ‘drunkenness’ are difficult to both define and to apply. The fact that legislation compels publicans not to serve customers who are apparently drunk does not make the introduction of a civil duty of care defined by reference to those expressions any more workable or attractive.’ The Australian Hotels Association hailed the ruling as sending a strong warning to drinkers to take responsibility for their own actions, and cautioned against patrons seeing the judgment as a green light to ‘get plastered’ at licensed venues. Professor Jim Davis at the Australian National University said the case continued the High Court’s shift in negligence cases towards encouraging personal responsibility for one’s own actions.12

ACTIVIT Y 6.1 — REFLECT

According to the court in Donoghue v Stevenson, the only test for establishing a duty of care was the reasonable foreseeability test. Later courts imposed additional requirements, including the requirement that the salient features of the case be consistent with the existence of a duty of care. Why do you think these additional requirements were imposed?

Requirement 2: breach of the duty of care Just because the defendant owed the plaintiff a duty of care it does not mean that the defendant is responsible for the plaintiff’s loss. It must be established that the defendant has in fact been careless; in other words, the defendant must have breached the duty of care that they owed to the plaintiff. The defendant will have breached their duty of care if the risk of harm was foreseeable and significant, and they failed to do what a reasonable person would have done in the circumstances. The standard of care is a question of law to be established by the judge. Whether the defendant breached that standard of care is a question of fact. Identifying a breach of duty

At common law, the defendant does not breach their duty of care unless they fail to do what a reasonable person would have done in the circumstances. This is known as the reasonable person test. In applying the reasonable person test the court compares the conduct of the defendant with that of the ordinary and careful ‘person in the street’ or, as one judge famously put it, ‘the man on the Clapham omnibus’. If the defendant’s conduct falls below the standard of the reasonable person they have breached their duty of care. The civil liability legislation in all jurisdictions (except the Northern Territory) now provides that a person will not breach their duty 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 reasonably to have known); (b) the risk was not insignificant; and (c) in the circumstances, a reasonable person in the person’s position would have taken those precautions.13 12 Matthew Denholm and Nicola Berkovic, ‘Blame Falls on Drinkers — High Court Rules for Responsibility’, The Australian (Sydney), 11 November 2009, 1. 13 Civil Law (Wrongs) Act 2002 (ACT) s 43(1); Civil Liability Act 2002 (NSW) s 5B(1); Civil Liability Act 2003 (Qld) s 9(1); Civil Liability Act 1936 (SA) s 32(1); Civil Liability Act 2002 (Tas) s 11(1); Wrongs Act 1958 (Vic) s 48(1); Civil Liability Act 2002 (WA) s 5B(1).

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In deciding whether or not a reasonable person would have taken precautions against a risk of harm, the civil liability legislation obliges the court to consider (see figure 6.2): (a) (b) (c) (d)

the probability that the harm would happen if precautions were not taken; the likely seriousness of the harm; the burden of taking precautions to avoid the risk of harm; and the social utility of the activity creating the risk of harm.14

Was the risk foreseeable?

YES Was the risk insignificant?

NO No breach

YES No breach

NO Did the defendant do what a reasonable person would have done in the circumstances, taking into account (1) the probability of harm, (2) the likely seriousness of harm, (3) the burden of taking precautions and (4) the social utility of the conduct?

YES No breach

FIGURE 6.2

NO Breach of duty

Requirements to establish a breach of duty

14 Civil Law (Wrongs) Act 2002 (ACT) s 43(2); Civil Liability Act 2002 (NSW) s 5B(2); Civil Liability Act 2003 (Qld) s 9(2); Civil Liability Act 1936 (SA) s 32(2); Civil Liability Act 2002 (Tas) s 11(2); Wrongs Act 1958 (Vic) s 48(2); Civil Liability Act 2002 (WA) s 5B(2).

226  PART 2 Legal Consequences

•• The risk was foreseeable — to establish the existence of a duty of care it is necessary to show that the plaintiff (or someone like them) being affected by the defendant’s conduct was foreseeable. To establish a breach of the duty of care it must be shown that the risk was foreseeable. If the risk was not foreseeable, the defendant has not breached their duty of care. •• The risk was not insignificant — if the risk was an insignificant one, the defendant has not breached their duty of care by failing to take precautions •• The person failed to do what a reasonable person would have done — in comparing the defendant’s conduct with that of a reasonable person (established by the reasonable person test), the court will take into account the probability of harm, the likely seriousness of the harm, the burden of taking precautions and the social utility of the defendant’s activity. •• The probability of harm — if the risk of injury was so small that a reasonable person would not have done anything about it, the defendant has not breached their duty of care. Bolton v Stone [1951] AC 850

Stone lived in a house adjacent to the Cheetham Cricket Ground. A batsman playing in a match at the Cricket Ground hit the ball out of the ground. The ball hit Stone while she was standing outside her house. It was only very rarely that a ball was hit over the fence during a match: it had only happened five or six times in 37 years. The Committee and Members of the Cheetham Cricket Club (CCC) were aware of the occasions on which it had occurred. No one had previously been struck by a cricket ball that was hit out of the ground, and the street in which Stone lived was not the subject of heavy traffic. Stone sued the Committee and Members of the CCC seeking to recover damages for the injuries she sustained when hit by the cricket ball. She alleged that her injuries were caused by their negligence in not taking steps to avoid the danger of a ball being hit out of the ground, such as moving the wickets a few steps further away from her road or heightening the fence. The court decided that it was foreseeable that a person on the adjacent road could be struck by a ball hit out of the ground. However, it also concluded that the CCC did not breach their duty of care to Stone because reasonableness did not require precautions to be taken against the very small risk that someone would be struck by a ball hit out of the ground, i.e. a reasonable person would not have taken any additional precautions given the very low risk of injury.

In some circumstances the court will also take into account the obviousness of the risk in deciding whether or not the duty of care has been breached: if an activity engaged in by the plaintiff is an obviously risky one the defendant is less likely to be found to have breached their duty of care by failing to take steps to prevent the risk being realised. Woods v Multi-Sport Holdings Pty Ltd (2002) 208 CLR 460

While batting in an indoor cricket match, Woods mistimed a shot and was hit in the right eye. The injury caused him to lose sight in the eye. The indoor cricket match was organised by Multi-Sport Holdings Pty Ltd (MSH) and held at a facility owned and operated by MSH. MSH supplied some equipment to the players (bats, balls and groin protectors) but did not provide helmets with a face guard or pads. MSH did not display a sign warning of the risk of serious eye injury. Woods sued MSH for damages alleging MSH had breached the duty of care it owed to him by (1) failing to supply a helmet with a face guard to Woods, and (2) failing to warn Woods of the risk or danger of injury. The court decided that a reasonable person would not have provided a helmet with a guard or warned Woods about the risk of eye injury. Indoor cricket is fast paced and conducted in a confined space, and there is an obvious risk of collision between players and of any player (batter, bowler or fieldsman) being hit by the ball. MSH did not have an obligation to warn players of this obvious risk or to provide them with protection.

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The question of obviousness of risk also relates to whether or not the plaintiff has voluntarily assumed the risk, a defence considered in more detail below. •• The likely seriousness of harm — if the possible harm arising from a careless act is not very significant then the defendant will owe a low standard of care, but if the possible harm is very serious then they will owe a higher standard of care. •• The burden of taking precautions — if the defendant could have avoided the risk of injury by taking some relatively simple precautions, their failure to take those precautions is likely to be a breach of duty. However, if the risk of injury could only have been avoided by taking significant, expensive and onerous precautions, it is less likely that the defendant will have breached their duty by failing to take those precautions. •• The social utility of the activity — at the time that the defendant’s conduct was alleged to have caused harm to the plaintiff, was the defendant doing something that was socially useful? If so, it is less likely that they will be found to have breached their duty of care. For example, an ambulance driver who is driving a patient to the hospital, and who is involved in a car accident, is less likely to be found to have breached their duty of care because at the time they were doing something socially useful. Paris v Stepney Borough Council [1951] AC 367

Paris worked for the Metropolitan Borough of Stepney (MBS) as a fitter’s mate in the garage of MBS’s Cleansing Department. Due to an injury he sustained as a result of an air raid during World War II, he was practically blind in his left eye. MBS was aware of this. Paris was removing a rusted bolt using a steel hammer while performing maintenance work on the under-carriage of a vehicle when a piece of metal flew off and entered his right eye causing him to lose sight in that eye as well. It was known to MBS that when employees undertook the type of work being performed by Paris at the time he was injured, dirt sometimes got into their eyes and pieces of metal might sometimes fly off when bolts were removed. However, it was not usual for employers to supply goggles to persons employed in garages and engaged in similar types of work. Paris sued MBS for negligence. He alleged that MBS breached its duty of care to Paris by (1) failing to provide him with suitable goggles for the protection of his eyes while he was engaged in the work he was engaged in, and (2) failing to require him to wear the goggles. The court stated that a reasonable employer would take different precautions against a risk of likely injury for different employees. In addition, it stated that the gravity of the consequences of injury to the particular employee was a relevant consideration in determining the reasonable precautions against injury that an employer was required to take. In this case since the possible harm to Paris was more serious than the possible harm to a worker with sight in both eyes, the standard of care owed to Paris was higher than usual. A reasonable person in the position of the Council would have insisted that Paris wear protective goggles. The Council had failed to do what a reasonable person would have done in the circumstances, and had therefore breached its duty of care.

Latimer v AEC Ltd [1953] AC 643

A factory owned by AEC Ltd was flooded and the floor became slippery. Latimer slipped on the wet floor and sued AEC Ltd for compensation. Had AEC Ltd breached its duty of care? AEC Ltd could have closed the factory while the floor was wet, but this precaution was a significant and expensive one and a reasonable person would not have taken the precaution in the circumstances. AEC Ltd had not breached its duty of care.

228  PART 2 Legal Consequences

Watt v Hertfordshire County Council [1954] 1 WLR 835

Watt was employed as fireman in the fire service operated by the Hertfordshire County Council (HCC). He was stationed at the Watford fire station. The Watford fire station was not a large one and had only a few vehicles. Its equipment included a jack that was on loan from the London Transport Executive. The jack was used only on rare occasions. Only one of the vehicles at the station was specially fitted to carry the jack. The station received an emergency call to attend an accident not far from the station in which a woman had been trapped under a heavy vehicle. The jack was required, but the vehicle specially fitted to carry the jack was otherwise engaged. Consequently, the officer in charge ordered the jack be put on another vehicle on which there was no means of securing it. While travelling to the scene, the jack moved inside the vehicle and hit Watt’s leg, injuring him. Watt sued the HCC claiming damages for negligence. The court decided that (1) the HCC was under no duty to ensure that a vehicle specially fitted to carry the jack was available at all times, and (2) the risk taken in travelling on a vehicle with a jack which was not secured was consistent with the risks that would normally be faced by a fireman and not unduly great given the emergency situation.

A lower duty of care

The court may decide that a defendant owes a lower duty of care (and is less likely to have breached their duty of care) because of: •• their status as a minor, or •• their inexperience. McHale v Watson (1966) 115 CLR 199

A 12-year-old boy and a 9-year-old girl were playing together. The boy threw a dart at a wooden post. The dart bounced off the post and hit the girl in the eye. In deciding whether or not the parents of the boy were liable for the negligence of the boy, the court had to decide if the boy had breached his duty of care. The court decided that the standard of care to be applied was not that of the reasonable person, but the standard ‘to be expected of an ordinary child of comparable age’, which was a much lower standard.

Until relatively recently the position at common law was that knowledge by the plaintiff of a defen­ dant’s inexperience would result in the defendant owing a lower standard of care. Cook v Cook (1986) 162 CLR 376

Margaret Cook (MC) did not hold, and never had held, a driver’s licence or learner’s permit and she was quite inexperienced as a driver. This was well known to Irene Cook (IC), a relative of MC. During a family gathering, MC and IC set out to drive to a local shop. On the drive, MC told IC that she intended to apply for a learner’s permit the following day. In response, IC stopped the car and told MC: ‘If you are going to drive you may as well start now’. MC resisted but, after further encouragement from IC, started to drive. While driving through an intersection, MC deliberately accelerated and steered the car off the road to avoid a parked car and drove the vehicle into a concrete electricity post. IC was injured. IC sued MC for damages on the basis of negligence. Does the duty of care owed by a driver to a passenger require that the driver exercise the degree of skill that could reasonably be expected of an experienced and competent driver in the circumstances, even if the driver and the passenger both know that the driver is unqualified and lacks that skill? The court decided that MC had been negligent. It explained that in special and exceptional circumstances the standard of care owed by a driver to a passenger might be modified from that which is expected of a reasonably competent and experienced driver.

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Given that (1) MC was to the knowledge of IC quite inexperienced and had not even obtained a learner’s permit, (2) IC was not an unwilling passenger and had instigated the driving of the vehicle by MC, and (3) at the time of the accident, the relationship of MC and IC bore some similarity to that of instructor and pupil, there were special and exceptional circumstances giving rise to a lower standard of care. That is, MC should be judged against the standard expected of an inexperienced and unqualified driver. And in the present case, MC’s action in accelerating off the road to avoid the parked car was carelessness over and above that which could be expected of mere inexperience. However, in 2008 the decision in Cook v Cook was overturned by the High Court of Australia.

Imbree v McNeilly (2008) 236 CLR 510

Paul Imbree and Jesse McNeilly were on a 4WD trip in the Northern Territory with others. McNeilly was 16 years and 5 months old, had little driving experience and did not hold a driver’s licence or learner’s permit, all of which Imbree was aware. At various times during the trip, Imbree allowed ­ McNeilly to drive the 4WD station wagon for 30 to 40 minute stints. Imbree sat beside McNeilly in the front ­passenger seat. After driving for some time, McNeilly and Imbree saw a piece of tyre on the road. McNeilly endeavoured to steer around the tyre by veering to the right. Imbree yelled at McNeilly to brake but he did not. When the vehicle was at the far right-hand side of the road, McNeilly made a sharp left turn and accelerated. The vehicle rolled. Imbree sustained spinal injuries in the accident and was rendered a tetraplegic. Imbree sued McNeilly in the tort of negligence. A majority of the High Court decided that (1) the standard of care owed by McNeilly to Imbree was the standard of care expected of a reasonable driver, and was not modified by the experience of the driver or whether they were licensed, and (2) Imbree’s knowledge of McNeilly’s inexperience was not sufficient to warrant the application of a lower standard of care. In reaching its decision, the High Court overruled its earlier decision in Cook v Cook.

The standard of care owed by an unlicensed or inexperienced driver to others (including their supervisor) is now the same objective standard as that owed by a licensed driver. LAW IN CONTEXT: LAW IN THE MEDIA

Banning cartwheels: school litigation fears are unfounded A few schools have hit the headlines recently for banning traditional playground activities like cartwheels, handstands, ball games and even high fives. Parents are rightly objecting to the bans, and pointing to the increasingly litigious society we live in. They say the schools are fearful of being sued, and even more fearful they might be sued successfully. But are schools’ fears well-founded? No lawyer could ever give a 100% guarantee of not being sued. But the perceptions that we live in an increasingly litigious society have no foundation in reality. Harder than you might think For the past ten years, since tort reforms came into force, rates of litigation have dropped in all Australian jurisdictions. Even before the reforms, litigation rates were steady rather than increasing, and had been so for some years. To add to the confusion the tort reform legislation — called different names in different jurisdictions — added significantly to the difficulty of suing for personal injury. In NSW in particular, suing schools became much more difficult especially when a recreational activity was involved that is not compulsory — like running, jumping and doing a headstand in the playground. Under the Act, it’s very easy to give a warning which exempts the school from liability. If this provision doesn’t apply there are other sections which make it harder to sue.

230  PART 2 Legal Consequences

Tour of duty The big problem for schools has traditionally been the rule that schools owe a non-delegable duty to their students to see that reasonable care is taken, which may (but probably does not) import a higher standard of care. Even this has been affected in NSW and Victoria by the new rule that non-delegable duty has to be treated like vicarious liability. Vicarious liability arises when an employee (or other agent) does something wrong which is connected to their work. In such cases the employer would have to pay their damages — that is they are vicariously liable for their employee. In the other jurisdictions the difficulties are not quite so great, but the tort reform process significantly reduced the ability of plaintiffs to sue in all jurisdictions. It is worth repeating that even before these reforms had come into play the rates of litigation were steady and success for plaintiffs had been reduced for some time. This was because the High Court had decided that what is ‘reasonable’ should be given greater scope. Negligence is established when the defendant did not act like a ‘reasonable person’ in the circumstances. The courts have often rejected liability in cases where students have been injured in the playground — recognising that it is impossible to watch every child every moment. A watching brief For example, in the 2005 Hadba case a child was injured when other children pulled her off the flying fox in the playground. This occurred while the teacher on duty was facing away from the play equipment. There was no evidence of any particular discipline problem. The school had a ‘hands off rule’ which applied when children were using the flying fox. The accident occurred when the supervising teacher was momentarily distracted by activities in another part of the playground — for about 30 seconds. Two children (neither of whom had previously breached the hands off rule or [had] discipline issues) grabbed the plaintiff by the legs and she fell, landing on her face. The court decided that the school’s well-established rules about the use of the equipment and the policy of supervision in the playground were sufficient. The momentary distraction of the teacher was not sufficient to be inadequate. The court also thought that extra teachers supervising to guard against this would be unreasonable and the school was not liable. So for schools, it’s worth noting that if supervision is inadequate liability may ensue, but where supervision is adequate together with clear instructions about behaviour, or where the injury would have occurred even with greater supervision, the school is likely not to be liable. Perceptions vs reality So why is there such a perception of massive litigation and such fear of risk in the school playground? The answer seems to be that people are not aware of the tort reforms, despite the massive media coverage of the insurance crisis leading up to the reforms in 2002. It seems as if people heard all the concerns of the insurance crisis being aired, but failed to notice that systems were put in place to fix the problem (if indeed the problem existed at all). It is ironic that even before the tort reforms the courts had reversed the trend of pro-plaintiff litigation and defendants were winning 75% of cases of personal injury allegedly caused by negligence. Other reasons for the perception may be that schools will not tolerate any risk of litigation — more broadly part of our risk-averse culture. The media, too, is likely to give prominence to any case where there is a successful suit, but won’t report every incident where harm is suffered but there is no litigation or it is unsuccessful — skewing perceptions further. Risky business The test for negligence is reasonable behaviour in the face of the foreseeable risks. This has been the test since 1932, although a stronger emphasis on personal responsibility has existed since the late 1990s. There are risks in the playground. But a school is not regarded as negligent simply because an activity carries risk.

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The question is what a reasonable response to that risk is. When schools consider this, it is important to consider that another foreseeable risk is that of obesity and heart disease caused by a lack of physical activity by children when at school. The courts recognise that children need physical activity and physical activity always carries some risk. If it is the fear of litigation which is driving these bans, it is not based on the legal reality. As I said earlier, no-one can be guaranteed 100% freedom from litigation, but it seems that the fear is disproportionate to the actual risk. Source: Prue Vines, 30 August 2012, https://theconversation.com/banning-cartwheels-school-litigation-fears-areunfounded-9140.

A higher standard of care

If a person has held themselves out as an expert or professional they will owe a higher standard of care. The standard of care owed by a medical specialist, for example, is not that of the reasonable ‘person in the street’ but that of the reasonable medical specialist.15 In some situations a person will owe not just a duty to take reasonable care but a duty to ensure that all reasonable care is taken. This higher standard of care is known as a non-delegable duty of care. If a person owes a non-delegable duty of care they cannot avoid liability by delegating responsibility to another person. For example, an employer owes a non-delegable duty of care to their employees.

15 Rogers v Whitaker [1992] 175 CLR 479.

232  PART 2 Legal Consequences

Kondis v State Transport Authority (1984) 154 CLR 672

Kondis was employed by the State Transport Authority (STA). He was injured at work when part of a crane being operated by an independent contractor fell on him. Kondis sued the STA for negligence. The STA argued that it was not responsible for the actions of the independent contractor. The court decided that while the STA was not vicariously liable for the actions of the independent contractor, it was in breach of its non-delegable duty to provide a safe place of work that it owed to all of its employees. This duty could not be delegated to an independent contractor. The duty of employers to provide a safe place of work is considered in more detail in a later chapter. Other examples of non-delegable duties of care include: • the duty owed by a hospital to its patients,16 • the duty owed by a school to its students,17 and • the duty owed by an occupier in relation to things on their property and under their control that could cause harm to others.18 The duty of care only extends to negligent acts by others and not to intentionally harmful acts by others.

Liability for failing to act

Generally speaking, there will be no breach of duty where physical harm or loss arises as a result of a failure to act. According to Brennan J in Council of the Shire of Sutherland v Heyman [1985] HCA 41: A man on the beach is not legally bound to plunge into the sea when he can foresee that a swimmer might drown.

In the absence of a previous relationship of responsibility, there is no legal obligation to help someone in need or come to their rescue. There may, however, be an ethical obligation. ACTIVIT Y 6.2 — REFLECT

Provide an explanation as to whether or not you have an ethical obligation to provide help in each of the following three circumstances. 1. A fellow student has fainted in class. 2. A stranger is being threatened by three youths in a park. 3. An injured dog is lying by the side of the road.

In some circumstances, however, a person will breach their duty of care by failing to act. For example: •• if a driver fails to apply the brake when required to do so, they will breach their duty, or •• if there is a continuing professional relationship between the parties such as solicitor and client or accountant and client, the professional will breach their duty if they fail to act to prevent harm from occurring to their client.

Requirement 3: harm caused by the breach of duty Establishing that the defendant has breached their duty of care is still not enough to make them liable for the plaintiff’s loss or injury. It must be established that the defendant’s breach of duty caused the harm suffered by the plaintiff. According to the civil liability legislation, in deciding that a breach of duty caused particular harm, the court must be satisfied that: 1. the breach of duty was a necessary condition of the occurrence of the harm (factual causation), and 16 Roe v Ministry of Health [1954] 2 QB 66. 17 Commonwealth v Introvigne (1982) 150 CLR 258. 18 Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520.

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2. it is appropriate for the scope of the liability of the defendant to extend to the harm so caused (scope of liability).19 These matters must be established by the plaintiff on the balance of probabilities. Factual causation is a question of fact; scope of liability is a question of law (see figure 6.3).

Harm caused by breach

Was the breach a necessary condition of the occurrence of harm?

NO Harm was not caused by breach.

YES Is it appropriate for the scope of the defendant’s liability to extend to the harm?

NO Harm was not caused by breach.

FIGURE 6.3

YES Harm was caused by breach.

Requirements to establish the harm caused by a breach of duty

Factual causation

The defendant is only responsible for harm that was actually caused by their carelessness. The question is a factual one: did the careless act cause, either directly or indirectly, the harm suffered by the plaintiff? Sometimes the issue of causation is relatively straightforward: the carelessness is a direct cause of the loss or injury. For example, in a case about a car accident, it would be relatively straightforward to establish that the defendant’s careless act — not paying attention while they were driving — caused their car to collide with the car being driven by the plaintiff, which in turn caused the physical injuries suffered by the plaintiff. In other circumstances the causation is less direct and less clear. What if, in the above example, the plaintiff had while recovering in hospital become addicted to painkillers? Was the harm suffered

19 Civil Law (Wrongs) Act 2002 (ACT) s 45; Civil Liability Act 2002 (NSW) s 5D; Civil Liability Act 2003 (Qld) s 11; Civil Liability Act 1936 (SA) s 34; Civil Liability Act 2002 (Tas) s 13; Wrongs Act 1958 (Vic) s 51; Civil Liability Act 2002 (WA) s 5C.

234  PART 2 Legal Consequences

by the plaintiff — the addiction to painkillers — caused by the defendant’s careless driving? A test often used by the courts is the ‘but for’ test: the court asks whether, but for the defendant’s carelessness, the plaintiff would have suffered the harm. If, in the absence of the defendant’s carelessness, the plaintiff would not have suffered the harm, then the harm was caused by the defendant’s carelessness. Yates v Jones [1990] Aust Torts Reports 81–009

Yates was injured in a car accident caused by Jones’s carelessness. While recovering in hospital, a friend of  Yates offered her heroin to help her to cope with the pain. She subsequently became addicted to heroin and when she sued Jones for compensation for her injuries, she included a claim for the cost of her heroin addiction. Was the heroin addiction caused by Jones’s carelessness? But for Jones’s carelessness, would Yates have become addicted to heroin? The court decided that the heroin addiction was not caused by the car accident but was rather caused by the actions of Yates’s friend.

The ‘but for’ test will not be appropriate where the harm suffered by the plaintiff has a number of causes. In such a situation, the court will apply the ‘material contribution’ test as explained by McHugh J in Chappel v Hart (1998) 195 CLR 232: Before the defendant will be held responsible for the plaintiff’s injury, the plaintiff must prove that the defendant’s conduct materially contributed to the plaintiff suffering that injury. In the absence of a statute or undertaking to the contrary, therefore, it would seem logical to hold a person causally liable for a wrongful act or omission only when it increased the risk of injury to another person. If a wrongful act or omission results in an increased risk of injury to the plaintiff and that risk eventuates, the defendant’s conduct has materially contributed to the injury that the plaintiff suffers whether or not other factors also contributed to that injury occurring. If, however, the defendant’s conduct does not increase the risk of injury to the plaintiff, the defendant cannot be said to have materially contributed to the injury suffered by the plaintiff. Cook v ACT Racing Club Incorporated and the Australian Jockey Club Inc [2001] ACTSC 106

After using an overheated sauna at the Canberra racecourse, a jockey suffered a heart attack. The dehydration associated with the use of the sauna was only one of the causes of the heart attack. The court decided that the sauna significantly increased the risk of injury to the plaintiff and was, therefore, a cause of the heart attack.

It is not necessary that the plaintiff establish that the defendant’s carelessness was the sole cause of the harm. It is sufficient to show that the carelessness was a contributing cause along with other causes. Scope of liability

The defendant is not liable for every consequence of their carelessness: the court must decide that it is appropriate for the scope of the defendant’s liability to extend to the harm actually suffered by the plaintiff. A key consideration to be taken into account is whether the harm suffered by the plaintiff was reasonably foreseeable. We saw earlier that to establish the existence of a duty of care, it was necessary to show that it was reasonably foreseeable that the defendant’s conduct could cause harm to a person in the plaintiff’s position. A similar test applies in determining the scope of the defendant’s liability, but here the question is whether the actual loss or injury suffered by the plaintiff was a reasonably foreseeable consequence of the defendant’s carelessness. If the harm suffered by the plaintiff was too remote or CHAPTER 6 Carelessly causing harm  235

far-fetched — in other words, it was not reasonably foreseeable — then the defendant will not be liable for that harm. (The same limitation applies to liability for the consequences of a breach of contract.) Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound No. 1) [1961] AC 388

Morts Dock & Engineering Company (Morts) carried on the business of ship building, ship repairing and general engineering at its wharf in Morts Bay in Sydney Harbour. Morts employees were working on a vessel moored at the wharf using welding equipment. A vessel owned by Overseas Tankship (UK) Ltd (OT), Wagon Mound, was moored at Caltex Wharf on the opposite shore of the harbour, approximately 600 feet from Morts Wharf, to enable the discharge of gasoline products and taking in of furnace oil. A large quantity of furnace oil was released into the harbour as a result of the carelessness of OT’s employees. The oil spread to Morts Wharf. When the Morts works manager became aware of the presence of the oil, he made enquiries with the manager of Caltex. The response he received led him to believe that the work at Morts Wharf could safely continue. Hot metal from the welding at Morts Wharf fell on cotton waste in the harbour and ignited the furnace oil. Consequently, the wharf and the vessel upon which Morts employees were working caught fire. Considerable damage was done to the wharf and to the equipment on it. Morts sued OT for negligence. The court decided that OT was only liable for the consequences of its actions that were reasonably foreseeable at the time of the negligent act. OT was not liable for unforeseeable consequences of its negligence. It decided that although OT had owed Morts a duty of care and that duty had been breached, the damage suffered by Morts was not reasonably foreseeable: OT did not know and could not reasonably be expected to have known that furnace oil was flammable when spread on water.

CAUTION!

A person who has breached their duty of care is not responsible for all of the harm caused by their breach, only for the harm caused by their breach that was reasonably foreseeable and not too remote or far-fetched.

Rowe v McCartney [1976] 2 NSWLR 72

Rowe agreed to permit McCartney to drive her powerful car. McCartney drove the car negligently and crashed into a telegraph pole. Rowe was a passenger in the car at the time. McCartney was badly injured and became a quadriplegic. Rowe suffered minor physical injuries but suffered a mental illness as a result of feelings of guilt about allowing McCartney to drive the car. Rowe sued McCartney for compensation for the costs associated with this mental illness. The court decided that although McCartney’s breach of duty had caused the mental illness, the mental illness was not a reasonably foreseeable consequence of McCartney’s careless driving.

It is only the type of harm that must be reasonably foreseeable, not the extent of the harm. If the plaintiff suffers greater than usual harm because of a pre-existing vulnerability, the defendant will be liable for the full extent of that harm provided the harm is of a type that is a reasonably foreseeable consequence of the defendant’s carelessness. This is known as the eggshell skull rule. ACTIVIT Y 6.3 — REFLECT AND APPLY

Illustrate the eggshell skull rule using your own example.

236  PART 2 Legal Consequences

Defences Even if the plaintiff has established all three elements of the tort of negligence, the defendant can still avoid liability, either completely or partially, if they can establish the existence of one or more of the following defences. Voluntary assumption of risk

If it can be established that the plaintiff was fully aware of the risk at the time the harm was caused and they voluntarily assumed that risk, the defendant is relieved of all liability. This is called voluntary assumption of risk, sometimes referred to by its Latin name volenti non fit injuria. This defence has traditionally been a difficult one to establish because it must be shown that: •• the plaintiff had full knowledge and appreciation of the risk, and •• the plaintiff freely and willingly agreed to the precise risk that eventuated. Rootes v Shelton (1967) 116 CLR 383

The plaintiff was injured while waterskiing when the defendant (the driver of the boat) drove too close to a moored boat. The defendant argued that the plaintiff had voluntarily assumed the risk of being injured while waterskiing. The court decided that while the plaintiff was aware of the risks normally associated with waterskiing and had assumed those risks, they had not assumed the risk of the defendant failing to avoid or warn of obstacles in the water.

The civil liability legislation in most jurisdictions now facilitates the raising of the defence of voluntary assumption of risk where the plaintiff is injured doing something that is obviously risky: If, in an action for damages for breach of duty causing harm, a defence of voluntary assumption of risk is raised by the defendant and the risk is an obvious risk, the plaintiff is taken to have been aware of the risk unless the plaintiff proves, on the balance of probabilities, that he or she was not aware of the risk.20

The legislation also provides: (1) A person (defendant) does not owe a duty to another person (plaintiff) to warn of an obvious risk to the plaintiff. (2) Subsection (1) 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, other than a doctor, 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.21 Agar v Hyde (2000) 201 CLR 552

Two rugby union players broke their necks when scrums collapsed on top of them. They commenced civil proceedings against the International Rugby Union Board arguing that it had been negligent in the preparation of the rules relating to scrums. The High Court decided that as the rugby players were aware of the risks inherent in playing rugby, they had voluntarily assumed the risk of injury and the International Rugby Union Board was not liable.

20 Civil Liability Act 2002 (NSW) ss 5F–5G; Civil Liability Act 2003 (Qld) ss 13–14; Civil Liability Act 1936 (SA) ss 36–37; Civil Liability Act 2002 (Tas) ss 15–16; Wrongs Act 1958 (Vic) ss 53–54; Civil Liability Act 2002 (WA) ss 5M–5P. 21 Civil Liability Act 2002 (NSW) s 5H; Civil Liability Act 2003 (Qld) s 15; Civil Liability Act 1936 (SA) s 38; Civil Liability Act 2002 (Tas) s 17; Civil Liability Act 2002 (WA) s 5O.

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The civil liability legislation of some jurisdictions also states that the defendant is not liable for harm suffered by the plaintiff as a result of the materialisation of an obvious risk of a dangerous recreational activity engaged in by the plaintiff.22 A ‘dangerous recreational activity’ usually means an activity engaged in for enjoyment, relaxation or leisure that involves a significant degree of risk of physical harm to a person. Contributory negligence

Contributory negligence is a partial defence: if it can be established that the plaintiff contributed in some way to their own loss or injury, liability will be apportioned between the defendant and the plaintiff. For example, if Simon was a pedestrian injured by Johnny in his car, the court might decide that Johnny drove negligently but that Simon was also negligent because he failed to look both ways before crossing the road. The court would apportion liability: it might decide that Johnny was 70 per cent responsible and Simon was 30 per cent responsible, and the compensation payable by Johnny to Simon would be reduced by 30 per cent. Ingram v Britten [1994] Aust Torts Reports 81–291

Ingram was employed by Britten. While driving a tractor owned by Britten at excessive speed, Ingram lost control and hit a tree causing the tractor to roll over. No metal frame was fitted to the tractor to protect the driver. Ingram sued Britten for compensation for the cost of his injuries. The court decided that Britten was negligent in not fitting a metal frame to the tractor, but that Ingram was also negligent in driving at an excessive speed. The court apportioned liability 40 per cent against Britten and 60 per cent against Ingram.

Manley v Alexander (2005) 223 ALR 228

After consuming 12 stubbies of beer in eight hours, Alexander lay down in the road and went to sleep. At 4.15  am, Manley drove over Alexander in his tow-truck. Alexander sued Manley in the tort of negligence. The court decided that Manley had been negligent, but Alexander had also been negligent and had contributed to his own injuries. The court decided that Alexander was 70 per cent responsible for the accident, and that he was therefore only entitled to recover 30 per cent of his losses from Manley.

To determine whether the plaintiff has also been negligent, the standard of care is that of a reasonable person in the plaintiff’s position — that is, the court applies the same principles as those applied in determining the defendant’s liability.23 According to the civil liability legislation in the Australian Capital Territory, New South Wales, Queensland and Victoria, contributory negligence on the plaintiff’s part can even result in the plaintiff being found to be completely responsible for their own loss or injury.24 The civil liability legislation in each jurisdiction provides that if the plaintiff was intoxicated at the time of the incident, or the plaintiff was relying on the care and skill of a person they knew to be intoxicated, contributory negligence on the part of the plaintiff will be presumed.25 22 Civil Liability Act 2002 (NSW) ss 5K–5L; Civil Liability Act 2003 (Qld) ss 17–19; Civil Liability Act 2002 (Tas) ss 18–20; Civil Liability Act 2002 (WA) ss 5E–5I. 23 Civil Liability Act 2002 (NSW) s 5R; Civil Liability Act 2003 (Qld) s 23; Civil Liability Act 1936 (SA) s 44; Civil Liability Act 2002 (Tas) s 23; Wrongs Act 1958 (Vic) s 62; Civil Liability Act 2002 (WA) s 5K. 24 Civil Law (Wrongs) Act 2002 (ACT) s 47; Civil Liability Act 2002 (NSW) s 5S; Civil Liability Act 2003 (Qld) s 24; Wrongs Act 1958 (Vic) s 63. 25 Civil Law (Wrongs) Act 2002 (ACT) ss 95–96; Civil Liability Act 2002 (NSW) s 50; Personal Injuries (Liabilities and Damages) Act 2003 (NT) ss 14–15; Civil Liability Act 2003 (Qld) ss 47–49; Civil Liability Act 1936 (SA) ss 46–50; Civil Liability Act 2002 (Tas) s 5; Wrongs Act 1958 (Vic) s 14G; Civil Liability Act 2002 (WA) s 5L.

238  PART 2 Legal Consequences

Other defences and immunities

•• Barristers — barristers do not owe a duty of care in relation to work done in court or work intimately connected with work in court.26 This immunity extends to solicitors acting as legal advocates, judges, and witnesses giving evidence in court. •• Volunteers — under the Commonwealth Volunteers Protection Act 2003 (Cth), a person will not incur civil liability for anything done in good faith while carrying out work for the Commonwealth or a Commonwealth authority if the work is done on a voluntary basis. State and Territory civil liability legislation and volunteer protection legislation also protects a volunteer from liability for any act or omission done in good faith while doing community work organised by a community organisation, or as an office holder of a community organisation.27 Liability instead attaches to the community organisation itself, and the plaintiff cannot sue the volunteer personally. In certain circumstances, the volunteer may be able to be sued personally; these circumstances vary from jurisdiction to jurisdiction, and include circumstances where the volunteer acted outside the scope of the activities authorised by the community organisation, or they acted contrary to instructions, or they were affected by alcohol or drugs at the time. •• Emergency service providers — in some jurisdictions, the civil liability legislation protects emergency service workers and/or ‘good Samaritans’.28 If a person is working for a ‘prescribed entity’ (which usually includes surf life savers, ambulance drivers and fire fighters) and providing first aid or other aid or assistance to a person in distress in emergency circumstances, they are not liable for careless acts if those acts were done in good faith and without reckless disregard for the safety of the person in distress. Similarly, people who voluntarily provide emergency assistance to strangers — ‘good Samaritans’ — are not liable for acts done or omissions made honestly and without recklessness in assisting a person injured or are at risk of being injured or in need of emergency medical assistance. The protection does not apply if the ‘good Samaritan’ was intoxicated while giving the assistance or advice, or caused the injury or risk of injury in the first place. •• Compliance with standard practice — can the defendant claim that they have not been careless because they have simply done what anyone else in the same industry or profession would have done? If the defendant is a non-professional, their compliance with custom, standard practice or a relevant code of practice will not mean they have not been negligent, and non-compliance will not mean they have been negligent. In other words, the court decides for itself what is careless behaviour, and just because everybody else would have done it the same way is irrelevant. Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580

Mercer was injured when the driver of one of the defendant’s trams collapsed at the controls and the tram collided with another tram. Mercer argued that the defendant had breached its duty of care by failing to install a ‘dead man’s handle’ in the tram. This is a handle that must be held by the driver for the tram to move; if the driver lets the handle drop for any reason the tram stops moving. If there had been a dead man’s handle in the tram the accident would not have occurred. The defendant argued that although dead man’s handles were used on some trains in Australia, they were not used on trams anywhere in Australia. The court decided that the defendant had nevertheless breached its duty. The fact that it was not common practice to install the handles on trams did not change the fact that it was a breach of duty for the defendant to fail to do so in this case.

26 D’Orta-Ekenaike v Victoria Legal Aid (2005) 223 CLR 1. 27 Civil Law (Wrongs) Act 2002 (ACT) s 8; Civil Liability Act 2002 (NSW) s 61; Personal Injuries (Liabilities and Damages) Act 2003 (NT) s 7; Civil Liability Act 2003 (Qld) s 39; Volunteers Protection Act 2001 (SA) s 4; Civil Liability Act 2002 (Tas) s 47; Wrongs Act 1958 (Vic) s 37; Volunteers and Food and Other Donors (Protection from Liability) Act 2002 (WA) s 6. 28 Civil Law (Wrongs) Act 2002 (ACT) s 5; Civil Liability Act 2002 (NSW) ss 56–57; Personal Injuries (Liabilities and Damages) Act 2003 (NT) s 8; Civil Liability Act 2003 (Qld) ss 26–27; Civil Liability Act 1936 (SA) s 74; Wrongs Act 1958 (Vic) s 31B; Civil Liability Act 2002 (WA) s 5AD.

CHAPTER 6 Carelessly causing harm  239

The situation will be different if the defendant is a professional such as a lawyer, doctor or accountant. The civil liability legislation in NSW, Queensland, South Australia, Tasmania, Victoria and Western Australia provides that in determining the appropriate standard for a professional the court must have regard to the opinions of the professional’s peers, and their conduct will not be a breach of duty if widely accepted in Australia by peer professional opinion as competent professional practice.29 •• Apology — an apology to the plaintiff by the defendant will not relieve the defendant from liability for the consequences of their conduct. Nor is an apology an admission of fault: the defendant can express regret in connection with a matter alleged to have been caused by them without it being interpreted by the court as an admission of fault or liability.

Applications In this section we consider three situations where the principles of negligence are applied to resolve legal disputes: 1. occupier’s liability, 2. the liability of public authorities, and 3. bailment. Occupier’s liability

An ‘occupier’ of premises is the person who has possession and control of those premises. For example, since Johnny runs his business from a restaurant, Johnny is the occupier of the restaurant. He is also the occupier of his own home. An occupier of premises owes a duty of care to all persons entering the premises to ensure that the premises are safe. Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479

While shopping at a Safeway supermarket on a rainy day, Zaluzna slipped on the wet floor near the entrance and was injured. The court decided that Safeway was liable to compensate Zaluzna for her injuries in accordance with the basic principles of negligence. Safeway as occupier of the premises owed Zaluzna a duty of care, and they had breached that duty of care by failing to take reasonable precautions to avoid such harm.

The notion of occupier’s liability does not mean that the occupier is automatically liable for any injury sustained by a visitor to their premises. It must be established that the occupier has in fact been careless. Phillips v Daly (1988) 15 NSWLR 65

The plaintiff parked her car in a hotel car park that was separated from the hotel by horizontal logs painted white and approximately 40  cm high. Instead of walking around the logs, the plaintiff climbed over them, tripped and fell. She sued the owners of the hotel for negligence, relying upon the principles of occupier’s liability. The court decided that the defendants had not breached their duty of care. It was daylight, the risk was obvious, and the plaintiff should have walked around the logs rather than stepping over them.

29 Civil Liability Act 2002 (NSW) s 5O; Civil Liability Act 2003 (Qld) s 22; Civil Liability Act 1936 (SA) s 41; Civil Liability Act 2002 (Tas) s 22; Wrongs Act 1958 (Vic) s 59; Civil Liability Act 2002 (WA) s 5PB.

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Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254

Modbury Triangle Shopping Centre Pty Ltd (Modbury) owned the Modbury Triangle Shopping Centre in Adelaide. Anzil was a manager of a video rental shop in the shopping centre. At about 10.30  pm, after closing the video shop, Anzil was walking to his car in the car park of the shopping centre when he was attacked by three assailants. He sustained serious injuries. The car park was not lit at the time of the incident as the car park lights were turned off at about 10  pm. Anzil sued Modbury for damages alleging negligence on the part of Modbury as the occupier of the land. The court decided that Modbury was not liable for Anzil’s injuries. As an occupier Modbury owed Anzil a duty of care, but the duty did not extend to taking reasonable steps to prevent criminal conduct by third parties that would cause physical injury to Anzil in circumstances where Modbury was unable to control the conduct of the assailants. Further, Modbury’s failure to leave the car park lit facilitated the crime, in a similar way to its provision of the car park and Anzil’s decision to park there, but it was not the cause of Anzil’s injuries. The direct and immediate cause of the injuries was the conduct of the three attackers who were acting independently of Modbury.

The standard of care owed by the occupier of commercial premises will generally be higher than the standard of care owed by the occupier of residential premises.30 ACTIVIT Y 6.4 — REFLECT

Refer to ‘Johnny and Ash’ at the beginning of this chapter. Is Johnny liable as an occupier for the injuries suffered by the old woman who slipped over in the spilled drink?

Does an occupier also owe a duty of care to people who are on their premises without their permission? For example, will Johnny be liable to someone who is injured in his restaurant while trespassing there after the restaurant has closed? Hackshaw v Shaw (1984) 155 CLR 614

A farmer suspected that someone was stealing petrol from the bowser on his farm. One night he caught a man stealing his petrol, and shot at the tyres of the man’s vehicle to prevent him from leaving. Unfortunately he hit the passenger door of the vehicle, injuring the plaintiff who was crouching on the front seat. She sued the farmer for compensation for her injuries. The court decided that even though the thief and the plaintiff were trespassing at the time the farmer still owed them a duty of care, and that he had breached that duty of care by firing his gun at the car in the dark.

ACTIVIT Y 6.5 — REFLECT

Do you agree with the decision of the court in Hackshaw v Shaw? Why or why not?

The civil liability legislation in some jurisdictions now provides that if the plaintiff was injured while in the process of committing an indictable offence the defendant will not be liable.31 However, in situations where the exclusion of liability would be harsh or unjust, the court has the discretion to award damages. Note that while burglary is an indictable offence, trespassing is not.

30 Neindorf v Junkovic (2005) 222 ALR 631. 31 Civil Liability Act 2002 (NSW) s 54; Personal Injuries (Liabilities and Damages) Act 2003 (NT) s 10; Civil Liability Act 2003 (Qld) s 45; Civil Liability Act 1936 (SA) s 43; Civil Liability Act 2002 (Tas) s 6.

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Liability of public authorities

What if the plaintiff is injured in a public place? Just as the occupier of a building owes a duty of care to entrants to the building, a public authority owes a duty of care to people who visit areas under the control of the authority. Where the danger is unnatural or hidden, a public authority will owe a duty of care to warn of foreseeable risks to persons using the area as intended by the public authority. Nagle v Rottnest Island Authority (1993) 177 CLR 423

The Rottnest Island Authority (RIA) managed and controlled a particular swimming area on the island. Nagle was injured when he dived into the water from a rock ledge and collided with some submerged rocks. The court decided that the RIA was liable to compensate Nagle for his injuries. As ‘occupier’ of the swimming area the RIA owed swimmers a duty of care, and it had breached that duty because it had encouraged people to swim in the area, but failed to warn swimmers of the dangers of diving from the rock ledge.

On the other hand, where the danger is obvious, the public authority is entitled to assume that most people will take reasonable care for their own safety. Romeo v Conservation Commission of Northern Territory (1998) 192 CLR 431

Romeo, a 15 year old girl, was drinking with her friends near a car park at the top of cliffs near a beach. At the edge of the cliff was low post-and-log fencing. At about midnight, Romeo walked to the edge of the cliff and fell 6.5 metres to the beach below, suffering serious injuries including paraplegia. She sued the Conservation Commission of Northern Territory (CCNT), the public authority responsible for the area, for compensation. The court decided that an occupier is entitled to assume that entrants will take reasonable care for their own safety, and that the CCNT was not liable for injuries sustained by ‘an inattentive young woman who was under the influence of alcohol’.

The difficulty for many local authorities is that they often lack the funding and resources to address every possible problem within the (often large) geographical area under their control. Courts have sometimes been unsympathetic to such commercial realities. For example, in Brodie v Singleton Shire Council (2001) 206 CLR 512 the High Court decided that government bodies responsible for roads, regardless of budget constraints, have a duty of care to take reasonable steps within a reasonable period of time to remedy foreseeable risks to road users and to discover hidden risks they reasonably suspect to exist. The civil liability legislation in the Australian Capital Territory, New South Wales, Queensland, Tasmania, Victoria and Western Australia now limits the liability of public authorities.32 The court must take into account the following principles when deciding whether or not a public or other authority has a duty or has breached a duty. •• The functions required to be exercised by the authority are limited by the financial and other resources that are reasonably available to the authority for the purpose of exercising the functions. •• The general allocation of financial or other resources by the authority is not open to challenge. •• The functions required to be exercised by the authority are to be decided by reference to the broad range of its activities (not merely by reference to the matter to which the proceeding relates). •• The authority may rely on evidence of its compliance with its general procedures and any applicable standards for the exercise of its functions as evidence of the proper exercise of its functions in the matter to which the proceeding relates.

32 Civil Law (Wrongs) Act 2002 (ACT) ss 110–114; Civil Liability Act 2002 (NSW) ss 42–45; Civil Liability Act 2003 (Qld) ss 35–37; Civil Liability Act 2002 (Tas) ss 38–40; Wrongs Act 1958 (Vic) ss 83–85; Civil Liability Act 2002 (WA) ss 5W–5Z.

242  PART 2 Legal Consequences

The legislation also provides that there is no duty of an authority to do or not to do a particular thing unless the act or omission of the authority was so unreasonable that no public authority with the same functions could properly consider the act or omission to be a reasonable exercise of its functions. Bailment

A bailment arises when one person is in temporary possession of property belonging to another person. Bailments are very common. Examples of bailments include: •• leaving clothes with a dry cleaner, •• leaving a car at a garage for repairs, •• borrowing a neighbour’s lawnmower, and •• finding lost keys belonging to another. The person in possession of the goods (the bailee) owes a duty of care to the owner of the goods (the bailor) to take reasonable care of the goods. If the bailee fails to take reasonable care of the goods, they will be liable for loss or damage to the goods. The actual standard of care owed by the bailee depends upon whether the bailment is gratuitous (free) or for payment, the bailee’s expertise, the nature of the goods, and whether the bailment is for the benefit of one party or both. ACTIVIT Y 6.6 — REFLECT

When have you been (a) a bailor and (b) a bailee? Provide three examples for each situation.

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions.  6.1 What is negligence?  6.2 What are the sources of negligence law?  6.3 What was the ‘insurance crisis’ and what effect did it have upon the law of negligence?  6.4 What must a plaintiff establish to bring an action in negligence?  6.5 When does one person owe another a duty of care?  6.6 What is the ‘reasonable foreseeability’ requirement? Explain using examples.  6.7 What is the ‘salient features of the case’ requirement? Explain using examples.  6.8 How does the court identify a breach of duty?  6.9 In determining whether or not there has been a breach of duty, of what relevance is (a) the probability that harm would occur; (b) the likely seriousness of the harm; (c) the burden of taking precautions; and (d) the social utility of the defendant’s conduct? Explain each answer by using examples. 6.10 In what circumstances will a defendant owe (a) a lower standard of care, and (b) a higher standard of care? 6.11 What is a non-delegable duty of care? 6.12 When will a person be liable for failing to act? 6.13 Is a person liable for all harm caused by their carelessness? Explain your answer. 6.14 When will harm be ‘caused’ by a breach of duty? 6.15 What is the ‘but for’ test of causation and how does it differ from the ‘material contribution’ test? 6.16 When will harm be ‘reasonably foreseeable’? 6.17 What is the defence of voluntary assumption of risk and why is it relatively difficult to establish? 6.18 What is the defence of contributory negligence and why is it described as only a partial defence? 6.19 What is the impact upon a negligent defendant’s liability if (a) the defendant was a volunteer doing community work; (b) the defendant was enhancing public safety; (c) the defendant was CHAPTER 6 Carelessly causing harm  243

trying to help someone in an emergency; (d) the defendant has complied with standard practice in the relevant industry or profession; and (e) the defendant has apologised? 6.20 What is occupier’s liability? 6.21 Is an occupier liable for all harm suffered by visitors to the premises? 6.22 Who is liable for injuries in public places? 6.23 What limitations are placed upon the liability of local authorities by the civil liability legislation? 6.24 Does an occupier owe a duty of care if the visitor is a trespasser? 6.25 What is a bailment? Give an example.

6.2 Carelessly causing financial harm LEARNING OBJECTIVE 6.2 When will a person be legally responsible for carelessly causing financial harm to another person?

What if the defendant’s negligence does not cause any physical harm to the plaintiff or their property, but the plaintiff suffers financial loss as a result of the defendant’s carelessness? Where the plaintiff suffers financial loss only, this is known as pure economic loss. In the past, the courts were reluctant to allow plaintiffs to make use of the law of negligence to recover compensation for pure economic loss. The courts insisted that the object of tort law was to provide remedies for those who had suffered personal injury or damage to property as the result of another person’s harmful conduct, and that those who had only suffered financial loss should seek a remedy in contract law or in some other category of law. In recent years, however, the principles of tort law have been extended to circumstances of pure economic loss. The situations where the plaintiff will be able to recover compensation for pure economic loss suffered as a result of the defendant’s carelessness include: 1. where the defendant has carelessly caused harm to the person or property of a third party and this has caused financial harm to the plaintiff; 2. where the plaintiff has suffered financial harm as a result of the defendant’s defective product; and 3. where the plaintiff has suffered financial harm as a result of the defendant’s negligent advice.

Harm to the person or property of a third party Where the plaintiff suffers pure economic loss as a result of harm caused by the defendant to the person or property of another person, the plaintiff may be entitled to compensation from the defendant. Willemstad (1976) 136 CLR 529

Australian Oil Refining Pty Ltd (AOR) and Caltex Oil (Australia) Pty Ltd (Caltex) were parties to a processing agreement according to which AOR refined crude oil that was delivered to its refinery on the southern shore of Botany Bay by Caltex, and then delivered the refined product back to Caltex’s oil terminal on the northern shore of Botany Bay via a pipeline that ran under the bay. The pipeline was owned by AOR. Under the terms of the agreement Caltex retained ownership of the oil in its various forms, and AOR was responsible for the risk of damage or loss to the oil as it passed through its pipeline. The dredge Willemstad was being used to dredge a water channel in the bay when it damaged the pipeline. Caltex sued the operators of the dredge in negligence to recover compensation for the costs it incurred in having to arrange an alternative means of transporting petroleum products until the pipeline was repaired. The court decided that the economic loss suffered by Caltex was recoverable. The general rule that pure economic loss is not recoverable is subject to an exception in circumstances where the defendant could reasonably foresee that the particular plaintiff, as opposed to a general class of persons, would suffer loss as a result of their negligence.

244  PART 2 Legal Consequences

Perre v Apand Pty Ltd (1999) 198 CLR 180

Apand Pty Ltd was a manufacturer of potato chips. The Perre family was one of a number of potato growers in the Riverland region of South Australia who sold potatoes to buyers in Western Australia. This was a lucrative business, as the price of potatoes in Western Australia was more than double the prices elsewhere in Australia. Apand sold an experimental batch of potato seed to the Perres’ neighbour Sparnon, another potato grower. The seed was infected with a disease called ‘bacterial wilt’ which contaminated Sparnon’s potatoes. Under Western Australian law, Sparnon’s potatoes could not be imported into Western Australia for a period of 5 years after the outbreak. Nor could any potatoes from farms within a 20 kilometre radius of Sparnon’s farm, which included the Perres’ farm. The Perre family, along with other potato farmers affected by the 5-year ban, sued Apand for compensation for the economic loss they incurred as a result of being unable to export their potatoes to Western Australia. The court decided that Apand owed a duty to the Perres and to the other potato farmers to avoid causing them to suffer purely economic loss. It was reasonably foreseeable that the supply of infected seeds to one farmer could affect the ability of neighbouring farmers to sell their produce, and thus cause them to suffer purely economic loss.

The decision in Perre v Apand Pty Ltd demonstrates an increased willingness by the courts to allow a person who has suffered purely financial loss to recover compensation using the law of negligence. The courts are now more likely to recognise the existence of a duty of care where the plaintiff is particularly vulnerable to the type of harm suffered.

Defective products If the defendant has negligently manufactured a defective product or provided a defective service, and the plaintiff suffers pure economic loss as a result of the defect, the plaintiff will be entitled to compensation. Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520

Veitchi Co Ltd negligently laid defective flooring in the factory of Junior Books Ltd. The defects meant that Junior Books Ltd would have high ongoing maintenance costs. The court decided that Junior Books Ltd was entitled to recover compensation from Veitchi Co Ltd for its pure economic loss: the cost of replacing the floor together with the profits lost while the business was closed for the replacement.

A manufacturer’s liability for defective products is also regulated by the ACL. The liability of manufacturers for defective products under the ACL is strict liability; unlike an action in negligence, it is not necessary to establish fault on the part of the manufacturer.

Negligent misstatement The giving of careless advice that leads to economic loss is known as negligent misstatement. This is an aspect of the law of negligence of direct relevance to accountants, auditors, financial advisers, investment consultants, travel agents and anyone who regularly gives advice to clients. If the defendant gives advice to the plaintiff they will owe a duty of care to the plaintiff if three criteria are met. 1. The advice was of a business or serious nature. 2. The defendant knew or should have known that the plaintiff intended to rely on the advice. 3. It was reasonable in the circumstances for the plaintiff to rely on the defendant’s advice. If all three of the above elements are satisfied the defendant will owe the plaintiff a duty of care. If the other two elements of the tort of negligence are also satisfied — the defendant breached their duty of care by giving careless advice, and the breach of duty caused the harm suffered by the plaintiff — then the defendant will be liable for the harm suffered by the plaintiff. CHAPTER 6 Carelessly causing harm  245

The defendant may owe a duty of care even if they are not a professional adviser such as a lawyer or accountant. Hedley Byrne & Co Ltd v Heller and Partners Ltd [1964] AC 465

Hedley Byrne & Co Ltd (HB) was an advertising agency that had made substantial future advertising orders for a client, Easipower Ltd. HB was directly liable for the costs of the orders. HB asked its bankers to check the financial status of Easipower. HB’s bankers contacted Heller & Partners Ltd (H&P), Easipower’s merchant bankers, and asked for H&P’s opinion on various matters including whether they considered Easipower ‘trustworthy, in the way of business, to the extent of £100  000 per annum advertising contract’ . H&P responded by stating that Easipower was a ‘[r]espectably constituted company, considered good for its ordinary business engagements’. The letter began with a disclaimer that the letter was ‘without responsibility on the part of the bank or its officials’. In reliance on the reference from H&P, HB placed orders for advertising for Easipower. Easipower subsequently went into liquidation, and HB lost approximately £17  000. HB sued H&P in negligence. The court decided that H&P was not liable to HB because of the express disclaimer of responsibility in its letter. However, in obiter dicta, the House of Lords explained that H&P owed a duty of care to HB in relation to the reference about Easipower because of H&P’s knowledge/expertise, and because it knew its opinion would be relied on by HB. In the absence of the disclaimer, H&P would have been found to be negligent because it had given a careless and unjustified reference about Easipower. In further obiter dicta comments, the House of Lords said they would have awarded damages for pure economic loss if not for the disclaimer.

The decision in Hedley Byrne v Heller was the first in a series of decisions that recognised that a duty of care may arise in circumstances where a party relies on the skill or expertise of another party. Rentokil Pty Ltd v Channon (1990) 19 NSWLR 417

Channon relied upon a pest inspection report prepared by Rentokil Pty Ltd in deciding to buy a house. The report incorrectly stated that the house was free of termites. After purchasing the house, Channon discovered that the house was in fact so badly infested with termites that it had to be demolished. The court decided that Rentokil Pty Ltd owed a duty of care to Channon, and that it had breached that duty of care.

These principles apply even if the ‘advice’ is little more than the provision of information. L Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225

Shaddock & Associates Pty Ltd (Shaddock) and another company were considering the purchase of a property in Parramatta for the purposes of redevelopment. Shaddock’s solicitor contacted the relevant department of the Parramatta City Council (the Council) to enquire whether any road-widening proposals affected the property. He was advised that there were not. A local road-widening proposal that would affect the property had in fact been approved in principle by the Council. Shaddock entered a contract to purchase the property. Seven months after the purchase was completed the road-widening proposal was formally approved by the Council. It required the acquisition of more than a third of the property. What remained was unsuitable for Shaddock’s proposed redevelopment. Shaddock sued the Council claiming damages for negligent misstatement. The court decided in favour of Shaddock. The Council owed Shaddock a duty of care in relation to the information it provided in relation to the property. The court explained that a person owes a duty of care in relation to the provision of advice or information where (1) the person carries on a business or profession; (2) in the course of that business or profession, the person provides advice or information of a kind which requires skill and competence, or in relation to which they profess to possess skill and competence; and (3) the person knows or ought to know that the recipient intends to act or rely on it. The court also explained that liability for negligent misstatement was not confined to those who carry on a profession, business or occupation involving the giving of advice.

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CHECKLIST

X will owe Y a duty of care if all of the following requirements are satisfied. ◼◼ X gives Y business or serious advice. ◼◼ X knows or should know that Y intends to rely on the advice. ◼◼ It is reasonable in the circumstances for Y to rely on the advice.

CAUTION!

Not only accountants, lawyers and other professional advisers owe a duty of care. Any person who gives advice or provides information on an ‘occasion of seriousness’ may be seen to owe a duty of care to the person to whom they are providing the advice or information.

If the defendant holds themselves out as having a special skill or expertise (e.g. a professional adviser, a financial adviser, an investment consultant or a mortgage broker) then the requirement that it be reasonable for the plaintiff to have relied upon the advice is more easily satisfied. In some circumstances the person giving advice will be liable not only to a person they directly advise but also to third parties who rely on the advice (see figure 6.4).

Defendant

FIGURE 6.4

gives advice to

client

who passes on advice to

plaintiff.

Liability to third parties

The court in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (see below) stated that three elements must be satisfied before a defendant giving advice will owe a duty of care to a plaintiff who is a third party. 1. The defendant knew or should have known that the information or advice would be communicated by their client to the plaintiff. 2. The information or advice was likely to lead the plaintiff to enter into a transaction of the kind the plaintiff in fact entered into. 3. It was likely that the plaintiff would suffer economic loss if the information or advice was wrong. This is of direct relevance to accountants and auditors who frequently prepare advice for their clients that is then passed on to, and relied upon by, persons other than the client. Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241

Esanda Finance Corporation Ltd (Esanda) loaned money to various subsidiaries of Excel Ltd (Excel), and in deciding to grant the loan relied upon financial records audited by Peat Marwick Hungerfords (PMH). The audited financial records were negligently prepared (they were in breach of certain mandatory accounting standards) and were inaccurate. Excel defaulted, and Esanda sought to recover its economic loss from PMH. Esanda argued that PMH owed it a duty of care because PMH should have known that lenders would be likely to rely upon the audited records, and insisted that it would not have entered into the transaction with Excel were it not for the audited records. PMH responded that it owed a duty of care only to its client Excel, and not to Esanda. The court decided in favour of PMH. The court explained that the mere fact that it is reasonably foreseeable that a third party will rely on the advice is not enough to make the adviser liable to that third party. Esanda should have made its own inquiries rather than rely upon the records audited by PMH and provided to Esanda by the borrower. PMH did not owe a duty of care to Esanda.

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This case is authority for the proposition that a person giving advice — such as an accountant or auditor — will as a general rule not owe a duty of care to a third party who relies upon the advice except where the adviser is aware or should be aware that the third party will be relying upon the advice. A person giving advice who does not wish to be liable to third parties should include in the advice a clear statement that the advice should only be relied upon by the person to whom the advice is directly provided. CHECKLIST

X will owe Z a duty of care if all of the following requirements are satisfied. ◼◼ X gives Y business or serious advice knowing that Y will communicate that advice to Z. ◼◼ The advice is likely to lead Z to enter into a particular type of transaction. ◼◼ It is likely that Z will suffer financial loss if they enter into that transaction and the advice is wrong.

When seeking a remedy for negligent advice given in trade or commerce, the recipient of the advice can also rely upon the provisions in the ACL that prohibit misleading or deceptive conduct. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 6.26 What is ‘pure economic loss’? 6.27 In what circumstances will a defendant be liable to a plaintiff who suffers pure economic loss as a result of the defendant’s careless conduct? 6.28 To whom is the defendant liable if they damage the property of one person and another person suffers consequential financial loss? 6.29 What are the consequences under tort law of manufacturing a defective product? 6.30 What is ‘negligent misstatement’? 6.31 When does a person owe a duty of care to someone they are advising? 6.32 Does an adviser owe a duty of care to everyone who relies upon the advice?

In conclusion •• If the defendant has carelessly caused harm to the person or property of the plaintiff, they may be found to have committed the tort of negligence. To be negligent the defendant must have (1) owed a duty of care to the plaintiff, (2) breached that duty of care, and (3) caused the plaintiff to suffer reasonably foreseeable harm. Defences to an accusation of negligence include voluntary assumption of risk by the plaintiff and contributory negligence by the plaintiff. •• The defendant may be liable under tort law if they have carelessly caused financial harm by damaging the property of a third party, by manufacturing a defective product or by providing negligent advice. JOHNNY AND ASH

[Ash and Johnny are still walking beside the river.] Johnny — So, what you are saying is that because I am the owner of the business, I owe a duty of care to the people who come to my restaurant, whether I am there at the time or not. I owe them a duty to provide a safe place for them to eat. And I breached my duty of care because a reasonable restaurant manager would have cleaned up the spilled drink within half an hour, no matter how busy the restaurant was. Even though I wasn’t there, I am  .  .  .  what was that phrase from earlier?

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Ash — Vicariously liable. Johnny — That’s right, vicariously liable for the actions of my employees. The breach of duty was a direct cause of the old lady slipping over, and her banging her head on a table is a reasonably foreseeable consequence of slipping over on a wet floor. So that means I am liable to compensate her for the amount of her loss, which will include not only any medical expenses but also loss of any income and future earning capacity. Lucky she was an old lady then, I guess. Ash — Johnny! Johnny — Hey, can’t I argue that she voluntarily assumed the risk of being injured when she came into my busy restaurant? Ash — No, not unless there was a sign on your door explaining the risk. Like: ‘If you choose to eat here you do so at your own risk, and you may be injured if you slip over on the wet floor’. You didn’t have a sign like that did you? No, I didn’t think so. But you may be able to argue contributory negligence if you can show, for example, that she was running between the tables, or that she was drunk at the time. Pretty unlikely though. Johnny — What about the guy Cathy punched? As the owner of the business, and as occupier of the premises, am I not civilly liable to that guy for failing to provide a safe place for him to eat? Ash — Only if it can be shown that his injury was somehow caused by your carelessness. How, exactly, were you careless? If it can be shown that you knew that Cathy was a violent individual and that you carelessly left her in charge of the restaurant, there may be an argument but, again, this seems unlikely. Your liability seems to be limited to compensating the old lady for her injuries. Hopefully they weren’t too serious. Johnny — Thank goodness for public liability insurance.

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QUIZ 1 Which of the following is a question of fact?

(a) Did the defendant owe the plaintiff a duty of care? (b) What is the standard of care owed to the plaintiff? (c) Did the defendant breach their duty of care? (d) Was the harm suffered by the plaintiff reasonably foreseeable? 2 In deciding whether or not the defendant owed the plaintiff a duty of care, which of the following is not a salient feature of the case? (a) The need for people to take personal responsibility for their own actions. (b) The possibility of indeterminate liability. (c) The control the plaintiff has over the situation and the relative vulnerability of the defendant. (d) The type of harm suffered by the plaintiff. 3 Which of the following is not a non-delegable duty of care? (a) The duty owed by a school to its students. (b) The duty owed by a hospital to its patients. (c) The duty owed by an occupier to visitors. (d) The duty owed by an employer to their employees. 4 In deciding if a reasonable person would have taken precautions against a risk of harm, the court need not consider (a) the social utility of the activity that creates the risk of harm. (b) if the defendant has complied with standard practice within the industry. (c) the probability that the harm would occur if care were not taken. (d) the burden of taking precautions to avoid the risk of harm. 5 A defendant is not liable for every consequence of their carelessness, only for those consequences that are (a) reasonably foreseeable. (b) too remote or far-fetched. (c) intended by the defendant. (d) none of the above. 6 If it is established that the defendant in a negligence action has subsequently apologised (a) they are relieved from all liability. (b) they are partially relieved from liability. (c) they are deemed to have admitted fault. (d) none of the above. 7 Where there is an obvious danger on public property, the local authority (a) does not owe a duty of care. (b) owes a duty of care to warn persons using the area as intended by the public authority. (c) owes a duty of care to remove the obvious danger. (d) is entitled to assume that most entrants will take reasonable care for their own safety.

EXERCISES EXERCISE 6.1 — DUTY OF CARE

Johnny hires Ash’s sister Rachel as a belly dancer to entertain his patrons at his restaurant The Lame Duck. Rachel encourages Barney, a customer who is celebrating his 60th birthday with his family, to join her in a dance. While vigorously attempting to keep up with Rachel, Barney breaks his hip. Does Barney have an action against Rachel in the tort of negligence? In your answer focus on whether or not Rachel owed Barney a duty of care. 250  PART 2 Legal Consequences

EXERCISE 6.2 – BREACH OF DUTY

Johnny regularly engages Ian to clean his pool. One day Ian parks his van in the driveway in front of Johnny’s double garage, which as usual is closed and locked while Johnny is at work. While Ian is cleaning the pool at the back of the house, a sudden hail storm causes damage to Ian’s van. Ian insists that Johnny compensate him for the damage to the van, since it occurred while Ian was on Johnny’s property, and would not have happened if Johnny had left the garage door open for him. Should Johnny be compelled to compensate Ian? Assume that Johnny owed Ian a duty of care, and focus upon whether or not that duty of care was breached. EXERCISE 6.3 — BREACH OF DUTY

Johnny has recently replaced the three steps that lead from the pavement to the front door of his restaurant with a short wooden ramp to facilitate wheelchair access. One rainy evening as she is leaving The Lame Duck restaurant, one of Johnny’s customers, Lily, slips over on the wet ramp. Lily severely sprains her ankle and is unable to work for the next 2 weeks in her job as a dance instructor. Consider if Lily has an action in negligence against Johnny. In your answer focus on whether or not Johnny has breached his duty of care. EXERCISE 6.4 — BREACH OF DUTY

Johnny has been training a new chef, Dan, in the kitchen of his restaurant. Johnny thinks Dan is almost ready to prepare food for customers. Dan and Johnny arrange for a small group of Dan’s family members and friends to come to the restaurant one evening, when the restaurant is ordinarily closed, to try Dan’s food. Johnny explains to the guests that Dan is being left alone in the kitchen to prepare the meal by himself, without supervision. Dan prepares a delicious three-course meal for the guests, including a daring and innovative durian pie. Unfortunately, Dan does not peel the durian fruit before putting it in the pie, and the sharp thorns cause three of his guests moderate injury before everybody else realises that the durian pie should be avoided. Has Dan breached his duty of care? Include in your answer consideration of whether or not Dan owed a lower duty of care to the guests due to his inexperience. EXERCISE 6.5 — HARM

Ted is in the final year of his Business Management degree. He orders a pizza from The Lame Duck the night before his Business Law exam. The pizza contains rotten pineapple, which was carelessly put on the pizza by Dan, Johnny’s new chef. The next day Ted suffers food poisoning, but attempts the Business Law exam anyway. He fails the exam and has to repeat the course over summer. Can Ted recover the cost of the summer course from Johnny by suing Johnny in the tort of negligence? In your answer focus on whether or not the harm suffered by Ted was caused by the breach of duty. EXERCISE 6.6 — HARM

Consider the facts of exercise 6.5. The symptoms of food poisoning experienced by Ted do not go away, and in fact worsen over the following week. Ted visits the hospital and is told by the doctors that the food poisoning has worsened a pre-existing acid imbalance in Ted’s stomach, triggering a stomach ulcer that is going to require extensive — and expensive — medical treatment. Can Ted recover the cost of this medical treatment from Johnny? EXERCISE 6.7 — DEFENCES

One night Johnny accepts a lift to work from one of his chefs, Sam, who has had his driving licence for only 2 weeks. On the way to work it starts raining heavily and Sam appears to have trouble keeping his vehicle on the road. Johnny asks Sam to slow down, but he continues driving at the speed limit. Shortly afterwards, Sam loses control of the vehicle and hits a telegraph pole. Both Johnny and Sam are injured. If Johnny were to sue Sam in the tort of negligence, would he be likely to succeed? In your answer focus on whether or not Sam could rely upon any defences. CHAPTER 6 Carelessly causing harm  251

EXERCISE 6.8 — DEFENCES

Ash has realised that she needs to put more effort into staying in shape. One of her friends has told her about the benefits of lifting weights regularly, and she decides to give it a try. For the first time in her life, she joins a gym. According to the terms of her membership agreement with the gym, she is entitled to a free one-hour session with a personal trainer, who will teach her the basics of weight training. Ash chooses not to take advantage of this arrangement, and instead uses an App on her phone to develop her own training program. On her third visit to the gym, she accidentally drops a large weight on her foot, breaking two toes. Could Ash sue the gym for failing to adequately warn her of the risk of injury associated with weight training? In your answer focus upon whether or not the gym could rely upon the defence of voluntary assumption of risk. EXERCISE 6.9 — OCCUPIER’S LIABILITY

Johnny arrives at the restaurant one morning to discover Marshall breaking in through the back door. Johnny yells out and Marshall tries to run away. On the previous evening, one of Johnny’s waiters left a mop and bucket on the path that leads from the back door to the back gate. While running away, ­Marshall steps into the bucket, trips and falls flat on his face and breaks his nose. He is still lying on the path and moaning when the police arrive. Marshall is now threatening to sue Johnny in the tort of negligence for the cost of his injuries. Is Marshall likely to succeed? EXERCISE 6.10 — NEGLIGENT MISSTATEMENT

Johnny’s friend Arnold wishes to purchase a restaurant. One Friday evening he finds an Indian restaurant called Puluub for sale, which is located on Kerouac Avenue around the corner from Johnny’s restaurant The Lame Duck. The restaurant is full of customers. The following Monday Arnold speaks to Johnny about his plans. Arnold explains that he is very keen to buy the business but that he has never owned a restaurant or even worked in the industry before, and he would appreciate Johnny’s advice and guidance. Johnny assures Arnold that Puluub appears to be a very successful restaurant and that he is ‘almost guaranteed’ to make a profit in the first 12 months. Arnold immediately decides to purchase the restaurant with his brother Cameron. One year later they are on the verge of bankruptcy; the restaurant was not as popular or as profitable as they expected, and turnover has declined even further since they took over the business. Has Johnny committed the tort of negligent misstatement? In your answer focus on whether or not Johnny owed a duty of care to (1) Arnold and (2) Cameron.

KEY TERMS bailment  One person is in temporary possession of property belonging to another person. contributory negligence  A civil defence: if it can be established that the plaintiff contributed in some way to their own loss or injury, liability for negligence will be apportioned between the defendant and the plaintiff. eggshell skull rule  The rule that if a plaintiff suffers greater than usual harm because of a pre-existing vulnerability, the defendant will nevertheless be liable for the full extent of that harm. negligence  A tort committed when one person fails to exercise reasonable care and causes harm to another person. negligent misstatement  The giving of careless advice that leads to economic loss. non-delegable duty of care  A duty of care that cannot be delegated or passed on to another person. obiter dicta  (‘saying by the way’) That part of a judge’s decision other than the legal principle upon which the final decision is based. public liability insurance  Insurance against the risk of being sued by a third party who has been injured or suffered harm or loss as a result of the actions of the insured. pure economic loss  Financial loss unaccompanied by loss to person or property. 252  PART 2 Legal Consequences

reasonable person test  A person does not breach a duty of care unless they fail to do what a reasonable person would have done in the circumstances. strict liability  Liability where fault does not have to be proved. voluntary assumption of risk  A civil defence: if it can be established that the plaintiff voluntarily assumed the risk of harm, the defendant is relieved of all liability.

ACKNOWLEDGEMENTS Photo: © dcwcreations / Shutterstock.com Photo: © Kyle Lee / Shutterstock.com Article: © Wendy Bonython, 23 April 2013, https://theconversation.com/why-mcdonalds-scaldingcase-could-be-a-storm-in-a-coffee-cup-13688 Article: © Prue Vines, 30 August 2012, https://theconversation.com/banning-cartwheelsschool-litigation-fears-are-unfounded-9140

QUIZ ANSWERS

1. c.  2. d.  3. c.  4. b.  5. a.  6. d.  7. d. CHAPTER 6 Carelessly causing harm  253

CHAPTER 7

Contract law: formation of the contract LEA RN IN G OBJE CTIVE S 7.1 What is a contract? 7.2 When does a contractual agreement come into existence? What is an offer? Is an advertisement an offer? What is an acceptance? When is it effective? 7.3 How do we know whether the parties to an agreement intended that it be legally enforceable? 7.4 A promise is only enforceable if it is ‘supported by consideration’. What does this mean? Why is it that consideration ‘need not be adequate’ but ‘must be sufficient’? How can a promise be enforced in the absence of consideration? 7.5 Do contracts always have to be in writing and signed? 7.6 Can a child form a contract? What about someone who is intellectually disabled, mentally ill or intoxicated? 7.7 What if the contract is for an illegal purpose?

JOHNNY AND ASH

[Johnny is at the bar of his restaurant with Maria, an old friend. They are both drinking wine. The bar is empty; the restaurant has closed for the evening, and Johnny appears to be a little drunk.] Maria — So, Johnny, what do you think? Johnny — I’m tempted, I really am. Maria — Of course you are. I know things haven’t been going so well for you here at the restaurant lately. I can help. The money I am offering will go a long way towards making things easier for you. Johnny — I know, it’s true. And your offer is a very generous one — $150  000 for a 60 per cent share in the business? That much money will really make a difference. Maria — Exactly. So what’s the problem? Johnny — Well, it’s just that I’ve gotten used to being the owner of The Lame Duck by myself. I’m not sure I want to share it with anyone else. Maria — Look, I don’t want to take control or anything like that. I just want to help you out, and make a little money for myself along the way. You would still be in charge of the restaurant. Johnny — I don’t know. Maybe if it was $150  000 for a 50–50 split I would do it  .  .  .  [As Johnny speaks, Maria looks at her watch, then stands up and prepares to leave.] Maria — Look, it’s late, I’m going to have to go. 50–50 sounds okay to me, but I’ll think about your offer overnight. I’ll probably call you in the morning to let you know if the deal is going ahead. How does that sound? Johnny — What? Oh, yeah, sure, okay. [Maria leaves the bar. Johnny sits quietly, nursing his drink. Some time passes. Johnny picks up his mobile phone and calls Ash.] Johnny — Ash? It’s Johnny. Were you asleep? Sorry. I just needed to talk to you about something important. My friend Maria wants to buy into the business. I think I’m going to tell her no and try to keep going by myself, but I wanted to run it past you first. I’m  .  .  .  sorry, just a sec, I’ve got a text  .  .  . [Johnny takes the phone from his ear and reads the text. He sits up straight very quickly, looking alarmed, and returns the phone to his ear.] Johnny — I can’t believe this! Maria just sent me a text saying that she accepts my offer, and that she is going to get her solicitor to draw up the papers in the morning! No way! [Johnny listens to his phone. He still looks alarmed.] Johnny — ‘Is there a contract?’ Of course not! I didn’t sign anything!  .  .  . What? Are you sure? Not all contracts need to be in writing? Well, is there a contract or not?

CHAPTER PROBLEM

As you make your way through this chapter, consider whether, when Maria sent Johnny a text saying that she accepted his offer, they formed a legally binding agreement.

Introduction In many ways, business is all about making deals. Buyers make deals with sellers. Wholesalers make deals with retailers, and retailers make deals with customers. Banks make deals with borrowers, insurance companies make deals with clients, and service providers make deals with the users of their services. Whenever anyone makes a deal, it is essential that they be able to trust the other party to the deal to tell the truth and do what they have promised to do. And when one of the parties to a deal CHAPTER 7 Contract law: formation of the contract  255

makes a false statement or fails to do what they promised to do, it is the law of contract that entitles the other party to enforce the deal, to be paid compensation or to receive some other form of civil remedy. In this chapter we consider the rules that regulate the making of deals in Australia. In particular, we explain how the law helps to determine whether or not a legally enforceable contract exists. In later chapters we will consider the different types of terms of a contract, the circumstances in which a contract will be unenforceable, and the consequences of breaching a contract.

7.1 Contracts LEARNING OBJECTIVE 7.1 What is a contract?

A contract is a legally enforceable agreement. As a general rule, for an agreement to be legally enforceable, three requirements must be satisfied. 1. There must be an agreement between two or more persons (called the parties to the contract). 2. Both parties must intend that their agreement be legally enforceable. 3. Both parties must pay a price or make a promise (this price or promise is called consideration). Most contracts do not need to be in writing. Many contracts are made verbally and, as explained below, some contracts are implied by the conduct of the parties. Some contracts are formed and performed at the same time. For example, if Johnny sells a pizza to Jin for cash, they make the contract (Johnny agrees to sell and Jin agrees to purchase the pizza) and perform the contract (Jin hands over the cash and Johnny hands over the pizza) at almost the same time. With other contracts, one or both of the parties make a promise and therefore have an ongoing obligation once the agreement has been formed. For example, if Johnny sells a pizza to Jin on credit, Johnny has performed his part of the agreement as soon as he hands over the pizza but Jin has an ongoing obligation to make payment at a later date. If Johnny hires Jennifer as an employee, they both have ongoing obligations, including Jennifer’s obligation to work for Johnny and Johnny’s obligation to pay Jennifer. Most contractual disputes involve this second type of contract and arise when one of the parties fails to keep their promise. CHECKLIST

A contract will be formed if all of the following requirements are satisfied. ◼◼ There is an agreement between the parties. ◼◼ The parties intended to create legal relations. ◼◼ Each party has provided consideration, that is, paid a price or made a promise.

ACTIVIT Y 7.1 — REFLECT

Think of five agreements you have made recently. Identify those agreements that you think qualify as contracts. Do they satisfy all three requirements?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 7.1 What is a contract? 7.2 What are the three essential elements of a contract? 7.3 What are some of the possible forms of a contract?

256  PART 2 Legal consequences

7.2 Requirement 1: agreement LEARNING OBJECTIVE 7.2 When does a contractual agreement come into existence? What is an offer? Is an advertisement an offer? What is an acceptance? When is it effective?

To establish the existence of a legally enforceable contract, it is first necessary to show that there is an actual agreement between the parties. An agreement is a meeting of minds, and exists when two or more people share understanding and intention. Many agreements are preceded by a period of negotiations. A contract does not exist until the negotiations are concluded and an agreement is reached. As a general rule, if important aspects of the arrangement are still being negotiated, there is no agreement and no contract. Sometimes the existence of a finalised agreement can be deduced from the conduct of the parties.1 The parties are clearly behaving as if they have already reached some kind of agreement. It is not necessary to show that the parties have discussed and agreed upon every single aspect of their arrangement; evidence that the parties have reached broad consensus is sufficient. At other times the existence of a finalised agreement is less clear. One party might insist that an agreement has been concluded, while the other party insists that an agreement is still being negotiated, or that no legally enforceable commitments have been made. In these circumstances, the test for determining the existence of an agreement is the existence of an offer by one party and an acceptance of that offer by the other party. An agreement is said to exist if it can be shown that one party has made an offer and that another party has accepted that offer and communicated their acceptance. Neither party can breach that agreement without legal consequences, provided that the other requirements of a contract are satisfied. CHECKLIST

An agreement will be formed if all of the following requirements are satisfied. ◼◼ One person (the offeror) has made an offer. ◼◼ Another person (the offeree) has accepted the offer. ◼◼ The offeree has communicated their acceptance of the offer to the offeror.

The following rules relating to offer and acceptance are used to determine the precise point in time that agreement is reached, because it is at this moment that the contract comes into existence and the parties become legally obliged to proceed.

Offer A person makes an offer when they express a willingness to immediately enter into a contract with the person to whom the offer is directed. For example, when Johnny tells Jin that he is willing to sell his pizza oven to Jin in return for $10  000, Johnny is expressing a willingness to immediately enter into a contract with Jin and he is, therefore, said to have made an offer to Jin. In these circumstances, Johnny is called the offeror and Jin is called the offeree. An offer can be: •• made in writing, •• made verbally, or •• indicated through conduct. For example, if Johnny picks up a newspaper in a shop and hands the money to the cashier, he is offering to buy the newspaper without actually saying anything. The following rules and guidelines assist in the identification of an offer. 1 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666.

CHAPTER 7 Contract law: formation of the contract  257

The offeree Sometimes an offer is made by one person to another, and sometimes an offer is made by one person to a group of people. Depending on the particular wording of the offer, the offer can be accepted by either the first person to respond or by anyone from the group who responds. There is no limit to the number of people to whom an offer can be made and, in fact, it is said that an offer can be made to ‘the world at large’.2 For example, if Ash puts up a poster offering a reward for the return of her lost cat she is making an offer to pay the reward to anyone in the world who finds the cat. CAUTION!

An advertisement promoting a product at a particular price may appear to be an offer to the world at large, but it is more likely to be categorised as an invitation to treat and not an offer at all . . . even if the advertisement uses the word ‘offer’. ‘Invitation to treat’ is explained below.

Acceptance, rejection or revocation If the offer is accepted, an agreement (and possibly a contract) comes into existence from that moment. If the offer has not already been accepted, the offer may be rejected by the offeree. For example, Jin may decline Johnny’s offer to sell the pizza oven to her for $10  000. If that is the case, the offer is terminated and Jin cannot later change her mind and accept the offer. (She can, however, approach Johnny and make an offer herself, which Johnny is not obliged to accept.) If the offer has not already been accepted or rejected, the offeror is entitled to revoke their offer. For example, if Jin has not yet accepted or rejected Johnny’s offer to sell the pizza oven for $10  000, Johnny can change his mind and withdraw the offer. As long as Johnny makes it clear to Jin that the offer has been revoked, Jin can no longer accept the offer. An offeror is entitled to revoke their offer even if they have promised to keep the offer open for a particular period.3 There is, however, an important exception: if the offeree has provided consideration for the offeror’s promise to keep the offer open (e.g. by paying a deposit), the offeror cannot withdraw their offer until the period has expired. If the offeree has paid a deposit, a separate contract comes into existence, sometimes referred to as an option, and the offeror breaches that contract if they withdraw the offer before the promised deadline. For example, if Johnny offers to sell the pizza oven to Jin for $10  000 and at Jin’s request Johnny promises to keep that offer open until 5.00  pm, Johnny can change his mind and sell the oven to someone else before 5.00  pm unless Jin has paid a deposit, in which case Jin has an option and Johnny must keep the offer to Jin open until 5.00  pm. Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674

Quinn offered to sell his land to Goldsborough Mort & Co Ltd (GMC) and promised to keep the offer open for one week in return for GMC paying to Quinn a deposit of fifty cents. Before the week had expired Quinn informed GMC that he was revoking his offer and selling the land to someone else. GMC then accepted the offer and sued Quinn for breach of contract. The court decided that because GMC had paid Quinn to keep his offer open for one week Quinn was not permitted to withdraw the offer, which meant that when GMC accepted the offer a contract was formed. Quinn had breached the contract by selling the land to someone else.

CAUTION!

Even if the offeror has promised to keep the offer open for a particular period, they are entitled to revoke their offer at any time prior to acceptance . .. unless the offeree has paid the offeror to keep the offer open.

2 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. 3 Dickinson v Dodds (1876) 2 Ch D 463.

258  PART 2 Legal consequences

If the offer is not accepted, rejected or validly revoked, it will lapse after the expiry of a reasonable amount of time. What is ‘reasonable’ will depend on the circumstances. Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109

On 8 June Montefiore made an offer to Ramsgate Victoria Hotel Co Ltd (RVH) to purchase shares in that company. More than 5 months later, on 23 November, RVH wrote back to Montefiore accepting the offer and informing Montefiore that the balance owing on the shares was now due. Montefiore refused to pay and RVH sued him for breach of contract. The court decided that there was no contract because there was no agreement. Montefiore’s offer had lapsed before RVH accepted it because more than a reasonable period of time had lapsed.

Requests for information It is important to differentiate between the making of an offer and a mere request for information. For example, if Jin emails Johnny and asks if Johnny is willing to sell his pizza oven for $8000, Jin is likely to be seen to be merely asking for information rather than making an offer to buy Johnny’s oven. Similarly a response to a request for information is not an offer. If Johnny replies to Jin’s email and says that the lowest price is $10  000, this is unlikely to be seen as an offer by Johnny to sell the oven at that price.4

Advertising and advertisements Despite the fact that many advertisements on television, in magazines, on posters and on the internet use the word ‘offer’, most advertisements are not offers. As explained earlier, an offer is an expression of willingness to immediately enter into a contract with the person to whom the offer is directed. If every advertisement placed by Johnny was a legal offer, he would immediately enter into a contract with every person who accepted the offer by responding to his advertisement, and once the advertised product was sold out he would be in breach of contract with every customer who missed out. Instead, most advertisements are deemed to be ‘invitations to treat’ rather than offers to the world at large. An invitation to treat is an invitation to another person to make an offer. If Johnny advertises his vegan pizzas on television, the advertisement is an invitation to treat, which invites members of the public to come to his restaurant and offer to purchase a pizza. The customer is the person who makes the offer and it is then up to Johnny to decide whether or not to accept that offer. There is no legally enforceable contract between Johnny and the customer until Johnny decides to accept the customer’s offer. This applies to most transactions involving the buying and selling of products. There are exceptions to this general rule. Sometimes the wording of an advertisement makes it clear that the advertiser is, in fact, willing to enter into a legally enforceable contract immediately upon acceptance of the advertised offer (i.e. the advertisement is an offer to the world at large). For example, an advertisement that states that the business only has a certain number of products in stock and that these products will be sold to the first few customers is an offer rather than simply an invitation to treat. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

The advertisement by Carbolic Smoke Ball Co (CSBC) promised that their product, the ‘Carbolic Smoke Ball’, would ‘positively cure coughs, cold in the head, cold on the chest, catarrh, asthma, bronchitis, hoarseness, loss of voice, sore throat, throat deafness, snoring, sore eyes, influenza, hay fever, ­headache, croup, whooping cough and neuralgia’. It further promised that ‘£100 reward will be paid by the

4 Harvey v Facey [1893] 1 AC 552; [1893] UKPC 1.

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Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. £1000 is deposited with the Alliance Bank, Regent Street shewing our sincerity in the matter’. Mrs Carlill used the product according to the directions and (perhaps not surprisingly) still caught the flu. However, when she contacted CSBC to claim the reward, they denied that they were legally obliged to pay the reward. Mrs Carlill sued the company for her £100 reward. The court considered whether or not a contract existed between CSBC and Mrs Carlill. In determining if there was an agreement, the court decided that the advertisement was more than a mere invitation to treat. It was a legal offer to the world because the wording of the advertisement made it clear that CSBC was willing to enter into legal relations with anyone who accepted the offer of the reward.

ACTIVIT Y 7.2 — RESEARCH

Look through a magazine, through a newspaper, or on the internet and provide an example of (1) an advertisement that is an invitation to treat, and (2) an advertisement that is a legal offer.

Catalogues and price lists, like most advertisements, are likely to be invitations to treat rather than offers.5 The display of a product in the window of a shop or on the shelves of a shop is also an invitation to treat rather than offer. This means that the contract is not formed until the customer offers to buy the product and the cashier accepts the offer.6 This view appeals to common sense. If the display of a product was really an offer, and the customer accepted that offer by picking the product up from the shelf, a contract would be formed at that point and the customer would not be permitted to return the product to the shelf if they changed their mind. This is clearly impractical and unrealistic. ACTIVIT Y 7.3 — REFLECT

If you pay for and download a song from iTunes, who makes the offer and who accepts the offer?

Auctions and tenders At an auction, the call for bids is an invitation to treat.7 The bidders are offerors, and there is no agreement and no contract until the auctioneer accepts an offer on behalf of the seller. This means that if the auction is ‘without reserve’ (i.e. there is no minimum price that must be reached before the seller is obliged to sell the product) and the auctioneer refuses to sell to the highest bidder, there is no contract and the auctioneer cannot be sued for breach. However, in these circumstances the court is likely to decide that there is in fact a second contract, called a collateral contract, between the auctioneer and all of the bidders to the effect that the auctioneer will sell to the highest bidder, and the auctioneer could be sued for breach of this collateral contract.

5 Partridge v Crittenden [1968] 1 WLR 1204. 6 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401. 7 Payne v Cave (1789) 3 TR 148; 100 ER 502.

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Smythe v Thomas (2007) 71 NSWLR 537

Thomas listed an antique fighter plane for sale by auction on eBay. The reserve price was $150  000. There was also an option for a purchaser to ‘buy now’ for $275  000. The only bidder was Smythe, who lodged a bid of $150  000 20  seconds before the auction closed. Smythe received the standard message from eBay: ‘Congratulations, the item is yours, please pay now.’ Thomas, however, refused to sell the plane at that price, arguing that there was no contract: the listing on eBay was an invitation to treat, Smythe’s bid was an offer, and Thomas had not accepted the offer. The court decided that there was a contract. When Thomas listed the plane on eBay he agreed to be bound by eBay’s terms and conditions, according to which the seller was obliged to enter into a contract with the bidder who lodged the highest bid at or above the reserve price before the auction ended. Unlike a traditional auction, in an online auction the listing is an offer and not merely an invitation to treat. Thomas was obliged to sell the plane to Smythe at the reserve price.

An advertisement calling for tenders is an invitation to treat.8 A person who submits a tender is making an offer, which may or may not be accepted by the person who called for the tenders. Once again, if the call for tenders states that the highest/lowest tender will be accepted, a failure to accept the highest/ lowest tender will be a breach of a collateral contract. Rather than an invitation to treat, a vending machine such as a ticket machine or a drink machine is said to be a standing offer by the owner of the machine. When the customer puts the coins into the machine and makes a selection, the customer is accepting the offer and it is at that point that the contract is formed.9 8 Spencer v Harding (1869-70) LR 5 CP 561. 9 Thornton v Shoe Lane Parking [1971] 2 QB 163.

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ACTIVIT Y 7.4 — REFLECT

When you go to the cinema, who makes the offer and who accepts the offer?

Acceptance When the offeree indicates by words or by action that they are willing to immediately enter into a legally enforceable contract with the offeror on the terms offered, they are said to accept the offer. The following rules and guidelines assist in the identification of a valid acceptance.

The offeree Only a person to whom the offer was addressed (the offeree) can validly accept the offer. For example, if Johnny makes an offer to Jin to sell his pizza oven, and Xue (a third party) attempts to accept the offer, Xue’s attempted acceptance will be no more than an offer to Johnny by Xue, which Johnny may or may not accept. As stated earlier, it is possible for an offer to be made to a group of people, and even to the ‘world at large’, in which case anyone in the group, or anyone at all in the latter case, can accept the offer.

Unqualified acceptance The offeree must accept the offer without qualification. If the offeree modifies the terms of the offer in any way, they are not accepting the offer. Rather, they are making what is called a counter offer. Consider, for example, the following exchange of text messages between Jin and Johnny: Johnny — ‘Will you buy my oven for $10  000?’ Jin — ‘Yes, but I will only pay $9000.’

In this example, there is no agreement and no contract because the offer by Johnny has not been accepted by Jin. Jin has made a counter offer, which Johnny may or may not accept. Negotiations may consist of an offer, a counter offer, a counter-counter offer, and so on, with neither party legally committed until one party accepts without qualification the other party’s previous offer. The making of a counter offer is effectively a rejection of the original offer and as such the original offer cannot subsequently be accepted.10 Just as a request for information is not an offer, a request for further information in response to an offer is not a counter offer.11

Communication of acceptance The agreement is not complete until the offeree communicates their acceptance to the offeror. Powell v Lee (1908) 24 TLR 606

Powell applied for the position of headmaster with a school. The school board decided to appoint Powell, but did not immediately inform him of the decision. A member of the board, without the authority of the board, told Powell that the board had accepted his offer of employment. The board subsequently changed its decision and appointed another person as headmaster. Powell sued the board claiming that  a contract had already been formed. The court decided that there was no agreement between Powell and the board. The board had not communicated its acceptance and an agreement is not formed until acceptance of the offer is communicated to the offeror. The communication by the board member acting without authority was invalid.

10 Hyde v Wrench (1840) 3 Beav 334; 49 ER 132. 11 Stevenson, Jaques & Co v McLean (1880) 5 QBD 346.

262  PART 2 Legal consequences

This also means that to enforce the agreement the offeree must show that they have effectively communicated their acceptance to the offeror. In face-to-face negotiations this is usually not a concern, but when the parties are negotiating at a distance it becomes necessary to establish that the offeror has in fact received the offeree’s acceptance. If the offeror specifies the way that acceptance must be communicated, the acceptance is not valid unless it is communicated in this manner or in an alternative manner that is just as prompt and no less advantageous to the offeror.12 For example, if Johnny makes an offer to Jin and states ‘reply by email’, the offer is effectively accepted if Jin communicates her acceptance directly to Johnny by telephone but not if she communicates her acceptance by posting a letter. If Johnny makes it clear that the reply can be communicated by email only, Jin must communicate her acceptance in this way. An offeror can waive the requirement that communication be accepted, but cannot insist that a failure to respond is acceptance.13 For example, if Johnny offers to sell his pizza oven to Jin for $10  000 and Johnny tells Jin that if he does not hear from Jin by 5.00  pm he will assume that Jin has accepted his offer, Jin can still enforce the agreement if Johnny refuses to provide the oven, but Johnny cannot enforce the agreement if Jin refuses to pay. ACTIVIT Y 7.5 — REFLECT

Why is it that an offeror is not able to insist that a failure to respond is acceptance?

There are three important exceptions to the requirement that the offeree communicate their acceptance to the offeror. The first is where there is an ongoing commercial relationship between the parties. In these circumstances, a failure to respond to an offer that is similar to previously accepted offers and that was previously accepted effectively by silence can amount to an indication of acceptance, and the agreement can be enforced by either party.14 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

(See the facts of this case described earlier.) CSBC argued that even if their advertised reward was a legal offer, Carlill had not communicated her acceptance of that offer. The court decided that since this was a unilateral contract it was not necessary that acceptance be communicated prior to performance. Mrs ­Carlill had accepted the offer by buying and using the smoke ball as directed, and that was sufficient.

R v Clarke (1927) 40 CLR 227

The government of Western Australia offered a reward of £1000 to anyone who provided information leading to the capture and conviction of a man wanted for the murder of two police officers. Clarke was arrested and charged with the murders and he provided information that led to the arrest of another man who was subsequently convicted of the murders. Clarke was released and he claimed the reward. The court decided that he was not legally entitled to the reward. The reward was a legal offer, but when Clarke provided the information he was not doing so in order to accept the offer; he was doing so to clear his own name. Clarke admitted that when he gave the information to the police he had forgotten about the reward. The court explained that a person cannot accept an offer by conduct unless they are acting in reliance on the offer.

12 Tinn v Hoffmann & Co (1873) 29 LT 271. 13 Felthouse v Bindley (1862) 11 CB NS 869; 142 ER 1037. 14 Boyd v Holmes (1878) 4 VLR(E) 161.

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The second exception relates to unilateral contracts. A unilateral contract is a contract where the offeree’s acceptance and performance are the same thing. The best example of a unilateral contract is an offer of a reward: if Ash puts up a notice offering a reward to whoever finds her lost cat, Jin’s finding and returning of the cat is both acceptance of the offer and performance of her side of the bargain. Jin does not need to communicate her acceptance of the offer prior to her performance. The third exception relates to contractual negotiations that are taking place through the post. If it is reasonable in the circumstances for the offeree to reply to the offer by post, then the offeree’s acceptance is effective, and the contract is formed, as soon as the offeree posts the letter of acceptance, not when the offeror actually receives the letter.15 This is known as the postal rule. The postal rule applies even if the letter is delayed in the post and even if the letter of acceptance never arrives. Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250

Lindsell made an offer to sell goods to Adams in a letter posted on 2 September. The letter was incorrectly addressed and Adams did not receive the letter until 5 September. Adams immediately wrote back accepting the offer. On 8 September Lindsell, assuming that Adams was not going to respond, sold the goods to someone else. Lindsell received Adams’ acceptance on 9 September. Adams sued Lindsell for breach of contract. The court decided that there was a contract between Adams and L ­ indsell: Adams’ acceptance was effective on 5 September and the contract was formed on that date.

The postal rule applies only to acceptances; it does not apply to offers and revocations.16 For example, on 1 March Johnny sends a letter to Jin offering to sell his pizza oven to Jin for $10  000. On 2 March Johnny writes again to Jin saying he has changed his mind and revoking the offer. Jin receives the letter of offer on 3 March and immediately writes back accepting the offer. Jin receives the letter of revocation on 4 March, and Johnny receives the letter of acceptance on 5 March. Is there a contract between Johnny and Jin? The acceptance took place on 3 March when Jin posted the letter of acceptance. The revocation did not take place until 4 March, when Jin received the letter of revocation. Therefore, the offer was accepted before it was revoked, the revocation was ineffective, and a contract was formed on 3 March. ACTIVIT Y 7.6 — REFLECT

How can the postal rule be justified? In your answer, consider the courts’ traditional preference for enforcing rather than voiding contracts.

The postal rule applies only to postal communications and telegrams. It does not apply to methods of instantaneous communication such as telephone calls and faxes.17 If an acceptance is sent by one of these methods, it is not effective and the contract is not formed until the acceptance is actually received by the offeror. The question of whether or not the use of the internet or email is a method of instantaneous communication and, therefore, beyond the scope of the postal rule has not yet been answered decisively by the courts. The better view seems to be, however, that the postal rule does not apply to the internet or email, and electronic communications must be actually received to be effective. The offeror can choose to override the postal rule by expressly stating that the offeree’s acceptance must be actually received by the offeror to be effective. 15 Henthorn v Fraser [1892] 2 Ch 27, 33. 16 Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344. 17 Brinkibon Ltd v Stahag Stahl Und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34.

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LAW IN CONTEXT: LAW AND TECHNOLOGY

Making agreements online The internet has made it easier for a business to enter into agreements with customers regardless of time differences, geographical locations and national borders. Parties can make an online agreement by exchanging emails. A website may advertise goods or services that the customer can purchase by completing and transmitting an online order form. When are online agreements formed? If a customer orders goods or services through a website, is the business contractually bound as soon as the order is received? The website is likely to be treated in the same way as an advertisement (i.e. as an invitation to treat rather than an offer), and an enforceable contract will not be formed until the business accepts the customer’s offer. It is, however, advisable that the business take the extra precaution of specifying on its website that the descriptions of the products are not offers in the legal sense of the term, and that once the customer transmits an order it must be accepted by the business before there will be a contract. Once the order is accepted by the business and that acceptance is received by the customer, the contract is formed. When is an electronic communication such as an email ‘received’? Section 14A of the Electronic Transactions Act 1999 (Cth) — and the equivalent sections in the State electronic transactions legislation — establishes basic rules for the time of receipt of an electronic communication. These rules depend on whether or not the receiver has told the sender to send the electronic communication to a particular information system. Where the receiver has specified an electronic address, and the communication is sent to that electronic address, s. 14A(1) states that the communication is ‘received’ when it becomes capable of being retrieved by the receiver. In all other cases s. 14A(2) states that the electronic communication will be received when it is capable of being retrieved by the receiver, and the receiver is aware that the electronic communication has been sent to the particular address. The term ‘aware’ does not mean that a communication must be actually read by the receiver: a receiver who knows, or should reasonably know in the circumstances, of the existence of the communication would be considered to have received the communication. For example, a receiver who is aware that the communication is in their email inbox but who refuses to read it would be considered to have received the communication. Where are online agreements formed? Jurisdiction is one of the most complex and confusing areas of the law relating to online contracts. What happens if the online agreement is between a business and a customer residing in different countries? If a dispute arises under the online agreement, whose law will apply to resolve the dispute? In the absence of express agreement between the parties regarding relevant jurisdiction, the dispute can only be settled under Australian law if the contract was formed in Australia. Therefore, the most important issue is where the agreement was formed. A contract is usually deemed to be formed in the place where the acceptance is received. If an Australian business responds to an overseas customer’s offer by sending its acceptance to the customer, then the contract will be formed in the jurisdiction of the customer. A business can, and should, avoid uncertainty about the issue of jurisdiction by stipulating in the terms of the contract which law will apply in the event of a dispute. In most online contracts it will be the business that will dictate the terms of the contract. If the contract is made via a website, the business should have a page dedicated to the terms governing the transaction. To effectively rely upon those terms, the website should be structured so that it is impossible for a customer to offer to buy the product without first viewing those terms. The terms page should have an acknowledgement button that will indicate that the customer has had the opportunity to read those terms and agrees to be bound by them. If the contract is made via email, the email from the business should contain the terms. In both cases the business should include a ‘jurisdiction clause’, making it clear that the law governing the transaction will be that of its jurisdiction and not the jurisdiction of the customer.

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Conditional agreements Sometimes the parties appear to have finalised negotiations and reached agreement, but they have expressly agreed that the agreement is a conditional one. If the parties have specified that the agreement will not be legally enforceable until the happening of a certain event, the condition is known as a condition precedent. For example, the agreement between Johnny and Jin that Johnny will sell his pizza oven to Jin may be conditional upon Jin successfully getting a loan from a bank within seven days of the date of the agreement. Until Jin gets the loan, the agreement is conditional. Note that Jin is obliged to take all necessary steps to satisfy the condition. If the condition precedent does not specify a time in which it must be satisfied, it must be satisfied within a reasonable time.18 If the parties have specified that the agreement is enforceable immediately but will cease to be enforceable upon the happening of a certain event, this is known as a condition subsequent. For example, the agreement between Johnny and Jin that Johnny will sell his pizza oven to Jin may be expressed to be conditional upon Jin not being evicted from her own business premises; if Jin is evicted the agreement ceases to be enforceable and comes to an end. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions.  7.4 What is an agreement, and why is it important to know exactly when an agreement was reached?  7.5 What is an offer, and how can an offer be made?  7.6 Explain the distinctions between acceptance, rejection and revocation of an offer.  7.7 In what circumstances can a promise to keep an offer open be enforced?  7.8 When will an offer lapse?  7.9 What is the difference between an offer and a request for information? 7.10 What is the difference between an offer and an invitation to treat? 7.11 At what point is the contract formed when a person (a) buys goods in a supermarket; (b) buys goods at an auction; and (c) buys goods by tender? 7.12 What is acceptance, and who can accept an offer? 7.13 What is the difference between an acceptance and a counter offer? 7.14 When will silence amount to acceptance? 7.15 In what circumstances will an acceptance be valid, even though it is not communicated to the offeror? 7.16 What is the postal rule, and when does it apply? 7.17 What is a conditional agreement? 7.18 What is the difference between a condition precedent and a condition subsequent?

7.3 Requirement 2: intention LEARNING OBJECTIVE 7.3 How do we know whether the parties to an agreement intended that it be legally enforceable?

Not every agreement is a contract. If Johnny offers Sam a job and Sam accepts the offer, the agreement between Johnny and Sam is likely to be a contract. But if Johnny offers to meet Ash for lunch and she accepts the offer, the agreement between Johnny and Ash is not a contract because neither of them intended the agreement to be a legally enforceable one. This is the second requirement for a contract: the parties to the agreement must intend the agreement to be legally enforceable. In deciding whether or not the second requirement is satisfied, the court does not ask the parties what they actually intended. Rather, the court looks at the conduct of the parties from the perspective of an 18 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537.

266  PART 2 Legal consequences

objective observer and asks whether the parties were behaving in a way that indicated that they intended the agreement to be legally enforceable.

Presumptions In applying the above objective test, the courts have traditionally made two important presumptions relating to: 1. social or domestic agreements, and 2. commercial agreements.

Social or domestic agreements The first presumption is that if the agreement was made in a social or domestic context, the agreement was not intended to be legally enforceable. In other words, if an agreement was made between two friends in a social setting, or between members of a household such as a brother and sister or a husband and wife, the court will presume that it was not intended to be a contract. Balfour v Balfour [1919] 2 KB 571

Mr and Mrs Balfour were married in 1900. They spent the first 15 years of their marriage living in Ceylon. The Balfours were in England from November 1915 to August 1916 on vacation. Towards the end of the vacation, Mrs Balfour received advice that she should remain in England for treatment of her rheumatic arthritis. On 8 August 1916, before returning to Ceylon, Mr Balfour agreed to send Mrs Balfour a monthly allowance of £30 until she could rejoin him. Mr Balfour later asked to remain separated. In 1918 Mrs Balfour sued for payment of the £30 per month on the basis of the agreement. Was the agreement between Mr and Mrs Balfour reached on 8 August 1916 legally binding? The court decided that the agreement between the Balfours was not a legally enforceable contract but merely an ordinary domestic arrangement. There was no intention to create legal relations and Mrs Balfour could not sue for the alleged breach of it. The Court was of the view that mutual promises made in the context of an ordinary domestic relationship between husband and wife do not usually give rise to a legally binding contract because there is no intention that they be legally binding. In other words there is no intention that one party will be able to take action for breach of the agreement by the other if they fail to perform.

It is not the case, however, that friends and relatives cannot make contracts with each other. The court will presume that an agreement between friends or family members was not intended to be a contract, but it is possible to rebut this presumption. This means that one of the parties can seek to convince the court that, given the particular circumstances of the agreement, the parties appear to have intended it to be a legally enforceable arrangement. Wakeling v Ripley (1951) 51 SR (NSW) 183

Ripley was an elderly and wealthy widower who required domestic assistance in his large home in New South Wales. He sought to persuade his sister and her husband (the Wakelings) to move from England to Australia to look after him. The Wakelings made it clear to Ripley that moving to Australia would require them to make significant sacrifices, including Mr Wakeling abandoning his salaried position at Cambridge University and his pension. Mr Wakeling sought assurances from Ripley as to what Ripley could offer to his family for the future. In May 1945, Ripley wrote to the Wakelings urging them to come as soon as they could and giving the Wakelings information as to the contents of the house, which he referred to as theirs. He wrote again in October 1945 attaching a copy of his will in which he left the bulk of his estate to the Wakelings. On the basis of this correspondence, the Wakelings agreed to come to Australia. They sold their property in England and Mr Wakeling resigned from his position at Cambridge. The Wakelings arrived in Australia in early 1947 and lived with Ripley throughout that year. A number of misunderstandings arose between the Wakelings and Ripley that resulted in Ripley selling the house and altering his will. The Wakelings commenced legal proceedings seeking to recover damages from Ripley for breach of the alleged contract between them. Was the agreement between Ripley and the Wakelings a legally binding contract? The court decided that there was a definite and binding contract. The correspondence between the parties regarding the arrangements as well as the seriousness of the move for the Wakelings demonstrated that the parties intended to be legally bound by the agreement.

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ACTIVIT Y 7.7 — REFLECT

If two friends buy a lottery ticket and agree to share the prize money equally if the ticket wins, is that agreement likely to be enforceable as a contract?

Commercial or business agreements The second presumption is that if the agreement is made in a commercial or business context, the court will presume that it was intended to be legally enforceable.19 It is possible for the presumption to be rebutted by evidence that the parties to the commercial agreement behaved in such a way that it was clear that they did not intend their agreement to be legally enforceable. For example, a written commercial agreement may contain a clause to the effect that the agreement is intended to be binding in honour only. Rose & Frank Co v JR Crompton & Brothers Ltd [1925] AC 445

Rose & Frank Co (RFC) was appointed as the sole agent for the sale in the United States and Canada of tissues for carbonising paper manufactured by UK companies J R Crompton & Brothers Ltd (JRC) and Brittains Ltd. A written agreement was entered into between all three parties dated 8 July 1913. The agreement had a 3-year term, subject to termination on the giving of 6 months notice. The agreement included the following ‘honourable pledge’ clause: This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves with the fullest confidence — based on past business with each other — that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation. In August 1918 the agreement was renewed for a further 3-year term on the same terms and conditions. The second term was due to expire on 31 March 1920. In early 1919 a dispute arose regarding RFC’s performance. JRC and Brittains then terminated the arrangement without notice in mid 1919. RFC sued JRC and Brittains for breach of contract. Did a legally binding contract exist between RFC, JRC and Brittains that was breached by the failure by JRC and Brittains to give 6 months notice of termination? The court decided that the agreement between RFC, JRC and Brittains was not a legally binding contract because the ‘honourable pledge’ clause showed that the agreement was intended to be binding in honour only. Consequently, JRC and Brittains were not legally obliged to give 6 months notice of termination and their termination of the arrangement without notice was valid and effective.

A comfort letter is a letter from a third party assuring a lender about the borrower’s ability to repay the loan. Depending upon the wording of the letter, the assurance by the third party may be a legally enforceable promise,20 or it may be no more than a non-binding statement of policy or intention.21 In 2002, the use of these two presumptions was called into question by the High Court. Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95

Ermogenous was the Archbishop of the Greek Orthodox Church in Australia from 1970 until 1993. When his employment was terminated, Ermogenous claimed annual leave and long service leave entitlements that he had not received during his 23 years of service. The church denied liability, claiming that there was no enforceable contract because the agreement was a religious one and, therefore, not intended to be legally binding. The High Court of Australia disregarded the traditional presumptions and instead simply considered the arrangement from the perspective of the objective observer. It concluded that the agreement was intended to be legally enforceable. Whether the presumptions will in future be abandoned entirely is not yet clear. 19 Edwards v Skyways Ltd [1964] 1 WLR 349. 20 Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149. 21 Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 WLR 379.

268  PART 2 Legal consequences

Preliminary agreements Sometimes parties who have been negotiating a deal appear to have reached an agreement, but the agreement is expressed to be ‘subject to’ some other event, such as ‘subject to the written agreement being approved by our solicitors’. Does this mean that the agreement is not intended to be legally enforceable? The answer is that it depends on the circumstances and the wording of the agreement. There are at least four possibilities. •• The parties do not intend the agreement to be legally enforceable until the condition is satisfied. •• The parties intend the agreement to be legally enforceable immediately and simply propose to have the agreement restated more formally. •• The parties intend the agreement to be legally enforceable immediately, but it is not intended to be performed until the condition is satisfied. •• The parties intend the agreement to be legally enforceable immediately, but they also intend to make another agreement that will eventually be substituted for the first agreement.22 In the first situation the parties to the negotiation can change their minds about the agreement prior to the condition being satisfied. In the other three possible situations, however, the agreement is already legally enforceable and the parties cannot change their minds. Masters v Cameron (1954) 91 CLR 353

Cameron agreed to sell his farm to Masters. They signed a written agreement that contained the following clause: ‘This agreement is made subject to the preparation of a formal contract of sale, which shall be acceptable to my [Cameron’s] solicitors on the above terms and conditions  .  .  . ’. The court decided that the circumstances indicated that Cameron did not intend to be legally bound until a formal contract of sale was prepared because the agreement gave Cameron’s solicitors the power to considerably alter the terms of the agreement.

‘Mere puff’ A promise made to customers in a business context will not be enforceable if the business can show that the promise was clearly not intended to be taken seriously by customers. Such promises are sometimes referred to as ‘puffery’ or ‘mere puff’ by the courts, and are not legally enforceable. For example, a television advertisement may contain an apparent promise by a car manufacturer that their car is capable of turning into a giant dancing robot, or of flying, or of surviving a fall from a cliff, but these sorts of promises are clearly not intended to be taken seriously and will not be legally enforceable by the promisee. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

(See the facts of this case that were described earlier.) CSBC claimed that their offer of a reward was ‘mere puff’ and clearly not intended to be taken seriously. The court disagreed, deciding that the wording of the advertisement, including the statement that ‘£1000 is deposited with the Alliance Bank, Regent Street showing our sincerity in the matter’, indicated that the offer of a reward was intended to be a legally enforceable one.

Advertising and other pre-contractual promises by businesses are now closely regulated by the ­Australian Consumer Law (the ACL). 22 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628.

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ACTIVIT Y 7.8 — RESEARCH

Find another example of a television advertisement that contains a promise that is clearly not intended to be taken seriously.

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 7.19 How do the courts decide whether or not the parties to an agreement intended that the agreement be legally binding? 7.20 What presumption regarding intention will a court make about an agreement reached in a social or domestic context? 7.21 How can this presumption be rebutted? 7.22 What presumption regarding intention will a court make about an agreement reached in a business or commercial context? 7.23 How can this presumption be rebutted? 7.24 Is an agreement made ‘subject to’ some other event intended to be legally binding? 7.25 What is ‘puffery’ or ‘mere puff’?

7.4 Requirement 3: consideration LEARNING OBJECTIVE 7.4 A promise is only enforceable if it is ‘supported by consideration’. What does this mean? Why is it that consideration ‘need not be adequate’ but ‘must be sufficient’? How can a promise be enforced in the absence of consideration?

An agreement is not a contract unless both parties to the agreement have paid, or promised to pay, a price. The contribution of each party to the agreement is called consideration. If Jin wishes to enforce her agreement with Johnny, she can only do so if she has provided consideration. Consideration can take the form of: •• the payment of money, •• the provision of goods, •• the provision of a service, •• the undertaking of an onerous obligation, •• refraining from doing something (e.g. agreeing not to sue), or •• a promise to do any of these things. Most agreements consist of one, and often both, of the parties contributing a promise to the agreement. A borrower promises to repay the money that they have borrowed; a manufacturer promises to deliver a certain quantity of products; an employee promises to show up for work and carry out particular tasks and an employer promises to pay the employee. If the promisee (the person to whom the promise is made) has not provided consideration to the promisor, then the promise is merely a gift and as a general rule legally unenforceable. ACTIVIT Y 7.9 — REFLECT

‘Bargains can be enforced but gifts cannot.’ How can this legal rule be justified?

For example, if Johnny offers to give Jin his pizza oven and Jin accepts his offer, the agreement between Johnny and Jin is not a legally enforceable contract because Jin has not provided any consideration in return for Johnny’s promise. It is a gift by Johnny to Jin. However, the agreement between Johnny and Jin is a contract and Jin can legally enforce Johnny’s promise if Johnny promises to give Jin his pizza oven in return for: •• Jin paying Johnny $10  000, •• Jin giving Johnny her car, 270  PART 2 Legal consequences

•• •• •• ••

Jin painting Johnny’s house, Jin agreeing to guarantee a loan to be taken out by Johnny, Jin agreeing not to sue Johnny, or Jin promising to do any of these things. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

(See the facts of this case that were described earlier.) CSBC promised to pay a reward to anyone who used their ‘smoke ball’ and still caught the flu. Had Carlill provided consideration for CSBC’s promise? She paid for the smoke ball, but that was consideration for the smoke ball itself, not for the promise of a reward. The court decided that Carlill had provided consideration: she suffered the inconvenience of using the product according to the instructions. As the court explained, consideration includes ‘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’.

CAUTION!

Consideration is not a price paid in addition to the bargain, it is each party’s part of the bargain. If Johnny has promised to sell his oven to Jin for $10  000, Johnny’s promise to sell the oven is enforceable by Jin because Jin has provided consideration for Johnny’s promise. The consideration is Jin’s promise to pay for the oven. Jin does not need to show that she gave Johnny something in addition to her promise; her promise to pay the $10  000 is the consideration.

Consideration must move from the promisee but not necessarily to the promisor.23 For example, if Johnny agrees to give Jin his pizza oven in return for Jin paying $10  000 to Johnny’s mother Jenny, there is still a valid contract: the consideration is moving from Jin. However, if Johnny agrees to give Jin his pizza oven in return for Jin’s friend Xue paying $10  000 to Johnny, Jin does not have a contract with Johnny because the consideration did not move from Jin.

Consideration need not be adequate The law of contract does not require each party to pay a fair or adequate price, only a price of some legal value. The requirement that each party contribute to the arrangement is satisfied as long as each party pays some consideration, no matter how inadequate or small in value. For example, if Johnny promises to give Jin his pizza oven in return for Jin paying him $50, the $50 is still consideration and the agreement is still a contract, even though $50 is not a fair or adequate price for the oven. Thomas v Thomas (1842) 2 QB 851; 114 ER 330

The executors of Mr Thomas’s estate promised to let Mrs Thomas live in Mr Thomas’s house for the rest of her life in return for Mrs Thomas paying rent of £1 per year. When Mrs Thomas later sought to enforce the promise, the executors argued that there was no contract because Mrs Thomas had not provided adequate consideration. The court decided that there was a contract. The consideration of £1 per year in return for the right to occupy the house was clearly not adequate, but it was still of legal value and, therefore, sufficient.

Thus, the court is uninterested in inquiring into the adequacy of the consideration provided by each party, and even the most trivial payment or promise will qualify as sufficient consideration provided it has some legal value.24 23 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847. 24 Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87.

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ACTIVIT Y 7.10 — REFLECT

‘A transaction will be enforced even if the price payable is not a fair one.’ How can this legal rule be justified?

Consideration must be sufficient Consideration will be sufficient if it has some legal value. Examples of insufficient consideration include a vague promise, past consideration, and a promise to do something one is already legally obliged to do.

A vague promise If the price paid by the promisee is a vague promise by the promisee to do something or refrain from doing something, this is insufficient consideration. ‘Vague’ here means uncertain or of no legal value. For example, if Johnny promises to give Jin his pizza oven in return for Jin’s promise to ‘be nice’ to him or to pay a ‘fair price’, Jin’s vague promise is insufficient consideration and Johnny’s promise is therefore unenforceable by Jin. White v Bluett (1853) 23 LJ Ex 36

A father promised to waive a debt that was owed to him by his son. In return, his son promised to stop complaining to the father that the father treated his other sons more favourably. The court decided that the son’s consideration was insufficient and the father’s promise was therefore unenforceable by the son.

Placer Development Ltd v Commonwealth (1969) 121 CLR 353

Placer Development Ltd (PDL) entered into an agreement with the Commonwealth according to which PDL would produce timber products in Papua New Guinea and import them into Australia. In return the Commonwealth would pay to PDL a subsidy in relation to the customs duties payable on the timber ‘of an amount or a rate determined by the Commonwealth from time to time’. The court decided that the agreement was unenforceable because the consideration payable by the Commonwealth was too vague.

Past consideration If the price paid for a promise was paid by the promisee before the promise was made (past consideration) it is insufficient consideration. For example, if at the end of a particularly busy shift Johnny promises to pay his employee Cathy a $50 bonus in return for Cathy’s hard work, his promise is not legally enforceable because Cathy has not provided sufficient consideration. Cathy’s hard work during the shift is insufficient consideration because it was a price paid before Johnny made the promise. If, on the other hand, Johnny had promised Cathy at the beginning of the shift that if Cathy worked hard Cathy would be paid a $50 bonus, Johnny’s promise would be legally enforceable because Cathy’s hard work would be sufficient consideration. Roscorla v Thomas [1842] 3 QB 234; 114 ER 496

Roscorla purchased a horse from Thomas at an auction. Immediately after the sale Roscorla asked Thomas about the condition of the horse. Thomas promised that the horse was ‘sound and free from vice’. When the horse turned out to be quite vicious, Roscorla sued Thomas for breach of contract. The court decided that Thomas’ promise was not legally enforceable because Roscorla had not provided sufficient consideration. Payment of the purchase price by Roscorla was not sufficient consideration because that had occurred before Thomas’ promise was made, and was therefore past consideration.

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ACTIVIT Y 7.11 — REFLECT

‘A price paid before a promise is made is not sufficient to make the promise enforceable.’ How can this legal rule be justified?

It is not always the case that a promise made after consideration is paid is unenforceable. Sometimes the consideration was paid because the payer expected a legally enforceable promise to be made at a later date. If the consideration was paid at the request of the person who subsequently made the promise, the consideration is not past consideration, and the promise will be legally enforceable. Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239

Hosking and the controller of Ipex Software Services Pty Ltd (ISS) negotiated an arrangement whereby Hosking would transfer to ISS his own software business in return for some shares in ISS. Hosking transferred his business to ISS and it was only after the transfer was completed that the controller of ISS gave Hosking a formal offer of 5 per cent ownership. The controller failed to keep his promise and Hosking sued to enforce it. The controller argued that the consideration for the promise — Hosking transferring his business — was past consideration. The court decided that although Hosking had transferred his business before the promise was made, he had done so at the controller’s request and in expectation of a formal promise. The controller’s promise was legally enforceable by Hosking.

A prior legal obligation If the price paid by the promisee is the fulfilment of a prior legal obligation (i.e. something that the promisee was already legally obliged to do) this is insufficient consideration. The promisee’s legal obligation may be one that is owed as a public duty or as a contractual duty. For example, if Johnny’s business premises are broken into and he promises to pay the police officer a small reward if she is able to apprehend the criminal, Johnny’s promise is not legally enforceable because the police officer’s consideration for that promise — apprehending the criminal — was something that she was legally obliged to do anyway as a police officer. Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168

When two of the sailors on a voyage from London to the Baltic Sea deserted their positions, Myrick, the captain of the ship, could not find replacements for them. He promised the remaining sailors that he would share the deserters’ pay with them if they got the ship back to London safely. When Myrick failed to keep his promise, the crew sued him for breach of contract. The court decided that the captain’s promise was not legally enforceable because the crew had not provided sufficient consideration in return for the promise. Getting the ship home safely in an emergency situation didn’t count as sufficient consideration because that was something the sailors were already contractually obliged to do.

ACTIVIT Y 7.12 — REFLECT

If Johnny engages Gary to repaint his premises and halfway through the job Gary threatens to stop work unless Johnny agrees to pay him more money, is Johnny’s promise to pay Gary more money legally enforceable? Explain your answer.

However, if the promisee does something beyond their legal or contractual duty, the consideration will no longer be insufficient and the promise will be enforceable. CHAPTER 7 Contract law: formation of the contract  273

Hartley v Ponsonby (1857) 7 El & Bl 872; 119 ER 1471

Seventeen crew members deserted ship in Melbourne. To encourage the remaining 19 sailors to sail the ship back to Liverpool, the captain promised to pay them extra wages. When the ship made it back to Liverpool, the owners of the ship refused to pay the extra wages. The court decided that while sailing the ship was part of the crew’s existing contractual duty, returning the ship with only half a crew was not. The captain’s promise was legally enforceable because the crew had done more than what they were contractually obliged to do and therefore provided sufficient consideration.

The rule that fulfilment of a prior contractual obligation is not sufficient consideration leads to a surprising conclusion in some circumstances. Consider the following scenario: Jin owes Johnny $10  000 for the oven. When the time comes to pay, Jin does not have enough money. Johnny generously promises that if Jin pays $8000, Johnny will waive payment of the other $2000. Can Johnny later change his mind and insist that Jin pay the other $2000? Johnny has promised to waive the $2000, but has Jin provided consideration for Johnny’s promise? Jin did pay $8000, but this was fulfilment of a prior contractual obligation, since she already owed Johnny $10  000. Johnny can therefore change his mind and break his promise to waive the $2000. Part payment of a debt is not sufficient consideration for a promise by the creditor to waive payment of the balance of the debt. This is known as the rule in Foakes v Beer. Foakes v Beer (1884) 9 App Cas 605

On 11 August 1875, Beer obtained a court judgment against Foakes in the amount of £2090 and 19 shillings. Beer was also entitled to interest on the judgment debt until it was paid. The interest was deemed to be part of the judgment debt. On 21 December 1876, Beer and Foakes entered into a written agreement whereby Beer agreed to give Foakes time to pay the £2090 and 19 shillings and promised not to ‘take any proceedings whatever on the said judgment’. Foakes’ consideration for the agreement was stated to be payment of £500 in partial satisfaction of the judgment debt. The agreement also provided that half yearly instalments were be paid by Foakes ‘until the whole of the said sum of £2090 and 19s shall have been fully paid and satisfied’. The agreement did not specifically mention the issue of the interest. Foakes made the instalment payments in accordance with the agreement to a total of £2090 and 19 shillings. However, he refused to pay interest. On 1 July 1882, Beer sued Foakes for the interest. Foakes insisted that Beer could not sue for payment of the interest because she had promised not to enforce the debt, and the interest was part of the judgment debt. The court decided that the agreement of 21 December 1876 was not legally enforceable. Because the interest payable formed part of the judgment debt, Foakes had paid an amount less than the debt owed. In the absence of any consideration by Foakes for Beer’s promise not to enforce the judgment debt if Foakes repaid the £2090 and 19 shillings, it was not a legally binding agreement.

ACTIVIT Y 7.13 — REFLECT

Have you ever owed money to somebody who then decided to forgive the debt? When? Can they still change their mind and insist that you repay the money? Why?

A debtor will have provided sufficient consideration for the creditor’s promise to waive the balance of the debt if: •• the debtor makes the part payment earlier than the originally agreed due date, •• the debtor makes the part payment in a different currency, •• the debtor accompanies the part payment with additional consideration such as the provision of a ­service, or •• the part payment is made by a third party rather than the debtor.25 25 Hirachand Punamchand v Temple [1911] 2 KB 330.

274  PART 2 Legal consequences

The creditor’s promise will also be enforceable if: •• the agreement to waive the balance is in the form of a deed, or •• the agreement satisfies the practical benefits test, or •• the doctrine of promissory estoppel is applicable to the situation. These last three exceptions to the rule are considered in more detail later below.

Deeds A deed is a formal contract. It is a written contract that has been signed by the parties before a witness and ‘sealed and delivered’ (a requirement satisfied by particular wording rather than the actual affixing of a seal and formal delivery) or is expressed to be a deed. Examples of deeds include: •• deeds of release (where one person releases another from a debt), •• deeds of sale (where one person sells property to another), •• deeds of mortgage (where one person lends money to another in return for security over real property), •• deeds of guarantee (where one person undertakes to repay a creditor upon default by the debtor), and •• powers of attorney. In seeking to enforce a deed it is not necessary to show that the promisee provided consideration for the promise. The enforceability of a deed is determined by reference to its form, not whether or not it satisfies the basic requirements of a contract. Contracts that are not in the form of a deed (i.e. the majority of contracts) are known as ‘informal’ contracts or ‘simple’ contracts.

Practical benefits test Performance of a prior legal obligation may amount to adequate consideration if the ‘practical benefits test’ is satisfied. The requirements of this test are as follows. 1. One of the parties to a contract has legitimate reasons for not performing their obligations under the contract. 2. The other party responds by altering the contract, e.g. by promising to reduce the amount payable by the first party. 3. The first party performs their obligations under the contract in reliance upon the other party’s promise. 4. The other party receives a benefit or avoids a detriment. For example, Jin has a contract with Johnny according to which Jin will purchase Johnny’s pizza oven for $10  000. Jin’s attempts to set up her own restaurant are unsuccessful, and Jin tells Johnny that she will be breaching the contract and not purchasing the oven. Johnny has already purchased a new oven on the assumption that Jin will be buying the old one. Johnny tells Jin that if she goes ahead with the purchase she can have the oven for $6000 instead. Ordinarily, Johnny’s promise to waive $4000 would not be legally enforceable: Jin has not provided any consideration for Johnny’s promise, since performing the contract was something she was already legally obliged to do. But since the requirements of the practical benefits test are satisfied, ­Johnny’s promise is enforceable and he cannot change his mind and insist that Jin pay the full $10  000. Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723

Winadell owned the shopping centre in which Musumeci ran a fruit shop. Winadell leased another shop in the centre to a competitor of Musumeci, causing Musumeci to experience such a decline in trade that they were going to have to close their shop and terminate (breach) their lease. Winadell promised to reduce the amount of rent payable by Musumeci to encourage them to stay in the centre. When Winadell later changed its mind, Musumeci sought to enforce the promise. Had Musumeci provided adequate consideration for Winadell’s promise to reduce the rent? The court decided that (1) Musumeci had a legitimate reason for terminating the lease, (2) Winadell had responded by promising to reduce the rent payable by Musumeci, (3) Musumeci had stayed in the centre in reliance upon that promise, and (4) Winadell had received a practical benefit (or avoided a detriment) in that the centre remained fully tenanted. According to the practical benefits test, Winadell had to keep its promise to reduce the rent payable by Musumeci.

CHAPTER 7 Contract law: formation of the contract  275

Promissory estoppel Until now it has been said that unless a promisee has provided sufficient consideration for the promise, the promise is not legally enforceable (unless it was contained in a deed). However, the courts have recognised that in some situations this will lead to an unjust result. To address the situations where the common law requirement that all promises be supported by consideration leads to an injustice, the courts of equity developed the doctrine of promissory estoppel. According to this doctrine, a promise will be legally enforceable, even if the promisee has not provided consideration for the promise, as long as the promisor intended the promisee to rely upon the promise, the promisee has relied upon the promise, and it would be unconscionable (unfair) for the promisor to break their promise. CHECKLIST

If the promisee has not provided consideration for the promise, the promise will still be enforceable using promissory estoppel if all of the following requirements are satisfied. ◼◼ The promisor intended the promisee to rely upon a clear and unambiguous promise. ◼◼ The promisee has, in fact, relied upon the promise by changing their circumstances, and if the promisor does not keep their promise, the promisee will suffer a material disadvantage. ◼◼ It would be unconscionable (unfair) for the promisor to break their promise.

Promissory estoppel can be used to prevent a party to a contract from enforcing their contractual rights. Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130

High Trees House Ltd (HTH) leased a block of flats in London from Central London Property Trust Ltd (CLPT) under a 99-year lease. During World War II many of the flats were vacant and HTH was unable to pay the rent. CLPT agreed to halve the rent for the duration of the war. When the war was over, CLPT restored the rent payable to the full amount, but also insisted that HTH pay the arrears of rent. The court decided that CLPT was not entitled to break its promise that the rent payable during the war would be halved, even though HTH had not provided any consideration for the promise. To allow CLPT to break its promise in these circumstances would have been inequitable and unfair. CLPT could not recover the arrears of rent from HTH.

Promissory estoppel can also be used to prevent a party from denying that a contract exists in the first place. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

Mr and Mrs Maher owned commercial property in Nowra. In mid 1983, negotiations commenced between the Mahers and Waltons about the lease of the property by Walton Stores (Interstate) Ltd. To meet Waltons’ requirements, the Mahers agreed to demolish an old building on the property and erect a new one that met Waltons’ specifications. Waltons advised the Mahers that it required the new building to be completed by 15 January 1984. An agreement was subsequently reached for an extension of time to complete the work. On 21 October 1983, the term of the lease and the rent having been agreed, the solicitors for Waltons sent the solicitors for the Mahers a draft agreement for lease. On 1 November 1983, the Mahers’ solicitor informed Waltons’ solicitor that the demolition of the building on the property had commenced and requested amendments to the agreement. On 9 November, the Mahers’ solicitor informed Waltons’ solicitor that the Mahers required the agreement to be concluded in the next day or two otherwise it would not be possible for the Mahers to complete the new building in time. Waltons’

276  PART 2 Legal consequences

solicitor orally advised the Mahers’ solicitor that he had verbal instructions from Waltons about the amendments the Mahers had sought and that he would get formal instructions. That night Waltons’ solicitor sent an updated agreement incorporating the amendments with a letter that confirmed that he believed formal instructions would be forthcoming and that he would let the Mahers’ solicitors know the following day if any amendments were not agreed to. On 11 November, the Mahers’ solicitors forwarded the amended deed executed by the Mahers to Waltons’ solicitors. In early January 1984, the Mahers commenced construction of the new building in accordance with the plans and specifications approved by Waltons. On 19 January, Waltons’ solicitors advised the Mahers’ solicitors that Waltons did not intend to proceed with the lease. The Mahers sued Waltons seeking a declaration that a binding agreement existed as well as specific performance of the agreement or damages. Was Waltons ‘estopped’ from denying the existence of a binding agreement that it would lease the property? The court decided that Waltons could not deny the existence of a binding agreement to lease the property even though no contract had been formally concluded. The court reached its decision on the basis of the equitable doctrine of promissory estoppel. Waltons had made an implied promise that the formal agreement would be signed and the Mahers had relied upon Waltons’ promise and would suffer material disadvantage if the promise was not kept. It would be unfair for Waltons not to keep its promise in these circumstances. Maher was entitled to use the doctrine of promissory estoppel to compel Waltons to keep its promise. According to the court at 407–8: The appellant’s inaction, in all the circumstances, constituted clear encouragement or inducement to the respondents to continue to act on the basis of the assumption which they had made. It was unconscionable for it, knowing that the respondents were exposing themselves to detriment by acting on the basis of a false assumption, to adopt a course of inaction which encouraged them in the course they had adopted. To express the point in the language of promissory estoppel the appellant is estopped in all the circumstances from retreating from its implied promise to complete the contract.

The doctrine of promissory estoppel can thus be relied upon by the promisee both as a defence against a legal action brought by the promisor (‘a shield’) and as a basis for a legal action against the promisor (‘a sword’). ACTIVIT Y 7.14 — APPLY

Recall the earlier example where Jin owed Johnny $10  000 and Johnny agreed to accept $8000 in repayment of the debt. In what circumstances can Jin use the doctrine of promissory estoppel to prevent Johnny from suing to recover the remaining $2000? If the court decides that the requirements of promissory estoppel are satisfied it can make an order that the promisor keep their promise (i.e. specific performance) or an order that the promisee be compensated for the disadvantage suffered as a result of relying upon the promise (i.e. damages). Giumelli v Giumelli (1999) 196 CLR 101

A son left school at the age of 15 to work on his parents’ farm on the assumption that he would receive part of the property in return. The parents later refused to transfer the land to him because they disapproved of his second marriage. The son sought to enforce his parents’ promise. The court decided that the requirements of promissory estoppel were satisfied: the parents had made a promise intended to be relied upon by the son; the son had relied upon the promise to his detriment by not pursuing other employment opportunities; and it would be unconscionable for the parents to now break their promise. However, instead of compelling the parents to keep their promise and transfer the property to the son, the court ordered the payment of damages as compensation.

CHAPTER 7 Contract law: formation of the contract  277

The doctrine of promissory estoppel can only be used to enforce a promise in a relatively narrow range of situations, and it is still the general rule that a promise must be supported by consideration to be legally enforceable. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 7.26 What is consideration? 7.27 What is the difference between a gift and a bargain? 7.28 What does it mean to say that consideration need not be ‘adequate’ but must be ‘sufficient’? 7.29 Will a vague promise amount to consideration? 7.30 What is past consideration? 7.31 Will a promise to do something one is already legally obliged to do amount to consideration? 7.32 In what circumstances will part payment of an existing debt be consideration for a promise to waive the balance? 7.33 What is a deed, and what is the difference between a deed and a simple contract? 7.34 What is promissory estoppel? 7.35 What does it mean to say that promissory estoppel can be used as both a ‘shield’ and a ‘sword’?

7.5 Formalities LEARNING OBJECTIVE 7.5 Do contracts always have to be in writing and signed?

At common law, as long as an agreement fulfils the other requirements of a contract, the physical contract itself does not have to satisfy any formal requirements. Contracts do not have to be in writing or signed, and can be made verbally or even implied by conduct. However, there is legislation that requires certain contracts to be ‘in writing’ (i.e. all of the terms must be in writing) and signed in order to be effective and enforceable. These include: •• arbitration agreements,26 •• assignments (i.e. transfer) of copyright, designs and patents, •• assignments of life insurance policies,27 •• bills of exchange and promissory notes,28 •• cheques,29 •• consumer credit contracts,30 •• hire-purchase contracts,31 and •• transfers of shares.32 Other legislation provides that if certain contracts are not ‘evidenced in writing’ they will not be enforceable. This means that one or more documents must exist that prove the existence of the contract

26 International Arbitration Act 1974 (Cth); Commercial Arbitration Act 1986 (ACT); Commercial Arbitration Act 2010 (NSW); Commercial Arbitration Act (National Uniform Legislation) 2011 (NT); Commercial Arbitration Act 1990 (Qld); Commercial Arbitration Act 2011 (SA); Commercial Arbitration Act 2011 (Tas); Commercial Arbitration Act 2011 (Vic); Commercial Arbitration Act 2012 (WA). 27 Life Insurance Act 1995 (Cth) s 200. 28 Bills of Exchange Act 1909 (Cth) s 8. 29 Cheques Act 1986 (Cth) s 10. 30 National Credit Code 2009 (Cth) s 14. 31 National Credit Code 2009 (Cth) s 9. 32 Corporations Act 2001 (Cth) s 1071B.

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and include the names of the parties, the subject matter, the consideration payable and the signature of the party against whom the contract is being enforced. These types of contracts include: •• contracts for the transfer of land or an interest in land such as a lease,33 •• contracts for the sale of goods for more than $20 (Western Australia and Tasmania only),34 and •• guarantees.35 If, for example, there is a contract between Johnny and Jin to the effect that Johnny will sublease part of his restaurant to Jin, but the contract is not evidenced in writing and signed, the contract is not enforceable by or against either party. Even when a contract is not required by law to be in writing or signed by the parties, such formalities may still be desirable: •• to encourage deliberation and reflection and to emphasise that the transaction has significant legal consequences, •• to ensure the availability of reliable evidence about the existence of the contract, •• to ensure the availability of reliable evidence about the terms of the contract, and •• to indicate that the agreement was intended to be legally enforceable. LAW IN CONTEXT: LAW AND TECHNOLOGY

Electronic contracts The Electronic Transactions Act 1999 (Cth) and the various equivalent State Electronic Transactions Acts provide that a transaction is not invalid just because it took place by means of one or more electronic communications. The following legal requirements can now be met in electronic form unless the legislation specifically provides otherwise: • a requirement to give information in writing, • a requirement to provide a signature, • a requirement to produce a document, • a requirement to record information, and • a requirement to retain a document.

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 7.36 What types of contracts are required to be in writing and signed in order to be legally enforceable? 7.37 Even if a contract is not required to be in writing and signed, why is it often a good idea to satisfy this formality anyway?

7.6 Capacity to contract LEARNING OBJECTIVE 7.6 Can a child form a contract? What about someone who is intellectually disabled, mentally ill or intoxicated?

A contract will only be enforceable if both of the parties have the legal capacity to enter into contracts. As a general rule, a person will not have legal capacity to contract if they are: •• a minor, or •• a person lacking intellectual capacity. 33 Civil Law (Property) Act 2006 (ACT) s 201; Conveyancing Act 1919 (NSW) s 54A; Law of Property Act 2000 (NT) s 62; Property Law Act 1974 (Qld) s 59; Law of Property Act 1936 (SA) s 26; Mercantile Law Act 1935 (Tas) s 6; Conveyancing and Law of Property Act 1884 (Tas) s 36; Instruments Act 1958 (Vic) s 126; Property Law Act 1958 (Vic) s 53; Law Reform (Statute of Frauds) Act 1962 (WA) s 2; Property Law Act 1969 (WA) s 34. 34 Sale of Goods Act 1896 (Tas) s 9; Sale of Goods Act 1895 (WA) s 4. 35 National Credit Code 2009 (Cth) ss 8, 9; Mercantile Law Act 1962 (ACT) s 12; Law of Property Act 2000 (NT) s 58; Property Law Act 1974 (Qld) s 56; Mercantile Law Act 1935 (Tas) s 6; Instruments Act 1958 (Vic) s 126; Law Reform (Statute of Frauds) Act 1962 (WA) s 2.

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Note that for the purposes of contract law, a corporation is treated as a legal person and has the legal capacity to enter into and enforce contracts.36 This is because a corporation has ‘separate legal personality’. Note also that partnerships, trusts and unincorporated associations (e.g. sporting clubs) do not have separate legal personality and are therefore unable to enter into and enforce contracts in their own name.

Minors A minor is a person under the age of 18 years.37 As a general rule, minors can enter into contracts. However, while such contracts are enforceable by the minor, they are not enforceable against the minor. This is because of the recognition that minors should usually be protected from the consequences of their ignorance and inexperience. On the other hand, the law also recognises that people who deal with minors sometimes do so to benefit the minor, and that it is appropriate in such cases to view the contract as legally enforceable by both parties. The three types of contract that may be enforceable against minors are: 1. contracts for necessaries, 2. beneficial contracts of service, and 3. contracts where the minor acquires a continuing interest or undertakes a continuing obligation.

Contracts for necessaries Necessaries include food, clothing, accommodation, medical treatment and education. Luxuries are excluded. A minor can be compelled to pay a reasonable price for the provision of goods or services,38 if they are: •• capable of being classified as necessaries (a question of law), and •• necessary for the minor in the particular circumstances (a question of fact). Bojczuk v Gregorcewicz [1961] SASR 128

Gregorcewicz, a minor, lived and worked in Poland. She wished to emigrate to Australia. Bojczuk, a relative in Australia, loaned her the money for the trip. Gregorcewicz did not repay the money and the court decided that Bojczuk could not enforce Gregorcewicz’s promise to repay the money because the contract was for the provision of money for an international trip, something that was not capable of being classified as a necessary.

Courts have traditionally taken into account the minor’s lifestyle, social background and social status in deciding what is ‘necessary’ for them. CAUTION!

It is not the case that children cannot form contracts. Children can form, and enforce, contracts. Certain contracts with children, however, will not be enforceable against the child.

Beneficial contracts of service If the contract is one where the minor is engaged to provide a service but the contract is such that it is for the benefit of the minor, it will be enforceable against the minor. Examples of such beneficial 36 Corporations Act 2001 (Cth) s 124. 37 Age of Majority Act 1974 (ACT) s 5; Minors (Property and Contracts) Act 1970 (NSW) pt 2; Age of Majority Act 1974 (NT) s 4; Law Reform Act 1995 (Qld) s 17; Age of Majority (Reduction) Act 1971 (SA) s 3; Age of Majority Act 1973 (Tas) s 3; Age of Majority Act 1977 (Vic) s 3; Age of Majority Act 1972 (WA) s 5. 38 Sale of Goods Act 1954 (ACT) s 7; Sale of Goods Act 1923 (NSW) s 7; Sale of Goods Act 1972 (NT) s 7; Sale of Goods Act 1896 (Qld) s 5; Sale of Goods Act 1895 (SA) s 2; Sale of Goods Act 1896 (Tas) s 7; Goods Act 1958 (Vic) s 7; Sale of Goods Act 1895 (WA) s 2.

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contracts of service include apprenticeships and employment contracts where the minor derives a clear educational benefit. The court will compare the benefits to the minor with the inconvenience suffered by the minor, and if the benefits outweigh the inconveniences the contract will be enforceable against the minor. Hamilton v Lethbridge (1912) 14 CLR 236

Lethbridge, a minor, agreed to work as an articled clerk (apprentice lawyer) for five years for ­Hamilton, a Toowoomba solicitor. One of the terms of the agreement was that after completing his term Lethbridge would not practise as a lawyer within 50 kilometres of Toowoomba. After completing his term ­Lethbridge, in fact, commenced practice in Toowoomba. Lethbridge argued that the contract with Hamilton could not be enforced because it was made while he was a minor. Hamilton argued that the contract was a beneficial contract of service and therefore enforceable against Lethbridge. The court decided that the benefits to Lethbridge of receiving five years of legal training outweighed the inconvenience of being unable to practise in Toowoomba, and that the contract was therefore a beneficial contract of service and enforceable against Lethbridge.

Continuing interest or obligation If a contract is one where a minor acquires a continuing interest in property (e.g. where they acquire shares or enter into a lease), or undertakes a continuing obligation such as an obligation to repay money, then the contract is ‘voidable’ by the minor. This means that it is enforceable against the minor unless the minor decides to terminate the contract before turning 18. If the minor does not terminate the contract before turning 18 or within a reasonable time of turning 18, the contract becomes an enforceable one. If the minor does terminate the contract, they cannot recover any money paid by them prior to termination unless there has been a total failure of consideration (i.e. the minor received nothing in return for their payment). Corpe v Overton (1833) 10 Bing 252; 131 ER 901

Corpe, a minor, entered into a partnership agreement with Overton, and contributed £100 in capital. Corpe then changed his mind and withdrew from the partnership. The court decided that he was entitled to do so and that he was also entitled to recover the £100 because the business had not yet commenced and he had therefore received nothing in return for his investment.

What if Johnny enters into a contract with Gaia to sell Gaia goods on credit, and Johnny later learns that Gaia is under the age of 18? If the goods are not necessaries the contract is not enforceable against Gaia, and Johnny cannot legally compel Gaia to pay for the goods. Does Gaia, therefore, get to keep the goods without paying for them? If Gaia obtained the goods from Johnny by fraud (e.g. Gaia lied about her age) then Johnny may be able to apply to the court for the equitable remedy of restitution, which is an order of the court that seeks to remedy unjust enrichment and restore the parties to their pre-­ contractual position. The court would direct Gaia to return the goods to Johnny. However, this remedy will be available only if the goods are still in Gaia’s possession; if they are not, then Johnny has no other remedy. It is unwise to enter into credit contracts with anyone who may be a minor without first confirming their correct age.

Legislative provisions In New South Wales, legislation now provides that a contract is enforceable against a minor provided that they have the ability to understand the nature of their contractual obligations at the time they enter CHAPTER 7 Contract law: formation of the contract  281

into the contract.39 If the contract is beneficial to the minor, the court will presume that it is binding on the minor.40 In South Australia, legislation provides that any contract unenforceable against a minor at common law will remain unenforceable unless ratified by the minor in writing upon turning 18 years of age. It also provides that a minor can seek court approval to enter into a contract that they would otherwise lack capacity to enter into.41

Persons lacking intellectual capacity A person may lack intellectual capacity as a result of: •• intellectual disability, •• insanity, or •• intoxication. A person lacking intellectual capacity who purchases goods that are necessaries can be compelled to pay a reasonable price for those goods.42 If Johnny enters into a contract with Wendy (a person who is lacking intellectual capacity) for the sale to Wendy of goods that are not necessaries, then the contract will still be enforceable against Wendy unless two requirements are satisfied. 1. Wendy was not capable of understanding the nature of the agreement she was entering into. 2. Johnny knew or should have known of Wendy’s lack of capacity. If both requirements are satisfied, Wendy can terminate the contract within a reasonable time. Unless both requirements are satisfied, the contract will be enforceable against Wendy. Hart v O’Connor [1985] AC 1000

In September 1977, Hart signed an agreement to purchase a farm from O’Connor, who owned the farm as a trustee under a family trust. O’Connor was in his seventies. Hart purchased the farm and subsequently made improvements to it. In March 1981, new trustees were appointed to the family trust in place of O’Connor. The new trustees sought to have the 1977 agreement set aside and the farm returned to the estate on the basis that O’Connor was of unsound mind when he signed the agreement. It was agreed by the parties that (1) O’Connor was not of sufficient mental capacity to enable him to enter into the agreement and (2) this lack of capacity was not known to Hart and was not something that should reasonably have been known to him. The issue was therefore whether the contract was enforceable in circumstances where Hart had not known, and could not reasonably have known, that O’Connor lacked capacity. The court decided in favour of Hart. A contract made by a party of unsound mind whose affliction is not apparent and whose consequent incapacity is not known to the other party will be judged by the same standards as a contract made by a person of sound mind.

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 7.38 When will a party to a contract lack legal capacity? 7.39 Do corporations have the capacity to make contracts? Do partnerships have that capacity? 7.40 When will a contract be enforceable against a minor? 7.41 What is a contract for necessaries? 39 Minors (Property and Contracts) Act 1970 (NSW) s 18. 40 Minors (Property and Contracts) Act 1970 (NSW) s 18–19. 41 Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) ss 4 and 6. 42 Sale of Goods Act 1954 (ACT) s 7; Sale of Goods Act 1923 (NSW) s 7; Sale of Goods Act 1972 (NT) s 7; Sale of Goods Act 1896 (Qld) s 5; Sale of Goods Act 1895 (SA) s 2; Sale of Goods Act 1896 (Tas) s 7; Goods Act 1958 (Vic) s 7; Sale of Goods Act 1895 (WA) s 2.

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7.42 What is a beneficial contract of service? 7.43 If an unenforceable contract is made with a minor, can any money or property transferred to the

minor be recovered? 7.44 When will a contract be enforceable against a person lacking intellectual capacity?

7.7 Legality LEARNING OBJECTIVE 7.7 What if the contract is for an illegal purpose?

In addition to satisfying all of the requirements considered already in this chapter, a contract must be legal. A court will not enforce a contract if it is illegal under common law or in contravention of a statutory prohibition. A contract will not satisfy the requirement of legality if: •• it is for an illegal purpose, or •• it requires one or both of the parties to engage in conduct that is illegal. As a general rule, a court will assume that a contract is legal, and the onus is upon the party alleging illegality to establish that illegality.

Illegality under common law Certain contracts are categorised by the common law as illegal and unenforceable, including: •• contracts to commit a crime or a tort,43 •• contracts that promote corruption in public office,44 •• contracts intended to evade the payment of tax,45 and •• contracts that prevent or delay the administration of justice. Public Service Employees Credit Union Cooperative Ltd v Campion (1984) 56 ACTR 39

Campion’s son was caught misappropriating money from Public Service Employees Credit Union ­Cooperative Ltd (PSECUC) and promised to repay it. Campion entered into an agreement with PSECUC, according to which PSECUC would not report the matter to the police in return for Campion guaranteeing the son’s debt. The court decided that the contract between Campion and PSECUC was illegal and unenforceable because it was an agreement to avoid the prosecution of an indictable offence and therefore an agreement to prevent the administration of justice.

If illegality is established, the contract is void and unenforceable and any money already paid or property already transferred under the agreement is generally not recoverable.

Statutory illegality An agreement may be illegal because it contravenes a statutory prohibition. The actual effect of contravention of a statutory provision upon the validity and enforceability of the contract depends upon the wording of the statute itself. Some statutes penalise the conduct of the parties but do not invalidate the agreement; some statutes invalidate the agreement, but do not penalise the parties; and some statutes both penalise the parties and invalidate the agreement.

43 Beresford v Royal Insurance Co Ltd [1938] AC 586. 44 Parkinson v College of Ambulance Ltd and Harrison [1925] 2 KB 1. 45 Effie Holdings Properties Pty Ltd v 3A International Pty Ltd (1984) NSW Conv R 55–174.

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Anderson Ltd v Daniel [1924] 1 KB 138

Anderson sold a quantity of fertiliser to Daniel. The sales invoice failed to comply with legislation that required the seller to disclose the percentages of certain chemicals in the fertiliser. Daniel refused to pay, claiming that the contract was illegal and therefore unenforceable. The court decided that the wording of the legislation rendered contracts made in breach of the legislation illegal and unenforceable. Anderson was not entitled to recover the purchase price from Daniel.

Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215

Fitzgerald engaged Leonhardt to drill boreholes on Fitzgerald’s land. Leonhardt did not have a borehole drilling permit, which was a contravention of the Water Act 1992 (NT). Fitzgerald refused to pay ­Leonhardt for drilling the holes, arguing that their agreement was illegal under the Water Act and therefore unenforceable. The court decided that the Act penalised the conduct of Leonhardt in drilling without a permit, but it did not invalidate agreements made in contravention of the Act. The contract between Fitzgerald and Leonhardt was still valid and enforceable.

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 7.45 What types of contracts are illegal under common law? 7.46 What is the effect of a contract being illegal under common law? 7.47 What is the effect of statutory illegality?

In conclusion •• A contract is a legally enforceable agreement. An agreement will be legally enforceable if (1) there is an agreement between the parties; (2) the parties intended the agreement to be legally enforceable, and (3) the party seeking to enforce the agreement has provided ‘consideration’ in the form of a price or a promise. •• An agreement can be apparent from the conduct of the parties, or it can be established by showing that one party has made an offer and the other party has accepted that offer. An offer is an expression of willingness to immediately enter into a contract with the person to whom the offer is made. Most advertisements are not offers but invitations to treat; it is usually the customer who makes the offer. An acceptance is an expression of willingness to enter into a contract with the offeror on the terms of the offer. As a general rule acceptance is not effective until it is actually communicated to the offeror; one exception to this rule is the postal rule. •• When an agreement is made in a social or domestic context it is presumed to have been intended not to be legally enforceable. When an agreement is made in a commercial context it is presumed to have been intended to be legally enforceable. Both presumptions can be rebutted by evidence to the contrary. •• A promise is only enforceable if it is ‘supported by consideration’. This means that if one party has made a promise the other party can only enforce that promise if they have given something in return for the promise: it could be money, or goods, or a service, or another promise. Consideration need not be ‘adequate’ in that it does not matter if the price paid for the promise is not a fair price. But consideration must be ‘sufficient’ and examples of insufficient consideration include past consideration, vague promises, and the performance of an obligation one was already legally obliged to perform. In the absence of consideration, a promise may still be enforceable if the requirements of promissory estoppel are satisfied. 284  PART 2 Legal consequences

•• Some contracts must be in writing and signed, such as contracts for the sale of land. •• As a general rule, contracts can be formed and enforced by minors but not against minors. Contracts enforceable against minors include contracts for necessaries and beneficial contracts of service. A contract will not be enforceable against someone who was intellectually disabled, mentally ill or intoxicated if at the time they made the contract they lacked the capacity to understand what they were doing, and the other party knew or should have known that. •• A contract will not be valid and enforceable unless it is for a legal purpose and requires the parties to engage in legal conduct. Contracts may be illegal under common law or legislation. JOHNNY AND ASH

[Johnny and Ash are sitting in the bar of the Lame Duck, facing each other across one of the tables.] Johnny — So, let me get this straight. Even though I haven’t actually signed anything yet, I may already have a legally enforceable contract with Maria if our arrangement satisfies the requirements of a simple contract. And those requirements are  .  .  .  an agreement, an intention, and  .  .  .  um  .  .  .  ‘kindness’? Ash — Consideration. Let’s go through them. First of all, an agreement. It’s possible that when you told Maria you would be willing to accept $150  000 for a 50 per cent share in the business, you were making a legal offer to Maria. Johnny — But I said ‘maybe’! ‘Maybe’ I would let her have 50 per cent! Ash — Yes, but when Maria said she would think about your ‘offer’ you didn’t correct her. Johnny — Well, okay, I made an offer. But Maria didn’t accept my offer properly did she? She just sent a text. Ash — There is no reason why her acceptance couldn’t be sent by text. Maria said she would call in the morning, but you didn’t say that her acceptance had to be by telephone, or in writing, or in any particular format. So her acceptance by text was effective, and an agreement was formed as soon as you received it. Johnny — Can I argue that the second requirement wasn’t satisfied, that I didn’t really intend the agreement to be legally enforceable? Ash — It isn’t a question of what you actually intended, it’s whether an impartial observer would think you both intended the agreement to be legally enforceable. And since it was an agreement made in a commercial context — it is about the sale of an interest in a business — then it would be presumed that it was intended to be legally enforceable. Johnny — What about the fact that Maria is my friend? Ash — I don’t think it would make any difference. Given the seriousness of the consequences of the arrangement, I still think the court would say that the second requirement has been satisfied. Johnny — Well, the third requirement, ‘consideration’, hasn’t been satisfied, has it? I mean, what did Maria put into the arrangement? What did she contribute? Ash — She has contributed the same thing you have: a promise to perform. She has promised to pay you $150  000, and in return you have promised to transfer to her a 50 per cent share in your business. The arrangement is an exchange of promises: the third requirement is satisfied. Johnny — What about the fact that there isn’t anything in writing? Ash — In this case the agreement doesn’t need to be in writing. Johnny — Yes, but if there is no offer in writing there is no evidence, right? Can’t I just deny ever making the offer in the first place? It will be my word against hers. Ash — You mean lie? Have you heard of ‘perjury’? That’s what we call lying in court. Do you realise you can be sent to jail for perjury? Johnny — Okay, so that plan’s out then. What about the fact that I had been drinking at the time I made the offer? Ash — It’s actually pretty difficult to get out of a contract on the grounds of intoxication. You would have to show that you were so drunk that you were incapable of understanding the nature of the obligation you were assuming. Were you that drunk?

CHAPTER 7 Contract law: formation of the contract  285

Johnny — No, not really. [Thinks] Is there anything I can do? Ash — Well, actually, before you start panicking about the legal consequences, you might try talking to Maria and explaining to her that there has been a misunderstanding. Who knows, maybe she will understand. Johnny — Okay, I’ll call her in the morning. And if that doesn’t work? Ash — Well, there is another argument that can be made: the only terms you agreed upon were the share of the business and the price payable. You haven’t agreed upon what would be included in the sale, when it would take place, and a whole range of other important issues. So, we could argue that the contract is void due to uncertainty. On the other hand, the courts have in the past been willing to imply terms into a contract to ‘fill the gaps’, but that is another topic  .  .  .

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QUIZ 1 Which of the following is not one of the three essential requirements of a contract?

(a) The intention that the agreement be legally enforceable. (b) An agreement between two or more persons. (c) An agreement in writing and signed by the parties. (d) Consideration. 2 Which of the following is not one of the legal consequences of effective acceptance of an offer? (a) The parties have reached agreement. (b) The parties intend the agreement to be legally enforceable. (c) The offer cannot be revoked. (d) The offer cannot be rejected. 3 Even if the offeror has promised to keep an offer open until a certain deadline, the offeror can validly revoke their offer prior to that deadline if (a) the offer has already been accepted. (b) the offeror has not provided consideration for the promise to revoke the offer. (c) the offeree has not provided consideration for the promise to keep the offer open. (d) the offeror has provided consideration for the promise to reject the offer. 4 Which of the following is most likely to be an offer rather than an invitation to treat? (a) Products in a confectionary vending machine. (b) An advertisement in a newspaper. (c) A call for tenders. (d) A product for sale on a website. 5 When goods are ordered from a website, the contract is usually formed (a) when the customer sends their acceptance of the seller’s offer. (b) when the seller receives the customer’s acceptance of the seller’s offer. (c) when the seller sends their acceptance of the customer’s offer. (d) when the customer receives the seller’s acceptance of the customer’s offer. 6 When the offeror has told the offeree to communicate by sending an email to a specific email address (e.g. [email protected]) the contract is formed (a) when the offeree sends the email from their computer. (b) when the offeree’s email is received by the ‘Smallpond’ server. (c) when the offeree’s email arrives in the offeror’s inbox. (d) when the offeror reads the offeree’s email. 7 Which of the following is most likely to have been intended to be legally enforceable? (a) A promise by a charity to a volunteer worker. (b) A promise by a lawyer to his friend at a party. (c) A promise by a business on its website. (d) A promise by a teacher to her boyfriend. 8 X promises to give Y $100. Which of the following is sufficient consideration for that promise? (a) A promise by Y to bake X a cake. (b) The performance by Y of a service to X one week earlier. (c) A promise by Y to be sympathetic to the needs of X. (d) A promise by Y not to shoplift. 9 X owes Y $100. Y agrees to accept $60 in full payment of the debt. Y can nevertheless insist upon payment of the $100 in full unless (a) X paid the $60 earlier than the due date of repayment. (b) A promise by Y to waive the balance was set out in a deed. (c) X (at the request of Y) helps Y to move house, which is in addition to X paying Y the $60. (d) All of the above. CHAPTER 7 Contract law: formation of the contract  287

10 Which of the following is not an element of promissory estoppel?

(a) (b) (c) (d)

It would be unfair for the promisor to break their promise. The promisor intended the promisee to rely upon the promise. The promisee provided something in return for the promisor’s promise. The promisee has relied upon the promisor’s promise.

EXERCISES EXERCISE 7.1 — AGREEMENT

Maria makes a new offer of $180   000 to Johnny to buy a 50 per cent share of The Lame Duck restaurant. Maria tells Johnny that if she does not hear from Johnny before 5.00  pm she will assume the offer has been accepted. Johnny does not communicate acceptance before 5.00  pm. (1) If Johnny refuses to proceed with the sale, can Maria enforce the contract? (2) If Maria refuses to proceed with the sale, can Johnny enforce the contract? EXERCISE 7.2 — AGREEMENT

Johnny wishes to purchase a new MP3 player. He visits BJ Hi-Fi and checks out the range of MP3 players they have available. One particular model, the Orange ePod, is on sale: there is a small stack of ePods under a sign that states: ‘Special offer! Only $100’. Johnny says to himself, ‘Well, that’s an offer that is too good to refuse’, and takes one from the stack. He takes the ePod to the counter, hands it to the cashier, and says ‘I’ll take this’. He then remembers seeing ePods on sale for $90 at another store. He says to the cashier, ‘I’m sorry, I’ve changed my mind’. The cashier responds, ‘No, I’m sorry, I’m afraid it’s too late. You have to buy this now. You are legally committed.’ Is the cashier correct? Focus upon whether or not there is an agreement between Johnny and BJ Hi-Fi. EXERCISE 7.3 — INTENTION

Ash and Johnny arrange to spend a week together at Noosa over the Christmas break. Johnny tells Ash that he will hire a sports car and drive them to Noosa if Ash books and pays for the accommodation. Ash takes the week off work and books and pays for the accommodation. On the day of departure, however, Johnny tells Ash that he has decided to spend the week in Sydney with his friends. Is there a contract between Johnny and Ash? Focus upon whether or not they intended to create legal relations. EXERCISE 7.4 — CONSIDERATION

Johnny promises to lend his car to Ash for a week as a gift. Ash, in return and without Johnny’s knowledge, leaves an envelope containing $50 in Johnny’s wallet. Is there a contract between Ash and Johnny? Focus upon the requirement of consideration. EXERCISE 7.5 — CONSIDERATION

Jenny (one of Johnny’s waiters) owes Johnny $500. Jenny tells Johnny that because of unforeseen medical expenses she will be unable to repay the debt in full. Johnny agrees to accept $300 in full satisfaction of the debt. The next day Johnny sees Jenny buying a new ePod, and Johnny tells Jenny that since she is clearly not in that much financial difficulty, Johnny has changed his mind and wants the debt repaid in full. Can Johnny enforce the debt? Include in your answer a consideration of whether or not Jenny can rely upon the doctrine of promissory estoppel. EXERCISE 7.6 — CAPACITY

Johnny and Gary are at a party together. After having had quite a few drinks, Johnny agrees to swap his car for Gary’s motorcycle. The next day Gary shows up at Johnny’s house to complete the exchange, but Johnny says he was drunk at the time he made the agreement and has changed his mind. In what circumstances can Gary enforce the agreement with Johnny? 288  PART 2 Legal consequences

EXERCISE 7.7 — LEGALITY

Phoebe is the chair of a large charity. Phoebe tells Maria that if Maria makes a substantial donation to the charity, Phoebe will use her government connections to ensure that Maria is given an Order of Australia the following Australia Day. Maria makes the donation but the Order of Australia does not eventuate. Can Maria enforce her agreement with Phoebe?

KEY TERMS agreement  An arrangement that exists when two or more people share understanding and intention. collateral contract  A secondary contract, the consideration for which is the entry into the main contract. comfort letter  A letter from a third party assuring a lender about the borrower’s ability to repay the loan. condition precedent  A term in an agreement that provides that the agreement will not be enforceable until the happening of a certain event. condition subsequent  A term in an agreement that provides that the agreement is enforceable immediately but will cease to be enforceable upon the happening of a certain event. counter offer  A response to an offer that modifies the terms of the offer and is therefore itself a new offer. consideration  The price paid for the other party’s performance of a contract. contract  An agreement between two or more persons that is legally enforceable. corporation  An artificial legal entity separate from its owners and able to make contracts, own property and be a party to litigation in its own name. creditor  A person to whom money is owed by another. damages  Monetary compensation; a type of civil remedy. debtor  A person who owes money to another. deed  A written contract that (1) has been signed by the parties before a witness, ‘sealed’ and ‘delivered’, or (2) is expressed to be a deed. Also known as a ‘formal contract’. doctrine of promissory estoppel  The principle that a promise will be legally enforceable even if the promisee has not provided consideration for the promise, as long as certain requirements are satisfied. effective  An effective contract achieves its purpose (e.g. effecting the transfer of ownership of property from a seller to a buyer). guarantee  An arrangement whereby one person (called the guarantor) promises to repay a loan in the event that the debtor refuses or is unable to do so. invitation to treat  An invitation to another person to make an offer. lapse  Automatic termination or withdrawal. minor  A person under the age of 18 years. mortgage  A security for a loan given over real property owned by the borrower. offer  An expression of willingness to enter into an enforceable relationship with the person to whom the offer is directed. offeree  A person to whom an offer is made. offeror  A person who makes an offer to another. option  A right to buy or sell property at a certain price and before or after a certain date. party  One of the people who have made an agreement. past consideration  Consideration paid by the promisee before the promise was made. postal rule  An offeree’s acceptance is effective, and a contract is formed, as soon as the offeree posts the letter of acceptance. power of attorney  A formal written grant of express authority to an agent. CHAPTER 7 Contract law: formation of the contract  289

promisee  A person to whom a promise has been made. promisor  A person who makes a promise. rebut  To contradict or prove otherwise. restitution  An order of the court that seeks to restore the parties to their original position (e.g. by directing a person to return goods to another person). revoke  To withdraw, cancel or terminate. Also known as ‘rescind’ or ‘repudiate’. specific performance  A court order directing a party to fulfil their contractual obligations. third party  A stranger to a transaction or relationship. unilateral contract  A contract where acceptance of the offer and performance by the offeree are achieved by the same act. waive  To deliberately surrender a known claim or right.

ACKNOWLEDGEMENTS Photo: © hxdbzxy / Shutterstock.com Photo: © Ditty_about_summer / Shutterstock.com

QUIZ ANSWERS

1. c  2. b  3. c  4. a  5. d  6. b  7. c  8. a  9. d  10. c

290  PART 2 Legal consequences

CHAPTER 8

Contract law: terms of the contract LEA RNIN G OBJE CTIVE S 8.1 What is a ‘term of the contract’? 8.2 What is the effect of a term being included in a written and signed contract? How can a term be included in a contract that is not in writing and signed? 8.3 When will the common law imply terms into a contract and what terms are implied into contracts by the sale of goods legislation? 8.4 What are disclaimers and how do they protect a party from the consequences of breach? 8.5 Are there types of contractual term that a court will not enforce? 8.6 What is the difference between a term and a non-contractual representation or promise? When will a non-contractual representation or promise be enforceable?

JOHNNY AND ASH

[Ash arrives at Johnny’s restaurant one evening to visit Johnny while he is working. Expecting to find him in his usual position at the entrance to the restaurant welcoming the guests, she is surprised when Maria, who is clearly in charge, greets her instead. When she asks about Johnny she is directed to the bar where once again Johnny is sat, morosely nursing a beer. Ash sits on a stool next to Johnny and orders a glass of wine.] Ash — What, exactly, is Maria doing running your restaurant this evening? Johnny — My restaurant? My restaurant? Don’t make me laugh. Ash — What do you mean? You didn’t  .  .  . Johnny — I did. I signed a contract, and I sold half the restaurant to Maria. Ash — I thought you weren’t going to go ahead with the sale? Johnny — I wasn’t, but Maria was very convincing. Her offer was very generous, and since she bought half the business from me I’ve managed to pay off a lot of my debts. And financially things have never looked better. With Maria’s help we will be able to buy that new pizza oven, and she has some other ideas that should start to bring the money in. Ash — But you aren’t happy. Johnny — No, I’m not. It was bad enough having to sell off half of my business, but at least I thought I would still be running the restaurant itself. I had no idea that Maria was going to want to come in here and participate in the actual management of the business! Ash — You didn’t draw up any sort of partnership agreement? Johnny — No. The contract just said that in return for $150  000 Maria became joint owner of all of the business assets. But when we were negotiating she told me she wouldn’t interfere in the running of the business! That she would leave that up to me! Ash — Hmm  .  .  . Johnny — Hey! Isn’t Maria in breach of the contract? Can’t I sue her? Ash — Good question. It depends upon whether Maria’s promise not to interfere in the running of the restaurant was a term or a non-contractual promise. If it was a non-contractual promise there may not be much that you can do. But if it was a term  .  .  .  well she has breached the contract and you would be entitled to a range of legal remedies, including — possibly — the right to terminate the contract  .  .  . Johnny — Well? Is Maria in breach of the contract or not?

CHAPTER PROBLEM

As you make your way through this chapter, consider the terms of the contract between Maria and Johnny. What are the express terms? Will any additional terms by implied by a court?

Introduction Business is all about making deals or, in other words, entering into legally enforceable contracts. In the previous chapter we considered the various ways in which a contract is formed. In this chapter we focus upon the terms of the contract. The terms of the contract are the specific details of the agreement, including the details about each party’s rights and obligations. Broadly speaking, there are two types of contractual term: express terms and implied terms. Implied terms include both those implied by the courts and any relevant statutory terms (see figure 8.1). 292  PART 2 Legal consequences

Express terms

FIGURE 8.1

Terms implied by court

Statutory terms

Terms of contract

Types of terms of a contract

8.1 Express terms LEARNING OBJECTIVE 8.1 What is a ‘term of the contract’?

Express terms are those terms explicitly agreed upon by the parties. They are often – but certainly not always – the result of a process of negotiation engaged in by the parties The terms may be in writing or they may be agreed upon verbally. As explained in the previous chapter, if the contract is a significant one, particularly if it is a commercially significant one, it is a very good idea to reduce the terms to writing so that all parties are clear about the precise extent of their obligations. If a particular term has not been consciously acknowledged and agreed to by a party, it will still be an express term binding upon that party if: 1. the term is in a written contract signed by the party, or 2. the term was brought to the attention of the party by reasonable notice before the contract was formed.

In writing and signed If a term is in a written contract that has been signed by the parties, it is a binding and enforceable term of the contract, even if one of the parties has not actually read and understood the written contract. L’Estrange v F Graucob Ltd [1934] 2 KB 394

L’Estrange agreed to purchase a cigarette vending machine from Graucob. The written contract contained the following term: ‘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’. L’Estrange signed the contract without reading it. The machine did not work properly and L’Estrange sued Graucob for breach of contract, namely breach of the implied term that the machine would be reasonably fit for the purpose for which it was bought. The court decided that L’Estrange was bound by the contract, including the term that excluded the operation of the implied conditions and warranties. The fact that L’Estrange had not read the contract was irrelevant; by signing the contract he was deemed to have agreed to all of the written terms of the contract.

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165

Alphapharm Pty Ltd engaged Finemores (a company subsequently purchased by Toll (FGCT) Pty Ltd) to distribute a flu vaccine on its behalf. When the vaccine was damaged, Finemores sought to rely upon a term in the written and signed contract which provided that Alphapharm Pty Ltd was to indemnify Finemores for any losses. Alphapharm Pty Ltd had not read the contract and argued that the term was not a term of the contract because it had not been brought to their attention. The court decided that the term was a binding and enforceable term of the written contract because it had been signed by A ­ lphapharm Pty Ltd, and that Finemores was under no obligation to bring particular terms to the attention of Alphapharm Pty Ltd.

ACTIVIT Y 8.1 — REFLECT

Explain why it is important to always read a document before signing it.

CHAPTER 8 Contract law: terms of the contract  293

There are very few circumstances where a person who signs a written contract will not be bound by it. As explained in the previous chapter, a contract may be unenforceable due to a lack of formality. As will be explained in the next chapter, a contract may be unenforceable due to a lack of contractual capacity, a lack of consent (mistake, duress, undue influence or unconscionability), or a lack of legality. Other situations where a signed contract may be unenforceable include the following. •• Cooling off periods — a contract may contain a term that gives one of the parties a cooling off period, that is, a short time within which to change their mind. The term may be an express term of the signed contract or it may be implied by legislation. For example, the Franchising Code implies into all franchise contracts a term granting a new franchisee a 7-day cooling off period. If the party does decide to exercise their right to withdraw from the contract, they are usually required to give the other party a written notice to that effect. •• Non est factum — courts are generally reluctant to allow a person who has signed a written contract to avoid liability under the contract, and they will certainly not do so if the person failed to read the contract simply because they were too lazy to do so, or in a hurry. However, if (1) the person had a good reason for not reading the contract (e.g. they are blind, or illiterate, or cannot read English, or they were encouraged not to read the document as the result of a misleading representation by the other party) and (2) the mistake is about the fundamental nature of the document they were signing, the court may be willing to decide that the contract is void and unenforceable. This is known as non est factum (‘not my document’). CHECKLIST

A written contract will be void and unenforceable against a person who has signed it if all of the following requirements of non est factum are satisfied. ◼◼ The person did not read the contract because they are blind, or illiterate, or cannot read English, or they were encouraged not to read the document as the result of a misleading representation by the other party. ◼◼ They were mistaken about the fundamental nature of the document they were signing.

Petelin v Cullen (1975) 132 CLR 355

Petelin spoke little English and could not read English at all. He granted an option to Cullen granting Cullen the right to purchase land belonging to Petelin within a certain time period. The time period expired and Cullen desired an extension. He sent Petelin $50 and asked Petelin to sign a document that he described as a receipt for the $50, which Petelin signed without reading. The document, in fact, granted Cullen an extension of the option. When Cullen attempted to exercise the option, Petelin refused to sell him the land. The court decided that Petelin could rely upon non est factum and was not obliged to comply with the option extension, even though he had signed it. Petelin’s failure to read the document was understandable in the circumstances.

Australian courts have also stated that if a person is ‘tricked’ into signing a contract by being led to believe that the document is not contractual in nature, they may not be bound by the contract. Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661

Before being permitted to drive one of Le Mans’ go-karts, Iliadis was asked to sign a piece of paper headed ‘to help with our advertising’. Iliadis was led to believe that the document was for marketing purposes, and he was rushed into signing it without reading it in full. The document contained a term that excluded Le Mans from liability for injuries to their customers. Iliadis was injured while driving the go-kart and Le Mans sought to rely upon the clause. The court decided that Iliadis was not bound by the written contract because it did not appear to be contractual in nature, he was not given enough time to read it, and the term was not brought to his attention.

294  PART 2 Legal consequences

CAUTION!

As a general rule, you will be legally bound by a contract that you have signed, even if you have not read it or you have not understood the terms of the contract.

Reasonable notice Of course, most contracts are not in writing and signed. For example, the contracts that Johnny makes with the customers at his restaurant are not in writing and signed. How then can written terms be expressly included in the contract? If a statement is not contained in a written and signed contract it will only be an express term of the contract if both parties had reasonable notice of the statement. For example, if when selling his pizza oven to Jin, Johnny wants to rely upon a statement that he will not be legally responsible if the oven does not work properly after it has been relocated to Jin’s premises, he must show that he brought that statement to the attention of Jin (1) before the contract with Jin was actually formed, and (2) in a reasonable way. He may do so verbally or in writing; the latter is preferred. A statement brought to the attention of the other party after the contract has already been formed will not be a term of the contract. Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163

In May 1964, Thornton parked his car at a new automatic car park owned and operated by Shoe Lane Parking Ltd (SLP). He had not previously used the car park. At the automatic ticket machine at the entry to the car park, Thornton paid money and received a ticket in return. The ticket stated in small print in the bottom left hand corner that it was ‘issued subject to conditions  .  .  .  displayed on the premises’. There was a sign on the pillar opposite the ticket machine that set out lengthy conditions. The conditions included a disclaimer seeking to exclude SLP’s liability for any personal injury sustained by a customer on the premises, as well as any damage to the customer’s vehicle. An accident occurred that resulted in personal injury to Thornton and damage to his car. Thornton sued SLP for damages for negligence. SLP sought to rely on the disclaimer. Had the disclaimer become a term of the contract between Thornton and SLP by way of reasonable notice? The court decided that the disclaimer had not become a term of the contract between Thornton and SLP because Thornton did not know of it and SLP had not done what was reason­ ably sufficient to bring it to his notice. The contract was formed at the time Thornton paid at the ticket machine upon entering the car park, and could not later be altered by anything printed on the ticket.

CAUTION!

New terms cannot be introduced into a contract after the contract has been formed. It is therefore important to know precisely when the contract was formed.

Even if Johnny makes the statement available to Jin before the contract was formed, it must be reasonably obvious to Jin that it is a term of the contract. Causer v Browne [1952] VLR 1

Browne was a dry cleaner who carelessly damaged Causer’s dress. When Causer claimed compensation, Browne sought to rely upon a statement on the docket handed to Causer when the dress was dropped off: ‘No responsibility is accepted for loss or injury to articles through any cause whatsoever’. Causer had not seen or read the statement. Was it incorporated into the contract? The court decided that it was not. It was not reasonable to expect Causer to have thought that the docket was anything more than something he needed to produce to collect the dress, and Causer had been given no indi­ cation by Browne that the docket contained such a statement.

CHAPTER 8 Contract law: terms of the contract  295

It is common practice for terms to be set out on a ticket such as a concert ticket or an airline ticket, and such terms will be incorporated into the contract, provided of course that they are brought to the other party’s attention before the contract is formed. But what if there is not enough room on the ticket to set out all of the terms? Terms can be incorporated into a contract by referring to them and telling the other party where they can be found, rather than setting them out in full. If the other party does not actually make the effort to examine the terms, they are still incorporated into the contract. Thompson v London, Midland & Scottish Railway Co [1930] 1 KB 41

Thompson was a passenger on a train that stopped slightly past the platform. When she stepped from the carriage she fell to the ground and was injured. When she claimed compensation from London, Midland and Scottish Railway Co (LMSR), they sought to rely upon an alleged term of the contract that protected LMSR from liability in such circumstances. The term was set out in the train timetable, and the ticket issued to all passengers included a notice that stated that the ticket was issued subject to the terms and conditions in the timetable. Thompson argued that she was not aware of the term because (1) her ticket had been purchased by her daughter on her behalf and (2) she was illiterate. Nevertheless the court decided that LMSR had taken reasonable steps to bring the term to the attention of passengers and that it was therefore a term of the contract protecting LMSR from liability.

Note, however, that if the term is unusual or particularly onerous the party seeking to rely upon it is obliged to make an extra effort to bring it to the other party’s attention for it to be incorporated into the contract.1 ACTIVIT Y 8.2 — REFLECT

If you make a contract with a business over the telephone, how can the terms be incorporated into the contract?

Note that some contracts explicitly permit one of the parties to modify or even replace the terms of a written contract after the contract has been formed. For example, loan contracts issued by banks often permit the bank to modify the terms, including the interest rate payable, after the contract has been signed by the parties. A term permitting one of the parties to modify the terms of the contract may be an ‘unfair term’ within the meaning of the Australian Consumer Law (ACL). LAW IN CONTEXT: LAW AND TECHNOLOGY

‘Clickwrap’ and ‘browsewrap’ When a person purchases a product or enters into an arrangement via a website, they are often asked to indicate that they have read and agreed to a set of terms by clicking on an ‘I accept’ or ‘I agree’ icon. This is known as a ‘clickwrap’ agreement. The person is effectively indicating that they have been given notice of the terms before entering into the online contract and the terms are, therefore, incorporated into the online contract by reasonable notice. It is generally accepted that clickwrap agreements are legally enforceable as long as the person is obliged to take some action indicating their assent to the terms before being permitted to proceed with the purchase or entry into the arrangement. The more action the person must take to proceed (e.g. having to scroll through the terms or even type their assent), the more likely it is that the terms are effectively incorporated into the online contract and enforceable against the person. The term ‘clickwrap’ is derived from the term ‘shrinkwrap’. A shrinkwrap contract is one that exists between a seller and a buyer where the product is sealed in shrinkwrap. A typical example of such a product is software. When the buyer opens the package after purchase, in addition to the actual product the box contains a document with a set of terms including the licence agreement for the use of the­

1 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433.

296  PART 2 Legal consequences

software. A notice on the package typically provides that by breaking the seal on the shrinkwrap the buyer is assenting to the terms set out on the document. The problem of course is that by the time the buyer is able to read the terms, the contract has already been formed; it was formed when the buyer purchased the product. How, then, can the terms be enforced against the buyer? One view is that there are, in fact, two contracts: the contract for the purchase of the product, and a second contract relating to the use of the product that does not commence until the buyer opens the package and accepts the terms. While clickwrap and shrinkwrap contracts are generally recognised as legally enforceable, the enforceability of ‘browsewrap’ agreements is less certain. This is where a website contains a link to a set of terms that the person is asked to — but not obliged to — read. The better view seems to be that it cannot be assumed that the person has seen the terms, and that they are not effectively incorporated into the online contract.

ACTIVIT Y 8.3 — APPLY

Locate the terms of a written contract (either on paper or in electronic form) that you have recently entered into. How were the terms effectively incorporated into the contract? What types of matters do the terms address?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 8.1 What is the difference between an ‘express term’ and an ‘implied term’? 8.2 How does a statement become an express term of a contract? 8.3 In what circumstances will a person who has signed a written contract not be bound by the terms of the contract? 8.4 How is a term incorporated into a contract by reasonable notice? 8.5 What are ‘clickwrap’, ‘shrinkwrap’ and ‘browsewrap’ contracts?

CHAPTER 8 Contract law: terms of the contract  297

8.2 Terms implied by the court LEARNING OBJECTIVE 8.2 What is the effect of a term being included in a written and signed contract? How can a term be included in a contract that is not in writing and signed?

Implied terms are terms that were not necessarily discussed or negotiated by the parties, but are nevertheless included in the contract as a result of the operation of certain legal rules. In this section we consider the terms that will be implied into a contract by the court. In the next section we consider the terms implied by legislation. As a general rule, if the parties fail to expressly include enough clear details in their agreement, it will be void for uncertainty, and unenforceable. G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251

Ouston arranged to purchase a truck from Scammell on hire purchase. The written agreement stated that the arrangement was ‘on the understanding that the balance of purchase price can be had on hire-purchase terms over a period of two years’. The court decided that the phrase ‘on hire-purchase terms’ was so vague that it conveyed no clear meaning and the contract was void for uncertainty, and unenforceable.

On the other hand, courts generally prefer to enforce rather than void contracts, and are frequently willing to imply a term or terms into a settled contract to ‘fill the gaps’, as long as it is obvious that the parties would have included the term themselves if they had only thought about it. The court will be willing to imply a term into a contract if it is reasonable and fair, necessary to make the contract viable, so obvious that it ‘goes without saying’, able to be clearly expressed, and consistent with the express terms.2 The court applies the ‘officious bystander test’: if a bystander had been present during the negotiations between the parties, and had asked the parties whether such a term was a term of the contract, the parties would have replied ‘yes, of course’. Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337

Codelfa was engaged by the NSW State Rail Authority (SRA) to build two tunnels in Sydney. When agreeing upon a price, Codelfa had believed that it would be possible to work on the tunnel 24 hours a day, but shortly after commencing work local residents obtained an injunction that imposed limits upon the hours Codelfa could undertake construction work. The delays imposed by the injunction meant that Codelfa’s costs would be substantially increased. Codelfa sought to renegotiate the price payable by the SRA. Codelfa argued that it was an implied term of the contract that if Codelfa’s work hours were restricted the price payable by the SRA would increase. The court applied the ‘officious bystander’ test and refused to imply such a term into the contract. At the time of negotiating, both parties believed that Codelfa’s work hours would be unrestricted so neither would have included such a term. Further, it was impossible for the court to determine the details of such a term even if it was implied into the contract. For instance, what would have been the amount of the extra payment? (The court ultimately decided that the contract was frustrated; this is explained in the next chapter.)

CHECKLIST

The court will imply a particular term into a contract if all of the following requirements are satisfied. ◼◼ The term is reasonable and fair. ◼◼ The term is necessary to make the contract viable. ◼◼ The term is so obvious that it ‘goes without saying’. ◼◼ The term can be clearly expressed. ◼◼ The term is consistent with the express terms.

2 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.

298  PART 2 Legal consequences

Terms may be implied into a contract as a result of custom or trade usage: the term is implied because it is the ‘way things are usually done’ in a particular region, trade, industry or profession.3 A term can also be implied into a contract as a result of the continuing relationship between the parties. If the parties have entered into similar contracts in the past, and those previous contracts contained a particular term, then that term is implied into the present contract. Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379

Robertson, a barrister, wished to catch a ferry from Sydney to Balmain. Turnstiles requiring the payment of one penny were located at the Sydney wharf: passengers paid upon entering the wharf when travelling from Sydney to Balmain, and after the ferry journey to exit the wharf when travelling from Balmain to Sydney. After paying the penny to enter the wharf, Robertson realised he had missed the ferry to Balmain and attempted to leave. He was obliged to pay another penny to exit the wharf. When he explained to the attendant that he had not in fact caught the ferry, the attendant directed his attention to a nearby sign: ‘A fare of one penny must be paid on entering or leaving the wharf. No exception will be made to this rule whether the passenger has travelled by ferry or not.’ The sign could be seen by passengers exiting the wharf but not by those entering the wharf. Robertson refused to pay the second penny and the attendant refused to let him leave the wharf. After a struggle, Robertson eventually left without paying and he commenced proceedings against Balmain New Ferry Co in the torts of assault and false imprisonment. The court decided that the sign was not reasonable notice since it could not be seen by a passenger before the contract was formed. However, the court also decided that because Robertson had caught the ferry many times in the past he was deemed to be aware of the term and that it was therefore implied into the contract.

There are certain terms that are implied into all contracts, known as universal implied terms. One such universal implied term is a promise by both parties to the contract that they will cooperate in the performance of the agreement. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537

Perri and Coolangatta Investments Pty Ltd (CI) agreed that CI would sell certain real estate to Perri. The agreement was made conditional upon Perri first selling certain property of his own. The agreement did not specify a time limit within which Perri had to sell his property. After four months Perri had still failed to sell his property and CI terminated the agreement. The court decided that CI was entitled to do so. Perri had an obligation to take all reasonable steps to satisfy the condition within a reasonable time and, in the circumstances, a reasonable time had passed. The court decided that CI was also entitled to terminate the contract because Perri had breached the implied term that both parties would cooperate in the performance of the agreement.

Another universal implied term that some Australian courts have recognised in recent years is a promise by both parties that they will act in good faith — that is, they will exercise their contractual rights honestly and reasonably rather than capriciously or for extraneous purposes.4 Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558

Hungry Jack’s Pty Ltd was the Australian franchisee of Burger King Corporation. Burger King wished to terminate the franchise contract. Burger King refused to approve a number of new sub-franchise outlets requested by Hungry Jack’s, and then terminated the contract on the grounds that Hungry Jack’s had failed to open the required number of new sub-franchise outlets. The court decided that Burger King had breached the implied duty of good faith. Burger King was obliged to exercise its contract powers — including the power to approve new sub-franchise outlets — honestly and reasonably rather than for an extraneous purpose, in this case to force Hungry Jack’s into breach.

3 Hutton v Warren (1836) 1 M & W 466; 150 ER 517. 4 In New South Wales the requirement that the parties act in good faith is a statutory requirement under the Contracts Review Act 1980 (NSW).

CHAPTER 8 Contract law: terms of the contract  299

ACTIVIT Y 8.4 — APPLY

If Johnny agrees to sell his pizza oven to Jin for $10  000, but nothing else is expressly agreed upon, what kinds of terms are likely to be implied into the contract? Is the contract void for uncertainty?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 8.6 When will a contract be void for uncertainty? 8.7 When will a term be implied into a contract by case law? 8.8 What are ‘universal implied terms’?

8.3 Statutory terms LEARNING OBJECTIVE 8.3 When will the common law imply terms into a contract and what terms are implied into contracts by the sale of goods legislation?

The most common type of contract is a contract for the sale of goods. Sale of goods legislation in each jurisdiction implies important terms into such contracts (see table 8.1). TABLE 8.1

Sale of goods legislation

Jurisdiction

Legislation

Australian Capital Territory

Sale of Goods Act 1954 (ACT)

New South Wales

Sale of Goods Act 1923 (NSW)

Northern Territory

Sale of Goods Act 1972 (NT)

Queensland

Sale of Goods Act 1896 (Qld)

South Australia

Sale of Goods Act 1895 (SA)

Tasmania

Sale of Goods Act 1896 (Tas)

Victoria

Goods Act 1958 (Vic)

Western Australia

Sale of Goods Act 1895 (WA)

The sale of goods legislation implies into contracts for the sale of goods statutory terms that protect the buyer (see figure 8.2). Statutory terms protecting buyer

Title

FIGURE 8.2

Description

Quality

Fitness

Sample

Statutory terms protecting buyer

The sale of goods legislation also implies into contracts statutory terms relating to ownership, payment, delivery, and acceptance. 300  PART 2 Legal consequences

Contracts for the sale of goods As a general rule, the sale of goods legislation applies only to contracts for the sale of goods. A contract for the sale of goods is a contract where a seller transfers, or agrees to transfer, the ownership of goods to a buyer in return for a monetary price.5 The key elements of this definition are as follows. •• Goods — goods are tangible items of personal property. This means that the following are not goods: –– Land and things attached to land such as buildings and fixtures. –– Intangible items of personal property such as intellectual property rights, shares and debts. –– Services — Where the contract involves the provision of both goods and services, it will only be a contract for the sale of goods if the ‘substance’ (the main purpose or focus) of the contract is the transfer of ownership of the goods. If the substance of the contract is the skill and expertise of one of the parties, it is a contract for services. Robinson v Graves [1935] 1 KB 579

Robinson agreed to paint a portrait of Graves in return for payment. Graves refused to pay, arguing that the contract failed to comply with certain requirements in the sale of goods legislation. The court decided that the contract was not a contract for the sale of goods. Although one of the outcomes of the contract was the transfer of ownership of a painting from Robinson to Graves, the substance of the contract was Robinson’s skill and expertise as a painter.

ACTIVIT Y 8.5 — APPLY

Which of the following four scenarios are contracts for the sale of goods? 1. Taking your car to a mechanic for an oil change and new spark plugs. 2. Having a new computer system, including special software and staff training, installed in your office building. 3. Ordering a pizza made with toppings you have selected yourself. 4. Having your hair coloured by a hairdresser.

•• Ownership — if ownership of the goods is not transferred, it is not a contract for the sale of goods. This means a contract where one person rents or hires goods from another is not a contract for the sale of goods. •• Monetary price — if the goods are transferred for free or in return for other goods (i.e. a barter or exchange), it is not a sale of goods. If part of the purchase price is in the form of a trade-in, but the balance is payable as money, it is still a sale of goods. The definition includes both the sale of goods, where money is exchanged for goods immediately upon formation of the contract, and an agreement to sell, where ownership is to be transferred at a later date.

Terms that protect the buyer The sale of goods legislation implies into contracts for the sale of goods statutory terms that protect the buyer. 5 Sale of Goods Act 1954 (ACT) s 6; Sale of Goods Act 1923 (NSW) s 6; Sale of Goods Act 1972 (NT) s 6; Sale of Goods Act 1896 (Qld) s 4; Sale of Goods Act 1895 (SA) s 1; Sale of Goods Act 1896 (Tas) s 6; Goods Act 1958 (Vic) s 6; Sale of Goods Act 1895 (WA) s 1.

CHAPTER 8 Contract law: terms of the contract  301

Title The sale of goods legislation implies into contracts for the sale of goods three statutory terms regarding the seller’s title to (ownership of) the goods.6 For example, according to the Sale of Goods Act 1923 (NSW) s 17: In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is: (1) an implied condition on the part of the seller that in the case of a sale the seller has a right to sell the goods, and that in the case of an agreement to sell the seller will have a right to sell the goods at the time when the property is to pass, (2) an implied warranty that the buyer shall have and enjoy quiet possession of the goods, (3) an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.

In other words, in every contract for the sale of goods there is an implied promise by the seller that the seller has the right to sell those goods to the buyer. This normally means that the seller is in fact the owner of the goods, or they will be by the time title is to be transferred to the buyer. If at the time of delivery the seller is not the owner of the goods (e.g. because the goods were in fact stolen from the true owner), the seller will have breached the statutory term regarding title.7 Note that this will be the case even if the seller was not aware that they were not the true owner of the goods. ACTIVIT Y 8.6 — REFLECT

In what circumstances will a seller who is not the owner of goods still be entitled to sell the goods?

There is also an implied warranty that the buyer will enjoy quiet possession of the goods. This means that the buyer will be left alone to use and enjoy the goods, and if this quiet possession is interfered with (e.g. by the seller trying to take the goods back or by a third party repossessing the goods), then the seller will have breached the statutory term. Finally, there is an implied warranty that the goods will be free from encumbrances not made known to the buyer at the time of sale. If after the sale the buyer learns that goods are subject to some form of encumbrance, such as a charge or lien, the seller will have breached the statutory term.

Description The sale of goods legislation implies into contracts for the sale of goods a statutory term regarding correspondence with description.8 For example, according to the Sale of Goods Act 1923 (NSW) s 18: Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description  .  .  .

This means that in every contract for the sale of goods by description, there is an implied promise by the seller that the goods will match their description. The description may be in a variety of possible locations, including: •• in an advertisement, •• on a website, 6 Sale of Goods Act 1954 (ACT) s 17; Sale of Goods Act 1923 (NSW) s 17; Sale of Goods Act 1972 (NT) s 17; Sale of Goods Act 1896 (Qld) s 15; Sale of Goods Act 1895 (SA) s 12; Sale of Goods Act 1896 (Tas) s 17; Goods Act 1958 (Vic) s 17; Sale of Goods Act 1895 (WA) s 12. 7 Rowland v Divall [1923] 2 KB 500. 8 Sale of Goods Act 1954 (ACT) s 18; Sale of Goods Act 1923 (NSW) s 18; Sale of Goods Act 1972 (NT) s 18; Sale of Goods Act 1896 (Qld) s 16; Sale of Goods Act 1895 (SA) s 13; Sale of Goods Act 1896 (Tas) s 18; Goods Act 1958 (Vic) s 18; Sale of Goods Act 1895 (WA) s 13.

302  PART 2 Legal consequences

•• on the packaging, or •• on a sign. The description may be in writing, may be made verbally by a salesperson, or may even be an image on the packaging or in the advertising. If the actual goods do not correspond with the description of the goods, the seller will have breached the statutory term regarding description. Reynolds v Turner (1989) ASC 55–922

A used car for sale in a car yard had the words ‘low kilometres’ written across the windscreen and a low odometer reading. The purchaser later discovered that the real odometer reading was actually much higher. The court decided that the dealer had breached the statutory term regarding description.

Quality A statutory term requiring goods to be of merchantable quality is implied into certain contracts for the sale of goods by the sale of goods legislation.9 For example, according to the Sale of Goods Act 1923 (NSW) s 19(2): Where goods are bought by description from a seller who deals in goods of that description (whether the seller be the manufacturer or not), there is an implied condition that the goods shall be of merchantable quality. Provided that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed.

In other words, in many contracts for the sale of goods, there is an implied promise by the seller that the goods will be of merchantable quality. If the goods are not of merchantable quality then the seller will be in breach of the statutory term. The term is not implied in relation to defects that the buyer should have noticed when they inspected the goods. What is ‘merchantable quality’? The sale of goods legislation does not expressly define ‘merchantable quality’, but it is normally understood to mean the quality one would reasonably expect from the goods in the circumstances, taking into account their price, their description, and so on. In practice, goods are not of merchantable quality when, if they had been described accurately including any defects, they could not have been sold at that price. CHECKLIST

A seller will have breached the statutory implied term regarding merchantable quality if all of the ­following requirements are satisfied. ◼◼ The contract is a contract for the sale of goods. ◼◼ The buyer has relied upon a description of the goods. ◼◼ The seller normally sells goods of that description. ◼◼ The goods are not of merchantable quality. ◼◼ The buyer has not examined the goods or, if they have examined the goods, the defect is not one that would have been revealed by the examination.

ACTIVIT Y 8.7 — REFLECT

What is the relationship between merchantable quality and the price paid for the goods?

9 Sale of Goods Act 1954 (ACT) s 19; Sale of Goods Act 1923 (NSW) s 19; Sale of Goods Act 1972 (NT) s 19; Sale of Goods Act 1896 (Qld) s 17; Sale of Goods Act 1895 (SA) s 14; Sale of Goods Act 1896 (Tas) s 19; Goods Act 1958 (Vic) s 19; Sale of Goods Act 1895 (WA) s 14.

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David Jones Ltd v Willis (1934) 52 CLR 110

Willis purchased a pair of shoes from David Jones Ltd. She said she wanted comfortable walking shoes. After wearing them only three times the heel of one of the shoes broke off and Willis fell down some steps and broke her leg. Willis sued for breach of the implied condition that goods will be of merchantable quality. The court decided that such a term was implied into the contract and that the implied term had been breached. ‘The buyer has a right to expect, not a perfect article, but an article which would be saleable in the market under that description. Goods are not of “merchantable quality” if, in the form in which they are tendered, they are of no use for any purpose for which such goods are normally used, and hence are not saleable under that description.’

Fitness A statutory term requiring goods to be fit for their purpose is also implied into certain contracts for the sale of goods by the sale of goods legislation.10 For example, according to the Sale of Goods Act 1923 (NSW) s 19(1): Where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skill or judgment, and the goods are of a description which it is in the course of the seller’s business to supply (whether the seller be the manufacturer or not), there is an implied condition that the goods shall be reasonably fit for such purpose. Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose.

This means that, in a contract for the sale of goods, there is an implied promise by the seller that the goods will be fit for their purpose, provided three requirements are satisfied. 1. At the time the contract was formed, the buyer, expressly or by implication, made the intended purpose known to the seller. If the intended purpose is obvious, because the goods have only one p­ urpose, the buyer does not have to make the intended purpose explicit.11 2. The buyer relied upon the seller’s skill and judgement. The requirement will usually be presumed to be satisfied if the buyer is a consumer. If the buyer is another business that knows as much or more about the product than the seller, this requirement will not be satisfied.12 3. The seller normally deals in goods of this description. If these three requirements are satisfied the statutory term regarding fitness for purpose is implied into the contract. And if the goods are not in fact fit for the stated purpose then the seller will be in breach of the statutory term. If the goods have several purposes, they must be reasonably fit for their normal purpose.13 CHECKLIST

A seller will have breached the statutory implied term regarding fitness for purpose if all of the following requirements are satisfied. ◼◼ The contract is a contract for the sale of goods. ◼◼ The seller normally sells goods of that description.

10 Sale of Goods Act 1954 (ACT) s 19; Sale of Goods Act 1923 (NSW) s 19; Sale of Goods Act 1972 (NT) s 19; Sale of Goods Act 1896 (Qld) s 17; Sale of Goods Act 1895 (SA) s 14; Sale of Goods Act 1896 (Tas) s 19; Goods Act 1958 (Vic) s 19; Sale of Goods Act 1895 (WA) s 14. 11 Preist v Last [1903] 2 KB 148. 12 Gibbett v Forwood Products Pty Ltd [2001] ASAL 55–060. 13 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31.

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◼◼ The buyer has either expressly or by implication told the seller the purpose for which they were buying the goods. ◼◼ The buyer has relied on the seller’s skill and judgement. ◼◼ The goods are not fit for the stated purpose. ◼◼ The buyer has not requested the particular goods by their patent or trade name.

Note that the statutory terms regarding fitness for purpose and merchantable quality are only implied into the contract if the seller normally deals in goods of that description. If the goods are purchased from a seller who does not normally sell those types of goods (e.g. at a private sale), then the statutory terms are not implied and the guiding principle is caveat emptor: ‘let the buyer beware’. The statutory terms regarding title and description are implied into the contract regardless of whether or not the seller normally sells those types of goods. Grant v Australian Knitting Mills Ltd [1936] AC 85

Grant purchased a set of woollen underwear. Trace chemicals in the underwear left over from the manufacturing process caused Grant to develop severe dermatitis. He sought compensation from the retailer, who claimed that they were not responsible for the problem. The court decided that since (1) the purpose of the goods was obvious, (2) Grant had relied on the retailer’s skill and judgement and (3) the retailer normally dealt in goods of this description, the condition that the goods be fit for their purpose was implied into the contract. This condition had been breached because the underwear was clearly not fit for its purpose.

Sample The sale of goods legislation implies into contracts for the sale of goods statutory terms regarding sale by sample.14 A sale by sample is where the buyer makes a decision to purchase the goods not after an inspection of the goods in total but after an inspection of a sample of the goods. For example, according to Sale of Goods Act 1923 (NSW) s 20(2): In the case of a contract for sale by sample: (a) there is an implied condition that the bulk shall correspond with the sample in quality, (b) there is an implied condition that the buyer shall have a reasonable opportunity of comparing the bulk with the sample, (c) there is an implied condition that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample.

This means that in every contract for the sale of goods by sample there are implied promises by the seller that: •• the bulk of the goods will correspond with the sample, •• the buyer will not be deemed to have accepted the goods until they have had an opportunity to compare the bulk with the sample, and •• the bulk will not have any defects that are not apparent on an examination of the sample. CAUTION!

The statutory terms protecting the buyer implied by the sale of goods legislation can be expressly overridden by the other terms of the contract; recall the facts of L’Estrange v F Graucob Ltd [1934] 2 KB 394.

14 Sale of Goods Act 1954 (ACT) s 20; Sale of Goods Act 1923 (NSW) s 20; Sale of Goods Act 1972 (NT) s 20; Sale of Goods Act 1896 (Qld) s 18; Sale of Goods Act 1895 (SA) s 15; Sale of Goods Act 1896 (Tas) s 20; Goods Act 1958 (Vic) s 20; Sale of Goods Act 1895 (WA) s 15.

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The Australian Consumer Law implies into contracts for the sale of goods or the supply of services to consumers an additional set of guarantees intended to protect the consumer. Unlike the terms implied by the sale of goods legislation, these implied guarantees cannot be overridden or excluded.

Ownership, delivery, payment and acceptance The following statutory terms implied by the sale of goods legislation are not about protecting the buyer but are about ‘filling the gaps’ in contracts.

Ownership Ownership usually passes from the seller to the buyer at the time agreed upon by the parties. However, in the absence of express agreement about this time, the passing of ownership is determined in accordance with the following five rules.15 1. If the contract is for the sale of specific goods (goods that were identified at the time the contract was formed, e.g. ‘this motor vehicle’) that are ready to be delivered to the buyer, then ownership passes at the time the contract is formed, regardless of when payment or delivery takes place. For example, if Johnny sells his pizza oven to Jin, Jin becomes the owner as soon as the contract is made, even if Jin has not yet paid for the oven. This is the general rule to which the other four rules are exceptions. (This is why it is important for a buyer to take out insurance over valuable goods as soon as they have agreed to purchase them, even if they have not yet collected or paid for them.) Tarling v Baxter (1827) 6 B & C 360; 108 ER 484

Baxter agreed to purchase a haystack from Tarling. The haystack was left on Tarling’s brother’s land until Baxter could collect it. Before he could do so, it was destroyed by fire. Tarling nevertheless insisted upon payment. The court decided that ownership had passed to Baxter at the time the contract was made; therefore, Baxter was the owner when the haystack was destroyed, even though he had not yet collected it. As he was the owner, he suffered the loss. He still had to pay for the haystack.

2. If the contract is for the sale of specific goods that are not yet ready for delivery to the buyer, ownership does not pass to the buyer until the seller has done whatever needs to be done to put them into a deliverable state and the buyer has been notified accordingly. For example, if Johnny sells the oven to Jin, but before it can be handed over Johnny first has to modify the oven in some way, Jin does not become the owner when the contract is formed; rather, she becomes the owner when Johnny has modified the oven and told Jin that he has done so. 3. If the contract is for the sale of specific goods that are ready to be delivered to the buyer but first need to be weighed or measured to calculate the price, the buyer does not become the owner when the contract is formed; they become the owner when the price is calculated and the buyer has been notified accordingly. For example, if Johnny agrees to sell pizza flour to Jin for $10 per kilogram and Jin agrees to buy two bags of flour, Jin does not become the owner until the two bags are weighed to calculate the price and Jin is told what this is. 4. If the contract is for the sale of goods to the buyer ‘on approval’ or ‘on sale or return’, the buyer becomes the owner not when the contract is formed, but when they expressly approve the goods, or when they do something with the goods that indicates that they have approved them (such as lending them to another), or they retain the goods for longer than a reasonable period without returning them.

15 Sale of Goods Act 1954 (ACT) ss 21–5, 32; Sale of Goods Act 1923 (NSW) ss 21–5, 31; Sale of Goods Act 1972 (NT) ss 21–5, 31; Sale of Goods Act 1896 (Qld) ss 19–23, 30; Sale of Goods Act 1895 (SA) ss 16–20, 28; Sale of Goods Act 1896 (Tas) ss 21–5, 33; Goods Act 1958 (Vic) ss 21–5, 35; Sale of Goods Act 1895 (WA) ss 16–20, 28.

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5. If the contract is for the sale of unascertained goods (goods that were not specifically identified at the time the contract was formed, e.g. ‘a motor vehicle’) or future goods (goods that were not yet in existence at the time the contract was formed), the buyer does not become the owner until specific goods are selected and agreed upon by both parties. For example, if Jin orders from Johnny 20 vegan pizzas, she does not become the owner until the pizzas are made and appropriated to the contract, and Jin approves the selection. Many contracts for the sale of goods now contain what are called retention of title clauses or ‘Romalpa’ clauses.16 These clauses override the above statutory rules regarding transfer of ownership by clearly stating that ownership of the goods does not pass until the buyer has paid for the goods in full, regardless of when the contract was made and regardless of delivery of the goods to the buyer. ACTIVIT Y 8.8 — REFLECT

How can each of the above rules about the passing ownership be justified?

It is important to know exactly when ownership passes and the buyer becomes the owner of the goods for two reasons. First, risk passes with ownership. As a general rule, if the goods are lost or damaged, the loss is borne by whoever owns the goods at the time.17 Note, however, that: •• if one of the parties has caused delivery to be delayed, the goods are at the risk of that party, and •• if the goods belong to one party but are in the possession of the other, the party in possession must take reasonable care of them, since this will be a bailment. Second, one cannot pass on to others what one does not have. This is known as the nemo dat quod non habet rule. If the buyer sells the goods to another person, they cannot pass on ownership unless they have already become the owner of the goods. There are some important exceptions to the nemo dat rule.18 A seller who is not the owner of the goods can nevertheless pass on title to a buyer if: •• the seller is the authorised agent of the owner of the goods (note that the authority to sell can be actual or apparent), •• the goods are sold in an open and public market to a buyer who has no notice of the seller’s lack of ownership (in South Australia, Tasmania, Victoria and Western Australia only), •• the seller has already sold the goods to someone else but retained possession and has now sold the goods again to a buyer who has no notice of the seller’s lack of ownership, •• the seller has bought the goods from someone else, acquiring possession of the goods without acquiring full ownership, and has now sold the goods to a buyer who has no notice of the seller’s lack of full ownership, or •• the seller is exercising a statutory power of sale, for example, a mortgagee.

Delivery ‘Delivery’ here refers to the act of handing possession of the goods to the buyer. It does not necessarily mean transporting the goods to the buyer’s place of business or residence. It includes symbolic delivery, such as handing over the keys to a vehicle or title documents to equipment.

16 Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. 17 Sale of Goods Act 1954 (ACT) ss 11–12; Sale of Goods Act 1923 (NSW) ss 11–12; Sale of Goods Act 1972 (NT) ss 11–12; Sale of Goods Act 1896 (Qld) ss 9–10; Sale of Goods Act 1895 (SA) ss 6–7; Sale of Goods Act 1896 (Tas) ss 11–12; Goods Act 1958 (Vic) ss 11–12; Sale of Goods Act 1895 (WA) ss 6–7. 18 Sale of Goods Act 1954 (ACT) ss 26, 29; Sale of Goods Act 1923 (NSW) ss 26, 28; Sale of Goods Act 1972 (NT) ss 26, 28; Sale of Goods Act 1896 (Qld) ss 24, 27; Sale of Goods Act 1895 (SA) ss 21–2, 25; Sale of Goods Act 1896 (Tas) ss 27, 30; Goods Act 1958 (Vic) ss 27–8, 30–1; Sale of Goods Act 1895 (WA) ss 21–2, 25.

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Where the parties have not themselves agreed upon the terms for delivery of the goods, the sale of goods legislation implies into contracts for the sale of goods a number of important terms relating to delivery.19 Unless otherwise agreed: •• the seller bears the expense of putting the goods into a deliverable state, •• the place for delivery is the seller’s place of business, if the seller has one, or the seller’s residence, •• if the contract is for the sale of specific goods, which to the knowledge of the parties when the contract is made are in some other place, then that place is the place of delivery, •• when the seller is obliged to send the goods to the buyer, but no time for sending them is fixed, the seller is obliged to send them within a reasonable time, •• the seller must deliver the exact quantity of goods ordered by the buyer, and •• the buyer is not obliged to accept delivery in instalments.

Payment Unless otherwise agreed, payment by the buyer and delivery by the seller are to occur at the same time. If no price has been agreed upon, the buyer must pay a reasonable price for the goods.20

Acceptance The term ‘acceptance’ here refers to acceptance of the goods by the buyer, not acceptance of the offer as described in the previous chapter. Once the buyer has accepted the goods, the buyer cannot then terminate the contract for breach by the seller of any of the express or implied terms of the contract (although the buyer may still be entitled to damages). In other words, the buyer cannot refuse to take delivery, or if they have already taken delivery they cannot return the goods and seek a refund, if they have already accepted the goods. 19 Sale of Goods Act 1954 (ACT) ss 33–7; Sale of Goods Act 1923 (NSW) ss 32–6; Sale of Goods Act 1972 (NT) ss 32–6; Sale of Goods Act 1896 (Qld) ss 31–5; Sale of Goods Act 1895 (SA) ss 29–33; Sale of Goods Act 1896 (Tas) ss 34–8; Goods Act 1958 (Vic) ss 36–40; Sale of Goods Act 1895 (WA) ss 29–33. 20 Sale of Goods Act 1954 (ACT) s 32; Sale of Goods Act 1923 (NSW) s 31; Sale of Goods Act 1972 (NT) s 31; Sale of Goods Act 1896 (Qld) s 30; Sale of Goods Act 1895 (SA) s 28; Sale of Goods Act 1896 (Tas) s 33; Goods Act 1958 (Vic) s 35; Sale of Goods Act 1895 (WA) s 28.

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CAUTION!

A buyer who has taken goods home from the shop or to whom goods have already been delivered will not necessarily be considered to have legally accepted the goods.

The sale of goods legislation implies into contracts for the sale of goods a number of important terms relating to acceptance.21 •• When goods are delivered that the buyer has not previously examined, the buyer is not deemed to have accepted the goods until the buyer has had a reasonable opportunity to examine them in order to determine whether they are in conformity with the contract. •• If the goods contain a hidden defect that only becomes apparent after some time or use, and the defect was present at the time of delivery, the seller will be in breach of the contract and, if the defect is a serious one, the buyer will still be entitled to terminate the contract and obtain a refund.22 •• The buyer will be deemed to have accepted the goods if: 1. the buyer intimates to the seller that the buyer has accepted them, 2. the goods have been delivered to the buyer, and the buyer does any act in relation to them that is inconsistent with the ownership of the seller (e.g. selling them to someone else), or 3. after the lapse of a reasonable time, the buyer retains the goods without intimating to the seller that the buyer has rejected them. It is the third form of acceptance that applies to most buyers: they are deemed to have accepted the goods after a reasonable period has lapsed, and if they delay for too long before attempting to return goods for a refund, they will lose their entitlement to terminate the contract.

Formalities The sale of goods legislation in most States and Territories does not require contracts for the sale of goods to comply with any particular formalities. However, the sale of goods legislation in Tasmania and Western Australia states that a contract for the sale of goods for $20 or more is not enforceable unless: •• the contract is in writing, •• the buyer has already paid a deposit, or •• the buyer has already received and accepted the goods.23 REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions.  8.9 What terms are implied by legislation into contracts for the sale of goods? 8.10 What is a contract for the sale of goods? 8.11 What is the implied term regarding title, when will it be implied and when will it be breached? 8.12 What is the implied term regarding description, when will it be implied and when will it be breached? 8.13 What is the implied term regarding fitness for purpose, when will it be implied and when will it be breached? 8.14 What is the implied term regarding merchantable quality, when will it be implied and when will it be breached? 8.15 What is the implied term regarding sale by sample, when will it be implied and when will it be breached? 21 Sale of Goods Act 1954 (ACT) ss 38–40; Sale of Goods Act 1923 (NSW) ss 37–9; Sale of Goods Act 1972 (NT) ss 37–9; Sale of Goods Act 1896 (Qld) ss 36–8; Sale of Goods Act 1895 (SA) ss 34–6; Sale of Goods Act 1896 (Tas) ss 39–41; Goods Act 1958 (Vic) ss 41–3; Sale of Goods Act 1895 (WA) ss 34–6. 22 Finch Motors Ltd v Quin (No 2) [1980] 2 NZLR 519. 23 Sale of Goods Act 1896 (Tas) s 9; Sale of Goods Act 1895 (WA) s 4.

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8.16 8.17 8.18 8.19 8.20

When does ownership of goods pass from the seller to the buyer? Why is it important to know when ownership of goods passes? In the absence of agreement, when and where is a seller obliged to deliver goods? In the absence of agreement, when is a buyer obliged to pay for goods? When is a buyer deemed to have accepted goods, and what is the effect of acceptance?

8.4 Disclaimers LEARNING OBJECTIVE 8.4 What are disclaimers and how do they protect a party from the consequences of breach?

A disclaimer is a term of a contract that states that one of the parties will not be in breach despite failing to perform one or more of their contractual obligations. For example, the disclaimer may state that there is no liability for false representations made during negotiations, or that one of the parties is not liable if the other party is injured, or that any damages payable for breach of the contract are limited or avoided entirely. Disclaimers are also known as ‘exclusion clauses’, ‘exemption clauses’, or ‘limitation of liability clauses’. Disclaimers are relatively common in standard form contracts, and typically protect the seller rather than the buyer. The operation of disclaimers is affected by legislation. Some legislation prohibits certain disclaimers; the ACL, for example, prohibits the exclusion of liability for breach of the statutory guarantees implied into consumer contracts. On the other hand, legislation may in fact encourage the use of disclaimers; the State and Territory civil liability legislation, for example, permits recreational service providers to rely upon disclaimers in limiting or avoiding liability to their customers in negligence.

Do disclaimers work? Whether a disclaimer will effectively protect a business from liability for breach of contract depends upon whether the disclaimer is in fact a term of the contract, and whether the disclaimer will be interpreted as applying to the particular breach in question (see figure 8.3).

Was disclaimer in a signed written contract?

YES Disclaimer effective if worded correctly

NO Was disclaimer brought to party’s attention by reasonable notice?

YES Disclaimer effective if worded correctly

NO Is disclaimer implied into contract as a result of prior dealings?

YES Disclaimer effective if worded correctly FIGURE 8.3

Determining whether a disclaimer is a term of the contract

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NO Disclaimer is not term of contract

ACTIVIT Y 8.9 — RESEARCH

Locate an example of a disclaimer and identify (1) which party the disclaimer protects and (2) the extent of the protection.

Is the disclaimer part of the contract? As we explained earlier, there are a number of ways a term can become part of a contract. A disclaimer will be part of the contract if: •• it is expressly set out in a written contract that has been signed by the parties, •• it is expressly brought to the attention of the other party by reasonable notice given before the contract was formed, or •• it is implied into the contract as a result of prior dealings between the parties. Even if the seller does bring the disclaimer to the attention of the buyer before the contract is formed,  the seller will be unable to rely upon the disclaimer if it misrepresents the effect of the disclaimer. Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805

Curtis took a white satin wedding dress with beads and sequins to be dry cleaned by Chemical Cleaning and Dyeing Co (CCD). The CCD shop assistant asked Curtis to sign a document headed ‘receipt’. The shop assistant explained that the document exempted CCD from liability for damage to the beads and sequins. CCD damaged the dress itself and sought to rely upon a disclaimer in the signed document that exempted CCD from liability ‘for any damage howsoever arising’. The court decided that because the CCD shop assistant had misrepresented the effect of the disclaimer CCD was unable to rely upon it, and Curtis was entitled to compensation.

How will the disclaimer be interpreted? If the disclaimer is contained in a contract between a business and a consumer, the court will interpret the disclaimer contra proferentem, or against the interests of the party seeking to rely upon it, the business. In other words, if there is more than one way of interpreting the disclaimer the court will choose the interpretation that makes it more likely that the disclaimer does not apply to the apparent breach being considered. White v John Warwick & Co Ltd [1953] 1 WLR 1285

White hired a bike from John Warwick & Co (JWC). The bike had been carelessly maintained by JWC and White was injured when the saddle of the bike tilted forward. White sued JWC for breach of contract (failure to supply goods fit for their purpose) and in the tort of negligence. JWC sought to avoid liability by relying upon a disclaimer in the contract that provided that ‘nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machines hired’. The court decided that it was not clear from the wording of the disclaimer whether or not it extended to personal injuries caused by JWC’s own negligence, and in applying the contra proferentem rule, decided that it did not protect JWC from liability under the tort of negligence.

If it is not clear whether the disclaimer protects the business in all circumstances or only if the conduct of the business falls within the ambit (or the ‘four corners’) of the contract, the court will prefer the narrower interpretation. CHAPTER 8 Contract law: terms of the contract  311

Sydney City Council v West (1965) 114 CLR 481

West parked his car in a car park owned by Sydney Corporation (SC). He was issued with a ticket that was required to be shown to the gate attendant to exit the car park. West’s car was stolen from the car park and when the thief went to exit he told the gate attendant that he had lost his ticket. The attendant allowed the thief to leave. When West sued SC for compensation, SC sought to rely upon a disclaimer on the ticket, which stated that ‘the council does not accept any responsibility for the loss or damage to any vehicle  .  .  .  however such loss, damage or injury may arise or be caused’. Did this disclaimer protect SC from liability? The court decided that it did not. There was more than one way of interpreting the disclaimer: it could be interpreted as protecting SC from liability in all situations, or as only protecting SC from liability while carrying out the terms of the contract. The court applied the contra proferentem rule and chose the narrower interpretation. Since, by allowing the thief to leave, the attendant was not carrying out the terms of the contract, the disclaimer did not apply and West was entitled to compensation.

If the disclaimer is contained in a contract between two businesses, the courts will presume that the parties had equivalent bargaining power and will interpret the disclaimer neutrally and without favouring either party.24 CAUTION!

Just because a business has a disclaimer on a sign, on its website or in its documentation, it cannot be assumed that the disclaimer will be effective: it may not be a term of the contract with the customer, and even if it is a term it may not apply to the situation where the customer has suffered harm.

ACTIVIT Y 8.10 — REFLECT

Why do courts prefer to interpret disclaimers in consumer contracts so strictly?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 8.21 What is a disclaimer? 8.22 How does a disclaimer become a term of the contract? 8.23 How are disclaimers interpreted by the courts?

8.5 Unenforceable terms LEARNING OBJECTIVE 8.5 Are there types of contractual term that a court will not enforce?

In addition to certain disclaimers, there may be terms within the contract that a court will not enforce. If possible, the court will ‘sever’ these terms from the rest of the contract and otherwise treat the contract as if the terms were not present. Some terms are prohibited by legislation and are therefore void and unenforceable. An example is a term of the contract that seeks to exclude the statutory guarantees implied into consumer contracts by the ACL. As we explained earlier, such a term is ineffective because the statutory guarantees implied by the ACL cannot be excluded. The ACL also states that certain unfair terms in standard form consumer contracts will be void and unenforceable. 24 Halton Pty Ltd v Stewart Bros Drilling Contractors Pty Ltd (1992) ASC 56–128.

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There are other terms that a court will refuse to enforce under common law. These include: •• terms that attempt to limit the court’s jurisdiction, and •• terms that amount to an unreasonable restraint on trade.

Terms limiting the court’s jurisdiction A term that states that in the event of a breach by one party, the other party is not permitted to commence legal proceedings, is an attempt to limit the court’s jurisdiction. Such a term is unlikely to be recognised or enforced by the courts.25 Note however that a court will enforce a term that obliges the parties to seek to resolve a dispute using alternative dispute resolution (ADR) before resorting to litigation.

Terms imposing an unreasonable restraint of trade A term is said to be in restraint of trade if it prohibits one of the parties from engaging in a particular type of business or employment. Such terms are relatively common in: •• sale of business contracts, where they prohibit the seller of a business from subsequently starting a new business in competition with the business they have just sold, and •• employment contracts, where they prohibit an employee from working for a competitor of the employer during or after the period of their employment. ACTIVIT Y 8.11 — REFLECT

In what other circumstances might a restraint of trade clause be useful or desirable?

The courts recognise that such terms are often necessary to protect the buyer or employer’s legitimate investment and confidential product and customer information. However, the term in restraint of trade cannot be used merely to discourage potential competition. The courts will refuse to enforce such a term if the restraint imposed by the term is unreasonable in terms of: •• time, •• geographical area, or •• scope of business. As a general rule, courts are more likely to enforce terms in restraint of trade in sale of business contracts than those in employment contracts, since the latter are frequently characterised by an inequality of bargaining power. When considering terms in restraint of trade contained within sale of business contracts, ‘reason­ ability’ is assessed in terms of both the interests of the parties and the interest of the public, which generally benefits from healthy competition between different businesses. When considering terms in restraint of trade contained within employment contracts, the court will only enforce the term if it is reasonable and is protecting a proprietary interest of the employer. Forster & Sons Ltd v Suggett (1918) 35 TLR 87

Forster & Sons Ltd (FSL) manufactured glass and glass bottles, and employed Suggett as a glassmaker. A term in his employment contract stated that following termination of his employment he would not engage in glass or glass bottle manufacturing anywhere in the United Kingdom for 5 years. The court decided that the restraint of trade was reasonable and was intended to legitimately protect FSL’s confidential manufacturing techniques from being discovered by a rival manufacturer.

25 Scott v Avery (1856) 5 HLC 811; 10 ER 1121.

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

Nordenfelt manufactured guns and had a global customer base. He sold the business to Maxim ­Nordenfelt Guns and Ammunition Company Ltd (MNGA). The business sale contract contained a term that prohibited Nordenfelt from starting a competing business anywhere in the world for 25 years. Was the restraint of trade term unreasonable and therefore unenforceable? The court decided that although a geographical area of the whole world and a time period of 25 years would usually be unreasonable, in the present circumstances, given the global customer base and the price paid for the business, the term was necessary to protect MNGA’s investment and not unreasonable.

Terms in professional sporting agreements that restrict player mobility (e.g. transfer restrictions, draft rules and salary caps) may constitute an unreasonable restraint of trade.26 Terms in restraint of trade may also breach those provisions in Part IV of the Competition and Consumer Act 2010 (Cth) that prohibit anti-competitive practices. The provisions are considered in detail in a later chapter. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 8.24 What types of term will a court refuse to enforce under common law? 8.25 What is the legal effect of a contract term that seeks to exclude the jurisdiction of the court? 8.26 In what circumstances is a restraint of trade clause likely to be used? 8.27 In what circumstances will a restraint of trade clause be legally enforceable?

8.6 Non-contractual representations and promises LEARNING OBJECTIVE 8.6 What is the difference between a term and a non-contractual representation or promise? When will a non-contractual representation or promise be enforceable?

Not everything said by the parties during negotiations ends up as a term of the contract. Can representations and promises made during negotiations be enforced? A representation is a statement of fact. If a representation made during contractual negotiations was not intended to become a term of the contract, it is referred to as a non-contractual representation and is generally not enforceable under contract law. The rationale for this is that if the parties had intended the representation to be enforceable they would have included it as a term of the contract. Similarly a non-contractual promise is a promise made during contractual negotiations that is not intended to become a term of the contract. Again, it is generally not enforceable under contract law, although it may be enforceable using promissory estoppel. Whether a representation or promise made during negotiations becomes a term of the contract depends upon the intention of the parties. Unless this intention is made explicit by putting the actual terms of the contract into writing, the intention must be ascertained from the words and conduct of the parties and from the context of the transaction. Oscar Chess Ltd v Williams [1957] 1 WLR 370

Williams sold a second-hand car to Oscar Chess Ltd, a used car dealer. During negotiations Williams showed Oscar Chess Ltd papers that stated that the car was a 1948 model. After the sale Oscar Chess Ltd discovered that the car was a 1939 model, and argued that Williams had breached the contract. Was the statement about the age of the car a term of the contract or a non-contractual representation? The court decided, based upon the context of the transaction, that the parties had not intended that the statement become a term of the contract. As an experienced dealer, Oscar Chess Ltd would have been expected to confirm the age of the vehicle for itself. The statement was a non-contractual representation.

26 Re Phillip Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242.

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Handbury v Nolan (1977) 13 ALR 339

Nolan sold a cow by auction to Handbury. Shortly before the sale Nolan informed the bidders that the cow was pregnant. After the sale Handbury discovered that the cow was, in fact, infertile. The court decided that Nolan’s claim was more than a non-contractual representation, it was an express term of the contract. In making that decision the court took into account the circumstances of the transaction: higher prices were paid for pregnant cows, and the statement was made immediately before bids were invited.

Parol evidence rule If the contract is in writing it is very difficult to establish that a verbal representation or promise made during negotiations was intended to become a term of the contract. According to the parol evidence rule: .  .  .  where a contract is reduced to writing, where the contract appears in the writing to be entire, it is presumed that the writing contains all the terms of it and evidence will not be admitted of any previous or contemporaneous agreement which would have the effect of adding or varying it in any way.27

This means that in the event of an inconsistency between a written term of an apparently complete contract and a verbal representation or promise, the court will favour the written term and disregard the verbal representation or promise. The parol evidence rule applies only if the written contract appears to be a complete record of the agreement. If the court decides that the verbal representation or promise was intended to be a term of the contract, the court can decide that the complete contract consists of the written agreement plus the verbal representation or promise, and the parol evidence rule will not apply. Van Den Esschert v Chappell [1960] WAR 114

Chappell agreed to purchase a house from Van den Esschert. Before signing the written contract Chappell asked Van den Esschert if the house was free from any infestation of white ants and Van den Esschert assured him that it was. The house turned out to be infested by white ants and C ­ happell sued Van den Esschert for breach of contract. Was Van den Esschert’s assurance a term of the contract? The court decided that the parol evidence rule did not apply. The written contract made no reference at all to white ants, so the complete agreement consisted of the written contract plus the verbal assurance.

•• •• •• ••

The court will also allow verbal evidence to be admitted in order to: establish that the written contract is invalid or unenforceable for some reason, establish that one party is an agent for someone else, incorporate common trade usage not referred to in the written contract, or explain technical terms or an ambiguity in the contract. ACTIVIT Y 8.12 — REFLECT

Explain in your own words the rationale for (1) enforcing terms but not enforcing representations, and (2) the parol evidence rule.

27 Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252, 262 (Innes J).

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If a representation or promise is not a term of the contract, it is not a breach of the contract if the representation is false or the promise is broken. However, the representation or promise may still be enforceable if the party that has suffered harm can establish that the false representation or broken promise was: •• a breach of a collateral contract, •• a misrepresentation, or •• a contravention of the Australian Consumer Law (ACL).

Breach of collateral contract If the court forms the view that a representation or promise prompted the other party to enter into the main contract in the first place, it may decide that a collateral contract has come into existence. A ­collateral contract is a secondary contract: in return for the representation or promise the other party has entered into the main contract. If the representation turns out to be untrue or the promise is broken the other party can sue them for breaching the collateral contract. De Lasalle v Guildford [1901] 2 KB 215

De Lasalle agreed to lease a house from Guildford. Before signing the written lease, De Lasalle asked Guildford whether the drains were in order. He explained that the drains in his previous home had become blocked and the house had flooded, and that he did not want such a thing to happen again. Guildford assured him that the drains were in order, and they signed the lease, which did not contain any reference to the drains. Unfortunately, the drains were blocked and De Lasalle’s home was again flooded. The court decided that although, as a result of the parol evidence rule, Guildford’s verbal assurance was not a term of the lease, the assurance did amount to a collateral contract: in return for Guildford’s promise about the drains De Lasalle had entered into the lease. Guildford had breached the collateral contract and De Lasalle was entitled to compensation.

Since it is the collateral contract and not the main contract that has been breached, the other party is not entitled to terminate the main contract. They may however be entitled to damages and equitable remedies for breach of the collateral contract.

Misrepresentation A misrepresentation is a false statement of fact made by one person to induce another person to enter into a contract, and that in fact induces that person to enter into the contract. It must be a statement of fact: promises are not ‘representations’ and hence cannot be misrepresentations.28 If a party to a contract was induced to enter into the contract by a misrepresentation, the contract is voidable by that party. There are three types of misrepresentation: 1. fraudulent misrepresentation, 2. negligent misrepresentation, and 3. innocent misrepresentation. If Johnny ‘tricks’ Jin into entering into the contract by telling her something that is not true, he is said to have made a fraudulent misrepresentation that gives Jin the right: •• under contract law to terminate the contract, and •• under tort law to recover damages in the tort of deceit. The misrepresentation is fraudulent if it was made: •• knowingly, •• without belief in its truth, or •• recklessly, that is, the person did not care whether the statement was true or false. 28 Edgington v Fitzmaurice (1885) 29 Ch D 459.

316  PART 2 Legal consequences

Derry v Peek (1889) 14 App Cas 337

The consent of the Board of Trade was required for the Plymouth, Devonport and District Tramways Co Ltd (PDDT) to use steam-powered trams. Application for that consent had been made but not yet received when, in January 1883, the PDDT directors issued a prospectus stating that PDDT had the right to use steam to run its trams. On the basis of the prospectus, Peek purchased 400 shares in PDDT at a cost of £4000. The Board of Trade subsequently refused consent for the use of steam power. PDDT was compulsorily wound up in May 1885. Peek sued the PDDT directors on the basis of the tort of deceit and claimed damages for fraudulent misrepresentation. He claimed that the statement made by them in the prospectus was untrue, that the directors knew it was untrue and that they had made the representations fraudulently. The directors argued that they should not be liable because they had honestly believed that getting the consents was a mere formality. The court decided that the directors were not liable. It accepted that the directors had believed that the statement in the prospectus about PDDT’s right to use steam was true and that they had not been careless as to whether what had been stated was true or false. The fact that they were mistaken in assuming the consent of the Board of Trade would follow as a matter of course was not sufficient to make the statement fraudulent. According to the court, at 374: ‘I think the authorities establish the following propositions: First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, 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. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false has obviously no such belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.’

If Johnny’s misrepresentation was made in breach of a duty of care, the misrepresentation will be negligent rather than fraudulent, and Jin will be entitled: •• under contract law to terminate the contract, and •• under tort law to recover damages in the tort of negligence. ‘Negligent misrepresentation’ is the same as negligent misstatement and as such it is necessary to show that (1) Johnny owed a duty of care to Jin, (2) he breached that duty of care, and (3) the breach of duty caused the loss incurred by Jin. In establishing the existence of a duty of care it is necessary to show that it was reasonable in the circumstances for Jin to rely upon Johnny’s representation.29 The right to terminate the contract for fraudulent or negligent misrepresentation will be lost if Jin does not act promptly upon discovering the truth of the matter, or does anything subsequent to discovering the truth that is inconsistent with an intention to terminate the contract. Jin only has the right to recover damages under tort law if Johnny’s misrepresentation was fraudulent or negligent. If Johnny’s misrepresentation was innocent (i.e. Johnny genuinely believed the statement of fact to be true), Jin is not entitled to damages under tort law, although she will still be entitled under contract law to terminate the contract.30 In the Australian Capital Territory and South Australia, the court can award damages for misrepresentation, even if it was innocent, if the court considers it just and equitable to do so.31

Breach of the ACL The limitations imposed by the relatively narrow definition of ‘representation’, the inconsistencies between tort law and contract law, and the ease by which the right to terminate the contract can be lost 29 Esso Petroleum Co Ltd v Mardon [1976] QB 801. 30 Whittington v Seale–Hayne (1900) 82 LT 49. 31 Civil Law (Wrongs) Act 2002 (ACT) s 175; Misrepresentation Act 1972 (SA) s 7.

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by the innocent party make misrepresentation a difficult and complex action to bring. A person tricked or deceived into entering into a contract is more likely to commence a legal action using the statutory provisions in the Australian Consumer Law (ACL) that prohibit misleading or deceptive conduct, false representations and other unfair practices. These provisions are simpler, more inclusive, and allow the other party to recover compensation even in the event of an innocent misrepresentation. They can apply not only to a false non-contractual representation but also to: •• a breach of a non-contractual promise, •• a breach of the terms of the contract, and •• a breach of the statutory terms. The ACL is considered in more detail in a later chapter.

Unenforceable promises Not all promises made during contractual negotiations will be enforceable. For example, if during negotiations between Johnny and Jin, Johnny makes a verbal promise to teach Jin how to use the oven, the promise is not included in the written contract, and Johnny does not keep his promise: •• the parol evidence rule will prevent the promise from being recognised as a term of the contract, •• if Johnny’s promise was not the main reason Jin bought the oven, there is no collateral contract, •• it will not be misrepresentation, since the rules relating to misrepresentation require that the representation be one of present fact rather than future intent, and •• it will not be a breach of the statutory prohibition of misleading and deceptive conduct unless Johnny actually lacked that intention at the time he made the statement; the statutory prohibition does not prevent him from simply changing his mind. It is therefore very important to ensure that any important promises made by either party are clearly included as terms of the contract. The courts also recognise that many claims made by suppliers and retailers when selling their products are obviously not intended to be taken seriously by buyers. Examples include claims such as ‘cheapest prices in town’ or ‘the best car money can buy’. These claims are called ‘puffery’ and they are not actionable if they turn out to be untrue or inaccurate, since they clearly lack an intention to be legally enforceable. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 8.28 What is the difference between a term and a representation and why is it important? 8.29 What are the legal consequences of making a false representation? 8.30 What is the parol evidence rule? 8.31 What is a collateral contract and how does it relate to the parol evidence rule? 8.32 What is a misrepresentation? In what circumstances will it make a contract unenforceable? 8.33 What is the difference between fraudulent, negligent and innocent misrepresentations? 8.34 Why is it that a party who suffers harm because of the other party’s misrepresentation is more likely to rely upon the ACL than the common law?

In conclusion •• A term included in a written and signed contract is referred to as an express term. It does not matter if the person who signed the contract read all of the written terms, they are nevertheless enforceable against the person. If a contract is not in writing and signed, terms can still be expressly included in the contract by being brought to the attention of the person by reasonable notice before the contract was formed. •• If aspects of the agreement have not been expressly agreed upon by the parties, a court may be willing to ‘fill the gaps’ by implying terms into the contract. 318  PART 2 Legal consequences

•• Sale of goods legislation and consumer protection legislation imply into contracts for the sale of goods (and into some contracts for services) statutory terms intended to (1) protect the buyer and (2) facilitate the transaction. Examples of the former include terms relating to title, description, quality and fitness; examples of the latter include terms relating to payment, delivery and acceptance. •• A contract may contain a disclaimer that seeks to protect one of the parties from the consequences of a failure to fully perform their obligations. Whether or not the disclaimer is effective depends upon (1) if the disclaimer has been incorporated as a term of the contract and (2) if the disclaimer is interpreted as applying to the situation in question. •• A court will not enforce a term in the contract that seeks to (1) restrict the court’s jurisdiction or (2) impose an unreasonable restraint on trade. •• If a statement made during contractual negotiations is a non-contractual representation or promise, it will as a general rule not be enforceable under contract law, although it may be enforceable as a misrepresentation, a collateral contract, or misleading or deceptive conduct. Whether a statement is a term or a non-contractual representation or promise depends upon the context within which the statement is made. JOHNNY AND ASH

[Ash and Johnny are still sitting at the bar. Johnny is looking much happier.] Ash —  .  .  .  so, while I don’t think the situation is black and white, I still think we can make a pretty convincing argument. Johnny — And I actually think I understand what that argument is! Ash — Go for it. Johnny — Okay, when Maria and I were still negotiating the contract for her purchase of a share in my restaurant, she told me that she would not participate in the day-to-day management of the restaurant, and that she would leave that to me. However, there was nothing said about that in the written contract that we signed. Now, Maria’s promise is either a non-contractual promise or a term of the contract. If it is a non-contractual promise there isn’t much we can do to enforce it, but if it is a term, we can enforce it. Ash — And how do we show that it was a term and not a non-contractual promise? Johnny — By showing how important it was to me, and how Maria must have appreciated that at the time. The fact that we were discussing it just before we signed the contract is also a point in my favour. Ash — What about the parol evidence rule? Johnny — That’s the rule that if there is a written contract, the court won’t allow evidence of verbal statements that contradict the written terms, right? Ash — Right. Johnny — Well, this situation could fall within one of the recognised exceptions to the rule. The written contract didn’t say anything about how the restaurant was to be run, so I could argue that the written contract is not the complete contract, that the complete contract includes Maria’s verbal promise as well. Ash — And if that doesn’t work? Johnny — If that doesn’t work we can argue that there is a collateral contract: I only entered into the written contract because of Maria’s verbal promise, and that ‘bargain’ is itself a separate contract that I can enforce! Ash — Wow, you are really getting the hang of this. So assuming we can establish that Maria’s promise not to interfere in the running of the restaurant is a term of the contract  .  .  . Johnny — I can force her to keep her promise! Ash — Okay, it’s time to talk about how we enforce contracts.

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QUIZ 1 A person who has signed a written contract is bound by the terms of that contract and cannot

avoid liability even if (a) they did not read the contract. (b) the contract contains a cooling off period. (c) they can rely upon non est factum. (d) they were led to believe that the document was not contractual in nature. 2 Which of the following is most likely to be categorised as a contract for the sale of goods? (a) A contract for the purchase of a house. (b) A contract for the sale of copyright in a novel. (c) A contract for the sale of 50 shares in a company. (d) A contract for the service and repair of a car including the installation of new spark plugs. (e) None of the above. 3 A contract will be ‘void for uncertainty’ if (a) the contract is not in writing. (b) any important details are not included as express terms. (c) more than one term is implied rather than express. (d) the parties fail to expressly include enough clear details in their agreement. 4 Goods must be fit for their purpose unless (a) the buyer did not make the intended purpose expressly known to the seller. (b) the buyer did not rely upon the seller’s skill and judgement. (c) they were sold by a seller who normally deals in goods of that description. (d) they were sold at a discount. 5 If a person selects some fruit at the fruit shop and offers to buy it at the counter, they become the owner of the fruit (a) when they select the fruit. (b) when the cashier weighs the fruit and tells them the price. (c) when they hand over payment for the fruit. (d) when the cashier hands the fruit back to them for them to take home. 6 Which of the following is not an exception to the nemo dat rule? (a) The goods are sold by the agent of the true owner to a buyer who has no notice of the seller’s lack of ownership. (b) The goods are sold by a previous owner who still has possession of the goods to a buyer who has no notice of the seller’s lack of ownership. (c) The goods are sold by a person who has taken possession of the goods before becoming the true owner to a buyer who has no notice of the seller’s lack of full ownership. (d) The goods are innocently sold by someone who purchased the goods from someone who stole the goods to a buyer who has no notice of the seller’s lack of ownership. 7 A buyer of goods is not deemed to have accepted the goods (and lost the right to a refund) simply because they have (a) taken possession of the goods. (b) retained the goods for longer than a reasonable period without rejecting them. (c) loaned the goods to another. (d) intimated to the seller that the goods have been accepted. 8 A disclaimer will not be an enforceable term of the contract if it is (a) contained within a written and signed contract. (b) brought to the attention of the other party by reasonable notice. (c) incorporated into the contract as a result of prior dealings between the parties. (d) none of the above. 320  PART 2 Legal consequences

 9 What is the principal distinction between a term and a non-contractual representation?

(a) A term is in writing and a non-contractual representation is verbal. (b) A term is signed and a non-contractual representation is not. (c) A term is enforceable in equity and a non-contractual representation is enforceable under common law. (d) Breach of a term is breach of the contract, breach of a non-contractual representation is not. 10 According to the parol evidence rule (a) where there is an inconsistency between a written term and a verbal statement, the court will favour the written term. (b) a term of a contract must be in writing to be enforceable. (c) a verbal statement or promise made at the time a written contract is executed may be enforceable as a collateral contract. (d) if a verbal statement or promise was intended to be an important part of the agreement, the court can decide that the complete agreement consists of the written agreement plus the verbal statement or promise.

EXERCISES EXERCISE 8.1 — IMPLIED TERMS

Ash agrees to buy Stephen’s car. She meets Stephen at his house where she hands over a bank cheque in exchange for the transfer papers and the keys to the car. When she gets into the car she discovers that there is no fuel in the fuel tank. When she asks Stephen about this he explains that he only agreed to sell her the car, not fuel as well. Has Stephen breached a term of the contract? EXERCISE 8.2 — CONTRACTS FOR THE SALE OF GOODS

Ash’s mother Shashi wants to buy a shopping cart that will be suitable for carrying her weekly groceries home from the supermarket. She goes to a shop owned by Neville that specialises in the sale of shopping carts. Shashi tells Neville what she wants and asks for advice about which cart to buy. Neville recommends the Shopper Ultra model that sells for $150, but when Shashi asks about the Shopper Basic, which sells for only $49.95, Neville tells Shashi that it is ‘not as good, but should be adequate’. Shashi buys the Shopper Basic. A few weeks later, she is unhappy because after using the cart to carry a stack of books back from the library, the fabric of the cart has started to tear. Has Neville breached the statutory implied term regarding fitness for purpose? EXERCISE 8.3 — CONTRACTS FOR THE SALE OF GOODS

Maria buys a helicopter for personal use from Nolan Copters Ltd. Two days later, Maria is contacted by the Common Bank, which tells her that the helicopter was used by a previous owner (not Nolan Copters Ltd) as security for a loan from the bank. The previous owner has defaulted under their loan and the bank is now taking possession of the helicopter. Nolan Copters Ltd were unaware of the charge on the helicopter. Has Nolan Copters Ltd breached the statutory implied term regarding title? EXERCISE 8.4 — DISCLAIMERS

Ash has purchased a first-class ticket for her flight to Sydney entitling her to use of the Kwantus Club lounge at the airport while waiting for a flight. While Ash is getting a drink from the bar, a waiter carelessly spills a tray of drinks onto Ash’s expensive laptop, which she left on her seat. When she complains to the club manager, he directs Ash’s attention to a sign on the wall that states ‘The airline takes no responsibility whatsoever for goods lost, damaged or stolen while using these facilities’. Does the sign prevent Ash from suing the airline for compensation? EXERCISE 8.5 — RESTRAINT OF TRADE

Johnny has an agreement with Vegan Lifestyle Ltd according to which Johnny will be the exclusive seller in his town of the spicy tofu chickens that they manufacture. A clause in the agreement provides CHAPTER 8 Contract law: terms of the contract  321

that for the duration of the agreement and for a period of two years after termination of the agreement, Johnny is not permitted to manufacture or distribute tofu products anywhere in Australia. Johnny decides to sell in his restaurant a new dish made from tofu. Can Vegan Lifestyle Ltd enforce the term in the agreement and prevent Johnny from selling the new dish? EXERCISE 8.6 — TERMS AND REPRESENTATIONS

Johnny decides to order the organic fruit for his restaurant from a new supplier, George. When he reads through the terms of the written contract given to him by George, he sees that while George guarantees that the fruit will be ‘fresh’, the contract says nothing about whether the fruit will be organic. Johnny asks George about this, explaining that he tells his customers that his fruit is always organic. George assures him that the fruit will always be organically grown. Johnny then signs the contract without changing it. The next three deliveries include fruit that is not organically grown. Can Johnny legally enforce George’s verbal promise about the fruit?

KEY TERMS alternative dispute resolution (ADR)  A range of non-litigious methods for resolving disputes, including mediation, arbitration and conciliation. Australian Consumer Law (ACL)  The law regulating consumer protection in Australia; a schedule to the Competition and Consumer Act 2010 (Cth). bailment  One person is in temporary possession of property belonging to another person. caveat emptor  (‘let the buyer beware’) The principle that each party to a contract is responsible for protecting their own interests. charge  A security for a loan over property. collateral contract  A secondary contract, the consideration for which is the entry into the main contract. contract for services  A contract where (1) the substance of the contract is the provision of a service rather than the transfer of ownership of goods, and (2) the person providing the service is an independent contractor rather than an employee. contract for the sale of goods  A contract where a seller transfers, or agrees to transfer, the ownership of goods to a buyer in return for a monetary price. contra proferentem  (‘against the one bringing forth’) An ambiguous contractual term should be interpreted against the person who insisted upon its inclusion. cooling off period  A period within which a person can change their mind about proceeding with a contract or application. deceit  A tort committed when one person makes a fraudulent misrepresentation to another. disclaimer  A statement that one of the parties to a contract will not be liable for the consequences of a failure to perform their obligations. Also known as an ‘exemption clause’ or an ‘exclusion clause’. encumbrance  A charge on property to secure repayment of a loan. express term  A term of a contract that is explicitly agreed upon by the parties, either verbally or in writing. fixture  An object that has been attached to real property and has become part of the real property, e.g. buildings and things attached to buildings. fraudulent misrepresentation  A deliberately false statement made by one party to induce the other party to enter into the contract. future goods  Goods that are not yet in existence at the time the contract is formed. good faith  Honesty and reasonableness. goods  Tangible items of personal property. implied term  A term that was not explicitly agreed upon by the parties, but is nevertheless a term of the contract. intellectual property  A form of intangible creation such as the expression of an idea, a trade mark, a new technology or a design. 322  PART 2 Legal consequences

jurisdiction  The extent of the power and authority conferred upon a parliament, a government body or a court. lien  A right to retain possession of property belonging to another; until a debt made payable by the property owner is paid. litigation  Legal proceedings brought by one member of the community against another. Also known as ‘civil action’. merchantable quality  The quality one would reasonably expect of goods taking into account the relevant circumstances, including the price paid for the goods. misrepresentation  A false statement of fact made by one person to induce another person to enter into a contract. mortgagee  A person who takes a mortgage over real property, typically in exchange for a loan to the owner of the real property. negligence  A tort committed when one person fails to exercise reasonable care and causes harm to another person. negligent misstatement  The giving of careless advice that leads to economic loss. nemo dat quod non habet  (‘no one gives what one does not have’)  The rule that a purchaser of goods from a seller who does not own the goods cannot acquire or pass on ownership of the goods. non est factum  (‘not my document’)  A claim that a written and signed contract contains terms or has legal consequences of which one of the parties was unaware as a result of a disability or disadvantage. option  A right to buy or sell property at a certain price and before or after a certain date. parol evidence rule  Where a contract is in writing and appears to be a complete record of the agreement, no evidence will be admitted that would have the effect of adding to or varying the contract. promissory estoppel  The principle that a promise will be legally enforceable even if the promisee has not provided consideration for the promise, as long as certain requirements are satisfied. quiet possession  Possession and use of real or personal property without interruption. Also known as ‘quiet enjoyment’. representation  A statement of fact. restraint of trade  A term in a contract imposing limitations upon the ability of one of the parties to engage in a certain type of business or employment. retention of title clause  A clause in a contract for the sale of goods stating that ownership of the goods does not pass until the buyer has paid for the goods in full, regardless of when the contract was made and regardless of delivery of the goods to the buyer. Also known as a ‘Romalpa clause’. share  One of the fractional parts into which the equity (ownership) of a corporation is divided. specific goods  Goods identified at the time the contract is formed. standard form contract  A contract in the form of a written document containing pre-printed terms that are not negotiated. term  A specific detail of an agreement. unascertained goods  Goods that are not specifically identified at the time the contract is formed. voidable  A voidable contract is enforceable and effective unless terminated by the innocent party.

ACKNOWLEDGEMENTS Photo: © LDprod / Shutterstock.com Photo: © michaeljung / Shutterstock.com

QUIZ ANSWERS

1. a  2. e  3. d  4. b  5. b  6. d  7. a  8. d  9. d  10. a CHAPTER 8 Contract law: terms of the contract  323

CHAPTER 9

Contract law: enforcement of the contract LEA RN IN G OBJE CTIVE S 9.1 Who can enforce a contract, and when can they do so? 9.2 What if the other party to the contract made a mistake? What if they were pressured or threatened or manipulated by the party seeking to enforce the contract? What if the party seeking to enforce the contract took advantage of the other party? Is the contract still enforceable? 9.3 If the contract has been breached, when will the party seeking to enforce the contract be entitled to damages? When can they terminate the contract because of the other party’s breach? What other remedies are available in the event of a breach of contract? 9.4 How can a contract be terminated by agreement? When will a contract be frustrated?

JOHNNY AND ASH

[Johnny and Ash are at the bar of his restaurant The Lame Duck, still discussing Johnny’s new partner Maria.] Johnny — When Maria and I decided to become partners, Maria promised that she would not interfere in the day-to-day running of the business. She told me that I would still be responsible for managing the restaurant. And yet here she is, in the restaurant, bossing the staff around and acting like she is in charge! Ash — I imagine that must be quite frustrating. Johnny — It is! What can I do about it? Can I force Maria to keep her promise? Ash — Well, we have established that Maria’s promise to let you manage the restaurant was a term of your contract with Maria. So now we need to consider whether you can enforce the contract. Johnny — Why is that even an issue? If someone makes a promise, don’t they have to keep their promise? Ash — Well, there are circumstances where even a contractual promise is unenforceable. The person enforcing the promise may not have the legal right to do so. Or it might be too late. Or there might be a question about whether or not the promisor really made the promise of their own volition. Johnny — Oh, I am sure Maria knew what she was doing when she made that promise. Ash — Well, the issue then becomes one about remedies. If you could enforce Maria’ promise in a court of law, what exactly would you want the result to be? Johnny — What are my options?

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Johnny is entitled to enforce Maria’s promise not to interfere in the running of the business, and, if so, what remedy would be the most appropriate.

Introduction As we saw in the previous chapters, business is all about entering into legally enforceable agreements or, in other words, making deals. When one of the parties to a deal makes a false statement or fails to do what they promised to do, the law of contract entitles the other party to a remedy, such as the right to terminate the contract, to seek compensation or to receive some other form of civil remedy. In an earlier chapter we considered the rules that regulate the making of contracts in Australia. In the previous chapter we considered the various terms of the contract. In this chapter, we focus upon enforcement of the contract, and consider the consequences of breaching the contract.

9.1 Entitlement to enforce LEARNING OBJECTIVE 9.1 Who can enforce a contract, and when can they do so?

In this section we consider two issues associated with enforcement of a contract: Who can enforce the contract? And when must legal action be commenced? CHAPTER 9 Contract law: enforcement of the contract  325

Privity of contract Only a party to the contract: •• is legally obliged to perform a contract, and •• has the legal right to enforce a contract. As a general rule, a person who is not a party to the contract (a third party) cannot sue or be sued for breach of the contract. This is known as the doctrine of privity of contract.1 CAUTION!

As a general rule, only the parties to a contract can enforce the contract.

For example, if Johnny and Jin have a contract according to which Johnny will deliver and transfer ownership of his pizza oven to Xue, Xue cannot enforce the contract if Johnny does not deliver the oven. Jin can sue Johnny for breach of contract, but she will not be able to recover damages since it is Xue, not Jin, who has suffered the loss. In these circumstances Xue should have been made a party to the contract. There are a number of important exceptions to the general rule. •• A third party beneficiary under an insurance contract is not a party to the contract but they are nevertheless entitled to enforce the contract.

1 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.

326  PART 2 Legal consequences

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

Blue Circle Southern Cement Ltd owned and operated a limestone crushing plant in NSW. In June 1977, Blue Circle took out a contract of insurance with Trident General Insurance Co Ltd. The insurance policy was said to cover Blue Circle, its subsidiaries, its contractors and its suppliers in respect of liability for various events, including personal injury during alterations and extensions to the plant. After the Trident insurance policy was issued, McNiece Bros Pty Ltd became the principal contractor for construction work being carried out at the plant. In July 1979, a crane driver employed by another company who was working under the direction of the McNiece site engineer was injured. The driver sued McNiece and was awarded damages. McNiece claimed indemnity under the Trident insurance policy. Trident denied the claim on the basis that McNiece was not a party to the insurance policy. McNiece sued Trident. Was McNiece, who was not a party to the original Trident insurance policy, entitled to sue for indemnity under the policy? The court decided that McNiece was entitled to be indemnified under the insurance policy even though it had not been a party to the original contract of insurance. It decided that the doctrine of privity of contract and the rule that consideration must move from the promisee do not apply to a policy of insurance. (As a result of the enactment of Insurance Contracts Act 1984 (Cth) s 48, it is unlikely that such a case will arise for consideration by the courts again. Section 48 expressly allows third parties to whom cover is extended under a contract of general insurance to sue the insurer under that contract.)

•• If two parties make a contract and one of the parties subsequently reveals that they were acting as an agent, the other party has the right to enforce the contract against the undisclosed principal. •• If the parties renegotiate the contract and all three parties (the two contracting parties and the third party) agree, the contract will be enforceable by and against the third party provided that the third party has provided consideration. This is known as novation. •• A buyer has statutory rights against a manufacturer even though the manufacturer is not a party to the contract of sale. It is also possible for one party to formally assign or transfer contractual rights (i.e. the benefit of a contract) to a third party if: •• the third party has provided consideration for the assignment, and •• the other party has received notice of the assignment. For example, if Johnny has a contract with Jin according to which Jin owes Johnny money, Johnny can transfer the benefit of the debt to Maria if (1) Maria has given Johnny something in return and (2) Johnny has notified Jin (preferably in writing) of the assignment of debt. ACTIVIT Y 9.1 — REFLECT

Why would one person want to assign the benefit of a debt to another person?

Time limits If one of the parties to the contract wishes to enforce the contract, they must commence legal proceedings within the statutory time limit (see table 9.1). The time limits differ depending upon whether the contract is a formal contract (i.e. a contract in the form of a deed) or a simple contract. The time limit starts from the date when the cause of action arises, which is usually the date of the breach of contract.

CHAPTER 9 Contract law: enforcement of the contract  327

TABLE 9.1

Statutory time limits

Jurisdiction

Formal contracts2

Simple contracts3

Australian Capital Territory

12 years

6 years

New South Wales

12 years

6 years

Northern Territory

12 years

3 years

Queensland

12 years

6 years

South Australia

15 years

6 years

Tasmania

12 years

6 years

Victoria

15 years

6 years

Western Australia

12 years

6 years

ACTIVIT Y 9.2 — REFLECT

Why is the time limit for simple contracts so much shorter than the time limit for formal contracts?

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 9.1 In what circumstances can a contract be enforced by a person who is not a party to the contract? 9.2 What is the time limit within which an action under contract law must be brought?

9.2 Unenforceable contracts: lack of consent LEARNING OBJECTIVE 9.2 What if the other party to the contract made a mistake? What if they were pressured or threatened or manipulated by the party seeking to enforce the contract? What if the party seeking to enforce the contract took advantage of the other party? Is the contract still enforceable?

A contract will only be enforceable against a party to the contract if that party entered into the contract willingly. If they were bullied, pressured or manipulated into entering into the contract, the contract will be unenforceable due to a lack of consent. Examples of circumstances in which Johnny will be unable to enforce a contract with Jin due to Jin’s lack of consent include: •• Jin made a mistake about a fundamental aspect of the agreement, and Johnny unfairly took advantage of that mistake (mistake), •• Jin entered into the contract as a result of inappropriate pressure by Johnny (duress), •• Jin entered into the contract because Johnny took advantage of his influence over Jin (undue influence), or 2 Limitation Act 1985 (ACT) s 13; Limitation Act 1969 (NSW) s 16; Limitation Act 1981 (NT) s 14(1); Limitation of Actions Act 1974 (Qld) s 10(3); Limitation of Actions Act 1936 (SA) s 34; Limitation Act 1974 (Tas) s 4(3); Limitation of Actions Act 1958 (Vic) s 5(3); Limitation Act 2005 (WA) s 18. 3 Limitation Act 1985 (ACT) s 11(1); Limitation Act 1969 (NSW) s 14(1)(a); Limitation Act 1981 (NT) s 12(1)(a); Limitation of Actions Act 1974 (Qld) s 10(1)(a); Limitation of Actions Act 1936 (SA) s 35(a); Limitation Act 1974 (Tas) s 4(1); Limitation of Actions Act 1958 (Vic) s 5(1)(a); Limitation Act 2005 (WA) s 13(1).

328  PART 2 Legal consequences

•• Jin entered into the contract because Johnny unfairly took advantage of a special weakness on the part of Jin (unconscionability).

Mistake As a general rule, if one of the parties to a contract has made a mistake, it does not entitle them to argue that the contract is unenforceable or terminate the contract. For example, if Ash buys an item of clothing that turns out to be the wrong size, or a gift for a person who turns out to already have one, she is not entitled to rely upon the mistake to get her money back. The rule here is caveat emptor, or ‘let the buyer beware’. It is Ash’s obligation to be careful to avoid such mistakes happening, and if they do happen, they are Ash’s responsibility. ACTIVIT Y 9.3 — REFLECT

Have you ever returned goods to a shop because you made a wrong choice? If the shop was not legally obliged to accept the return, why do you think they did so anyway?

The three important exceptions to this rule are: 1. unilateral mistakes, 2. common mistakes, and 3. mutual mistakes. Each of these exceptions may make a contract void (ineffective and unenforceable) due to mistake, provided the mistake relates to a fundamental aspect of the contract. Each only applies to a relatively narrow set of circumstances. The courts prefer to protect, wherever possible, the reliability and enforceability of contracts, particularly where declaring a contract void will have negative consequences for a third party who has innocently relied upon the validity of the original contract. For example, if Johnny sells his oven to Jin and Jin then sells the oven to Xue, a court is less likely to declare the contract between Johnny and Jin void for mistake because by doing so, Xue will be unfairly penalised. CAUTION!

If one of the parties to a contract makes a mistake, the general rule is caveat emptor, and the party has no legal remedy. It is only in exceptional circumstances that a contract will be void for mistake.

Unilateral mistake A unilateral mistake is a one-sided mistake — that is, it is a mistake made by only one of the parties. As a general rule, a unilateral mistake will not make a contract void. However, a court will refuse to enforce a contract where one party makes a serious mistake about a fundamental aspect of the contract, the other party knows that they have made a mistake and they seek to take unfair advantage of that mistake. CHECKLIST

A contract will be void or unenforceable due to unilateral mistake if all of the following requirements are satisfied. ◼◼ One of the parties has made a mistake. ◼◼ The mistake relates to a fundamental aspect of the contract. ◼◼ The other party has sought to take advantage of the mistake.

CHAPTER 9 Contract law: enforcement of the contract  329

Taylor v Johnson (1983) 151 CLR 422

Johnson made a written offer to Taylor to sell 10 acres of land for $15  000. She had intended the offered price to be $15  000 per acre but had mistakenly omitted the words ‘per acre’. Taylor strongly suspected that Johnson had made a mistake, but accepted the offer as written and subsequently sought to enforce the agreement when Johnson realised her mistake. The court decided that although unilateral mistake about the terms of a written contract does not make the contract void, in these circumstances the contract was unenforceable under equity because Taylor was aware of Johnson’s serious mistake and had sought to take advantage of it — that is, because Taylor had behaved unconscionably.

The court will declare a contract void for unilateral mistake where (1) one party is mistaken as to the identity of the other party, (2) the identity of the parties is a fundamental aspect of the contract, and (3) the other party knows of the mistake and seeks to rely upon it. Cundy & Lindsay (1877–78) LR 3 App Cas 459

Blenkarn wrote to Lindsay ordering certain goods. Blenkarn signed the letter so that his name looked like ‘Blenkiron & Co’, a well known and reputable business in the same area. Lindsay thought that the order had come from Blenkiron & Co and forwarded the goods on credit. As soon as Blenkarn received the goods he sold them to Cundy, and disappeared with the money. Lindsay sued Cundy for the return of the goods. The court decided that the contract between Lindsay and Blenkarn was void for unilateral mistake: Lindsay was mistaken about the identity of the purchaser, Blenkarn had taken advantage of that mistake, and the identity of the purchaser was of fundamental importance in that Lindsay had intended to deal only with Blenkiron & Co and with no-one else. Since the contract between Lindsay and Blenkarn was void, ownership of the goods did not pass to Blenkarn and could not pass to Cundy, and Lindsay was entitled to recover the goods from Cundy.

In the above case the contract was void because the parties were doing business at a distance and the court was satisfied that Lindsay intended to deal only with Blenkiron & Co. If, however, the parties are doing business face-to-face and the court is of the view that the mistaken party intended to deal with whoever they were in fact dealing with, regardless of their true identity, the contract will not be void. Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581

Papas sold a car to a buyer who used false identification and paid with a fraudulently altered cheque. The buyer used the car to obtain finance from Bianca Investments Pty Ltd (BI), a pawnbroker, and then disappeared with the money. Papas sued BI to recover the car. The court decided that there was no unilateral mistake as to the identity of the buyer: Papas had intended to deal with the person physically present at the deal, not the person named in the false identification. The contract was not void, and BI was entitled to retain the car.

‘Unilateral mistake’ also includes circumstances where one party encourages the other party to sign a written contract without first reading it or understanding it. As a general rule, the courts are not sympathetic towards a person who signs a contract without reading it. However, if (a) the party who made the mistake had a good reason for not reading the contract (e.g. they are blind, or illiterate, or cannot read English) and (b) the mistake is about the fundamental nature of the document they were signing, the court may be willing to decide that the contract is void and unenforceable. This is known as non est factum, and was discussed in more detail in the last chapter.

Common mistake A common mistake (or bilateral mistake) occurs when both of the parties to the contract are mistaken as to a fundamental aspect of the contract, such as the identity or the existence of the subject matter of 330  PART 2 Legal consequences

the contract. If the court is of the view that the agreement between the parties was conditional upon the truth of a bilateral belief that turns out to be false, the contract will be void due to common mistake.4 For example, if Jin agrees to buy Johnny’s oven, but at the time the agreement is made and unknown to either of them the oven has been destroyed and no longer exists, the contract between Johnny and Jin is void due to common mistake.5 CHECKLIST

A contract will be void due to common mistake if all of the following requirements are satisfied. ◼◼ The agreement between the parties is conditional upon the truth of a belief held by both parties. ◼◼ At the time the agreement was formed, the belief was incorrect.

If the parties make a common mistake but the court decides that the contract was not conditional upon the truth of the bilateral belief, the contract will not be void. Leaf v International Galleries [1950] 2 KB 86

Leaf purchased a painting from International Galleries (IG). At the time of purchase, both Leaf and IG believed the painting to be the work of the famous artist John Constable. Later, Leaf discovered that the painting was in fact the work of another, lesser-known artist. Leaf sought to have the contract declared voidable due to misrepresentation but in obiter dictum the court considered whether the contract was void due to common mistake. The court stated that although both Leaf and IG had been mistaken about the identity of the painter, the contract was not conditional upon the truth of this belief: the contract was for the sale of ‘this painting’ not ‘a painting by Constable’, and, therefore, the contract was not void due to common mistake.

Mutual mistake A mutual mistake occurs when the parties to the contract believe they have reached an agreement but in fact there has been no meeting of minds because they were both thinking of different things at the time they made the agreement.6 For example, if Jin agrees to buy Johnny’s oven, but at the time of the agreement Jin was thinking of Johnny’s large oven and Johnny was thinking of his small oven, the contract is void for mutual mistake. CHECKLIST

A contract will be void due to mutual mistake if all of the following requirements are satisfied. ◼◼ The agreement between the parties is conditional upon the truth of a belief held by each party. ◼◼ The belief held by each party is a different belief.

Duress If one party compels the other to enter into the contract by expressly or impliedly threatening harm such as physical violence, they are said to have engaged in duress.

4 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. 5 The common mistake or ‘bilateral mistake’ rule is now contained in the sale of goods legislation in each jurisdiction: Sale of Goods Act 1954 (ACT) s 11; Sale of Goods Act 1923 (NSW) s 11; Sale of Goods Act 1972 (NT) s 11; Sale of Goods Act 1896 (Qld) s 9; Sale of Goods Act 1895 (SA) s 6; Sale of Goods Act 1896 (Tas) s 11; Goods Act 1958 (Vic) s 11; Sale of Goods Act 1895 (WA) s 6. 6 Raffles v Wichelhaus (1864) 2 Hurl & C 906; 159 ER 375.

CHAPTER 9 Contract law: enforcement of the contract  331

CHECKLIST

A contract will be voidable due to duress if all of the following requirements are satisfied. ◼◼ One of the parties has expressly or impliedly threatened the other party with harm. ◼◼ The threat of harm contributed to the threatened party’s decision whether or not to enter into the contract.

Duress makes a contract a voidable contract rather than void. This means that rather than making the contract completely ineffective, the contract is still effective and enforceable until it is terminated by the other party. This distinction has important practical consequences when a third party is involved. Consider again this example: Johnny sells his oven to Jin, and Jin sells the oven to Xue (see figure 9.1).

Johnny

FIGURE 9.1

sells oven to

Jin

sells oven to

Xue

Sale by buyer to third party

If the contract between Johnny and Jin is void (e.g. because of unilateral mistake), ownership of the oven does not pass from Johnny to Jin and, therefore, Xue does not become the owner of the oven and must return the oven to Johnny. But if the contract between Johnny and Jin is only voidable (e.g. because of duress by Jin) it is valid and effective until Johnny terminates the contract, and if Jin has already sold the oven to Xue before Johnny terminates the contract, ownership has effectively passed to Xue and Johnny cannot recover the oven from Xue. ACTIVIT Y 9.4 — REFLECT

Think of another practical example to illustrate your understanding of the difference between ‘void’ and ‘voidable’ contracts.

Duress involves the threat of harm. The threat may be to the personal safety of the other party or to that of their loved ones. Barton v Armstrong [1973] 2 NSWLR 598

Armstrong was the chairman of the board of Landmark Corporation Ltd. Barton was Landmark’s ­managing director. In mid 1966, Barton and Armstrong’s relationship began to deteriorate. In November 1966 Armstrong was removed from the board. Armstrong demanded repayment of loans owed by Landmark to his family company, and in January 1967, Barton on behalf of Landmark agreed with Armstrong to buy out his interest. This agreement was set out in certain deeds signed by Barton on 17 January 1967. Barton commenced proceedings against Armstrong alleging that Armstrong had coerced him into signing the deeds by threatening to have him murdered and by otherwise exerting unlawful pressure upon him. He detailed numerous occasions between mid October 1966 and January 1967 in which Armstrong made threats against Barton’s life. The court decided that the deeds had been executed by Barton under duress and were void. Armstrong’s threats and unlawful pressure contributed to Barton’s decision to execute the deeds (even though it may be that due to commercial necessity he would have executed them in any event).

332  PART 2 Legal consequences

Seear v Cohen (1881) 45 LT 589

Seear pressured Cohen into signing a promissory note by telling him that if he did not, Seear would report Cohen’s son to the police for misappropriating money. The court decided that the promissory note was not enforceable against Cohen because he had signed it under duress.

The threat may be to the safety of the other party’s goods or property. Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298

Hawker Pacific Pty Ltd (Hawker Pacific) agreed to paint a helicopter belonging to Helicopter Charter Pty Ltd (HC). The job was not done properly and HC returned the helicopter to Hawker Pacific to fix the problems. When HC went to collect the helicopter from Hawker Pacific they were asked to sign an agreement releasing Hawker Pacific from all further liability for the paint job. Hawker Pacific implied that the helicopter would not be returned to HC unless the agreement was signed. HC signed the agreement, but later claimed that it was signed under duress. The court decided that by threatening to retain the helicopter belonging to HC, Hawker Pacific had engaged in duress, making the agreement signed by HC voidable and unenforceable.

The threat may be to the other party’s economic or financial wellbeing. This is known as economic duress. North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705

In April 1972, North Ocean Shipping Co Ltd (NOSC) entered into a contract with Hyundai Construction Co Ltd according to which Hyundai agreed to build a tanker for NOSC. The contract fixed the price of the tanker in US dollars and required NOSC to pay the price in five instalments. The first instalment was paid. In February 1973, the US dollar was devalued by 10%. In April 1973, Hyundai requested a 10 per cent increase in each of the final four instalments. There was no legal basis for this request. NOSC refused the increase and paid the second and third instalments in the amounts stipulated in the 1972 contract. Hyundai refunded these payments and continued to insist on the increase. In doing so, Hyundai made it clear to NOSC that it would not continue with construction of the tanker unless the increase was granted. In May 1973, unbeknownst to Hyundai, NOSC chartered the tanker to Shell at a particularly profitable rate, subject to the tanker being completed on time. In June 1973, due to the imperative of having the tanker completed on time, NOSC agreed to the requested increase. The tanker was delivered on time in November 1974. In July 1975, NOSC claimed the return of the extra 10 per cent paid on the final 4 instalments. Hyundai refused and NOSC commenced legal proceedings. The court decided that the June 1973 agreement was entered into by NOSC under economic duress and that, consequently, NOSC had the option of either affirming or avoiding the contract. (However, because NOSC had delayed making a claim for the return of the extra payments by more than 6 months, NOSC had impliedly affirmed the June 1973 agreement and NOSC could neither avoid the June 1973 agreement nor recover the extra payments.)

The difficulty in relation to economic duress is in establishing that the economic pressure exerted by one party over the other was not merely the kind of pressure that is typically and legitimately brought to bear by one business against another. The court will find financial pressure to amount to economic duress only if the pressure is in some way unlawful.

Undue influence The parties to the contract may have a pre-existing relationship where one party has a degree of influence or dominance over the other. If the stronger party takes advantage of their influence such that the CHAPTER 9 Contract law: enforcement of the contract  333

weaker party is not really exercising their independent judgment, the contract will be voidable by (and unenforceable against) the weaker party on the grounds of undue influence. CHECKLIST

A contract will be voidable due to undue influence if all of the following requirements are satisfied. ◼◼ The parties to a contract are in a pre-existing relationship such that one party has controlling influence over the other. ◼◼ The stronger party takes advantage of that influence such that the weaker party is not exercising their independent judgment when entering into the contract.

Undue influence will be presumed where the relationship between the parties is one of the following recognised relationships of influence: •• doctor and patient, •• lawyer and client, •• trustee and beneficiary, •• parent/guardian and child, or •• religious leader and follower. In these situations it will be up to the stronger party to establish that, despite the relationship, they did not exert their influence over the weaker party in making the contract. If they are unable to do so, the contract will be voidable. Allcard v Skinner (1887) 36 Ch D 145

Upon joining a religious order, Allcard took a vow of poverty and donated all of her property to the order. Five years after leaving the order, Allcard sought to have the gift set aside because of undue influence. The court confirmed that because the relationship between the parties was one of religious leader and follower, there was a presumption of undue influence that the religious order would have to rebut. (However, in the circumstances, Allcard had left it too long to seek to have the gift set aside, and she was deemed to have ratified (confirmed) the gift once she was no longer subject to the undue influence.)

Where the relationship between the parties is not one of these recognised relationships of influence, influence will not be assumed, and it will be up to the weaker party to establish that the stronger party had a controlling influence over their decision-making. Examples of situations where such a controlling influence might arise include contracts between: •• spouse and spouse, •• principal and agent, •• accountant and client, •• bank and client, •• employer and employee, and •• carer and patient. If the weaker party can establish that the stronger party does in fact have such a controlling influence it will then be up to the stronger party to convince the court that they did not take advantage of that influence. Johnson v Buttress (1936) 56 CLR 113

Buttress was 67 years old, illiterate, unintelligent and ignorant of business affairs. He had a history of relying on the advice of others in relation to business matters and had made frequent changes to his will. In 1931, he had become increasingly reliant on the advice of a distant relation of his deceased

334  PART 2 Legal consequences

wife, Mary Johnson. In April 1931, Buttress transferred a cottage to Johnson for no consideration. The transfer was executed in Johnson’s solicitor’s office. Buttress did not have independent advice about the transfer and there was evidence to show that he did not understand the irrevocable nature of the transfer. Buttress died in 1934. His son sued to have the transfer of the cottage set aside on the basis that it was made under undue influence. The court decided that the evidence established that a relation of trust and confidence did exist between Buttress and Johnson such that the presumption of undue influence arose. The Court further decided that Johnson was not able to rebut this presumption. The court explained as follows: ‘The jurisdiction of a court of Equity to set aside gifts inter vivos [made while living] which have been procured by undue influence is exercised where undue influence being presumed from the relations existing between the parties, the presumption has not been rebutted. Where certain special relations exist undue influence is presumed in the case of such gifts. These relations include those of parent and child, guardian and ward, trustee and cestui que trust [beneficiary], solicitor and client, physician and patient, and cases of religious influence. The relations mentioned, however, do not constitute an exhaustive list of the cases in which undue influence will be presumed from personal relations. Wherever the relation between donor and donee is such that the latter is in a position to exercise dominion over the former by reason of the trust and confidence reposed in the latter, the presumption of undue influence is raised.’7

Unconscionability To be a valid and enforceable contract, both of the parties to the agreement must behave conscionably; that is, they must behave fairly. A contract will be void due to unconscionable conduct if one party has unfairly taken advantage of a special weakness or disadvantage of the other party. Kitto J in Blomley v Ryan (1956) 99 CLR 362 explained the concept of unconscionability as follows: Whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.

Blomley v Ryan (1956) 99 CLR 362

In February 1952, Blomley’s father approached Ryan regarding the sale of Ryan’s grazing property in New South Wales to Blomley. Ryan responded that he would not be interested until the end of the year and that the price would be £33  264. Later that year, Ryan indicated that he would not be interested in selling the property until May 1953. Nevertheless, on 21 April 1953, Ryan signed a contract for the sale of the property to Blomley for £25   000. The contract confirmed the terms of an agreement that had been concluded on 20 April 1953 between Ryan, Blomley’s father and an agent who was acting on behalf of Blomley. At the time of making the agreement and signing the contract, Ryan was 78 years old and had been on a drinking bender for several days. Blomley, his father and the agent were aware of Ryan’s drinking habits. Blomley’s father and the agent had brought a bottle of rum to the meeting on 20 April 1953. Ryan did not obtain a copy of the contract until July 1953. He obtained legal advice and decided not to complete the contract. Blomley commenced proceedings seeking specific performance of the contract or, alternatively, damages for breach of contract. The court decided that at the time the agreement was made and the contract signed, Ryan was not capable of understanding its nature or effect and Blomley was aware of this. Consequently, the contract was unconscionable and equity would not enforce the contract by granting specific performance or allow it to be enforced at law.

7 Johnson v Buttress (1936) 56 CLR 113, 119.

CHAPTER 9 Contract law: enforcement of the contract  335

It must be established that the stronger party was aware of, or should have made themselves aware of, the other party’s special weakness or disadvantage. CHECKLIST

A contract will be void due to unconscionability if all of the following requirements are satisfied. ◼◼ One of the parties to the contract has a special weakness or disadvantage. ◼◼ The other party knows about or should know about that special weakness or disadvantage. ◼◼ The other party takes unfair advantage of that special weakness or disadvantage.

Commercial Bank of Australia v Amadio (1983) 151 CLR 447

Mr and Mrs Amadio, an elderly couple who spoke little English, were asked by their son to mortgage their property to the Commercial Bank of Australia as a guarantee for the debts that he owed. Mr and Mrs Amadio agreed, believing that their son’s business was successful and that their liability would be limited to $50  000. They were wrong on both counts. The bank manager took the mortgage and guarantee documents to Mr and Mrs Amadio to sign. The manager did not explain the documents to Mr and Mrs Amadio, nor did he check to see if they understood the risk and liability they were assuming. Mr and Mrs Amadio signed the documents without reading them. When the son defaulted on his loans, the bank sought to enforce the mortgage and guarantee over Mr and Mrs Amadio’s property. The court decided that the mortgage and guarantee were void due to unconscionability on the part of the bank. Mr and Mrs Amadio were in a position of special ­disadvantage because of their ignorance of their son’s indebtedness, their age and their inability to read and understand English. The bank knew about this disadvantage and should have taken steps to ensure that Mr and Mrs Amadio were better informed. The bank’s failure to do so amounted to unconscionable conduct.

A ‘special weakness or disadvantage’ may include: •• an inability to speak or read English, •• illiteracy, •• lack of education, •• poverty, •• sickness, •• age or youth, •• lack of intellectual capacity, •• ignorance of important facts, or •• intoxication. Bridgewater v Leahy (1998) 194 CLR 457

A farmer transferred farming land worth $700  000 to his nephew for $150  000. The farmer’s widow and daughters challenged the transaction. The court decided that it was an unconscionable transaction: the farmer uwas 84 years old at the time; the same local solicitor acted for both the farmer and the nephew, and the farmer did not receive independent legal advice; the farmer relied heavily upon the nephew, who had worked for him for 25 years; and the nephew had taken advantage of the farmer’s position of disadvantage.

In one notable case the ‘special weakness’ included being in love. 336  PART 2 Legal consequences

Louth v Diprose (1992) 175 CLR 621

Diprose was a solicitor and Louth was his client. Diprose was twice-divorced and middle-aged. He became infatuated with and emotionally dependent upon Louth. Louth claimed that she and her two children were about to be evicted from their home, and convinced Diprose to give her $60  000 for the purchase of a house. Diprose later sought to recover the gift, and the court decided to set the gift aside because of Louth’s unconscionable conduct: Diprose’s unrequited love for Louth put him at a special disadvantage, and Louth had unconscionably exploited Diprose’s love for her to benefit herself.

ACTIVIT Y 9.5 — REFLECT

Consider the cases described under the headings ‘mistake’, ‘duress’ and ‘undue influence’, and identify those that could also be categorised as ‘unconscionability’.

The notion that a contract can be set aside on the grounds of unconscionability is an equitable notion developed by the courts, but the legislature has adopted the notion, and unconscionable conduct is now prohibited by Part 2-2 of the Australian Consumer Law (ACL). Two types of unconscionable conduct are prohibited by the ACL: 1. unconscionable conduct generally: ACL s 20, and 2. unconscionable conduct when supplying goods or services to, or acquiring goods or services from, a person other than a listed public company: ACL s 21. These sections are examined in detail in a coming chapter.

Unfairness The Australian Consumer Law also seeks to address the use of unfair terms in consumer contracts. ACL s 23 states: 1. A term of a consumer contract is void if: (a)  the term is unfair; and (b)  the contract is a standard form contract. A finding by a court that a term is unfair, and therefore void, means that the term is treated as if it never existed. This section will also be examined in detail in a coming chapter. In New South Wales, the Contracts Review Act 1980 (NSW) allows the court to refuse to enforce a contract, to declare a contract void, or to vary the terms of a contract if it is of the view that the contract is ‘harsh, oppressive, unconscionable or unjust’. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions.  9.3 In what circumstances will a contract be unenforceable due to the lack of consent by one of the parties?  9.4 What is ‘caveat emptor’?  9.5 When will a mistake by one of the parties make the contract void?  9.6 What is ‘unilateral mistake’ and when will it make the contract void?  9.7 When will a mistake about the identity of the other party make a contract void?  9.8 What is ‘common mistake’ and when will it make the contract void?  9.9 What is ‘mutual mistake’? 9.10 What is ‘duress’ and in what circumstances will it make a contract voidable? 9.11 What is the difference between ‘physical duress’ and ‘economic duress’? 9.12 What is ‘undue influence’ and in what circumstances will it make a contract voidable? 9.13 When will ‘undue influence’ be assumed? If it is not assumed, can it still be pleaded? 9.14 What is ‘unconscionability’ and in what circumstances will it make a contract voidable?

CHAPTER 9 Contract law: enforcement of the contract  337

9.3 Remedies LEARNING OBJECTIVE 9.3 If the contract has been breached, when will the party seeking to enforce the contract be entitled to damages? When can they terminate the contract because of the other party’s breach? What other remedies are available in the event of a breach of contract?

If one party breaches a term of the contract (or, in some cases, a non-contractual representation or promise) and they are not protected from liability by an effective disclaimer, a number of possible legal remedies are available to the other party including: •• rescission, •• damages, •• equitable remedies, and •• statutory remedies. In this section we consider each of these remedies in detail.

Rescission Rescission is termination or cancellation of the contract as a consequence of a breach of the contract by the other party. Rescission may be a remedy granted by the court or the rescission may be conducted by the innocent party and, if challenged by the party allegedly in breach, subsequently endorsed by the court. For example, if Johnny breaches his contract with Jin, Jin can either attempt to rescind the contract herself, or she can commence legal proceedings and seek an order to the court that the contract is rescinded. When rescission is granted or endorsed by the court, the court will as far as possible seek to restore the parties to their original positions. For example, if after taking delivery of the pizza oven Jin is able to have the contract rescinded, Jin will have to return the oven to Johnny, and Johnny will have to repay the purchase price to Jin. ACTIVIT Y 9.6 — REFLECT

Why would a party not wish to terminate a contract despite the other party’s breach?

Not every breach of contract will entitle the other party to terminate the contract. The right to terminate the contract will depend upon whether there has been a complete or a partial failure to perform, and whether the partial failure to perform involves breach of a condition or of a warranty.

Complete failure to perform A party to a contract will completely fail to perform if: •• they make no effort at all to perform their contractual obligations, •• their actual performance is completely different to what they were required to do under the contract, or •• prior to the time for performance they clearly indicate that they will not be performing their obligations (anticipatory breach). For example, if Johnny and Jin agree that Jin will pay $10  000 for the pizza oven on Thursday, and on Wednesday Jin tells Johnny that she cannot afford to pay for the oven, Jin will have completely failed to perform by way of anticipatory breach. A complete failure to perform will entitle the other party to terminate the contract. It will also entitle the other party to damages and to equitable remedies such as specific performance or an injunction, considered below. If Jin breaches the contract by anticipatory repudiation, Johnny is entitled to terminate the contract immediately and sell the oven to someone else, even if the actual time for Jin’s performance has not 338  PART 2 Legal consequences

yet arrived.8 However, Johnny should be careful not to act too promptly, because if it turns out that he was not entitled to terminate the contract early, his action will itself amount to a breach of the contract entitling Jin to a remedy. Gold Coast Oil Co Pty Ltd v Lee Properties Pty Ltd [1985] 1 Qd R 416

Gold Coast Oil (GCO) entered into a contract with Lee Properties (LP) according to which GCO would lease certain premises from LP following the completion of certain alterations to the premises by GCO. GCO informed LP that the alterations would not be completed until economic conditions became more favourable. LP terminated the contract and GCO challenged its right to do so. The court decided that GCO’s conduct amounted to anticipatory breach and that LP was therefore entitled to terminate.

Partial failure to perform In most cases the party in breach of the contract will be in breach not because of a complete failure to perform but because they have only partially performed the contract. A party to a contract will partially fail to perform the contract if they comply with some of the terms of the contract but breach one or more of the other terms. Partial failure to perform is still a breach of the contract, entitling the other party to damages and the range of equitable remedies. But what about rescission? If one party breaches a single term of the contract, is the other party entitled to terminate the contract? This will depend upon whether the term breached was a condition or a warranty. Condition or warranty

A condition is a term of the contract of fundamental importance. In the absence of such a term, the party favoured by the term would not have entered into the contract in the first place. If one party breaches a term that is a condition, the other party has the right to: •• confirm the contract and recover damages, or •• terminate the contract and recover damages. A warranty is a term of the contract of lesser importance. In the absence of such a term, the party favoured by the term would have entered into the contract anyway. If one party breaches a term that is a warranty, the other party does not have the right to terminate the contract, although they will still have the right to seek one of the other remedies described below, including damages. Sometimes the parties will explicitly categorise the various terms of the contract as conditions or warranties. More commonly, the categorisation must be worked out from the conduct of the parties and the context of the transaction. Bettini v Gye (1876) 1 QBD 183

Bettini was a singer and Gye was a promoter. Bettini and Gye entered into a contract according to which Bettini would sing for Gye at various events over a 15-week period. Bettini was obliged to attend rehearsals for 6 days before the first event, but missed 4 days of rehearsals due to illness. Gye sought to terminate the contract. Was the term requiring Bettini’s attendance at rehearsals a condition or a warranty? The court decided that it was warranty: the requirement that Bettini attend rehearsals was a term of lesser importance, not a term of vital importance. Gye was not entitled to terminate the contract.

8 Mahoney v Lindsay (1980) 33 ALR 601.

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Associated Newspapers Ltd v Bancks (1951) 83 CLR 322

Associated Newspapers Ltd was the publisher of a newspaper and Bancks was a cartoonist. Bancks entered into a contract with Associated Newspapers Ltd to provide a weekly full-page cartoon that Associated Newspapers Ltd promised to publish on the front page of its comics section. For three weeks Associated Newspapers Ltd published Bancks’ cartoon on page 3 of the comics section. Bancks sought to terminate the contract. Was Associated Newspapers Ltd’s promise a condition or a warranty? The court decided that the circumstances indicated that it was a condition, because if Associated Newspapers Ltd had not promised to publish the cartoon on the front page, Bancks would not have entered into the contract. Bancks was therefore entitled to terminate the contract.

Late performance of a contractual obligation will usually be treated as a breach of a warranty rather than a breach of a condition, unless the parties have expressly agreed that timely performance is an essential term of the contract. ACTIVIT Y 9.7 — REFLECT

Why is a party to a contract entitled to terminate the contract if the other party breaches a condition but not if they breach a warranty? Intermediate terms

Sometimes it is not possible to categorise a term of the contract as either a condition or a warranty. Such terms are called intermediate terms. Whether or not a breach of an intermediate term entitles the other party to terminate the contract depends upon the seriousness of the breach: a serious breach will justify termination, a minor breach will not. A serious breach is a breach that deprives the other party substantially of the benefit for which they entered into the contract in the first place. Cehave NV v Bremer Handelsgesellschaft mbH; The Hansa Nord [1976] QB 44

Cehave NV purchased a shipment of citrus pellets from Bremer Handelsgesellschaft mbH (BH) to be used as animal feed. The contract required the pellets to be in ‘good condition’. The pellets were not in good condition, although they were still good enough to use as animal feed. Was Cehave NV entitled to reject the shipment and terminate the contract? The court decided that the term requiring the pellets to be in good condition was an intermediate term, and that, therefore, Cehave NV would only be entitled to terminate the contract in the event of a serious breach of the term. The breach in this case was not a serious breach because the pellets could still be used by Cehave NV for the purpose for which they were purchased. Cehave NV was obliged to accept and pay for the pellets, although he was entitled to damages from BH as compensation for the decline in the value of the pellets as a result of the breach.

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115

A contract existed between the Council and Sanpine relating to development by Sanpine of the Council’s land. Sanpine was obliged under the terms of the contract to maintain certain financial records, and when financial mismanagement contributed to the Council eventually going into administration, the Council administrator terminated the contract with Sanpine. Sanpine insisted that the administrator was not entitled to terminate the contract because the terms that had been breached were not conditions. The court decided that the terms relating to the keeping of financial records were either conditions or intermediate terms, the breach of which had been so serious that the administrator was entitled to terminate the contract.

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CAUTION!

A breach of contract will not necessarily entitle the other party to terminate the contract. It will depend upon whether the breach is of a condition or a warranty, or a serious or minor breach of an intermediate term.

Loss of right to payment

The party who has partially failed to perform the contract cannot enforce the contract themselves, so if the other party refuses to pay for the partial performance, the party in breach cannot compel them to pay except in certain circumstances. For example, if Johnny delivers the pizza oven to Jin on Saturday instead of on Friday as agreed, he has partially failed to perform the contract and is in breach of one of the terms. If Jin then refuses to pay for the oven, can Johnny still enforce the contract? Partial failure to perform will not lead to the party in breach completely losing the right to enforce payment in the following circumstances. 1. If the contract between the parties is ‘divisible’, the party in breach can enforce payment for those parts of the contract that have been performed. A divisible contract is one under which the party providing the goods or the services is payable in stages (e.g. a builder being entitled to payment upon completion of each stage of construction). Even though the party has not completely performed the contract they are entitled to enforce quantum meruit payment (i.e. the amount they deserve) for those stages that have been completed. On the other hand, if the contract is one that requires performance in full before the entitlement to payment arises, the party in breach cannot enforce payment unless they fall within one of the other two exceptions. A contract will be presumed to be divisible in the absence of express words to the contrary. Cutter v Powell (1795) 6 Term R 320; 101 ER 573

Cutter agreed to sail as second mate for Powell on a return voyage from London to Jamaica in return for a payment of 30 guineas. Cutter completed most of the voyage but died before the ship returned to London. Cutter’s widow sued for part payment based on the proportion of the voyage that Cutter had completed. The court decided that the contract was not divisible, that Cutter was only entitled to payment upon complete performance and that Cutter’s wife was not entitled to any payment at all in the circumstances.

2. If the party in breach has substantially performed their obligation (i.e. there is only a small difference between what the party was required to do and what they actually did), the party in breach will still be entitled to enforce payment, subject to a small adjustment in the price to reflect their failure to perform the contract completely.9 In the example with Johnny and Jin, it is likely that Johnny will be able to rely upon this exception to recover payment from Jin subject to a small adjustment for the late delivery. 3. If the other party has chosen to accept the partial performance, the party in breach can enforce payment but they will only be paid quantum meruit rather than the full amount agreed upon in the contract. This means that the other party will be entitled to a pro rata reduction in the price payable.

9 Hoenig v Isaacs [1952] 2 All ER 176.

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Steele v Tardiani (1946) 72 CLR 386

Tardiani was engaged by Steele to cut firewood. The contract provided that Tardiani was to cut the wood to be six inches in diameter and that Steele would pay Tardiani six shillings per tonne of wood. Tardiani delivered 1500 tonnes of cut wood, but it was cut into pieces ranging from six to fifteen inches in diameter. Was Tardiani entitled to insist upon payment? The court decided that Tardiani had partially failed to perform the contract and that he was therefore in breach. However, Steele had accepted the partial performance by Tardiani because Steele knew that Tardiani was cutting the wood too wide, but had told Tardiani that Tardiani would be paid anyway. Steele had waived his right to insist on complete performance, and Tardiani therefore had the right to enforce payment to the value of the work actually done.

A well drafted contract will avoid uncertainty about this issue by clearly setting out the consequences of a partial failure to perform in terms of entitlement to payment.

Damages A plaintiff will be entitled to damages in the event of: •• any breach of contract by the defendant, whether total or partial, actual or anticipatory, condition or warranty, •• breach of a collateral contract by the defendant, or •• fraudulent or negligent misrepresentation by the defendant. The objective of the court in making an award of damages is to restore the plaintiff to the position they would have been in if the breach or misrepresentation had not occurred; that is, if the contract has been performed properly (as in the following examples). •• If Jin defaults under a loan contract with Johnny, Johnny is entitled to damages equivalent to the total  amount of repayments, including interest, which he would have received if Jin had not defaulted. •• If Johnny contracts with Jin to sell his pizza oven to Jin for $10  000 and Johnny then refuses to complete the contract, Jin is only entitled to claim damages if she is unable to buy a similar oven elsewhere for the same price or lower. If she can buy the same oven elsewhere but at a higher price, the amount of her damages claim will be the difference in the prices, plus any additional expenses incurred in finding the other oven. •• If, on the other hand, Jin breaches the contract by refusing to accept delivery of Johnny’s oven, Johnny will only be entitled to claim damages if he cannot sell the oven to someone else at the same price or higher. If he can only sell the oven to someone else at a lower price the amount of his damages claim will be the difference in the prices, plus any additional expenses incurred in finding the other buyer. If the plaintiff has not suffered any actual loss as a result of the breach of contract, they will only be entitled to nominal damages. This is a token amount (e.g. $1) that merely affirms that the defendant was in the wrong.10 In practice, a plaintiff in these circumstances is unlikely to have commenced a legal action in the first place. In exceptional circumstances, such as where the defendant has intentionally breached the contract in an effort to maliciously cause harm to the plaintiff, the court may award exemplary damages. This is an award of damages in an amount above and beyond mere compensation and is intended by the court to penalise or punish the defendant and to act as a deterrent.11

10 Charter v Sullivan [1957] 2 QB 117. 11 Hospitality Group Pty Ltd v Australian Rugby Union (2001) 110 FCR 157.

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Liquidated and unliquidated damages Damages that can be easily calculated in advance are liquidated damages. For example, if Johnny is 2 months in arrears in the payment of the rent for his restaurant, the damages payable to his landlord are easily calculated: the monthly rent multiplied by two. Damages payable to the plaintiff that cannot be easily calculated in advance are called unliquidated damages. Examples of unliquidated damages include compensation for the plaintiff’s pain and suffering, anxiety, distress, disappointment, frustration or discomfort as a result of the breach of contract. The terms of the contract are unlikely to include a pre-estimate of such damages and it will be up to the court itself to calculate them. Sometimes the parties to a contract calculate in advance the quantity of damages to which one party will be entitled in the event of breach by the other party, and include a ‘liquidated damages clause’ in the contract. As long as the liquidated damages clause is a genuine pre-estimate of likely losses, the court will enforce the clause. If, however, the clause is interpreted as imposing a penalty on the defendant it will not be enforced and the court will calculate the damages payable for itself.12

Direct and indirect losses In the event of a breach of contract by the defendant, the plaintiff will be entitled to compensation for direct losses and may be entitled to compensation for indirect losses. Direct losses are those losses incurred by the plaintiff that flow naturally from the breach according to the ordinary course of events. Damages payable for direct losses are called general damages (or normal damages). Koufos v C Czarnikow Ltd; The Heron II [1969] 1 AC 350

Czarnikow Ltd and Koufos entered into a contract according to which Koufos would ship a quantity of Czarnikow Ltd’s sugar from Romania to Iraq. Koufos took 10 days longer than expected to deliver the sugar and, as a result of a decline in the price of sugar over that period, Czarnikow did not make as much money when the sugar was sold in Iraq. Czarnikow Ltd sued Koufos for breach of contract and sought damages to compensate him for the amount of the loss. The court decided that the loss incurred as a result of the drop in the price of sugar was a direct loss arising from Koufos’ breach: Koufos would have been aware that a delay in delivery might lead to such a loss.

Losses that are not caused directly by the breach or that would not ordinarily be expected to result from the breach are called indirect losses or consequential losses. Such losses are recoverable only if it can be shown that the parties had the possibility of such losses in mind when the contract formed — for example, if the plaintiff had expressly made the defendant aware of the possibility of such a loss. Damages payable for indirect losses are called special damages (or abnormal or extraordinary damages). Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145

Hadley was the owner of a mill and Baxendale was a courier. Hadley engaged Baxendale to deliver a broken mill shaft to the shaft manufacturer for repair. Baxendale promised to deliver the shaft the next day, but actually took a number of days to make the delivery. Because Hadley only had the one shaft, the mill stood idle for the whole time the shaft was being transported and repaired. Hadley sued Baxendale for breach of contract and he sought compensation for his loss of profits for that period. The court decided that Hadley’s loss of profits was an indirect loss caused by Baxendale’s breach. As such, Hadley was only entitled to compensation if it could be shown that Baxendale was aware of the possibility of such a loss at the time the contract was formed. Baxendale did not know that the shaft was Hadley’s only shaft and that the mill would be idle without it, and in the court’s opinion Baxendale was entitled to assume that Hadley had a spare shaft. Hadley was not entitled to compensation for the loss of profits.

12 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359.

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CAUTION!

The defendant is not liable for all of the harm suffered by the plaintiff as a result of the defendant’s breach of contract, only for those losses incurred by the plaintiff that are either natural or anticipated.

Mitigation When one party breaches the contract, the other party is under an obligation to mitigate their loss.13 This means that they are obliged to take all reasonable steps to minimise their loss. If, for example, Johnny breaches a five-year commercial lease by vacating the property six months before the expiry of the lease term, the landlord is not entitled to leave the property vacant for the six months and then claim from Johnny damages equivalent to six months rent. Rather, the landlord is obliged to take all reasonable steps to seek a new tenant, and the amount of their damages claim is limited to the loss actually incurred by them: the cost of re-advertising the property, rent for the period that the property was vacant, and the shortfall, if any, between the monthly rent payable by Johnny and the rent being paid by the new tenant. As you will recall from an earlier chapter, a person harmed by the negligence of another has a similar obligation. Brace v Calder [1895] 2 QB 253

The plaintiff was an employee of a partnership. When the partnership was dissolved the plaintiff’s employment contract was effectively, and illegally, terminated. Two of the partners became the new owners of the business and they offered to re-employ the plaintiff on the same terms as his original employment. The plaintiff refused the offer and instead sued the original partnership for damages for breach of contract. The court decided that while the partnership had in fact breached the plaintiff’s employment contract, the plaintiff had by refusing the offer of new employment failed to comply with his obligation to mitigate, and the court awarded the plaintiff nominal damages only.

ACTIVIT Y 9.8 — REFLECT

Why does the law require a party to mitigate their loss?

Equitable remedies If the plaintiff can demonstrate to the court that an award of damages is not a satisfactory remedy, the court may decide to provide an equitable remedy. Equitable remedies include specific performance and injunction. ACTIVIT Y 9.9 — REFLECT

Give three examples of situations where an award of damages would not be a satisfactory remedy for the plaintiff.

13 Payzu Ltd v Saunders [1919] 2 KB 581.

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Equitable remedies are discretionary: it is up to the court to decide whether or not an equitable remedy should be granted. Equitable remedies will not be granted if: •• an award of damages would be adequate, •• the plaintiff has delayed in bringing the action (called laches), or •• the plaintiff has behaved unfairly or unconscionably.

Specific performance An order of specific performance is a court order directing the defendant to fulfil their contractual obligations. In other words, instead of ordering the defendant to pay monetary compensation to the plaintiff, the court orders the defendant to do what they promised to do under the contract. The court will not order specific performance if the contract is one that requires the defendant to provide a personal service, since (1) such a contract requires goodwill on the part of the defendant and if they were ordered to carry out the service they may do so poorly, and (2) the court would have to monitor the defendant’s performance on an ongoing basis, which courts are usually unwilling to do.14 The court will not order specific performance if the defendant has failed to deliver certain goods to the plaintiff and those goods are readily available from another supplier. In such circumstances damages will be an adequate remedy. Specific performance will only be ordered if the goods are unique or rare, or have a special or particular value. Dougan v Ley (1946) 71 CLR 142

Ley contracted with Dougan to purchase Dougan’s taxicab and operating licence. Dougan then changed his mind and Ley sued Dougan for breach of contract. Ley sought an order for specific performance. The court granted the order: taxicab operating licences were not readily available on the market, and therefore an award of damages was not an adequate remedy.

Injunction An injunction is a court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. An injunction may be sought by the plaintiff to prevent the defendant from engaging in a threatened or anticipated breach of contract, or in an actual ongoing breach of contract. An injunction is more likely to be granted than an order for specific performance. Buckenara v Hawthorn Football Club Ltd [1988] VR 39

Buckenara was contracted to play professional football for the Hawthorn Football Club. One of the terms of the contract provided that Buckenara could not play for any other club during the period of the contract with Hawthorn. When Buckenara expressed an intention to play for another club, Hawthorn successfully obtained an injunction prohibiting Buckenara from doing so.

An injunction thus differs from an order of specific performance because the defendant is not being compelled to actually perform the contract (which, as we have seen, courts are often reluctant to do), only prohibited from engaging in particular conduct that would amount to a breach of the contract. The defendant can still refuse to perform their contractual obligations in other ways. Injunctions are used in a wide variety of situations, not only in the event of a breach of contract. For example, we explained in an earlier chapter that they can be used to prevent a person committing a tort.

14 JC Williamson Ltd v Lukey & Mulholland (1931) 45 CLR 282.

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Statutory remedies If the term breached is one of the terms implied into the contract by the sale of goods legislation, the legislation provides a range of remedies.

Seller’s remedies If it is the buyer of goods who has breached the contract, the legislation grants the seller certain remedies.15 •• If the buyer refuses to accept delivery of the goods, the seller is entitled to compensation for any expenses thereby incurred. •• If the buyer has not paid for the goods and the seller still has possession of the goods, the seller can retain possession of the goods until they are paid, or resell the goods to another buyer. •• If the buyer refuses to pay for the goods, the seller is entitled to sue for the price.

Buyer’s remedies If it is the seller of goods who has breached the contract, the legislation grants the buyer a number of remedies.16 •• If the seller has failed to deliver the goods, the buyer is entitled to sue the seller for damages. If the goods are rare or unique and damages would not be an adequate remedy, the buyer is entitled to sue for specific performance. •• If the seller has delivered the goods, but the goods are in breach of the implied terms relating to title, description, fitness, quality or sale by sample, the buyer will be entitled to sue the seller for damages. •• If the implied term that has been breached by the seller is described in the legislation as a warranty, then the buyer is only entitled to sue for damages. If, however, the implied term that has been breached by the seller is described in the legislation as a condition, then the buyer is also entitled to reject the goods and treat the contract as at an end. The buyer loses this right if they are deemed to have accepted the goods. Additional remedies available to consumers under the ACL are examined in a coming chapter. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 9.15 What is the remedy of rescission? 9.16 Does anticipatory breach entitle the other party to terminate the contract? 9.17 What are the consequences of partial failing to perform a contract? 9.18 What is the difference between a ‘condition’ and a ‘warranty’? 9.19 What is an ‘intermediate term’? When will breach of an ‘intermediate term’ entitle the other party to terminate the contract? 9.20 When will a person who has partially failed to perform a contract be entitled to enforce the contract? 9.21 How are damages calculated? 9.22 What are (a) nominal damages, and (b) exemplary damages? 9.23 What are (a) liquidated damages, and (b) unliquidated damages? 9.24 When will the plaintiff be entitled to compensation for (a) direct losses, and (b) consequential losses? 9.25 What does it mean to say that the plaintiff has a duty to ‘mitigate’ their loss? 9.26 What is specific performance and when will it be awarded? 15 Sale of Goods Act 1954 (ACT) ss 41–52; Sale of Goods Act 1923 (NSW) ss 40–51; Sale of Goods Act 1972 (NT) ss 40–52; Sale of Goods Act 1896 (Qld) ss 39–50; Sale of Goods Act 1895 (SA) ss 37–48; Sale of Goods Act 1896 (Tas) ss 42–53; Goods Act 1958 (Vic) ss 44–55; Sale of Goods Act 1895 (WA) ss 37–48. 16 Sale of Goods Act 1954 (ACT) ss 54–56; Sale of Goods Act 1923 (NSW) ss 53–55; Sale of Goods Act 1972 (NT) ss 53–56; Sale of Goods Act 1896 (Qld) ss 52–54; Sale of Goods Act 1895 (SA) ss 50–52; Sale of Goods Act 1896 (Tas) ss 55–57; Goods Act 1958 (Vic) ss 57–59; Sale of Goods Act 1895 (WA) ss 50–52. 346  PART 2 Legal consequences

9.27 What is an injunction? 9.28 What statutory remedies are provided by the sale of goods legislation to (a) sellers, and (b) buyers?

9.4 The end of the contract LEARNING OBJECTIVE 9.4 How can a contract be terminated by agreement? When will a contract be frustrated?

We have explained that a contract can come to an end because both parties have performed their obligations, or because the contract has been terminated by one party as a result of a breach of the contract by the other party. In this section we consider two other ways a contract can come to an end: agreement and frustration.

Agreement The parties to the contract can agree to voluntarily end the contract. There are a number of different ways this can happen. •• Both parties can agree to mutually release each other from any future obligations. The consideration for each party’s promise not to enforce the contract is the other party’s promise to do the same thing. •• The party who has already fully performed their own obligations can promise to unilaterally release the other party from complete performance of their obligations. This promise is only enforceable if it is in the form of a deed, or is supported by consideration, or satisfies the requirements of promissory estoppel (see the discussion regarding part payment of existing debts in an earlier chapter). •• The parties can mutually agree to replace the existing agreement with a new agreement on different terms; this is called novation (see above). The consideration for release from the old contract is entry into the new contract. •• The contract may contain a condition precedent that has not been satisfied, or a condition subsequent that has been satisfied.

Frustration Something might happen that is not the fault of either of the parties but which makes performance of the contract impossible or only possible in a way that neither of the parties anticipated. This is called frustration. For example, Johnny might agree with Jin that he will sell Jin his pizza oven for $10  000. Unfortunately, after the contract is formed but before delivery can take place, Johnny’s oven is destroyed by fire. He no longer has a contractual obligation to provide an oven to Jin, and he does not have to compensate Jin for failing to provide the oven, because the contract is said to have been frustrated. A contract will come to an end as a result of frustration if a ‘supervening event’ makes performance of the contract either completely impossible or at least impossible to perform in the way originally envisaged by the parties, and it would be unjust to compel either party to proceed with the contract. The contract will not be frustrated if either party caused the supervening event, or if the contract provided for the supervening event either expressly or by implication. CHECKLIST

A contract will be frustrated if all of the following requirements are satisfied. ◼◼ A ‘supervening event’ has made performance of the contract either completely impossible or at least impossible to perform in the way originally envisaged by the parties. ◼◼ Neither party caused the supervening event. ◼◼ The contract did not provide for the supervening event either expressly or by implication. ◼◼ It would be unjust to compel either party to proceed with the contract.

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Examples of supervening events include the following. •• The subject matter of the contract is unexpectedly destroyed. Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309

Taylor and Caldwell entered into a contract according to which Caldwell would hire his hall to Taylor for four concerts. Between the making of the contract and the dates of the booking, Caldwell’s hall was destroyed by fire. Taylor sought damages (compensation) from Caldwell as a result of his failure to provide the hall. The court decided that the contract had been frustrated and that Caldwell was under no further contractual obligation to provide a hall to Taylor.

•• The sale of goods legislation specifically states that if there is an agreement to sell specific goods and, before risk passes to the buyer, the goods perish without any fault on the part of the seller or buyer, the agreement is avoided.17 •• One of the parties to the contract dies, where the contract required them to perform a personal service. •• An unexpected change in the law makes performance of the contract illegal.18 •• The anticipated event that gave rise to the contract in the first place does not, in fact, occur. Krell v Henry [1903] 2 KB 740

Henry and Krell entered into a contract according to which Henry would rent a room in Krells’ home for one day to watch the coronation procession pass by in the street below. The coronation procession was cancelled, but Krell nevertheless sought to enforce the contract. The court decided that the contract had been frustrated by the cancellation of the coronation procession.

•• The conditions under which one of the parties is obliged to perform their obligations change dramatically. Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337

Codelfa was engaged by the NSW State Rail Authority (SRA) to build two tunnels in Sydney. When agreeing upon a price, Codelfa had believed that it would be possible to work on the tunnel 24 hours a day, but shortly after commencing work local residents obtained an injunction that imposed limits upon the hours Codelfa could undertake construction work. The delays imposed by the injunction meant that Codelfa’s costs would be substantially increased. Had the contract been frustrated? The court decided that the injunction was an unforeseen event outside the control of the parties, and that while performance by Codelfa was still possible it would be in a manner substantially different to that originally envisaged by the parties. The contract had been frustrated and Codelfa was able to negotiate a new contract, on different terms, with SRA.

While it is not necessary to show that performance is completely impossible, it is necessary to show that as a result of the frustrating event, performance will be substantially different, not merely more difficult or more expensive for one of the parties. 17 Sale of Goods Act 1954 (ACT) s 12; Sale of Goods Act 1923 (NSW) s 12; Sale of Goods Act 1972 (NT) s 12; Sale of Goods Act 1896 (Qld) s 10; Sale of Goods Act 1895 (SA) s 7; Sale of Goods Act 1896 (Tas) s 12; Goods Act 1958 (Vic) s 12; Sale of Goods Act 1895 (WA) s 7. 18 Esposito v Bowden (1857) 7 El & Bl 763; 119 ER 1430.

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Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

The Fareham Urban District Council engaged Davis Contractors Ltd (DC) to construct 78 houses within six months. Due to a shortage of labour and materials the work took longer than expected and cost an additional £17  000. DC wished to renegotiate the price payable by the council and argued that the original contract had been frustrated. The court decided that the contract had not been frustrated. DC’s costs had unexpectedly increased, but this did not amount to performance only being possible in a manner unanticipated by either of the parties.

The frustrating event must be beyond the control of the contracting parties. If the event was the outcome of the deliberate actions or decisions of one of the parties, it is not frustration.19 ACTIVIT Y 9.10 — REFLECT

Why is it necessary that the frustrating event be ‘beyond the control of the parties’?

When a contract is frustrated, all outstanding obligations of the parties are discharged. However, any obligations that have already been performed cannot be reversed or recovered. In the example above, if Jin had already paid a deposit for the oven to Johnny before the frustration event, that deposit cannot be recovered. The exception is if there has been a ‘total failure of consideration’ — in other words, Jin has received nothing at all from Johnny in return for paying the deposit. In those circumstances Jin can recover the deposit from Johnny. Legislation in New South Wales and South Australia allows a person to recover money paid, or payment for performance rendered, under a contract that has subsequently been frustrated.20 REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 9.29 In what ways can the parties to a contract end the contract by agreement? 9.30 When will a contract be frustrated? 9.31 What is the effect of frustration?

In conclusion •• According to the doctrine of privity of contract, a contract can only be enforced by — and against — a party to the contract. As a general rule, it cannot be enforced by or against third parties. •• A contract may be unenforceable if (1) both parties made a common mistake or a mutual mistake, or one party made a unilateral mistake that the other party has unfairly sought to take advantage of; (2)  one party pressured the other party into entering into the contract using physical or economic duress, or undue influence; or (3) one party unconscionably took advantage of a special weakness or disadvantage on the part of the other party. •• A breach of contract will entitle the other party to terminate the contract if the breach was of a condition and not a warranty, or it was a serious breach of an intermediate term. It will also entitle them to claim damages, that is, monetary compensation. The other party may be entitled to equitable remedies such as specific performance or an injunction, but these remedies are only granted if damages

19 Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524. 20 Frustrated Contracts Act 1978 (NSW); Frustrated Contracts Act 1988 (SA).

CHAPTER 9 Contract law: enforcement of the contract  349

are demonstrated to be an inadequate remedy. If the contract is for the sale of goods, the sale of goods legislation may offer additional remedies. •• The parties to a contract can agree to end a contract by agreement. If a supervening event outside the control of the parties makes performance of the contract impossible, or only possible in a way the parties did not anticipate, the contract is said to have been frustrated. JOHNNY AND ASH

[Johnny and Ash are sitting in the now empty bar. There are four empty coffee cups on the table, indicating that they have sat talking for some time.] Ash — Okay, so we have established that Maria’s promise not to interfere with the running of the business was a term of the contract between the two of you, and that by not keeping her promise she is actually in breach of the contract. Johnny — That’s great! So now what? Ash — Well, we should work out what it is, exactly, that you want. Johnny — What are my options? Ash — Well, if you sued her for breach of contract you might be entitled to monetary compensation. Or the court might be willing to order Maria to keep her promise and stop interfering with the running of the business. Or you might even be entitled to terminate the contract with Maria completely. Johnny — Can I arrange for Maria to be arrested and thrown into jail? Ash — No, Johnny. Do I need to explain the difference between civil law and criminal law again? Johnny — That’s okay. I remember. Actually, I am happy to keep going with our partnership. I just want to make sure that we do things the way we originally agreed. Ash — Okay, that would be specific performance, or possibly even an injunction to prevent Maria coming into the restaurant every night and taking control. Of course, we would prefer not to actually go to court and get orders for specific performance or an injunction. If things get that serious your relationship with Maria – who is after all your business partner – are likely to get rather tense. Johnny — So what do I do? Ash — As usual, we start by trying to talk it though and negotiate a mutually satisfactory outcome. Organise a meeting with Maria and remind her of her promise. Gently let her know that you are confident that her promise is in fact a term of the contract that the two of you made. Ask her nicely to stick to what you both agreed. Hopefully that will resolve the matter, and things won’t have to get litigious. Johnny — I’ll give it a shot.  .  .  .  Will you come with me? Ash — Sure. But not as your lawyer. I‘ll be there as your friend. Johnny — Is that what we are Ash? Friends?

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QUIZ 1 X, a real estate agent, arranges for a house owned by Y to be leased to two tenants, Mr Z

and Mrs Z. Which of the following is least likely to be permitted to enforce the rental contract? (a) X. (b) Y. (c) Mr Z. (d) Mrs Z. 2 Which of the following mistakes will not render a contract void? (a) The buyer has mistakenly purchased the wrong colour product. (b) The buyer has purchased a product that they mistakenly believe to be a valuable antique and the seller knows about the buyer’s mistaken belief. (c) The buyer has agreed to purchase shares in a company; unknown to both the buyer and seller the company has been liquidated. (d) The buyer thought they had agreed to purchase product ‘A’ from the seller; the seller thought they had agreed to sell product ‘B’. 3 Which of the following is least likely to be classified as duress? (a) A threat to cause harm to the property of the other party to the contract. (b) A threat to cause harm to the property of the person making the threat. (c) A threat to cause physical harm to the other party to the contract. (d) A threat to cause physical harm to a close relative of the other party to the contract. 4 In which of the following contracts will undue influence not be presumed? (a) A contract between doctor and patient. (b) A contract between lawyer and client. (c) A contract between husband and wife. (d) A contract between parent and child. 5 Which of the following is NOT an essential requirement in establishing unconscionable conduct by X in a contract between X and Y? (a) X has a special weakness or disadvantage. (b) X knows about or should know about that special weakness or disadvantage. (c) X takes unfair advantage of that special weakness or disadvantage. (d) None of the above. 6 If one party fails to fully perform their obligations under a contract, the other party is not entitled to terminate the contract if (a) the breach is of a condition. (b) the breach is of a warranty. (c) the breach is a serious breach of an intermediate term. (d) none of the above. 7 Late performance of a contractual obligation will usually be treated as (a) a breach of a condition. (b) a breach of a warranty. (c) a breach of an intermediate term. (d) not a breach of contract.

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 8 X agrees to rent equipment to Y for a period of six months at a rental of $10  000 per month.

After two months Y returns the equipment and makes no further rental payments. One month later, after spending $50 advertising the equipment, X is able to rent the equipment to Z for $9000 per month for six months. What is the amount of the damages that X is entitled to from Y? (a) $10  050 (b) $13  050 (c) $16  050 (d) $40  050  9 A contract is not frustrated by (a) an event that makes performance by one of the parties more expensive or inconvenient than expected. (b) the destruction of the subject matter of the contract. (c) an unexpected change in the law, making performance illegal. (d) the non-occurrence of an event that gave rise to the contract in the first place. 10 X has paid Y a deposit for a room in the hotel of Y. Before the date of the booking the hotel is flooded. In this case, which of the following statements is correct? (a) X cannot recover the deposit because the contract has been frustrated. (b) X cannot recover the deposit because the contract is void ab initio. (c) X can recover the deposit because Y has breached the contract. (d) X can recover the deposit because there has been a total failure of consideration.

EXERCISES EXERCISE 9.1 — MISTAKE

Johnny buys a pair of diamond earrings for $4000 for Ash for her birthday from Gemstone Jewellery. Ash insists upon only wearing ‘ethical’ jewellery and Gemstone Jewellery insists that the diamonds in the earrings are not conflict diamonds. When Ash later has the earrings valued for insurance purposes she learns that Gemstone Jewellery were mistaken and that the diamonds are in fact conflict diamonds. What rights does Johnny have against Gemstone Jewellery? Focus on the law of mistake. EXERCISE 9.2 — DURESS

The waiters at Johnny’s restaurant, Dan and Sam, have been pestering Johnny for weeks about getting an increase in their hourly rate. Johnny repeatedly explains to Dan and Sam that he cannot agree to a pay rise without first speaking to his accountant, and that he will not have time to do so until the end of the month. Dan and Sam are becoming increasingly frustrated with Johnny’s refusal to consider their request. One Friday evening, during the busiest part of the shift, Dan and Sam confront Johnny and tell him that unless he agrees to increase their hourly rate by $5 per hour, they are going to walk out, leaving him to serve the customers on his own. Johnny has no choice but to agree to their request. He promises to adjust their pay as requested. Is Johnny legally obliged to keep his promise? Focus upon whether or not Dan and Sam have engaged in duress. EXERCISE 9.3 — UNDUE INFLUENCE

Ross, Ash’s next door neighbour, is illiterate and suffers from severe depression. Ross relies upon Ash for advice and support. Ross wants to sell some land that he owns and Ash agrees to buy the land from Ross. Ross accepts the first price that Ash offers (without seeking independent legal or financial advice) and Ross signs the contract of sale. Ross’s brother Robert has now called Ash to express his concern about the contract price. Can Ross cancel the sale? 352  PART 2 Legal consequences

EXERCISE 9.4 — CONDITIONS AND WARRANTIES

Ash agrees to buy Stephen’s car. She meets Stephen at his house where she hands over a bank cheque in exchange for the transfer papers and the keys to the car. When she gets into the car she discovers that there is no fuel in the fuel tank. Assuming that it is a term of the contract that the fuel tank contains fuel, can Ash insist upon terminating the contract and getting her money back as a result of Stephen’s breach? EXERCISE 9.5 — PARTIAL PERFORMANCE

Johnny engages Elaine to repaint the interior of his restaurant. Elaine has quoted Johnny $5000 for the job. Before she finishes the job, Elaine informs Johnny that she is moving to Melbourne with her boyfriend and will not have time to finish. Johnny is annoyed, and refuses to pay Elaine any more than the cost of the paint she has used, which he estimates to be $1000. In what circumstances can Elaine insist upon being paid more than $1000? EXERCISE 9.6 — DAMAGES

Johnny arranges for his new pizza oven to be installed in his restaurant by Gary. According to the terms of their agreement, Gary is to install the oven on 20 February. He, in fact, installs the oven one week later on 27 February. As a result of Gary’s breach, Johnny’s planned launch of a new range of vegan pizzas is delayed by a week. The advertising flyers he had printed for the launch have to be thrown away and a new set of flyers printed. Also during that week, he had to explain to a number of disappointed customers that the pizzas were not yet available. And because Johnny had to close the restaurant on the 27th instead of the 20th (to allow Gary to install the oven properly), he had to cancel an extremely lucrative private function booked by the Vegan Food Appreciation Society, which then decided to go to a different restaurant. If Johnny sues Gary for breach of contract, how will Johnny’s damages be calculated? EXERCISE 9.7 — FRUSTRATION

Ash made a contract to purchase Stephen’s car. Ash paid a deposit of $500 with payment of the balance of the purchase price to take place on 11 November 2016 at 10.00 am. On 8 November Ash loses her driver’s licence due to accumulated loss of points. Can Ash refuse to proceed with the purchase? If so, can she recover the deposit?

KEY TERMS agent  A person who acts on behalf of a principal who is legally responsible for the actions of the agent. assign  To transfer rights or property. caveat emptor  (‘let the buyer beware’) The principle that each party to a contract is responsible for protecting their own interests. common mistake  A mistake made by both parties to a contract. Also known as a ‘bilateral mistake’. condition  A term of a contract of fundamental importance. condition precedent  A term in an agreement that provides that the agreement will not be enforceable until the happening of a certain event. condition subsequent  A term in an agreement that provides that the agreement is enforceable immediately but will cease to be enforceable upon the happening of a certain event. consideration  The price paid for the other party’s performance of a contract. damages  Monetary compensation; a type of civil remedy. deed  A written contract that (1) has been signed by the parties before a witness, ‘sealed’ and ‘delivered’, or (2) is expressed to be a deed. Also known as a ‘formal contract’. direct loss  A loss incurred by the plaintiff that flows naturally from the breach of contract by the defendant according to the ordinary course of events. CHAPTER 9 Contract law: enforcement of the contract  353

doctrine of privity of contract  The principle that only a party to the contract is legally obliged to perform a contract, and has the right to enforce a contract. duress  A threat of harm made to another person to pressure them to enter into a contract economic duress  A threat made to another person’s economic or financial wellbeing to pressure them to enter into a contract. exemplary damages  An award of damages to the plaintiff in an amount above and beyond mere compensation, intended by the court to penalise or punish the defendant. formal contract  A written contract that (1) has been signed by the parties before a witness, ‘sealed’ and ‘delivered’, or (2) is expressed to be a deed. frustration  The termination of a contract due to unanticipated impossibility or extreme difficulty of performance. general damages  Damages payable for direct losses arising from a breach of contract. Also known as ‘normal damages’. indirect loss  A loss that is not caused directly by the breach of contract by the defendant or would not ordinarily be expected to result from the breach. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. intermediate term  A term of a contract that is neither a condition nor a warranty, the consequences of breach of which will depend upon the severity of the breach. laches  Unreasonable delay in pursuing a legal remedy. liquidated damages  A pre-estimate of the quantity of damages one party will be entitled to in the event of breach by the other party. misrepresentation  A false statement of fact made by one person to induce another person to enter into a contract. mitigate  To minimise or reduce; when one party is negligent or breaches a contract the other party is obliged to take reasonable steps to mitigate their loss. mutual mistake  A mistake that arises when the parties to a contract believe they have reached an agreement but, in fact, there has been no meeting of minds because they were both thinking of different things at the time they made the agreement. nominal damages  A token amount of monetary compensation awarded to the plaintiff that merely affirms that the defendant was in the wrong. non est factum  (‘not my document’) A claim that a written and signed contract contains terms or has legal consequences of which one of the parties was unaware as a result of a disability or disadvantage. novation  The parties to a contract agree to replace the old contract with a new contract with new terms. obiter dicta  (‘saying by the way’) That part of a judge’s decision other than the legal principle upon which the final decision is based. principal  A person represented by an agent and who is legally responsible for the actions of the agent. quantum meruit  (‘as much as he has deserved’) Part payment in proportion to the amount of work actually completed. rescission  The cancellation of a contract and the restoration of the parties to their original positions. simple contract  Any contract other than a formal contract. special damages  Damages payable for indirect losses arising from a breach of contract. Also known as ‘abnormal damages’ or ‘extraordinary damages’. specific performance  A court order directing a party to fulfil their contractual obligations. standard form contract  A contract in the form of a written document containing pre-printed terms that are not negotiated. third party  A stranger to a transaction or relationship. 354  PART 2 Legal consequences

unconscionable conduct  Unfairly taking advantage of another person’s special weakness or disadvantage. undue influence  Unfair influence by one party to a contract over the other party, making the contract voidable by the other party. unilateral mistake  A one-sided mistake; that is, a mistake made by only one of the parties. unliquidated damages  Damages payable to the plaintiff that cannot be easily calculated in advance. void  A void contract is both unenforceable and ineffective. voidable  A voidable contract is enforceable and effective unless terminated by the innocent party. warranty  A term of a contract of lesser importance.

ACKNOWLEDGEMENTS Photo: © ALEXSTAND / Shutterstock.com

QUIZ ANSWERS

1. a  2. a  3. b  4. c  5. a  6. b  7. b  8. b  9. a  10. d CHAPTER 9 Contract law: enforcement of the contract  355

CHAPTER 10

Contract law: working with agents LEA RN IN G OBJE CTIVE S 10.1 What is the relationship between a ‘principal’, an ‘agent’ and a ‘third party’? 10.2 When will the principal be legally responsible for statements, payments and contracts made by their agent? If the agent does something they are not actually authorised to do, is the principal still legally responsible for their actions? 10.3 What duties are owed by an agent to their principal? What if the agent breaches those duties? 10.4 What are the entitlements of the agent? Can they insist upon being paid for their efforts? 10.5 In what circumstances will the agent be personally liable to the third party? 10.6 How can the principal–agent relationship be brought to an end?

JOHNNY AND ASH

[Johnny and Ash are sitting in adjacent seats in the business-class section of a commercial aircraft. They are about to take off on a flight to Thailand for a holiday together. Ash is sitting peacefully, hands clasped in her lap, eyes closed as she awaits take-off. Johnny is fiddling with his mobile phone, trying to send a text.] Ash — You are supposed to have that switched off by now. Apparently the signal interferes with the plane’s navigation system. Johnny — That’s just a myth. I don’t think a single plane has ever crashed because somebody didn’t turn their phone off. Ash — Well, I hope that ours isn’t going to be the first one. Johnny — Yeah, yeah. Anyway, I have to text Cathy. Ash — Cathy? Johnny — Yeah, my manager at the restaurant. I’ve left her in charge for the 2 weeks that we are going to be away. I want to remind her again not to make any important decisions without checking with me. Last time I left her in charge she nearly cost me a lot of money. Ash — Why? What happened? Johnny — Well, last year I took a week’s holiday and left her in charge of the restaurant. I told her before I left that all she had to do was order the stock, keep the place clean and serve the customers. I made it very clear that if anything out of the ordinary happened she was to get in touch with me and seek instructions. Ash — What went wrong? Johnny — Well, little did I realise, but the week I was away was the week the only other vegan restaurant in town was closed for renovations, so of course our turnover doubled. Cathy didn’t realise it was only for the week, and decided to hire a new waiter. A disaster! When I got back turnover was back to normal and I had to explain to the new waiter that Cathy had made a mistake, and that he didn’t actually have a job. Ash — How did he take it? Johnny — Well, he wasn’t happy, but I explained that Cathy wasn’t authorised to hire new employees, and he accepted it. Ash — Wow, you were lucky. It could have turned out much worse for you. You realise he could have insisted that he had a legally binding employment contract with you? Johnny — What? How? Cathy wasn’t authorised to hire any new staff on my behalf! Ash — Cathy may not have had any actual authority to act on your behalf, but she almost certainly had apparent authority, and that would have been enough to create a binding contract between you and the new waiter. Johnny — What on earth are you talking about? This is about law again isn’t it?

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Cathy, in hiring the new waiter, created a legally binding contract between the new waiter and Johnny.

Introduction It is very common for contracts to be negotiated and finalised not by the parties directly but by other people acting on behalf of the parties. A person who makes a statement, creates a contract or makes or receives payments on behalf of another is called an ‘agent’, the person on whose behalf they act is called a ‘principal’, and the person with whom the agent deals on behalf of the principal is called a ‘third party’. CHAPTER 10 Contract law: working with agents  357

10.1 Getting someone else to do it LEARNING OBJECTIVE 10.1 What is the relationship between a ‘principal’, an ‘agent’ and a ‘third party’?

A successful business owner is unlikely to do everything personally. They will have workers who, on their behalf, deal with third parties such as suppliers, customers, other employees and other businesses. For example, the owner of a car dealership will have salespeople who sell the cars to the customers. The business owner may never meet the customers; nevertheless, the contracts of sale are between the business owner and the customers. The business owner will be legally bound by any statements, contracts or payments made (and possibly even torts and crimes committed) by any worker authorised to act on the business owner’s behalf. A person who acts on behalf of another in dealing with a third party is called an agent, and the person they are acting for is called the principal (see figure 10.1). In the situation described by Johnny at the beginning of this chapter, Johnny is the principal, Cathy is the agent, and the new waiter is the third party. The principal may be an individual or a corporation. The same is true of the agent and the third party. The third party will only be able to enforce the statement, contract or payment against the principal if the agent acting on the principal’s behalf had authority to do so. If the agent acted without the principal’s authority, the third party will not have any legal rights against the principal (see ‘Scope of authority’ later in the chapter). The existence of the agency relationship may be alleged by: •• the principal — for example, because they are insisting that the agent owes them certain duties (see ‘The agent’s duties’ later in the chapter), •• the agent — for example, because they are insisting that the principal owes them remuneration or reimbursement (see ‘The agent’s entitlements’ later in the chapter), or •• the third party — for example, because they are insisting that even though they dealt with the agent they actually have a contract with or claim against the principal. Examples of common agent–principal relationships are set out in table 10.1.

tho au

als de tly ec dir ith w

ris es

Agent

Principal

FIGURE 10.1

The agency relationship

358  PART 2 Legal consequences

has contract with

Third party

TABLE 10.1

Examples of agents and principals

Agent

Principal

Employee

Employer (although see Caution! below)

Auctioneer

Seller

Mercantile agent

Seller

Solicitor

Client

Real estate agent

Client

Stockbroker

Client

Director

Corporation

Partner

Partner

Donee of power of attorney

Donor of power of attorney

CAUTION!

While it is common for an employee to be the agent of their employer, the employment relationship and the agency relationship are not the same thing. Not all agents are employees, and not all employees are agents. Similarly, while it is common for a solicitor to be appointed as an agent of the client, a solicitor is not necessarily the client’s agent.1

Agents can be classified as universal agents, general agents and special agents. •• A universal agent has unrestricted authority to act on behalf of the principal, and can do almost anything in the principal’s name that the principal could do themselves. For example, an elderly person might appoint a younger relative as their universal agent using a power of attorney (see the section below on powers of attorney) and authorise the younger relative to sign any document and make any decision on their behalf. •• A general agent has broad but not unrestricted authority to act on behalf of the principal. For example, a business owner may prefer to have little to do with the day-to-day running of the business, and so appoint a manager as their general agent to run the business on the business owner’s behalf. •• A special agent has limited authority to act on behalf of the principal, often in relation to a single transaction. For example, a house owner may be trying to sell their house at the same time that they will be taking an overseas holiday, and so appoint their real estate agent as their special agent to sell the house on their behalf while they are away. The real estate agent is authorised to sign the contract of sale on the owner’s behalf but does not have any authority to enter into other contracts in the ­owner’s name. CAUTION!

The word ‘agent’ is one that is used frequently in the world of business. However, somebody who describes themselves as an ‘agent’ or an ‘exclusive agent’ is not necessarily an agent in the legal sense. They may simply be a distributor or a retailer of the products of a particular manufacturer, and they will not have the power to make statements, contracts or payments on behalf of the manufacturer.

1 Nowrani Pty Ltd v Brown [1989] 2 Qd R 582.

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A mercantile agent is an agent appointed to sell the property of the principal. There are two types of mercantile agent. 1. If the mercantile agent is given possession of the principal’s property, the agent is referred to as a factor. A factor usually sells the property in their own name. For example, a person who wishes to sell their car may give it to a motor dealer to sell on their behalf. The motor dealer may not inform the buyer that the car belongs to the principal. 2. If the mercantile agent does not have possession of the principal’s property, the agent is referred to as a broker. Examples of brokers include insurance brokers, stockbrokers and finance brokers. CAUTION!

Be careful to distinguish between an ‘insurance broker’ and an ‘insurance agent’. An insurance broker is an independent intermediary between the client and the insurance company. They are usually the agent of the insured person. An insurance agent is engaged by and represents the insurance company. They are the agent of the insurer.

Another type of agent is a del credere agent. This agent is similar to other types of agents with one important exception: the agent has agreed to indemnify the principal in the event of non-performance by the third party. For example, in the case of an agent negotiating a contract between the principal and the third party according to which the third party has promised to purchase the goods of the principal at a certain price, if the third party defaults under the contract, the agent will compensate the principal for their loss. Del credere agents are usually paid a higher commission in return for this indemnity. ACTIVIT Y 10.1 — REFLECT

Is the relationship between a principal and an agent necessarily a contract? Explain.

The principal–agent relationship is regulated primarily by case law. However, legislation exists in most States and Territories regulating specific types of agents, such as commercial agents and real estate agents.2 This legislation may, for example, require a person acting as such an agent to obtain a licence before doing so. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 10.1 What is ‘agency’? What is the relationship between a principal and an agent? 10.2 What are some examples of principal–agent relationships? 10.3 Is an employee necessarily an agent of the employer? Explain. 10.4 What are the differences between a universal agent, a general agent and a special agent? 10.5 What is the difference between a factor and a broker? 10.6 What is the distinguishing feature of a del credere agent?

2 Agents Act 2003 (ACT); Commercial Agents and Private Inquiry Agents Act 2004 (NSW); Factors (Mercantile Agents) Act 1923 (NSW); Property Stock and Business Agents Act 2002 (NSW); Agents Licensing Act 1979 (NT); Factors Act 1892 (Qld); Introduction Agents Act 2001 (Qld); Property Occupations Act 2014 (Qld); Security Providers Act 1993 (Qld); Land Agents Act 1994 (SA); Property Agents and Land Transactions Act 2005 (Tas); Security and Investigations Agents Act 2002 (Tas); Estate Agents Act 1980 (Vic); Private Security Act 2004 (Vic); Employment Agents Act 1976 (WA); Real Estate and Business Agents Act 1978 (WA); Settlement Agents Act 1981 (WA).

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10.2 Scope of authority LEARNING OBJECTIVE 10.2 When will the principal be legally responsible for statements, payments and contracts made by their agent? If the agent does something they are not actually authorised to do, is the principal still legally responsible for their actions?

If the agent is acting within the scope of their authority, the resulting contract or other legal relationship is between the principal and the third party, and the agent incurs no personal liability. There are five main ways in which an agent can be authorised to act on behalf of a principal. These include express annual authority, implied actual authority, apparent authority, agency of necessity and authority by ratification.

Express actual authority The principal can expressly authorise the agent, in writing or verbally, to act on the principal’s behalf. For example, the board of directors of a company might expressly authorise a senior manager to attend a meeting with a potential new supplier and negotiate a contract on behalf of the company. It is usually a good idea for the authorisation to clearly state the duration of the agent’s appointment, the precise scope of the agent’s authority and (if relevant) the agent’s entitlement to any commission or payment. It is also a good idea for the authorisation to be in writing rather than verbal, especially if the authorisation includes the authority to commit the principal financially. In some circumstances the express authorisation of the agent must be in writing and signed by the principal, such as where the agent will be buying and selling land on behalf of the principal.

Powers of attorney A power of attorney is a written grant of express actual authority to an agent. It empowers the agent to sign documents and make decisions on behalf of the principal. Powers of attorney are regulated by specific State and Territory legislation.3 There are two types of power of attorney: a general power of attorney and an enduring power of attorney. •• A general power of attorney authorises the agent to act on behalf of the principal. It is often used to give someone the power to sign contracts and make decisions on the principal’s behalf when the principal is absent, for example, while they are overseas. A power of attorney is a contract between the principal and the agent and as such a general power of attorney will automatically terminate by operation of law if, for example, one of the parties dies, becomes bankrupt or loses the intellectual capacity to contract.

3 Powers of Attorney Act 2006 (ACT); Powers of Attorney Act 2003 (NSW); Powers of Attorney Act 1980 (NT); Powers of Attorney Act 1998 (Qld); Powers of Attorney and Agency Act 1984 (SA); Powers of Attorney Act 2000 (Tas); Instruments Act 1958 (Vic).

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•• An enduring power of attorney is sometimes called an ‘irrevocable power of attorney’ or a ‘living will’. It is usually set up to take effect in the event something happens to the principal such as illness, old age or accident that results in the principal being unable to make their own decisions. In some jurisdictions an agent under an enduring power of attorney can even make decisions about medical treatment on behalf of the principal.4 Unlike a general power of attorney, an enduring power of attorney does not automatically lapse if the principal loses intellectual capacity. ACTIVIT Y 10.2 — REFLECT

In what circumstances would it be useful to authorise someone to act on your behalf by appointing them as your agent under (a) a general power of attorney and (b) an enduring power of attorney?

ACTIVIT Y 10.3 — RESEARCH

Search online for a power of attorney form that would be valid within your State or Territory.

Under both types of power of attorney, the decisions made and the actions taken by the agent have the same legal force as if the principal had made the decision or taken the action themselves. Whether or not a power of attorney is used, the scope of the agent’s express actual authority may be very narrow (restricted to only a particular type of transaction or even to a particular transaction) or very broad (with the agent empowered to do almost anything the principal can do for themselves).

Implied actual authority The principal can authorise the agent to act on the principal’s behalf by implication, usually by instructing the agent to carry out a particular task on the principal’s behalf or appointing them to a particular position in a way that makes it obvious that the agent will be required to enter into a contract with a third party on the principal’s behalf. For example, whenever two people go into business together as partners there is an implied grant of actual authority by each partner to the other authorising them to act on behalf of the other in relation to matters incidental to the partnership business. LAW IN CONTEXT: LAW IN PRACTICE

Company directors The implied authority of a company director to act on behalf of the company will depend upon the position of the director on the board. The general rule is that the more senior the role the greater the person’s implied authority is likely to be.5 • An individual company director acting alone as a general rule has no implied authority to act on behalf of the company. The authority of company directors is usually exercised collectively, as a board.6 • The company chairperson acting alone will not normally have any more implied authority to act on behalf of the company than an individual director.7 • The managing director or CEO acting alone, on the other hand, does have implied authority to commit the company to contracts entered into within the ordinary course of the company’s business.8 • The company secretary acting alone also has implied authority to act on behalf of the company, but this authority is limited to making representations and contracts of an administrative nature.9

4 For example, Medical Treatment Act 1988 (Vic) s 5A. 5 Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608. 6 Northside Developments Pty Ltd v Registrar-General (NSW) (1990) 170 CLR 146. 7 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, 583–584. 8 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, 583. 9 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711.

362  PART 2 Legal consequences

Whenever an agent is expressly authorised to act on behalf of a principal there is a grant of implied authority to do all things incidental to carrying out the main task. For example, when a real estate agent is appointed to sell a house they are given implied authority to provide information about the house to potential purchasers. An agent may have implied authority to act on behalf of the principal in order to give business efficacy to a contractual arrangement. Authority may also be implied if the agent has had authority to act on behalf of the principal in the past, or if agents in the particular trade or industry are usually granted certain authority by their principal. In ascertaining the extent of the agent’s implied actual authority the court will consider the surrounding circumstances and the past conduct of the parties. ACTIVIT Y 10.4 — REFLECT

What are the advantages of expressing the actual authority of an agent in writing rather than relying upon the authority implied by law?

At common law, if two people live together as spouses, each spouse has the implied authority of the other to incur debts in their name in order to purchase necessaries.10 In the ACT, New South Wales, the Northern Territory and South Australia, however, this implied authority has been abolished by legislation.11

Apparent authority If the principal allows the third party to believe that the agent has authority to act on the principal’s behalf, it would be unfair to permit the principal to avoid responsibility for the agent’s actions by insisting that the agent was not actually authorised to act on the principal’s behalf. The law acknowledges this potential unfairness: if a principal has not actually authorised the agent to act on the principal’s behalf, the agent will nevertheless have authority, and the principal will nevertheless be bound by the agent’s actions in dealing with the third party, if three requirements are satisfied. CHECKLIST

An agent will have apparent authority to act on behalf of the principal if all of the following requirements are satisfied. ◼◼ The third party did not know that the agent did not have actual authority. ◼◼ The principal ‘held out’ the agent as having authority to act on the principal’s behalf — for example, by appointing the agent to a particular position, or by having held the agent out as having authority in the past. ◼◼ The third party relied upon that holding out, and reasonably assumed that the agent had actual authority.

If all three of these requirements are satisfied, the agent will have apparent authority (sometimes called ‘ostensible authority’ or ‘authority by estoppel’) to act on behalf of the principal, and the principal will be legally bound by the actions of the agent, even if the principal expressly told the agent that the agent was not to enter into such a contract or act in that manner on the p­ rincipal’s behalf.

10 Debenham v Mellon (1880-81) LR 6 App Cas 24. 11 Married Persons Property Act 1986 (ACT) s 5; Married Persons (Equality of Status) Act 1996 (NSW) s 7; Married Persons (Equality of Status) Act 1989 (NT) s 5; Law of Property Act 1936 (SA) s 104.

CHAPTER 10 Contract law: working with agents  363

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711

The company secretary of Fidelis Furnishing Fabrics (FFF) hired cars on behalf of FFF from Panorama Developments. Some of these cars were hired by the company secretary for his private use, and FFF refused to pay for these cars because the company secretary had hired them without actual authority. The court decided that the company secretary had acted with FFF’s apparent authority, and FFF was therefore liable to pay for the cars. The court explained that by appointing the person as company secretary, FFF was holding him out as having the authority to do all the things that company secretaries normally do, including making contracts on behalf of the company that fall within the normal day-to-day business of the company.

If the principal has recently withdrawn the actual authority of the agent to act on the principal’s behalf, the principal may nevertheless be bound by the actions of the agent if the third party with whom the agent is dealing does not know that the agent’s actual authority has been withdrawn. Summers v Solomon (1857) 7 El & Bl 879; 119 ER 1474

The agent was employed as a manager of a jewellery shop, and authorised to order stock on behalf of the owner. The owner terminated the agent’s employment. The agent ordered more jewellery and took it with him when he left. The owner refused to pay the supplier for the jewellery, arguing that the agent did not have actual authority to order that jewellery. The court decided, however, that because the supplier did not know that the agent’s employment had been terminated, the agent had acted with the owner’s apparent authority, and the owner was therefore liable to pay for the jewellery.

Tooth v Laws (1888) 9 LR (NSW) 154

Laws was the owner and licensee of a hotel, and was named as such on a sign above the door of the hotel. Tooth regularly supplied liquor to the hotel. Laws sold the hotel to Kinchela, but the sign was not changed and Tooth was not informed of the change in ownership. Tooth continued to supply liquor to the hotel. When Kinchela failed to pay for the liquor, Tooth sought to recover the amount owing from Laws. Laws insisted that he was not liable since he was no longer the owner of the hotel, but the court decided that Laws was liable to pay for the liquor because when Kinchela ordered it, Kinchela was acting with Laws’ apparent authority.

CAUTION!

In order to establish apparent authority it must be shown that the principal has somehow held the agent out as having authority to act on their behalf. If it is only the agent who has held himself or herself out as having authority, this is insufficient to establish apparent authority. Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375

The agent was acting on behalf of the principal in negotiating a contract with the third party. The principal had signed the contract but before faxing it to the third party for their consideration, the agent had made a number of handwritten changes to the contract. The third party signed the contract with the handwritten changes, but the principal later insisted that it was not bound by the handwritten changes because they had been made by the agent without the principal’s actual authority. The third party insisted that the changes had been made with the principal’s apparent authority and that the principal was therefore bound by them. The court decided that the agent had not acted with the principal’s apparent authority: the principal had done nothing to hold the agent out to the third party as having authority to make changes to the contract on the principal’s behalf.

The principal can terminate the agent’s apparent authority by expressly informing the third party that the agent is not authorised to act on the principal’s behalf. 364  PART 2 Legal consequences

ACTIVIT Y 10.5 — REFLECT

Is it fair that a principal may be bound by the actions of an agent who has done something the principal did not actually authorise them to do? Why or why not?

The relationship between express, implied and apparent authority is set out in figure 10.2. Did the principal expressly authorise the agent to act on their behalf, e.g. by power of attorney?

YES Agent had express authority. Contract is enforceable against principal by third party.

NO Did the principal authorise the agent to act on their behalf by implication, e.g. by appointing them as their partner?

YES Agent had implied authority. Contract is enforceable against principal by third party.

NO Did the third party know that the agent lacked express or implied authority?

NO Did the principal 'hold out' the agent as having authority, e.g. by appointing them to a senior position?

NO Agent had no authority. Contract is not enforceable against principal by third party.

YES Did the third party rely upon the 'holding out' and assume the agent had authority?

YES Agent had apparent authority Contract is enforceable against principal by third party. FIGURE 10.2

YES Agent had no authority. Contract is not enforceable against principal by third party.

NO Agent had no authority. Contract is not enforceable against principal by third party.

Express, implied and apparent authority

CHAPTER 10 Contract law: working with agents  365

Agency of necessity The principal may not have actually authorised the agent to act on their behalf but the agent will nevertheless have authority if the agent has to deal with the third party on behalf of the principal or deal with the property of the principal in order to protect the interests or the property of the principal. CHECKLIST

An agency of necessity will only exist if four requirements are satisfied. ◼◼ The agent has possession or control of property belonging to the principal. ◼◼ The property of the principal is under threat. ◼◼ The agent cannot contact the principal to get express instructions. ◼◼ The agent acts in good faith to protect the property of the principal. Great Northern Railway Co v Swaffield (1873–74) LR 9 Exch 132

Swaffield purchased a horse and arranged for it to be delivered to him by train. When the train arrived at the station Swaffield was not there to collect the horse. An employee of Great Northern Railway (GNR) arranged for the horse to be stabled for the night. Swaffield refused to pay for the cost of stabling, arguing that he was not the one who made the contract with the stable owner. The court decided that in the circumstances, GNR acquired authority to act on behalf of Swaffield, and the contract was therefore between Swaffield and the stable owner. Swaffield was obliged to pay for the stabling of the horse. Springer v Great Western Railway Co [1921] 1 KB 257

Springer entered into a contract with Great Western Railway Company (GWRC) according to which GWRC would deliver tomatoes belonging to Springer by a certain date. The delivery was delayed by weather and by industrial action, and rather than allow the tomatoes to perish GWRC sold the tomatoes to local buyers. Springer sued GWRC in the tort of conversion (a form of trespass to goods). GWRC argued that it had authority to sell the tomatoes. The court decided that GWRC was not an agency of necessity because the third requirement was not satisfied: GWRC could have contacted Springer for express instructions but did not. ACTIVIT Y 10.6 — REFLECT

Think of another example of a situation where one person has to act on behalf of another in order to protect the other person’s interests or their property.

Authority by ratification Even if an agent acts without actual or apparent authority it is still possible for the principal, upon later learning of the agent’s action, to ratify that action by authorising it retrospectively. As long as the principal ratifies the agent’s act within a reasonable time of the act, it is as if the agent was acting with the principal’s actual authority at the time. Bolton Partners v Lambert (1889) 41 Ch D 295

Lambert made a written offer to Bolton Partners (BP) to lease certain property to BP. The managing director of BP accepted the offer on behalf of BP. However, the managing director did not have actual authority to accept such an offer on behalf of BP. Lambert attempted to withdraw the offer. BP then ratified the managing director’s acceptance of Lambert’s offer. Was there a contract between BP and Lambert? The court decided BP’s ratification of the managing director’s acceptance operated retrospectively so that it was as if the managing director had actual authority at the time of acceptance. Lambert’s offer had therefore been validly accepted and it was too late for him to withdraw the offer.

366  PART 2 Legal consequences

The ratification can be express, or it can be implied from the conduct of the principal. Section 131 of the Corporations Act 2001 (Cth) permits a new company (the principal) to ratify contracts made by the founders of the company (the agents) prior to the company coming into existence. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions.  10.7 What are the five ways in which an agent can be authorised to act on behalf of a principal?  10.8 When will an agent be expressly authorised to act on behalf of a principal?  10.9 What is a power of attorney? 10.10 When will an agent have implied authority to act on behalf of a principal? 10.11 When will an agent have apparent authority to act on behalf of a principal? 10.12 When will an agent have authority by necessity to act on behalf of a principal? 10.13 When will an agent have authority by ratification to act on behalf of a principal?

10.3 The agent’s duties LEARNING OBJECTIVE 10.3 What duties are owed by an agent to their principal? What if the agent breaches those duties?

The relationship between the agent and the principal is a fiduciary one. The agent is in a position of trust and responsibility, and the agent therefore owes a range of duties to the principal under the law of equity (see figure 10.3).

Duty to follow instructions Duty to communicate information

Duty to account

Duty of confidentiality

Duties of an agent

Duty to act in the best interests of the principal

FIGURE 10.3

Duty to act personally

Duty of care

Duties of an agent

The agent also owes duties to the principal under tort law and contract law. It is reasonably foreseeable that the actions of the agent could affect the principal, so the agent owes the principal a duty of care. And the relationship between principal and agent is usually (but not always) a contractual one, which leads to the imposition of certain duties upon the agent. CHAPTER 10 Contract law: working with agents  367

Certain types of agent will also owe statutory duties to their principal. For example, real estate legislation in most States and Territories obliges real estate agents to comply with certain rules of conduct. Statutory obligations are also imposed upon company directors, partners, stockbrokers and insurance brokers.

Duty to follow instructions In exercising their authority the agent is obliged to obey the lawful instructions of the principal. If they fail to do so they will be personally liable to the principal for any harm caused to the principal as a result of the agent’s breach of duty.12 For example, if the agent is instructed to make a contract on certain terms with the third party and they in fact make a contract with the third party on different terms, the agent will have breached their duty to follow the principal’s instructions and will be liable to compensate the principal. CAUTION!

We explained earlier that even if an agent does something on behalf of the principal that the principal has expressly told the agent they are not authorised to do, the principal will still be bound by the actions of the agent if the agent has acted with apparent authority. However, in these circumstances, the agent may have breached their duty to follow the principal’s instructions. The principal will be liable to the third party against the principal’s wishes, but the agent will be liable to compensate the principal.

The agent will not be liable if they fail to carry out instructions of the principal that are unlawful. ACTIVIT Y 10.7 — REFLECT

Does the agent have to obey any lawful instructions of the principal or only those related to the subject matter of the agency? Explain.

If the principal’s instructions are vague or ambiguous, and the agent interprets those instructions honestly but incorrectly, the agent will not be in breach of their duty to the principal even though they have not done what the principal wanted them to do.13

Duty to communicate information An agent owes a duty to the principal to communicate to the principal information relevant to the agency. The agent should pass on to the principal anything they learn that a reasonable agent would consider relevant in the ordinary course of business.14 For example, if a real estate agent fails to inform their client about a person interested in purchasing the property at a price known to be acceptable to the client, the real estate agent is in breach of this duty. John D Wood & Co (Residential & Agricultural) Ltd v Knatchbull [2002] EWHC 2822 (QB)

John Wood & Co (JWC) was appointed to sell a certain property belonging to Knatchbull. JWC advised Knatchbull to set a price of £1.5m, and it sold at that price. JWC was aware that a similar property in the same street was being offered for sale at the same time for £1.95m, but did not pass this information on to Knatchbull. The other property sold for £1.8m. Upon learning of the sale, Knatchbull successfully sued JWC for breach of its duty to communicate relevant information to the principal.

12 Bertram Armstrong & Co v Godfray (1830) 1 Knapp 381; 12 ER 364. 13 Jones v Canavan [1972] 2 NSWLR 236. 14 Neeson v Wrightson NMA Ltd [1989] ANZ ConvR 605.

368  PART 2 Legal consequences

Duty to act personally An agent is obliged to carry out the principal’s instructions personally. This means that an agent is not permitted to delegate the task to another person, or appoint a sub-agent, unless the principal gives them permission to do so. John McCann & Co v Pow [1974] 1 WLR 1643

John McCann & Co (JMC) was appointed by Pow as agent to sell Pow’s property. JMC appointed another agent to sell the property, and the other agent found a buyer. The court decided that JMC had breached its duty to act personally, and that neither JMC nor the other agent was entitled to be paid a commission by Pow.

ACTIVIT Y 10.8 — REFLECT

Why do you think the law imposes a duty upon an agent to carry out the principal’s instructions personally?

It is, however, acceptable for an agent who operates a business — such as a real estate agent or a travel agent — to delegate minor aspects of the task such as clerical responsibilities to the agent’s employees.

Duty of care An agent owes the principal a duty to carry out the principal’s instructions with due care and skill. An agent who fails to do what a reasonable agent would have done in the same circumstances will be liable to the principal in the tort of negligence.15 Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541

Consolidated Wood Products (CWP) appointed Provincial Insurance Australia (PIA) as its insurance broker and instructed PIA to obtain property insurance against all contingencies, including water or flood damage. PIA carelessly obtained insurance that excluded flood risk. When CWP suffered loss caused by flood and was unable to make a claim under the insurance policy, it sued PIA for breach of PIA’s duty of care. The court ordered PIA to compensate CWP for the loss.

The civil liability legislation in New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia provides some protection for agents who are ‘professionals’ by providing that a professional does not incur liability in negligence if it is established that the professional acted in a manner that is widely accepted in Australia by peer-professional opinion as competent professional practice.16 A ‘gratuitous’ agent — that is, an agent who is not paid by the principal — still owes the principal a duty of care although the standard will usually be a lower one: the agent must exercise ‘such care and diligence as persons ordinarily use in their own affairs, and such skill as he has’.17

15 Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd [1984] WAR 365. 16 Civil Liability Act 2002 (NSW) s 5O; Civil Liability Act 2003 (Qld) s 22; Civil Liability Act 1936 (SA) s 41; Civil Liability Act 2002 (Tas) s 22; Wrongs Act 1958 (Vic) s 59; Civil Liability Act 2002 (WA) s 5PB. 17 Beal v The South Devon Railway Co (1864) 3 H & C 337; 159 ER 560.

CHAPTER 10 Contract law: working with agents  369

Chaudhry v Prabhakar [1989] 1 WLR 29

Chaudhry asked her friend Prabhakar to help her to find a second-hand car to purchase. She insisted that the car must not have been in an accident. Prabhakar found a car for sale by a panel beater. Prabhakar told Chaudhry that the panel beater was a friend of his (he wasn’t) and advised Chaudhry to buy the car. Chaudhry bought the car, and when she discovered that the car had been involved in a serious accident in the past, she sued Prabhakar for compensation. The court decided that Prabhakar was Chaudhry’s gratuitous agent, and that he had breached his duty of care by failing to exercise the degree of care that a person would ordinarily use in their own affairs. Prabhakar argued that he had not breached his duty of care because he would have bought the car for himself, but the court explained that the test is an objective one not a subjective one — the question is whether the agent has done what a reasonable person in the same position would have done.

ACTIVIT Y 10.9 — REFLECT

Why should a ‘gratuitous’ agent owe a lower standard of care than an agent who is being paid by the principal?

Duty to act in the best interests of the principal An agent has a fiduciary obligation not to exercise their authority in a way contrary to the interests of the principal. For example, an agent under a general power of attorney should not (unless clearly authorised by the principal to do so) exercise their authority so as to use the principal’s money to pay the agent’s own debts.18 (In some jurisdictions the power of attorney legislation specifically provides that an agent under a power of attorney has no authority to do any act that confers a benefit on the agent unless it is permitted by the terms of the power of attorney.)19

Conflicts of interest An agent should not put themselves in a position where the best interests of the principal are in conflict with the agent’s own personal interests. If there is such a conflict of interest the agent must make full disclosure to the principal, and if they fail to do so they are in breach of their duty to the principal. An agent should not sell their own property to the principal without informing the principal beforehand. For example, a stockbroker should not, in their capacity as the agent of their client, sell their own shares to (or buy shares from) the client. Hewson v Sydney Stock Exchange Ltd [1968] 2 NSWR 224

Hewson was a stockbroker who, without informing his clients that he was doing so, sold his own shares to his clients and bought shares himself from his clients. He was held to have breached his duty to act in the best interests of the principal.

An agent acting for two principals who are dealing with each other is also in a position of conflict of interest.20 For example, a real estate agent should not act for both the buyer and seller in a transaction, and a solicitor should not act for both parties in a dispute.

18 Reckitt v Barnett, Pembroke & Slater Ltd [1929] AC 176. 19 Powers of Attorney Act 2006 (ACT) s 34; Powers of Attorney Act 2003 (NSW) s 12. 20 Lintrose Nominees Pty Ltd v King [1995] 1 VR 574.

370  PART 2 Legal consequences

Secret commissions An agent is in breach of their duty to act in the best interests of the principal if they receive a secret commission from the third party. A secret commission is a payment made by the third party to the agent without the principal’s knowledge and permission, and intended to induce or reward the agent for acting on behalf of the principal in a way that favours the third party. It is effectively a bribe. For example, if Dan, an employee at Johnny’s restaurant, is authorised by Johnny to locate a new supplier of beer for the bar, and one particular supplier offers Dan six free cartons of beer if Dan chooses him as the new supplier, Dan will be guilty of taking a secret commission if he accepts the supplier’s offer. If an agent is discovered to have received a secret commission from the third party, the principal may be entitled to: •• recover the secret commission from the agent, •• refuse to pay a commission to the agent, •• terminate any contract with the agent, and/or •• terminate the contract between the principal and the third party. The receipt of a secret commission is not only a breach of the agent’s duty to the principal, it is also a criminal offence that could lead to a fine and even jail.21 ACTIVIT Y 10.10 — RESEARCH

What is the penalty in your State or Territory for an agent who accepts a secret commission?

Duty of confidentiality An agent has an obligation to maintain the principal’s confidentiality. This means that they should not disclose to others or use for their own benefit information about the principal or the principal’s affairs without the permission of the principal. It also means that they should not use for their own benefit information acquired during the course of the agency. For example, if an agent appointed by the principal to locate and purchase a suitable investment property finds a particularly cheap property while doing so, they should inform the principal and not keep that opportunity for themselves.

Duty to account The agent owes the principal a duty to account; that is, they are obliged to keep proper records of any funds that are spent or received on behalf of the principal, and to produce these records when asked to do so by the principal. The agent must also keep any money and property belonging to the principal in their possession separate from their own money and property. Many professional agents such as accountants, solicitors and real estate agents operate what is known as a trust account — a separate account in which they keep their clients’ money. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 10.14 What duties does an agent owe to a principal? 10.15 What must an agent do in order to comply with their duty to follow instructions? 10.16 What must an agent do in order to comply with their duty to communicate information?

21 Criminal Code Act 1995 (Cth) div 141; Crimes Act 1900 (NSW) pt 4A; Criminal Code Act 1983 (NT) ss 236–7; Criminal Code 1899 (Qld) ch 42A; Criminal Law Consolidation Act 1935 (SA) pt 6; Criminal Code 1924 (Tas) s 266; Crimes Act 1958 (Vic) ss 175–186; Criminal Code 1913 (WA) ch 55.

CHAPTER 10 Contract law: working with agents  371

10.17 What must an agent do in order to comply with their duty to act personally? 10.18 In what circumstances can an agent delegate to another person responsibility for carrying out

the principal’s instructions? 10.19 What must an agent do in order to comply with their duty of care? 10.20 Does a gratuitous agent owe the same duty of care as an agent who is being paid? 10.21 What must an agent do in order to comply with their duty to act in the best interests of the

principal? 10.22 When will an agent be in conflict of interest? What should they do? 10.23 What is a ‘secret commission’? What are the possible consequences of an agent accepting a

secret commission? 10.24 What must an agent do in order to comply with their duty of confidentiality? 10.25 What must an agent do in order to comply with their duty to account?

10.4 The agent’s entitlements LEARNING OBJECTIVE 10.4 What are the entitlements of the agent? Can they insist upon being paid for their efforts?

Remuneration Remuneration is payment by the principal to the agent for the time and effort expended by the agent in carrying out the principal’s instructions. An agent has no inherent right to remuneration. They will only be entitled to insist upon payment by the principal if the principal and the agent have agreed that the agent should be paid; that is, the payment of remuneration to the agent is a term of the contract between the principal and the agent. The remuneration may be a flat fee, a commission based upon the application of a formula to a transaction amount, or some other arrangement. Commissions are common in relation to professional agents such as real estate agents. ACTIVIT Y 10.11 — RESEARCH

What is the amount of commission typically payable to real estate agents in your State or Territory?

If the agent has been appointed by the principal to sell the principal’s property, whether the agent is entitled to payment of a commission upon finding a suitable buyer who makes a legitimate offer or upon completion of the contract of sale will depend upon the terms of the agreement between the agent and the principal.22 It is therefore important that the contract between the principal and the agent be worded carefully and understood by both parties. Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351

Salamon appointed Moneywood as its agent to sell certain land belonging to Salamon. Moneywood found a buyer who signed a contract to purchase the land, but the contract was not completed, and Salamon did not pay any commission to Moneywood. Some time later Salamon and the buyer signed another contract without Moneywood’s involvement, and this contract reached completion. Salamon refused to pay any commission to Moneywood. The court decided that Moneywood was entitled to payment of the commission, since Moneywood had originally located the buyer.

22 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566.

372  PART 2 Legal consequences

LAW IN CONTEXT: LAW IN PRACTICE

Real estate agents All real estate agents are required to have a written and signed agency agreement with their client. If the agent has been appointed to sell the client’s property, the agreement will set out the fees and com­ missions payable to the agent, as well as: • the details of the services the agent is to provide, • the circumstances in which the agent will be entitled payment (for example, when the property is sold), • a warning notifying the client of the circumstances in which a commission may be payable to more than one agent, • the extent of the agent’s authority to act on behalf of the client, and • the estimated selling price for the property. The agreement will usually be one of four types. An exclusive agency is one of the most commonly used types, and gives the real estate agent the exclusive right to sell the property; that is, they are the only person entitled to sell the property. This means that the agent will be entitled to the commission even if the client sells the property themselves or the property is sold by another agent during the term of the agreement. A sole agency is similar to an exclusive agency except that if the client finds a buyer themselves no commission is payable to the agent. An open agency or general listing is used where the property is listed with a number of different agents. The commission is only payable to the agent who finds the buyer. With a multiple listing, the agent appointed by the client is a member of a network of different agents who all work together to try to sell the property. The commission is paid to the original agent, who usually shares it with the agent who actually finds the buyer.

Indemnity All agents are entitled to be indemnified by the principal; that is, they are entitled to be reimbursed for payments made, expenses incurred and liabilities assumed while carrying out the principal’s instructions. Unlike the right to remuneration, this is an inherent right: the agent is entitled to be reimbursed even if there is no specific agreement by the principal to do so. It is however possible for the contract between the principal and the agent to expressly exclude the agent’s right to indemnity.

Lien If the principal owes money to the agent — either remuneration or indemnity — and refuses to pay the amount owing, the agent is entitled to a lien over any property of the principal in the agent’s possession. This means that if the agent has any of the principal’s property — including money — they are entitled to retain it until the principal pays the debt to the agent. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 10.26 What is the difference between ‘remuneration’ and ‘indemnity’? 10.27 In what circumstances is an agent entitled to remuneration? 10.28 In what circumstances is an agent entitled to indemnity?

10.5 Liability of agent and principal LEARNING OBJECTIVE 10.5 In what circumstances will the agent be personally liable to the third party?

In this section we consider the various possible liabilities of the agent and of the principal. CHAPTER 10 Contract law: working with agents  373

Personal liability of agent As a general rule, any deal negotiated by the agent on behalf of the principal is between the principal and the third party. The agent is merely an intermediary and is not personally liable, provided that they make it clear to the third party that they are in fact acting as an agent. The agent does not need to identify the principal specifically, but they do need to inform the third party that they are acting on behalf of a principal. There are three circumstances where the agent may be personally liable to the third party.

Intentional liability An agent will be personally liable if the circumstances show that the parties intended that the agent be personally liable. This intention may be expressed in the terms of the contract, or it may be implied as a result of custom or standard practice within a particular field. For example, at an auction the auctioneer is the agent of the seller but they traditionally assume personal responsibility for statements that they make during the auction.

Undisclosed principal If the agent did not tell the third party that they were acting as an agent, the agent will be personally liable. This is known as the doctrine of the undisclosed principal. This is why it is important that the agent informs the third party that they are acting as an agent. If the agent signs a written contract on behalf of the principal, they should make it clear that they are signing on behalf of the principal by including appropriate words such as ‘as agent’, ‘for principal’ or ‘on behalf of principal’ after their signature. If the principal was undisclosed (i.e. the agent did not tell the third party that they were acting as an agent) and the third party subsequently becomes aware of the existence of the principal, the third party has the option of enforcing the contract against either the principal or the agent (but not both). The third party must choose between the principal and the agent reasonably promptly, and is not entitled to change their mind. Even if the principal was undisclosed the principal will still be able to enforce the contract with the third party,23 unless: •• the agent did not have authority to act on behalf of the principal at the time, •• the agent has expressly told the third party that they are not an agent, or •• the existence of an undisclosed principal is inconsistent with the terms of the contract — for example, because the third party clearly intended to contract only with the agent. Said v Butt [1920] 3 KB 497

Butt was the managing director of the Palace Theatre. Said was a theatre critic that Butt had banned from attending the theatre. Said arranged for a friend to purchase a ticket on his behalf, but when Said tried to attend the theatre with the ticket he was refused entry. Said (the undisclosed principal) sought to enforce the contract. The court decided that he was not entitled to do so because at the time the contract was formed the intention of Butt (the third party) was not to contract with Said.

ACTIVIT Y 10.12 — REFLECT

Why should an agent who fails to tell the third party that they are an agent be personally liable to the third party?

23 Keighley, Maxsted & Co v Durant [1901] AC 240.

374  PART 2 Legal consequences

Breach of warranty of authority The agent will be personally liable if they represent themselves as having authority to act on behalf of the principal and they do not in fact have any such authority. They will be liable to the third party for breach of warranty of authority. The agent may also be liable to the third party in the torts of deceit or negligence, as well as for breach of s 18 of the Australian Consumer Law. CHECKLIST

An agent will be liable to the third party for breach of warranty of authority if all of the following requirements are satisfied. ◼◼ The agent claimed that they were making the contract on behalf of the principal. ◼◼ The agent did not in fact have authority to act on behalf of the principal. ◼◼ The third party relied upon the agent’s representation, and would not have entered into the contract in the absence of the representation.

Vicarious liability of principal The principal will, of course, be personally liable under any contracts created on their behalf by an agent acting within the scope of their authority. Whether the principal will also be liable for any torts or crimes committed by their agent depends on the extent of the control exercised by the principal over the agent. If the agent is an independent contractor and not subject to direct control by the principal, the principal is unlikely to be liable for the agent’s actions. But if the agent is an employee of the principal, the principal is more likely to be held vicariously liable for the agent’s torts and crimes, provided they were committed by the agent while carrying out the principal’s instructions. Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 509

The driver of a petrol tanker lit a cigarette while delivering petrol to an underground tank. The lit cigarette caused a fire. The court had to decide whether the employer of the driver was liable for the damage. The employer argued that the driver was not permitted to smoke while delivering petrol. The court decided that the employer was nevertheless liable, because at the time the driver was carrying out an authorised task.

Deatons Pty Ltd v Flew (1949) 79 CLR 370

A barmaid at a hotel got into an argument with Flew, a customer at the hotel, about his continued use of bad language, and threw a glass of beer at Flew’s face. Flew commenced legal proceedings against Deatons, the owner of the hotel, claiming that Deatons was vicariously liable for the actions of the ­barmaid. The court decided that the barmaid was not acting within the scope of her employment at the time of the incident, and that therefore Deatons was not vicariously liable for her actions.

Hollis v Vabu Pty Ltd (2001) 207 CLR 21

Hollis was injured when he was knocked over by a bicycle courier who worked for Vabu (which traded as ‘Crisis Couriers’). Hollis could not identify the individual courier who injured him but he recognised the courier’s uniform so he commenced legal proceedings against Vabu for compensation. He argued that as the courier’s employer, Vabu was vicariously liable for the courier’s actions. Vabu argued that its couriers were independent contractors. The court referred to the fact that the couriers were not skilled workers engaged in an independent enterprise, that the couriers wore a Crisis Couriers uniform, and that payments to the couriers were set by Vabu rather than negotiated. The court decided that the courier was an employee rather than an independent contractor and that Vabu was therefore vicariously liable for the actions of the courier.

CHAPTER 10 Contract law: working with agents  375

REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 10.29 When will an agent be personally liable under a contract made with a third party? 10.30 Why is it important that an agent disclose to the third party that they are acting as an agent? 10.31 What is ‘breach of warranty of authority’? 10.32 When will a principal be vicariously liable for the torts and crimes of an agent?

10.6 Concluding the agency LEARNING OBJECTIVE 10.6 How can the principal–agent relationship be brought to an end?

There are many ways in which the principal–agent relationship can be brought to an end.

Termination by the parties The authority of the agent to act on behalf of the principal will be brought to an end if any of the following occur. •• The agent completes the tasks they were appointed by the principal to complete. •• The duration of the appointment established by the principal (if any) expires. •• The principal and the agent agree to terminate the relationship. •• The principal dismisses the agent because they have breached the contract between them or otherwise breached any of the duties owed by the agent to the principal. •• The principal revokes or limits the authority of the agent to act on their behalf. ACTIVIT Y 10.13 — REFLECT

If a principal revokes the authority of the agent to act on their behalf, will the agent have a legal remedy against the principal?

CAUTION!

Even if the principal–agent relationship has been brought to an end by one or both of the parties, the agent may still have apparent authority to act on behalf of the principal. In a commercial context where the agent has been acting on behalf of the principal on a regular basis it is important that the principal takes the time to inform potential third parties, both directly and by placing an advertisement, that the agent no longer has authority to act on the principal’s behalf.

Automatic termination The authority of the agent to act on behalf of the principal is automatically brought to an end in the following circumstances. •• The death of either the principal or the agent. Note, however, that the power of attorney legislation in each jurisdiction provides that if an agent under a power of attorney acts on behalf of the principal after the principal has died but before the agent has been informed, the agent’s actions will bind the estate of the principal and the agent will not be personally liable. •• The loss by either the principal or the agent of the capacity to contract. For example, if the principal loses the capacity to contract due to a loss of intellectual incapacity such as mental illness, the agency relationship will automatically come to an end. An important exception, explained earlier, is where the agent was appointed using an enduring power of attorney. 376  PART 2 Legal consequences

•• The bankruptcy of either the principal or the agent. •• The subject matter of the agent’s appointment becoming illegal. For example, if a 19-year-old agent is appointed to purchase alcohol on behalf of the principal and the law is subsequently changed to make it illegal to sell alcohol to any person under the age of 21, the agent’s appointment will automatically terminate. •• The frustration of the contract between the principal and the agent. For example, if the agent was appointed by the principal to sell the principal’s car, and the car is accidentally destroyed by fire prior to it being sold, the agent’s appointment will automatically terminate. REVISION QUESTIONS

Before proceeding, ensure that you can answer each of the following questions. 10.33 What are the five ways by which the principal–agent relationship can be terminated by the parties? 10.34 In what circumstances will the principal–agent relationship be automatically brought to an end by operation of law? 10.35 In what circumstances will an agent still have authority to act on behalf of the principal despite the termination of the principal–agent relationship?

In conclusion •• An agent is a person authorised to make statements, contracts and payments on behalf of a principal when dealing with a third party. •• The principal will be legally responsible for statements, contracts and payments made by their agent as long as the agent is acting within the scope of their authority. If the agent does something they are not actually authorised to do, the principal will still be legally responsible for the agent’s actions if the agent was acting with apparent authority. •• An agent owes a range of duties to the principal, including a duty to follow instructions, a duty to act personally, a duty of care and a duty to act in the best interests of the principal. •• All agents are entitled to be reimbursed for expenses and liabilities incurred in acting on behalf of the principal. The principal and the agent may also agree that the agent will be entitled to remuneration such as payment of a commission. •• As a general rule the agent does not incur personal liability when acting on behalf of the principal. The agent will incur personal liability if that is what the parties agree, or if the agent does not tell the third party that they are an agent, or if the agent breaches their warranty of authority. •• The principal–agent relationship may brought to an end by the parties or may terminate automatically by operation of law. JOHNNY AND ASH

[Ash and Johnny still sit together on the plane. The flight is underway.] Johnny — Okay, I think I understand, although I am not sure I agree with the law. If my agent Cathy ignores my clear instructions this week and goes ahead and hires new staff, I will still be responsible for what she does and still be locked into an employment contract with the new staff member. Ash — Yes, if she is shown to have acted with your apparent authority. By leaving her in charge for 2 weeks it could be argued that you are ‘holding her out’ as having authority to make decisions associated with the business on your behalf, including hiring new staff. If the new employee relies upon that holding out and reasonably assumes that Cathy is authorised to hire them, the new employee will have a contract with you.

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Johnny — But that is so unfair! Cathy will have done something I specifically told her not to do! Why should I still be legally responsible for what she does? Ash — Look at it from the point of view of the third party, the new employee. They have applied for a job, been interviewed by the person you have left in charge of the restaurant, and been offered a job by them. How could they possibly know that you told Cathy not to hire anyone new? From their point of view they have done nothing wrong, so why should they be penalised just because of a disagreement between you and Cathy? Johnny — So I am stuck with a new employee and there is nothing I can do about it? Ash — Not true. By disobeying your instructions Cathy has breached one of her duties as an agent. Johnny — The duty to follow instructions, right? Ash — Yes. Which means that you are entitled to bring a legal action against Cathy seeking compensation. You are probably also entitled to dismiss her, but more about that later. Johnny — I’m unlikely to sue Cathy. She doesn’t earn enough money to make it worthwhile. I suppose I will just have to trust her to do the right thing. [Their conversation is interrupted by a member of the flight crew serving a meal to the passengers.] Johnny — Hey! I ordered the vegetarian meal! What kind of restaurant is this?

378  PART 2 Legal consequences

QUIZ 1 An authorised agent may be entitled to make which of the following on behalf of the principal?

(a) Statements. (b) Payments. (c) Contracts. (d) All of the above. 2 Which of the following is least likely to be X’s agent? (a) X’s stockbroker. (b) X’s employer. (c) X’s real estate agent. (d) X’s partner. 3 An agent with broad but restricted authority to act on behalf of the principal is referred to as a (a) universal agent. (b) special agent. (c) general agent. (d) mercantile agent. 4 Which of the following is the distinguishing feature of a del credere agent? (a) They guarantee performance by the principal. (b) They guarantee performance by the agent. (c) They guarantee performance by the third party. (d) All of the above. 5 Which of the following is NOT a type of authority? (a) Implied actual authority. (b) Express apparent authority. (c) Express actual authority. (d) Ostensible authority. 6 How does an enduring power of attorney differ from a general power of attorney? (a) It is only used between family members. (b) It is in writing and signed by both the principal and the agent. (c) The agent is reimbursed by the principal. (d) It does not automatically expire upon the principal losing contractual capacity. 7 Authority for the agent to act on behalf of the principal may be implied (a) in order to give business efficacy to a contract. (b) to permit the agent to complete the task given to them by the principal. (c) if the agent has been granted such authority in the past. (d) all of the above. 8 Which of the following is NOT a requirement that must be satisfied in order to establish the existence of apparent authority? (a) The third party knew that the agent did not have actual authority. (b) The principal ‘held out’ the agent as having authority to act on their behalf. (c) The third party relied upon that holding out, and reasonably assumed that the agent had actual authority. (d) None of the above. 9 Which of the following is the best example of apparent authority? (a) X appoints Y as his partner. (b) X appoints Y as his agent under an enduring power of attorney. (c) X dismisses Y as his employee but does not tell his suppliers. (d) Y acts to protect X’s property in circumstances where X cannot be contacted for instructions. CHAPTER 10 Contract law: working with agents  379

10 An agency of necessity will not exist if

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(a) the agent can contact the principal to get express instructions. (b) the property of the principal is under threat. (c) the agent acts in good faith to protect the property of the principal. (d) the agent has possession or control of the principal’s property. An agent owes duties to the principal under (a) equity. (b) the law of torts. (c) the law of contracts. (d) all of the above. If an agent disobeys the principal’s lawful instructions (a) the agent breaches their duty to the principal. (b) the contract between the principal and agent is automatically terminated. (c) the agent has no authority to act on behalf of the principal. (d) all of the above. In what circumstances can an agent delegate to another person responsibility for carrying out the principal’s instructions? (a) When it is permitted by the terms of the contract between the principal and the agent. (b) When the agent has the principal’s permission to do so. (c) When the agent conducts a business and the delegated task is of an administrative nature. (d) All of the above. If an agent does not tell the principal that the agent is related to the third party with whom the agent has been authorised to negotiate a contract, the agent will be in breach of (a) the duty of care. (b) the duty to disclose conflicts of interest. (c) the duty to follow the principal’s instructions. (d) the duty to account. If an agent is discovered to have received a secret commission from the third party, the principal may be entitled to (a) refuse to pay a commission to the third party. (b) terminate the contract with the agent. (c) recover the secret commission from the principal. (d) terminate the contract between the agent and the third party. A ‘commission’ is a type of (a) indemnity. (b) reimbursement. (c) remuneration. (d) liability. A ‘lien’ is (a) a right to withhold property belonging to another. (b) a form of payment. (c) a right to be reimbursed. (d) a remedy available to the principal in the event of breach of duty by the agent. In what circumstances will the agent NOT be personally liable to the third party? (a) The agent discloses the fact that they are an agent but does not disclose the identity of their principal. (b) The agent does not disclose the fact that they are an agent. (c) The agent does not disclose that they are acting without authority. (d) The agent signs a written contract as principal.

380  PART 2 Legal consequences

19 In order to establish breach of warranty of authority the third party must show that

(a) the agent claimed that they were making the contract on behalf of the principal. (b) the agent did not in fact have authority to act on behalf of the principal. (c) the third party relied upon the agent’s representation, and would not have entered into the contract in the absence of the representation. (d) all of the above. 20 The principal–agent relationship is automatically terminated if (a) the agent breaches the contract between the principal and the agent. (b) the third party is declared bankrupt. (c) the principal loses the capacity to contract and the agent was not appointed under an enduring power of attorney. (d) the principal’s car is destroyed.

EXERCISES EXERCISE 10.1 — APPOINTMENT OF AGENT

Johnny’s elderly grandmother, Pam, has recently moved into a nursing home. She finds it difficult to leave the home to attend to her banking and other business affairs. She has asked Johnny to look after her affairs on her behalf. What steps should Pam and Johnny take to formalise Johnny’s appointment? EXERCISE 10.2 — APPARENT AUTHORITY

In addition to being part-owner of The Lame Duck restaurant, Maria is the sole owner of a real estate business. She sells the business to one of her senior managers, Joey. Joey does not change the name of the business, and neither Maria nor Joey tell anybody that ownership of the business has changed. After becoming owner, Joey is given $1  000  000 by Haji, one of the business’s regular clients, to hold on behalf of Haji until Haji pays the money to settle the purchase of a house. Joey takes the $1  000  000 and leaves the country. Can Haji recover the money from Maria? EXERCISE 10.3 — APPARENT AUTHORITY

Pearl is the owner of an antique store. Ahmed has been employed by Pearl as the store manager and principal salesperson for the past 2 years. One day Ash is shopping for furniture and finds a particular red leather antique armchair amongst the many chairs in Pearl’s store. She starts negotiating with Ahmed. Ahmed has been instructed by Pearl to sell the armchair for at least $3500. Nevertheless, after 30 minutes of bartering, Ash manages to persuade Ahmed to sell the chair to her for only $2500. The next day, upon discovering that Ahmed had disobeyed her instructions and sold the armchair to Ash for only $2500, Pearl immediately calls Ash and insists that she return the armchair. Is Pearl legally entitled to do this? EXERCISE 10.4 — AGENCY OF NECESSITY

Cathy is employed by Johnny and Maria as the manager of The Lame Duck restaurant. One evening when she closes the restaurant and goes home she accidentally leaves a candle burning on one of the tables at the front of the restaurant. Later that night the candle burns down and sets the tablecloth on fire. Fortunately, Geoff is walking past the restaurant on his way home from work and sees the fire. He picks up a brick, uses it to smash the plate glass window at the front of the restaurant, and bravely reaches through the hole to grab the burning tablecloth and yank it outside where he stamps out the fire. A potential disaster is averted. Maria is, however, considering whether or not to sue Geoff for trespass in order to recover compensation for the cost of replacing the window. How can Geoff avoid liability? EXERCISE 10.5 — AGENT’S DUTIES

Ash agrees to buy a used car from Terence on the condition that the car is approved as mechanically sound by her mechanic Ng. After inspecting the car, Ng tells Ash that the car is fine and Ash buys the car from Terence. One month later, Ash learns that the car needs a new engine because the existing one

CHAPTER 10 Contract law: working with agents  381

was so poorly maintained. She also finds out that Terence had paid Ng $500 to certify the car as mechanically sound. What are the legal consequences of Ng’s actions? EXERCISE 10.6 — AGENT’S DUTIES

See the facts of exercise 10.5. Ash has, perhaps foolishly, forgiven her mechanic, Ng, for his actions. She asks him to try to sell the used car on her behalf, instructing him to get ‘the best possible price’. Ng says he will buy the car from Ash himself for $1000. Ng knows of someone who is willing to pay $1500 for the car, and Ng plans to buy the car from Ash and sell it to this buyer in order to make a $500 profit. If Ng proceeds with this course of action, what will be the likely legal consequences? EXERCISE 10.7 — AGENT’S DUTIES

Ash’s niece, Gaia, is backpacking overseas. She unfortunately runs out of money. She telephones her flatmate, Emily, and asks her to raise some extra money by selling Gaia’s computer system on her behalf. Gaia tells Emily that she can sell the computer components separately or together, but that she has to get at least $500 for the lot. Emily is also to deposit the money into Gaia’s savings account. Two weeks later, Gaia is surprised to discover that only $250 has been deposited into her account. When Gaia asks Emily about this, Emily explains that she sold the CPU to one person, the monitor to another person, and the printer and scanner to a third person; that she thought she got quite good prices for the CPU and the monitor, but she only got $50 for the other components; that this is not her fault because she got her friend Annie to sell them for her; that she couldn’t sell the keyboard because someone at a party spilt wine all over it and now it doesn’t work properly; that someone else at the same party stole the mouse; and that she is not completely sure if the $250 is the right amount, because when she collected the money from the buyers it ‘kind of got mixed up’ with her own money. Which duty or duties owed by an agent does Emily appear to have breached? EXERCISE 10.8 — AGENT’S ENTITLEMENTS

See the facts of exercise 10.7. Assume that Emily has complied fully with Gaia’s instructions. Emily now insists that she is entitled to (1) a reasonable commission for the sale of the computer system and (2) reimbursement of the money she spent placing advertisements online. Is Emily correct? EXERCISE 10.9 — LIABILITY OF AGENT AND PRINCIPAL

Johnny is approached by Anastasia, a wedding planner. Anastasia tells Johnny that she is acting on behalf of Brangelina, a local celebrity who is known to be getting married next month. Anastasia explains that Brangelina wants to book The Lame Duck restaurant for the wedding. Johnny accepts the booking and informs his regular customers that the restaurant will be closed for a private function on the night of the wedding. The day before the wedding Johnny learns that his restaurant was just one of a number of restaurants approached by Anastasia, and that Brangelina has decided to use a different restaurant. Anastasia apologises, explains that she made a mistake and that Brangelina never authorised her to book The Lame Duck. Can Johnny insist that he has a contract with Brangelina with which Brangelina must comply? If not, can Johnny recover compensation from Anastasia? EXERCISE 10.10 — LIABILITY OF AGENT AND PRINCIPAL

See the facts of exercise 10.9. If Anastasia was in fact authorised to act on behalf of Brangelina but told Johnny she wanted to book the restaurant for herself, could Johnny enforce the contract against both Brangelina and Anastasia?

KEY TERMS agent  A person who acts on behalf of a principal who is legally responsible for the actions of the agent. apparent authority  Authority conferred upon an agent unintentionally when the principal holds the agent out as having authority and the holding out is relied upon by a third party. Also known as ‘ostensible authority’ or ‘authority by estoppel’. 382  PART 2 Legal consequences

bankruptcy  A statutory process whereby the assets of an insolvent individual are sold and used to repay their creditors. breach of warranty of authority  A representation by an agent that they have authority to act on behalf of the principal when they do not in fact have any such authority. broker  A mercantile agent who does not have possession of the principal’s property when selling it. contract  An agreement between two or more persons that is legally enforceable. conversion  A tort committed when one person wrongfully deals with the goods of another in a way that is inconsistent with their ownership or rightful possession. del credere agent  An agent who has agreed to indemnify the principal in the event of non-performance by the third party. director  A person who is responsible for the management of a company. doctrine of the undisclosed principal  The principle that an agent who does not tell the third party they are acting as an agent will be personally liable to the third party. enduring power of attorney  A power of attorney set up to take effect in the event something happens to the principal such as illness, old age or accident that results in the principal being unable to make their own decisions. Also known as an ‘irrevocable power of attorney’ or a ‘living will’. equity  The category of case law rules and remedies based on fairness and justice, developed to supplement the common law. exclusive agency  An arrangement with a selling agent according to which the agent has the exclusive right to sell the property. factor  A mercantile agent who is given possession of the principal’s property in order to sell it. fiduciary  A position of trust and confidence held by a person such as an agent, trustee or partner. frustration  The termination of a contract due to unanticipated impossibility or extreme difficulty of performance. general agent  An agent with broad but not unrestricted authority to act on behalf of the principal. independent contractor  A person who is contracted to provide services, but who is not an employee. lien  A right to retain possession of property belonging to another until a debt payable by the property owner is paid. mercantile agent  An agent appointed to sell the property of the principal. multiple listing  An arrangement with a selling agent according to which the agent is a member of a network of different agents who all work together to try to sell the property. negligence  A tort committed when one person fails to exercise reasonable care and causes harm to another person. open agency  An arrangement with a selling agent according to which the agent shares the right to sell the property with other agents. power of attorney  A formal written grant of express authority to an agent. principal  A person represented by an agent and who is legally responsible for the actions of the agent. ratify  To approve or adopt something retrospectively. retrospective  Something that is deemed to have commenced before it was actually created, e.g. retrospective legislation. secret commission  A payment made to a person who owes a fiduciary obligation (e.g. an agent) by a third party and without the knowledge of the person to whom the fiduciary obligation is owed. secretary  The company officer who is primarily responsible for ensuring compliance with the administrative requirements of the Corporations Act. sole agency  An arrangement with a selling agent according to which the agent is the only agent with the right to sell the property but if the client finds a buyer themselves no commission is payable to the agent. special agent  An agent with limited authority to act on behalf of the principal, e.g. in relation to a single transaction. third party  A stranger to a transaction or relationship. CHAPTER 10 Contract law: working with agents  383

tort  A harmful act, other than a breach of contract, giving the victim a right to sue for compensation, e.g. trespass, negligence, defamation, nuisance and passing off. trust account  A bank account maintained by an agent or other fiduciary in which they hold funds on behalf of the principal or client. universal agent  An agent with unrestricted authority to act on behalf of the principal. vicarious liability  Liability for the conduct of another.

ACKNOWLEDGEMENTS © LifetimeStock / Shutterstock.com

QUIZ ANSWERS

1. d  2. b  3. c  4. c  5. b  6. d  7. d  8. a  9. c  10. a  11. d  12. a  13. d  14. b  15. b  16. c  17. a  18. a  19. d  20. c 384  PART 2 Legal consequences

CHAPTER 11

Dealing with consumers LEA RNIN G OBJE CTIVE S 11.1 11.2 11.3 11.4

Why do consumers deserve additional legal protection? When marketing and selling to consumers, what kinds of conduct are prohibited? What are the consequences of getting caught engaging in the prohibited conduct? What are the consequences of a business failing to protect consumers’ information privacy?

JOHNNY AND ASH

[Ash and Johnny are dining out at another restaurant. Johnny is grinning like a fool and appears to be more than a little drunk. Ash, on the other hand, is playing it cool. She fills her wine glass and takes a sip before finally querying his out-of-character manic delight with a raised eyebrow.] Johnny — Well! Not only did Maria agree to step back and let me keep running the restaurant, we’re going to start turning a profit at last! Ash — That’s great. What are you  .  .  . Johnny — I’m glad you asked! It’s mainly thanks to Maria and her great new ideas about making more money at the restaurant. Some of them may seem a little  .  .  .  dodgy  .  .  .  but I’m sure they’re legal! Ash — Tell me more. Johnny — Maria and I are going to set up a new company called Lame Duck Organics Pty Ltd! We are going to sell precooked, packaged, microwaveable organic meals! Ash — Hey, that’s a great idea. Johnny — I know! Everybody these days wants to eat healthy food, and wants it to be organic! So we’ve chosen a bunch of meal items from our menu for the packaged meals and added the word ‘organic’. We’re going to charge three times as much, even though they’re made from exactly the same ingredients as those in the restaurant: people are always willing to pay more if they think it’s organic. And it’s all legal because Maria looked up the word ‘organic’ in the dictionary and one meaning says ‘derived from living organisms’. Since all the items on our menu are made from plants, all the meals are literally ‘organic’! Ash — Um  .  .  . Johnny — What? Ash — Where do I begin? Misleading and deceptive conduct? False representations regarding goods? My sudden headache? Johnny — [His grin wavers, then collapses completely.] I knew it was all too good to be true  .  .  .

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Maria’s proposal to sell ordinary food labelled as ‘organic’ is strictly legal.

Introduction Until the late 20th century, the law treated consumers in the same way as everyone else: they were expected to be careful to protect their own interests. Since the 1970s, however, there has been a growing recognition that it is relatively easy for a business to take advantage of and profit from a consumer’s ignorance, and a powerful consumer protection movement has led to many important changes in the law. Today there is a wide range of legal rules with which a business must comply when dealing with consumers. In this chapter we consider the types of conduct that are permitted or prohibited when it comes to dealing with consumers.

11.1 Protecting consumers LEARNING OBJECTIVE 11.1 Why do consumers deserve additional legal protection?

Consumers are seen to be entitled to additional protection under Australian law because when dealing with a business they are usually at a disadvantage. A business will almost always know more about its products than the consumer, it will almost always have more business experience than the consumer, and it will almost always have greater access to resources than the consumer. 386  PART 2 Legal consequences

The traditional rules of contract law offer little assistance to a consumer who is disadvantaged because of this inequality of bargaining power. Many of these traditional rules — particularly the common law rules — were developed in British courts during the 17th and 18th centuries at a time when one of the most important guiding principles for judges was the notion of freedom of contract. Judges were reluctant to interfere in the bargaining process, preferring instead to allow the parties to negotiate the terms of the agreement themselves. The common law offers guidance in establishing the existence of a contract and in providing remedies to a party who suffers because of the other party’s breach, and case decisions such as those in Donoghue v Stevenson and Carlill v Carbolic Smoke Ball Co (discussed in previous chapters) established rules for the basic protection of consumers, but the common law has relatively little to say about how the parties should behave when negotiating the contract and whether the terms of the contract negotiated by the parties are fair for both parties. The rules relating to terms, non-­contractual representations and promises, collateral contracts, and misrepresentation (see earlier c­ hapters) may occasionally afford a remedy, but those rules are so complex and specific that in practice they are often of little use. The overriding principle is caveat emptor: ‘let the buyer beware’. This traditional reluctance by the common law to interfere in the negotiation process may have been appropriate at a time when most contracts were made between persons with a general equality of bargaining power, but by the end of the 20th century such equality of bargaining power was more the exception than the rule. Most contracts made today by consumers are with large organisations and ­powerful corporations, and rather than a true negotiation of the terms, standard form contracts are often used to impose terms upon consumers. The range of products available to the modern consumer is overwhelming, and the complexity of these products is ever increasing. Advertising techniques are much more sophisticated and persuasive. In such a context, it becomes possible for a business to seek to profit from consumers’ ignorance and to take advantage of the freedom of contract permitted by the common law to impose upon consumers’ contract terms that are weighted in favour of the business. The first steps away from caveat emptor were taken by the United Kingdom Sale of Goods Act 1893, the model for the sale of goods legislation in each of the Australian States and Territories. In 1974 the Federal Parliament established a much more rigorous scheme for the protection of consumers with the passing of the Trade Practices Act 1974 (Cth), which in 2010 was renamed the Competition and Consumer Act 2010 (Cth). As explained by the minister introducing the Trade Practices Bill into the Federal Parliament: 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’. The 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.1

There are now numerous statutes that seek to offset the fundamental inequality of bargaining power between consumers and businesses, for example by: •• implying additional terms into certain contracts to protect the consumer, •• prohibiting certain types of conduct by businesses, or •• closely regulating certain types of transactions with consumers, such as those involving the handling of consumers’ personal information. There are often significant criminal and civil consequences for businesses that are found to have contravened consumer protection laws, as well as the possibility of unwelcome media attention. It is, therefore, vitally important that businesses understand these laws and organise their affairs in order to avoid contravention. 1 Commonwealth, Parliamentary Debates, Senate, 30 July 1974, 540–541 (Lionel Murphy, Leader of the Government in the Senate).

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LAW IN CONTEXT: LAW AND ECONOMICS

Consumer protection and information asymmetry In economic theory, when one party to a transaction has more or better information than the other party, it is referred to as an instance of information asymmetry. Information asymmetry creates an imbalance of power that can sometimes lead to problems such as adverse selection: as a result of information asymmetry in consumer transactions, ‘bad’ products are more likely to be sold. Poor quality and defective products are usually cheaper to produce, and because these products can be offered for sale at a lower price and the consumer is usually unaware of the quality of the product until after it has been purchased, many sellers will choose to sell bad products. Information asymmetry can eventually lead to the collapse of a market.2 Where consumers cannot know whether a product is good quality or poor quality, the sellers are motivated to pass off poor quality products as good quality products. However, the consumers will eventually be aware of the risk of buying a poor quality product and the price they are willing to pay for any such product will fall somewhere between the correct price for a good quality product and the correct price for a poor quality product. This means that the good quality products will be sold for less than their true value and the poor quality products will be sold for more than their true value, creating a further incentive for sellers to sell poor quality products, and driving the sellers of good quality products out of the market. This will continue to occur, and price and quality will continue to fall, until the market collapses. Government intervention into the market in the form of consumer protection legislation is a way of protecting the market from such collapse. Information asymmetry is minimised by compelling sellers to disclose certain information to consumers and by punishing sellers who rely upon information asymmetry to sell defective products or to otherwise disadvantage consumers.

ACTIVIT Y 11.1 — REFLECT

Consumer protection laws are explicitly intended to help consumers, but is there a cost to consumers as well? Think about the possible impact of rigorously enforced consumer protection laws upon the price of goods.

LAW IN CONTEXT: LAW IN PRACTICE

Some common scams There have always been unethical business people willing to rip off innocent victims, but with the advent of the internet and the explosive growth in online interaction, scammers have found newer and sneakier ways to trick people into parting with their money. Some of the more common scams being run today include the following. • Fake fraud alerts — the scammer convinces the victim to disclose their bank account or credit card details or passwords by sending the victim an email that appears to be from the victim’s bank or credit card company telling the victim that there has been suspicious activity in relation to their account and that they should follow a link in the email and enter their details. • Pyramid schemes — the scammer persuades the victim to pay a large sum of money to join their ‘get rich quick’ distribution scheme by telling the victim about the enormous bonuses they will earn whenever they convince someone else to join the scheme. • Weight loss scams — the scammer persuades the victim to pay large sums of money for ‘miraculous’ weight loss products, diets or regimes by lying about the effectiveness of the products and quoting fictional scientific evidence.

2 George A Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ (1970) 84 Quarterly Journal of Economics 488.

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• Work from home scams — the scammer promises the victim that they can get rich working from home, and requires the victim to pay for a starter kit. The starter kit is never sent, or it is no more than a set of instructions about how to run the same scam on other victims. In some cases the starter kit is a set of raw materials and instructions about how to combine them into finished products, but it takes so long to finish each product that the victim is effectively paid only a few cents per hour, or the finished products are never acceptable to the scammer and the victim is never paid at all. • Ring tone scams — the scammer contacts the victim by text or email offering them a ‘free’ or low cost ring tone. By accepting the offer, the victim actually subscribes to a service that keeps sending them ring tones and charging the victim a premium rate. • ‘Nigerian’ scams — these scams take a variety of forms. In one common version, the victim receives an email telling them that they will earn a large fee if they assist a person in another country — such as a Nigerian politician — to transfer a large sum of money out of the other country. The victim is asked to deposit a relatively ‘small’ sum into an overseas account to initiate the transaction, or they are asked to provide their own personal account details. Sometimes the victim is asked to pay a small ‘bank fee’, then another larger fee, then another, until the victim realises that they are never going to earn that large reward. These and other such scams are described in detail at www.SCAMwatch.gov.au. SCAMwatch is a website run by the Australian Competition and Consumer Commission that provides information to consumers and small businesses about how to recognise, avoid and report scams.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 11.1 Why do consumers deserve extra legal protection? 11.2 Why do the traditional rules of contract law often fail to protect consumers? 11.3 What is the relationship between ‘freedom of contract’ and ‘consumer protection’? 11.4 Why was the United Kingdom Sale of Goods Act 1893 so important? 11.5 What is the economic justification for consumer protection legislation?

11.2 Dealing with consumers LEARNING OBJECTIVE 11.2 When marketing and selling to consumers, what kinds of conduct are prohibited?

In this section we consider the statutory rules regulating the advertising and selling of products to consumers. It is extremely important that any business dealing directly with members of the public be familiar with these rules, and with the potential consequences of contravening them.

Consumer protection regulation Most of the rules regulating advertising and selling to consumers are now found in the Australian Consumer Law (ACL). The ACL is set out in Schedule 2 to the Competition and Consumer Act 2010 (Cth) (the CCA). Prior to the passage of the ACL, the system of regulation was much more confusing. Some consumer transactions were regulated by Commonwealth legislation, some were regulated by State or Territory legislation, and some were regulated by the basic principles of contract law. In 2010 the ACL replaced a large number of Commonwealth, State and Territory laws.3 There is now a single, national law r­ egulating consumer protection and fair trading in a consistent manner across all Australian jurisdictions. 3 The legislation replaced by the ACL includes: Trade Practices Act 1974 (Cth) pts IVA, V, VA and VC; Fair Trading Act 1992 (ACT); Fair Trading (Consumer Affairs) Act 1973 (ACT); Door to Door Trading Act 1991 (ACT); Lay by Sales Agreements Act 1963 (ACT); Fair Trading Act 1987 (NSW); Consumer Affairs and Fair Trading Act 1990 (NT); Fair Trading Act 1989 (Qld); Fair Trading Act 1987 (SA); Consumer Transactions Act 1972 (SA); Manufacturers Warranty Act 1974 (SA); Fair Trading Act 1991 (Tas); Fair Trading (Reinstatement of Regulations) Act 2008 (Tas); Door to Door Trading Act 1986 (Tas); Fair Trading Act 1999 (Vic); Fair Trading Act 1987 (WA); Consumer Affairs Act 1971 (WA); Door to Door Trading Act 1987 (WA).

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The ACL is applied and enforced as a law of each Australian jurisdiction. As a law of the Commonwealth it applies to the conduct of corporations and those associated with them. As a State or Territory law it applies to the conduct of all businesses not covered by the Commonwealth law. This ensures that the ACL applies to all businesses and all business transactions in Australia, regardless of the particular business structure. ACTIVIT Y 11.2 — REFLECT

As a Commonwealth law, why is the application of the ACL limited to corporations and those associated with them? (Hint: Refer back to an earlier chapter and the exclusive, concurrent and residual powers of the Federal and State Parliaments.)

The provision of financial products and services to consumers is regulated by the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). The ASIC Act was amended in 2010 to bring the regulation of consumer credit into line with the ACL. LAW IN CONTEXT: LAW AND POLITICS

The political history of the Australian Consumer Law In 2005, in its Review of National Competition Policy Reforms, the Australian Productivity Commission identified consumer protection legislation as one of four priority areas for reform. The Commission stated that ineffective national coordination mechanisms had led to regulatory inefficiencies and inconsistencies to the detriment of both consumers and businesses. The Commission recommended that the Commonwealth, State and Territory governments establish a national review into consumer protection policy and administration. In 2008 the Productivity Commission completed its Review of Australia’s Consumer Policy Framework and recommended the implementation of a national consumer protection law.4 Later that year, in the National Partnership Agreement to Deliver a Seamless National Economy, the Commonwealth, State and Territory governments agreed to complete the legislative process to implement such a national consumer protection law by 31 December 2010, and that it would commence in all jurisdictions on 1 January 2011. In 2009 the Council of Australian Governments (COAG) agreed to the Inter-Governmental Agreement for the Australian Consumer Law. In 2010 the Federal Parliament passed the Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 (Cth). This Act inserted the ACL as a Schedule to the Trade Practices Act 1974 (Cth). Subsequent legislation changed the name of the Trade Practices Act 1974 (Cth) to the Competition and Consumer Act 2010 (Cth). The ACL drew on the conclusions of the 2008 Productivity Commission report as well as best practice in existing Commonwealth, State and Territory laws. The Productivity Commission has estimated that the reforms introduced by the ACL could provide benefits to the Australian community of between $1.5 billion and $4.5 billion a year.5

Regulators As a law of the Commonwealth, the ACL is administered by the Australian Competition and Consumer Commission (ACCC). The ACCC seeks to promote competition and fair trade in the market place, and regulates national infrastructure services. Its primary responsibility is to ensure that individuals and businesses comply with Commonwealth competition and consumer protection laws.

4 Productivity Commission, Review of Australia’s Consumer Policy Framework (2008). 5 Productivity Commission, Review of Australia’s Consumer Policy Framework (2008) 323.

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ACTIVIT Y 11.3 — RESEARCH

Visit the ACCC website at www.accc.gov.au. What is the procedure for lodging a complaint with the ACCC about the conduct of a business?

As a State or Territory law the ACL is administered by the relevant State or Territory consumer protection agency (see table 11.1). TABLE 11.1

State/Territory consumer protection agencies

Jurisdiction

Agency

Website

Australian Capital Territory

ACT Office of Regulatory Services

www.ors.act.gov.au

New South Wales

NSW Fair Trading

www.fairtrading.nsw.gov.au

Northern Territory

NT Consumer Affairs

www.consumeraffairs.nt.gov.au

Queensland

Queensland Office of Fair Trading

www.fairtrading.qld.gov.au

South Australia

SA Consumer and Business Services

www.cbs.sa.gov.au

Tasmania

Consumer Affairs and Fair Trading Tasmania

www.consumer.tas.gov.au

Victoria

Consumer Affairs Victoria

www.consumer.vic.gov.au

Western Australia

WA Department of Commerce — Consumer Protection

www.commerce.wa.gov.au/ consumerprotection

The consumer protection provisions in the ASIC Act relating to the provision of consumer credit are administered by the Australian Securities and Investments Commission (ASIC). The administration and enforcement of the ACL and the related ASIC Act provisions is facilitated at an operational level by a Memorandum of Understanding (MOU) between the ACCC, ASIC and the various State and Territory consumer protection agencies.

Meaning of ‘consumer’ The term consumer is defined in ACL s 3 as follows: 1. A person is taken to have acquired particular goods as a consumer if, and only if: (a) the goods were of a kind ordinarily acquired for personal, domestic or household use or consumption; or (b) the goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads. 2. However, subsection (1) does not apply if the person acquired the goods, or held himself or herself out as acquiring the goods: (a) for the purpose of re-supply; or (b) for the purpose of using them up or transforming them, in trade or commerce:   (i) in the course of a process of production or manufacture; or (ii) in the course of repairing or treating other goods or fixtures on land. 3. A person is taken to have acquired particular services as a consumer if, and only if, the services were of a kind ordinarily acquired for personal, domestic or household use or consumption.

For example, if someone buys a packaged meal from Lame Duck Organics with the intention of eating it at home, they would be a consumer because they have acquired goods for personal consumption. However, if someone buys a quantity of packaged meals from Lame Duck Organics with the intention of reselling them in their own restaurant, they are not a ‘consumer’ within the meaning of the ACL because of sub-section (2). CHAPTER 11 Dealing with consumers  391

The definition of consumer in the ACL is wide enough to include many businesses, to the extent that they are not buying products for resale. For example, if Johnny buys new cutlery for his restaurant he will be a consumer and protected by the provisions of the ACL, ‘goods  .  .  .  of a kind ordinarily acquired for personal, domestic or household use or consumption’ and he is not acquiring them for the purpose of re-supply. CAUTION!

The protection provided to consumers by the ACL is also available to other businesses buying products for their own use and not intended for resale.

General protections Chapter 2 of the ACL prohibits certain general forms of conduct by a business. The chapter includes: •• a general prohibition of ‘misleading or deceptive conduct’ in trade or commerce; •• a general prohibition of ‘unconscionable conduct’ in trade or commerce and specific prohibitions of ‘unconscionable conduct’ in consumer transactions and some business transactions; and •• a provision that makes ‘unfair contract terms’ in consumer contracts void.

Misleading or deceptive conduct The ACL prohibits misleading or deceptive conduct by a business. According to ACL s 18: (1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

This section provides the same protection as that previously provided by s 52 of the Trade Practices Act 1974 (Cth) (the TPA). Most of the cases considered below relate to TPA s 52, but are of direct relevance to an understanding of ACL s 18. A person who suffers loss because a business has engaged in misleading or deceptive conduct can commence legal proceedings against the business and seek one or more of the wide range of remedies offered by the ACL. Alternatively, the person can lodge a formal complaint about the business with the ACCC, which may take action against the business on behalf of the consumer. Unlike the other prohib­ itions, however, no criminal penalty is imposed on the business. This prohibition is one of the most relied-upon legislative provisions in Australian law. The broad application of the prohibition can be attributed to a number of factors. •• In establishing a contravention of the prohibition, the intention of the business is irrelevant. It does not matter if the business intended to mislead or deceive or if it believed that it was acting honestly and reasonably; if the conduct is misleading or deceptive the prohibition has been contravened. LAW IN CONTEXT: LAW IN THE MEDIA

Apple fined $2.25m by ACCC for false advertising When in 2012 Apple released its new iPad in Australia, Apple claimed in its advertising and marketing materials that the iPad was 4G capable. The iPad was 4G capable in other countries, but not in A ­ ustralia: it operated on the 700 MHtz and 2100 MHz bands, neither of which are available in Australia. The ACCC commenced legal proceedings against Apple, alleging that Apple had misled consumers. In June 2012, the ACCC and Apple entered into a settlement agreement. Apple agreed to pay a fine of $2.25 million to the ACCC, and to pay $300   000 to cover the ACCC’s legal costs. Reproduced from Daniel Fogarty, ‘Apple fined more than $2m over iPad claim’, Australian Associated Press (Melbourne), 21 June 2012.

392  PART 2 Legal consequences

•• In assessing the conduct of the business as misleading or deceptive, the standard applied is lower than the common law’s ‘reasonable person’ standard. It is the standard of the ‘unsuspecting modest member of the community’.6 •• There are very few defences set out in the ACL. •• Liability cannot be avoided by use of a disclaimer. ACCC v Telstra Corporation Limited (2007) 244 ALR 470

Telstra made various claims in its advertising for its Next G mobile network, including the claim that it had ‘coverage everywhere you need it’. The ACCC alleged that in making such a claim Telstra had engaged in misleading or deceptive conduct. Telstra argued that some of the advertisements directed consumers to its website, where there was information about the actual extent of its network coverage. The court decided that this disclaimer did not prevent Telstra’s conduct from being misleading or deceptive, as it did not sufficiently communicate the information to potential customers.

•• The range of remedies provided by the ACL for contravention of the section is much wider than that available at common law for misrepresentation or breach of contract. •• The section can be relied upon not only by consumers but also by interested members of the public and by other businesses, including competitors. Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1

The Australian Federation of Consumer Organisations (AFCO) commenced proceedings against the Tobacco Institute of Australia Ltd for contravention of TPA s 52, claiming that newspaper advertisements placed by the Tobacco Institute denying a link between passive smoking and diseases caused by the inhalation of smoke by non-smokers were misleading or deceptive. The court confirmed that although the AFCO was not a consumer it was still entitled to sue under TPA s 52.

Gillette Australia Pty Ltd v Energizer Australia Pty Ltd (2002) 193 ALR 629

Television advertisements for Duracell batteries showed the Duracell bunny outlasting other toy bunnies powered by competing batteries. The advertisements included the claim that Duracell batteries would ‘last four times longer’ or ‘up to four times longer’ than the opposition. Energizer Australia Pty Ltd, the manufacturers of Eveready batteries, brought a civil action against Gillette Australia Pty Ltd, the manufacturers of Duracell batteries, claiming that Gillette had engaged in misleading or deceptive conduct. Energizer alleged that the advertisements did not make it clear that Duracell alkaline batteries were being compared with the zinc–carbon batteries of other manufacturers, and that since alkaline batteries generally last up to four times longer than zinc–carbon batteries, Duracell batteries did not offer any particular advantage over the batteries of Gillette’s competitors. The court decided that although Energizer was a competitor and not a consumer it was entitled to bring an action under TPA s 52.

6 Henderson v Pioneer Homes Pty Ltd (1979) 142 CLR 294.

CHAPTER 11 Dealing with consumers  393

LAW IN CONTEXT: LAW IN THE MEDIA

Comparative advertising causes headaches GlaxoSmithKline Consumer Healthcare, the maker of Panadol, published advertisements in newspapers and via television commercials across Australia that compared Panadol Caplets to Herron Capseals and said that Panadol Caplets were ‘Made in Australia by Australians’, while Herron Capseals were ‘Made in the USA by Americans’. Caplets are 500 mg of paracetamol, and Capseals are 500 mg of paracetamol enclosed in a gelatin cover. Both are similarly shaped. According to the ACCC: Although factually correct, GlaxoSmithKline neglected to mention that it also produces a similar comparable product to Herron Capseals, the Panadol Gel Caps. Those products are also made in the United States of America. In other words Caplets were being compared to Capseals. The ACCC has informed GlaxoSmithKline that this sort of c ­ omparative advertising raises concerns under section 52 of the Trade Practices Act 1974 which prohibits m ­ ­ isleading and deceptive conduct or conduct which is likely to mislead or deceive. The ACCC has already stated that particular care is needed when comparisons are made between products of competing traders so that the comparisons don’t mislead. ­Advertisements must be considered as a whole, and they must be in context. A comparison can be misleading by the omission of information that would be necessary to render the com­parison fair. Comparative advertising is good for competition. Unlike some countries, A ­ ustralia does not prohibit competitors from comparing products. But special care is needed to ensure that comparisons are not misleading. Source: Australian Competition and Consumer Commission, ‘Comparative Advertising Causes Headaches’ (Media Release, MR 250/01, 2 October 2001) http://www.accc.gov.au/media-release/comparative-advertising-causes-headaches.

ACL s 18 can be used in a wide range of situations. It applies whenever a business engages in misleading or deceptive conduct in trade or commerce. For example, an action against a business for contravention of ACL s 18 may be brought in conjunction with, or as an alternative to, an action against the business for the tort of negligence,7 the tort of passing off,8 the tort of defamation,9 breach of contract,10 misrepresentation,11 or infringement of intellectual property rights.12 CHECKLIST

A business will have contravened ACL s 18 if all of the following requirements are satisfied. ◼◼ The business has ‘engaged in conduct’. ◼◼ The conduct was ‘in trade or commerce’. ◼◼ The conduct was ‘misleading or deceptive or  .  .  .  likely to mislead or deceive’.

To establish that a business has contravened s 18, three requirements must be satisfied. Requirement 1: The business has ‘engaged in conduct’

A business ‘engages in conduct’ if it makes a statement, a claim or a promise, performs an action, or refuses to do any of these things.

 7 Henville v Walker (2001) 206 CLR 459;.  8 Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553.  9 Nixon v Slater & Gordon (2000) 175 ALR 15. 10 CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2005] ATPR 42–042. 11 Fencott v Muller (1983) 152 CLR 570. 12 Hutchence v South Sea Bubble Co Pty Ltd (1986) 64 ALR 330.

394  PART 2 Legal consequences

In certain circumstances, even silence can be conduct. If, for example, Johnny is negotiating with a buyer and he is aware that the buyer is acting on the basis of a misunderstanding, Johnny has an obligation to correct that misunderstanding, and if he fails to do so he has engaged in conduct that is misleading or deceptive. Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 2) (1989) 40 FCR 76

Henjo Investments Pty Ltd was negotiating the sale of a restaurant to Collins Marrickville Pty Ltd (CM). When CM viewed the restaurant it had seating for 128 people. However, the restaurant licence limited the seating capacity to only 84 people. When following the sale CM learned of the limit in the licence, it commenced proceedings against Henjo. The court decided that Henjo’s silence on that point was misleading and deceptive conduct.

It does not matter if the conduct is unintentional, or the business did not intend the conduct to be misleading. In establishing a contravention of ACL s 18, the intention of the business is irrelevant. Requirement 2: The conduct was ‘in trade or commerce’

The second requirement in establishing a contravention of ACL s 18 is that the conduct of the business was ‘in trade or commerce’. ‘Trade or commerce’ is defined in ACL s 2 as meaning: (a) trade or commerce within Australia; or (b) trade or commerce between Australia and places outside Australia; and includes any business or professional activity (whether or not carried on for profit).

Conduct that takes place in a non-commercial context will not contravene ACL s 18. Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594

Nelson was a worker who was injured when he fell to the bottom of an air conditioning shaft because a foreman had incorrectly explained how to remove a grate. He commenced proceedings against Concrete Constructions claiming that the foreman’s conduct had been misleading in contravention of TPA s 52. The court decided that TPA s 52 was not applicable because the conduct was not ‘in trade or commerce’.

Statements made in a political or educational context are not in trade or commerce and are, therefore, not covered by ACL s 18. Durant v Greiner (1990) 21 NSWLR 119

It was claimed that the Premier of New South Wales had made statements about the future of a school that were misleading and deceptive in contravention of TPA s 52. The court decided that s 52 had not been contravened because the statements were not made ‘in trade or commerce’.

Plimer v Roberts (1997) 80 FCR 303

Roberts delivered a series of lectures about the location of Noah’s Ark. Plimer argued that Roberts’ claims were misleading or deceptive conduct in contravention of TPA s 52. The court decided that TPA s 52 was not applicable because the statements were not ‘in trade or commerce’.

CHAPTER 11 Dealing with consumers  395

Requirement 3: The conduct was ‘misleading or deceptive’

To establish a contravention of ACL s 18 it must be shown that the conduct of the business was misleading or deceptive or likely to mislead or deceive. ‘Misleading or deceptive’ is not defined in the ACL, and the courts have to date declined to provide a precise definition. ‘Mislead’ is usually interpreted as simply meaning ‘to lead astray’ or ‘to lead into error’, and ‘deceive’ is interpreted as ‘to cause to believe what is false’.13 In deciding whether conduct is misleading or deceptive the court will use an objective test. The High Court explained this test in the following case.

Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177

A restaurant in Sydney owned by Taco Bell Pty Ltd (TB) had been operating under the name ‘Taco Bell’ for some time. There was a chain of restaurants in the United States with the same name, and Taco Company of Australia Inc (TCA) sought to open a restaurant with that name as part of the US franchise. TCA commenced a civil action against TB alleging a contravention of TPA s 52; TB cross-claimed, alleging the same thing. The court decided that since TB had commenced operations in Australia first, it was TCA that was engaging in the misleading or deceptive conduct. In making its decision, the court explained the test for determining whether particular conduct is misleading or deceptive: ‘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 the 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.’

ACTIVIT Y 11.4 — REFLECT

What is the difference between the ‘reasonable person test’ in tort law and the test established by the court in the ‘Taco Bell’ case?

The requirement that the conduct be assessed in terms of the effect upon the target audience means that, for example, an advertisement directed towards children will be assessed differently to an advertisement directed towards doctors.14 To establish a contravention of ACL s 18 it need only be shown that a small percentage of the target audience is likely to be misled or deceived. However, a certain amount of intelligence on the part of the target audience can be assumed: 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.15

13 Weitmann v Katies Ltd (1977) 29 FLR 336. 14 Astrazeneca Pty Ltd v GlaxoSmithKline Australia Pty Ltd (2006) ATPR 42–106. 15 Annand & Thompson Pty Ltd v TPC (1979) 25 ALR 91.

396  PART 2 Legal consequences

ACCC v Powerballwin.com.au Pty Ltd [2010] FCA 378

Powerballwin.com.au Pty Ltd offered a ‘100 per cent guarantee’ that it could correctly predict Powerball numbers. The company set up a website and distributed 163  000 leaflets to households around Australia claiming ‘.  .  .  an amazing discovery that disputes the theory of random probability and has totally shocked the experts’. The scheme required consumers to pay a $59 subscription fee in order to receive a series of predicted numbers to help win all divisions of Powerball. The predicted numbers failed to produce any dividend for subscribers. The court decided that Powerballwin had engaged in misleading or deceptive conduct: it was impossible to predict future Powerball numbers. It restrained the further promotion of the scheme and ordered that Powerballwin pay $48 163 compensation to subscribers and leaflet distributors and to pay the ACCC’s costs.

A statement that is literally true can still be misleading or deceptive: the business may present the literal truth in such a way that the overall effect of the conduct is misleading or deceptive. For example, the meals sold by Lame Duck Organics are literally ‘organic’ in the sense that they are made from organic matter, but the description of the meals as organic is nevertheless misleading. Henderson v Pioneer Homes Pty Ltd (No 2) (1980) 29 ALR 597

Pioneer Homes Pty Ltd (PH) placed a newspaper advertisement for a house and land package that included a low weekly repayment rate that was in large print, but also a statement in fine print to the effect that the low repayment rate was for one year only and would later be increased to a higher commercial rate. The court decided that the overall impression created by the advertisement was a misleading one, even though the advertisement contained all of the correct information.

On the other hand, claims that are not literally true are not necessarily misleading or deceptive. As we have seen in earlier chapters, courts have for many years tolerated a degree of ‘sales puff’, that is, exaggerated and even false claims that are obviously so and clearly made solely to make a product or an advertisement interesting or attractive to consumers. A television advertisement that, for example, portrays a soft drink as giving people the ability to fly is making a false claim about the qualities of the product but it is not misleading or deceptive conduct because no one watching the advertisement would take the claim seriously. Depending on the circumstances, an exaggeration may be misleading or deceptive conduct. Given v Pryor (1980) 30 ALR 189

A proposal for a subdivision contained the statement ‘a wonderful place to live’. The court decided that this was an exaggeration and misleading and deceptive conduct because the zoning requirements prohibited the development of dwellings.

Conduct that creates confusion amongst consumers is not necessarily misleading or deceptive conduct. McWilliams Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 49 FLR 455

McWilliams Wines Pty Ltd released an extra-large 2-litre bottle of wine that they marketed as the ‘Big Mac’. McDonald’s commenced a civil action against McWilliams alleging a contravention of TPA s 52. The court decided that, although some members of the public might be confused about a bottle of wine being called a Big Mac and wonder if there was a connection between the two companies, this was not the same as being misled or deceived.

CHAPTER 11 Dealing with consumers  397

What if a business does not make a statement of fact, but simply tells a customer what they think, i.e. they share their opinion? A statement of opinion will be misleading or deceptive conduct if: •• the statement contains a representation of fact that is misleading or deceptive; •• the opinion is not based on reasonable grounds; or •• the opinion is one that is not honestly held. What if the statement made by a business relates to something that is going to happen? Statements about the future are expressly referred to in the ACL s 4: (1) If: (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  .  .  .  to be misleading.

This means that if Johnny tells another person (such as another business during contractual n­ egotiations, or a customer by way of an advertisement) that something may or may not happen in the future, it will be misleading conduct if he does not have any reason to believe that what he is saying is true. ACTIVIT Y 11.5 — REFLECT

Refer to the chapters on deliberately and carelessly causing harm and consider how each of the following torts directly applies to advertising: 1. deceit, 2. negligent misstatement, and 3. passing off.

Unconscionable conduct ‘Unconscionable’ means unfair. As we saw in an earlier chapter, a person engages in unconscionable conduct when they unfairly take advantage of a superior bargaining position or of another person’s special weakness or disadvantage. The notion that a contract can be set aside on the grounds of unconscionability is an equitable notion developed by the courts, but the legislature has adopted the notion, and unconscionable conduct is now prohibited by Part 2-2 of the ACL. Two types of unconscionable conduct are prohibited by the ACL: 1. unconscionable conduct generally, and 2. unconscionable conduct when supplying goods or services to, or acquiring goods or services from, a person other than a listed public company. Unconscionable conduct generally

According to ACL s 20: (1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.

The meanings of ‘in trade or commerce’ and ‘engage in conduct’ were explained above. The phrase ‘unconscionable within the meaning of the unwritten law’ means unconscionable conduct as defined under case law: whatever the courts define as unconscionable conduct is also prohibited under the ACL, and consumers can take advantage of the wide range of remedies provided by the ACL when bringing a legal action against a business when it has generally behaved unconscionably. However the section adds little to our understanding of the meaning of ‘unconscionable conduct’. 398  PART 2 Legal consequences

Unconscionable conduct in connection with the supply or acquisition of goods or services

Section 21 of the ACL states: (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.

This section applies whenever a business deals with an individual or company (other than a listed public company) by supplying goods or services to them or by acquiring goods or services from them. CHECKLIST

A business will have contravened ACL s 21 if all of the following requirements are satisfied. ◼◼ The business has ‘engaged in conduct’. ◼◼ The conduct was ‘in trade or commerce’. ◼◼ The conduct was in connection with the supply of goods or services to, or acquisition of goods or services from, another person. ◼◼ The other person was not a listed public company. ◼◼ The conduct was unconscionable.

The exclusion of listed public companies from the scope of the protection provided by the section means that this protection is generally limited to consumers and to small business. ACL s 21 does not contain a definition of ‘unconscionable’. ACL s 22(1), however, contains an extensive list of matters that the court may consider in deciding whether or not a business has contravened ACL s 21 when supplying goods or services to a customer. These include: (a) the relative strengths of the bargaining positions of the supplier and the customer; (b) whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; (c) whether the customer was able to understand any documents relating to the supply of the goods or services; (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer by the supplier; (e) the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier; (f) the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other customers; (g) the requirements of any applicable industry code; (h) the requirements of any other industry code, if the customer acted on the reasonable belief that the supplier would comply with that code; (i) the extent to which the supplier unreasonably failed to disclose to the customer (i) any intended conduct of the supplier that might affect the interests of the customer, and (ii) any risks to the customer arising from the supplier’s intended conduct; (j) if there is a contract between the supplier and the customer for the supply of the goods or services,    (i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract, (ii) the terms and conditions of the contract, (iii) the conduct of the supplier and the customer in CHAPTER 11 Dealing with consumers  399

complying with the contract, and (iv) any conduct that the supplier or the customer engaged in after they entered into the contract; (k) whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and (l) the extent to which the supplier and the customer acted in good faith. ACL s 22(2) contains a similar list of matters that the court may consider in deciding whether or not a business has contravened ACL s 21 when acquiring goods or services from a supplier.

LAW IN CONTEXT: LAW IN THE MEDIA

Federal Court finds Lux acted unconscionably in door-to-door vacuum sale to vulnerable consumer In 2004 the ACCC successfully brought a legal action against Lux Pty Ltd for engaging in unconscionable conduct in relation to the door-to-door sale of a $949 Lux vacuum cleaner. A Lux door-to-door sales agent sold the vacuum cleaner to a clearly vulnerable woman while she was home alone at her house. In handing down its judgment, the Federal Court stated that it should have been apparent to the salesman that the woman, who was home alone at the time the salesman came to her door, was substantially illiterate, was unable to understand commercial matters in any depth, was unlikely to be able to make a worthwhile judgment as to whether buying the vacuum cleaner would be in her best interest and was, therefore, obviously a person of some vulnerability. The court found that the salesman did not give the woman the opportunity to get independent advice or assistance before having her sign the contract to buy the vacuum cleaner. The court declared that Lux Pty Ltd, through the actions of the salesman, had acted unconscionably. Source: Australian Competition and Consumer Commission, ‘Federal Court Finds Lux Acted Unconscionably in Doorto-Door Vacuum Sale to Vulnerable Consumer’ (Media Release, MR 127/04, 19 July 2004) http://www.accc.gov.au/ media-release/federal-court-finds-lux-acted-unconscionably-in-door-to-door-vacuum-sale-to-vulnerable.

LAW IN CONTEXT: LAW IN PRACTICE

How to avoid engaging in unconscionable conduct On its website, the ACCC provides advice to businesses about dealing fairly with disadvantaged or vulnerable consumers: • Do not exploit the other party when negotiating the terms of an agreement or contract. • Take care to be reasonable when exercising your rights under a contract. • Consider the characteristics and vulnerabilities of your customers. For example, use plain English when dealing with customers from a non-English speaking background. • Make sure your contracts are thorough, easy to understand, not too lengthy and do not include harsh, unfair or oppressive terms. • Ensure you have clearly disclosed important or unusual terms or conditions of an agreement. • Ensure customers understand the terms of any agreement associated with the transaction and give them the opportunity to consider the offer properly. If the contract is long, you may decide to provide a summary of the key terms. • Observe any cooling-off periods that may apply or consider offering a cooling-off period. • Give customers the opportunity to seek advice about the contract before they sign it. • If things go wrong, be open to resolving complaints. • Do not reward your staff for unfair, pressure-based selling.

Source: Australian Competition and Consumer Commission, Unconscionable Conduct http://www.accc.gov.au/business/ anti-competitive-behaviour/unconscionable-conduct.

The customers protected by s 21 include other businesses as well as consumers. 400  PART 2 Legal consequences

LAW IN CONTEXT: LAW IN THE MEDIA

ACCC acts against landlord for alleged unconscionable conduct In February 1999 the ACCC alleged that Leelee Pty Ltd, the landlord of the Adelaide International Food Plaza, had acted unconscionably towards a tenant by: • increasing the rent contrary to the terms of the lease, • failing to act to protect the tenant’s rights under his lease, and • forcing the tenant to charge not less than a particular amount for certain food dishes while allowing his competitors to charge less for their food dishes. The ACCC also took action against the managing director of Leelee Pty Ltd for aiding or abetting or being knowingly concerned in the contraventions. Source: Australian Competition and Consumer Commission, ‘ACCC Acts Against Landlord for Alleged Unconscionable Conduct’ (Media Release, MR 008/99, 5 February 1999) http://www.accc.gov.au/media-release/accc-acts-against-landlordforalleged-unconscionable-conduct.

ACTIVIT Y 11.6 — RESEARCH

Visit www.accc.gov.au. What are the ‘high risk’ situations identified by the ACCC where unconscionable conduct is likely?

Unfair contract terms The ACL contains a set of provisions that seek to address the use of unfair terms in consumer contracts. ACL s 23 states: (1) A term of a consumer 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.

A finding by a court that a term is unfair, and therefore void, means that the term is treated as if it never existed. CHECKLIST

A term of a contract will be in contravention of ACL s 23 and therefore void if all of the following requirements are satisfied. ◼◼ The contract is a consumer contract. ◼◼ The contract is a standard form contract. ◼◼ The term is unfair.

Three requirements must be satisfied before the term will be void. Requirement 1: The contract is a consumer contract

A ‘consumer contract’ is defined in ACL s 23(3) as a contract for the supply of goods, services or 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.

CHAPTER 11 Dealing with consumers  401

This definition of ‘consumer contract’ is narrower than the definition of ‘consumer’ in ACL s 3. The earlier definition focuses upon the type of product being purchased whereas this definition focuses upon the purpose to which the buyer will put the product. A contract to supply goods, services or an interest in land to a business for business purposes is therefore not covered by ACL s 23. Requirement 2: The contract is a standard form contract

A standard form contract is usually understood to be a contract the terms of which are not negotiated by the parties but are provided by the business to the consumer on a ‘take it or leave it’ basis. Most written contracts entered into by consumers these days are standard form contracts, often presented to the ­consumer as the ‘standard terms’ used by a business. The term ‘standard form contract’ is not defined in the ACL, but according to ACL s 27(2), in determining whether a contract is a standard form contract, the court must take into account: (a) whether one of the parties has all or most of the bargaining power relating to the transaction, (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties, (c) whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented, (d) whether another party was given an effective opportunity to negotiate the terms of the contract, and (e) whether the terms of the contract take into account the specific characteristics of another party or the particular transaction. A consumer contract is presumed to be a standard form contract unless another party to the proceedings proves otherwise: s 27(1). This presumption limits the potential for avoidance by a business of the unfair contract terms provisions in the ACL. Requirement 3: The term is unfair

According to ACL s 24(1), a term of a consumer contract is ‘unfair’ if three requirements are satisfied: (a) It causes a significant imbalance in the parties’ rights and obligations arising under the contract. The consumer must prove that, on the balance of probabilities, the term would cause a significant imbalance in the rights and obligations of the business and the consumer. (b) It is not reasonably necessary to protect the legitimate interests of the business. The onus is on the business to establish, on the balance of probabilities, that the use of the term is reasonably necessary to protect their legitimate interests. (c) It would cause detriment to the consumer. Detriment is not limited to financial detriment. It also includes other forms of detriment that may affect the consumer, including inconvenience, delay or distress. In determining whether a term of a consumer contract is unfair, the court must take into account the extent to which the term is ‘transparent’: ACL s 24(2). A term is transparent if it is expressed in reasonably plain language, legible, presented clearly, and readily available to the party affected by the term: ACL s 24(3). ACL also lists a number of examples of unfair terms in s 25: •• A term that permits the business (but not the consumer) to avoid or limit performance of the contract. This example refers to the unfair use of disclaimers by a business to avoid or limit their liability under the contract. •• A term that permits the business (but not the consumer) to terminate the contract. Any term that allows the business to terminate the contract in the event of an inconsequential breach by the consumer, or for no valid business reason, is likely to be considered an unfair term. Director of Consumer Affairs Victoria v AAPT Limited [2006] VCAT 1493

The terms of a mobile phone contract offered by AAPT permitted AAPT to immediately terminate the contract in the event of any breach by the customer, no matter how inconsequential. AAPT also had the right to immediately terminate the contract if the customer changed their address. The Tribunal decided that these terms were unfair terms.

402  PART 2 Legal consequences

•• A term will also be considered unfair if it states or implies that the consumer cannot cancel the contract under any circumstances or only with the consent of the business, regardless of the conduct of the business. •• A term that penalises the consumer (but not the business) for a breach or termination of the contract. This will include any term imposing penalties for trivial breaches committed inadvertently by the consumer, and any term imposing penalties for terminating a contract because the supplier has not complied with its obligations under the contract. •• A term that permits the business (but not the consumer) to vary the terms of the contract. This will include any term that requires a consumer to accept increased costs or penalties, new requirements or reduced benefits, as well as any term giving the supplier the right to make corrections to the contract at its discretion and without liability. Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd [2008] VCAT 2092

The Victorian Civil and Administrative Tribunal decided that a clause in a health club contract allowing the health club operator to unilaterally change the location of the club within a 12-kilometre radius of the club’s original location was unfair.

•• A term that permits the business (but not the consumer) to renew or not renew the contract. If a consumer contract provides the business with the right to renew (or not to renew) the contract but not the consumer, or permits with business to automatically renew the contract without notifying the consumer, the business may be unfairly advantaged. •• A term that permits the business to vary the upfront price payable under the contract without the right of the consumer to terminate the contract. A term allowing the business to unilaterally increase the price after the contract has been formed is likely to be seen as unfair. •• A term that permits the business to unilaterally vary the characteristics of the goods, services or interest in land being supplied. This will include any term that allows a business to substitute a different product or service to that which the business originally agreed to supply to the consumer. Director of Consumer Affairs Victoria v AAPT Limited [2006] VCAT 1493

A term in AAPT’s mobile phone contract allowed AAPT to ‘vary a Supplier or its products, or vary [AAPT’s] charges from time to time without notice to you [the consumer]’. The Tribunal decided that this term caused a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer, and was therefore an unfair term.

•• A term that permits the business to unilaterally determine whether the contract has been breached or to interpret its meaning. If the business has the right to determine whether it has performed its contractual obligations properly, the business may unfairly refuse to acknowledge that it has breached its obligations. Similarly, if the business reserves the right to decide the meaning of a contractual term, the business is able to manipulate the contract to its own advantage in a manner that may not be fair. •• A term that limits the vicarious liability of the business for its agents. This includes a term that permits the business to deny responsibility for what is said to the consumer by a sales representative, employee or agent of the business. •• A term that permits the business to assign the contract to the detriment of the consumer without the consumer’s consent. When a business is sold, its contracts with its customers are often transferred to the purchaser. This may be considered unfair if the assignment detrimentally affects a consumer’s rights under the contract. CHAPTER 11 Dealing with consumers  403

•• A term that limits the consumer’s right to sue the business. A term that could be used to prevent a consumer from enforcing their rights against the business when the business is in default of the contract is likely to be seen as unfair. •• A term that limits the evidence the consumer can adduce in proceedings relating to the contract. This will include, for example, a term that limits the evidence able to be presented by the consumer to the contract itself and excludes any evidence of pre-contractual negotiations. •• A term that imposes the evidential burden on the consumer in proceedings relating to the contract. This is similar to the previous example in that it has the potential to deter consumers from taking legal action against a business. These examples are included in the legislation in order to provide guidance only. They do not actually prohibit the use of such terms, or create a legal presumption that the terms are unfair.

ACTIVIT Y 11.7 — REFLECT

What are the similarities and differences between ‘unconscionable conduct’ and an ‘unfair term’? Exemptions

According to ACL s 26, the unfair contract term provisions do not apply to: •• terms that define the main subject matter of a consumer contract, •• terms that set the ‘upfront price’ payable under the contract, or •• terms that are required, or expressly permitted, by a law of the Commonwealth or a State or a Territory. A term that defines the main subject matter of the contract is one that identifies the good, service or interest in land that is being supplied to the consumer. Exempting such a term from the coverage of ACL s 23 ensures that consumers cannot avoid their contractual obligations simply because they have changed their mind about what they are buying. According to one judge: [T]erms 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.16

The rationale for exempting terms that set the ‘upfront price’ is that the upfront price is easily understood by consumers, and when the price is stated upfront it is unlikely to create any imbalance in the parties’ rights and obligations. The exemption of terms ‘required, or expressly permitted, by a law’ ensures that a court will not be required to determine whether a term is unfair when the term must or can be included in consumer contracts by law.

Specific protections Chapter 3 of the ACL provides various specific protections for consumers against unfair business practices. The protections in chapter 3 differ from the protections in chapter 2 in that chapter 2 prohibits misleading or deceptive conduct, unconscionable conduct and unfair terms generally, and chapter 3 prohibits specific claims and practices. They also differ in that criminal penalties may attach to contravention of the specific prohibitions in chapter 3.

16 Harbison J in Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd (Civil Claims) [2008] VCAT 482 at 66.

404  PART 2 Legal consequences

In practice, if a business has engaged in misleading or deceptive conduct or one of the other general forms of prohibited conduct it will usually be accused of contravening both the general prohibition and one or more of the specific prohibitions.

Unfair practices ACL Part 3-1 prohibits certain unfair practices, including: •• making false or misleading representations about goods or services: ACL s 29, •• making false or misleading representations about the sale of land: ACL s 30, •• engaging in misleading conduct in relation to employment: ACL s 31, •• offering a rebate, gift, prize or other free item without intending to provide it, or without intending to provide it within a reasonable time: ACL s 32, •• engaging in misleading conduct regarding the nature, manufacturing process, characteristics, suit­ ability for purpose or quantity of any goods: ACL s 33, •• engaging in misleading conduct regarding the nature, characteristics, suitability for purpose or quantity of any services: ACL s 34, •• engaging in bait advertising: ACL s 35, •• wrongly accepting payment when unable to supply the product: ACL s 36, •• making false or misleading representations about the profitability or risk of a home business: ACL s 37, •• sending unsolicited debit or credit cards: ACL s 39, •• asserting a right to payment for unsolicited goods or services: ACL s 40, •• asserting a right to payment for unauthorised entries or advertisements: ACL s 43, •• participating in, or inducing another person to participate in, a pyramid scheme: ACL s 44, •• supplying goods with more than one displayed price and not charging the lower price: ACL s 47, •• failing to specify a single price (i.e. a price including all charges, fees, taxes, levies, etc.) for goods or services supplied for personal, domestic or household use or consumption: ACL s 48, •• offering a contingent rebate, commission or other benefit in return for a referral: ACL s 49, and •• using physical force, harassment or coercion in relation to the supply of or payment for goods, services or land: ACL s 50. Doherty v Traveland Pty Ltd (1982) 4 ATPR 40–323

Traveland Pty Ltd continued to issue a brochure stating that a particular tour was a 13-day trip after it was changed to an 11-day trip. The court decided that Traveland had engaged in misleading conduct regarding the characteristics of a service.

LAW IN CONTEXT: LAW IN THE MEDIA

ACCC institutes against cafés over alleged menu breaches In September 2010 the ACCC instituted proceedings against four cafés and restaurants for alleged failure to specify a single price. The cafés had failed to include Sunday and public holiday surcharges in their menu prices. The ACCC sought declarations, injunctions, civil penalties and costs. The ACCC had undertaken a compliance survey and identified a number of café and restaurant menus that did not comply with the Act. The traders were contacted and the ACCC took no further action against those who responded. Infringement notices were issued to those cafés that did not correct their menus despite the ACCC’s concerns. Proceedings were instituted against the cafés that did not comply with the infringement notices. Source: Australian Competition and Consumer Commission, ‘ACCC Institutes Against Cafés Over Alleged Menu Breaches’ (Media Release, MR 186/10, 9 September 2010) http://www.accc.gov.au/media-release/accc-institutes-against-caf%C3% A9s-over-alleged-menu-breaches.

CHAPTER 11 Dealing with consumers  405

Below we explain some of these unfair practices in more detail. False or misleading representations about goods or services

ACL s 29(1) relates to statements made by a business when advertising or selling its products. A business must not, in trade or commerce, in connection with the supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services, make a false or misleading representation: (a) that the goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use, (b) that the services are of a particular standard, quality, value or grade, (c) that the goods are new, (d) that a particular person has agreed to the acquire the goods or services, (e) that purports to be a testimonial by any person relating to the goods or services, (f) concerning a testimonial by any person relating to goods or services, (g) that the goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits, (h) that the person making the representation has a sponsorship, approval or affiliation, (i) with respect to the price of the goods or services, (j) concerning the availability of facilities for the repair of goods or of spare parts for the goods, (k) concerning the place of origin of the goods, (l) concerning the need for any goods or services, (m) concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy, or (n) concerning a requirement to pay for a contractual right that is equivalent to any condition, warranty, guarantee, right or remedy that a person has under a law of the Commonwealth, a State or a Territory (other than an unwritten law). Hartnell v Sharp Corporation of Australia Pty Ltd (1975) 5 ALR 493

In a number of its magazine advertisements, Sharp Corporation of Australia Pty Ltd falsely claimed that ‘every Sharp microwave oven is tested and approved by the Standards Association of Australia’. The court decided that this was a false representation that goods were of a particular standard. Sharp was fined $100   000.

ACCC v Cadbury Schweppes Pty Ltd (2004) ATPR 42–001

Cadbury Schweppes Pty Ltd (CS) sold flavoured cordial under the Cottees’ brand with a label containing the words ‘banana mango flavoured cordial’, with pictures of bananas and mangoes and a cartoon monkey holding a banana. The cordial did not contain any bananas or mangoes. The court decided that CS’s failure to adequately inform potential buyers of this fact amounted to a false representation about the composition of goods.

LAW IN CONTEXT: LAW IN THE MEDIA

Federal Court declares phone card advertising false and misleading In August 2010, the Federal Court in Perth declared that phone card sellers Prepaid Services Pty Ltd (PPS) and Boost Tel Pty Ltd (Boost) had engaged in misleading conduct and made false representations in regard to the value, price and benefits of their phone cards. The ACCC alleged that PPS and Boost had contravened the Act by representing that certain phone cards would provide consumers with a specified amount of call time, when that was not the case; that no fees, other than timed call charges,

406  PART 2 Legal consequences

would apply when in fact other fees were charged; and that a specified rate per minute would apply to calls regardless of the number and length of calls made, when in fact the specified call rate was highly unlikely to be ever achieved. For example, Boost represented that its card offered 1896 minutes of talk time to various countries including the UK and Japan at a flat rate of ½ cent per minute. In fact, the 1896 minutes could be obtained only in exceptional and unlikely circumstances, namely through one  continuous call in excess of 30 hours or through a series of calls of exactly one or five minutes dur­ation. The court declared Boost’s conduct to be false and misleading, ordered injunctions to prevent similar conduct in the future, ordered Boost to publish corrective notices, and ordered Boost to pay the ACCC’s costs. The court made similar declarations and orders against PPS. Source: Australian Competition and Consumer Commission, ‘Federal Court Declares Phone Card Advertising False and Misleading’ (Media Release, MR 163/10, 9 August 2010) http://www.accc.gov.au/media-release/federal-court-declaresphone-card-advertising-false-and-misleading.

The prohibition of false or misleading representations about the place of origin of the goods in ACL s 29(1)(k) is expanded upon in ACL Part 5-3. According to ACL s 255, a representation as to the country of origin of goods — such as a label stating that goods are ‘made in Australia’ — can only be made if the goods have been ‘substantially transformed’ in Australia, and more than 50 per cent of the cost of production was incurred in Australia. Goods are ‘substantially transformed’ in a country if they undergo a fundamental change in that country in form, appearance or nature such that the goods existing after the change are new and different goods from those existing before the change: ACL s 29(3). A representation that goods are the produce of a particular country — such as a label stating that goods are a ‘Product of Australia’ — can be used only if the country was the country of origin of each significant ingredient or significant component of the goods, and all, or virtually all, processes involved in the production or manufacture happened in that country. LAW IN CONTEXT: LAW IN THE MEDIA

Major charity donation follows ACCC concerns about Golden Circle ownership claims US company HJ Heinz Company acquired tinned fruit and vegetable manufacturer Golden Circle in December 2008. After the acquisition, Heinz continued to sell Golden Circle products with the representation ‘Proudly Australian Owned’. The Golden Circle website also continued to include a statement that its ‘iconic status has been achieved through a commitment to remaining proudly Australian owned’. After the ACCC raised concerns in 2010 that this amounted to a breach of the TPA, Heinz admitted that it had engaged in misleading conduct and gave court-enforceable undertakings that it would cease supplying Golden Circle branded products with Australian-owned representations, use its best endeavours to ensure that corrective signage appeared next to Golden Circle products on supermarket shelves, and publish corrective advertisements in major newspapers throughout Australia. More than 800  000 tins of Golden Circle fruit and vegetables with the misleading labels (worth approximately $1.8 million) were donated to Australian welfare agencies that feed the hungry. Source: Australian Competition and Consumer Commission, ‘Major Charity Donation Follows ACCC Concerns About Golden Circle Ownership Claims’ (Media Release, MR 050/10, 18 March 2010) http://www.accc.gov.au/media-release/ major-charity-donation-follows-accc-concerns-about-golden-circle-ownership-claims.

A sign informing buyers that they are not entitled to a refund under any circumstances would be a contravention of ACL s 29(1)(m) since a consumer’s implied right to a refund under the ACL cannot be excluded by the seller.17 Such a sign would also be a contravention of ACL s 18. 17 Miller v Fiona’s Clothes Horse of Centrepoint Pty Ltd and Fiona’s Clothes Horse Pty Ltd (1989) ATPR 40–963.

CHAPTER 11 Dealing with consumers  407

ACTIVIT Y 11.8 — REFLECT

For each of the types of false or misleading representation listed above, give a specific example of conduct that would be found to be in contravention of the section. Bait advertising

A business engages in bait advertising when it advertises a product at a price that is likely to attract buyers to its premises when it knows or should know that it is likely to run out of stock very quickly. The cheap or free product is ‘bait’ to attract buyers who will hopefully purchase another, more expensive, product. Bait advertising is prohibited by ACL s 35 as follows: (1) A person must not, in trade or commerce, advertise goods or services for supply at a specified price if: (a) there are reasonable grounds for believing that the person will not be able to offer for supply those goods or services at that price for a period that is, and in quantities that are, reasonable, having regard to:   (i) the nature of the market in which the person carries on business; and (ii) the nature of the advertisement; and (b) the person is aware or ought reasonably to be aware of those grounds. (2) A person who, in trade or commerce, advertises goods or services for supply at a specified price must offer such goods or services for supply at that price for a period that is, and in quantities that are, reasonable having regard to: (a) the nature of the market in which the person carries on business; and (b) the nature of the advertisement. LAW IN CONTEXT: LAW IN THE MEDIA

ACCC makes a noise over Repco’s sound promotion In 2005 the ACCC investigated Repco’s ‘$1 Million Sizzling Sound Sellout’ and found that Repco had engaged in bait advertising. To promote the sale, Repco had circulated 3.9 million catalogues to consumers’ letterboxes and via in-store distribution stands as well as advertising the sale on its website. Five of the products advertised in the catalogue were advertised at a discount of between 66 per cent and 92 per cent off their original pre-sale price, four on the catalogue’s front page. More than one-third of Repco’s 290 stores Australia-wide did not have any of the five products available for sale during any part of the sale period. Of those stores that did hold stock, most did not have any stock available to consumers after the first day of the sale. Source: Australian Competition and Consumer Commission, ‘ACCC Makes a Noise Over Repco’s Sound Promotion’ (Media Release, MR 333/05, 23 December 2005) http://www.accc.gov.au/media-release/accc-makes-a-noise-over-repcossound-promotion.

Wrongly accepting payment

A business must not accept payment from a buyer when it either does not intend to supply the product or it knows or should know that it will be unable to provide the product within the specific time quoted or within a reasonable time: ACL s 36. This prohibition is contravened if the business accepts payment when it knows it will be unable to provide the product. Dawson v World Travel Headquarters Pty Ltd (1981) 53 FLR 455

Word Travel Headquarters Pty Ltd (WTH) accepted a booking for a tour advertised as a 2-day trip to Singapore after the tour had been changed to an overnight stay in Singapore. The court decided that WTH had contravened the prohibition on accepting payment without intending the supply.

408  PART 2 Legal consequences

It is also contravened if the business accepts payment and promises to be able to provide the product within a particular period but it knows or should know that it will take longer than that. Inertia selling

The practice of sending an unsolicited product to a person and then pressuring the person to pay for that product is known as inertia selling. Inertia selling is prohibited by the ACL. A business must not claim a right to payment for goods or services unless it reasonably believes that it in fact has a right to payment: ACL ss 40, 43. If a business has sent an unsolicited product to a person, the person: •• does not have to pay for it, and •• is not liable for the loss of or damage to the product unless the loss or damage results from a wilful and unlawful act: ACL ss 41(1), 42. Further, after the expiry of a certain period, the product becomes the property of the person, free of charge: ACL s 41(2). The person can send the business notice in writing that the product is unsolicited and telling the business where it can collect the product. (The person is not obliged to return the unsolicited product themselves.) If the business has not collected the product within either 1 month from the day the notice is given or 3 months from the day the person received the product, whichever is the earliest, the product becomes the property of the person. If the person does not send the notice, the product automatically becomes the property of the person 3 months from the day the person received the product: ACL s 41(2). The product does not automatically become the property of the person if: •• the person unreasonably refuses to permit the business to recover possession of the product during the period, •• within that period the business takes possession of the product, or •• the product was received by the person in circumstances in which the person knew or should have known that the product was not intended for them: ACL s 41(3). Pyramid schemes

A pyramid scheme is a type of product distribution scheme whereby a participant makes a profit or receives a commission for the sale of each product to a buyer. The participant is also rewarded for the introduction of other participants to the scheme, usually by receiving a commission for each new participant. For example, imagine Johnny starts a scheme where he convinces five people (the level one distributors) to pay a participation fee of $1000 to distribute vegan meals on his behalf. Johnny makes $5000 without selling a meal. The level one distributors each convince five more people (the level two distributors) to pay the participation fee, and in return they receive a commission of $100 for each new participant they introduce. Each level one distributor makes $500 ($100 × 5) and Johnny makes another $22  500 ($900 × 25). If each of the 25 level two distributors is able to convince five more people (the level three distributors) to join the scheme, Johnny will make $112  500 ($900 × 125). As you can see, pyramid schemes have the potential to grow very quickly and to make a lot of money for the person who sets up the scheme (see figure 11.1). The problem with pyramid schemes is that while those who start the scheme (those at the ‘top’ of the pyramid) make substantial profits, most participants who are further down the pyramid fail to recover their initial outlay. This is usually because the commission for the sale of each product is rather low, the product itself is difficult to sell, and new participants become increasing difficult to find. Eventually the pyramid ‘collapses’ (i.e. both the market for the product and the availability of new participants dry up) and most of the participants end up having spent a lot more than they made. Further damage is caused by the fact that most participants conscript friends and family members as new participants, and close relationships can be damaged when everyone ends up out of pocket. Businesses are expressly prohibited from participating in, or inducing others to participate in, pyramid schemes: ACL s 44. A pyramid scheme is defined in the ACL as a scheme where: •• to take part in the scheme, new participants must make a ‘participation payment’, and •• the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled to a ‘recruitment payment’ in relation to the introduction to the scheme of further new participants. CHAPTER 11 Dealing with consumers  409

Johnny Level 1 5 distributors Level 2 5 × 5 = 25 distributors Level 3 5 × 5 × 5 = 125 distributors Level 4 5 × 5 × 5 × 5 = 625 distributors FIGURE 11.1

Pyramid schemes

There are legitimate product distribution schemes where participants are paid a commission for recruiting new participants. Whether this makes the distribution scheme a pyramid scheme depends upon how much it costs to join the scheme and how much emphasis is placed upon the recruitment payments in the promotion of the scheme. According to the ACL, in deciding whether a scheme is a pyramid scheme, the court will have regard to. (a) the extent to which the participation payments bear a reasonable relationship to the value of the goods or services that participants are entitled to be supplied under the scheme, and (b) the emphasis given in the promotion of the scheme to the entitlement of participants to the supply of goods and services by comparison with the emphasis given to their entitlement to recruitment payments: ACL s 46. If in the promotional materials the entitlement to recruitment payments is promoted as incidental to the benefits of actually selling the product, and in return for paying to join the scheme the new participant receives products of approximately equivalent value, the scheme is more likely to be legitimate. But if the entitlement to recruitment payments is promoted as the principal benefit of joining the scheme, and the participation payment is substantially greater than the value of any products the new participant receives in return, the scheme is more likely to be a pyramid scheme. As a general rule, a scheme for the distribution of a single product is likely to be a pyramid scheme whereas a scheme for the distribution of a wide range of products is likely to be legitimate (e.g. Amway). The internet has become a popular medium for the proliferation of pyramid schemes. People who are unsure whether or not a particular scheme is a pyramid scheme can visit the ACCC website and consult the list of known pyramid schemes. ACTIVIT Y 11.9 — RESEARCH

Visit www.scamwatch.gov.au. 1. What are the warning signs for a pyramid scheme? 2. How does the website suggest that consumers protect themselves from pyramid schemes? Contingent referral selling

When a business offers a buyer a discount in the form of a rebate, commission or other benefit in return for the buyer providing the business with the contact details of another potential buyer, it is known as 410  PART 2 Legal consequences

referral selling. Referral selling is not prohibited by the ACL. The business is however prohibited from making the discount contingent upon a later event, such as the referral buying the product: ACL s 49. The business must give the discount immediately and unconditionally.

Consumer transactions ACL Part 3-2 regulates transactions with consumers by implying into consumer contracts certain guarantees, by closely regulating unsolicited consumer agreements, and by imposing certain minimum requirements in relation to lay-by agreements. Consumer guarantees

The ACL implies into contracts with consumers certain guarantees intended to protect the interests of the consumer. When the contract relates to the supply of goods to a consumer, the guarantees include: •• a guarantee that the seller has title — that is, the business has the right to pass on to the consumer ownership of the goods: ACL s 51, •• a guarantee that the consumer will have undisturbed possession — that is, the consumer’s subsequent possession of the goods will not be interrupted by the business or some other person seeking to recover the goods: ACL s 52, •• a guarantee that there are no undisclosed securities — that is, there is no security, charge or encumbrance that has not been disclosed to the consumer: ACL s 53, •• a guarantee that the goods are of acceptable quality — that is, they are as fit for all the purposes for which goods of that kind are commonly supplied, acceptable in appearance and finish, free from defects, safe, and durable as a reasonable consumer fully acquainted with the state and condition of the goods would regard as acceptable: s 54, •• a guarantee that the goods are fit for any disclosed purpose — that is, they are reasonably suitable for any purpose disclosed by the consumer to the business and for any purpose the business represents that the goods are reasonably fit: s 55, •• a guarantee that the goods correspond with their description: s 56, •• a guarantee that the goods correspond with any sample or demonstration model in quality, state or condition: s 57, •• a guarantee that the manufacturer will ensure that repair facilities and spare parts are reasonably available: s 58, and •• a guarantee that the manufacturer will comply with any express warranties given in relation to the goods: s 59. When the contract relates to the supply of services to a consumer, the guarantees include: •• a guarantee that the services will be rendered with due care and skill: s 60, •• a guarantee that the services, and any product resulting from the services, will be fit for any disclosed purpose — that is, they will be suitable for any purpose disclosed by the consumer to the business, and they will be of such nature, quality, state or condition that they would be reasonably expected to achieve the result disclosed by the consumer to the seller: s 61, and •• a guarantee that the services will be supplied to the consumer within a reasonable time (if a time for supply was not fixed by contract or otherwise agreed upon): s 62. Unlike the terms implied into contracts by the State and territory sale of goods legislation, these guarantees cannot be excluded or overridden by the business. ACL s 64 states that any term of the ­contract between the business and the consumer that seeks to exclude, restrict or modify the guarantees is automatically void. This ensures that a business cannot seek to avoid its legal obligations to consumers by including a term in its consumer contracts — for example, on its website or on a sign in the shop — that states that no such guarantees are provided. The consequences of a business failing to comply with these consumer guarantees are set out later in the chapter. CHAPTER 11 Dealing with consumers  411

CAUTION!

A business is not legally obliged to provide a customer with an exchange or a refund simply because the customer has changed their mind   .   .   . although some businesses will do this voluntarily as a service to their customers.

Unsolicited consumer agreements

An unsolicited consumer agreement is an agreement to supply goods or services for at least $100 that is made by telephone or at a place other than the business premises of the suppler and that is not a result of an invitation by the consumer to enter into negotiations for the supply: ACL s 69. An agreement formed following a ‘cold’ telephone call by a business to a consumer at their home is an unsolicited consumer agreement, as is an agreement formed with a consumer by a ‘door-to-door’ salesperson. In 2012 the ACCC published a comprehensive report into the door-to-door sales industry in Australia.18 The report revealed the following. •• In 2011 over 1.3 million sales were conducted door-to-door. Of these, approximately 1 million sales related to energy services. •• On average every home in Australia is door knocked eight times a year. •• Companies usually engage third party sales agents to deliver door-to-door sales services, with remuneration typically based on commission. This model may encourage agents to adopt unlawful tactics in order to secure more sales. •• Some research participants reported preying on vulnerable customers, using false pretexts such as pretending to have lost their dog, or failing to provide consumers with certain information as required by under the ACL. Door-to-door sales, as a form of unsolicited marketing, is closely regulated by the ACL. ACL s 73 states that the dealer (that is, the person dealing with the consumer, who may or may not be the supplier) must not call on the consumer for the purpose of negotiating an unsolicited consumer agreement: (a) at any time on a Sunday or a public holiday, (b) before 9  am on any other day, or (c) after 6  pm on any other day (or after 5  pm if the other day is a Saturday). The dealer must, as soon practicable and before starting to negotiate, inform the consumer about the dealer’s purpose and (if the dealer is physically present) that the dealer must leave upon request: ACL s 74. If an agreement is formed, the consumer must be given a copy of the agreement immediately (if made face to face) or within 5 business days (if made by telephone): ACL s 78. ACL s 79 sets out the information that must be included in the agreement, including information about the consumer’s right to terminate the agreement. ACL s 82 gives the consumer a ‘cooling off’ period: the consumer is entitled to terminate the agreement within 10 days (unless the dealer has contravened one of the earlier prohib­ itions — such as the restriction on when the consumer can be called on — in which case the cooling off period is 3–6 months). These rights cannot be waived by the consumer: ACL s 90. ACTIVIT Y 11.10 — REFLECT

Why is ACL s 90 such an important element in the system of protections provided to consumers in ­relation to unsolicited consumer agreements?

18 ACCC, Research into the Door to Door Sales Industry in Australia (2012) .

412  PART 2 Legal consequences

LAW IN CONTEXT: LAW IN THE MEDIA

Telco admits telemarketing and door-to-door sales likely to mislead For several years People Telecom had used telemarketers and door-to-door sales agents to promote its telecommunication services, including mobile, fixed phone and data services. A number of customers complained to the ACCC that the agents transferred their services to People Telecom without their consent, or after representing that the agents were working on behalf of the customer’s current telecommunications carrier, or that the customer was required to change their carrier to People Telecom, or that changing to People Telecom would not compromise any arrangements with their current carrier when this was not the case. In March 2010 People Telecom admitted in a court enforceable undertaking given to the ACCC that its sales agents had transferred customers from rival carriers without consent and made other potentially misleading claims in order to sign up customers. As part of the undertaking People ­Telecom agreed to write to affected customers, and to place a notice on its website, offering to allow them to terminate their contract without penalty, and refund or waive certain debts arising from the misrepresentations. People Telecom also agreed to monitor the conduct of its agents to ensure they ­complied with the scripts provided by People Telecom, and to implement a trade practices ­compliance program. Source: Australian Competition and Consumer Commission, ‘Telco Admits Telemarketing and Door-to-Door Sales Likely to Mislead’ (Media Release, MR 0310/10, 1 March 2010) http://www.accc.gov.au/media-release/telco-admits-telemarketinganddoor-to-door-sales-likely-to-mislead.

CHECKLIST

A door-to-door salesperson must: ◼◼ leave immediately if the customer asks them to and not return for 30 days; ◼◼ not visit at all on Sundays or public holidays, before 9  am or after 6  pm on weekdays, or before 9  am or after 5  pm on Saturdays without the customer’s permission; ◼◼ show the customer their identity card and tell the customer their name, the contact details of the company they represent and why they are at the customer’s door; and ◼◼ tell the customer about their right to cancel the contract if they change their mind. Lay-by agreements

A lay-by agreement is an agreement between a supplier and a consumer for the supply of consumer goods where the price of the goods is to be paid by three or more instalments and the goods will not be delivered to the consumer until the total price of the goods has been paid: ACL s 96(3). Lay-by agreements must be in writing: ACL s 96(1). ACL s 97 gives the consumer the right to terminate the lay-by agreement at any time prior to delivery of the goods. The supplier must refund any payments made by the consumer, less any permitted termination charge: ACL s 99. Evidence of transactions

The consumer is entitled to receive evidence of their transactions. The business must provide the consumer with a proof of transaction — i.e. a ‘receipt’ — for transactions over $75, and upon request for lesser amounts: ACL s 100. The information to be included in a proof of transaction is the same as that needed to comply with the tax invoice requirements for the GST. If a consumer requests it, a business must also provide an itemised bill for services: ACL s 101.

Safety of consumer goods ACL Part 3-3 regulates the safety of products sold to consumers. Product safety standards

The ACL provides for the creation of product safety standards. These standards impose upon businesses certain requirements relating to: CHAPTER 11 Dealing with consumers  413

•• the performance, composition, contents, methods of manufacture or processing, design, construction, finish or packaging of consumer goods; •• the testing of consumer goods during, or after the completion of, manufacture or processing; and •• the form and content of markings, warnings or instructions to accompany consumer goods: ACL s 104 A business is prohibited from supplying goods or services that do not comply with any relevant product safety standard: ACL ss 106–7. Bans

Goods or services that could cause injury may be made the subject of an interim ban by the relevant Minister under ACL s 109. Interim bans last for 60 days, and can be extended further: ACL s 110. ACL s 114 allows for the imposition of a permanent ban. A business is prohibited from supplying goods or services that are the subject of an interim or a permanent ban: ACL ss 118, 119. ACTIVIT Y 11.11 — RESEARCH

Visit the website of the ACCC at www.accc.gov.au. Provide an example of goods that have been recently banned in Australia. Recalls

Goods that could cause injury or that do not comply with the relevant product safety standard may be made the subject of a compulsory recall notice by the relevant Minister under ACL s 122. The notice requires the business to recall the goods, notify members of the public about the nature of the defect, and inform the public about what the business proposes to do: repair the goods, replace the goods, or provide a refund. It is also possible for a business to voluntarily recall goods under ACL s 128. Safety warning notices

ACL s 129 allows for the publication on the internet of a safety warning notice, that is, a notice stating that particular consumer goods or services are under investigation to determine if they cause injury, and/ or warning of the possible risks involved in the use of the goods or services. ACL ss 131 and 132 oblige a business that becomes aware that particular goods or services have been associated with the death, serious injury or illness of another person to give written notice to the relevant Minister. LAW IN CONTEXT: LAW IN THE MEDIA

Apollo withdraws bike due to safety concerns In February 2010 a children’s bicycle missing three required safety components was withdrawn from sale by Apollo Bicycle Co Pty Ltd following concerns raised by the ACCC. More than 450 Radius Racer X Al 12″ children’s bicycles supplied by Apollo did not have a hand brake, a front white reflector or red rear reflector as required under the mandatory product safety standard for pedal bicycles. Apollo provided the ACCC with court enforceable undertakings that it would: • not supply any bicycles to which the mandatory standard applies unless the bicycles comply with the standard, • supply the missing components to retailers and advise them to contact customers to arrange to have the missing components fitted, • cause information notices to be displayed at retail outlets and on their website, • conduct an audit to identify any products which do not comply with the relevant mandatory s­ tandards, and • develop and implement a trade practices compliance program. The Apollo product was detected by the ACCC during a national product safety survey focusing on children’s bicycles and toys. Source: Australian Competition and Consumer Commission, ‘Apollo Withdraws Bike Due to Safety Concerns’ (Media Release, MR 022/10, 15 February 2010) http://www.accc.gov.au/media-release/apollo-withdraws-bike-due-to-safety-concerns.

414  PART 2 Legal consequences

Information standards ACL Part 3-4 regulates the use of information standards for goods or services. An information standard sets out the form and content of the information that must accompany the supply of goods or services (for example, on the product packaging): ACL s 134. A business must not, in trade or ­commerce, supply goods or services if the relevant information standard has not been complied with: ACL ss 136–7.

Manufacturers’ liability In addition to the general duty of care imposed upon them by the law of negligence, ACL Part 3-5 imposes a range of obligations and liabilities upon manufacturers. The term ‘manufacturer’ refers not only to the actual manufacturer of a product. According to ACL s 7, a ‘manufacturer’ includes any person who: (a) grows, extracts, produces, processes or assembles goods, (b) holds himself or herself out to the public as the manufacturer of goods, (c) applies their name or trademark to goods supplied by them, (d) permits another person to hold them out to the public as the manufacturer of the goods, or (e) imports goods into Australia if the actual manufacturer of the goods does not have a place of business in Australia. CAUTION!

The term ‘manufacturer’ refers not only to the actual manufacturer but also to a range of other persons, including, in some circumstances, the importer of goods.

The ACL imposes strict liability upon the manufacturers of defective goods. The consumer does not need to prove negligence or fault. If: (a) the manufacturer supplies the goods in trade or commerce, (b) the goods have a safety defect, and (c) the individual suffers injuries because of the safety defect, the manufacturer must compensate the individual: ACL s 138. Goods have a ‘safety defect’ if they are not as safe as a consumer would expect them to be, having regard to: (a) the way they have been marketed, (b) their packaging, (c) any mark used on the goods, (d) any instructions about using the goods, (e) what might reasonably be expected to be done with the goods, and (f) the time when they were supplied by their manufacturer: ACL s 9. If goods have a safety defect, the manufacturer must compensate: •• anyone injured because of the safety defect: ACL s 138, •• anyone other than the injured individual who suffers loss because of the safety defect: ACL s 139, •• anyone who used or intended to use other goods damaged or destroyed because of the safety defect: ACL s 140, and •• anyone who used or intended to use land or buildings damaged or destroyed because of the safety defect: ACL s 141. However, the manufacturer is not liable if: (a) the safety defect did not exist at the time they were supplied by the manufacturer, (b) they had that defect only because the manufacturer was complying with a mandatory standard for them, CHAPTER 11 Dealing with consumers  415

(c) the state of scientific or technical knowledge at the time when they were supplied by the manufacturer was not such as to enable the defect to be discovered, or (d) the defective goods were a component of other goods and the defect is attributable to the design of the other goods, or the markings on or accompanying the other goods, or the instructions or warnings given by the manufacturer of the other goods: ACL s 142. ACTIVIT Y 11.12 — REFLECT

How have the above provisions of the ACL added to or modified the liability of manufacturers under the tort of negligence?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  11.6 Does the ACL apply to all Australian businesses? How?  11.7 What is the role of the ACCC?  11.8 Which bodies enforce State consumer protection laws?  11.9 How is ‘consumer’ defined in the ACL? 11.10 In what circumstances will a business be in contravention of ACL s 18? 11.11 Why is ACL s 18 of such broad application? 11.12 Can ACL s 18 be enforced by persons other than consumers? Explain. 11.13 How does a court decide whether or not conduct is ‘misleading or deceptive’? 11.14 Can an expression of opinion be misleading or deceptive within the meaning of ACL s 18? 11.15 Can a statement about the future be misleading or deceptive within the meaning of ACL s 18? 11.16 What are the consequences of contravening ACL s 18? 11.17 How is unconscionable conduct defined for the purposes of ACL s 20? 11.18 What factors are taken into account by the court in deciding whether ACL s 21 has been contravened? 11.19 In what circumstances will a term of a contract be unfair and therefore void under ACL s 23? 11.20 What factors are taken into consideration by a court in deciding whether or not a term of a contract is unfair? 11.21 How do the specific protections in ACL Chapter 3 differ from the general protections in ACL Chapter 2? 11.22 What kinds of unfair practices are prohibited by ACL Part 3-2? 11.23 What kinds of representations are prohibited by ACL s 29? 11.24 What are the consequences of a business displaying a sign that says ‘no refunds’? 11.25 What is ‘bait advertising’ and how is it regulated by the ACL? 11.26 When will a business ‘wrongly accept payment’ in contravention of the ACL? 11.27 What is ‘inertia selling’ and how is it regulated by the ACL? 11.28 When does a consumer become the owner of unsolicited goods? 11.29 What is a ‘pyramid scheme’ and how are they regulated by the ACL? 11.30 What is ‘referral selling’ and how is it regulated by the ACL? 11.31 What is the ‘consumer guarantee’ implied into contracts with consumers? 11.32 What is an ‘unsolicited consumer agreement’, and how are they regulated by the ACL? 11.33 How are lay-by agreements regulated by the ACL? 11.34 How is the safety of consumer goods regulated by the ACL? 11.35 In what circumstances will a manufacturer be liable to a consumer under ACL Part 3-5?

416  PART 2 Legal consequences

11.3 Consequences of contravention LEARNING OBJECTIVE 11.3 What are the consequences of getting caught engaging in the prohibited conduct?

In this section we identify the possible offences committed by a business that contravenes the ACL, the penalties that may be imposed, and the defences available to the business. We also describe the various ways in which the prohibitions in the ACL are enforced, and the various remedies that can be granted by a court in the event of contravention by a business.

Offences and penalties ACL Part 4-1 sets out the offences and penalties associated with the various prohibitions described above. Criminal penalties are imposed on a strict liability basis for contravention of any of the following prohibitions: •• making false or misleading representations about goods or services: ACL s 151, •• making false or misleading representations about the sale of land: ACL s 152, •• engaging in misleading conduct in relation to employment: ACL s 153, •• offering rebates, gifts, prizes or other free items without intending to supply: ACL s 154, •• engaging in misleading conduct as to the nature of goods: ACL s 155, •• engaging in misleading conduct as to the nature of services: ACL s 156, •• engaging in bait advertising: ACL s 157, •• wrongly accepting payment without intending to supply or without intending to supply within a reasonable time: ACL s 158, •• making misleading representations about business activities that can be carried on from home: ACL s 159, •• sending an unsolicited credit card or debit card: ACL s 161, •• asserting a right to payment for unsolicited goods or services: ACL s 162, •• asserting a right to payment for unauthorised entries or advertisements: ACL s 163, •• participating in, or inducing another to participate in, a pyramid scheme: ACL s 164, •• engaging in multiple pricing: ACL s 165, •• failing to specify a single price: ACL s 166, •• engaging in contingent referral selling: ACL s 167, and •• using physical force, harassment or coercion in connection with the supply of or payment for goods or services: ACL s 168. A contravention of the prohibition of multiple pricing can lead to a penalty of $5000 for corporations and $1000 for individuals. A contravention of any of the other prohibitions can lead to a penalty of $1.1 million for corporations and $220  000 for individuals. All contraventions can lead to the recording of a criminal conviction. A variety of penalties are also imposed for contravening the prohibitions relating to: •• consumer guarantees: ACL s 169, •• unsolicited consumer agreements: ACL ss 170–83, •• lay-by agreements: ACL ss 188–91, •• warranties: ACL s 192, •• repairs: ACL s 193, •• safety standards: ACL ss 194–6, •• bans: ACL ss 197–8, •• recalls: ACL ss 199–201, •• products associated with death or serious injury: ACL s 202, •• information standards: ACL ss 203–4, and •• substantiation notices: ACL ss 205–6. CHAPTER 11 Dealing with consumers  417

The court cannot order imprisonment for a contravention of any of these prohibitions, but imprisonment may be ordered to enforce the payment of a penalty already imposed. Prosecutions are usually commenced by the ACCC but they can also be commenced by another person with the written consent of the relevant Minister. A prosecution must be commenced within 3 years of the commission of the offence: ACL s 212.

Defences ACL Part 4-1 also sets out the defences available to a business accused of contravening these prohib­ itions and committing these offences. A business will not be liable if: •• the contravention was caused by a reasonable mistake of fact, including a mistake of fact caused by reasonable reliance by the business on information supplied by another person: ACL s 207, or •• the contravention was due to the act or default of another person, to an accident or to some other cause beyond the control of the business, and the business took reasonable precautions and exercised due diligence to avoid the contravention: ACL s 208. In relation to a contravention committed by the publication of an advertisement, it is a defence if the business can establish that its business is to publish advertisements and that it 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: ACL s 209. In relation to a contravention committed by the supplying of goods or services that did not comply with a product safety standard or information standard, it is a defence if: •• the goods or services were acquired for the purpose of re-supply from a person who carried on in Australia a business of supplying such goods, and •• the business did not know, and could not with reasonable diligence have ascertained, that the goods or services did not comply with that standard or it relied in good faith on a representation by the person from whom it acquired the goods or services that a product safety standard or information standard, as the case may be, had not been prescribed: ACL ss 210–11.

Enforcement The prohibitions in the ACL are enforced in a number of different ways. •• Enforceable undertakings: If a business suspects that it might have contravened the ACL, the business can offer the ACCC an undertaking that it will not do it again and take steps to improve compliance. If it is accepted by the ACCC, the undertaking is court-enforceable: ACL ss 218. •• Substantiation notices: The ACCC can issue a substantiation notice to a business seeking information about claims made by the business in the marketplace to determine if they are genuine and whether further investigation is necessary: ACL ss 219–22. •• Public warning notices: The ACCC can issue a public warning notice about a business where the regulator has reasonable grounds to suspect that the business has contravened the ACL, or has refused or failed to respond to a substantiation notice: ACL s 223. •• Legal action: A consumer or any other person harmed as a result of a contravention of the ACL by the business can commence a legal action against the business seeking one or more of the remedies below. An action can also be brought by the ACCC.

General remedies ACL Part 5-2 sets out the remedies that can be granted by a court for contravention of the ACL. These remedies include: •• various pecuniary (that is, monetary) penalties: ACL ss 224–31, •• various types of injunction: ACL ss 232–5; 418  PART 2 Legal consequences

•• an order that the business pay damages to any person who has suffered loss because of the contravention: ACL s 236, •• a compensation order for injured persons (on application by either the injured person or the ACCC) or non-party consumers (on application by the ACCC): ACL ss 237–41, •• an order declaring a contract void, varying a contract, refusing to enforce a contract, ordering a refund, ordering compensation, ordering repair of the goods, ordering the provision of services, or ordering execution of an instrument relating to land: ACL s 243, •• various non-punitive orders including an order directing the business to perform a community service, an order directing the business to establish compliance and education programs for its employees, an order requiring the business to disclose information, and an order requiring the business to place an advertisement: ACL s 246, •• an adverse publicity order: ACL s 247, and •• an order disqualifying a person from managing a corporation: ACL s 248.

LAW IN CONTEXT: LAW IN THE MEDIA

Domino’s to correct ‘fresh dough’ claims In 2006 Domino’s Pizza Enterprises Ltd corrected claims in its advertising brochures after the ACCC expressed concerns that a representation in its ‘Australia’s Most Popular Pizza’ advertisement may have misled consumers. The advertisement contained the claim that all of the dough used for its pizza bases was made fresh daily in its local stores. However, not all Domino’s dough was made fresh daily in its stores. The ‘Classic’ and ‘Pan’ pizza bases were made fresh daily in stores, but the ‘Thin ‘n’ Crispy’ pizza bases were made off the premises and delivered snap-frozen to each local store. Source: Australian Competition and Consumer Commission, ‘Domino’s to Correct “Fresh Dough” Claims’ (Media Release, MR 317/06, 20 December 2006) http://www.accc.gov.au/media-release/dominos-to-correct-fresh-dough-claims.

ACCC v Jetplace Pty Ltd [2010] FCA 759

Jetplace Pty Ltd was the operator of the socialising and dating website www.redhotpie.com.au. In addition to the profiles created by registered users of the website, nearly 1400 profiles were fictitious and created by Jetplace itself. Jetplace used some of these profiles to send ‘flirts’ or customised messages to registered users of the website. The Jetplace profiles also appeared in searches carried out by registered users and by visitors to the website. The court decided that Jetplace had contravened the TPA by engaging in misleading or deceptive conduct and by representing that membership of the website had performance characteristics and benefits that it did not have. The court made orders restraining Jetplace from engaging in similar conduct in the future. Jetplace was also ordered to publish a corrective notice about the conduct when certain users of the website next logged on; to email a copy of the notice to each user; and to implement a corporate trade practices law compliance program.

ACL ss 251–253 provide the business with access to a range of defences similar to those set out in ACL Part 4-1.

Consumer guarantees ACL Part 5-4 sets out the remedies available to a consumer when a product does not comply with the consumer guarantees in ACL Part 3-2 (that is, those relating to title, fitness for purpose, etc.).

CHAPTER 11 Dealing with consumers  419

Action against supplier of goods or services Where the non-compliance is not a major failure, the consumer can require the business to remedy the failure within a reasonable time: ACL s 259(2). The business can remedy the non-compliance by: •• curing the defect in title (if any), •• repairing the goods, •• replacing the goods, or •• providing a refund: ACL s 261. Where the non-compliance is a major failure or cannot be remedied by the business, the consumer can reject the goods (that is, return the goods for a refund or a replacement) or require the business to pay to the consumer the difference between the value of the goods and the price paid for them: ACL s 259(3). A failure to comply with a guarantee is a major failure if: (a) the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure, (b) the goods depart in one or more significant respects from their description, sample or demonstration model, (c) the goods are substantially unfit for a purpose for which goods of that kind are commonly supplied and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose, (d) the goods are unfit for a disclosed purpose that was made known to the business and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose, or (e) the goods are not of acceptable quality because they are unsafe: ACL s 260. The consumer will lose the right to reject the goods (that is, return the goods for a refund or a replacement) if: (a) the rejection period for the goods has ended, (b) the goods have been lost, destroyed or disposed of by the consumer, (c) the goods were damaged after being delivered to the consumer for reasons not related to their state or condition at the time of supply, or (d) the goods have been attached to, or incorporated in, any real or personal property and they cannot be detached or isolated without damaging them: ACL s 262. The ‘rejection period’ is the period within which it would be reasonable to expect the relevant failure to comply with a guarantee to become apparent having regard to the type of goods, the use to which a consumer is likely to put them, the length of time for which it is reasonable for them to be used, and the amount of use to which it is reasonable for them to be put before such a failure becomes apparent. If a consumer acquires goods from a supplier and gives them to another person as a gift, the other person can exercise any rights or remedies which would be available if they had acquired the goods from the supplier: ACL s 266. Similar provisions apply to an action against a supplier of services: ACL ss 267–70.

Action against manufacturer If a consumer guarantee relating to the supply of goods has not been complied with, the consumer has (in addition to any rights against the supplier) the right to recover compensation from the manufacturer: ACL s 271. The manufacturer is not liable if the guarantee was not complied with only because of: (a) an act, default or omission of, or any representation made by, any person other than the manufacturer or an employee or agent of the manufacturer, or (b) a cause independent of human control that occurred after the goods left the control of the manufacturer, or (c) the fact that the price charged by the supplier was higher than the manufacturer’s recommended retail price, or the average retail price, for the goods: ACL s 271(2). 420  PART 2 Legal consequences

ACTIVIT Y 11.13 — REFLECT

Why might a consumer prefer to commence a legal action against the manufacturer of defective goods rather than the supplier (that is, the retailer) of the goods?

Codes of conduct Industry self-regulation plays an important role in Australia’s consumer protection regime. Legislation sets minimum standards, and industry codes of conduct establish ‘best practice’. Codes of conduct are usually voluntary. However, Part IVB of the Competition and Consumer Act 2010 (Cth) enables the government to establish mandatory codes of conduct for a particular industry or profession. The government will usually do so if the voluntary code of conduct has been unsuccessful in reforming the industry or profession to better protect consumers. A prescribed mandatory industry code of conduct is binding on all industry participants. The ACCC is responsible for promoting compliance with prescribed industry codes of conduct by providing education and information and, where necessary, taking enforcement action. Mandatory industry codes of conduct include: 1. the Franchising Code (see a later chapter), 2. the Oil Code, 3. the Horticulture Code, and 4. the Unit Pricing Code.

Industry ombudsman As an alternative to lodging a complaint with the ACCC or local consumer protection authority or commencing civil proceedings against the business, a consumer concerned about the conduct of a particular business may be able to take advantage of the services offered by the relevant industry ombudsman (see table 11.2). TABLE 11.2

Industry ombudsman

Financial Ombudsman Service

www.fos.org.au

Private Health Insurance Ombudsman

www.phio.org.au

Telecommunications Industry Ombudsman

www.tio.com.au

ACTIVIT Y 11.14 — RESEARCH

What types of complaints are dealt with by the Financial Ombudsman Service? What is the procedure for lodging a complaint?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 11.36 Contravention of which of the prohibitions in the ACL will lead to a fine? 11.37 What defences are available to a business accused of contravening the ACL? CHAPTER 11 Dealing with consumers  421

11.38 What are the general remedies able to be granted by a court following contravention of the

ACL? 11.39 What are the consequences of non-compliance with a consumer guarantee? 11.40 What is a code of conduct, and how does it differ from a legal rule?

11.4 Consumer privacy LEARNING OBJECTIVE 11.4 What are the consequences of a business failing to protect consumers’ information privacy?

In this the final section of the chapter, we consider the laws that seek to prevent unauthorised use of a consumer’s personal information. Businesses frequently collect and deal with personal information in order to: •• tailor their product to meet the specific needs of consumers, •• deliver the product to consumers, •• send marketing materials, and •• ascertain individual preferences in order to engage in more effective marketing. Personal information about consumers has commercial value. However, when dealing with a consumer’s personal information, the business must comply with its obligation to respect the consumer’s information privacy. ACTIVIT Y 11.15 — REFLECT

Describe three recent technological developments that have the potential to threaten privacy.

What is information privacy? According to the Universal Declaration of Human Rights: No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.19

Privacy is important for a number of reasons. •• People need private space to become and be healthy and unique individuals. •• To have a healthy community, people need to be free to behave, and to associate with others, without the continual threat of being observed. •• To have a healthy economy, people need to be free to innovate. •• People need to be free to think, and argue, and act; constant surveillance restricts behaviour and speech, and threatens democracy. Privacy can be divided into a number of separate, but related, concepts (see figure 11.2). •• Bodily privacy concerns the protection of a person’s physical self against unwanted physical interference, including invasive procedures such as genetic tests, drug testing and cavity searches. A number of laws protect bodily privacy, including various criminal and civil assault laws. •• Territorial privacy concerns the setting of limits on intrusion into domestic and other environments such as the workplace or public space. Property laws protect territorial privacy.

19 Universal Declaration of Human Rights (10 December 1948) art 12.

422  PART 2 Legal consequences

•• Privacy of communications covers the security and privacy of mail, telephone calls, email and other forms of communication. There are laws generally prohibiting interference with the privacy of communications, such as the Telecommunications (Interception and Access) Act 1979 (Cth). •• Information privacy involves the establishment of rules governing the collection and handling of personal data, such as credit information, and medical and government records. In recent times, Australian governments have focused increasingly on the protection of personal information. This has been in response to increasing public concern about the erosion of information privacy.

Bodily privacy

Information privacy

Privacy

Territorial privacy

Communication privacy

FIGURE 11.2

Types of privacy

Information privacy protection Information privacy is protected by both Federal and State/Territory legislation.

Federal legislation The Privacy Act 1988 (Cth) originally applied only to the handling of personal information by Commonwealth government departments. The Act now applies to any business (even if it is a non-profit organisation) if it has an annual turnover of more than $3 million. If a business has an annual turnover of $3 million or less, it is exempt from the Act unless the business: •• is related to another business (for example as its holding company or as a subsidiary) that has an annual turnover of more than $3 million, •• provides a health service and holds health records, •• discloses personal information for a benefit, service or advantage, •• provides someone else with a benefit, service or advantage to collect personal information, or CHAPTER 11 Dealing with consumers  423

•• is a contracted service provider to the Commonwealth. Exemptions from the operation of the Act include: •• the journalism activities of media organisations, and •• an act done by an employer that is directly related to a current or former employment relationship between the employer and the individual, or an employee record held by the organisation and relating to the individual. The Privacy Act 1988 (Cth) also regulates: •• credit providers and credit reporting agencies in the way they handle individual credit information, and •• private sector organisations in possession or control of Tax File Number (TFN) information. ACTIVIT Y 11.16 — RESEARCH

Visit the website of the Office of the Privacy Commissioner at www.privacy.gov.au. What are the rules regulating the use of tax file numbers?

If a business is covered by the legislation, it must choose to be bound by either a privacy code approved by the Privacy Commissioner, or the privacy principles set out in the Act. Since the statutory privacy principles set the minimum standards for privacy and any approved privacy code will be at least as rigorous as the statutory privacy principles, the following section will focus upon these principles.

Australian Privacy Principles The Privacy Act initially contained a set of Information Privacy Principles that applied to Commonwealth government departments dealing with personal information. These principles were subsequently supplemented by a set of National Privacy Principles that applied to the private sector. In 2012, the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) replaced both with a single set of Australian Privacy Principles (APPs) that apply to both the private sector and the public sector. These changes commenced in March 2014. The APPs seek to ensure that businesses that hold information about individuals handle that information responsibly. They also give individuals some control over the way information about them is handled. The APPs are drafted in a way that is technology-neutral, and they apply equally to conventional, electronic and digital environments. The $3 million turnover threshold means that most Australian businesses are exempted from the Act. However, given the importance of privacy to many individuals and the nature of competition, many small businesses have voluntarily adopted privacy policies. The APPs protect personal information and sensitive information. Personal information is information or an opinion about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion.20 A person’s postal and email addresses are, for example, personal information. Personal information can also include medical records, bank account details, photos, videos, and even information about what a person likes, their opinions and where they work. Information does not have to include the person’s name to be personal information. In some cases, for example, a date of birth and postcode will be enough to identify the person. Sensitive information is a subset of personal information. It is information or an opinion about an individual’s racial or ethnic origin, political opinions, membership of a political association, religious beliefs or affiliations, philosophical beliefs, membership of a professional or trade association, membership of a trade union, sexual preferences or practices, criminal record or health.21 20 Privacy Act 1988 (Cth) s 6 (definition of ‘personal information’). 21 Privacy Act 1988 (Cth) s 6 (definition of ‘sensitive information’). 424  PART 2 Legal consequences

•• •• •• •• •• •• •• •• •• •• •• •• ••

There are thirteen APPs: APP 1 — Open and transparent management of personal information APP 2 — Anonymity and pseudonymity APP 3 — Collection of solicited personal information APP 4 — Dealing with unsolicited information APP 5 — Notification of collection of personal information APP 6 — Use and disclosure of personal information APP 7 — Direct marketing APP 8 — Cross-border disclosure of personal information APP 9 — Adoption, use or disclosure of government related identifiers APP 10 — Quality of personal information APP 11 — Security of information APP 12 — Access to personal information APP 13 — Correction of personal information.

APP 1 — Open and transparent management of personal information

A business must manage personal information in an open and transparent way. This means that a business must: •• take reasonable steps to implement practices, procedures and systems that will ensure that it will comply with the APPs; and •• have a clearly expressed and up-to-date policy about the management of personal information. The privacy policy must contain information about the kinds of personal information the business collects; how the business collects and holds personal information; how an individual can seek access to personal information held by the business or seek correction of such information; how an individual can complain about the breach of an APP and how the business will deal with such a complaint; whether the business is likely to disclose personal information to overseas recipients and if so, the countries in which such recipients are likely to be located. APP 2 — Anonymity and pseudonymity

Individuals must have the option of dealing with the business anonymously or through the use of a pseudonym in relation to a particular matter unless: •• the business is required or authorised by law to deal with individuals who have identified themselves; or •• it is impracticable for the business to deal with individuals who have not identified themselves. APP 3 — Collection of solicited personal information

A business must not collect personal information (other than sensitive information) unless the information is reasonably necessary for one or more of the functions or activities of the business. A business must not collect sensitive information about an individual unless: •• the individual consents to the collection and the information is reasonably necessary for one or more of the functions or activities of the business; or •• one of the exceptions at APP 3.4 applies, e.g. where the collection is required or authorised by law. APP 4 — Dealing with unsolicited information

Where a business receives personal information and it did not solicit the information, the business must, within a reasonable period of time, determine whether or not it could have collected the information under APP 3 if the information had been solicited. If the business determines that it could not have collected the personal information and the information is not contained in a Commonwealth record, it must, as soon as practicable (but only if it is lawful and reasonable to do so), destroy the information or de-identify it. APP 5 — Notification of collection of personal information

A business collecting personal information must notify or make individuals from whom it is collecting information aware that it is doing so. If that is not practicable, it must do so as soon as practicable after the collection. CHAPTER 11 Dealing with consumers  425

APP 6 — Use and disclosure of personal information

If a business holds personal information about an individual that was collected for a particular purpose, the business must not use or disclose it for another purpose unless: •• the individual has consented to the use or disclosure; or •• the use or disclosure of the information falls within the exceptions in APP 6.2 or 6.3. APP 7 — Direct marketing

A business holding personal information (other than sensitive information) about an individual must not use that information for the purpose of direct marketing unless: •• the business collected the information from the individual; and •• the individual would reasonably expect the business to use the information for direct marketing; and •• the business provides a simple means for the individual to easily request not to receive direct marketing communications and the individual has not made such a request. Where a business collects personal information (other than sensitive information) from an individual who would not reasonably expect the business to use the information for direct marketing, it can only use the information for direct marketing if: •• the individual has consented to the use of the information for direct marketing; or •• it is impracticable to obtain this consent and: –– the business provides a simple way for the individual to easily request not to receive the direct marketing communication; and –– in each direct marketing communication, the business includes a prominent statement that the individual can make a request not to receive the direct marketing communication or otherwise draws the individual’s attention to the fact that they can make such a request; and –– the individual has not made such a request. A business can only use or disclose sensitive information about an individual for the purpose of direct marketing if the individual has consented to the use or disclosure of the information for that purpose. An individual can request a business that uses or discloses personal information about them for the purpose of direct marketing to provide its source of the information. The business must notify the individual of its source without any charge within a reasonable period of time, unless it is impracticable or unreasonable to do so. APP 8 — Cross-border disclosure of personal information

Before a business discloses personal information about an individual to an overseas recipient, it must take reasonable steps to ensure that the overseas recipient does not breach the APPs (other than APP 1) in relation to the information. APP 9 — Adoption, use or disclosure of government related identifiers

A business must not adopt a government related identifier (such as a tax file number) of an individual as its own identifier of the individual unless this is required or authorised by law. APP 10 — Quality of personal information

A business must take reasonable steps to ensure that personal information that is collected, used or disclosed is accurate, up-to-date and complete and relevant. APP 11 — Security of information

A business must take reasonable steps to protect personal information that it holds from misuse, interference, loss and unauthorised access, modification or disclosure. It must also take reasonable steps to destroy or de-indentify personal information it holds if it is no longer needed to any purpose for which it may be used or disclosed, it is not contained in a Commonwealth record, and the business is not required by law to retain it. APP 12 — Access to personal information

A business that holds personal information about an individual must, on request by that individual, give the individual access to the personal information. 426  PART 2 Legal consequences

The business must respond to requests for personal information within a reasonable period after the request is made. Any charges by the business for giving access to the personal information must not be excessive. APP 13 — Correction of personal information

A business must take reasonable steps to correct personal information that it holds to ensure that, having regard to the purpose for which the information is held, it is accurate, up-to-date, complete, relevant and not misleading where the individual whom the information is about requests the entity to correct the information. CAUTION!

A business should only use the personal information of its customers for the purpose for which the information was collected. If the business wishes to use the information for a different purpose — for example, for marketing purposes — then it should as a general rule seek the customers’ permission.

ACTIVIT Y 11.17 — RESEARCH

Consult the Privacy Act 1988 (Cth). What are the differences between the Australian Privacy Principles, the National Privacy Principles and the Information Privacy Principles?

LAW IN CONTEXT: LAW IN THE MEDIA

‘Fingerprint scanners concern privacy watchdog’ The growing use of fingerprint scanning technology in pubs and clubs could potentially breach customer privacy and pose major security risks, the Australian ­ ­Privacy Commission has warned. Fourteen major venues across the country — including the Coogee Bay Hotel in Sydney and Amplifier nightclub in Perth — are now using biometric technology systems supplied by NightKey in a bid to control alcohol-related violence. The systems are used to record a photo, fingerprint and some form of ID such as a driver’s licence, creating a computer profile of each person who enters the venue. If a patron is banned or ejected from the venue, their profile is flagged so they cannot gain re-entry. The data is also being used to provide venues with a demographic breakdown of their patrons. Amid calls for a national set of guidelines to govern the technology, Privacy Commissioner Karen Curtis said the information needed to be destroyed as soon as possible and the collection process made transparent. ‘Clubs also need to keep their databases secure, keep their information accurate and up to date, and allow people to see the information they hold about them,’ Ms Curtis said. ‘If the information was collected for security reasons, for example, presumably if no incident occurred on the date of collection, the information would not need to be kept for much longer afterwards.’ ‘If clubs fail in any of these areas they run the risk of breaching their customers’ privacy and of having a privacy complaint lodged against them.’ As well as places using fingerprint scans, machines storing identification are also in use in about 200 pubs and clubs nationally.

CHAPTER 11 Dealing with consumers  427

Ms Curtis warned that creating any database of individuals may be in breach of privacy laws as was sharing of personal information between venues — even those owned by the same proprietors. Patrons should also be made aware of why their fingerprints were being taken and what would be done with the information, she said. Consent for recording sensitive information — like organ donation on a licence — needed to be obtained first. Source: Helen Davidson, ‘Fingerprint Scanners Concern Privacy Watchdog’ (9 July 2010) News Limited http://www.news. com.au/technology/privacy-watchdog-warns-of-fingerprint-scanners/story-e6frfro0-1225889736646.

The consequences of infringement If an individual thinks that a business has breached the APPs, they can complain to the Office of the Australian Information Commissioner. When the office receives the complaint the individual will, in most cases, be referred back to the business to give the business a chance to resolve the complaint itself.22 If the business and the individual cannot resolve the complaint, the office will conciliate the complaint using letters and phone calls, or face-to-face meetings. As a last resort, the Commissioner can make a formal determination. If the business does not comply with the determination, either the Commissioner or the individual can seek to have it enforced by the Federal Court of Australia. The Commissioner can also investigate an act or practice that may be a breach of privacy, even if there is no complaint.23 If the business has decided to be bound not by the APPs but by an approved privacy code that has its own complaint handling procedures, the individual would complain to the privacy code adjudicator. A privacy code adjudicator or the individual can seek to have a determination enforced by the Federal Court. The Commissioner has the power to review a complaint heard by a privacy code adjudicator. If the business fails to comply with its own stated privacy policy it also risks being found to have breached the provisions in the ACL relating to misleading and deceptive conduct. ACTIVIT Y 11.18 — RESEARCH

Visit the website of the Office of the Australian Information Commissioner at www.oaic.gov.au. How does an individual commence the process of making a complaint to the Commissioner?

LAW ON CONTEXT: LAW IN THE MEDIA

‘Google unpunished for privacy breaches’ A fresh probe into the collection of personal data by Google Street View vehicles has highlighted inadequacies in Australian privacy laws, experts have claimed. The British Information Commissioner’s Office (ICO) is re-investigating Google over claims it deliberately collected personal data, including emails and passwords, when capturing images for its Street View maps service. The decision follows a US report by the Federal Communications Commission (FCC), which found Google’s claims that it was unaware its vehicles intercepted WiFi networks were untrue. Australia’s privacy commissioner, Timothy Pilgrim, considered the new information contained in the FCC report but, on 29 May, decided he would not commence another investigation. He cited the department’s inability to impose enforceable undertakings as one reason for his decision. While the ICO can fine organisations up to £500,000 for serious privacy breaches, the Australian regulator does not have the power to impose penalties or other remedies under the Privacy Act.

22 Privacy Act 1988 (Cth) s 40(1A). 23 Ibid s 40(2). 428  PART 2 Legal consequences

Graham Phillips, a partner and technology law specialist at Herbert Geer, told Lawyers Weekly that the privacy commissioner must be given greater powers by the Australian government if compliance with privacy legislation is to be taken seriously by organisations like Google. ‘The Google Street View investigation is a reminder of the current limitations on the privacy commissioner’s powers’, he said. ‘Where there is a risk of penalties you would expect compliance to increase.’ In May 2010, Google admitted it had ‘inadvertently’ collected personal data from private WiFi networks using its Street View cars. Two months later, Karen Curtis (the Australian privacy commissioner at the time) found Google guilty of breaching the Privacy Act. While Google honoured Curtis’ directions, which included a privacy impact assessment on new Street View activities involving the collection of personal data, the undertakings were not enforceable. This would change under the Attorney-General’s Bill (introduced 23 May) to amend the Privacy Act, which would give the privacy commissioner powers to make enforceable undertakings and seek court orders for compensation. The Bill represents the first stage of the government’s response to the A ­ ustralian Law Reform Commission 2008 report on Australian privacy law and practice. The strengthening of these powers would send a message to businesses, like Google, that there are serious c ­ onsequences for p ­ rivacy violations, said Phillips. Commissioner Pilgrim also welcomed the changes. Referring to the Google case, he said the new Bill would give him ‘access to enforceable remedies for investigations of this type’. The Bill, which is more than 230 pages, has been referred to the House of Representatives Standing Committee on Social Policy and Legal Affairs. Source: Leanne Mezrani, ‘Google Unpunished for Privacy Breaches’ (18 June 2012) Lawyers Weekly http://www.lawyersweekly. com.au/news/google-unpunished-for-privacy-breaches.

Protection under State and Territory law Each jurisdiction has its own approach to privacy protection. •• In the Australian Capital Territory, the Information Privacy Act 2014 (ACT) regulates the handling of personal information by ACT public sector agencies. The ACT Information Privacy Commissioner handles privacy complaints against, and receives data breach notifications from, ACT public sector agencies, and conducts assessments of ACT public sector agencies’ compliance with the Information Privacy Act. •• In New South Wales the Privacy and Personal Information Protection Act 1998 (NSW) applies generally to the public sector. The Act is administered by the NSW Information and Privacy Commission. The Commission also has the power to investigate and conciliate privacy breaches by private sector organisations. •• In the Northern Territory the Office of the Information Commissioner is responsible for overseeing the privacy provisions of the Information Act 2002 (NT). The Act regulates the protection of personal information, record keeping and archive management of information held in the public sector. •• In Queensland the Information Privacy Act 2009 (Qld) regulates the handling of personal information by Queensland government agencies. It contains 11 Information Privacy Principles that set out how Queensland government agencies are to handle personal information. The Act is administered by the Queensland Office of the Information Commissioner. •• South Australia has issued an administrative instruction requiring its government agencies to generally comply with a set of Information Privacy Principles and has established a privacy committee. •• In Tasmania the Personal Information Protection Act 2004 (Tas) applies to the public and local government sectors. The Act is administered by the Department of Justice and complaints can be made to the Tasmanian Ombudsman. •• In Victoria the Privacy and Data Protection Act 2014 (Vic) regulates the handling of all personal information, other than health information, and protective data security in the public sector in Victoria. The Act is administered by the Victorian Commissioner for Privacy and Data Protection. •• Western Australia does not currently have a legislative privacy regime. The Freedom of Information Act 1992 (WA) contains some of the privacy principles, and is overseen by the Office of the Infor­ mation Commissioner (WA). CHAPTER 11 Dealing with consumers  429

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 11.41 What is privacy and why is it important? 11.42 What are the four kinds of privacy, and how is each protected? 11.43 Which businesses must comply with the Privacy Act? 11.44 Which businesses are exempted from the Privacy Act? 11.45 Why would a business exempt from the Privacy Act nevertheless choose to comply with it? 11.46 What are the ‘Australian Privacy Principles’? 11.47 What is (a) ‘personal information’ and (b) ‘sensitive information’? 11.48 What must a business do to comply with each of APP1 to APP13? 11.49 When can a business use personal information for marketing purposes? 11.50 What additional protection is given to ‘sensitive’ information? 11.51 If an individual believes that their personal information has been misused in breach of the Privacy Act, what can they do? 11.52 What are the consequences for a business that fails to comply with its privacy policy? 11.53 How is privacy regulated in your State or Territory?

In conclusion •• Generally speaking, a consumer is a person who purchases a product for personal use. Consumers are granted additional protection under Australian law because of the fundamental inequality of bargaining power that exists between a consumer and a business, and because of the tendency of some business people to take advantage of consumers’ ignorance for their own benefit. •• Marketing and selling to consumers is regulated primarily by the Australian Consumer Law. The ACL contains three general prohibitions: misleading and deceptive conduct, unconscionable conduct, and unfair contract terms. The ACL also prohibits a range of specific marketing and selling practices. •• A business found to be in breach of these prohibitions may be subject to civil action and/or penalties. •• A business covered by the Privacy Act 1988 (Cth) must comply either with the Australian Privacy Principles (APPs) or with an approved privacy code. The APPs aim is to ensure that businesses that hold information about individuals handle that information responsibly. They also give individuals some control over the way information about them is handled.

JOHNNY AND ASH

[Ash and Johnny are still at the restaurant. Johnny looks devastated.] Johnny — So, let me see if I understand this right. Maria’s brilliant scheme to describe all of the meals distributed by Lame Duck Organics Pty Ltd as ‘organic’, even though technically we are not lying, will still be misleading or deceptive conduct which means a customer could sue us for breaching s 18 of the Australian Consumer Law? Ash — That’s right. Johnny — And it’s also possibly a breach of the sections that prohibit false representations about our products, which could also lead to prosecution by the ACCC and a fine of more than ONE MILLION DOLLARS? Ash — Well, the $1.1 million is a maximum amount, but yes. Johnny — How are we supposed to make any money? Ash — Have you considered the possibility that you can still make a profit behaving ethically and honestly?

430  PART 2 Legal consequences

QUIZ 1 The principle of caveat emptor means that

(a) a buyer is entitled to the protection of the law. (b) a buyer gets what they pay for. (c) a buyer is entitled to a refund regardless of what the seller says. (d) a buyer is obliged to protect their own interests. 2 When many of the traditional rules of contract were being developed in British courts, one of the most important guiding principles for the judges was the notion of (a) caveat emptor. (b) consumer protection. (c) freedom of contract. (d) enforceability of contract. 3 The Trade Practices Act is now known as (a) the TPA. (b) the Australian Consumer Law. (c) the Competition and Consumer Act. (d) the Prices and Surveillance Act. 4 The fact that when buying a computer the seller will often know more about the product than the buyer is an example of (a) information asymmetry. (b) information imbalance. (c) adverse selection. (d) adverse information. 5 In seeking to establish a breach of s 18 of the Australian Consumer Law the intention of the corporation is (a) irrelevant. (b) determinative. (c) one factor to be considered. (d) deemed to be honest. 6 Unsolicited goods become the property of the consumer to whom they have been sent (a) never. (b) immediately. (c) one month after the date they were received. (d) three months after the date they were received. 7 ‘Manufacturer’ under the ACL refers to (a) the actual manufacturer only. (b) a business that permits itself to be held out as manufacturer. (c) an importer of goods where the actual manufacturer has a place of business in Australia (d) a linked credit provider. 8 Criminal prosecution for breach of the ACL may not be commenced (a) by the ACCC. (b) by a person other than the ACCC. (c) within 3 years of the alleged breach. (d) with respect to a breach of s 18. 9 Which of the following would not be classified as ‘sensitive’ information under the Privacy Act 1988 (Cth)? (a) Information about an individual’s ethnic origin. (b) Information about an individual’s occupation. CHAPTER 11 Dealing with consumers  431

(c) Information about an individual’s religious beliefs. (d) Information about an individual’s sexual preferences. 10 A business that refuses to correct out-of-date information about its customers may be in breach of (a) APP 9. (b) APP 10. (c) APP 11. (d) APP 12.

EXERCISES EXERCISE 11.1 — CONSUMERS

Which of the following buyers would be classified as consumers within the meaning of the ACL s 4? (a) An individual who purchases an engagement ring for $50  000. (b) A baker who purchases flour for use in the baking of bread in their bakery. (c) A baker who purchases flour for use in the baking of bread in their home. (d) A real estate agent who purchases a sports car for use in their real estate business. EXERCISE 11.2 — MISLEADING OR DECEPTIVE CONDUCT

Johnny has decided to add a new range of pasta dishes to his menu. He has placed a large sign on the restaurant window promoting his new pasta dishes as ‘the best pasta in town, made with all fresh ingredients!’. Angel, the owner of Angel’s, the Italian restaurant next door, is rather annoyed about the sign. She has been serving pasta for years. She has accused Johnny of misleading customers, because she knows that Johnny still uses tinned olives in his pasta dishes. Johnny’s response is that even if the olives are from a tin, they are fresh from the tin. Angel has now threatened legal action under ACL s 18. (a) Is she entitled to bring such an action? (b) If so, is such an action likely to succeed? EXERCISE 11.3 — UNCONSCIONABLE CONDUCT

Alexandra has recently moved to Australia from Argentina. Her spoken English is exceptional, but she does not read or write English terribly well, and she has little experience in the way business is conducted in Australia. Alexandra ran a successful catering business in Argentina and is now in the process of establishing a similar business here in Australia. She approaches Johnny to negotiate the supply by The Lame Duck of vegan food for her business. During the negotiations, Johnny realises how little Alexandra understands Australian business practices, and convinces her to agree to pay much more for his food than he charges similar customers. He tells her that it is unusual for Australian businesses negotiating such an arrangement to use legal representation. He also tells her that it is normal practice for a customer in her position to distribute materials advertising his restaurant to all of her own customers, and to commit to a contract with him for at least ten years. Alexandra explains that these arrangements would be extremely unusual in Argentina, but Johnny insists that that is the way things are usually done and that she has no choice but to agree to them, since any other supplier would insist upon the same thing. When Johnny instructs his solicitors to draw up the contract, he tells them to make it especially complicated and legalistic. Alexandra signs the contract agreeing to all of Johnny’s requirements, and she does so without seeking independent legal advice or reading it herself. A few weeks later after talking to some helpful Australian friends, she realises that she may have done the wrong thing. Can Alexandra take advantage of ACL s 21? EXERCISE 11.4 — UNFAIR TERMS

Ash’s car is damaged in a minor accident and her mechanic informs her that it will take 3 weeks to repair the damage. Ash decides to hire a car from Davis Car Rental Pty Ltd for those 3 weeks. She makes a booking via the Davis website, arranging to collect the car at 2  pm on 14 September and to 432  PART 2 Legal consequences

return the car at 2  pm on 28 September. When she arrives at the Davis office at 2  pm on 14 September to collect the car, she is asked to pay a deposit of $500 and to sign a document that sets out the terms of the car hire arrangement. She pays the deposit and signs the document. She then waits 30 minutes for the car to be cleaned and made ready, before finally taking the car away at 2.30  pm. Ash returns the car to Davis at 2.30  pm on the 28th. The Davis employee at the office informs her that because she has returned the car 30 minutes late she has forfeited her deposit. Ash explains that because the car wasn’t ready when she came to collect it she thought she could have an extra half an hour to return it. The employee refers Ash to the following term in the car hire contract: 1. Davis will make all reasonable efforts to ensure that the vehicle is available for collection by the customer by the agreed time. Davis will not be liable for any delay in making the vehicle available to the customer. 2. The customer must return the vehicle by no later than the agreed time. Any failure whatsoever to comply with this requirement will result in forfeiture of the deposit. Advise Ash. EXERCISE 11.5 — SPECIFIC PROHIBITIONS

Donna owns a ladies fashion boutique. She advertises a particular popular style of dress for $100 on her website. The dress normally sells for $500 at other stores. Ash sees the advertisement and rushes to Donna’s shop only to be told by Donna that the dress is out of stock. Has Donna breached any of the specific prohibitions in the ACL? EXERCISE 11.6 — INFORMATION PRIVACY

While studying at university, Gaia applies for a part-time job with Omega Pty Ltd. With her job application she submits a copy of her university results to date. Despite her excellent academic record, she is unsuccessful in getting the job. A few weeks later she receives a call from Alpha Tutoring, asking if she would like to improve her university results by hiring them to provide learning assistance. During the phone call it becomes clear that (a) Alpha Tutoring obtained her university results from Omega Pty Ltd, and (b) some of those results are incorrect. Has Omega Pty Ltd breached the Australian Privacy Principles? If so, what should Gaia do? EXERCISE 11.7 — INFORMATION PRIVACY

On the counter of Johnny’s restaurant is a large glass bowl with a sign saying ‘leave your business card for a chance to win a free meal’. Each month Johnny picks a card out of the bowl and gives the owner of the card a free meal at the restaurant. He also records the contact details on all of the cards in the bowl and uses that information to send copies of his takeaway menu to the card owners. Is Johnny breaching any of the Australian Privacy Principles?

KEY TERMS Australian Competition and Consumer Commission (ACCC)  The Australian regulatory body primarily responsible for administration of the Competition and Consumer Act and Australian Consumer Law. Australian Consumer Law (ACL)  The law regulating consumer protection in Australia; a schedule to the Competition and Consumer Act 2010 (Cth). Australian Privacy Principles (APPs)  The minimum standards for privacy established by the Privacy Act 1988 (Cth). Australian Securities and Investments Commission (ASIC)  The statutory authority responsible for monitoring compliance with the Corporations Act. bait advertising  The practice of advertising a product to attract customers to a businesses’ premises when the business knows or should know that it is likely to run out of stock very quickly. business structure  The legal form of a business organisation, e.g. sole trader, partnership or company. CHAPTER 11 Dealing with consumers  433

caveat emptor  (‘let the buyer beware’) The principle that each party to a contract is responsible for protecting their own interests. common law  (1) Law made by the courts in accordance with the doctrine of precedent. Also known as ‘case law’. (2) The category of those case law rules and principles developed by the common law courts in Britain. consumer  A person who purchases goods or services for personal, domestic or household use and not for the purpose of re-supply or use in a manufacturing process. consumer credit  The provision of money or credit by a business to a consumer for non-commercial purposes and with the expectation of repayment at a later date. disclaimer  A statement that one of the parties to a contract will not be liable for the consequences of a failure to perform their obligations. Also known as an ‘exemption clause’ or an ‘exclusion clause’. holding company  The company in a corporate group that owns and/or controls one or more other companies (subsidiaries). inertia selling  The practice of sending an unsolicited product to a customer and then pressuring the customer to pay for that product. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. lay-by agreement  An agreement between a supplier and a consumer for the supply of consumer goods where the price of the goods is to be paid by three or more instalments and the goods will not be delivered to the consumer until the total price of the goods has been paid. misrepresentation  A false statement of fact made by one person to induce another person to enter into a contract. negligence  A tort committed when one person fails to exercise reasonable care and causes harm to another person. ombudsman  A public official who investigates complaints about the government or an organisation. personal information  Information or an opinion about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion. pyramid scheme  A product distribution scheme where new participants must pay to join after being induced to do so by the prospect that they will be entitled to payment upon the introduction of further participants. referral selling  The practice of offering a buyer a discount in the form of a rebate, commission or other benefit in return for the buyer providing the seller with the contact details of another potential buyer. sensitive information  Information or opinion about an individual’s racial or ethnic origin, political opinions, membership of a political association, religious beliefs or affiliations, philosophical beliefs, membership of a professional or trade association, membership of a trade union, sexual preferences or practices, criminal record, or health. standard form contract  A contract in the form of a written document containing pre-printed terms that are not negotiated. strict liability  Liability where fault does not have to be proved. subsidiary  A company in a corporate group that is owned and/or controlled by another company (the holding company). Tax File Number (TFN)  A unique number issued by the ATO to all individuals and organisations to help the ATO to administer tax. unconscionable conduct  Unfairly taking advantage of another person’s special weakness or disadvantage. unsolicited consumer agreement  An agreement to supply goods or services for at least $100 that is made by telephone or at a place other than the business premises of the suppler and that is not a result of an invitation by the consumer to enter into negotiations for the supply. unsolicited product  A product sent to a buyer without the buyer having requested it. 434  PART 2 Legal consequences

ACKNOWLEDGEMENTS Photo: © chungking / Shutterstock.com Extract: © Commonwealth of Australia 2015, extracts from Australian Consumer Law, ss 3, 18, 2, 4, 20, 21, 22, 23, 35l, Extracts: © Commonwealth of Australia Article: © Helen Davidson, ‘Fingerprint Scanners Concern Privacy Watchdog’ (9 July 2010), News Limited. Article: © Leanne Mezrani, ‘Google Unpunished for Privacy Breaches’ (18 June 2012), Lawyers Weekly.

QUIZ ANSWERS

1. d  2. c  3. c  4. a  5. a  6. d  7. b  8. d  9. b  10. d CHAPTER 11 Dealing with consumers  435

CHAPTER 12

Dealing with competitors LEA RN IN G OBJE CTIVE S 12.1 12.2 12.3 12.4

What is so important about competition? How is competition regulated in Australia? What is ‘anti-competitive’ conduct? When is anti-competitive conduct permitted?

JOHNNY AND ASH

[Ash and Johnny are still dining at the restaurant, and are now sharing a dessert. Johnny is less enthusiastic about Maria’s plans for the Lame Duck than he was earlier, after Ash’s explanation from the previous chapter.] Ash — So, does Maria have another other ideas about increasing profits at The Lame Duck? Johnny — Well, actually she does. But now I’m thinking that you might not like it. Ash — Go on  .  .  . Johnny — Well, you know how so many new restaurants have opened on Kerouac Avenue lately? Competition between the restaurants has gotten so fierce it’s been threatening to put many of us out of business. Ash — Yes. And? Johnny — And last night Maria and I met with the owners of eight other restaurants on the avenue at a secret location. We discussed and agreed on some minimum prices, and worked out a way to synchronise our ‘half-price’ nights so we don’t steal each other’s custom. As Maria keeps saying, just because we’re competitors it doesn’t mean we can’t be friends. Ash — So why a ‘secret location’? Johnny — I asked Maria that. She just laughed and said something like: ‘We wouldn’t want the wrong people to hear about our arrangement, would we?’ Ash — What did you say? Johnny — Nothing. I assumed she knew what she was doing.  .  .  .  Ash! Stop banging your head on the table! It’s embarrassing!

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Maria’s proposal to cooperate with the other restaurant owners is strictly legal.

Introduction In the previous chapter we examined the wide range of legal rules with which a business must comply when dealing with consumers. Similarly, there are important rules that apply when a business deals with its competitors. If separate businesses, which are of course usually in competition with each other and have little to do with each other, were free to negotiate whatever arrangements they liked, conspiracies would abound and consumers would be severely disadvantaged. In this chapter we consider the types of conduct that are permitted or prohibited when it comes to dealing with competitors.

12.1 Protecting competition LEARNING OBJECTIVE 12.1 What is so important about competition?

In previous chapters we emphasised the importance of ‘freedom of contract’. This is the notion that people should generally be free to negotiate contracts on whatever terms they like, subject to certain minimal legal rights and protections. But if freedom of contract is so important, shouldn’t competitors within a market be free to meet and make whatever agreements they like? Why can’t competitors work together to reduce costs and maximise profits? The answer is that freedom of contract has never meant unrestrained freedom. Contracting parties have always been restrained by the obligation, for example, to make legal contracts. And contracting competitors are constrained by a set of rules that seek to protect and enhance competition within the market. CHAPTER 12 Dealing with competitors  437

It is widely believed that competition within a market is good for consumers and good for the economy. If there is a single supplier of a product in a market — in other words, if there is a monopoly — that supplier has little incentive to charge a fair price or maintain the quality of their product. The same is likely to happen if a group of suppliers work together to operate as, effectively, a single supplier. However, where each supplier is competing for consumers with other suppliers, they are more likely to operate efficiently, overall prices are likely to be lower, and overall product quality is likely to be higher. Healthy competition assists economic growth and job creation, and encourages operational and technological innovation. Competition law seeks to protect and enhance competition by regulating and prohibiting certain actions by businesses, including certain arrangements between competitors and other agreements that artificially maintain or inflate prices. Paradoxically, it seems that government intervention is often necessary to preserve the operation of a free market. ACTIVIT Y 12.1 — REFLECT

Why is government regulation of competition necessary? What would happen to competition in an unregulated market?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 12.1 What is the relationship between freedom of contract and competition regulation? 12.2 Why is competition within a market desirable?

12.2 Dealing with competitors LEARNING OBJECTIVE 12.2 How is competition regulated in Australia?

Australian law protects and preserves competition by prohibiting certain forms of anti-competitive conduct.

Competition regulation Competition in Australia is regulated primarily by the Competition and Consumer Act 2010 (Cth). In this section we present an overview of the competition regulation provisions in this Act, as well as some other important pieces of legislation.

Trade Practices Act 1974 (Cth) and Competition Policy Reform Act 1995 (Cth) Competition in Australia was initially regulated by the Trade Practices Act 1974 (Cth) (the TPA). For the same constitutional reasons explained in the previous chapter in relation to consumer protection, the ­competition regulation provisions of the TPA were initially limited to the regulation of corporations and of those individuals engaged in trade or commerce: •• between Australia and another country or between the States, •• within a Territory or between a State and a Territory or between the Territories, •• involving the supply of goods or services to the Federal Government, or •• involving the use of postal, telegraphic or telephonic services or which takes place in a radio or ­television broadcast. 438  PART 2 Legal consequences

In 1995 the Federal Parliament passed the Competition Policy Reform Act 1995 (Cth). The Act introduced three important changes to competition regulation in Australia. 1. The application of the competition regulation provisions of the TPA was extended to all Australian businesses and professions, whether incorporated or unincorporated. 2. The Trade Practices Commission (the body primarily responsible for administration of the TPA) and the Prices Surveillance Authority merged to form the Australian Competition and Consumer ­Commission (the ACCC). At the same time, the Trade Practices Tribunal became the Australian ­Competition Tribunal, and a new advisory body, the National Competition Council, was established. ACTIVIT Y 12.2 — RESEARCH

Visit the following websites and, in relation to each, outline the role of the organisation and its relevance to competition regulation in Australia. (a) Australian Competition and Consumer Commission: www.accc.gov.au (b) Australian Competition Tribunal: www.competitiontribunal.gov.au (c) National Competition Council: www.ncc.gov.au

3. Part IIIA of the TPA established an ‘access regime’ to facilitate third party access to ‘essential facilities’ such as gas and water pipelines, electricity transmission wires, railway tracks, airport systems, and telecommunication networks.

Prices surveillance The Prices Surveillance Authority was established in 1983 to monitor prices in areas where effective competition is not sufficient to achieve efficient prices and protect consumers, and where prices are of strategic importance to the general price level. The Authority was empowered to endorse price increases, to suggest lower prices, and to recommend to the Minister that a public inquiry be held. Following the enactment of the Competition Policy Reform Act 1995 (Cth) the Prices Surveillance Authority’s functions were taken over by the ACCC.

Competition and Consumer Act 2010 (Cth) In 2010 the TPA was renamed the Competition and Consumer Act 2010 (Cth) (the CCA) as part of the reforms that also saw the introduction of the Australian Consumer Law as described in the previous chapter. One of the fundamental objectives of the CCA is ‘enhancing the welfare of Australians through the ­promotion of competition’: CCA s 2. Part IV of the CCA promotes competition by prohibiting ‘cartel conduct’ as well as certain trade practices that have the effect of substantially lessening competition in the market. Some of these forms of conduct are so obviously anti-competitive that they are prohibited outright. These are known as per se offences, and include: •• cartel conduct, •• misuse of market power, •• resale price maintenance, and •• primary boycotts. The other forms of conduct prohibited by Part IV are conditional offences: they are only prohibited if they have the effect of substantially lessening competition in the relevant market. These include: •• secondary boycotts, •• exclusive dealing, •• certain mergers and acquisitions, and •• agreements that lessen competition. Cartel conduct and the other prohibited practices are considered in more detail later in the chapter. CHAPTER 12 Dealing with competitors  439

Each of the prohibited forms of conduct (other than misuse of market power) can be ‘authorised’ by the ACCC. The authorisation process is considered in detail towards the end of this chapter. ACTIVIT Y 12.3 — REFLECT

What is the relationship between consumer protection and competition regulation?

Key concepts Before looking closely at the specific forms of conduct prohibited by Part IV of the CCA, it is necessary to explain the meanings of three important terms used throughout the legislation: •• ‘market’, •• ‘competition’, and •• ‘substantially lessening competition’.

‘Market’ Conduct by a business is anti-competitive if it has the effect of substantially lessening competition in a market. The nature and extent of the relevant market is therefore the starting point in the evaluation of the anti-competitive impact of any conduct. The difficulty in establishing the nature and extent of a particular market has been explained as follows: 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 substitutionability and the significance of competition between traders at different stages of distribution.1

A person claiming that conduct by a business is anti-competitive will want the market to be narrowly defined, since the narrower the market the more likely it is that conduct will have the effect of substantially lessening competition. A person claiming that conduct by a business is not anti-competitive will want the market to be defined widely, since the wider the market the more likely it is that conduct will not have a substantial impact on competition. The CCA contains in s 4E an inclusive rather than a comprehensive definition of ‘market’: For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.

The reference to including products that are ‘substitutable for, or otherwise competitive with’ the product in question ensures that in ascertaining the extent of a market, the market is not limited to the sale of products of a particular brand or type. For example, in ascertaining the extent of the market for electronic tablets such as the iPad, one would include the market for smart phones and certain types of laptop computer. The definition of market usually relied upon by the courts is as follows: A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them.2 1 Deane J in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 196; [1989] HCA 6. 2 Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169, 190.

440  PART 2 Legal consequences

A market is usually recognised as having four dimensions (see figure 12.1).

Product

Geography Market

Time

FIGURE 12.1

Function

Four dimensions of a market

1. The product dimension refers to the types of products in the particular market. It is the range of products, including substitutes for them, which will satisfy customer requirements. An important indicator as to whether products are in the same market is customer response to price changes. 2. The geographic dimension refers to the geographic area the market covers. 3. The functional dimension refers to the particular level at which the organisation in question operates, for example, manufacturing, wholesale, or retail. 4. The temporal dimension refers to the period of time in relation to which the determination of the market is made. It is the period of time over which substitution possibilities are considered.

TPC v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299

Australian Meat Holdings Pty Ltd (AMH) purchased shares in Borthwick’s abattoirs in North Queensland. The Trade Practices Commission (TPC) opposed the purchase, arguing that it amounted to an unauthorised merger in contravention of the TPA. The court had to determine the nature and extent of the relevant market, and decided that the market was the market for the slaughtering (the functional dimension) of cattle (the product dimension) that had to be fattened before slaughter (the temporal dimension) in northern Queensland (the geographic dimension).

‘Competition’ In the legislation competition is not precisely defined. According to s 4 of the CCA: Competition includes competition from imported goods or from services rendered by persons not resident or not carrying on business in Australia.

The Trade Practices Tribunal has explained competition as follows: Competition expresses itself as rivalrous market behaviour  .  .  .  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  .  .  . The five elements of market structure which we would stress as needing to be scanned in any case are: 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; CHAPTER 12 Dealing with competitors  441

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 five elements of market structure, no doubt the most important is the second element, the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of 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.3

LAW IN CONTEXT: LAW IN THE MEDIA

Microsoft and monopolies In the late 1990s Microsoft began to bundle the internet Explorer web browser with its Windows operating system so that everybody who purchased a personal computer with Windows — by far the majority of PC purchasers — automatically acquired internet Explorer. Microsoft thereby achieved a dominant share in the web browser market. In 2000, ‘antitrust’ (competition regulation) proceedings were brought against Microsoft in the United States.4 The company was found to have abused its monopoly in the desktop operating systems market. The finding that Microsoft effectively enjoys monopoly power was based on three factors: (1) Microsoft’s share of the market for PC operating systems is extremely large and stable; (2) Microsoft’s dominant market share is protected by a ‘high barrier to entry’; and (3) as a result of that barrier, Microsoft’s customers lack a commercially viable alternative to Windows. The court explained the nature of the barrier to entry: ‘The fact that there is a multitude of people using Windows makes the product more attractive to consumers. The large installed base  .  .  .  impels ISVs (independent software vendors) to write applications first and foremost to Windows, thereby ensuring a large body of applications from which consumers can choose. The large body of applications thus reinforces demand for Windows, augmenting Microsoft’s dominant position and thereby perpetuating ISV incentives to write applications principally for Windows .  .  . The small or non-existent market share of an aspiring competitor makes it prohibitively expensive for the aspirant to develop its PC operating system into an acceptable substitute for Windows.’5

A rule of thumb for determining whether there is competition in the relevant market is to ask: ‘If the business raised its price — without altering anything else, such as quality or customer service — would it sell less?’ If the answer is yes, then there is competition.

‘Substantially lessening competition’ Many of the types of conduct referred to in Part IV of the CCA are only prohibited if they have the effect of substantially lessening competition in a market. ‘Substantial’ has been variously defined as large, weighty, big, real, of substance, or not insubstantial. The precise meaning of the term depends on the context. In one case the judge said that to determine whether competition is 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’.6

3 Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169, 189. 4 United States v Microsoft Corp, 87 F Supp 2d 30 (DDC 2000). 5 Ibid III.39–40. 6 Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR 41–752. 442  PART 2 Legal consequences

CHECKLIST

In order to determine whether conduct by a business has the effect of substantially lessening competition: ◼◼ Determine what the relevant market is. ◼◼ Determine whether the conduct lessened competition in that market, or would be likely to do so. ◼◼ If so, was the lessening substantial? ◼◼ If not, was the purpose of the conduct to substantially lessen competition in the market? If the answer to either of the last two questions is yes, then the conduct may be in contravention of the CCA.

Note that injury to an individual trader within the particular market does not necessarily mean that there has been a substantial lessening of competition. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  12.3 How does competition law seek to protect and enhance competition?  12.4 What were the three important changes to competition law introduced by the Competition Policy Reform Act?  12.5 What was the role of the Prices Surveillance Authority? Which body now performs that role?  12.6 What is a per se offence? Which offences are per se offences under Part IV of the CCA?  12.7 Which actions are only prohibited under CCA Part IV if they have the effect of substantially lessening competition?  12.8 What is a ‘market’? What are the four dimensions of a market?  12.9 What is ‘competition’? 12.10 What does the term ‘substantially lessening competition’ mean? What is the test for determining whether there has been a substantial lessening of competition?

12.3 Prohibited conduct LEARNING OBJECTIVE 12.3 What is ‘anti-competitive’ conduct?

Part IV of the CCA promotes competition by prohibiting ‘cartel conduct’ as well as certain trade practices that have the effect of substantially lessening competition in the market.

Cartel conduct Division 1 of Part IV of the CCA prohibits a business from engaging in ‘cartel conduct’. A cartel is a contract, arrangement or understanding between two or more competitors that lessens competition by, for example, fixing prices, controlling outputs, rigging bids or allocating customers. A cartel can be formed in any industry, and may involve agreements between small, local businesses or between wellknown multinational corporations. In Australia, cartels are illegal. Section 44ZZRJ of the CCA prohibits a business from making a contract or arrangement, or arriving at an understanding, that contains a cartel provision. Section 44ZZRK prohibits a business from putting a cartel provision into effect. ‘Cartel provision’ is defined in s 44ZZRD as a provision of a contract, arrangement or understanding between two or more businesses that are or should be in competition with each other that has the purpose or effect of: 1. fixing the prices charged by the cartel members (see below); 2. controlling outputs — that is, controlling or limiting the quantity of goods or services available to buyers, thereby artificially inflating prices; CHAPTER 12 Dealing with competitors  443

3. rigging bids so that members of the cartel control the outcomes of, for example, tendering processes; or 4. allocating customers, suppliers and territories amongst the cartel members. Cartel conduct is a per se offence. This means that the conduct is illegal, regardless of its actual impact upon competition within the market.

TPC v TNT Australia Pty Ltd (1995) ATPR 41–375

Between 1987 and 1990, representatives from TNT Australia, Ansett Industries and Mayne Nickless met secretly and entered into a series of agreements to allocate customers and share the Australian commercial freight market. The companies agreed not to poach each other’s customers. When customers moved from one company to another, the companies paid compensation to each other. On some occasions, where a customer moved from one company to another, the second company deliberately provided poor service to compel the customer to return to the first company. For example, in one case a customer’s perishable freight was intentionally delayed to drive them back to their previous freight supplier, who then charged higher prices when the customer returned to them. The TPC commenced legal proceedings against the companies, and in 1995, fines of $11 million were imposed.

ACCC v Visy Industries Holdings Pty Ltd (No 3) (2007) 244 ALR 673

The Visy and Amcor groups of companies between them held 90 per cent of the corrugated fibreboard packaging market in Australia. Between January 2000 and October 2004 companies in the Visy group and certain officers of those companies entered into agreements with companies in the Amcor group according to which: • Amcor and Visy agreed to maintain their respective market shares and not to deal with each other’s customers, • increases in prices were agreed in each year, • prices were agreed in respect of particular customers, and • in respect of particular customers who had changed from one supplier to the other, that supplier would provide another customer or customers in exchange. The Federal court decided that Visy had committed 69 contraventions of the TPA by engaging in price fixing and market sharing with Amcor. Visy was fined $36 million, and the CEO and the General Manager, both of whom had participated in the making of the agreements with Amcor, were fined $1.5 million and $500  000 respectively.

In addition to these civil prohibitions, cartel conduct is also a criminal offence: ss 44ZZRF, 44ZZRG. The penalty for individuals is imprisonment for up to 10 years and/or a fine of up to $220  000 per offence. The penalty for corporations is the greater of (1) $10 million, (2) three times the total value of the benefits obtained that are attributable to the offence or contravention, or (3) where benefits cannot be fully determined, 10 per cent of the annual turnover of the company. The ACCC has extensive legal powers to investigate cartels.

ACTIVIT Y 12.4 — RESEARCH

Watch the ACCC-produced short film The Marker at http://www.accc.gov.au/publications/cartelthe-marker-dvd. What are the key lessons from the film?

444  PART 2 Legal consequences

LAW IN CONTEXT: LAW IN PRACTICE

How to get out of a cartel Immunity for cartel participants The ACCC has established an immunity policy for corporations and individuals who have been involved in a cartel but then report their involvement to the ACCC. The policy provides immunity from litigation and penalty for those who assist with cartel investigations. The ACCC can grant civil immunity. Immunity from criminal prosecution can only be granted by the Commonwealth Director of Public Prosecutions (CDPP), on the recommendation of the ACCC, as outlined in the MOU, and in accordance with the prosecution policy of the Commonwealth. The immunity is strictly conditional and is subject to a number of conditions. Conditions for immunity • Only the first person or corporation to bring the matter to the attention of the ACCC may qualify for immunity (those who subsequently cooperate may be offered leniency). • The immunity applicant must not have been the clear leader of the cartel or have coerced others to join. • They must cooperate fully with the ACCC and continue to cooperate, or the immunity may be withdrawn. • They must cease their involvement in the cartel or agree to cease such conduct. • An application for immunity will not be accepted if the ACCC already has written advice that there is sufficient evidence to commence court proceedings. • A person or corporation may request a ‘marker’ for a limited period of time. This will, in effect, preserve first place in the queue while the applicant collects information or seeks legal advice. Corporate immunity is offered only if the admissions are a truly corporate act, as opposed to isolated confessions of individual representatives. The immunity may cover past and current directors, officers and employees who admit their conduct and cooperate with the investigation. The corporation must list all those seeking this derived immunity at the time of applying. Individuals may also seek immunity on the same conditions. This might apply where an individual officer wishes to report the conduct to the ACCC. Confidentiality Whistleblowers can report to the ACCC on a confidential basis. Investigators will, as far as possible, keep the identity of whistleblowers confidential. The Competition and Consumer Act has special provisions for protected cartel information. This enhances the protection given to confidential information about a possible breach of the civil or criminal provisions relating to cartel conduct. Benefits of the immunity policy The immunity policy has been extremely successful in detecting cartels and providing a powerful deterrent to engaging in cartel activity. It provides a strong incentive for a member to be the first to break ranks, confess, stop participating in cartel activities and help with ACCC and CDPP investigations. The policy works by injecting distrust and suspicion into a cartel, which destabilises relationships between participants. The message is simple: Don’t be beaten in the rush to the confessional. It is important to note that immunity does not protect a company from civil damages claimed by its customers. Source: Australian Competition and Consumer Commission, ACCC Immunity Policy for Cartel Conduct (2009).

Price fixing One of the more common forms of cartel conduct is price fixing. According to CCA s 44ZZRD, a provision of a contract, arrangement or understanding is a cartel provision if it has the purpose or is likely to have the effect of fixing, controlling or maintaining the price of goods or services, or of a discount, allowance, rebate or credit in relation to goods or services. CHAPTER 12 Dealing with competitors  445

This means that a business cannot form a cartel with its competitors and agree that they will all charge the same price for particular products, or that they will all raise, lower or maintain their prices. Note that it is not necessary to prove that price fixing actually occurred, only that the businesses intended to fix prices. Nor is it necessary to prove that if price fixing did occur it had any actual effect upon competition in the market: price fixing, like all cartel conduct, is prohibited per se. ACCC v Alice Car and Truck Rentals Pty Ltd (1997) ATPR 41–582

Alice Car and Truck Rentals Pty Ltd stopped offering a car rental discount called the ‘Ayers Rock ­Special’ after it had reached an understanding with its competitors that they would also stop offering the special. The court decided that this was a price fixing agreement. The four companies involved were fined $1.54 million in total, and the manager of the Alice Springs office of Territory Rent-a-Car was fined $100  000, as well as costs of $50  000.

In establishing a breach of these provisions, two requirements must be satisfied. CHECKLIST

A business will have engaged in price fixing if all of the following requirements are satisfied. ◼◼ The business has a contract, arrangement or understanding with one or more other businesses with which it is in competition. ◼◼ The contract, arrangement or understanding contains a provision that has the purpose or likely effect of fixing, controlling or maintaining prices.

Requirement 1: A contract, arrangement or understanding

To prove the existence of an arrangement or understanding between the businesses, it is necessary to show that they arrived at the same conclusion — that is, that there was a ‘meeting of minds’. If only one of the businesses intended to engage in the conduct, it will generally not meet the required threshold. There must be a consensus between the businesses. Just because two businesses act in parallel does not necessarily mean that they are in collusion. A common example of parallel conduct is ‘price leadership’. This occurs when one business sets a price and competitors subsequently set the same price. This is often raised in relation to petrol stations. Price leadership will not contravene the CCA, as there has been no agreement between the businesses. TPC v Email (1980) 43 FLR 383

Email and Warburton Franki were the only manufacturers of certain electricity meters in Australia, with Email holding approximately 70 per cent of the market and generally recognised as market leader. Email and Warburton Franki engaged in parallel pricing: they issued identical price lists, they sent their respective price lists to each other, and they submitted identical tenders for contracts. The TPC brought an action alleging the existence of an ‘arrangement or understanding’ in breach of the prohibition on price fixing. The defendants argued that the parallel pricing was due to market forces and that Warburton Franki simply followed the prices of Email as market leader. The Federal Court decided that there was no price fixing agreement.

Requirement 2: The purpose or likely effect of fixing, controlling or maintaining prices

The term ‘purpose’ has been interpreted as both subjective (what were they actually thinking?) and objective (how would an observer interpret the situation?). It is the purpose of the particular provision that is important, not the purpose of the entire contract or arrangement. If the provision was included for the substantial purpose of fixing, controlling or 446  PART 2 Legal consequences

maintaining prices, then the fact that there may be a legitimate purpose for the entire contract or arrangement will not prevent it from being a contravention of the CCA. Competitors do not need to agree on a particular price to contravene the provision. Examples of price fixing include: •• using an agreed formula to set prices, •• exchanging data relevant to setting prices, •• restricting production with the intention of increasing the price, and •• setting the same discounts, allowances, rebates or availability of credit. ‘Recommended retail price’ arrangements are not prohibited, as long as they are simply recommendations. LAW IN CONTEXT: LAW IN THE MEDIA

Federal Court orders $23.3 million in penalties for petrol price fixing In 2002 the ACCC instituted proceedings against 16 companies and individuals in the Ballarat region, alleging the existence of a long-standing price-fixing arrangement in the petrol supply market. The ACCC alleged the participants arranged to increase prices by telephoning each other, agreeing upon the size and approximate time of price rises, and then contacting retail sites to implement the rises. When a company became aware that a service station had not raised its price, further calls were made to participants to have the site raise its prices. The Federal Court found that a price-fixing arrangement existed, and in 2005 the court imposed pecuniary penalties totalling $23.3 million. In addition to penalties, the Federal Court also declared the conduct in breach of the Act and ordered injunctions against the respondents prohibiting them from communicating to or obtaining from competitors the retail price of fuel for a period of four years and ordered that the respondents pay the ACCC’s costs. Source: Australian Competition and Consumer Commission, ‘Federal Court Orders $23.3 Million in Penalties for Petrol Price Fixing’ (Media Release, MR 067/05, 17 March 2005) http://www.accc.gov.au/media-release/federal-court-orders233-million-inpenalties-for-petrol-price-fixing.

Other prohibitions The other, specific types of anti-competitive conduct prohibited by CCA Part IV include: •• misuse of market power, •• resale price maintenance, •• boycotts, •• exclusive dealing, •• certain mergers and acquisitions, and •• agreements that lessen competition.

Misuse of market power This prohibition only applies to a business if it has a substantial degree of power within a market — that is, it is one of the major suppliers of goods or services within a particular market. Such a business is not permitted to take advantage of its market power to: •• eliminate or substantially damage a competitor, •• prevent the entry of a person into that or any other market, or •• deter or prevent a person from engaging in competitive conduct in that or any other market: CCA s 46. In determining the extent of the market power of a business, the ACCC or court will consider: •• the ability of the business to increase its prices above the minimum cost of production without ­competitors taking its customers away, CHAPTER 12 Dealing with competitors  447

•• •• •• ••

the degree to which its conduct in the market is controlled by its competitors or prospective competitors, its market share, the existence of vertical integration, and any barriers to entry within the market. CAUTION!

The CCA does not prohibit the existence of market power; it prohibits the misuse of market power.

In determining whether conduct will be a misuse of market power, the ACCC or court will consider whether the conduct: •• adversely affects the competitive process in a market; •• adversely affects consumers in terms of price, quality, availability, choice or convenience; •• raises the costs of entry to a market; or •• can be explained in terms of efficiency or a desire to engage in genuine competitive rivalry. An example of misuse of market power is predatory pricing. A business engages in predatory pricing when it charges an unrealistically low price for its product to force a competitor out of the market. Price cutting and underselling competitors is not necessarily predatory pricing, but when a business has a substantial degree of market power it may be considered to be a misuse of that market power. LAW IN CONTEXT: LAW IN THE MEDIA

Court upholds predatory pricing appeal against Boral Besser Masonry Ltd In 1994 C&M Bricks, a private company that manufactured concrete masonry products in Bendigo, Victoria, began new manufacturing operations in the outskirts of Melbourne using highly efficient, ‘state of the art’ technology, which increased production capacity and reduced costs significantly. Boral Besser Masonry Ltd slashed prices below manufacturing costs for the purpose of driving C&M Bricks out of the concrete masonry products market and of deterring other new entrants from entering this market. In 2001 the Full Court of the Federal Court decided that Boral Besser Masonry Ltd’s pricing below manufacturing costs was a misuse of market power in breach of Part IV of the TPA. The Court found that the relevant market was the Melbourne market for concrete masonry products and that Boral Besser Masonry Ltd had a ‘substantial degree of power’ in this market.7

ACTIVIT Y 12.5 — RESEARCH

In assessing the extent of market power the court will take into account the existence of vertical integration. What is ‘vertical integration’?

Other types of conduct that may amount to a misuse of market power include: •• refusing to supply products to a competitor to exclude them from a market,8 and •• a major retailer refusing to sell products that are on special at nearby independent stores.9 Misuse of market power is prohibited per se and cannot be authorised by ASIC.

7 Australian Competition and Consumer Commission, ‘Court Upholds Predatory Pricing Appeal Against Boral Besser Masonry Ltd — Important Case About Misuse of Market Power’ (Media Release, MR 035/01, 28 February 2001) . 8 Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177. 9 ACCC v Australian Safeway Stores Pty Ltd (No 4) [2006] ATPR 42–101.

448  PART 2 Legal consequences

Resale price maintenance CCA s 48 prohibits the practice of resale price maintenance. This is the practice of prohibiting retailers from selling a product at a discount. Specifically, a business will engage in resale price maintenance if it: •• imposes a minimum price upon resellers of its product below which the product must not be sold, •• sets a price that retailers are likely to understand is the price below which the product should not be sold or advertised, •• agrees with retailers that they will not advertise the product below a specified price, •• induces a retailer not to discount the product, or •• threatens to refuse supply to a retailer to force them to comply with any of the above: CCA ss 96–100. Whereas price fixing is a horizontal agreement between competitors to set prices at some level, resale price maintenance is a vertical agreement between a supplier and a reseller. In a resale price maintenance arrangement the businesses will not be operating in competition with each other. Although resale price maintenance has been illegal in Australia since 1971, the practice continues to be one of the largest areas of litigation for the ACCC. TPC v Sony (Australia) Pty Ltd (1990) ATPR 41–031

Two retailers decided to discount Sony electrical goods below the prices set by Sony (Australia) Pty Ltd. Sony withheld supply of goods ordered by the two retailers. The court decided that Sony had engaged in resale price maintenance. Sony was fined $250  000, its former Queensland manager $12  000 and its national consumer sales manager $12  000.

ACCC v Chaste Corp Pty Ltd (in liq) [2005] FCA 1212

The Chaste Corporation Pty Ltd, a manufacturer of weight-loss tablets, entered into 70 area management agreements Australia-wide which contained provisions preventing managers from selling the weight-loss products at a discount. The Federal Court decided that the company had engaged in resale price maintenance. The company was fined $600  000 and total penalties of $430  000 were ordered against senior members of the company.

A business will engage in resale price maintenance if it openly states a price below which the reseller must not sell. However, it may also be engaging in resale price maintenance if it: •• states the desired selling price as a formula (e.g. ‘cost + 20%’), •• states the desired price in a way that is likely to be understood by the reseller to be a minimum resale price, or •• claims that supply of the product to the reseller is not being withheld due to the pricing policy of the reseller but rather due to ‘shipping delays’ or ‘stock issues’. A business is more likely to engage in resale price maintenance if it sells a ‘branded’ product. The business may be concerned to maintain an ‘exclusive’ brand image and put pressure upon resellers not to discount the product. ACCC v Dermalogica Pty Ltd (2005) 215 ALR 482

Between July and September 2002, Dermalogica Pty Ltd, a wholesaler of prestige skincare products, wrote to two retailers who were discounting Demalogica products, stating: ‘It has come to our attention that your website is offering the Dermalogica product range for sale lower than the recommended retail price. Our web guidelines and policies clearly state that in order to maintain Dermalogica’s

CHAPTER 12 Dealing with competitors  449

premium brand image and consistent pricing strategy, we strongly discourage the selling of Dermalogica products for more or less than their suggested retail prices. I would ask you therefore to please adjust your prices for online retailing with immediate effect.’ Staff of the company also met with the retailers to express concern about their practice of discounting Dermalogica products, making it known that the company would stop selling Dermalogica products to retailers that sold products at a significant discount to the recommended retail price. The Federal Court decided that Dermalogica had engaged in resale price maintenance and fined the company $250  000.

A business does not engage in resale price maintenance if: •• a price attached to the goods or services is preceded by the words ‘recommended price’, or the business states that the price is a recommended price only and there is no obligation to comply with the recommendation: CCA s97, •• it insists on a maximum price, or •• it withholds supply if the reseller engages in loss leading with the product, that is, selling the product at less than cost to attract customers or recover a loss of profits from the sale of other products. Resale price maintenance is prohibited per se.

Boycotts A boycott is an action by an individual or group that prevents or is intended to prevent another individual or group from buying or selling products in a market. A business is not permitted to agree with one or more other businesses that they will collectively refuse to deal with a particular competitor, supplier or customer. The legislation prohibits both primary boycotts and secondary boycotts. Primary boycotts

A primary boycott is where two or more businesses directly boycott the products of the target (see figure 12.2).

Two or more businesses

boycott

target

FIGURE 12.2

Primary boycott

According to CCA s 45(2), a business is not permitted to make a contract or arrangement, or arrive at an understanding, that contains an exclusionary provision. This is a provision that seeks to prevent, restrict or limit the supply of goods or services to, or the acquisition of goods or services from, particular persons or classes of persons by all or any of the parties to the contract, arrangement or understanding: CCA s 4D(1). In other words, competitors are prohibited from agreeing with each other not to supply to or buy from the boycott target, or to supply or buy from them only in particular circumstances. 450  PART 2 Legal consequences

TPC v JW Bryant Pty Ltd (1978) ATPR 40–075

A trade association threatened to expel some of its members — fruit and vegetable marketers — because of their refusal to charge certain costs to customers as required by an association resolution. Expulsion would have limited the marketers’ ability to acquire goods. The court decided that this was an exclusionary provision.

Primary boycotts are prohibited per se. Secondary boycotts

A secondary boycott is an indirect boycott. It occurs if two or more business put pressure on a third business with whom they have no dispute to discourage them from dealing with the target of the boycott (see figure 12.3). According to CCA s 45D, a business must not, in concert with a second person, engage in conduct that hinders or prevents a third person supplying or acquiring goods or services to a fourth person, and that has the purpose and effect of causing substantial loss or damage to the business of the fourth person. And according to CCA s 45DA, it must not, in concert with a second person, engage in conduct that hinders or prevents a third person supplying or acquiring goods or services to a fourth person, and that has the purpose and effect of causing a substantial lessening of competition in any market in which the fourth person supplies or acquires goods or services.

Two or more businesses

pressure

another business to

boycott

target

FIGURE 12.3

Secondary boycott

For example, Johnny might be concerned about a new business, New Ltd, which has recently started competing with him. Johnny and one of his other competitors, Other Ltd, inform a company which supplies both of them, Supply Ltd, that if Supply Ltd deals with New Ltd, Johnny and Other Ltd will no longer deal with Supply Ltd. This would be a secondary boycott. It is not a prohibited secondary boycott if: •• the target of the secondary boycott is the employer of the boycotters: CCA ss 45D(1). 45DA(1), •• the dominant purpose of the secondary boycott is substantially related to remuneration, conditions of employment, hours of work or working conditions: CCA ss 45DD(1) – (2), or •• the dominant purpose of the secondary boycott is substantially related to environmental protection or consumer protection: CCA s 45DD(3). CHAPTER 12 Dealing with competitors  451

ACTIVIT Y 12.6 — REFLECT

What might be the justification for including each of the three exceptions listed above in the legislation?

LAW IN CONTEXT: LAW IN THE MEDIA

Doctors risk breaching competition laws The Kangaroo Island Medical Clinic was the only general medical clinic on the island. Five doctors worked at the clinic. Each of the doctors operated their own medical practice and shared office and administration facilities. On 1 October 2009, each doctor wrote to the administrator of the Kangaroo Island hospital giving notice of his or her intention not to accept the current remuneration for afterhours services to the hospital from midnight 31 October 2009, and enclosing an interim contract for negotiations should the hospital wish to continue an on call doctor arrangement. In other words, the doctors were threatening to withdraw their services unless a new payment arrangement was agreed to by the hospital. The ACCC commenced an investigation due to concerns that the doctors had breached the TPA by engaging in a prohibited boycott. Although they all operated from the same medical clinic the doctors were competitors. At the conclusion of the investigation in 2010 the ACCC was satisfied that its concerns could be addressed by undertakings to the ACCC. Each of the five doctors gave an undertaking to the ACCC that they would not, in the future, come to an arrangement or understanding with one or more of their associates to withdraw services from the Kangaroo Island hospital. Source: Australian Competition and Consumer Commission, ‘Doctors risk breaching competition laws’ (Media Release, MR 038/10, 5 March 2010) http://www.accc.gov.au/media-release/doctors-risk-breaching-competition-laws.

Exclusive dealing CCA s 47 prohibits a business from engaging in exclusive dealing. This occurs when a business imposes restrictions on another person’s freedom to choose with whom, in what amount, or where they buy products. If Johnny supplies his product on the condition that the purchaser does not purchase the product of one of his competitors, or on the condition that they not sell his product to a particular type of customer, Johnny engages in exclusive dealing. There are two types of exclusive dealing: full line forcing and third line forcing. Full line forcing

A business engages in full line forcing when it refuses to supply its product unless the buyer agrees: •• not to buy products of a particular kind or description from a competitor, •• not to resupply products of a particular kind or description acquired from a competitor, or •• not to resupply its product to a particular place or class of place. A full line forcing arrangement is only prohibited if it has the effect of substantially lessening competition in the relevant market. TPC v Massey Ferguson (Australia) Ltd (1983) 67 FLR 364

Massey Ferguson (Australia) Pty Ltd (MF) offered to supply tractors to a dealer on the condition that the dealer not stock a competitor’s products. In addition, MF twice refused to supply dealers because they had either bought elsewhere or had not agreed not to. The court decided that the relevant market was the wholesale supply of tractors in Australia, and that MF’s conduct had the likely effect of substantially lessening competition in that market. MF was fined $40  000.

452  PART 2 Legal consequences

LAW IN CONTEXT: LAW AND TECHNOLOGY

Federal Court finds Warner Music, Universal Music had misused their market power, engaged in exclusive dealing to prevent parallel imports of CDs In 1998 the ACCC conducted an investigation into the conduct of Warner Music and Universal Music after allegations that the companies had threatened to withdraw significant trading benefits from retailers who stocked competitively priced parallel imports of CDs, and had cut off supply to retailers who stocked parallel imports. In September 1999 the ACCC instituted proceedings against Warner Music and Universal Music alleging that the action taken by the companies contravened the exclusive dealing and misuse of market power sections of the Act, by taking advantage of their market power to deter retailers from engaging in competitive conduct. In 2001 the Federal Court decided that Warner Music and Universal Music had engaged in the alleged misuse of market power and exclusive dealing. The companies were found to have had a ‘substantial degree of market power in the recorded music wholesale market for recorded music, which is an essential element for establishing a contravention of s 46’. Source: Australian Competition and Consumer Commission, ‘Federal Court Finds Warner Music, Universal Music Had Misused Their Market Power, Engaged in Exclusive Dealing to Prevent Parallel Imports of CDs’ (Media Release, MR 314/01, 14 December 2001) http://www.accc.gov.au/media-release/federal-court-finds-warner-music-universal-musichad-misused-their-market-power.

The CCA does not, however, give buyers an absolute right to be supplied whatever the circumstances. Whether or not a refusal by Johnny to deal with a particular buyer is a contravention of the Act depends on the effect the refusal has or would have on a market. It is still legal to refuse supply for a variety of reasons. For example, Johnny might believe the buyer to be a bad credit risk, an incompetent business person or simply an unpleasant individual to deal with. Provided that his reasons for refusing to supply are legitimate commercial reasons, there is no contravention of the CCA. Third line forcing

Third line forcing is prohibited as a form of exclusive dealing: CCA s 47(6). It occurs when a business makes the supply of its product to a customer conditional upon the customer also purchasing the product of another business. Prior to 2007 third line forcing was prohibited outright; it is now prohibited if it has the effect of substantially lessening competition in the relevant market. LAW IN CONTEXT: LAW IN THE MEDIA

Warning to travel industry on advertising, third line forcing In 1996 ACCC investigations revealed that WA travel company Cannon Investments Pty Ltd, trading as Travelshop, offered flights to London on the condition that prospective passengers also acquired travel insurance from nominated insurance companies. Additionally, the prices at which the flights were advertised did not include the additional costs associated with the travel insurance. Travelshop acknowledged that it may have engaged in third line forcing. It gave a legally enforceable undertaking that it would: • cease applying conditions to its travel services which may constitute third line forcing and, in future, refrain from representing, in advertising or by any other means, that consumers are required to obtain travel insurance from another supplier in relation to any flights or other services being offered by Travelshop, • withdraw its current advertising and in future ensure that full details are provided in its advertising of all conditions applicable to any offer being made by it, • publish corrective advertising in each newspaper and publication in which the current advertising originally appeared, and • institute a trade practices compliance/training program within the company. Source:Australian Competition and Consumer Commission, ‘Warning to Travel Industry on Advertising, Third Line Forcing’ (Media Release, MR 154/96, 14 November 1996) http://www.accc.gov.au/media-release/warning-to-travelindustry-on-advertising-third-line-forcing.

CHAPTER 12 Dealing with competitors  453

CHECKLIST

A business will have engaged in third line forcing if all of the following requirements are satisfied. ◼◼ There is one product that the purchaser desires and another product is forced upon them. ◼◼ The business ‘forces’ the product of a third party onto the purchaser. ◼◼ The purchaser will not gain the desired product without also being required to obtain the product of the third party.

ACTIVIT Y 12.7 — REFLECT

It is not uncommon for two businesses to have a relationship where they support each other and recommend each other’s products. What practical precautions can they take to ensure that they do not engage in third line forcing?

Mergers and acquisitions A merger occurs when two or more organisations combine to form a single organisation. An acquisition occurs when one organisation acquires ownership of, or purchases the assets of, another organisation. Mergers and acquisitions allow organisations to create economies of scale and spread risk, and are good for the overall economy to the extent that they provide a mechanism by which poorly performing organisations are replaced by better performing ones. However, in some cases, mergers and acquisitions can have an anti-competitive effect by discouraging competitive conduct and by reducing the number of competitors in a market. The CCA prohibits mergers and acquisitions that have, or would be likely to have, an anti-competitive effect. According to CCA s 50, a business is not permitted to merge with or acquire ownership of another business or purchase the assets of another business if by doing so it will have the effect of substantially lessening competition in a market. Section 50A extends the prohibition to mergers and acquisitions taking place outside of Australia. In deciding whether the merger or acquisition has the effect of substantially lessening competition, the court will consider: •• the actual and potential level of import competition in the market, •• the height of barriers to entry to the market, •• the level of concentration in the market, •• the degree of countervailing power in the market, •• the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins, •• the extent to which substitutes are available in the market or are likely to be available in the market, •• the dynamic characteristics of the market, including growth, innovation and product differentiation, •• the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor, and •• the nature and extent of vertical integration in the market: CCA s 50(3). When businesses are considering a merger it is usually appropriate to have the merger assessed in terms of its potential impact upon competition. There is no legislative requirement that the businesses notify the ACCC of the proposed merger, and they have the option of proceeding with a merger without seeking any regulatory consideration. However, this may put them at risk of legal action. ACTIVIT Y 12.8 — RESEARCH

Download the Formal Merger Process Guidelines from www.accc.gov.au. What is a ‘merger clearance’ and how is one obtained?

454  PART 2 Legal consequences

Where the ACCC has identified concerns with a proposed merger or asset sale, the businesses might decide to offer certain undertakings to the ACCC to address the competition concerns: CCA s 87B. If the ACCC decides to accept the undertakings and the businesses subsequently breach the undertakings the ACCC can seek a range of possible orders from the Federal Court, including: •• an order that the businesses comply with the undertaking, •• an order that they give up any financial benefit they gained from the breach, and/or •• an order that they pay compensation for any other loss or damage as a result of the breach.

Agreements that lessen competition In addition to the above prohibitions, a business is not permitted to make a contract or arrangement, or arrive at an understanding, that has the purpose or effect of substantially lessening competition: CCA s 45(2). Nor is it permitted to give a covenant or require the giving of a covenant that has the purpose or effect of substantially lessening competition: CCA s 45B(2). In other words, a business cannot make a deal with one or more of its competitors that is intended to or is likely to substantially reduce competition in the particular market or in any other market. LAW IN CONTEXT: LAW IN THE MEDIA

ACCC welcomes changes to eBay payment policies The terms for the use of eBay set out on ebay.com.au obliged sellers to offer PayPal as a payment option. The ACCC investigated complaints that this conduct by eBay had the effect of, or was likely to have the effect of, substantially lessening competition in contravention of the TPA. In May 2010 eBay announced that it would change the ebay.com.au website to remove the requirement that sellers offer PayPal as a payment option. The ACCC responded by welcoming the action by eBay and discontinuing its investigation. Source: Australian Competition and Consumer Commission, ‘ACCC Welcomes Changes to eBay Payment Policies’ (Media Release, MR 099/10, 13 May 2010) http://www.accc.gov.au/media-release/accc-welcomes-changes-to-ebaypayment-policies.

As was the case with price-fixing arrangements, in establishing a breach of these provisions it does not need to be shown that the business has finalised a formal agreement. It is sufficient to show that it has reached an ‘arrangement or understanding’. 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.10

Of course, in the absence of a formal agreement, evidence of such an arrangement or understanding may be difficult to find. Sometimes the ACCC is provided with direct evidence of an arrangement or understanding by a ‘whistleblower’. For example, in one case evidence of price fixing was provided by an employee who took detailed notes of the relevant company policy.11 In the absence of direct evidence of an arrangement or understanding, the existence of an arrangement or understanding may be established by indirect or circumstantial evidence, such as evidence of parallel conduct, similar pricing structures, or opportunities for the parties to reach an understanding. ACTIVIT Y 12.9 — REFLECT

In the absence of documentation, how might the ACCC prove the existence of an arrangement or understanding between Johnny and his competitors?

10 TPC v Email Ltd (1980) 31 ALR 53, 56. 11 Allied Mills Industries Pty Ltd v TPC (No 1) (1981) 34 ALR 105.

CHAPTER 12 Dealing with competitors  455

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 12.11 What is a ‘cartel’? What is ‘cartel conduct’? 12.12 What is ‘price fixing’? Give an example. 12.13 What is the difference between price fixing and price leadership? 12.14 What is ‘misuse of market power’? 12.15 How does the court determine the extent of market power? 12.16 What is ‘predatory pricing’? Give an example. 12.17 What is ‘resale price maintenance’? Give an example. 12.18 What is the difference between resale price maintenance and price fixing? 12.19 What is a ‘boycott’? 12.20 What is an ‘exclusionary provision’? Give an example. 12.21 What is the difference between a primary boycott and a secondary boycott? 12.22 What kinds of secondary boycott will not breach the CCA? 12.23 What is ‘exclusive dealing’? Give an example. 12.24 What is the difference between full line forcing and third line forcing? 12.25 What are ‘mergers’ and ‘acquisitions’ and why do they occur? 12.26 What kinds of mergers and acquisitions are prohibited by CCA Part IV? 12.27 What kinds of agreements are prohibited by CCA s 45(2)? 12.28 What is the difference between an ‘agreement’ and an ‘arrangement or understanding’?

12.4 Consequences of breach LEARNING OBJECTIVE 12.4 When is anti-competitive conduct permitted?

In this section we consider the consequences of a business contravening Part IV of the CCA.

Remedies If a contravention of Part IV is established, the Federal Court can grant a number of possible remedies, including: •• a fine: CCA s 76, •• an injunction: CCA s 80, •• a divestiture order in the case of a prohibited merger: CCA s 81, •• an action for damages: CCA s 82, •• a corrective advertising order: CCA s 86C, •• an adverse publicity order: CCA s 86D, •• enforcement of a written undertaking given to the ACCC: CCA s 87B, and/or •• a declaration: CCA s 163A. Part IV of the CCA can be enforced by a competitor, a supplier, a franchisee, a customer or a consumer. Part IV can also be enforced by the ACCC. In practice the ACCC will only take action if it is of the view that it is necessary to do so in the public interest. (The ACCC receives tens of thousands of complaints each year, and cannot pursue all of them.) Rather than commence legal proceedings, the ACCC may choose to accept an undertaking (which is enforceable in the court) not to repeat the conduct, to make good any losses, or to perform some kind of community service.

Penalties If the court decides that a business has: •• contravened a provision of Part IV, •• attempted to contravene such a provision, 456  PART 2 Legal consequences

•• aided, abetted, counselled or procured a person to contravene such a provision, •• induced, or attempted to induce, a person, whether by threats or promises or otherwise, to contravene such a provision, •• been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision, or •• conspired with others to contravene such a provision. The court may order the business to pay a fine in respect of each contravention as the court determines to be appropriate having regard to all relevant matters, including: •• the nature and extent of the contravention and of any loss or damage suffered as a result of the contravention. •• the circumstances in which the contravention took place, and •• whether the business has previously been found to have engaged in any similar conduct: CCA s 76. If the business is a corporation, the maximum fine will usually be the greatest of: •• $10 million, •• three times the value of the benefit that the business has obtained directly or indirectly as a result of the contravention, and •• 10% of the annual turnover of the business, if the Court cannot determine the value of that benefit. If the business is not a corporation, the maximum fine is $500  000. ACCC v Telstra Corp Ltd (2010) 188 FCR 238

Telstra admitted to engaging in anti-competitive conduct in the form of multiple breaches of its obligation under the Telecommunications Act 1997 (Cth) to permit access by competing telecommunications companies to its networks. It also admitted to making misleading representations about its facilities’ capacity to accommodate the access seekers. The Federal Court imposed a fine of $18.5 million. In calculating the fine, the court took into account a range of factors including the following in Telstra’s favour: • There was no proof of a deliberate decision to engage in anti-competitive conduct. • The various failures in communication, training, and management had been addressed by Telstra. • Telstra had cooperated, accepted responsibility for the breaches, and admitted liability in court. • The ACCC could not prove that Telstra’s actions had caused any actual loss to the access seekers. • The refusals to grant access were about 0.5 per cent of all the access requests received at that time. The court also took into account the following: • Telstra had shown no remorse for its actions. • The purpose of the legislation was to protect consumers, and general and specific deterrence was needed for this protection. • Telstra had many years to get its systems in order, but took no steps to develop a culture of compliance with its access obligations.

The fines payable for breach of Part IV are civil rather than criminal penalties. This means that liability is determined using the civil standard of proof (the balance of probabilities) rather than the criminal standard of proof (beyond all reasonable doubt). ACTIVIT Y 12.10 — REFLECT

Explain why the fines for breaching Part IV of the CCA are so large.

Authorisations and notifications If a business wishes to engage in conduct or enter into an arrangement that is likely to be considered to be anti-competitive in contravention of Part IV of the CCA, it may nevertheless be able to do so if it has the approval of the ACCC. CHAPTER 12 Dealing with competitors  457

The authorisation and notification processes in the CCA allow the ACCC to permit anti-competitive conduct on public benefit grounds.

Authorisation The ACCC can authorise conduct that would otherwise be considered to be: •• an agreement that lessens competition, •• price fixing, •• a prohibited boycott, •• exclusive dealing, •• resale price maintenance, or •• a prohibited merger: CCA s 88. Authorisation is not available for misuse of market power. The ACCC first publishes a draft decision and gives interested parties the opportunity to respond before making its final decision: CCA s 90A. The business can apply to the Australian Competition Tribunal for a review of the ACCC’s decision CCA Part IX.

Notification A business can notify the ACCC of proposed exclusive dealing conduct and gain automatic immunity from legal proceedings: CCA s 93. The ACCC can withdraw the immunity if it forms the view that the conduct will substantially lessen competition and is not outweighed by a public benefit, and the immunity ceases 30 days after the ACCC’s decision to withdraw it. LAW IN CONTEXT: LAW IN THE MEDIA

Speedway racing notifications revoked In 2008 the ACCC accepted notifications lodged by Perth Motorplex and Avalon Raceway that they would engage in exclusive dealing by only allowing drivers and pit crew to access racing track facilities if they held a licence from the National Association of Speedway Racing (NASR). In August 2010, however, the ACCC decided that the balance of public benefits and public detriments had changed since it initially allowed the notified conduct. As a result of the notifications, speedway associations that issued licences in competition with NASR were only able to host events at Perth and Avalon if their drivers also obtained a NASR licence. This reduced the attractiveness of competing licensing bodies and reduced their ability to expand their membership. The ACCC decided that the restriction of access to particular licence holders was anti-competitive and entrenched NASR’s position as a licence provider to the detriment of alternate licensing bodies, and revoked the notifications. Source: Australian Competition and Consumer Commission, ‘Speedway Racing Notifications Revoked’ (Media Release, MR 169/10, 19 August 2010) http://www.accc.gov.au/media-release/speedway-racing-notifications-revoked.

The business can apply to the Australian Competition Tribunal for a review of the ACCC’s decision: CCA Part IX.

Public benefit and public detriment The CCA contains two different tests for authorising anti-competitive conduct: CCA s 90. Unless the ACCC is satisfied in all circumstances that the agreement or conduct is likely to result in a public benefit that outweighs the likely public detriment constituted by any lessening of competition, it will not grant authorisation for: •• proposed or existing agreements that might substantially lessen competition, or •• proposed exclusive dealing (other than third line forcing). 458  PART 2 Legal consequences

Unless the ACCC is satisfied in all the circumstances that the proposed conduct is likely to result in such a benefit to the public that the conduct should be permitted, it will not grant authorisation for: •• primary boycotts, •• secondary boycotts, •• third line forcing, or •• resale price maintenance. ‘Public benefit’ and ‘public detriment’ are not defined in the CCA. The Trade Practices Tribunal has stated that ‘public benefit’ includes ‘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’.12 The Australian Competition Tribunal has said of public benefits that: .  .  .  they have been taken to include anything which  .  .  .  increases  .  .  .  the well-being of members of society  .  .  .  Particular emphasis is placed on positive  .  .  .  consequences for the achievement of the goal of maximising economic efficiency (including dynamic efficiency leading to economic progress).13

The Trade Practices Competition Tribunal has defined ‘public detriment’ as: .  .  .  any impairment to the community generally, any harm or damage to the aims pursued by the society including as one of its principal elements the achievement of the goal of economic efficiency.14

Public detriment is essentially the opposite of public benefit. ACTIVIT Y 12.11 — REFLECT

List as many ‘public benefits’ as you can that might justify authorising anti-competitive agreements.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 12.29 Who enforces Part IV of the CCA? 12.30 What remedies are able to be granted by the court in the event of contravention of CCA Part IV? 12.31 Apart from an actual contravention of CCA Part IV, what other actions can lead to the imposition of a fine by the court? 12.32 What is an ‘authorisation’ under CCA Part IV? 12.33 What is a ‘notification’ under CCA Part IV? 12.34 In what circumstances will the ACCC be obliged to assess the public benefit and/or the public detriment arising from particular conduct?

In conclusion •• Competition within markets is protected and promoted because it is widely believed to be good for the consumer and good for the economy. •• Competition in Australia is regulated by Part IV of the Competition and Consumer Act 2010 (Cth).

12 Re Queensland Cooperative Milling Association Ltd (1976) 8 ALR 481. 13 Re VFF Chicken Meat Growers’ Boycott Authorisation [2006] ATPR 42–120. 14 Re 7-Eleven Stores Pty Ltd (1994) ATPR 41–357, 42,683.

CHAPTER 12 Dealing with competitors  459

•• Part IV prohibits a range of anti-competitive conduct, including cartel conduct such as price-fixing; misuse of market power; resale price maintenance; boycotts; exclusive dealing; anti-competitive mergers; and agreements that have the effect of substantially lessening competition. Some forms of conduct are prohibited if they have the effect of substantially lessening competition in a market; others are prohibited per se. •• A business found to be in breach of Part IV can be fined up to $10 million for corporations and $500  000 for individuals. The authorisation and notification processes in the CCA allow the ACCC to permit anti-competitive conduct on public benefit grounds. JOHNNY AND ASH

[Ash and Johnny are still at the restaurant. Johnny looks devastated.] Johnny — So you think our deal with the other restaurant owners is a bad idea? Ash — There are strict rules against the making of agreements to work together to fix prices or reduce the level of competition within a market. Even if your agreement isn’t formalised, the reaching of an informal understanding is still going to be a breach of Part IV of the Competition and Consumer Act. Johnny — And this time the fine could be up to TEN MILLION DOLLARS! Things may be tough at the moment on Kerouac Avenue, but a $10 million fine certainly isn’t going to make things any easier. And  .  .  .  [He pauses.] Ash — And? Johnny — And regardless of the potential fines, I don’t want to participate in any of Maria’s schemes or make secret deals with my competitors. It feels like cheating, and I’m starting to realise that I would rather succeed in business as a result of my own efforts. Ash — Bravo, Johnny. So what are you going to do? Johnny — I think it’s time Maria and I had a little chat. Ash — Okay. Good idea. Johnny — [He takes out his mobile phone and makes a call.] Maria? It’s Johnny. I’m afraid I’ve changed my mind about a few things that we’ve been discussing lately. And we need to talk about my involvement with the restaurant.  .  .

460  PART 2 Legal consequences

QUIZ 1 ‘Freedom of contract’

(a) no longer exists under Australian law. (b) is a traditional principle of contract regulation. (c) means the same as ‘caveat emptor’. (d) informs consumer protection legislation in Australia. 2 An informal understanding between two of the three main suppliers of a product that one supplier will not undercut the other supplier’s prices is (a) price fixing. (b) not price fixing because no specific price is set for the products. (c) not price fixing because there is no formal agreement. (d) not price fixing because only two of the three main suppliers reached the informal understanding. 3 A wholesaler tells a retailer that while the retailer can sell the product at any price, they are not permitted to advertise the product at a discounted price. This is (a) price fixing. (b) resale price maintenance. (c) a secondary boycott. (d) not prohibited under Part IV of the CCA. 4 The managers of three companies agree which company is to be successful in tendering for a particular project. Two companies agree to quote higher prices to ensure that the third company will secure the tender. This is an example of (a) price fixing. (b) misuse of market power. (c) resale price maintenance. (d) third line forcing. 5 What is the difference between a primary boycott and a secondary boycott? (a) A primary boycott is only prohibited if it has the effect of substantially lessening competition; a secondary boycott is prohibited per se. (b) A primary boycott is a boycott by more than one business; a secondary boycott is a boycott by a single business. (c) A primary boycott is a boycott that targets more than one business; a secondary boycott is a boycott that targets a single business. (d) A primary boycott is a direct boycott of a business; a secondary boycott is the application of pressure on a business to boycott another business. 6 Which of the following statements is not true? (a) The prohibition of exclusive dealing applies to both goods and services. (b) An agreement that has the effect of substantially lessening competition in that market cannot be authorised by the ACCC. (c) If an agreement is intended to have the effect of substantially lessening competition, it is illegal even if there are a number of other purposes. (d) The process of notification can protect a business from ACCC action for exclusive dealing. 7 Which of the following is illegal only when the conduct would have the effect of substantially lessening competition? (a) Resale price maintenance. (b) Exclusive dealing. (c) Misuse of market power. (d) Price fixing. CHAPTER 12 Dealing with competitors  461

 8 Which of the following cannot be authorised by the ACCC?

(a) Exclusive dealing. (b) Price fixing. (c) A prohibited merger. (d) Misuse of market power.  9 A business will gain immunity from legal proceedings under the CCA upon notification to the ACCC of proposed (a) exclusive dealing. (b) price fixing. (c) prohibited merger. (d) misuse of market power. 10 The court cannot impose a fine upon a person who has merely (a) attempted to breach CCA Part IV. (b) counselled another to breach CCA Part IV. (c) attempted to induce another to breach CCA Part IV. (d) none of the above.

EXERCISES EXERCISE 12.1 — PRICE FIXING

At the meeting of the Kerouac Street restaurant owners, the owners agree in principle that Wednesday night will be ‘discount night’ in the street, and no owner will be permitted to have a discount night or half-price night on any other night of the week. The owners do not put the agreement in writing. Is the arrangement between the restaurant owners prohibited by Part IV of the CCA? EXERCISE 12.2 — EXCLUSIVE DEALING

Johnny buys the organic falafel used in his restaurant from Idoru Ltd. When Johnny complains to Idoru about a recent price increase, Idoru offers Johnny a special deal: Johnny will only have to pay $6 per kilo for organic falafel for the next 12 months, but he must commit to buying all of his organic fruit from Burning Chrome Farms. Idoru does not receive any commission from the Burning Chrome sales, and Johnny is the only restaurant owner to be given such an arrangement. (a) Is this arrangement prohibited by Part IV of the CCA? (b) Would your answer be different if the arrangement was that Johnny would buy all of his organic fruit from Idoru? (c) If either arrangement is prohibited, could authorisation be sought from the ACCC? How? EXERCISE 12.3 — MISUSE OF MARKET POWER

Before deciding whether or not to commit to the arrangement described in the previous question, Johnny decides to explore his options and discovers that a small Northern Territory supplier of organic falafel, Monalisa Overdrive, is keen to enter the Queensland market. Monalisa Overdrive offers to sell falafel to Johnny for only $5.50 per kilo. When Idoru learns of Monalisa Overdrive’s plans, Idoru announces that it will be selling falafel in Queensland and in the Northern Territory for only $3.00 per kilo. Monalisa Overdrive Pty Ltd, being only a small operation, cannot compete with the lower price. Is Idoru in breach of Part IV of the CCA? EXERCISE 12.4 — BOYCOTTS

Johnny is concerned that if he does not participate in the new arrangement between the Kerouac Street restaurant owners, the other owners will work together to make life difficult for him. In particular, he is concerned that the other owners will put pressure on Idoru not to deal with him. If the other owners did apply such pressure, would it be a breach of Part IV of the CCA? 462  PART 2 Legal consequences

EXERCISE 12.5 — MERGERS

Idoru sells 90 per cent of all organic falafel sold in Queensland. Idoru also sells 40 per cent of the organic falafel in New South Wales and 30 per cent of the organic falafel in Victoria. A competing supplier, Count Zero Ltd, holds 30 per cent of the New South Wales market and 15 per cent of the Victoria market. Idoru proposes to merge with Count Zero. (a) What problems, if any, do you see with this merger? (b) Do you think that this merger would be legal under the CCA? (c) What if, pursuant to CCA s 87B, Idoru offers a written undertaking to the ACCC to sell its current New South Wales operations to another entity? (d) What if Idoru subsequently breached this undertaking?

KEY TERMS acquisition  The purchase by one organisation of another organisation, or of all of the assets in another organisation. authorisation  An administrative procedure whereby the ACCC authorises on public benefit grounds conduct that would otherwise be a contravention of the CCA. boycott  An action by an individual or group that prevents or is intended to prevent another individual or group from buying or selling products in a market. cartel  A contract, arrangement or understanding between two or more competitors that lessens competition by fixing prices, controlling outputs, rigging bids or allocating customers, suppliers or territories. competition  Rivalrous market behaviour. conditional offences  Conduct only prohibited by CCA Part IV if it leads to a substantial lessening of competition in the relevant market. exclusionary provision  A provision in an agreement between competitors intended to prevent, restrict or limit the supply of products to, or the acquisition of products from, a particular person or class of persons. exclusive dealing  The practice of imposing restrictions on a buyer’s freedom to choose with whom, in what amount, or where they buy products. full line forcing  The practice of refusing to supply a product unless the buyer agrees not to buy products of a particular kind or description from a competitor. loss leading  The practice of selling a product at less than cost in order to attract customers. merger  The voluntary combination of two or more organisations into a single organisation. notification  An administrative procedure whereby an organisation notifies the ACCC about exclusive dealing conduct that would otherwise be a contravention of the CCA and attains immunity from legal proceedings. parallel importing  The practice of importing products into Australia that were legally made overseas but without the consent of the local owner or licensee of the copyright or registered design. per se offences  Conduct so obviously anti-competitive that it is prohibited outright by CCA Part IV. predatory pricing  Charging an unrealistically low price for a product to force a competitor out of the market. price fixing  Fixing, controlling or maintaining the price for, or a discount, allowance, rebate or credit in relation to, goods or services. resale price maintenance  A practice whereby the supplier of a product imposes a minimum price below which the product cannot be resold. third line forcing  The practice of supplying a product to a customer conditional upon the customer also purchasing the product of another business. TPC (Trade Practices Commission)  The statutory authority formerly responsible for administration of the TPA, replaced by the ACCC. CHAPTER 12 Dealing with competitors  463

ACKNOWLEDGEMENTS Extract: © Commonwealth of Australia, Attorney-General’s Department extract from Re Queensland Co-operative Milling Association Ltd 1976 25 FLR 169, 189. Extracts: © Commonwealth of Australia Extract: © Commonwealth of Australia, Attorney-General’s Department extract from Annand & Thompson Pty Ltd v TPC (1979) 25 ALR 91; [1979] FCA 36

QUIZ ANSWERS

1. b  2. a  3. b  4. a  5. d  6. b  7. b  8. d  9. a  10. d 464  PART 2 Legal consequences

CHAPTER 13

Protecting IP LEA RNIN G OBJE CTIVE S 13.1 How does the law protect the intangible results of creative effort? What types of intellectual property are protected by IP law? 13.2 How does copyright law protect original texts, images and other forms of expression from unauthorised copying? When is copyright infringed and what can be done about it? 13.3 How does trade mark law protect a trade mark from unauthorised use? When are trade mark rights infringed and what can be done about it? If a trade mark is not registered, is it still protected? 13.4 How does patent law protect new technology from unauthorised exploitation? When is a patent infringed and what can be done about it? 13.5 How does design law protect an original design from unauthorised use? When is a registered design infringed and what can be done about it? 13.6 How can a business stop someone from breaching its confidentiality and disclosing its trade secrets?

JOHNNY AND ASH

[Johnny and Ash are sitting on a couch in Johnny’s untidy apartment, watching television. There is a laptop on the floor near the couch.] Ash — I can’t believe Maria threw you out of your own restaurant. Johnny — I know! Just because I told her again that I was thinking about selling up or shutting it down. Well, at least I’ve got the night off. Ash — Yeah. [She looks at her watch.] We’re not going out to dinner, are we? Johnny — [He yawns and stretches.] Do you want to order some takeaway food instead? Ash — [She rolls her eyes and sighs.] Okay. I’ll order it from that other vegan place you like, the one with the new website. What’s it called? ‘Simulacra’? I haven’t tried their food yet. [She picks up the laptop and starts clicking.]  .  .  .  Hey! Johnny — ‘Hey’ what? Ash — Hey, I’m looking at the menu on the Simulacra website and they’ve got a tofu burger that looks just like your tofu burger. They’ve even called it the ‘lame duck’ burger  .  .  .  Johnny — What? The chef in their kitchen used to work at The Lame Duck but I sacked him when I bought the place. I knew he was copying some of my old recipes, but I can’t believe he has copied my tofu burger. Ash — Not just your burger Johnny. It looks like they’ve copied pretty much everything on your menu. Even the descriptions of the dishes are the same as your descriptions  .  .  .  ‘Lentil and beetroot calzone: boiled organic lentils blended with beetroot jam and raisins, folded into a light and flaky wholemeal pizza base and smothered in creamy guacamole’  .  .  .  I never thought I’d see that description anywhere else  .  .  .  Johnny — What! That’s our best seller. I’m famous for my lentil and beetroot calzone! This is so unfair! It’s exactly what I was saying about our stupid legal system! Ash — What on earth do you mean? Johnny — I’ve been robbed, but there’s nothing I can do. If someone had broken into the restaurant and stolen the tables and chairs I could complain to the police, but because they’ve stolen the results of my hard work and creativity and not something physical, it doesn’t count and I just have to put up with it. Ash — Actually  .  .  .  Johnny — [Ignoring her.] It’s just another example of the way the law completely fails to be of any relevance to modern business. It’s a bunch of rules made when most business people were farmers selling pumpkins. Ash — Well, that’s just not true  .  .  .  Johnny — What about those of us living in the 21st century? Where are the rules to protect the artists, the creators, the digital pioneers who  .  .  .  Ash — SHUT! UP! Johnny — [Stunned silence.] Ash — Right. Now, let me tell you something about intellectual property law  .  .  . 

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Johnny has any right to prevent ­Simulacra from using his ideas to sell their own products.

466  PART 2 Legal consequences

Introduction In the past, most businesses made their profits from the manufacture and sale of tangible products, such as food, clothes, furniture and machinery. Previous chapters have described the legal regulation of the manufacture and sale of these types of products. In the 21st century, however, many businesses make their profits from the creation and licensing of intangible products, such as software, games, movies, music, manufacturing processes, and marketing and sales techniques. And even those businesses that still manufacture and sell tangible products frequently place as much emphasis — if not more emphasis — upon the intangible brand as they do upon the tangible product. When a customer pays $1000 for a pair of jeans, for instance, how much is for the jeans and how much is for the brand? Brands and other such intangible products are usually referred to as intellectual property or IP. IP is a form of intangible creation such as the expression of an idea, a trade mark, a new technology or an original design. It is a product of intellectual effort rather than a physical manufacturing process. IP is a valuable commercial asset. In this chapter we explore the intricacies of intellectual property law. Intellectual property law is the set of legal rules that protect IP from unauthorised use and exploitation by others.

13.1 Intellectual property law LEARNING OBJECTIVE 13.1 How does the law protect the intangible results of creative effort? What types of intellectual property are protected by IP law?

Intellectual property law grants the owner of IP the right to prevent others from copying, using or exploiting their IP without their permission. Many types of IP are protected by intellectual property law (see figure 13.1). These types of product are usually referred to collectively as ‘intellectual property’. Sometimes, however, the term ‘intellectual property’ is used to refer only to those products protected by the law of copyright, and the other types of product are referred to collectively as ‘industrial property’. In this text, the terms ‘intellectual property’ and ‘IP’ are given their broader, more inclusive meaning. Copyright law protects text, images and other forms of expression Trade mark law protects distinctive words, phrases and symbols

Intellectual property law

Patent law protects new technologies

Design law protects the shape and appearance of products The tort of breach of confidence protects commercial secrets FIGURE 13.1

Types of IP protection

CHAPTER 13 Protecting IP  467

Intellectual property law can be a complicated and confusing area of law because the rules protecting the various categories of IP developed at different times and in different contexts, and have different organising principles. There are overlaps between the categories and there are gaps between them. Software, for example, is protected under both copyright law and patent law, while ideas that have not been reduced to material expression are often not protected at all. Copyright protection is automatic, while other types of IP rights are not enforceable unless the creation has been formally registered with the appropriate legislative authority. Trade mark protection can be renewed indefinitely, while copyright, design and patent protection exist for a limited time after which the protection lapses. There are as many differences between the categories as there are similarities. CAUTION!

A particular creation may be protected by more than one form of intellectual property protection.

A single product may be protected by multiple categories of IP rights. Consider a can of soft drink, for example. •• The name of the product may be protected by trade mark law. •• The manufacturing method may be protected by patent law. •• The recipe for the soft drink may be protected as a commercial secret. •• The packaging may be protected by design law. •• The writing on the packaging may be protected by copyright law. When intellectual property rights have expired, and the IP in question can be copied or exploited by others without penalty, the IP is said to have entered the public domain. ACTIVIT Y 13.1 — REFLECT

Why do most forms of IP eventually enter the public domain?

Rationale for protection There are two types of justification for the protection of IP rights: economic justifications and moral justifications. In Australia and in other common law legal systems the emphasis has traditionally been upon the economic justifications: innovators are given protection by IP law and granted financially valuable legal rights because they have invested time and effort into creating something of commercial value. Further, protecting IP motivates others to be innovative, and this is ultimately of economic benefit to the community. Widespread innovation would be less likely if innovators were not granted a monopoly over the exploitation of the results of their efforts. Moral justifications for IP protection form the basis of IP law in civil law legal systems. Innovators are given protection by IP law because they are morally deserving in their own right as a consequence of their efforts, regardless of the commercial value of their efforts. In recent years, Australia has begun to recognise the moral basis of IP protection, and this is reflected in the moral rights recognised by the Copyright Act, described later.

Commercialising IP Intellectual property law grants the owner of the IP the exclusive right to exploit the IP for a profit. This includes the right to license the IP. This means that in return for a fee (usually referred to as ‘royalties’ or ‘licence fees’) the owner permits others to exercise their exclusive rights in relation to the IP. They can 468  PART 2 Legal consequences

license all of their exclusive rights or only some of them; for example, they may permit another person to copy their creation but not to publish it. The IP owner can also impose other restrictions, such as: •• where the rights can be exercised (e.g. in some countries but not in others), •• the time period within which the rights can be exercised, and •• how many copies can be made or how often the rights can be exercised. LAW IN CONTEXT: LAW IN PRACTICE

International commercialisation IP Australia suggests that a business person considering international expansion ask themselves the following questions. • Would I generate the best returns by establishing my product in Australia first, or should I approach the Australian and world markets at the same time? • Should I manufacture my product in Australia and distribute it to other countries, or outsource ­production in another country? • Do I have the manufacturing and distribution capabilities to supply to countries outside Australia? • Do I have the marketing and promotion networks to successfully commercialise in other countries? • Do I have the resources to successfully commercialise outside Australia? • Will I need financial support and do I have the track record and security to generate that finance?1

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 13.1 What are five types of IP protected by IP law? 13.2 Why is IP law ‘complicated and confusing’? 13.3 What is the ‘public domain’? 13.4 What are the two types of justification for the protection of IP rights? 13.5 How can ownership of IP be exploited commercially?

13.2 Copyright LEARNING OBJECTIVE 13.2 How does copyright law protect original texts, images and other forms of expression from unauthorised copying? When is copyright infringed and what can be done about it?

Text, images and other forms of expression such as computer programs, films, television programs and music are protected from unauthorised copying by the law of copyright.

What is copyright? Copyright is the legal right to prevent unauthorised copying of the expression of an idea. The law of copyright does not protect the idea itself, only the expression of that idea. If Johnny tells Simon about an idea and Simon then exploits that idea himself, Simon has not infringed Johnny’s copyright. However, if Johnny writes his idea down and Simon copies the expression of that idea without Johnny’s permission, Simon has infringed Johnny’s copyright and Johnny will be entitled to a remedy.

1 IP Australia, Commercialise Internationally (2015) .

CHAPTER 13 Protecting IP  469

Copyright in Australia is regulated by the Copyright Act 1968 (Cth). ACTIVIT Y 13.2 — REFLECT

How can technology be used to (a) infringe copyright, and (b) protect copyright?

Requirements for copyright protection To be protected under the law of copyright, a creation must be (1) a ‘work’ or ‘subject matter other than works’ as defined in the Copyright Act 1968 (Cth), (2) original, and (3) expressed in a material form. CHECKLIST

A creation will only be protected by copyright law if all of the following requirements are satisfied. ◼◼ The creation is a ‘work’ or ‘subject matter other than works’. ◼◼ The creation is original. ◼◼ The creation is expressed in a material form.

Requirement 1: The creation is a ‘work’ or ‘subject matter other than works’ The Copyright Act extends protection to four types of ‘work’: •• literary works, •• musical works, •• dramatic works, and •• artistic works.2 The Act also extends protection to four types of ‘subject-matter other than works’: •• sound recordings,3 •• films,4 •• television and sound broadcasts,5 and •• published editions.6 A creation will not necessarily fall within a single category. It may be a combination of different types of protected works and subject matter. For example, a website will be a combination of literary and artistic works, and possibly films and sound recordings. A pop song will be a combination of literary works (lyrics), musical works and sound recordings, all of which are separately protected by the law of copyright. Literary works

A ‘literary work’ is not necessarily literature. It is any expression of an idea in the form of text, such as a novel, a journal article, a screenplay, a poem, a letter, an email, a print advertisement, a set of instructions, a timetable, a contract, or the lyrics of a song. ‘Literary work’ is defined in the Copyright Act 1968 (Cth) as including ‘a table, or compilation, expressed in words, figures or symbols; and a computer program or compilation of computer programs’.7 You will note that this is an ‘inclusive’ definition rather than a ‘comprehensive’ definition: see an earlier chapter. 2 Copyright Act 1968 (Cth) s 32. 3 Copyright Act 1968 (Cth) s 89. 4 Copyright Act 1968 (Cth) s 90. 5 Copyright Act 1968 (Cth) s 91. 6 Copyright Act 1968 (Cth) s 92. 7 Copyright Act 1968 (Cth) s 10.

470  PART 2 Legal consequences

Mirror Newspapers Ltd v Queensland Newspapers Pty Ltd [1982] Qd R 305

The court decided that a list of winning bingo numbers was a ‘literary work’ within the meaning of the Copyright Act, and therefore could not be reproduced without the copyright owner’s permission.

‘Compilations’ include anthologies, directories and databases. They are protected as literary works in their own right, separate from the protection accorded to the individual elements of which they are comprised. Single words, names, titles, slogans and headlines are too short and/or unoriginal to be protected as literary works. They may, however, be protected as trade marks (see below). Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109

Fairfax was the publisher of the national newspaper The Australian Financial Review (AFR). Reed provided an online service known as ‘ABIX’, which provided to subscribers abstracts of articles published in various newspapers and magazines, including articles in the AFR. Each abstract included the headline of the article, usually without alteration, the by-line of the journalist who wrote the article, and a short summary of the article written by an employee of Reed. Fairfax sued Reed, alleging that Reed had infringed its copyright in the individual headlines, and in the articles themselves since the headlines comprised a substantial part of the articles. The court decided that the headlines were not discrete literary works, and that by copying the headlines Reed had not copied a substantial part of the original articles. The court also decided that Reed’s conduct in reproducing and communicating the AFR headlines was ‘fair dealing’ for the purpose of reporting news (see below). Musical works

The term ‘musical work’ is not defined in the Copyright Act, but it is usually understood to refer to a particular combination of notes and sounds. It does not include lyrics or an actual recording of the music, since these are protected separately as ‘literary works’ and ‘sound recordings’ respectively. A & M Records Inc v Napster Inc 239 F 3d 1004 (9th Cir, 2001)

The US court confirmed that ‘peer to peer’ sharing of copyrighted digital music files over the internet is an infringement of the copyright in ‘musical works’. Napster hosted a website that facilitated peer to peer file sharing, and Napster’s facilitation of copyright infringement was decided by the court to itself be an infringement of the rights of the copyright owner (see below). Dramatic works

A ‘dramatic work’ is defined in the Copyright Act 1968 (Cth) as including ‘a choreographic show or other dumb show’ such as a dance routine, and ‘a scenario or script for a  .  .  .  film; but does not include a  .  .  .  film as distinct from the scenario or script’.8 Films are protected separately as a ‘subject-matter’ (see below). Artistic works

An ‘artistic work’ is defined in the Copyright Act as: •• a painting, sculpture, drawing, engraving or photograph, whether the work is of artistic quality or not, •• a building or a model of a building, whether the building or model is of artistic quality or not, or •• a work of artistic craftsmanship.9 Artistic works include distinctive business logos, graphic designs, and the plans for a house. 8 Copyright Act 1968 (Cth) s 10 (definition of ‘dramatic work’). 9 Copyright Act 1968 (Cth) s 10 (definition of ‘artistic work’).

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Clarendon Homes (Aust) Pty Ltd v Henley Arch Pty Ltd (1999) 46 IPR 309

A couple visited a show home designed by Henley Arch, and then instructed Clarendon to build a house according to the same plan. The court decided that an architect’s plan for a house was an ‘artistic work’ within the meaning of the Copyright Act 1968 (Cth), and was therefore protected by copyright law from unauthorised copying.

Most artistic works are protected regardless of their quality. However, if the work is not a ‘painting, sculpture, drawing, engraving or photograph’ or ‘building or a model of a building’, it will only qualify for protection as an artistic work if it is a work of ‘artistic craftsmanship’. According to the court in the following case, a work will only be a work of artistic craftsmanship if the creator of the work ‘was applying his [sic] skill and taste to its production with the main object of creating an article, which even if it be utilitarian, nevertheless will have substantial appeal to the aesthetic tastes of those who observe it’. Cuisenaire v Reed [1963] VR 719

‘Cuisenaire rods’ are small coloured wooden rods of various lengths used to teach maths to children. The court decided that the rods were not ‘artistic works’ within the meaning of the Copyright Act because no skill was involved in their creation and they were not intended to appeal to the aesthetic tastes of others.

Subject matter other than works

The Copyright Act 1968 (Cth) extends copyright protection to sound recordings, films, television and sound (radio) broadcasts, and published editions of original works. Copyright in this subject matter is owned not by the original creator but by the producer of the subject matter, and this kind of protection is therefore sometimes referred to as ‘manufacturer’s copyright’. ‘Sound recordings’ — including, of course, digital songs and other musical recordings — are protected in their own right separately from the protection accorded to the lyrics and the musical arrangement. Similarly, films are protected separately from the script (literary work) upon which they are based, and television and radio broadcasts are protected separately from the content being broadcast. Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273

The Channel Ten program ‘The Panel’ showed 20 segments of Channel Nine programs, which were commented upon by the panel. Channel Nine sued Channel Ten for infringing its copyright in the segments as ‘television broadcasts’. Channel Ten argued that a television broadcast is an entire program or movie, and that many of the items broadcast by Channel Ten were not television broadcasts. The court decided that although a single image appearing on a television screen with audio is not a television broadcast, an individual segment within a television program may qualify as a television broadcast in which copyright subsists.

A ‘published edition’ of original works is a compilation of literary or artistic works, such as a compilation of journal articles or short stories. It also includes the particular published version of a novel or monograph. The published edition is protected by copyright in its own right, separately from the copyright in the literary and artistic work or works of which it is comprised. Thus a person who photocopies a paperback version of Moby Dick will not infringe Herman Melville’s copyright in the novel as a 472  PART 2 Legal consequences

literary work since that expired long ago (see below), but they will infringe the publisher’s copyright in that particular published version of the novel. People’s faces are not protected by copyright, although the unauthorised use of an image of someone’s face may amount to the tort of defamation or the tort of passing off (see an earlier chapter).

Requirement 2: The creation is original The second requirement for copyright protection is that the creation is original.10 This does not mean that the creation must be different to other creations. It means that it must be the result of the creator’s own skill and effort rather than the result of copying from another source. If two creators express the same idea and their respective creations are created independently and without copying, both creations will be protected by copyright. Copyright protection does not give the owner of the copyright the right to stop others creating the same or similar creations where there is no copying. A minimal degree of creativity is required. Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491

Desktop Marketing Systems Pty Ltd (DMS) used the data from Telstra’s telephone directories to create searchable directories on CD-ROMs. The CD-ROMs replicated the layout of Telstra’s directories. The court decided that the telephone directories were protected by copyright as original literary works, even though the level of creativity was minimal; the originality requirement was satisfied by Telstra’s effort and expense in compiling the data. DMS had therefore infringed Telstra’s copyright.

This requirement of originality applies only to literary, dramatic, musical and artistic works. Subject matter other than works — that is, sound recordings, films, television and radio broadcasts, and published editions — do not have to satisfy this requirement of originality, since they are usually adaptations, recordings or republications of literary, dramatic, musical and artistic works.

Requirement 3: The creation is expressed in a material form The third requirement for copyright protection is that the creation is expressed in a material form. As explained earlier, copyright law will not protect an idea, it will only protect the expression of the idea. Facts, information, methods and systems are not protected by copyright unless they are expressed in material form. John Fairfax & Sons Pty Ltd v Australian Consolidated Press Ltd [1960] SR (NSW) 413

The Daily Telegraph copied and published birth and death notices from the Sydney Morning Herald. The Herald obtained an injunction prohibiting the Telegraph from doing so. The Telegraph instead published notices that used the information from the Herald’s notices, but using a different wording and different format. The court decided that the injunction had not been infringed: the Herald only owned copyright in the way the information was expressed — its wording and layout — and not in the information itself.

CAUTION!

Ideas are not protected by copyright. Copyright law protects the expression of ideas, not the ideas themselves.

It is not the originator of an idea who owns the copyright but the person who first expresses the idea in material form. 10 Copyright Act 1968 (Cth) s 32.

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Donoghue v Allied Newspapers Ltd [1938] Ch 106

Donoghue was a jockey who was interviewed by a journalist. The interviews were written up by the journalist and published in a series of newspaper stories. Five years later the journalist wanted to use material from the newspaper stories in a book to be published by Allied Newspapers. Donoghue opposed the use of the material, and claimed ownership of copyright in the interviews. The court decided that copyright in the interviews was owned not by Donoghue but by the original newspaper (as the journalist’s employer at the time). The ideas in the interviews may have been Donoghue’s, but it was the journalist who first expressed them in material form. According to Farwell J: ‘A person may have a brilliant idea for a story, or for a picture, or for a play, and one that appears to him to be original. However, if that idea is told to an author or an artist who produces a work based on that idea the copyright belongs to the author or artist who converted the idea into a finished work. The owner of the idea has no rights in the finished work.’

Under the Copyright Act 1968 (Cth), material form means ‘any form (whether visible or not) of storage’.11 It includes expression in writing, painting, drawing, photography, sound recording or film. It also includes storage as electrical impulses in a computer. ACTIVIT Y 13.3 — REFLECT

Is an idea expressed in material form if it is expressed verbally?

Automatic protection If all three of the above requirements are satisfied, the creation is automatically protected by the Copyright Act 1968 (Cth) upon being expressed in material form. It is not necessary for the creator to register the creation with any authority. They do not have to do anything to obtain copyright protection for their creation. Even though copyright protection is automatic, it is nevertheless a good idea to attach a copyright notice to the work or subject matter. A copyright notice usually consists of the copyright symbol ©, the copyright owner’s name and the date of first publication; for example, ‘© Johnny Bristol 2008’. A copyright notice is not a compulsory requirement for protection, but it does clearly warn others that the creation is protected by copyright. If someone then infringes that copyright, they cannot claim that they did so innocently or unknowingly.

International protection Like most Western countries, Australia is a signatory to the international copyright convention known as the Berne Convention. Under the Berne Convention, a creation protected by copyright in one member country will have the same protection in other member countries. This means that if a creation is protected in Australia under the Copyright Act 1968 (Cth) then under the Berne Convention it will be given the same protection in other countries that are members of the Convention. ACTIVIT Y 13.4 — RESEARCH

Read about the Berne Convention at www.wipo.int. How many countries are contracting parties to the convention?

Extent of copyright protection In this section we describe the exclusive rights of the copyright owner, the duration of protection, and the identity of the owner. 11 Copyright Act 1968 (Cth) s 10 (definition of ‘material form’).

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Exclusive rights of the copyright owner The owner of copyright in a protected work has the exclusive right:12 •• in the case of a literary, dramatic or musical work: –– to reproduce the work in a material form, –– to publish the work, –– to perform the work in public, –– to communicate the work to the public, and –– to make an adaptation of the work, •• in the case of an artistic work: –– to reproduce the work in a material form, –– to publish the work, and –– to communicate the work to the public, •• in the case of a literary work (other than a computer program) or a musical or dramatic work: –– to enter into a commercial rental arrangement in respect of the work reproduced in a sound recording, and •• in the case of a computer program: –– to enter into a commercial rental arrangement in respect of the program. The right to ‘communicate the work to the public’ was inserted into the Act in 2001 as part of a set of reforms intended to update the Act to take into account recent technological innovations. ‘Communicate’ is defined as: .  .  .  make available online or electronically transmit (whether over a path, or a combination of paths, provided by a material substance or otherwise) a work or other subject-matter, including a performance or live performance within the meaning of this Act.13

In other words, the communication right expressly permits the copyright owner to exclusively publish the material online, and to authorise or prevent others from doing so. The Act gives the owners of copyright in sound recordings, films, broadcasts and published editions the exclusive right to make copies of the subject matter. They also have exclusive rights: •• to cause the film or sound recording to be seen or heard in public, •• to communicate the film or sound recording to the public, and •• to rebroadcast the television or radio broadcast.14 If another person exercises any of these exclusive rights without the owner’s permission, they infringe the owner’s copyright. Rank Film Production Ltd v Dodds [1983] 2 NSWLR 553

Dodds was the owner of a motel. He played movies on a video recorder that could be watched by guests on the television sets in their rooms. The court decided that ‘public’ includes a portion of the public, no matter how small. Dodds had caused the films to be ‘seen or heard in public’ and had therefore infringed the copyright owned by Rank Film.

A copyright owner also has the right to prevent the importation of infringing products (see below). Moral rights

The Copyright Act 1968 (Cth) grants the creators of original works, as well as the directors and producers of films, certain inalienable rights known as moral rights.15 Unlike the other rights described above, these rights cannot be transferred or licensed by the creator to another, although they can be 12 Copyright Act 1968 (Cth) s 31. 13 Copyright Act 1968 (Cth) s 10 (definition of ‘communicate’). 14 Copyright Act 1968 (Cth) ss 89–92. 15 Copyright Act 1968 (Cth) pt IX.

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surrendered (known as a waiver). These rights can be exercised by the creator even when — especially when — the creation and the other rights associated with it have been transferred to another. Moral rights include the following. •• The right of attribution of authorship: The creator can insist that they be identified as the creator of the work.16 For example, when a painter sells a painting they retain the right to insist that they be identified as the painter. •• The right not to have authorship falsely attributed: The creator can prevent others from being falsely identified as the creator.17 •• The right of integrity: The creator can object to, and in some instances prevent, derogatory treatment of the work in a way that will prejudicially affect their honour and reputation.18 For example, a sculptor can object to their sculpture being unreasonably modified by the new owner. Snow v Eaton Shopping Centre Ltd (1982) 70 CPR (2d) 105

Snow was a sculptor who created a display of 60 geese for the Eatons Shopping Centre in Vancouver, Canada. The store subsequently decided to put red bows on the geese. Snow successfully obtained an injunction preventing the store from doing so on the grounds that it was an infringement of his right of integrity: he had the right to prevent an unreasonable modification of the work.

The remedies available for an infringement of moral rights include damages, injunction, public apology, and an order to remove or reverse the infringement.19 An act or omission will not be an infringement of moral rights if it is ‘reasonable’, having regard to the relevant circumstances.20 ACTIVIT Y 13.5 — REFLECT

Why can’t moral rights be transferred or sold?

Duration of protection The owner of copyright in a creation is accorded protection for a fixed period. After expiry of that fixed period the creation enters the public domain, and others can copy the creation without penalty. The length of the fixed period depends upon the type of creation (see table 13.1). TABLE 13.1

Duration of copyright

Type of work or subject matter

Duration of protection

Literary, dramatic, musical or artistic work

70 years after the end of the calendar year of the creator’s death OR if the work is not published during the creator’s lifetime, 70 years after the end of the calendar year in which the work is first published21

Film or sound recording

70 years after the end of the calendar year in which the film or recording is first published22

Television or sound broadcast

50 years after the end of the calendar year in which the broadcast is first made23

Published edition of works

25 years after the end of the calendar year in which the edition is first published24

16 Copyright Act 1968 (Cth) s 193. 17 Copyright Act 1968 (Cth) s 195AC. 18 Copyright Act 1968 (Cth) s 195AI. 19 Copyright Act 1968 (Cth) s 195AZA. 20 Copyright Act 1968 (Cth) ss 195AR-195AS. 21 Copyright Act 1968 (Cth) s 33. 22 Copyright Act 1968 (Cth) ss 93–4. 23 Copyright Act 1968 (Cth) s 95. 24 Copyright Act 1968 (Cth) s 96.

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The duration of protection for most creations was formerly 50 years, but in 2005 protection under the Copyright Act 1968 (Cth) was extended to 70 years to ensure that Australia complied with its obligations under the Australia–United States Free Trade Agreement. LAW IN CONTEXT: : LAW AND POPULAR CULTURE

Famous creations in the public domain Famous works in which the copyright has already expired include: • the Bible; • the works of Homer; • the works of Mozart; • the works of Hans Christian Andersen, such as Thumbelina, The Little Mermaid and The Ugly Duckling; • Tarzan of the Apes by Edgar Rice Burroughs; • the works of Charles Dickens, such as A Christmas Carol, Oliver Twist and Great Expectations; • the Sherlock Holmes novels of Sir Arthur Conan Doyle; • Moby Dick by Herman Melville; • the works of the Brothers Grimm, including Snow White; • the works of William Shakespeare; • Frankenstein by Mary Shelley; • Dracula by Bram Stoker; and • The War of the Worlds by HG Wells. While the original work may have entered the public domain, a particular edition may still be protected as a ‘published edition’, preventing someone from, for instance, photocopying a novel without permission. If the original work has been adapted into a film, copyright in the film may still exist, such as copyright in the Disney film of Snow White. If someone were to adapt a version of Snow White and use elements of the story present in Disney’s version but not present in the original story, such as the Prince waking Snow White with a kiss, they would infringe Disney’s copyright. Speaking of Disney, the earliest Disney films were due to enter the public domain in 1976. At this time, following extensive lobbying by powerful corporate copyright holders in the entertainment industry, legis­lation was passed in the United States extending copyright protection by a further 20 years for works created by individuals and by a further 45 years for works created by corporations. This legislation is sometimes referred to sarcastically as the ‘Mickey Mouse Protection Act’. The earliest Disney films will now enter the public domain in 2019  .  .  .  unless copyright protection is again extended. Ironically, many of Disney’s most famous works, such as Snow White and The Little Mermaid, were only possible because the original works upon which they were based had themselves entered the public domain.

Copyright protection is automatically lost if a three-dimensional artistic work is applied commercially.25 Such a work should be registered as a design in order to be protected from unauthorised copying (see below).

Ownership of copyright Ownership of copyright is a separate issue from ownership of the physical item. For example, someone may own a DVD but they do not necessarily own the copyright in the material on the DVD. Literary, artistic, musical and dramatic works

The person who creates the work will usually be the owner of the copyright in the work.26 This general rule is subject to several important exceptions. 25 Copyright Act 1968 (Cth) s 77A. 26 Copyright Act 1968 (Cth) s 35(2).

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Where an original work is created by someone ‘in pursuance of the terms of his or her employment by another person’, then that other person (i.e. the employer) is the copyright owner.27 For this exception to apply, two elements must be satisfied: •• the creator must be an employee rather than an independent contractor, and •• the original work must have been created as part of the duties that the person is employed to carry out. Where an employee of a newspaper, magazine or other periodical creates an original work as part of their job, copyright is divided between the employee and the employer, subject to agreement to the contrary. The employee owns copyright for the purposes of book publication and photocopying, and the employer owns copyright for all other purposes, including publishing in newspapers and magazines, broadcasting and electronic publication.28 Independent contractors usually own copyright in what they create. The person who pays for the work to be created will generally not own copyright, although they do have a licence to use the work for the purposes for which it was commissioned. There are, however, circumstances where a person who commissions another to create a work for them will own copyright, including where the work is a commissioned portrait or engraving. Where a photograph is commissioned, the photographer is the owner of the copyright unless the photograph was commissioned for a private or domestic purpose (such as a portrait of family members), in which case the client owns the copyright, subject to agreement to the contrary.29 As a general rule, academics and teachers own the copyright in their research, but copyright in the teaching materials developed as part of their teaching role is owned by the educational institution. ­Students own the copyright in their assignments and theses. ACTIVIT Y 13.6 — REFLECT

If Sam, one of Johnny’s chefs, writes poetry while he is cooking in the kitchen of the restaurant, does Johnny own the copyright in Sam’s poetry?

Films, sound recordings, broadcasts and published editions

Copyright in a sound recording or film is owned by the producer, unless the subject matter was made under contract for some other person in which case that other person is the copyright owner.30 Copyright in a broadcast is owned by the maker of the broadcast.31 Copyright in a published edition is owned by the publisher.32 Written agreements

The above rules can be modified by written agreement. If there is any doubt about who will be the owner of copyright in a creation (e.g. where a person is engaged to write software for a business), the parties should enter into a written agreement and specify how the copyright is to be owned and used. Assignments and licences

A copyright owner may choose to assign copyright to another.33 For example, an author may assign copyright in their novel to their publisher in return for a fee. In fact, it is common practice for creators to assign copyright to publishers and employers.

27 Copyright Act 1968 (Cth) s 35(6). 28 Copyright Act 1968 (Cth) s 35(4). 29 Copyright Act 1968 (Cth) s 35(5). 30 Copyright Act 1968 (Cth) ss 97–8. 31 Copyright Act 1968 (Cth) s 99. 32 Copyright Act 1968 (Cth) s 100. 33 Copyright Act 1968 (Cth) ss 196–7.

478  PART 2 Legal consequences

Alternatively a copyright owner may choose to license their copyright in the creation.34 LAW IN CONTEXT: LAW IN PRACTICE

Copyright and licensing The granting of licences and the collection of licence fees for the use of copyrighted materials can be a complex process, particularly where there are large numbers of people who want to use the copyrighted creation. For example, every time a radio station wants to play a song it must pay licence fees to the owners of the copyright in (1) the music and lyrics, and (2) the sound recording. Fortunately the process of licensing is facilitated by the assistance of certain organisations that collect licence fees (usually referred to as royalty fees) on behalf of the copyright owners: • Copyright Agency represents authors, journalists, visual artists, surveyors, photographers and newspaper, magazine and book publishers as their non-exclusive agent to license the copying of their works to the general community: www.copyright.com.au. • The Australasian Performing Rights Association (APRA) represents the interests of songwriters and publishers. It collects and distributes licence fees for the public performance and communication of its members’ musical works. The Australasian Mechanical Copyright Owners Society (AMCOS) collects and distributes mechanical royalties for the reproduction of its members’ musical works: www.apraamcos.com.au. • The Phonographic Performance Company of Australia (PPCA) represents the interests of record labels and recording artists. It grants licences for the broadcast, communication or public playing of recorded music or music videos, and distributes the licence fees to its members: www.ppca.com.au.

Infringement Copyright is infringed when a person exercises the exclusive rights of the copyright owner in relation to the creation without the owner’s permission to do so. To establish an infringement of copyright it must be shown that (1) a substantial part of the creation has been copied, (2) there is objective similarity between the creation and the copy, and (3) there is a causal connection between the creation and the copy. CHECKLIST

Copyright in a creation will be infringed if all of the following requirements are satisfied. ◼◼ A substantial part of the creation has been copied. ◼◼ There is objective similarity between the creation and the copy. ◼◼ There is a causal connection between the creation and the copy.

Requirement 1: A substantial part has been copied Whether a ‘substantial’ part of the original creation has been copied will depend upon the circumstances. There is no fixed rule about the precise proportion that must be copied, and the quality of the part that has been copied will be taken into consideration. A large proportion of insignificant material may not be an infringement, whereas a relatively small proportion of important, essential or distinctive material may be an infringement. Hawke & Son (London) Ltd v Paramount Film Service Ltd [1934] Ch 593

The copying of only a few bars of a popular song was decided to be copying of a ‘substantial part’ because the few bars were an important part of the song and easily recognisable.

34 Copyright Act 1968 (Cth) s 196.

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TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) (2005) 145 FCR 35

(See the facts described earlier in the chapter.) The court decided that 11 of the segments did infringe Channel Nine’s copyright because the segments were a substantial part of the original broadcast, in that they were highlights of the original broadcast. In relation to the other nine segments, Channel Ten was entitled to rely upon the defence of ‘fair comment’.

LAW IN CONTEXT: LAW IN THE MEDIA

‘Men at Work plundered Kookaburra riff: court’ In February 2010, the Federal Court decided that Australian band Men at Work had plagiarised part of their famous 1980s hit song ‘Down Under’. Larrikin Music had accused Men at Work of stealing the song’s flute riff from the old children’s song ‘Kookaburra Sits In The Old Gum Tree’, in which Larrikin Music owned the copyright. ‘Kookaburra Sits In The Old Gum Tree’ was written by Melbourne teacher Marion Sinclair for a Girl Guides jamboree in 1934. Larrikin subsequently acquired copyright in the song. Larrikin demanded compensation from ‘Down Under’ songwriters Colin Hay and Ron Strykert in the form of a share of the considerable royalties from ‘Down Under’, and the court decided that copyright had been infringed.35

ACTIVIT Y 13.7 — REFLECT

What is the difference between copyright infringement and plagiarism?

Requirement 2: Objective similarity between the original and the copy The requisite degree of similarity will depend upon the type of creation in question. An exact copy of the original creation is clearly ‘objectively similar’. If the copy is not an exact copy, the question to be decided is whether a reasonable person would view the copy as similar to the original. Zeccola v Universal City Studios Inc (1982) 67 FLR 225

Universal Studios owned the copyright for the novel, the screenplay and the film of Jaws. They successfully sued Zeccola, the producers of an Italian film called Great White, for infringement of their copyright: the Italian film was objectively similar to the Jaws story.

The requirement of objective similarity may be satisfied even if the original creation and the copy are in completely different media. For example, a film may be objectively similar to a book.

Requirement 3: Causal connection between the original and the copy It must be shown that the alleged copy of the original creation was in fact copied and not created ­independently. To do this it must be shown that the maker of the copy had access to the original creation. It does not matter whether the copying was direct or indirect, deliberate or accidental, conscious or unconscious.

35 Sarah Dingle, ‘Men at Work Plundered Kookaburra Riff: Court’ (4 February 2010) Australian Broadcasting Corporation http://www.abc.net.au/news/2010-02-04/men-at-work-plundered-kookaburra-riff-court/321624.

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LAW IN CONTEXT: LAW IN POPULAR CULTURE

Subconscious plagiarism In 1962, US band The Chiffons recorded the song ‘He’s So Fine’. The song was a big hit in the US (hitting the top of the Billboard charts for five weeks) and a moderate hit in the UK. In 1969, George Harrison, a member of the famous UK band The Beatles, wrote the song ‘My Sweet Lord’. In 1970, a version of ‘My Sweet Lord’ was released on Harrison’s solo album ‘All Things Must Pass’. ‘My Sweet Lord’ was released as a single and it went to number one in the US. Bright Tunes Music Corp, the owner of copyright in ‘He’s So Fine’, sued Harrison for breach of copyright. Bright Tunes alleged that the songs were so similar that Harrison must have copied ‘He’s So Fine’ when he wrote ‘My Sweet Lord’. (You can compare the songs yourself by listening to them on YouTube.) No one suggested that Harrison had deliberately stolen the song. Rather, it was alleged that Harrison had unconsciously copied parts of the ‘He’s So Fine’ when he wrote his own song. The matter finally went to trial in 1976. After hearing from expert witnesses from both sides, the trial judge decided that Harrison had breached copyright in the song by engaging in what he called ‘subconscious plagiarism’. A substantial part of ‘He’s So Fine’ had been accidentally copied, there was objective similarity between the two songs, and there was a causal connection: Harrison admitted that he would have heard the original song when it was released in 1962. The court explained that in establishing an infringement of copyright it was not necessary to show that there had been any intent to infringe.

Direct and indirect infringement Direct infringement is where a person other than the copyright owner does any act that is considered an exclusive right of the copyright owner.36 It is also a direct infringement for someone to authorise another to exercise any of the exclusive rights of the copyright owner without permission, including encouraging them to do so and providing them with the means to do so. Roadshow Films Pty Ltd v iiNet Ltd (No 3) (2010) 263 ALR 215

iiNet is an Australian internet service provider. In what was seen as an important test case, Roadshow and 33 other television and movie studios including Universal Pictures, Paramount Pictures, Twentieth Century Fox, Disney and the Seven Network brought legal proceedings against iiNet claiming that it had infringed their copyright by knowingly allowing its customers to illegally download approximately 100 000 movies, television programs and songs using BitTorrent during a particular 59-week period. The plaintiffs argued that by failing to enforce its own user agreements that state that customers are not to illegally download files, iiNet had itself infringed the plaintiffs’ copyright. The court decided in favour of iiNet, explaining that ‘iiNet is not responsible if an iiNet user uses that system to bring about copyright infringement  .  .  .  the law recognises no positive obligation on any person to protect the copyright of another’. (In 2012 the studios appealed this decision to the High Court of Australia. The High Court dismissed the appeal.) LAW IN CONTEXT: LAW AND TECHNOLOGY

Copyright and the internet • Downloading movies or music from the internet without the permission of the copyright holder will be a direct infringement of copyright, as will printing or even simply saving to a hard drive material from a website or discussion board without permission. • When a person visits a website a copy of the webpage is downloaded to their computer and copied onto their hard drive. However, under the Copyright Act 1968 (Cth), temporary and incidental copying of a creation by the technical process of transmitting and browsing material on the internet is not a direct infringement of copyright.37

36 Copyright Act 1968 (Cth) ss 36, 101. 37 Copyright Act 1968 (Cth) ss 111A–111B.

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• Linking from one website to another is unlikely to be an infringement of the copyright of the owner of the linked website because their permission to do so will be implied from the circumstances, provided the link is to the front page of the website. • If a website knowingly facilitates copyright infringement in the form of peer to peer file sharing, the owner of the website will themselves infringe copyright, but if they have no control over the process they will not be liable. • An ISP will not be liable for authorising infringements by their customers simply because the infringement occurred using their facilities.38

Indirect infringement includes: •• importing products knowing that if they had been manufactured in Australia they would be a direct infringement of copyright in an original work or subject matter,39 •• selling or renting products known to be unauthorised copies of the work or subject matter,40 and •• permitting a place of public entertainment to be used for public performance of a work or subject matter which is known to be unauthorised.41 Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240

Indofurn Pty Ltd imported carpets from Vietnam. The carpets reproduced Australian Aboriginal artwork without the permission of the copyright owners. The court decided that because Indofurn knew that if the carpets had been manufactured in Australia they would have been a direct infringement of copyright, Indofurn had committed an indirect infringement of copyright.

Parallel importing of books, music and software is no longer an infringement of copyright in ­Australia.42 Parallel importing is the importing of products into Australia that were legally made overseas, but without the consent of the local owner or licensee of the copyright. For example, Claire may have an exclusive licence to produce and distribute in Australia the novels of Stephen Donaldson. Vicki has an exclusive licence to produce and distribute Stephen Donaldson’s novels in the United Kingdom. Mike buys copies of the novel from Vicki online, imports them into Australia and sells them in competition with Claire. This is parallel importing. Prior to 1991 this would have been an infringement of Claire’s exclusive rights, but that is no longer the case under the present law. The exception was extended to sound recordings in 1998, and to software in 2002. ACTIVIT Y 13.8 — REFLECT

Why is parallel importing of books, music and software permitted but not of other products?

Remedies and penalties In the event of infringement, the owner of copyright is accorded a wide range of possible remedies under the Copyright Act 1968 (Cth), including: •• damages to compensate them for any loss suffered as a result of the infringement,43 •• additional damages if it is established that the infringement was deliberate and the court wishes to deter others from engaging in such conduct,44 38 Copyright Act 1968 (Cth) s 116AG. 39 Copyright Act 1968 (Cth) ss 37, 102. 40 Copyright Act 1968 (Cth) ss 38, 103. 41 Copyright Act 1968 (Cth) s 39. 42 Copyright Act 1968 (Cth) ss 44A–44F. 43 Copyright Act 1968 (Cth) ss 115(2)-(3). 44 Copyright Act 1968 (Cth) s 115(4).

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•• an injunction to restrain infringement and prevent future infringements,45 •• an account of profits – that is, an order that the defendant pay to the owner any profits made as a result of their infringement,46 and •• an order that the defendant transfer to the owner any infringing products.47 An infringement action under the Act must be commenced within 6 years of the infringement. In addition to these statutory remedies, the common law offers the following additional remedies: •• an Anton Piller order according to which the copyright owner is granted access to the defendant’s premises in order to locate or take possession of any infringing products,48 and •• a Mareva injunction according to which the defendant is ordered not to remove infringing products from the jurisdiction of the court.49 FNH Investments Pty Ltd v Sullivan [2003] 59 IPR 121

FNH Investments Pty Ltd (FNH) engaged Sullivan to provide photographs for use in a marketing ­campaign. FNH refused to pay for the photos, claiming that they were not of merchantable quality, but nevertheless used the photos as part of the campaign. The court decided that Sullivan retained the copy­right in the photos, which FNH had infringed. FNH was ordered to pay the price for the photos under the contract as well as $15 000 in additional damages.

The Copyright Act contains a range of indictable offence and summary offence provisions.50 A  person found guilty of breaching one of these provisions will be subjected to potentially harsh ­penalties, including fines and up to 5 years’ imprisonment. The offences include: •• commercial scale infringement of copyright,51 •• making an infringing copy with the intention of selling it or hiring it or obtaining a commercial advantage or profit,52 •• selling or hiring out an infringing copy,53 •• offering an infringing copy for sale or hire,54 •• exhibiting an infringing copy in public commercially,55 •• importing infringing copies commercially,56 •• distributing an infringing copy with intention of trading or obtaining a commercial advantage or profit,57 •• possessing an infringing copy for commerce,58 •• the aggravated offence of converting a work to digital form,59 •• making or possessing a device for making an infringing copy,60 and •• advertising the supply of an infringing copy.61 45 Copyright Act 1968 (Cth) s 115(2). 46 Copyright Act 1968 (Cth). 47 Copyright Act 1968 (Cth) s 116(1). 48 Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55. 49 Mareva Compania Naviera SA v International Bulk Carriers SA; The Mareva [1980] 1 All ER 213. 50 Copyright Act 1968 (Cth) pt V div 5. 51 Copyright Act 1968 (Cth) s 132AC. 52 Copyright Act 1968 (Cth) s 132AD. 53 Copyright Act 1968 (Cth) s 132AE. 54 Copyright Act 1968 (Cth) s 132AF. 55 Copyright Act 1968 (Cth) s 132AG. 56 Copyright Act 1968 (Cth) s 132AH. 57 Copyright Act 1968 (Cth) s 132AI. 58 Copyright Act 1968 (Cth) s 132AJ. 59 Copyright Act 1968 (Cth) s 132AK. 60 Copyright Act 1968 (Cth) s 132AL. 61 Copyright Act 1968 (Cth) s 132AM.

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The Copyright Act 1968 (Cth) also contains a set of remedies and penalties to help copyright owners protect and monitor their exclusive rights. For example, a business may seek to protect digital material from unauthorised access or use by encrypting material or encoding a broadcast. Under the Act, the business can take action against: •• any person who circumvents such technological measures designed to control access to copyright material,62 •• any person who makes, sells, imports or rents out devices that are used to circumvent technological measures,63 •• any person who provides circumvention services,64 •• any person who removes or alters electronic rights management information,65 and •• any person who distributes to the public works with electronic rights management information removed.66 It is also a criminal offence for a person to: •• use a circumvention or decoding device,67 •• deal commercially with circumvention or decoding devices,68 •• offer decoding or circumvention services,69 •• alter or remove electronic rights management information,70 or •• deal with copyright material knowing that rights management information has been removed from it.71

Defences A person accused of infringing copyright may seek to rely upon a range of possible defences. Fair dealing

A ‘fair dealing’ with a creation does not constitute an infringement of the copyright in the creation if it is for the purpose of: •• criticism or review,72 •• parody or satire,73 •• reporting news,74 •• judicial proceedings or professional advice,75 or •• research or study.76 Copying of the following proportions of an original work for research or study will be taken to be fair dealing: •• the whole of a journal article, •• 10 per cent of the pages or one chapter of a publication of more than 10 pages, or •• 10 per cent of the words or one chapter of an electronic publication. ‘Fair dealing’ is not defined in the Copyright Act 1968 (Cth), but it is usually interpreted to mean that the use of the protected creation is primarily for the legitimate purpose and not for the purpose of competing with the owner of the copyright or depriving them of their rightful entitlements. If the review, parody or news report reproduces the whole of the original work being reviewed, parodied or reported upon, it is unlikely to qualify as fair dealing and will be an infringement of copyright. 62 Copyright Act 1968 (Cth) s 116AN. 63 Copyright Act 1968 (Cth) s 116AO. 64 Copyright Act 1968 (Cth) s 116AP. 65 Copyright Act 1968 (Cth) s 116B. 66 Copyright Act 1968 (Cth) s 116C. 67 Copyright Act 1968 (Cth) s 132APC. 68 Copyright Act 1968 (Cth) s 132APD. 69 Copyright Act 1968 (Cth) s 132APE. 70 Copyright Act 1968 (Cth) s 132AQ. 71 Copyright Act 1968 (Cth) s 132AR. 72 Copyright Act 1968 (Cth) ss 41, 103A. 73 Copyright Act 1968 (Cth) ss 41A, 103AA. 74 Copyright Act 1968 (Cth) ss 42, 103B. 75 Copyright Act 1968 (Cth) ss 43, 104. 76 Copyright Act 1968 (Cth) ss 40, 103C.

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Other defences

The Copyright Act 1968 (Cth) contains a large number of other exceptions to infringement, including: •• reproducing text for private use (e.g. copying an extract from a novel into a diary),77 •• reproducing text for a collection in a place of education,78 •• public readings and recitations,79 •• performances at home,80 and •• incidental filming or televising of public works.81 The making of a back-up copy of a computer program by, or on behalf of, a licensed owner of the program is not an infringement so long as the copy is to be used if and when the original fails.82 LAW IN CONTEXT: LAW IN PRACTICE

Recording television programs On 11 December 2006, the Copyright Act 1968 (Cth) was amended to allow people to record television and radio programs so that they can watch them or listen to them at a more convenient time.83 This new exception to infringement only applies if the recording is made for the sole purpose of private or domestic use. A person will still infringe copyright if they sell, rent or distribute the recording, or play or show the recording in public. Part VA of the Act grants educational institutions a licence to copy television and radio broadcasts for teaching purposes: the institution pays an annual fee based on student numbers to the Audio Visual Copyright Society.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  13.6 What is copyright?  13.7 What are the requirements for copyright protection?  13.8 What types of ‘work’ and ‘subject matter’ are protected by copyright?  13.9 When is a creation ‘original’? 13.10 When is a creation expressed in material form? 13.11 Does an author have to register their creation to gain copyright protection? 13.12 What is the purpose of the copyright symbol? 13.13 What is the effect of the Berne Convention? 13.14 What are the exclusive rights of the copyright owner? 13.15 What are moral rights? 13.16 How long does copyright last? 13.17 Who owns the copyright? 13.18 When is copyright infringed? 13.19 What is the difference between direct and indirect infringement? 13.20 What is ‘parallel importing’? 13.21 What are some of the defences to a copyright infringement action? 13.22 What are the available remedies in the event of copyright infringement? 13.23 What are the possible penalties in the event of copyright infringement?

77 Copyright Act 1968 (Cth) s 43C. 78 Copyright Act 1968 (Cth) s 44. 79 Copyright Act 1968 (Cth) s 45. 80 Copyright Act 1968 (Cth) s 46. 81 Copyright Act 1968 (Cth) ss 65–70. 82 Copyright Act 1968 (Cth) s 47C. 83 Copyright Act 1968 (Cth) s 111

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13.3 Trade marks LEARNING OBJECTIVE 13.3 How does trade mark law protect a trade mark from unauthorised use? When are trade mark rights infringed and what can be done about it? If a trade mark is not registered, is it still protected?

A distinctive trade mark is an important marketing tool, and a potentially valuable asset. The Coca-Cola trade mark, for example, is estimated to be worth more than $70 billion. But what are trade marks, and how are they protected?

What is a trade mark? A trade mark is a distinctive word, phrase, or symbol used in commercial dealings to show a connection between a particular business and its product. Trade marks include brand names and logos. The trade mark enables customers to choose between the products of different businesses according to the reputation associated with the trade mark.

In Australia, trade marks are regulated by the Trade Marks Act 1995 (Cth) and administered by the Trade Marks Office of IP Australia. A trade mark must be registered to gain protection under the Trade Marks Act. The Trade Marks Act defines a trade mark as ‘a sign used, or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provided by any other person’.84 A ‘sign’ is defined as including the following or any combination of the following: ‘any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent’.85 Coca-Cola Co v All-Fect Distributors Ltd (1999) 96 FCR 107

Coca-Cola registered as a trade mark the shape of the contoured glass bottle in which Coke was traditionally sold. Although most Coke today is sold in cans and plastic bottles, Coca-Cola successfully restrained All-Fect, a confectionary company, from importing and selling lollies in a plastic bottle the same shape as the contoured glass Coke bottle.

84 Trade Marks Act 1995 (Cth) s 17. 85 Trade Marks Act 1995 (Cth) s 6 (definition of ‘sign’).

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BP plc v Woolworths Ltd (2004) 212 ALR 79

BP plc attempted to register as a trade mark a particular shade of the colour green in relation to the sale of petrol. Woolworths opposed the application because it intended to use the colour green in relation to its own sale of petrol. The court decided that because that particular shade of green used in connection with the sale of petrol was already, in the minds of members of the public, associated with BP, BP was entitled to register that colour as a trade mark.

ACTIVIT Y 13.9 — REFLECT

What is the relationship between a trade mark and the goodwill of a business?

Australian Company Numbers (ACNs) and business names are not the same as trade marks. The purpose of registering an ACN or a business name is to enable consumers to identify the owners operating under that name (see the next chapter). Registration of a particular business name or a company name does not automatically entitle the registrant to prevent others from using that name to market their product. Nor is it, in itself, a defence to an action for infringement of a registered trade mark brought by another business. For example, if Johnny is the registered holder of the business name ‘The Lame Duck’ but Simulacra has registered that term as a trade mark, and Johnny uses that name to market his products, Simulacra will be entitled to take legal action to prevent Johnny from doing so. A business should therefore endeavour to register its name as both a business name and a trade mark.

Requirements for trade mark protection Registration of a trade mark gives the trade mark owner the statutory right to prevent competitors from using the trade mark to market their own products. It also: •• protects the goodwill associated with the product, •• is an important and valuable business asset, and •• facilitates the processes of franchising and licensing. Registration of a trade mark is not compulsory. As explained below, an unregistered trade mark is still protected by both the law of passing off and the Australian Consumer Law (ACL). However, enforcement of a registered trade mark is simpler and cheaper than enforcement of an unregistered trade mark.

Registration criteria A trade mark will only be registered if it: •• does not contain a proscribed sign, •• is able to be represented graphically, •• is distinctive, •• is not scandalous or contrary to law, •• is not likely to deceive or cause confusion, and •• is not identical with or deceptively similar to another pending or registered trade mark. Proscribed signs

An application for registration of a trade mark will be rejected if the trade mark contains or consists of a sign that is proscribed (forbidden) by regulation.86 Certain signs and marks have been declared by regulation to be incapable of registration as a trade mark. These include Australian national emblems and the emblems of Australian towns and cities. 86 Trade Marks Act 1995 (Cth) s 39.

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Graphic representation

An application for registration will be rejected if the trade mark cannot be represented graphically.87 The trade mark must be capable of representation as a word, as a logo, or as a description, such as the description of a shape. A sound or tune must be able to be represented by notes indicated on a music stave. ACTIVIT Y 13.10 — REFLECT

The definition of ‘trade mark’ in the Act includes scents. How can a scent be represented graphically? Distinctive

The trade mark must be capable of distinguishing the product from the products of other persons.88 Beecham Group plc v Colgate-Palmolive Co (2001) 58 IPR 161

The Colgate-Palmolive Co applied to register the stripes in their toothpaste as a trade mark. The application was opposed by Beecham Group plc, the owners of Macleans toothpaste. The court decided that the stripes were not capable of distinguishing Colgate’s goods from the goods of their competitors, and Colgate’s application failed.

It is difficult to register everyday words as a trade mark. A trade mark that consists solely of a description of the product (e.g. ‘bread’) or of a characteristic or quality of the product (e.g. ‘fresh’) will not be distinctive and will unfairly exclude others who may wish to operate a similar sort of business or produce similar kinds of goods. Samuel Taylor Pty Ltd v Registrar of Trade Marks (1959) 102 CLR 650

Samuel Taylor (ST) applied for registration of the name ‘Pressure Pak’ as a trade mark. The Registrar of Trade Marks refused to register the name on the ground that the name referred directly to a characteristic or quality of the product, and ST appealed the decision. The court upheld the Registrar’s decision: the name ‘Pressure Pak’ indicated that the contents of the container were held under pressure, and was therefore a direct reference to some character or quality of the product.

A similar rationale applies to geographic names and common surnames. Other traders in that p­ articular location or with that particular name will need to make use of the name, which shouldn’t be the exclusive right of any one person. On the other hand, if there is strong evidence of association of a particular name with a particular product or products (e.g. ‘McDonald’s’ or ‘David Jones’), the name may be ­successfully registered as a trade mark. Distinctive or unique words are more likely to be registered. Examples include: •• made up words, such as ‘iPad’, •• suggestive or emotive words such as ‘lucky dog’, and •• descriptive words that do not match the product, such as ‘Apple’ for computers. Words that are not distinctive on their own may still be able to be registered if they are accompanied by other words or by a distinctive image or symbol, because another business is unlikely to need to use that particular combination of words and image.

87 Trade Marks Act 1995 (Cth) s 40. 88 Trade Marks Act 1995 (Cth) s 41.

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Scandalous or contrary to law

An application for the registration of a trade mark will be rejected if the trade mark contains or consists of scandalous matter, or its use would be contrary to law.89 Scandalous trade marks include those that use swear words or are deemed offensive in some way, such as a trade mark that is racist. In the United States, an application to register the term ‘dykes on bikes’ as a trade mark was refused on these grounds,90 as were the terms ‘LMFAO’ and ‘FUKU’. On the other hand, ‘Knuckingfackered’ has been registered as a trade mark in the UK, and ‘Far Kew’ has been registered in Australia. LAW IN CONTEXT: LAW IN THE MEDIA

‘ ‘‘Nuckin Futs” gets the green light from Australians’ In 2012 a Gold Coast company’s plans to trade mark the name ‘Nuckin Futs’ in relation to a snack food product attracted widespread publicity following the announcement that the trade mark examiner had accepted the name for registration pending the three month opposition period. Despite the public outcry, by the end of the opposition period no one had actually lodged an objection. According to the applicant’s solicitor: ‘Nobody took five minutes out of their day to actually oppose it after all the [abusive] emails we received,  .  .  .  So really do people think it’s that scandalous and really does it impact them at all? People may have been shocked by the trademark but not offended enough to put a stop to it.’ The applicant successfully argued that the name was not offensive because the term was commonplace in everyday Australian language, and the registration proceeded. Reproduced from Sarah O’Carroll, ‘Nuckin Futs’ Gets the Green Light from Australians (28 June 2012) News Limited http://www.news.com.au/business/your-business/nuckin-futs-gets-the-green-light-from-australians/story-fn9evb641226410384183.

A trade mark will be ‘contrary to law’ if it is one that is prohibited unless the person is an appointed user under specific legislation. For example, the Olympic symbol can be used only by designated organisations. Likely to deceive or cause confusion

An application will be rejected if, because of some connotation that the trade mark or a sign contained in the trade mark has, the use of the trade mark would be likely to deceive or cause confusion.91 Questions of deception or confusion arise when a trade mark is similar to that of another business, whether registered or not. In Australia, the first person to use the mark is the owner of that mark for trade mark purposes, regardless of whether or not the mark is registered. A trade mark that consists of a term commonly used to describe that type of product (e.g. ‘Cheapest Cars’) is unlikely to be registered. A descriptive term may imply a feature that is not present in the product, and the trade mark would therefore be misleading. Identical to pending or registered trade mark

Since a trade mark is supposed to distinguish one business’s product from that of another, a trade mark needs to be different from those trade marks already registered in Australia. A trade mark cannot be registered if it is substantially identical with or deceptively similar to another trade mark that is already registered or that has already been lodged for registration.92 ‘Deceptively similar’ is defined to mean that the trade mark ‘so nearly resembles that other trade mark that it is likely to mislead or cause confusion’.93 89 Trade Marks Act 1995 (Cth) s 42. 90 Patricia Loughlan, ‘“Dykes on Bikes”: Trade Mark Registration (Rightly) Refused’ (2005) 18 Australian Intellectual Property Law Bulletin 74. 91 Trade Marks Act 1995 (Cth) s 43. 92 Trade Marks Act 1995 (Cth) s 44. 93 Trade Marks Act 1995 (Cth) s 10.

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Torpedoes Sportswear Pty Ltd v Thorpedo Enterprises Pty Ltd (2003) 132 FCR 326

Swimming champion Ian Thorpe applied to register the name ‘Thorpedo’ as a trade mark. The appli­ cation was opposed by Torpedoes Sportswear, and one of the reasons for their opposition was that it was substantially identical with or deceptively similar to their own trade mark. The opposition was unsuccessful: the court decided that the ‘Thorpedo’ trade mark was unlikely to mislead or cause confusion because the name ‘Thorpedo’ was already widely recognised by members of the public.

Registration process The following steps are required to register a trade mark. 1. An applicant should first search the trade marks database at the IP Australia website (www.ipaustralia. gov.au) to see if the same or a similar trade mark has already been registered. 2. Before lodging the application the applicant can request an assessment of the likelihood of the application being successful by using the ‘TM Headstart’ service accessible online at the IP Australia website. 3. The application must be in relation to a particular class or classes of products. There is no limit on the number of classes in which a trade mark can be registered, as long as the trade mark is actually used or intended to be used in relation to products in that class. 4. The application is examined by IP Australia. If the application meets the requirements for registration it will be accepted for registration. 5. If accepted for registration, the application is advertised in the Official Journal of Trade Marks. Anyone who opposes the registration of the trade mark will have 3 months within which to register their opposition. In the event that the application is opposed the applicant will have to defend their application. Oppositions are administered by the Trade Marks Hearings section of IP Australia. 6. If no opposition is filed, or if the opposition is unsuccessful, the trade mark will be registered. IP Australia will issue a Certificate of Registration and record the details of the trade mark in the Register of Trade Marks. The trade mark will be registered from the date the application was filed. ACTIVIT Y 13.11 — RESEARCH

Go to the trade marks section of the IP Australia website at www.ipaustralia.gov.au. What is the present number of (1) classes of goods, and (2) classes of services?

A trade mark may be removed from the register if: •• the registrant has not used and had no intention of using the trade mark at the time the application was filed, •• the registrant has not used the trade mark for a period of at least 3 years, or •• the registrant’s use of the trade mark has not been in good faith.

Other types of trade mark In addition to trade marks generally, the Act permits the registration of particular types of trade mark, namely: •• collective trade marks, •• certification trade marks, and •• defensive trade marks. A collective trade mark distinguishes the products of members of a particular association from the products of persons who are not members of the association.94 94 Trade Marks Act 1995 (Cth) s 162.

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The purpose of a certification trade mark is not to establish a connection between the product and a particular business, but to inform customers that the product has a special quality, for example, that it has been approved by the Australian Heart Foundation. The registrar will only register a certification trade mark if it is satisfied that the applicant has the authority to certify products as having that special quality, and that the registration of the trade mark is in the public interest.95 If a trade mark is particularly well known and the owner wishes to prevent others from registering and using the trade mark to market their products even though the products are in a different class to the owner’s own products, they may be able to register a defensive trade mark in that different class.96

Trade mark symbols If a particular trade mark becomes widely used by the public as the generic name for a particular type of product, the trade mark will no longer satisfy the requirement that it be distinctive, and trade mark protection will be lost. Examples of trade marks that have entered the public domain in this way include ‘linoleum’, ‘trampoline’, ‘kerosene’, ‘nylon’, ‘aspirin’ and ‘escalator’. A trade mark owner can prevent this from happening by ensuring that their trade mark is always accompanied by a trade mark symbol. A pending or unregistered trade mark can be identified by use of ™ next to the mark. If the trade mark is registered then the ® symbol may be used. Some businesses choose to use an asterisk after the first reference to the trade mark and then refer to the asterisk ­elsewhere on the packaging or material, for example, ‘* Registered trade mark of X Limited’. CAUTION!

If a particular trade mark becomes so well known that it is often used as the generic name for a type of product, it will no longer be distinctive and the trade mark owner will no longer be entitled to retain registration of the trade mark.

Extent of trade mark protection In this section we consider the identity and exclusive rights of the trade mark owner, and the duration of protection.

Ownership of the trade mark The successful applicant becomes the owner of the trade mark. The applicant must have a ‘legal personality’ – that is, they must be a person, a company or an incorporated association.

Exclusive rights of the trade mark owner The system for registering trade marks allows the registrant to, in a sense, ‘own’ the trade mark. It allows them to exclude others from using that trade mark, or a deceptively similar trade mark, in relation to the sale of the same or similar products. It is, thus, a limited form of ownership. The registrant only has the right to restrain others from using the registered trade mark in relation to the class of products for which the trade mark has been specifically registered. A registered owner can also give a notice to the Australian Customs Service objecting to the importation of goods that infringe the registered trade mark. As with other forms of IP rights, the owner of a registered trade mark can license their trade mark for others to use with respect to the products specified in the class or classes, or they can assign the trade mark rights entirely. 95 Trade Marks Act 1995 (Cth) s 169. 96 Trade Marks Act 1995 (Cth) s 185.

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CAUTION!

The owner of a trade mark is not entitled to prevent everyone else from copying or using the trade mark. They are only entitled to prevent a competitor from using the trade mark to market products in the same class of products in which the trade mark has been registered.

Duration of protection As long as the trade mark owner keeps using the trade mark and continues paying the periodic renewal fees every 10 years, they can renew registration of their trade mark indefinitely.97

International protection Trade mark registration is territorial: each country has its own system of registration. If a business wants to sell its product overseas, it will need to register the trade mark in the countries it proposes trading in. It can either register the trade mark in each country separately, or it can submit a list of countries to IP Australia in the form of a single application. The Madrid Protocol facilitates this latter process; there are at present 65 member countries party to the Protocol. ACTIVIT Y 13.12 — RESEARCH

What is the Madrid Protocol?

JT International SA v Commonwealth [2012] HCA 43

The Tobacco Plain Packaging Act 2011 (Cth) forces cigarette companies to use ‘plain packaging’ by imposing restrictions on the colour, shape and finish of retail packaging for tobacco products and restricting the use of trade marks on the packaging. A group of cigarette companies including British American Tobacco, Imperial Tobacco, Japan Tobacco and Philip Morris commenced legal proceedings against the Commonwealth. The cigarette companies challenged the constitutional validity of the Act, arguing that the Commonwealth was in effect acquiring the companies’ intellectual property in breach of the requirement in s 51(xxxi) of the Australian Constitution that the government only acquire property on ‘just terms’. A majority of the High Court of Australia decided that to engage s 51(xxxi), an acquisition must involve the accrual to the Commonwealth (or to any other person for the purposes of the Commonwealth) of a proprietary benefit or interest. The Tobacco Plain Packaging Act 2011 (Cth) regulated the plaintiffs’ intellectual property rights and imposed controls on the packaging and presentation of tobacco products, but it did not confer a proprietary benefit or interest on the Commonwealth or any other person. As a result, neither the Commonwealth nor any other person acquired any property and s 51(xxxi) was not relevant.

Infringement If another business uses a trade mark that is substantially identical or deceptively similar to a registered trade mark in relation to products in respect of which the trade mark is registered, it has infringed that trade mark.98 The infringer may also commit the tort of passing off, discussed earlier in the chapter.

97 Trade Marks Act 1995 (Cth) ss 73, 77–79, 84. 98 Trade Marks Act 1995 (Cth) s 120.

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CHECKLIST

X infringes the registered trade mark of Y if all of the following requirements are satisfied. ◼◼ Y’s trade mark is registered under the Act. ◼◼ X uses a trade mark that is substantially identical with or deceptively similar to Y’s trade mark. ◼◼ X uses the trade mark in relation to goods or services that are the same as or closely related to goods or services in respect of which Y’s trade mark is registered.

LAW IN CONTEXT: LAW IN THE MEDIA

‘Dough-Vo bows to Vo-Vo: Krispy Kreme backs down’ Arnott’s Biscuits manufactured a biscuit called the Iced Vo-Vo, a biscuit with pink icing and coconut sprinkles. Arnott’s had owned the trade mark in the name of the biscuit since 1906. In 2009, Krispy Kreme released a donut called the ‘Iced Dough-Vo’, which also had pink icing and coconut sprinkles. Arnott’s threatened Krispy Kreme with legal action, claiming that Krispy Kreme was engaging in misleading and deceptive conduct and breaching Arnott’s trade mark in the name ‘Iced Vo-Vo’. Krispy Kreme agreed to rename the product.99

LAW IN CONTEXT: LAW AND TECHNOLOGY

Trade marks and the internet The following may amount to online infringement of a trade mark. • If the website of a competitor without the trade mark owner’s permission links to part of their website that contains the trade mark. • If the website of a competitor contains ‘meta-tagging’ that includes the trade mark. Meta-tagging is the use of HTML tags that provide information about a webpage and which are used by search engines to identify appropriate websites in response to search queries. • If the website of a competitor ‘frames’ a page from the trade mark owner’s website that includes the trade mark so that to the viewer it appears that they are still on the competitor’s website.100

As explained previously, a trade mark owner only has the right to prevent others from using the trade mark in relation to the sale of products in the category or categories in which the trade mark is ­registered. If, for example, Ash has developed an electronic book and registered the name ‘Intelli-book’ as a trade mark in category 9 (electronic instruments) and category 16 (printed materials), she cannot prevent another person from using the same name in relation to, say, the provision of hotel booking services, which would fall within category 43 (temporary accommodation). The exception to this is if the trade mark is ‘well known in Australia’ in which case the trade mark owner would be able to prevent someone from using the trade mark in relation to unrelated goods or services.101 Eastman Photographic Materials Co Ltd v John Griffiths Cycle Corp Ltd (1898) 15 RPC 105

Eastman Photographic Materials Co Ltd owned the trade mark ‘Kodak’. The court decided that because the trade mark was so generally well known, the company was able to prevent Griffiths from using the trade mark in relation to the sale of bicycles.

  99 Australian Broadcasting Corporation, ‘Dough-Vo Bows to Vo-Vo: Krispy Kreme Backs Down’ (30 April 2009) . 100 Shetland Times Ltd v Willis (1997) SLT 669. 101 Trade Marks Act 1995 (Cth) s 120(3).

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Virgin Enterprises Ltd v Klapsas [2002] AIPC 91–760

Klapsas sought to register the name ‘Virgin Car Rentals’ as a trade mark in relation to the leasing of cars. The application was successfully opposed by Richard Branson’s Virgin Enterprises.

Remedies Under the Trade Marks Act the remedies available for infringement of a registered trade mark include: •• an injunction to prevent further infringement, and •• either damages or an account of profits.

Defences The Trade Marks Act contains the following possible defences to infringement proceedings. •• The trade mark is the defendant’s own name, or the name of their place of business, or the name of a predecessor in the business, or the name of the predecessor’s place of business, and the name is being used by the defendant in good faith.102 •• The trade mark describes the kind, quality, quantity, intended purpose, value, geographical origin, or some other characteristic of the defendant’s products and is being used by the defendant in good faith.103 •• The trade mark was used by the defendant in comparative advertising.104 •• The trade mark was used by the defendant with the implied consent of the trade mark owner.105 •• The defendant can demonstrate that they have been using the trade mark in question since a time before the owner registered or started using the trade mark.106

Unregistered trade marks If a business’s trade mark is unregistered it may still be able to prevent another person from misusing it by bringing a legal action either in the tort of passing off or under the ACL.

The tort of passing off Both registered and unregistered trade marks are protected under common law by the tort of passing off. As you will recall from an earlier chapter, passing off is a tort committed when one person makes a misrepresentation that implies a commercial association with another person, such as when a business markets their own products as if they are a competitor’s products. For example, if Simulacra uses Johnny’s trade mark, brand, distinctive packaging, name or likeness without Johnny’s permission to sell their own product, they commit the tort of passing off. To successfully bring an action in passing off against Simulacra, Johnny must establish that: •• Simulacra has deliberately made a misrepresentation (a false statement of fact) that their goods or services are connected with Johnny or his business, •• the misrepresentation by Simulacra was made in the course of trade, and •• the misrepresentation was intended to deceive potential purchasers. The remedies available under common law include damages and an injunction to restrain further use of the trade mark. Although it is possible to protect an unregistered trade mark by bringing legal proceedings in the tort of passing off, there are clear advantages to having a registered trade mark. To bring an action under 102 Trade Marks Act 1995 (Cth) s 122(1)(a). 103 Trade Marks Act 1995 (Cth) s 122(1)(b). 104 Trade Marks Act 1995 (Cth) s 122(1)(d). 105 Trade Marks Act 1995 (Cth) s 123. 106 Trade Marks Act 1995 (Cth) s 124.

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the Trade Marks Act it is only necessary to show that the defendant is using the trade mark without permission, but to establish the tort of passing off the plaintiff has to show that the defendant is deliberately misleading the public into thinking that they have some form of business association with the plaintiff.

Australian Consumer law A competitor who uses a registered or unregistered trade mark may also breach the Australian Consumer Law. For example, they may breach the prohibition of misleading and deceptive conduct in ACL s 18: if they are marketing their products in a way that will make customers think that they are the trade mark owner’s products, the competitor is engaging in conduct that is misleading or deceptive or likely to ­mislead or deceive. LAW IN CONTEXT: LAW IN THE MEDIA

Cadbury to fight on for colour purple in Australian courts The colour purple has never caused so much fuss — but the battle between two chocolate manufacturers may still not be over. In a long-running dispute going back more than five years, Cadbury had objected to Darrell Lea’s use of various shades of purple in its store signage, uniforms and product. But Justice Peter Heerey ruled in the Federal Court today the use of purple by Darrell Lea did not amount to misleading and deceptive conduct, as had been alleged by Cadbury. Justice Heerey said chocolate eaters were discerning enough to tell their Cadbury’s from their Darrell Lea. ‘I am not satisfied that such usage has resulted, or would result, in  .  .  .  purchasers of chocolate being misled or deceived’, he said. ‘Consumers are never presented at the point of sale with a Cadbury product, in purple or not, without the Cadbury name prominently displayed.’ ‘The ordinary reasonable consumer is to be credited with awareness of this when confronted with the allegedly misleading Darrell Lea product.’ The decision delighted Darrell Lea company director, Michael Lea, describing it as a ‘victory for common sense’. ‘We have used various shades of purple in our packaging and shop displays for decades  .  .  .  before Cadbury raised any complaint’, said Mr Lea. ‘We were prepared to stand up for our rights.’ But Cadbury Schweppes quickly announced it would appeal the decision. ‘Cadbury Schweppes has deliberately established a connection between our shade of purple and Cadbury chocolate, and many consumers associate Cadbury purple with Cadbury chocolate’, Cadbury managing director Mark ­Callaghan said. ‘We remain totally committed to protecting our brand identity and Cadbury will appeal this decision.’ Darrell Lea lawyer Tony Watson said he was disappointed, but not surprised, by Cadbury’s decision to appeal. ‘They will appeal and go to every length’, Mr Watson told AAP. ‘It smacks of a party that is prepared to exert its financial muscle at every step.’ Mr Watson said Darrell Lea remained confident and would defend the appeal. Marketing experts for Cadbury had said consumers may mistakenly link Cadbury with Darrell Lea, and vice versa, having become connected in consumers’ minds through the common use of purple. Dr Brian Gibbs from the University of Melbourne said consumers linked purple with Cadbury. But lawyers for Darrell Lea had said Cadbury’s knowledge was limited to inspection of goods on display and physical surroundings, and did not involve any observation of consumer behaviour.  eproduced from © AAP 2008, ‘Cadbury to fight on for colour purple in Australian courts’ by K. Foulstone, 12 April. R See full credit on acknowledgements page.

If breach of the ACL can be established, the trade mark owner will be entitled to the usual range of remedies available under the ACL, including an order for damages, injunctions and corrective advertising orders. CHAPTER 13 Protecting IP  495

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 13.24 What is a trade mark? 13.25 What is the difference between a business name and a trade mark? 13.26 What are the requirements for trade mark protection? 13.27 What is the process of registering a trade mark? 13.28 What are collective trade marks, certification trade marks and defensive trade marks? 13.29 Who is the owner of a trade mark? 13.30 What are the exclusive rights of a trade mark owner? 13.31 What is the duration of trade mark protection? 13.32 How can a trade mark be protected in another country? 13.33 When is a trade mark infringed? 13.34 What are the defences to a trade mark infringement action? 13.35 What are the consequences of trade mark infringement? 13.36 How can an unregistered trade mark be protected?

13.4 Patents LEARNING OBJECTIVE 13.4 How does patent law protect new technology from unauthorised exploitation? When is a patent infringed and what can be done about it?

A new technology such as an invention, a new substance or an innovative method or process can be protected by registering a patent.

What is a patent? A patent is a form of legal protection granting the creator of a new technology the exclusive right to use and exploit that new technology for a limited period. It is intended to encourage invention and innovation by rewarding the creator with a potentially valuable limited monopoly. In return the creator is obliged to provide a full description of how the new technology works; this information becomes public and can provide the basis for further research by others. Examples of famous new technologies patented in Australia include: •• the Hills hoist, •• the Victa lawnmower, and •• dynamic lifter. The technology can be any device, substance, method or process provided that it is new, inventive and useful. Generally, a patent will be granted to protect any novel and non-obvious technological development. Technologies that cannot be patented include: •• artistic creations (because they are not ‘useful’), •• principles, theories or mathematical models, •• plans, •• schemes, and •• purely mental processes with no tangible commercial application. Patent protection is not automatic; the patent must be registered with the Patents Office of IP Australia. Australian patents are regulated by the Patents Act 1990 (Cth). The Plant Breeder’s Rights Act 1994 (Cth) provides rights similar to patent rights to the creator of an innovative plant variety.

Types of patent In Australia there are two types of patent: the standard patent and the innovation patent. The standard patent is the most common patent currently filed in Australia. A standard patent lasts for 20 years from the filing date of the patent application (or up to 25 years for pharmaceutical 496  PART 2 Legal consequences

substances). A standard patent must satisfy the requirements relating to inventiveness, and each application for a standard patent is examined thoroughly by the Patents Office. An innovation patent is available for new technologies that are not sufficiently inventive to meet the inventive threshold required for standard patents — that is, it is a relatively minor advance upon existing technology. The innovation patent provides a relatively cheap patent right that is quick and easy to obtain. It is appropriate for new technologies that have a short commercial life. A patent will be granted after a simple formalities check. Substantive examination will occur only if specifically requested by the patentee, the Commissioner or a third party. Note, however, that monopoly rights cannot be enforced without substantive examination. The main differences between the innovation patent and a standard patent are: •• the requirement that the subject matter of an innovation patent be ‘innovative’ is a lower threshold than the requirement that the subject matter of a standard patent be ‘inventive’ (although other requirements, such as novelty, are the same), and •• the term of an innovation patent is only 8 years.

Requirements for patent protection To register a patent in Australia the new technology must satisfy four requirements.107 The new technology must (1) be a manner of manufacture, (2) be novel, (3) involve an inventive or innovative step, and (4) be useful. CHECKLIST

A new technology will only be patented if all of the following requirements are satisfied. ◼◼ The new technology is a manner of manufacture. ◼◼ The new technology is novel. ◼◼ The new technology involves an inventive or innovative step. ◼◼ The new technology is useful.

Requirement 1: The new technology is a ‘manner of manufacture’ The new technology must be a technology, or, as it is referred to in the Act, a ‘manner of manufacture’. This means it must be a product that has been created, or a composition or a process. It cannot be an abstract idea, or something that occurs naturally like a new mineral or a species of plant that has been discovered. It has to be an invention. A general rule of thumb is that to be a manner of manufacture the new technology must result in an artificially created state of affairs — and it must have a broad commercial significance.108 Examples include: •• new drugs and medicines, •• new processes, •• new machines, •• new business systems,109 and •• new ways of using existing products.

107 Patents Act 1990 (Cth) s 18(1). 108 National Research Development Corp v Commissioner of Patents (1959) 102 CLR 252. 109 Welcome Real-Time SA v Catuity Inc (2001) 113 FCR 110.

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NV Philips Gloeilampenfabrieken v Mirabella International Pty Ltd (1995) 183 CLR 655

Philips sought to patent its long-life energy-saving compact fluorescent lamp. It argued that the lamp qualified as a manner of manufacture because it was ‘a new use of an old substance’. The court rejected Philips’ argument, because fluorescent tubes had been in use for a long time and making them smaller and more energy efficient did not amount to a new use.

Grant v Commissioner of Patents (2006) 154 FCR 62

In 2003, Grant filed an Australian innovation patent application for an ‘Asset Protection Method’. The invention was a set of methods for protecting an asset from financial risk. The patent specification did not refer to any technical features, data processing or computer system. Rather it set out a series of steps to be followed in order to protect assets, such as setting up a trust, transferring money to the trustee, and having the trustee make a loan of the money back to the owner secured over the asset. After being granted an innovation patent, Grant requested examination and certification of the patent (see below), resulting in the patent being revoked by the Commissioner of Patents. Grant appealed to the Federal Court of Australia, which decided that the invention was not a proper subject of letters patent. This decision was upheld by the Full Court of the Federal Court. The invention did not result in an artificially created state of affairs in the sense of a concrete, tangible, physical, or observable effect. Rather it was ‘a mere scheme, an abstract idea, mere intellectual information, which has never been held to be patentable’.

New technologies that are excluded from the definition of ‘manner of manufacture’ include: •• discoveries, •• naturally occurring organisms, and •• scientific theories and intellectual information unless they have been practically or technically applied. ACTIVIT Y 13.13 — REFLECT

How can each of the above exclusions be justified?

Other excluded new technologies are those that are contrary to law, mischievous to the State, or generally inconvenient. The Patents Act 1990 (Cth) specifically provides that human beings and the biological processes for their generation are not patentable.110 It is therefore not possible to patent in-vitro fertilisation processes or genetic engineering processes resulting in human beings. On the other hand, micro-organisms, microbiological processes, living organisms and other life forms are patentable.

Requirement 2: The new technology is ‘novel’ The new technology must, when compared with the prior art base as it existed before the priority date of the claim, be novel. The ‘prior art base’ includes any information in a document that is publicly available whether in or out of the patent area, and any information made publicly available through doing an act, whether in or out of the patent area.111 This means, for example, that the new technology cannot be patented if it has already been published or publicly used. Public disclosure includes any disclosure either orally or in writing to any person or persons. The applicant for a patent cannot have disclosed the new technology to potential financiers, potential customers, potential partners, friends, business associates, inventor organisations or the media before filing the patent application. If they have disclosed the new technology to any of these people before filing the patent application, the new technology has 110 Patents Act 1990 (Cth) s 18(2). 111 Patents Act 1990 (Cth) s 3.

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already entered the public domain and is unpatentable. Similarly, if the applicant has launched, sold or even given away samples of the new technology before filing a patent application, they may not be able to protect it by patent. CAUTION!

A creator of a new technology must not disclose that new technology to another person prior to lodging their application for a patent, otherwise the new technology will not be novel and it will not be patented.

The exceptions to this rule are: •• the applicant can disclose the new technology to another person under the protection of a properly drafted confidentiality agreement without losing their right to protect the new technology by patent, and •• the applicant can disclose the new technology to a professional adviser such as a patent attorney, as the nature of this relationship implies a duty of confidentiality. In 2002, the Act was amended to provide for a ‘grace period’.112 Within this grace period a new technology can be publicly disclosed under certain conditions and this will not prevent a valid patent being registered. For example, discussing the new technology with a contractor without having them sign a confidentiality agreement will not compromise the applicant’s ability to register a patent provided they lodge the application within 12 months of the disclosure. The grace period is intended to allow an application for registration to succeed even though the applicant has disclosed the patent by mistake or at the wrong time. The technology is also tested for novelty against publications anywhere in the world, whether made in writing, orally or by use. The technology will not be ‘novel’ if someone else has already publicly disclosed the details of the technology, whether or not they developed the technology themselves. Windsurfing International Inc v Petit & Borsimex Ltd (1983) 3 IPR 449

A patent for a windsurfer was revoked when it was discovered that there had been prior use of homemade windsurfers that had been described in a magazine article published before the patent application was lodged.

Requirement 3: The new technology involves an inventive/innovative step The new technology need not be a major breakthrough. Most patented new technologies are improvements on existing technology. However: •• a standard patent will not be registered unless the new technology involves an inventive step — that is, it is not an obvious thing to do to a person skilled in the technical field to which the patent relates, and •• an innovation patent will not be registered unless the new technology involves an innovative step — that is, there is a non-trivial difference between the new technology and what is publicly known about that technology. The test for an innovative step in relation to an innovation patent involves comparing the claims made in the application against information contained in other patent specifications. The test for an inventive step in relation to a standard patent involves the comparison of the new technology with the same information used to determine innovation in relation to an innovation patent, plus standard background knowledge in the technical field of the new technology (or ‘common general knowledge’) including common work practices, standard texts and handbooks, technical dictionaries and other material widely consulted in the field. 112 Patents Act 1990 (Cth) s 24.

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The requirement for registration of a standard patent is therefore much stricter and more difficult to satisfy.

Requirement 4: The new technology is useful The new technology must be ‘useful’ in that it must have a practical use and the potential for commercial return, and must be achievable not just in theory but in practice. A specific, substantial and credible use for the invention must be disclosed in the patent specification.113 During examination, IP Australia does not require or check that a new technology has utility, but it is a matter that can be raised by objectors and in subsequent court actions.

Registration process It is common practice to engage the services of a patent attorney to assist with the process of registering a patent. A patent attorney is a person who specialises in the patent application process and in IP law (although they are not lawyers and, as such, do not give legal advice). 1. The application is made to the Commissioner of Patents at IP Australia. 2. It may be a good idea to begin with a provisional application. This will establish a priority date and give the applicant 12 months within which to decide whether or not to go to the expense of a complete application (or an international or convention application (see below)). 3. A patent will only actually be granted upon the making of a complete application. The complete application must include a complete specification, which must contain at least one claim. (A standard patent can have any number of claims, an innovation patent can have no more than five.) The claims must be written as a single sentence; distinguish the new technology from what is already known; set out all the characterising technical features of the new technology; and be consistent with the description. 4. Upon receipt of the complete application, IP Australia conducts a formalities check to ensure that the application is in order, and notifies the applicant accordingly. 5. If the applicant wishes to enforce the patent they must formally request an examination of the patent. Examination is not automatic. Upon receipt of the request for examination, IP Australia examines the patent to determine whether: (a) the description of the new technology is clear and complete, (b) the claims define a manner of manufacture, (c) the claims define a technology that is novel, (d) the claims define a technology that involves an innovative step (for innovation patents) or an inventive step (for standard patents), and (e) the claims and the description are fairly based. Pfizer Overseas Pharmaceuticals v Eli Lilly & Co (2005) 225 ALR 416

Eli Lilly and Company challenged Pfizer Overseas Pharmaceuticals’ patent for the impotence treatment medication Viagra. Eli Lilly had a rival product, Cialis. The court confirmed that the patent was generally valid because it was sufficiently described, it was a manner of manufacture, it involved an inventive step, and it was new. However, Viagra’s broad claim for treatment of penile erectile dysfunction over and above its more specific claims, which would have allowed Viagra to prevent any other person manufacturing erectile dysfunction medication, was disallowed because it was not fairly based.

6. If IP Australia decides to certify an innovation patent, the applicant’s rights become legally enforceable. Otherwise IP Australia will notify the applicant of the problems with the patent and they will have the opportunity to rectify them. If the problems cannot be rectified the patent will lapse. 113 Patents Act 1990 (Cth) s 7A.

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7. If IP Australia decides to accept a standard patent, the application proceeds to the next stage. ­Otherwise IP Australia will notify the applicant of the problems with the patent and they will have the opportunity to rectify them. If the problems cannot be rectified the patent will lapse. 8. IP Australia publishes detail of the standard patent in the Australian Official Journal of Patents. Anyone who opposes the granting of the standard patent has three months within which to commence opposition proceedings. 9. After the opposition period, if no opposition is filed or if the opposition fails, and the acceptance fees are paid, the accepted standard application is sealed and the patent deed (or ‘letters patent’) is sent to the applicant. In practice, it may take up to a couple of years for a standard patent to finally be granted; an inno­ vation patent, on the other hand, may be granted relatively quickly. A patent may be revoked if, for example, it is shown to have been obtained by fraud, false suggestion or misrepresentation.114 ACTIVIT Y 13.14 — RESEARCH

Visit the website of an Australian patent attorney firm. What types of services are offered by the firm?

Patented or patent pending

A patent owner is not obliged to mark their patented products with the words ‘patented’ or ‘patent pending’ or refer to their application or patent number. However, it is often a good idea to do so because it puts potential infringers on notice and prevents them from claiming innocent infringement as a defence in subsequent court proceedings.

Extent of patent protection In this section we consider the identity and exclusive rights of the patent owner, and the duration of protection.

Ownership of the patent Only the owner of the new technology can apply for the patent. The owner is usually the creator of the new technology.115 However, this general rule is, like other forms of IP, subject to some important exceptions. If the new technology was developed by an employee in the course of their employment, for example, the new technology is owned by the employer. The owner must be a legal person — that is, they must be an individual or a corporation, rather than a partnership or a business name.

Exclusive rights of the owner The owner of a patent has the exclusive right to exploit the new technology.116 This means that they can prevent others from making, using or selling the new technology for the duration of the patent. They can also assign or license their patent to someone else in return for royalty payments. In return for being granted a monopoly over the use of the new technology for the duration of the patent, the patent owner must share their knowledge by providing a full description of how the new technology works. This information becomes public and can provide the basis for further research by others.

114 Patents Act 1990 (Cth) s 138. 115 Patents Act 1990 (Cth) s 15. 116 Patents Act 1990 (Cth) s 13.

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Duration of protection A standard patent grants protection for 20 years from the date of the patent.117 This can be extended to 25 years for new technologies relating to pharmaceutical substances.118 An innovation patent grants protection for 8 years.119 LAW IN CONTEXT: LAW IN PRACTICE

Evergreening Patents balance the rewarding of innovation in research and development with the public benefit of sharing knowledge with others. When the patent protection period expires, the new technology enters the public domain and can be copied and used freely by others. The owner of the patent, however, loses a valuable asset, and in recent years this process has been resisted by large corporations that own valuable patents, such as large pharmaceutical companies. One way in which the expiry of valuable patents is resisted is known as ‘evergreening’. Since 1983, pharmaceutical companies in the United States have been using this process to protect their valuable drug patents for as long as possible. When the original patent over the active compound of a brandname drug is about to expire, the owner of the patent will lodge a large number of new, complex and often highly speculative patents protecting not the drug itself, but instead some aspect of the drug manufacturing process. If a competitor gives notice of their intention to start manufacturing their own version of the soon-to-be no-longer-patented drug, the owner of the original patent can threaten the competitor with legal proceedings for infringing one or more of the new patents. Although these new patents may not yet have been registered, the fact of their lodgement can still be used to legally prevent the competitors from marketing their version of the product. The problem is a serious one in the United States. In 2002, an inquiry by the US Federal Trade Commission found that as many as 75 per cent of new drug applications by generic drug manufacturers were the subject of legal actions under patent laws by the original brand-name patent owner. These were driving up US drug costs by keeping the cheaper generic versions off the market. Under existing law, the evergreening of patents is also possible in Australia.

International protection Patent applications must be filed in each country where protection is sought. Each country has its own patent system, and protection gained in one country does not extend to another. This means that a new technology is unprotected in any country where there is no patent in force, regardless of the status of a patent in any other country. International patent protection is facilitated by the Patents Cooperation Treaty 1970. Under this treaty, the provisions of which have been incorporated into the Patents Act, a person can file an international application with IP Australia that will give their new technology recognition (but not registration) in each country that is a party to the treaty (more than 120 countries, including Australia). Thus, if a person wishes to patent their new technology overseas, they can either: •• file an international application via IP Australia, leading to simultaneous recognition of the patent in a number of different countries, or •• file a convention application for registration of the patent in each country separately. A patent, or even a patent application, in one country can be used to oppose the granting of a patent for the same new technology in another country even if it is not registered in that other country. For example, if Johnny has a patent or a patent application in Australia, it will be public knowledge, and a person in Britain will not be able to have a patent granted for the same new technology because their application would lack the requisite novelty. They can still produce the new technology in their country, 117 Patents Act 1990 (Cth) s 67. 118 Patents Act 1990 (Cth) ss 70–79A. 119 Patents Act 1990 (Cth) s 68.

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but they cannot prevent Johnny from importing his product and competing with them on the open market by patenting the new technology.

Infringement A patent owner’s rights are infringed if the new technology protected by the patent is copied, used or exploited without their consent. Neither a standard patent nor an innovation patent can be enforced until the patent has been formally examined by the Commissioner. Examination does not occur until it is explicitly requested.

Remedies The remedies for infringement include: •• an injunction to restrain threatened or further infringements, •• damages, •• an account of profits, and •• an inspection order.120

Defences A court may refuse to award damages or an account of profits if it is shown that at the time of the infringement the defendant was not aware that the new technology was protected by a patent.121 If, however, the patented product was sold or used to a substantial extent in Australia before the date of the infringement, and the product was marketed as being subject to a patent (for instance, the products were marked with the word ‘patented’) then the defendant will be deemed to have been aware of the existence of the patent. In 2012 the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 amended the Patents Act 1990 to clarify that experiments on patented inventions do not constitute patent infringement.122 The exemption applies to tests, trials and procedures that a researcher undertakes as part of discovering new information or testing a principle or supposition. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 13.37 What is a patent? 13.38 What is the difference between a standard patent and an innovation patent? 13.39 What criteria must be satisfied before a patent will be registered? 13.40 What is the process for registering a patent? 13.41 Who is the owner of a patent? 13.42 What are the exclusive rights of the patent owner? 13.43 What is the duration of patent protection? 13.44 How can a patent be protected internationally? 13.45 When is a patent infringed? 13.46 What are the possible defences to an infringement action? 13.47 What are the remedies and penalties for infringement?

13.5 Designs LEARNING OBJECTIVE 13.5 How does design law protect an original design from unauthorised use? When is a registered design infringed and what can be done about it?

The Designs Act 2003 (Cth) protects the design of a product from unauthorised copying or exploitation. 120 Patents Act 1990 (Cth) s 122. 121 Patents Act 1990 (Cth) s 123(1). 122 Patents Act 1990 (Cth) s 119C.

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What is a design? The design is the overall appearance of the product resulting from one or more visual features of the product.123 It is those visual features of the product that make it distinctive and unique. A ‘product’ is a thing that is manufactured or hand-made.124 It includes a component part of a complex product, provided it is made separately from the product. A ‘visual feature’ includes the shape, configuration, pattern and ornamentation of the product; it may, but need not, serve a functional purpose.125 Neither the feel of the product nor the materials used in the product are included as ‘visual features’. Examples of famous registered designs include: •• the electric jug (1948), •• the folding chair (1961), •• ‘Speedo’ swimming trunks (1976), •• the portable cooler (1984), and •• the Dunlop tyre (1986). Design protection only protects the appearance of the product, not the way it works. However, the product may be protected simultaneously by design protection, patent registration and copyright. For example, a CD cover may be protected as a design under the Designs Act 2003 (Cth) and an artistic work under the Copyright Act 1968 (Cth), and the name of the band may be protected as a trade mark under the Trade Marks Act 1995 (Cth).

Design protection versus copyright There is an overlap between copyright law and design law in that a particular design may be protected as an ‘artistic work’ under copyright law. As explained earlier, the Copyright Act 1968 (Cth) now provides that copyright protection is automati­ cally lost if a three-dimensional artistic work is applied commercially (i.e. if more than 50 articles have been made from the design). Such a work should be registered as a design in order to be protected from unauthorised copying. Two-dimensional designs, on the other hand, are still protected by copyright, provided that the usual requirements for copyright protection are satisfied.

Requirements for design protection Design protection is not automatic. The design must be registered with IP Australia.

Registration criteria A design will not registered unless it is new and distinctive.126 CHECKLIST

A design will only be registered if all of the following requirements are satisfied. ◼◼ The design is new. ◼◼ The design is distinctive.

A design will be new unless it is identical to a design that forms part of the prior art base. The prior art base is publicly available information at the time of registration against which a design is compared to determine if it is ‘new’. The prior art base includes: •• designs publicly used in Australia, •• designs published outside Australia, and 123 Designs Act 2003 (Cth) s 5. 124 Designs Act 2003 (Cth) s 6. 125 Designs Act 2003 (Cth) s 7. 126 Designs Act 2003 (Cth) s 15.

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•• designs of different types of products, whether or not it was obvious to adapt those designs to the product being registered. A design will be distinctive unless it is substantially similar in overall impression to a design that forms part of the prior art base. If a design has been publicly disclosed or published in a document prior to lodgement of the application for registration, it will already be in the public domain and will not be new and distinctive. It is therefore vitally important that, like patents, new designs be kept confidential until the application for registration is lodged.

Registration process 1. The applicant should first search the designs database at www.ipaustralia.gov.au to see if the same or a similar design has already been registered. 2. When the application is filed the applicant can elect to request that the design be registered or published. Registration of the design will enable the applicant to enforce their design rights against an alleged infringer. If the applicant requests publication, the design will be published in the Australian Official Journal of Designs and in the designs database. Publication of the design will not give the applicant any enforcement rights, but it will prevent others from gaining any rights to the design. 3. If the applicant requests that the design be registered, the design undergoes a formalities check. If the application passes this check, the design will be registered and details of the design will be made publicly available in the Australian Official Journal of Designs and in the designs database. IP Australia will issue a Certificate of Registration and the design will be recorded in the Register of Designs. 4. An examination of the design by the Registrar may be requested by any person, ordered by the court, or made at the discretion of the Registrar. If ‘upon examination’ the Registrar decides that the design was not new and distinctive at the time the application was lodged, the registration is revoked. If the Registrar is satisfied that the registration is valid, they issue a Certificate of Examination, and infringement proceedings can then be commenced.

Extent of design protection In this section we consider the identity and exclusive rights of the design owner, and the duration of protection.

Ownership of the design An application for registration can only be made by the owner of the design. The owner of the design is: •• the creator of the design, •• the employer of the creator, if the creator made the design in the course of their employment, •• the person who contracted the creator to make the design, or •• a person to whom the creator has assigned the design.127 Ownership of a design must be assigned in writing.

Exclusive rights of the design owner The registered owner has the exclusive right: •• to make a product that embodies the design, •• to import such a product into Australia for sale, or for use for the purposes of any trade or business, •• to sell, hire or otherwise dispose of such a product, •• to use such a product in any way for the purposes of any trade or business, and •• to authorise another person to do any of these things.128 In other words, the owner also has the right to license others to produce, use and sell the design, usually in return for a fee. A registered design is therefore a valuable commercial asset. 127 Designs Act 2003 (Cth) s 13. 128 Designs Act 2003 (Cth) s 10.

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Duration of protection Design registration initially protects the design for 5 years.129 The owner can renew the registration for a further 5 years, after which the design automatically enters the public domain and may be freely copied and used by others.130 ACTIVIT Y 13.15 — RESEARCH

Visit the IP Australia website at www.ipaustralia.gov.au. How can a design be protected internationally? What is the ‘Paris Convention’?

Infringement A person will infringe a registered design if, without the owner’s consent, they make, import, sell, hire, offer for sale or offer for hire a product that embodies a design that is identical to or substantially similar in ‘overall impression’ to the registered design.131 Parallel importing is permitted. Infringement proceedings can only be commenced if the Registrar has examined the design and a Certificate of Examination has been issued.132

Remedies Remedies available to the design owner in the event of infringement of their registered design include: •• an injunction to prevent further infringement, and •• either an account of profits or damages.133

Defences A person accused of infringing a design may seek to rely upon the following defences: 1. The ‘spare parts’ defence: A design will not be infringed if the allegedly infringing product is a component part of a complex product — such as a spare part for a car — and is made or sold for the purpose of genuine repair of the complex product. This defence is intended to encourage competition in the spare parts market.134 2. The court will refuse to award an account of profits or damages if the defendant was not aware that the design was registered at the time of infringement, and had taken all reasonable steps to ascertain whether the design was registered.135 REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 13.48 What is a design? 13.49 What criteria must be satisfied before a design will be registered? 13.50 What is the process for registering a design? 13.51 Who is the owner of a design? 13.52 What are the exclusive rights of the design owner? 13.53 What is the duration of design protection? 13.54 When is a design infringed? 13.55 What are the possible defences to an infringement action? 13.56 What are the remedies for infringement?

129 Designs Act 2003 (Cth) s 46. 130 Designs Act 2003 (Cth) s 47. 131 Designs Act 2003 (Cth) s 71. 132 Designs Act 2003 (Cth) s 73. 133 Designs Act 2003 (Cth) s 75. 134 Designs Act 2003 (Cth) s 72. 135 Designs Act 2003 (Cth) s 75(2).

506  PART 2 Legal consequences

13.6 Breach of confidence LEARNING OBJECTIVE 13.6 How can a business stop someone from breaching its confidentiality and disclosing its trade secrets?

When one person uses information disclosed to them on a confidential basis without the consent of the owner of the information, the tort of breach of confidence is committed. This area of tort law protects not only trade secrets but also confidential government information and personal information. The tort of breach of confidence is committed if information is given by the plaintiff to the defendant in circumstances where an obligation of confidence is explicitly made known and accepted, or is implied from the context; the information is of a confidential nature (trivial information and public knowledge are not protected); and there is an unauthorised use or threatened use of the information by the defendant. CHECKLIST

X will have committed the tort of breach of confidence and will be liable to Y if all of the following requirements are satisfied. ◼◼ Information is given by Y to X in circumstances where an obligation of confidence is explicitly made known and accepted, or is implied from the context. ◼◼ The information is of a confidential nature. ◼◼ There is an unauthorised use or threatened use of the information by X.

An obligation of confidence will usually be assumed to exist in the relationship of employer and employee. NP Generations Pty Ltd v Feneley (2001) 80 SASR 151

While employed by NP Generations Pty Ltd (NPG), Feneley contact details of NPG’s customers. After her employment over the address book to NPG. The court ordered that she details were confidential information and her failure to return

compiled an address book containing the was terminated, Feneley refused to hand hand over the address book. The contact the book was a breach of confidence.

Note that, unlike copyright law, it is possible for an idea to qualify as confidential information; it does not need to be expressed in material form. Fraser v Thames Television Ltd [1984] QB 44

Fraser, together with three female actors, verbally presented an idea for a television series to Thames Television. The main characters were to be played by Fraser and the three actors. The idea was presented to Thames Television in confidence. Thames Television paid a deposit for an option on the series, and Fraser and the actors were given the first right of refusal in relation to starring in the series. Thames Television made the series without Fraser and the actors, and they sued Thames Television for breach of contract and breach of confidence. Thames Television argued that the information about the television program was not confidential information because it was presented verbally. The court decided that there had nevertheless been a breach of confidence and that Thames Television had to pay damages. The idea for the television program had been communicated to Thames Television in circumstances that imparted an obligation of confidence, and the idea was identifiable, original and capable of reaching fruition.

CHAPTER 13 Protecting IP  507

The remedies available include an injunction, damages (compensation for loss of utility in the confidential information) and an order for account of profits. In circumstances where confidential information is to be disclosed to another, it is wise to prepare and execute a confidentiality agreement to remove all uncertainty and ensure that all parties are aware of their obligation of confidence. Contracts of employment should contain an appropriately worded restraint of trade clause. Confidentiality agreements have at least one significant advantage over copyright and patents: they do not expire, and the content of the agreement does not eventually enter the public domain. Some of the most famous trade secrets (e.g. the recipe for Coca-Cola or the ingredients in KFC’s ‘secret herbs and spices’) are not patented but are rigorously protected by confidentiality agreements. ACTIVIT Y 13.16 — RESEARCH

Draft a clause for inclusion in Johnny’s employment contracts that obliges employees to keep Johnny’s recipes confidential.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 13.57 What is the tort of breach of confidence? 13.58 What requirements must be satisfied to establish breach of confidence? 13.59 What are the remedies for breach of confidence?

In conclusion •• IP law protects the results of creative effort by giving the creator a monopoly over the exploitation of the results of their effort, either temporarily or indefinitely. •• Copyright law protects original texts, images and other forms of expression from unauthorised copying. Protection is provided for certain creations that are original and expressed in a material form. As a general rule, the owner of the copyright is entitled to prevent others from copying the creation for a period of 70 years from the date of publication. Copyright is infringed if another person, without the owner’s permission, copies a substantial part of the creation, and there is both an objective similarity and a causal connection between the original creation and the copy. •• Trade mark law protects a trade mark — a name, symbol or form of packaging that identifies a product as that of a particular business — from unauthorised use. Protection is not automatic; the trade mark must be registered. Registration of the trade mark allows the owner to exclude others from using that trade mark, or a deceptively similar trade mark, in relation to the sale of the same or similar products: they only have the right to restrain others from using the registered trade mark in relation to the class of products in which the trade mark has been specifically registered. Trade mark protection is indefinite although registration of the trade mark must be renewed every 10 years. If another business markets their products using a trade mark that is substantially identical or deceptively similar to the registered trade mark, they have infringed the trade mark. If a trade mark is unregistered, the owner may still be able to prevent another from misusing it by bringing a legal action either in the tort of passing off or under the ACL. •• Patent law protects new technologies from unauthorised exploitation. Protection is not automatic; the patent must be registered. In Australia there are two types of patent: the standard patent and the innovation patent. An applicant will be entitled to register the patent if the new technology is a manner of manufacture; new (or ‘novel’); inventive/innovative; and useful. The owner of a patent has the ­exclusive right to prevent others from making, using or selling the new technology for a fixed period 508  PART 2 Legal consequences

of 20 years for a standard patent, and 8 years for an innovation patent. The owner’s rights are infringed if the new technology protected by the patent is copied, used or exploited without their consent. •• Design law protects an original design — the overall appearance of a product resulting from one or more visual features of the product — from unauthorised use. Protection is not automatic; the design must be registered. A design will not be registered unless it is new and distinctive. The registered design owner has the exclusive right to produce, use and sell the design. A person will infringe the registered design if, without the owner’s consent, they make, import, sell, hire, offer for sale or offer for hire a product that embodies a design that is identical to or substantially similar in ‘overall impression’ to the registered design. •• A business can stop a person from disclosing its trade secrets if the person commits the tort of breach of confidence. Breach of confidence is committed when a person uses information disclosed to them on a confidential basis without the consent of the owner of the information.

JOHNNY AND ASH

[Johnny and Ash are still on the couch in Johnny’s untidy apartment. The remains of a pizza sit in a pizza box on the floor, next to the laptop computer.] Ash — Okay, so let’s work out if Simulacra have infringed any of your IP rights. What have they done? Johnny — For a start they’ve copied my tofu burger recipe and called it the ‘lame duck’ burger, which is the name of my restaurant! Ash — Well, that’s two things: the recipe and the name. Let’s think about them separately. The name first, ‘lame duck’. Have you registered ‘lame duck’ as a trade mark? Johnny — I’ve registered it as a business name. Is that the same thing? Ash — No. Because you registered it as a business name you can stop anyone else from calling their restaurant ‘The Lame Duck’, but it doesn’t mean you can stop someone else calling their product a ‘lame duck burger’. This is why you should remember to register the name as both a business name and a trade mark. Johnny — So I can’t stop them calling their burger the ‘lame duck’ burger? Ash — Not under the Trade Marks Act. But you might be able to argue that they are committing the tort of passing off: they are making a misrepresentation to the public that they are somehow associated with you or your business. You will have to show that there is an awareness of your restaurant name in the minds of members of the local community who are also customers of Simulacra  .  .  .  Johnny — I can do that. Ash — Good, so such an action might be successful. We shouldn’t have too much trouble establishing that they were trying to rely upon your reputation to sell their product; why else would they call it a ‘lame duck burger’? Johnny — [Sarcastically] It is a bit of a coincidence. Ash — Indeed. Now, what about the fact that they’ve copied the recipe for your burger? Johnny — Copyright? Ash — Well, there does appear to be some copyright issues here. They have copied the descriptions of many of the items on their menu straight from your menu. Johnny — I haven’t registered my menu  .  .  .  Ash — You don’t have to. Copyright protection is automatic, remember. Your menu is a ‘literary work’ — don’t laugh — that is both original and expressed in a material form. They have copied a substantial portion of your literary work, and there is objective similarity — the wording is exactly the same — and a causal connection — they could quite easily have seen a copy of your menu. So where they have used the wording from your menu they have infringed your copyright.

CHAPTER 13 Protecting IP  509

Johnny — But what about the actual recipes themselves? Aren’t they protected? Ash — No. The idea for a dish is not automatically protected, only the material expression of the idea. Johnny — Can I patent my recipes? Ash — Well, it’s too late now to patent your existing recipes. They are already in the public domain. Johnny — What if I come up with a new recipe? Can I patent it then? Ash — It’s a lot of trouble and expense to go to in order to protect something that you probably change every few years. And anyway, I imagine it would be rather difficult to convince the Patents Office to allow you to register a patent over a recipe. Remember, it has to be inventive or innovative, and not something that is an obvious step to someone who is an expert in the field. Most recipes, no matter how weird, are unlikely to qualify as truly inventive or innovative; rather they are just a new combination of ingredients. On the other hand, if you came up with, say, a completely new way to make pizzas  .  .  .  Johnny — Or a secret recipe for a soft drink? Like my new recipe for organic cola? Ash — Or a secret recipe for a soft drink, then you might be able to patent it. Johnny — Okay. Where does that leave us? Ash — By calling their tofu burger a ‘lame duck’ burger, Simulacra may be committing the tort of passing off, so we can probably get them to change the name of the burger. And it looks like Simulacra has infringed the copyright in your menu items, so we can get them to change their menu, but as long as they rewrite the descriptions in their own words we can’t stop them serving the same menu items as you. As for stealing your recipes  .  .  .  Johnny — That damn chef. Ash — Yes. If we can show that while he was working for you, you passed on the recipes to him in circumstances of confidence — in other words, you made it very clear that he was to keep the recipes a secret, and not use them for his own benefit — you might be able to establish that he has committed a breach of confidence. Is that what happened? Johnny — No  .  .  .  Ash — Okay, so we can’t sue the chef for breach of confidence. You might want to think about including some kind of confidentiality clause in your employment agreements from now on. Still, we’ve got copyright law and the tort of passing off. That’s something. Johnny — Great! Let’s sue them into oblivion! Ash — Hmm  .  .  .  Let’s start by writing them a letter and see where that gets us  .  .  . 

510  PART 2 Legal consequences

QUIZ 1 Which of the following is most likely to be protected by the law of copyright?

(a) A new method for storing data in a computer. (b) A brand. (c) The innovative shape of a new sports car. (d) The contents of an email. 2 Which of the following categories of IP law grants protection automatically? (a) Patent law. (b) Design law. (c) Copyright law. (d) All of the above. 3 Someone writes a novel in 2010 that is published in 2015, which is 2 years after their death. When will the novel enter the public domain under the present law? (a) Never. (b) 2013. (c) 2080. (d) 2083. (e) 2085. 4 The requirement that a ‘substantial part’ be copied in order to establish an infringement of copyright is usually interpreted as meaning that (a) nearly all of the original creation must be copied. (b) most of the original creation must be copied. (c) more than one-third of the original creation must be copied. (d) an important or recognisable part of the original creation must be copied. 5 Which trade mark associated with the sale of lemonade is most likely to be accepted for registration? (a) ‘Lemon’. (b) ‘Brisbane Lemonade’. (c) ‘Spryte’. (d) ‘Lost’. 6 If a trade mark is not accompanied by a trade mark symbol (a) the trade mark is not enforceable. (b) the trade mark will automatically enter the public domain. (c) the trade mark may enter the public domain if it becomes a generic term. (d) the trade mark will be deregistered. 7 Which of the following cannot be patented? (a) A new discovery. (b) A new machine. (c) A new process. (d) A new medicine. 8 If the patent for a product is registered in Australia but not in the UK (a) the patent owner can sell the product in Australia but not in the UK. (b) a UK competitor can sell their product in Australia. (c) the patent owner can still prevent a UK competitor from selling their product in the UK. (d) a UK competitor can be stopped from patenting the product in the UK. 9 At the very latest, a design will enter the public domain (a) upon the death of the designer. (b) 5 years after creation of the design. CHAPTER 13 Protecting IP  511

(c) 10 years after registration of the design. (d) 20 years after first publication of the design. 10 Which of the following is not one of the requirements of the tort of breach of confidence? (a) Unauthorised use or threatened use of the confidential information. (b) Disclosure of the information in circumstances where the obligation was explicitly or impliedly known. (c) The information is confidential in nature. (d) The defendant has executed a confidentiality agreement.

EXERCISES EXERCISE 13.1 — COPYRIGHT

Johnny has created his own website for his restaurant ‘The Lame Duck’. When he designed it he had trouble thinking of interesting and informative content and layout, so he had a look at what other restaurant websites looked like. He then designed his own website. He has now been contacted by Rochelle, the owner of ‘La Rochelle Patisserie’, who claims that Johnny has copied her website, specifically the colour scheme, the font and the menu design. She also claims that he has copied the slogan ‘Every bite is like a kiss from a lover’ from her website. Johnny insists that he did not deliberately copy the La Rochelle website, although it was one of the websites he looked at when he was planning his own. Is the La Rochelle website, including the slogan, protected by copyright law? If so, has Johnny infringed Rochelle’s copyright? EXERCISE 13.2 — COPYRIGHT

The local tourism office gives away postcards of the Kerouac Avenue eating precinct to tourists. One of those postcards shows a group of smiling youths standing in front of Johnny’s restaurant, ‘The Lame Duck’. Is the postcard an infringement of Johnny’s copyright? EXERCISE 13.3 — COPYRIGHT

Gaia has, without permission to do so, recorded one of her university lectures and posted the recording to her personal website for her fellow students to download. (a) Is the lecture protected by copyright? If it is protected, who owns the copyright, and what rights has Gaia infringed? (b) Can Gaia rely upon the defence of fair dealing? EXERCISE 13.4 — COPYRIGHT

On some days, when the restaurant is very quiet, Johnny sets up a DVD player and projector at the back of the restaurant and shows old movies from his extensive DVD collection to his customers. He does not charge them for this. Is there anything wrong with this? EXERCISE 13.5 — COPYRIGHT

In his time as a restaurant owner, Johnny has heard many entertaining stories told by his customers. He would like to write a book containing some of the best stories. Does he need to contact the customers and get their permission before including their stories in the book? EXERCISE 13.6 — TRADE MARKS

‘The Lame Duck’ restaurant is located directly across the road from a McDonald’s restaurant. Johnny thought it would be funny if he put a large sign out the front of his restaurant with the words ‘Mmmm .  . . try our vege burger instead’, with each of the ‘m’s in the shape of the McDonald’s ‘golden arches’. (a) Would the sign infringe McDonald’s registered trade mark? (b) How would your answer be different if the golden arches were not a registered trade mark? EXERCISE 13.7 — PATENTS

Johnny has developed a new cola made from all natural organic ingredients. Explain to Johnny (a) the circumstances in which the recipe can be patented, (b) the advantages and disadvantages of registering the patent, and (c) the process of registering the patent. 512  PART 2 Legal consequences

EXERCISE 13.8 — BREACH OF CONFIDENCE

Johnny and Maria are thinking about allowing someone else to open another Lame Duck restaurant under a franchise agreement. They are unsure whether or not to proceed, and Johnny asks his accountant Valerie for financial advice. A few days later he receives a call from Rochelle (owner of La Rochelle Patisserie) asking him if it is true that he is planning to franchise his restaurant. Rochelle reveals that she heard the information from her friend Valerie. Johnny is alarmed and annoyed because he had wanted to keep that information confidential. Has Valerie committed the tort of breach of confidence? If so, what remedies are available to Johnny?

KEY TERMS account of profits  An order of the court requiring the defendant to pay to the plaintiff the profits made by the defendant as a consequence of their harmful act. Australian Company Number (ACN)  The 9-digit number issued by ASIC upon registration of a company. Australian Consumer Law (ACL)  The law regulating consumer protection in Australia; a schedule to the Competition and Consumer Act 2010 (Cth). Anton Piller order  An order of the courts granting the plaintiff access to the defendant’s premises in order to locate or take possession of any infringing products. assign  To transfer rights or property. breach of confidence  A tort committed when one person uses confidential information without the consent of the owner of the information. business name  The trading name of a business person or business organisation. certification trade mark  A trade mark that informs customers that the product has a special quality. civil law legal system  A type of legal system, based upon the Roman legal system, where the main source of law is legislation. collective trade mark  A trade mark that distinguishes the products of members of a particular association from the products of persons who are not members of the association. confidentiality agreement  A written agreement according to which one or both of the parties undertake to keep certain information confidential. copyright  The right to prevent unauthorised copying of a text, image or other form of expression. damages  Monetary compensation; a type of civil remedy. defamation  A tort committed when one person publishes to a third party, in spoken or written form, a statement about another person that would damage the reputation of that person. defensive trade mark  A well-known trade mark registered in a class different to the classes of the well-known trade marked product. design  The overall appearance of a product resulting from one or more visual features of the product. independent contractor  A person who is contracted to provide services, but who is not an employee. indictable offence  A serious criminal offence such as murder, manslaughter, rape or robbery, which is tried before a judge and jury. infringe  To breach or break a rule, or to violate, transgress or encroach upon the rights of another. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. innovation patent  A patent that only needs to satisfy the ‘innovative’ requirement rather than the stricter ‘inventive’ requirement. intellectual property  A form of intangible creation such as the expression of an idea, a trade mark, a new technology or an original design. license  Non-exclusive and temporary permission by the owner of IP to exercise rights in relation to that IP (e.g. a licence to copy and publish copyrighted material). CHAPTER 13 Protecting IP  513

Mareva injunction  A court order directing the defendant not to remove infringing products from the jurisdiction of the court. moral rights  The non-transferrable rights of a creator to insist that they be identified as the creator, to prevent false attribution of creatorship, and to prevent derogatory treatment of the creation. parallel importing  The practice of importing products into Australia that were legally made overseas but without the consent of the local owner or licensee of the copyright or registered design. passing off  A tort committed when one person misrepresents themselves or their product as having some kind of connection with another person or their business. patent  A form of legal protection granting the creator of a new technology a monopoly over use and exploitation of that new technology for a limited period. patent attorney  A person who specialises in the patent application process and in IP law. prior art base  Publicly available information against which a patent or design is compared to determine if it is ‘new’. public domain  When IP protection expires, the IP is said to ‘enter the public domain’. restraint of trade  A term in a contract imposing limitations upon the ability of one of the parties to engage in a certain type of business or employment. standard patent  A patent that satisfies the ‘inventive’ requirement, and lasts for 20 years. summary offence  A less serious criminal offence such as common assault, a traffic offence, or being drunk and disorderly, which is tried before a magistrate. trade mark  A ‘mark’ such as a distinctive word, phrase, or symbol used in commercial dealings to show a connection between a product and a particular business. waiver  The deliberate surrendering of a known claim or right.

ACKNOWLEDGEMENTS Photo: © Nicescene / Shutterstock.com Photo: © veronchick84 / Shutterstock.com Article: © AAP VIC: Cadbury To Continue Fight For Colour Purple 11/04/2008

QUIZ ANSWERS

1. d  2. c  3. e  4. d  5. d  6. c  7. a  8. d  9. c  10. d 514  PART 2 Legal consequences

PART 3 Managing a business 14 Managing a business: start-up  516 15 Managing a business: business ownership  550 16 Managing a business: companies and corporate governance  588 17 Managing a business: making payments and recovering debts  623 18 Managing a business: insurance and taxes  657 19 Managing a business: employing workers  680 20 Managing a business: closing down  707

CHAPTER 14

Managing a business: start-up LEA RN IN G OBJE CTIVE S 14.1 W  hat should a person do first if they are thinking about starting a new business? 14.2 When will a business be required to register its business name, and how does it go about doing it? What licences will it need to apply for to conduct its new business? 14.3 Should the business lease its premises or own them outright? What is the difference between owning property and leasing property? What are the advantages and disadvantages of each? 14.4 When is a business allowed to be open for trading? What are the legal issues associated with setting up a website and acquiring a domain name?

JOHNNY AND ASH

[When Ash exits the front door of her city office building at the end of the day she finds Johnny leaning against a wall waiting for her.] Johnny — Well, I did it. Ash — [They start walking down the street together towards Ash’s city apartment.] Did what? Johnny — I told Maria that I’m going to sell my share in the restaurant to her. She has agreed to pay me another $100  000 for my share; apparently she’s going to give it to her nephew as a birthday present. I tell you, that woman sure has a lot of money. Anyway, it will all be over soon. I’ve agreed to stay involved for the next few months to assist with the transition but after that I’ll keep the recipes I’m working on and the rest will be all hers. Ash — That’s great? [Pauses.] Isn’t it? You don’t look happy. Johnny — Oh, don’t get me wrong. I’m actually relieved that I’ll no longer be in charge of the restaurant. It really never was my thing. I prefer to cook, to create. But what am I going to do now? Ash — Well, what do you want to do? Johnny — [He pauses.] What do you think of my organic cola? Ash — The new one you developed? You know what I think. I think it’s delicious. And the fact that it’s healthy too  .  .  .  As I keep telling you, it could make you rich. Johnny — Well, maybe it’s time to get rich. I want to start making and selling organic, healthy soft drinks and energy drinks. Get the kids off that sugary stuff and drinking something that’s actually good for them. Ash — Fantastic! That is a brilliant idea! Johnny — So, do you want to get rich with me? Ash — What? Johnny — Look, I know you already have a job, but I also know you have some money to invest. Do you want to invest in me? Do you want to be my business partner? Ash — I’ll have to think about it, but  .  .  .  I am interested. Of course, we will have to do it properly. A formal business plan. Insurance. Licences. Renting the premises. Setting up a website. A partnership agreement, maybe even set up a company. How exciting! Johnny — Oh yeah, woo hoo. How about I stick to the kitchen and you take care of the paperwork? Ash — Deal!

CHAPTER PROBLEM

As you make your way through this chapter, make a list of all the things Johnny and Ash will have to do to start their new business.

Introduction Johnny and Ash have decided to start a new business manufacturing and distributing organic soft drinks. In this chapter we consider in detail the rules relevant to the establishment of a new business, including the range of possible legal business structures available (which we will consider further in later chapters), business name registration and licensing issues, the basic principles of property law as they relate to ownership or leasing of business premises, and the rules regulating trading hours and domain names. We also refer to the wide range of online resources available to a person who is trying to start a business. CHAPTER 14 Managing a business: start-up  517

14.1 Preparation LEARNING OBJECTIVE 14.1 What should a person do first if they are thinking about starting a new business?

Johnny thinks he and Ash are ready. He has developed a new product that he is sure is going to make them rich. But before they open their doors, launch their website, or sign any contracts, they should put some time and effort into making sure that they are truly prepared to go into business.

Do some research Johnny and Ash can do the research themselves, or they can engage someone else to do the research for them, but they should try to find out: •• if customers are going to be willing to purchase their product, •• who their competitors will be and whether or not there is room for them and their product in the market, •• how much it is going to cost them to start the business and run the business, and whether they can afford it, •• what knowledge and skills they are going to need in order to succeed, and •• what additional professional advice they are going to need: business, legal and/or financial. LAW IN CONTEXT: LAW IN PRACTICE

Getting advice There are many sources of advice and support a person can use when they are thinking about starting or buying a business. These include the following. • The Australian Government’s business.gov.au website. By using the resources on this website they will be able to comply with the government requirements associated with the establishment of a new business more easily. It includes information about AusIndustry, the Australian Government’s business program delivery division of the Department of Innovation, Industry and Science. AusIndustry provides incentives to help businesses conduct research and development, grow small business, take up new technology, undertake industry-specific manufacturing and production, commercialise a new technology or venture, apply for a tax or duty concession for research and development or to improve export competitiveness, and gain access to science resources. • The BEC Australia website at www.becaustralia.org.au. Business Enterprise Centres throughout ­Australia work with and on behalf of the micro and small business sectors. They provide free advice and assistance to small business. • Business advisers, accountants and solicitors. • The government business authority of each State and Territory (see table 14.1).

TABLE 14.1

Government business authorities

Jurisdiction

Government business authority

Website

Australian Capital Territory

Innovation, Trade and Investment

www.business.act.gov.au

New South Wales

Small Business NSW

www.smallbiz.nsw.gov.au

Northern Territory

Department of Business

www.dob.nt.gov.au

Queensland

Department of Tourism, Major Events, Small Business and the Commonwealth Games

www.dtesb.qld.gov.au

South Australia

Department of State Development

www.statedevelopment.sa.gov.au

Tasmania

Department of State Growth

www.stategrowth.tas.gov.au

Victoria

Business Victoria

www.business.vic.gov.au

Western Australia

Small Business Development Corporation

www.smallbusiness.wa.gov.au

518  PART 3 Managing a business

ACTIVIT Y 14.1 — RESEARCH

Visit the website of the government business authority in your jurisdiction. What resources are provided for someone who wants to purchase an existing business?

LAW IN CONTEXT: LAW AND ETHICS

Business entrepreneur or social entrepreneur? When a person is planning a new business they should think about their overall  objectives. Are they doing this to make money for themselves, or do they have a wider goal? Are they going to be a business entrepreneur or a social entrepreneur? A social entrepreneur is someone who is concerned about a social problem and uses their business skills and principles to effect social change. A business entrepreneur will measure their success in terms of profit and return. A social entrepreneur will measure their success in terms of the impact they have upon society. An example of a successful social entrepreneur is Muhammad Yunus, the founder and manager of the Grameen Bank in Bangladesh. The bank is a microfinance organisation and community bank that makes small loans to poor people without requiring security for the loan. The bank’s group-based credit approach relies upon peer pressure within the borrower group to ensure that individual borrowers comply with their legal obligations. The bank and its founder were jointly awarded the Nobel Peace Prize in 2006.

Protect the IP Johnny and Ash will be relying upon something innovative, unique or different about their  product to succeed. They should therefore think about how best to protect their intellectual property (IP), and they should do so as early as possible. As we explained in the previous chapter, some forms of IP protection will become unavailable if they disclose their innovation too soon.

Prepare a plan Careful planning is essential to the success of a new business. Johnny and Ash should prepare the following plans. •• A business plan, which will set out their overall objectives, and include their market analysis and marketing plan, their IP strategy, their operations plan, their financial plan and their management plan. •• A marketing plan, which will set out the results of their market research and the ways in which they will promote their product. •• A risk management plan, which will set out the range of possible risks associated with starting and running their business and how they will manage them. •• A succession plan, which will set out who will take over the business if one or both of them are unable to continue or choose to dispose of their interest in the business. •• If they propose to market and sell their product internationally, they will also need an export plan.

Select a business structure One of the most important legal questions Johnny and Ash will have to answer for themselves when they are preparing to start their new business is which business structure they will adopt. A business structure is the legal form of a business organisation. Their choice of business structure will have important consequences for Johnny and Ash in terms of the ease and cost of setting up the business, their legal and financial liability, the way they pay tax, their ability to raise finance, and their ongoing regulatory obligations. The most common types of business structure are the sole trader, the partnership, the company and the trust (see figure 14.1). CHAPTER 14 Managing a business: start-up  519

Business structures

Sole trader

FIGURE 14.1

Partnership

Company

Trust

Types of business structure

A sole trader is an individual who directly owns and operates a business by themselves. A sole trader may engage employees but they are the sole owner of the business. They have sole responsibility for raising the funds to start the business; they have sole control over the operation of the business; the profits of the business are their own personal income; and they have unlimited personal liability for the debts and other legal obligations of the business. This is the simplest form of business structure. When Johnny owned and operated The Lame Duck restaurant by himself he was a sole trader. What if, rather than going into business by themselves, a person wishes to do so with one or more members of their family, some friends or some business associates? Then, instead of becoming a sole trader, they may find themselves becoming a partner in a partnership. A partnership is a group of two or more people who directly own and operate a business together. When Maria purchased a half-share in The Lame Duck restaurant from Johnny, Maria and Johnny became partners. A number of important legal consequences attach to being a partner in a partnership. The most important of these is mutual liability: each partner is both the principal and the agent of the other partners. This means that each partner is liable for the actions, contracts and debts of the other partners. A company is a type of corporation: it is a corporation incorporated under and regulated by the Corpor­ ations Act 2001 (Cth). A corporation is an artificial legal person separate from its owners and able to make contracts, own property and be a party to litigation in its own name. One of the main attractions of the company as a business structure is the concept of limited liability. Limited liability means that if the company is unable to pay all of its debts, the shareholders (the owners of the company) are not liable to contribute any more than what they have agreed to pay. They are, therefore, able to keep their personal wealth and assets safe from business creditors. The company is the most common type of business structure in Australia, and Johnny and Ash are considering this business structure for their new soft drink business. A trust arises whenever a person (either an individual or a corporation), called the trustee, owns property for the benefit of one or more other people, called the beneficiaries. The trustee is the legal owner of the trust property, and the beneficiaries are the equitable owners. The trust property may be a single asset or an entire business. The person who sets up the trust is known as the settlor. The terms of the trust may be set out in writing in a trust deed, which can be rather complex. The trust as a business structure can be used as a substitute for the company structure. The trust has a number of advantages over the company, including the fact that a trust does not have to be registered. Ash would like to own her share of the new business as a trustee for a family trust. Sole traders, partnerships, companies and trusts, and the advantages and disadvantages of each as a business structure, will be examined in detail in coming chapters. Note that these business structures are not mutually exclusive. Two or more companies, for example, can form a partnership,1 and a sole trader or a company can be a trustee under a trust. Note also that these are not the only possible structures. An unincorporated association is a not-forprofit association of members. It is not a separate legal entity and cannot own property or enter into contracts in its own name. It is managed by a management committee, the members of which may be personally liable for the activities of the association. This structure is commonly used by smaller not-forprofit organisations, clubs and sporting associations. 1 Anderson Group Pty Ltd (in liq) v Davies (2001) 53 NSWLR 401.

520  PART 3 Managing a business

Legislation in each State and Territory allows for the creation of incorporated associations.2 ­Incorporated associations differ from unincorporated associations in that the association is a separate legal entity, and the members have limited liability for the debts and obligations of the association. This structure is often used by larger clubs and sporting associations as well as charities and housing associations.

Raise some money It is likely that Johnny and Ash will need some capital to start their business. Where are they going to get finance from? Are they going to borrow money from a bank? Are they going to try to attract investors? If a business needs a large sum of money it has, broadly speaking, two options. 1. It can borrow money from lenders. This is called debt capital. 2. It can raise money from investors. This is called equity capital. The ratio of the debts of a business to its equity is called the gearing ratio. Every business must decide upon the most appropriate gearing ratio, taking into account the relative costs of debt and equity. LAW IN CONTEXT: LAW IN PRACTICE

Grants and subsidies for small business In addition to borrowing money from lenders and raising money from investors, a business may have a third option: applying for a government grant. Small business grants and other funding programs are available from Federal, State and Territory governments and in some cases from local authorities. Generally, grants are not available for starting a business. However, grants and other assistance are available for a range of business activities such as expanding the business, research and development, innovation and exporting. More information on available grants and assistance can be found at the following websites. • The business.gov.au website offers a Grants and Assistance Finder that locates and describes relevant Federal, State and Territory government grants including specific grants for Indigenous business, women and young people, as well as general and industry specific grants: www.business.gov.au/ businesstopics/ grantsandassistance. • The AusIndustry website lists government grants that support industry, research and innovation: www.ausindustry.gov.au. • The websites of the various State or Territory business agencies (see above) set out information on State and Territory government grants. • The website of the relevant local government may contain information on available business grants.

Debt capital If Organicola borrows money from a lender such as a bank, it will enter into a contract with the lender. As such the basic principles of contract law will be applicable. The loan may be secured or unsecured. If it is a secured loan, the lender (referred to as a secured creditor) will be entitled to seize and sell the property over which the loan is secured in the event that the borrower defaults. The security over the property is referred to as a charge on the property. If the security is over real property, it is usually called a mortgage. The lender may insist that the loan be supported by a guarantee. This is an arrangement whereby a third party (the guarantor) promises to repay the loan in the event that the borrower refuses or is unable to do so. The rules regulating the enforcement of personal property securities, mortgages and guarantees are described in a later chapter. Additional statutory rules apply to borrowing by companies. These are described in detail in a coming chapter. 2 Associations Incorporation Act 1991 (ACT); Associations Incorporation Act 2009 (NSW); Associations Act 2003 (NT); Associations Incorporation Act 1981 (Qld); Associations Incorporation Act 1985 (SA); Associations Incorporation Act 1964 (Tas); Associations Incorporation Reform Act 2012 (Vic); Association Incorporation Act 1987 (WA) (but note the Associations Incorporation Bill 2014 (WA)).

CHAPTER 14 Managing a business: start-up  521

Equity capital The other major source of funding for a business is equity capital: the provision of funding by investors. Since an investor becomes an owner of the business, investment in a business has important legal consequences, depending upon the legal structure of the business. If the business is a sole trader, only the sole trader can invest in the business. If anyone else were to invest in the business, the sole trader would cease to be a sole trader and the business structure would instead become a partnership. If the business is a partnership, the investor becomes a partner in the partnership. Even ‘silent partners’ are subject to mutual liability, which is a key characteristic of the partnership as a business structure, unless the partnership is a limited partnership or an incorporated limited partnership (see the next chapter). For these reasons it is much easier to attract investment in a business if the business structure is a company. The raising of equity capital by companies is considered in detail in a later chapter.

Take out insurance Taking out the right insurance will help to protect Johnny and Ash from risk. They should consider whether or not they need any of the following types of insurance. •• Public liability insurance — this insurance will protect them from civil liability if they cause death or injury, property damage or loss, or economic loss to third parties. •• Professional indemnity insurance — this insurance will protect them from civil liability if they cause economic loss as a result of negligent misstatement or negligent advice. •• Product liability insurance — this insurance will protect them from civil liability if anyone suffers injury or damage as a result of use of or a defect in their product. •• Assets and revenue insurance — this insurance will protect them in the event of loss of or damage to their business assets or their revenue earning capacity. •• Accident or illness insurance — this insurance will protect them from financial loss in the event of personal accident or illness. It also includes life insurance. If they do decide that they need insurance, Johnny and Ash should arrange the insurance as early as possible. The rules regulating insurance are described in detail in a later chapter.

522  PART 3 Managing a business

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  14.1 What types of things should be researched before starting a new business?  14.2 Why is it important to think about IP protection before starting a new business?  14.3 What kinds of plans should be prepared before starting a new business?  14.4 Why is the choice of business structure an important decision?  14.5 What is a sole trader?  14.6 What is a partnership?  14.7 What is a company?  14.8 What is a trust?  14.9 What is the difference between debt capital and equity capital? 14.10 What kinds of insurance might be required when starting a new business?

14.2 Licences and registration LEARNING OBJECTIVE 14.2 When will a business be required to register its business name, and how does it go about doing it? What licences will it need to apply for to conduct its new business?

Once Johnny and Ash have made their plans, taken out insurance, protected their IP and selected their business structure they will still have to ensure their compliance with a range of statutory registration and licensing requirements before they can commence their new business.

Registering the business name Unless they propose to carry on their business under their own names (including their surnames and first names, or surnames and initials) Johnny and Ash must register the business name. This requirement applies to sole traders, partnerships and trusts. If Johnny and Ash choose to use a company as their business structure and they propose to carry on business under a name different to the registered name of the company, the business name must be registered. Each State and Territory has its own business names legislation, and prior to 2011 a business was required to register its business name in each State and Territory in which the business organisation proposed to conduct business. In 2011 the Australian Securities and Investments Commission (ASIC) took over responsibility for the registration of business names and introduced a national registration service for business names. Businesses now register their national business name at www.abr.gov.au. Johnny and Ash’s application to register their business name will be refused if: •• the name has already been registered as a business name in the State or Territory, •• the name is similar to a business name already registered in the State or Territory, or •• the name has already been registered as a company name anywhere in Australia. Johnny and Ash can search the national business names and company names registers online at www.search.asic.gov.au. ACTIVIT Y 14.2 — RESEARCH

Visit www.abr.gov.au and describe the process of (a) registering a business name, and (b) renewing the registration.

The purpose of requiring registration of a business name is not to protect the business’s interest in the name. The purpose is to protect the public by: •• making the identity of the person or company behind the business name publicly available and identifiable in the event of a problem, and •• avoiding the potentially misleading situation of having two businesses with the same business name. CHAPTER 14 Managing a business: start-up  523

Once a business name is registered the business does not ‘own’ the business name in the same way that it is possible to ‘own’ a trade mark. The business simply has permission to use that name for a limited period and to object to others using that same name. As we explained in the last chapter, a business name is not the same as a trade mark, which must be registered separately. If someone has already registered Johnny and Ash’s proposed business name as a trade mark, Johnny and Ash may infringe that trade mark if they register the business name. They should therefore check the trade mark register, which can be found at www.ipaustralia.gov.au, before registering the business name. CAUTION!

Business name registration must be renewed periodically. If a business owner neglects to renew the registration of their business name by the due date, they will no longer be entitled to use that business name.

Complying with licensing requirements A person starting a new business may require one or more licences from the relevant Federal, State or local government body. For example, if someone wanted to open a fitness centre in Brisbane, they would need the following licences. •• A licence to erect advertising signage — if the advertising signage will be visible from a road, footpath or public place, it will require the approval of the Brisbane City Council. •• Registration of a swimming pool — if the fitness centre has a pool it will need to be registered with the Brisbane City Council. •• Music and video licences — if they intend to play copyrighted music or videos via radio, television, CD, DVD, or through the telephone as music on hold, they will need licences from APRA, which represents the interests of the songwriters and publishers, and PPCA, which represents the interests of the artist and the record company. •• Vehicle registration — if they will be using a motor vehicle in relation to the business, they will have to register the vehicle as a commercial vehicle with Queensland Transport. The Commonwealth has established the Australian Business Licence and Information Service (ABLIS), which provides useful practical information about the licences required for each type of business. ACTIVIT Y 14.3 — RESEARCH

Visit the ABLIS website at https://ablis.business.gov.au and identify the licences that will be required by Johnny and Ash to set up a soft drink manufacturing and distribution business.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 14.11 In what circumstances will a person or organisation be obliged to register their business name? 14.12 When will an application to register a particular business name be refused? 14.13 What is the purpose of requiring business names to be registered? 14.14 What is a ‘licence’ and what are some examples of licences that may be required by a business? 524  PART 3 Managing a business

14.3 Renting or buying the premises LEARNING OBJECTIVE 14.3 Should the business lease its premises or own them outright? What is the difference between owning property and leasing property? What are the advantages and disadvantages of each?

Johnny and Ash face the same choice as that faced by homeowners: should they lease their business premises or should they buy them outright? In this section we look at the rules regulating real property ownership and those regulating commercial leasing.

Property concepts We begin our analysis of real property law by considering some of the basic rules regulating real property generally.

Ownership and possession It is important to first of all distinguish between ownership of property and possession of property. The owner of property is said to have ‘title’ to the property. They have extensive legal rights in relation to the property, including the right to transfer ownership of the property to another person. Someone in possession of property has temporary control and custody of the property. In most cases, possession and ownership of property coincide, that is, someone is the owner of the property and it is in their possession. But it is possible for someone to be the owner of property that is not in their possession, for example, where they have loaned or leased it to another. It is also possible for someone to be in possession of property of which they are not the owner, for example where they have found property that belongs to another. As we saw in an earlier chapter, the situation where one person is in possession of personal property that belongs to another is called a bailment.

Real and personal property Property is any thing, right or interest that can be owned by a person. Property generally can be divided into two legal categories: real property and personal property. Real property is land and things attached to the land — that is, fixtures such as buildings and things attached to buildings. Personal property (sometimes called ‘chattels’) includes all forms of property other than real property, including both tangible forms of personal property (choses in possession), such as cars, books, clothes and food, and intangible forms of personal property (choses in action), such as shares, intellectual property rights and contractual rights (see figure 14.2). Real property is regulated by State and Territory legislation.3

Land Land is a defined section of the planet’s surface. It includes all of the features and resources naturally occurring within the boundaries of the land: the trees, the rocks and soil, and the water. 3 Civil Law (Property) Act 2006 (ACT), Land Titles (Unit Titles) Act 1970 (ACT), Land Titles Act 1925 (ACT), Lands Acquisition Act 1994 (ACT); Conveyancing Act 1919 (NSW), Conveyancing and Law of Property Act 1898 (NSW), Crown Lands (Continued Tenures) Act 1989 (NSW), Crown Lands Act 1989 (NSW), Property, Stock and Business Agents Act 2002 (NSW), Real Property Act 1900 (NSW); Crown Lands Act 1992 (NT), Crown Lands Freehold (Conversion From Crown Leasehold) Act 1980 (NT), Lake Bennett (Land Title) Act 2005 (NT), Land Title Act 2000 (NT), Lands Acquisition (Pastoral Leases) Act 1982 (NT), Lands Acquisition Act 1979 (NT), Law of Property Act 2000 (NT), Real Property (Unit Titles) Act 1975 (NT); Land Act 1994 (Qld), Land Title Act 1994 (Qld), Property Law Act 1974 (Qld); Crown Land Management Act 2009 (SA), Land Acquisition Act 1969 (SA), Land and Business (Sale and Conveyancing) Act 1994 (SA), Law of Property Act 1936 (SA), Real Property (Commonwealth Titles) Act 1924 (SA), Real Property (Foreign Governments) Act 1950 (SA), Real Property (Registration of Titles) Act 1945 (SA), Real Property Act 1886 (SA), Strata Titles Act 1988 (SA); Conveyancing Act 2004 (Tas), Conveyancing and Law of Property Act 1884 (Tas), Crown Lands (Shack Sites) Act 1997 (Tas), Crown Lands Act 1976 (Tas), Land Titles Act 1980 (Tas), Strata Titles Act 1998 (Tas); Crown Land (Reserves) Act 1978 (Vic), Land Acquisition and Compensation Act 1986 (Vic), Land Act 1958 (Vic), Property Law Act 1958 (Vic), Subdivision Act 1988 (Vic); Property Law Act 1969 (WA), Real Estate and Business Agents Act 1978 (WA), Real Property (Commonwealth Titles) Act 1925 (WA), Real Property (Foreign Governments) Act 1951 (WA), Strata Titles Act 1985 (WA), Transfer of Land Act 1893 (WA).

CHAPTER 14 Managing a business: start-up  525

Property

Personal property (chattels)

Real property

Land

FIGURE 14.2

Fixtures

Tangible (choses in possession)

Intangible (choses in action)

Forms of property

If someone is the owner of land, how far beneath the surface of the land is still their property? The classic legal view was that they owned the land all of the way to the centre of the earth. In practice, however, this property right is of little consequence because ownership of the valuable minerals beneath the surface of the land is vested by legislation in the Crown. It does, however, entitle the owner to prevent someone tunnelling under their property without their permission.4 What about airspace? How high above the land is still the owner’s land? According to various case law decisions, there is no fixed height to which a person owns the airspace above their land. Rather, they own the airspace above their land to the height reasonably necessary for the ordinary use and enjoyment of their land. This means that if, for example, a crane or a billboard on neighbouring property intrudes above the land, the tort of trespass to land is committed.5 On the other hand, a plane or a satellite that passes over the property is not trespassing since it is above the height necessary for the owner’s ordinary use and enjoyment of the land. Lord Bernstein v Skyviews & General Ltd [1978] QB 479

Skyviews & General Ltd tried to sell Baron Bernstein an aerial photograph of his home. Bernstein sued Skyviews for trespass, arguing that it had invaded the airspace above his property. The court decided that the flight of an aircraft many hundreds of feet above the ground did not constitute a trespass because the rights of the owner of the surface to the airspace above should be restricted ‘to such height as is necessary for the ordinary use and enjoyment of his land and the structures upon it, and  .  .  . above that height he has no greater rights in the airspace than any other member of the public’.

Fixtures Ownership of real property includes not only ownership of the land itself, but also ownership of the fixtures on the land. A fixture is something that has been or is intended to be permanently attached to the land in order to enhance the land in some way. In other words, it is something that was previously personal property but which has now become part of the real property. Fixtures include not only buildings and things like in-ground swimming pools but also objects permanently attached to the buildings such as carpets, taps and air-conditioning units. Whether or not something is a fixture is a question that may arise in a number of different situations. It may arise when real property is sold and there is a dispute over whether a particular asset is a fixture and therefore automatically the property of the new owner, or personal property retained by the previous owner. It can also arise when real property is mortgaged and there is a dispute over whether an asset is included as part of the security for the loan. 4 Grigsby v Melville [1974] 1 WLR 80. 5 Kelsen v Imperial Tobacco Co (of Great Britain and Ireland) Ltd [1957] 2 QB 334.

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In deciding whether or not something is a fixture, the court will consider: •• the intention of the person who attached the object to the land or building, •• the ease or difficulty with which the object can be removed from the land or building, and •• whether substantial damage will be caused by the object’s removal.6 An object that has been attached to the land or building but which is not a fixture is known as a fitting. An example of a fitting is a washing machine. Australian Provincial Assurance Co Ltd v Coroneo (1938) 30 SR (NSW) 700

A theatre was sold. The court was called upon to decide whether certain assets — the seats, the switchboard and the projector — were fixtures that passed to the purchaser or fittings that remained the property of the vendor. The court decided that because the switchboard and the projector were securely and permanently attached to the building they were fixtures. However, the chairs were only bolted to the floor while movies were being shown and could be removed and stacked elsewhere when the theatre was used for other purposes, and the court concluded that they were, therefore, fittings.

CHECKLIST

When deciding whether or not an object is a fixture and therefore part of the land, the court will consider the following: ◼◼ What was the intention of the person who attached the object to the land or building? ◼◼ How easily can the object be removed from the land or building? ◼◼ Would substantial damage be caused by the object’s removal?

Disputes over whether objects are fixtures or fittings can be avoided by ensuring that the written contract for the sale of land or the mortgage document specifies clearly what is and what is not included in the sale or mortgage. Tenants’ fixtures

What if the property is rented to a lessee or tenant who attaches fixtures to the building? If it can be shown that the fixtures were attached for the purpose of trade, ornament or domestic convenience, they will be classified as tenants’ fixtures and they will not become the property of the lessor or landlord. Instead, the lessee will be entitled to remove the fixtures during the lease or within a reasonable time after the end of the lease. Most modern commercial leases will state explicitly that the lessee is not permitted to install fixtures without the permission of the lessor, and will contain terms setting out what is to happen to the fixtures upon expiry of the lease. Spyer v Phillipson [1931] 2 Ch 183

A lessee of a house installed oak and pine panelling, valuable antique fireplaces and a chimney. The lessor sought to prevent the lessee from removing them at the end of the lease, arguing that they were fixtures and had become part of the property. The court decided that because the objects had been attached to the house for the enjoyment of the lessee and not to permanently improve the lessor’s property, they were tenants’ fixtures and the lessee was, therefore, permitted to remove them.

CAUTION!

An object attached to a building may appear to be a fixture, but if it qualifies as a tenant’s fixture it has not become part of the building and is not the property of the building owner.

6 Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 at 712–713.

CHAPTER 14 Managing a business: start-up  527

ACTIVIT Y 14.4 — REFLECT

Look around the room you are in at the moment and identify which items would be classified as fixtures and which items would be classified as fittings.

Buying and owning real property The advantages and disadvantages of owning the business premises are set out in table 14.2. TABLE 14.2

Advantages and disadvantages of owning the business premises

Advantages

Disadvantages

• The property is an asset of the business.

• The initial outlay is substantial.

• The value of the property may increase over time.

• The value of the property may decrease over time.

• Owners have ‘security of tenure’, i.e. they can’t be evicted.

• It will be more difficult to sell the business because it will be necessary to persuade the buyer to also purchase the premises.

• A lessor cannot impose restrictions upon the use of the property.

• Owners are fully responsible for maintenance and repairs to the property as well as rates, rather than sharing them with a lessor.

• Owners can borrow against their investment in the property to expand the business.

• Interest payments are not as easy to renegotiate as rental payments.

• The value of the business increases as the value of the property increases.

• The consequences of business failure will be more substantial.

• Owners can lease parts of the property to others.

• Substantial fees and costs are associated with buying real property.

• Depreciation costs can be claimed as a tax deduction.

• Interest rates may increase. • It is a substantial and long-term financial commitment.

Types of ownership Strictly speaking, all real property is legally owned by the Crown. When someone ‘buys’ real property they in fact acquire an interest or estate in the real property that is less than complete ownership. There are two types of estate: freehold and leasehold (see figure 14.3).

Real property

Freehold

Fee simple

FIGURE 14.3

Estates and interests

528  PART 3 Managing a business

Leasehold

Life estate

A freehold estate is an interest in real property of uncertain duration. It is the closest thing to ownership possible under our system of land law, and in the eyes of most people it is ownership of the land. There are two principal types of freehold estate. 1. Fee simple — the most common type of freehold estate is fee simple. A holder of fee simple effectively has unrestricted ownership of the real property, subject only to the rights of the Crown. They can transfer or bequeath the real property to whoever they choose. 2. Life estate — a less common type of freehold estate is a life estate. A holder of a life estate is effectively the owner of the real property for their own lifetime (or sometimes the lifetime of another) after which the property automatically passes to another person, who is said to be entitled to the remainder. The holder of the life estate is entitled to rent and other income from the property, but cannot transfer or bequeath the property to another. For example, Ash may wish to ensure that her land ends up with her two nieces, but also wants to provide for her sister after her death. Ash therefore leaves her sister Rachel a life estate in the land and names her nieces Gaia and Talila as entitled to the remainder. Rachel is entitled to ownership of the property during her own lifetime, but cannot dispose of it and upon her death the land passes automatically to the nieces. The other type of estate is leasehold. The holder of the leasehold estate is entitled to possession of the real property for a limited period of time, after which the right to possession of the real property ‘reverts’ or returns to the owner. Leases are considered in detail below.

Co-ownership It is, of course, possible for real property to be owned by more than one person at a time. When there are two or more co-owners there are two possible arrangements: joint tenancy and tenancy in common. When co-owners are joint tenants they have an equal and undivided interest in the property. For co-­ ownership to qualify as a joint tenancy, four requirements must be satisfied, known as the ‘four unities’. 1. Unity of possession — each joint tenant is entitled to possession and occupation of the whole of the property. 2. Unity of interest — each joint tenant has the same interest in the property in terms of extent and duration, i.e. ownership is shared equally. 3. Unity of title — each joint tenant acquired their interest in the property from the same legal document, e.g. the same will or the same contract of sale. 4. Unity of time — each joint tenant acquired their interest at the same time. If any of these requirements are not satisfied, the co-ownership is a tenancy in common rather than a joint tenancy. A tenancy in common will still be characterised by unity of possession: each co-owner is entitled to possession of the whole of the property. (The only way to provide that each co-owner has possession of separate parts of the property is to subdivide the property.) The main differences between the two forms of co-ownership are as follows. •• A tenancy in common does not have to have unity of interest, which means that it is possible for ownership to be shared unequally. For example, two joint tenants must each have a half share in the property, but two tenants in common can share ownership such that one owner has a one-quarter share and the other owner has a three-quarter share. •• A joint tenancy is characterised by the right of survivorship: if one joint tenant dies, their share of the property automatically passes to the remaining owner or owners, even if the deceased’s will provides otherwise. This is why joint tenancy is the preferred form of co-ownership for spouses. There is no such right of survivorship with respect to tenants in common, and when one co-owner dies their share of the property passes in accordance with their will. A tenancy in common will be the preferred form of co-ownership when the co-owners have contributed to the purchase price in different amounts, or where the co-owners have acquired their interest at different times or from different legal documents. A joint tenancy will automatically become a tenancy in common if any of the four unities ceases to be present, e.g. if a co-owner sells their interest in the property to another. CHAPTER 14 Managing a business: start-up  529

Strata title and community title Legislation in each jurisdiction permits the subdivision of real property into a combination of smaller lots and common property.7 A lot is owned separately by an individual owner, and the common property is owned and managed by a body corporate or owners’ corporation representing the individual owners. Strata title refers to the vertical subdivision of the airspace above land into, for example, a high-rise accommodation block with the common property consisting of shared areas such as stairwells, elevators, reception areas and gardens. Community title refers to the horizontal and/or vertical sub­ division of land into, for example, a residential complex with the common property consisting of shared pathways and facilities. The legislation in each jurisdiction regulates the management and conduct of the body corporate/ owners’ corporation, covering, for example, the holding of meetings, the maintenance of the common property, financial issues, insurance, and the settlement of disputes between the owners.

Buying real property Johnny and Ash have seen the property that they want to buy, they have met the real estate agent, and they have signed a contract of sale. What are the legal consequences of this, and what happens next? The first legal consequence is that they immediately acquire an interest in the property. Legal ­owne­rship of the property does not pass to Johnny and Ash until after settlement of the contract of sale, normally at least 30 days after the contract is signed. However, as soon as the contract of sale is signed by both the vendor and the purchasers, Johnny and Ash immediately acquire an equitable interest in the property. They, in effect, become the owners in equity and, as such, have the right to obtain from the court an order for specific performance to compel the vendor to transfer ownership to them if the vendor later refuses to do so. A fiduciary duty is also imposed upon the vendor to preserve the property pending settlement. The position of the vendor has been compared to that of trustee. The vendor has a duty to disclose defects. As we explained in a previous chapter, a key feature of the normal contractual relationship is the principle of caveat emptor. A purchaser usually has a duty to investigate and be satisfied with what is being purchased. However, in a contract for the sale of land, the vendor has a corresponding duty to disclose defects of which the vendor is aware, and which would affect the purchaser’s decision whether or not to enter into the contract. As previously explained, contracts for the sale of land must be in writing to be enforceable. Any ­subsequent variations to the contract of sale should also be in writing. A common example is a variation in the date for settlement. If an extension is granted it should be a fixed date and it should be evidenced in writing. CAUTION!

A contract for the sale of land (as well as any change to that contract) is not legally enforceable unless it is in writing and signed by both parties.

By far the majority of conveyances involve the use of a standard form contract for the sale of land, typically issued by the relevant State or Territory Real Estate Institute (see table 14.3). There are standard contracts for the sale of house and land, standard contracts for the sale of home units and townhouses, and standard contracts for the sale of commercial property. It is not compulsory that the contract be a standard contract, but the forms have been developed to avoid the pitfalls associated with less formal written formats, and are very commonly used. 7 Community Titles Act 2001 (ACT); Strata Schemes (Freehold Development) Act 1973 (NSW); Strata Schemes Management Act 1996 (NSW); Community Land Development Act 1989 (NSW); Community Land Management Act 1989 (NSW); Unit Titles Act 1975 (NT); Body Corporate and Community Management Act 1997 (Qld); Strata Titles Act 1988 (SA); Community Titles Act 1996 (SA); Strata Titles Act 1998 (Tas); Owners Corporations Act 2006 (Vic); Strata Titles Act 1985 (WA).

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TABLE 14.3

Real estate institutes

Jurisdiction

Real estate institute

Website

Australian Capital Territory

Real Estate Institute of the Australian Capital Territory

www.reiact.com.au

New South Wales

Real Estate Institute of New South Wales

www.reinsw.com.au

Northern Territory

Real Estate Institute of Northern Territory Inc

www.reint.com.au

Queensland

Real Estate Institute of Queensland

www.reiq.com.au

South Australia

Real Estate Institute of South Australia

www.reisa.com.au

Tasmania

Real Estate Institute of Tasmania

www.reit.com.au

Victoria

Real Estate Institute of Victoria

www.reiv.com.au

Western Australia

Real Estate In Western Australia

www.reiwa.com.au

The terms of a standard contract often need modification to meet the specific needs of the parties. When this happens, special conditions can be inserted. Common special conditions include conditions that the sale of the property is: •• subject to sale of another property, •• subject to registration of a plan of subdivision, •• subject to a rezoning, or •• subject to local authority approval of a particular use. ACTIVIT Y 14.5 — APPLY

Draft a special condition making Johnny and Ash’s purchase of property conditional upon the sale of another property owned by Ash.

The sale of the property may be made ‘subject to finance’. For example, Johnny may be seeking to borrow money to finance his share of the purchase, and he does not have finance approval at the time that the contract is signed. In this situation the written contract would include a special condition stating that it is ‘subject to finance’. (Most standard contracts will contain provision for making the contract subject to finance.) LAW IN CONTEXT: LAW IN PRACTICE

Steps for buying property The process of buying real property differs between jurisdictions in Australia. The Real Estate Institute in the relevant jurisdiction should be consulted for specific details of the buying process. The following are the basic steps for a person buying real property. 1. The purchaser first finds out their borrowing capacity from their bank or other financier. 2. The purchaser decides upon the location where they would like to buy. 3. The purchaser finds out about properties for sale in the area from local selling agents, newspapers and property websites. 4. Upon locating a suitable property, the purchaser approaches the selling agent and inspects the property. They clarify with the selling agent what will be included in the sale. 5. The purchaser arranges to have the property independently and professionally valued by a licensed property valuer. 6. The purchaser should engage a solicitor to act on their behalf before the contract is drafted so that the solicitor can ensure the contract contains any special conditions necessary to protect the purchaser’s interests. 7. The purchaser makes an offer for the property.

CHAPTER 14 Managing a business: start-up  531

 8. Once a price has been agreed upon with the vendor, the purchaser or their solicitor receives the contract (likely to be in the standard form) from the selling agent. The selling agent may also be obliged to provide the purchaser with a statutory disclosure statement containing certain information about the property, as well as a statutory warning statement in the prescribed form setting out their rights and obligations, including their right to a cooling off period within which they can change their mind about their decision to purchase the property.   9. The purchaser or their solicitor ensures the contract contains any necessary special conditions. 10. The purchaser signs the contract and returns it to the selling agent. 11. The purchaser pays the deposit (usually 5 per cent or 10 per cent of the purchase price) and receives a trust account receipt from the selling agent. The balance of the purchase price will be payable on the settlement date, usually 30 or 60 days after the date of the contract. 12. The purchaser arranges their finance and/or building inspection and/or pest inspection. 13. If they have not already done so, the purchaser engages a solicitor to act on their behalf in relation to the transfer of the property (the conveyance). In some jurisdictions they may have the option of engaging a conveyancer instead of a solicitor. The solicitor will, between the signing of the contract and the date for settlement, attend to the following matters: (a) checking the details of the property on the register of titles; (b) determining whether the local authority or any government body has any proposals or outstanding requirements in relation to the property; (c) checking that the transfer documents are prepared correctly by the vendor, arranging their signing, and attending to their assessment for stamp duty; and (d) negotiating any adjustments (e.g. for rates and rental payments) to the final payment amount. 14. The purchaser’s solicitor arranges settlement with the vendor’s solicitor and, if relevant, the vendor’s financier (who will be releasing their mortgage over the property) and the purchaser’s financier (who will be taking a new mortgage over the property). 15. The parties attend settlement. The purchaser hands over the balance of the purchase price in exchange for the title documents for the property. Either the purchaser’s financier or their solicitor will arrange for the transfer of the property into the purchaser’s name to be registered in the relevant land title registry. 16. The purchaser’s solicitor informs the selling agent that settlement has taken place, and the purchaser collects the keys.

Registration of title How does someone selling land prove that they are the owner of the land? The answer depends on whether the land is held under old system title or Torrens system title. Old system title

Under what is known as old system title, the seller will produce the document proving the transfer to them from the previous owner, the document proving the transfer to that person from their previous owner, and so on all of the way back to the original grant of the land by the Crown. This is known as showing a ‘good chain of title’. Legislation usually limits the required length of the ‘chain’ to 30 years. Torrens system title

The complexity and difficulty in establishing title under the old system led to the development of a new, statutory system of title known as the Torrens system. Most land in Australia is now under the Torrens system, although some land remains under the old system of title. Under the Torrens system, a Registrar of Titles in each State or Territory (see table 14.4) maintains a register in which they record the details of all land falling under the system, the name of the owners of the land, and details of all registrable interests in the land including leases, mortgages and easements. The document that proves ownership of Torrens system land is known as the certificate of title or the folio identifier. A person can only obtain a legal interest in land under the Torrens system through registration. In other words, making a contract with and paying a purchase price to the vendor of land is not enough to make Johnny and Ash the owners of the land: their ownership must be registered. It is only upon the recording of their names upon the register that they become the owners of the land. 532  PART 3 Managing a business

TABLE 14.4

Title registries

Jurisdiction

Registry

Website

Australian Capital Territory

Land Titles Unit, Access Canberra

www.accesscanberra.act.gov.au

New South Wales

Land and Property Information, Department of Finance, Services and Innovation

www.lpi.nsw.gov.au

Northern Territory

Land Titles Office, Department of the Attorney-General and Justice

www.nt.gov.au/justice

Queensland

Titles Registry, Natural Resources and Mines

www.dnrm.qld.gov.au

South Australia

Land Services Group, Department of Planning, Transport, and Infrastructure

www.landservices.sa.gov.au

Tasmania

Land Titles Office, Department of Primary Industries. Parks, Water and the Environment

www.dpipwe.tas.gov.au

Victoria

Land Titles Office, Department of Transport, Planning and Local Infrastructure

www.dtpli.vic.gov.au

Western Australia

Land Information Authority

www.landgate.wa.gov.au

Under the Torrens system of title it is no longer necessary to show a good chain of title. To prove ownership of land, a person simply shows that they are recorded as the owner of the land on the register. The most important feature of the Torrens system is the indefeasibility of title that registration confers. A person becoming the registered owner of land under the Torrens system takes priority over any earlier, unregistered interest, even if they knew about it.8 A person wishing to acquire an interest in Torrens system land need only be concerned with interests that are already recorded on the register. For example, if Johnny and Ash are aware that the vendor of land had promised to sell the land to another, and they buy it instead, then upon becoming the registered owners their entitlement takes ­priority over the unregistered interest of the other purchaser. Similarly, if the previous owner of the land had granted an unregistered five-year lease to a lessee, upon becoming registered owners Johnny and Ash are not bound by the unregistered lease and they can evict the lessee. Registration, in other words, is all-­important. (Note, however, that if the recording of an interest on the register was achieved by fraud, the holder of that interest does not have indefeasibility of title.) Legal and equitable interests in land

An interest in property recognised by the common law is called a legal interest and an interest in property recognised by equity is called an equitable interest. The distinction between the common law and equity was explained earlier in the text. In relation to Torrens system land, a legal interest is one that is recorded on the registered title, and an equitable interest is one that has been created by the owner of the land but is not recorded on the title. For example, if the owner of land grants a lease of the land for more than three years to a lessee but the lease is not registered, the lessee will have an equitable interest but not a legal interest in the land. An unregistered mortgage of Torrens system land is an equitable mortgage. And as we explained earlier, as soon as someone signs a contract for the purchase of land they acquire an equitable interest in the land. Equitable and unregistered interests in land can be protected by lodging a caveat. A caveat is a recording on the register that informs others of the unregistered interest. Further dealings with the property — such as the transfer of the property to another — cannot take place without the consent of the caveator or the removal of the caveat. Penalties attach to the lodgement of a caveat on the register without just cause. ACTIVIT Y 14.6 — REFLECT

What are the advantages of the Torrens system of title over the old system of title?

8 Frazer v Walker [1967] 1 AC 569.

CHAPTER 14 Managing a business: start-up  533

Leases Rather than become the owner of their business premises, Johnny and Ash may decide to lease the premises from another person. This is in fact the most likely course of action, particularly if the business is a relatively small one. The advantages and disadvantages of leasing business premises are set out in table 14.5. TABLE 14.5

Advantages and disadvantages of leasing a business premises

Advantages

Disadvantages

The flexibility of being able to move to different (better, cheaper, larger) premises at the end of the lease term.

The business premises are owned by the lessor and are ultimately subject to the control of the lessor.

Initial costs are much lower than buying the premises.

The lessor may decide to relocate the premises, or refurbish or even demolish the centre in which they are located.

The costs of the premises (e.g. repairs, rates) can be shared with the lessor.

Rent money paid by the lessee is ‘dead money’. It does not contribute to payment for an asset.

The money not spent on buying the premises can be invested in the business itself.

The lease may impose restrictions upon the lessee’s use of the premises.

Lease payments may be a tax-deductible expense.

The lessee cannot assign the lease upon sale of the business without the permission of the lessor.

A lease (also known as a ‘tenancy’) arises when one person, the owner of real property, grants to another the right to occupation and possession of the real property for a limited period in return for the payment of rent. The grantor is known as the lessor or landlord, the grantee is known as the lessee or tenant, and the property leased is usually referred to as the premises. In addition to being a grant of property rights by the lessor to the lessee, the lease is a contract between the lessor and the lessee, and as such the basic principles of contract law apply to the arrangement. A lease of land must be in writing and signed by the person granting the lease. A lease of Torrens system land for more than three years must be executed in the prescribed form and recorded on the registered title to be a legally enforceable lease. The lease appears as a notation on the certificate of title. Leases for less than three years do not need to be registered to be legally enforceable.

534  PART 3 Managing a business

Commencement and duration There must be a definite date of commencement of the lease and a definite duration of the lease. Because a lease is by definition less than fee simple, it is not possible to grant a perpetual lease. The commencement date may be retrospective. Most leases commence from the date that the lessee takes possession of the premises, even if the lease document is not signed until after that date. The commencement date need not be stated explicitly. It is sufficient if there is provision within the lease for the date to be determined. Similarly, if the duration is not stipulated, there must be reference to a related matter that will allow the duration to be calculated. This is known as the rule in Lace v Chantler [1944] KB 368, where a statement that the lease was ‘for the duration of the war’ was decided by the court not to be sufficiently precise. A lease made ‘until the end of Semester 2, 2017’ would be valid because the date is ascertainable, even if at the time of signing the lease neither party knew the exact date.

Exclusive possession As lessees, Johnny and Ash have the right to exclude all others from the premises. This is called ­exclusive possession. It includes the right to exclude the lessor, although the lessor usually has limited access rights included as express conditions in the lease and implied by legislation. It is important to distinguish between a lease and a licence. A lease gives the lessee the exclusive right to possession of the property, whereas a licence gives a non-exclusive right (i.e. a right that can be shared by others) to the grantee of the licence, called the licensee, to do something to the property that would otherwise be unlawful. Examples include a licence to go in and remove timber, or a licence to use common property (such as stairs, hallways and lifts) in an office building. Unlike a lease, a licence may be of uncertain duration.

Types of lease There are two main types of lease: a fixed term lease and a periodic tenancy. A fixed term lease gives exclusive possession for a specific period of time from the commencement date, e.g. six months. The key feature of such a lease is that it automatically terminates on the date specified. A periodic tenancy is a lease that continues indefinitely from one period to another, e.g. from year to year, month to month, or week to week. If the period of the lease is not expressly stated it is usually deemed to be the period when rent is paid, although this test is not conclusive. If a fixed term lease expires and is not renewed, and the lessee remains in possession of the premises with the consent of the lessor, the lease will be deemed to have become a periodic tenancy. With the exception of a yearly tenancy, a periodic tenancy can be terminated by giving notice equivalent in length to the period. For example, a monthly tenancy requires one month’s notice. A yearly tenancy requires only six months’ notice. The parties can ‘contract out’ of these notice provisions by agreeing on a different period of notice in the lease itself.

The lease document The terms of a commercial lease can be very complicated, particularly in relation to large office buildings. In the case of such a property a lessee should seek legal advice regarding the contents of the lease. Typically, the lease document will set out: •• the names of the parties, •• the description of the premises, •• the date of commencement, •• the duration of the lease, and •• the rent, or the means of calculating rent. As well as this basic information, the lease will contain a number of terms setting out in detail the rights and obligations of the lessor and the lessee under the lease. The rights and obligations of the parties to a lease are either express or implied. If express, they are written down in the lease document as terms. If certain rights and duties are not referred to, they may be implied into the lease by legislation or by common law. CHAPTER 14 Managing a business: start-up  535

Express rights and duties of the parties

The following rights and duties are usually express terms of a commercial lease. •• The lessee must pay rent to the lessor. The requirement to pay rent is the principal requirement in every commercial lease. The payment of rent represents compensation to the lessor for the lessee’s exclusive possession of the premises. Rent must be paid to the lessor by the due date. ‘Gross rent’ includes outgoings (see below) while ‘net rent’ will require an additional payment to be made for outgoings. The usual provision in most commercial leases is for net rent. •• The rent payable by the lessee will be periodically reviewed. Rent review clauses vary the rent so that the lessor consistently receives an appropriate rental for the premises. Rent may be reviewed to market, increased in accordance with a set percentage, increased to a set figure, increased in accordance with increases in the Consumer Price Index (CPI), or adjusted through a combination of these methods. Many commercial rent review clauses contain a ratchet clause stating that the rent can increase but not decrease. •• The lessee is required to contribute towards the outgoings. Outgoings are the expenses associated with the premises and the centre or building of which the premises are a part. They usually include insurance premiums, garbage services, charges for operating and maintaining relevant plant, security, promotion and other such costs. •• The lessee must keep the premises in a certain state of repair. •• The lessee is not to use the premises or permit them to be used for any purpose other than the specified purpose without the lessor’s prior written consent. •• The lessee is obliged to insure items such as plate glass windows, to maintain a public liability insurance policy, and to insure any tenant’s fixtures. •• Most commercial leases contain an option to renew. This is a term of the lease giving the lessee a right to call for a fresh lease upon expiry of the original lease. •• The lease may contain an option to purchase. This is a term of the lease giving the lessee the right to purchase the premises upon the condition that they give notice and satisfy other requirements ­stipulated in the option. Implied rights and duties of the parties

The following rights and duties are usually implied by common law. •• The lessee has the right to enjoy the premises in a peaceful manner free from interruption by the lessor. This is known as the covenant of quiet enjoyment. This is not the same as saying that the lessor must guarantee that the lessee will not be disturbed in any way, or that the lessee will be protected from other noises or nuisances. It means that the lessor will give the lessee exclusive possession and, subject to the exceptions referred to above, will not interrupt this possession. •• The lessor must not do anything inconsistent with the reason why the lease was granted. This is known as the covenant ‘not to derogate from grant’. While this covenant overlaps with the covenant for quiet enjoyment, there are acts that breach this covenant yet do not interfere with the lessee’s peaceful possession of the premises. For example, if a lease is granted for the purpose of storage of fragile goods the lessor must not use any adjoining land for a purpose that could damage or destroy the fragile goods. •• The lessee must use the premises in a ‘tenant-like manner’. •• The lessee must give up possession of the premises at the end of the lease. •• The lessee must undertake associated duties to an acceptable standard. The following rights and duties are usually implied by statute. •• The lessee is entitled to withhold payment of rent in certain circumstances. State and Territory property legislation entitles the lessee to a reduction in the rent payable on the occurrence of an event that renders the premises unfit for occupation, such as a major fire, flood or storm. The extent of the reduction is proportionate to the extent of the damage sustained, and the lessor’s rights to recover rent are suspended until the premises have been rebuilt or made fit for the lessee’s occupation and use. •• The lessee must keep the premises in good and tenantable repair during the term of the lease and return the premises in such repair at the end of the lease. This standard is gauged by the condition of the premises at the commencement of the lease. 536  PART 3 Managing a business

•• The lessee must allow the lessor to enter the premises to view the state of repair upon the giving of notice in writing of their intention to do so. If the lessor is not satisfied with the condition of the premises, a notice to remedy the defect can be served on the lessee. If the lessee does not comply, the lessor may enter the premises and undertake the repairs and/or terminate the lease.

Commercial and retail shop lease legislation Each State and Territory has enacted legislation specifically regulating commercial and/or retail shop leases.9 The object of this legislation is primarily to regulate the relationship between a lessor and lessee of particular types of leases and to provide a statutory framework for the resolution of disputes under such leases. The terms of the legislation differ in each jurisdiction, but each is likely to contain the following provisions and require compliance with the following obligations. •• Applicable premises — the legislation sets out the types of leased premises to which the legislation will apply. A retail shop lease, for example, may be defined as premises less than a certain size (usually 1000m2) leased for retail purposes or located within a retail shopping centre. •• Lease costs — the legislation may regulate the types of costs payable by each party, e.g. legal costs (usually payable by each party), the cost of preparing the lease (usually payable by the lessor), and stamp duty and registration fees (usually payable by the lessee). •• Disclosure statements — the legislation may oblige the lessor to provide a disclosure statement to the lessee in the prescribed form a minimum period (usually 7 days) before the lessee signs the lease. The statement will set out important information such as rent, outgoings and the lessee’s other obligations. •• Key money — the legislation may prohibit the taking of key money by the lessor from the lessee. This is an up-front fee charged by the lessor for the privilege of being granted a lease of the premises. •• Bonds — the legislation may limit the amount of bond payable by the lessee and regulate the terms upon which the bond is held and released. •• Rent review — the legislation may regulate the terms upon which rent can be reviewed during the term of the lease, and may prohibit ratchet clauses. •• Turnover rent — the legislation may permit the lessor to charge turnover rent. This is rent based upon the lessee’s turnover. The legislation will also regulate the way in which the lessee’s turnover is calculated. •• Outgoings — the legislation may regulate the way in which the lessee is charged for outgoings, including obliging the lessor to provide the lessee with an itemised estimate of outgoings in a prescribed format. •• Relocation, renovation and demolition — the legislation may grant the lessee certain rights in the event of the lessor deciding to relocate the leased premises within the centre, renovate the centre or demolish the centre. •• Duration and extension — the legislation may grant the lessee a right to a minimum duration of the lease (usually 5 years) as well as rights relating to renewal and extension of the duration. •• Dispute resolution — the legislation may impose conditions upon the resolution of disputes between lessors and lessees. ACTIVIT Y 14.7 — RESEARCH

Download the relevant legislation for your State/Territory and describe how the legislation addresses each of the above matters.

9 Leases (Commercial and Retail) Act 2001 (ACT); Retail Leases Act 1994 (NSW); Business Tenancies (Fair Dealings) Act 2003 (NT); Retail Shop Leases Act 1994 (Qld); Retail and Commercial Leases Act 1995 (SA); Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (Tas); Retail Leases Act 2003 (Vic); Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA).

CHAPTER 14 Managing a business: start-up  537

LAW IN CONTEXT: LAW IN PRACTICE

Before signing a commercial lease Before a person signs a commercial or retail shop lease, they should ensure they know the answers to all of the following questions. • What is the duration of the lease? • Is there an option to renew the lease? Does the lessee need to give prior notice of intention to take up the next option? Must this be in writing? When must the option be exercised? • How is the rent calculated? • How often and on what basis can the rental be varied by the lessor? • Who is responsible for the outgoings for the premises? • Is the lessee obliged to make a contribution to the costs of the centre (e.g. cleaning, security, gardening, or maintenance of air-conditioning plant)? • Who is responsible for payment of the legal costs, stamp duty, and other fees and charges associated with the lease? • What is the permitted use under the lease? Does the lessee have permission to do all of the things associated with their business? • Is the business premises zoned for the type of business that the lessee wishes to undertake? • What types of insurance is the lessee required by the lease to take out? • Who will be responsible for maintenance of the premises? • Is the lessee permitted to sublease all or part of the premises? If so, under what conditions? • Is the lease transferable in the event of the sale of the business by the lessee and, if so, under what conditions? • Is there an arbitration clause in place to settle disputes? People should be careful of leases with low commencement rents designed to attract prospective ­lessees: there may be a substantial increase at the first annual review.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 14.15 What is the difference between ownership and possession? 14.16 What is (a) property, (b) real property, and (c) personal property? 14.17 What are the different types of personal property? 14.18 What is land? 14.19 How much of the ground beneath the surface of land is owned by the landowner? 14.20 How much of the airspace above land is owned by the landowner? 14.21 What is a fixture? When will an object become a fixture? 14.22 What is the difference between a fixture and a fitting? 14.23 What are tenants’ fixtures? 14.24 What are the advantages and disadvantages to a business person of owning their premises? 14.25 What is the difference between a freehold estate and a leasehold estate? 14.26 What is (a) fee simple, and (b) a life estate? 14.27 What is the difference between a joint tenancy and a tenancy in common? 14.28 What are the four unities? 14.29 What is the right of survivorship? 14.30 What is (a) strata title and (b) community title? What is the difference between the two? 14.31 What is a ‘body corporate’ and what is ‘common property’? 14.32 What are the legal consequences of signing a contract for the sale of real property? 14.33 What types of special conditions are often required to be included in a standard contract? 14.34 What is the process of buying real property? 14.35 What is the difference between old system title and the Torrens system of title? 14.36 What is indefeasibility of title? 14.37 What is the difference between a legal interest in land and an equitable interest in land, and how does one protect an equitable interest? 538  PART 3 Managing a business

14.38 14.39 14.40 14.41 14.42 14.43 14.44

What is a lease? When must a lease be registered in order to be enforceable? What is exclusive possession? What are the two main types of lease? What types of terms would one expect to find in a lease document? What terms are implied into a lease (a) by common law, and (b) by legislation? In what ways are retail shop and commercial lessees given additional legal entitlements?

14.4 Opening for business LEARNING OBJECTIVE 14.4 When is a business allowed to be open for trading? What are the legal issues associated with setting up a website and acquiring a domain name?

In this section we consider some of the rules regulating real world and virtual shops.

Shop trading hours If Johnny and Ash’s new business includes the operation of a retail shop, they will have to comply with any relevant trading hours legislation. Legislation in some States imposes restrictions upon when retail shops are permitted to be open for business. Laws restricting trading hours exist for a range of historical and contemporary reasons, including: •• observance of the Sabbath and religious holidays, •• protection of small businesses, and •• attempts to restrict employers requiring employees to work outside of traditional working hours. Shop trading hours vary considerably between Australia’s States and Territories. In some jurisdictions trading hours are virtually unrestricted, while in other jurisdictions arrangements include designated days for late night shopping during the week and restrictions on Sunday trading. Restrictions differ on the basis of the size of the business, its location and the products sold. Even in jurisdictions where trading hours are virtually unrestricted, retailers are usually not permitted to trade on Christmas Day, Good Friday and Easter Sunday. ACTIVIT Y 14.8 — RESEARCH

Prepare a description of the trading hours restrictions (if any) in your State or Territory.

ACTIVIT Y 14.9 — REFLECT

Should retail trading hours be regulated? Why or why not?

LAW IN CONTEXT: LAW IN THE MEDIA

NSW Government withdraws bill amending retail trading on public holidays The O’Farrell Government has withdrawn the Retail Trading Amendment Bill 2012 (the Bill) which sought to allow certain retail trading on protected public holidays. These days included Good Friday, Easter Sunday, Anzac Day (before 1pm), Christmas Day and Boxing Day (the restricted trading days). The Bill was withdrawn by Minister Greg Pearce following a rally of disgruntled community groups and workers led by ‘Santa’ yesterday.

CHAPTER 14 Managing a business: start-up  539

The Shop, Distributive & Allied Employees Association (SDA) welcomed the decision as a win for families. ‘[W]orkers and community groups will continue to fight to ensure the last few remaining public ­holidays are kept free from the commercial interests of big business,’ said SDA NSW Secretary Gerard Dwyer. The CEO of the Australian National Retailers Association (ANRA), Margy Osmond, supported the reconsideration of the Bill and the government’s desire to engage in further community consultation. ‘In a marketplace where online trading is growing steadily it is important that there is a level playing field for retailers. Consumers are able to shop online any day or night of the week,’ Ms Osmond said. ‘Shopper demand on Boxing Day is particularly strong as demonstrated by the long queues outside city department stores every year. Retailers are simply asking for legislation to be brought into line with trading hours in Victoria to enable NSW consumers to benefit from the convenience of being able to shop when they want to,’ she said. The opposition described the withdrawal of the Bill as a ‘backdown’ of a ‘disastrous plan’. ‘This was always a disgraceful attack by Barry O’Farrell on the retail workers who have every right to spend these special days at home with their families and friends like the rest of us,’ said the Shadow Minister for Industrial Relations, Adam Searle.  .  .  . Source: NSW government withdraws bill amending retail trading on public holidays (15 November 2012) CCH Australia http://www.cch.com.au/au/News/ShowNews.aspx?ID=39032&Type=F&TopicIDNews=9&CategoryID News=0&u_i=81358.

Setting up a website Setting up a website to promote their products online will facilitate the marketing of Johnny and Ash’s product to a global audience. And, of course, actually selling their product online will increase their sales revenue. To set up their website Johnny and Ash can engage the services of a professional website developer or, if they have the necessary knowledge and skills, they can set up the website themselves. Table 14.6 sets out some useful online e-business resources. Once they have set up their website it will be important to ensure that it is properly protected to prevent valuable data from being stolen, corrupted or destroyed. This is especially important if Johnny and Ash intend to gather personal information from customers and allow online payments via their website. TABLE 14.6

Online e-business resources

Resource

Description

Website

Digital Business

Advice about establishing an online presence and getting started in e-commerce

www.communications.gov.au/ what-we-do/internet/digital-business

Australian Communication and Media Authority

Advice and information about a person’s legal obligations when conducting business online

www.acma.gov.au

Stay Smart Online

Provides information about online security and online payments

www.communications.gov.au/ what-we-do/internet/stay-smart-online

Scamwatch

Provides information about protecting a website and e-business from online scams

www.scamwatch.gov.au

Contractual issues, including the formation of online contracts, were explained in earlier chapters. Online privacy issues and intellectual property issues such as copyright and trade mark infringement were also explained in recent chapters.

Domain names A domain name is the name given to an internet site address. Each website has its own distinct domain name allowing it to be distinguishable from other sites. Johnny and Ash’s domain name is their address on the internet and gives them an online identity or brand. 540  PART 3 Managing a business

A domain name is made up of different parts. Consider for example the domain name ‘www.organicola.com’. The first part — ‘www’ — indicates that the site is located on the World Wide Web. The second part — ‘organicola’ — is known as a sub-­ domain, and is the part that can be chosen by Johnny and Ash. The end part — ‘.com’ — is known as the top-level domain. This part reflects terms now standard throughout the world. Visit www.icann.org for a list of the generic top-level domains. ACTIVIT Y 14.10 — RESEARCH

Visit the Australian Domain Name Administrator website at www.auda.org.au and describe the process of applying for the domain name www.organicola.com.au.

Given the global nature of the internet and the limited number of domain names, it is inevitable that competition for domain names will arise. Sometimes that competition is between two businesses, both of which are legitimately entitled to the use of the same domain name. LAW IN CONTEXT: LAW IN THE MEDIA

BBC blew $375K on bbc.com When, in the 1990s, UK television broadcaster the BBC (British Broadcasting Corporation) tried to register the domain name ‘www.bbc.com’, it discovered that the domain name had already been taken by the US firm Boston Business Computing. The British Broadcasting Corporation was not legally entitled to insist that the US firm hand over www.bbc.com, since the US firm was just as entitled to the use of the domain name — it had traded in the US under the business name ‘BBC’ for some time — and the US firm had got there first. In 1999 the British Broadcasting Corporation purchased the domain name from the US firm for $375  000, a decision that angered critics of the publicly funded broadcaster, particularly in light of the broadcaster’s failure to make use of the domain name beyond redirecting visitors to the main website www.bbc.co.uk. Reproduced from Tim Richardson, BBC Blew $375k on bbc.com (5 October 2012) The Register http://www.theregister. co.uk/2005/10/05/bbc_domain.

At other times, the competition is between a business legitimately entitled to the domain name and someone who has registered the domain name with a view to selling it for a profit. This practice is known as cybersquatting. It is the act of registering a domain name incorporating the name of a large or well-known company or trademark and then attempting to sell it to the company for a large sum of money. The problem of cybersquatting, and domain name disputes generally, can usually be resolved without resorting to litigation by using either the Australian Domain Name Administrator (auDA) or the World Intellectual Property Organization (WIPO) dispute resolution process. The dispute resolution process enables the relevant domain name administrator to cancel, change or transfer a domain name registration either on the written or electronic instruction of the registrant or the receipt of a decision from a dispute resolution service provider. Generally, the holder of a domain name must surrender that domain name if: •• the domain name is identical or confusingly similar to a trade mark to which the complainant has rights, •• the domain name holder has no rights to or legitimate interests in the name, and •• the domain name has been registered and is being used in bad faith. Otherwise the domain name belongs to the first person to register it. CHAPTER 14 Managing a business: start-up  541

LAW IN CONTEXT: LAW IN THE MEDIA

Tina Arena wrests namesake site from cybersquatters Singer Tina Arena has seized control of an internet domain bearing her name from cybersquatters, in a decision which could help other entertainers assert their presence online. A resolution panel has ruled in favour of the 39-year-old diva, who sought to claim www.tinaarena. com.au from Melbourne-based business Enigmatic Minds. An alternative dispute resolution organisation overseeing the complaint said Arena’s counsel had successfully satisfied all conditions of Australian domain policy necessary to enact a transfer of the site name to her. Presiding panelist Sara Delpopolo said the respondent’s domain name was identical to Arena’s trade name, that Enigmatic had no legitimate interest in the domain and that the company had registered the site in bad faith. Enigmatic claimed in a disclaimer on the website that the service ‘had not yet launched’ but that when it did, it would ‘offer products, services and activities related to the domain name’. However, Ms  ­Delpopolo dismissed these claims and said the respondent was relying on the singer’s reputation built up over the past 30 years in generating future profit. ‘By the respondent’s own admission, it was the complainant’s fame and reputation that causes the respondent to register the domain name,’ Ms ­Delpopolo said in a written decision. ‘Use of the domain name by the respondent of offering “official goods” is misleading or deceiving internet users into believing the respondent is authorised, affiliated or has the approval of the complainant when this is clearly not the case.’ David Vaile, executive director of the Cyberspace Law and Policy Centre, said the ruling showed cyber-squatting — the act of registering a site with intention to profit from a trademark belonging to someone else — was not a lucrative trade. ‘There is now a very straightforward and cheap mechanism not only for big name stars but also smaller people that might have been ripped off for whatever reason,’ Mr Vaile said. ‘Any fear that you would have a massive trademark case in the Supreme Court is really not on. The relatively low cost alternative dispute resolution process . . . actually seems to work quite well.’ AAP Reproduced from © 2007, ‘Tina Arena wrests namesake site from cybersquatters’ by Sam Holmes, 24 April. See full credit on acknowledgements page.

ACTIVIT Y 14.11 — RESEARCH

Visit the WIPO website at www.wipo.org and locate the information on domain name dispute resolution. How do you file a dispute?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 14.45 How are retail trading hours regulated in your State or Territory? 14.46 What is a domain name? 14.47 What are the different elements of a domain name? 14.48 How are domain name disputes resolved?

In conclusion •• A person thinking about starting a new business should first take the time to do some research, take steps to protect their IP, prepare a business plan and a marketing plan, consider the source of their funding, and think about what insurance they will require. They should also decide upon the appropriate business structure for their organisation: will they conduct business as a sole trader, a partnership, a company or a trust? 542  PART 3 Managing a business

•• If they propose to conduct business under a name other than their own name (or the name of their company) they will be obliged to register their business name. They will also be obliged to apply for any relevant licences they need to conduct their new business. •• They can either lease their business premises or own them outright. If they are the owner they will own the land as well as any fixtures attached to the land. They will own the freehold estate in the land, probably in fee simple, either alone or jointly with others. The process of buying land is a complex one. Once they have bought the land they must ensure that they are recorded as owner on the registered title. If they lease their premises they are entitled to exclusive possession of the premises for a limited period. They will be subject to a number of important legal obligations, including the obligation to pay rent and outgoings, and keep the premises in good repair. •• Retail trading hours legislation in the relevant State or Territory may impose limitations upon the hours they are able to be open for business. If they choose to set up a website they should choose the domain name carefully. If someone else has already registered the name to which they believe they are entitled, processes exist to resolve the dispute relatively quickly and cheaply. JOHNNY AND ASH

[Johnny and Ash are in Ash’s tasteful, tidy city apartment, standing on the balcony looking at the view.] Johnny — Wow, we’ve actually got quite a lot to do before we start selling the drinks. Ash — We sure do. First of all we need to look into patenting your new recipe for the organic cola. In a business like this, IP protection is going to be pretty important. We might even decide not to patent, and just keep the recipe a secret using confidentiality agreements. Johnny — Like Coke. Ash — Yeah, like Coke. And we need to do some research, find out some more about the market. We need to write up our business plan. Work out what insurances we need. What else? Business name! Johnny — I like ‘Organicola’. Ash — Me too. Descriptive, yet original. We should register the name as a trade mark. Johnny — And register www.organicola.com as well, if it hasn’t already been taken. Or maybe just www.organicola.com.au. Ash — And we’ll need a business premises. We can start by renting something with room for the manufacturing plant, and look at moving to something bigger if  .  .  .  when  .  .  .  things take off. Johnny — And eventually we will build the Organicola Mega-Plaza in the middle of the city. Ash — Eventually!

CHAPTER 14 Managing a business: start-up  543

QUIZ 1 Members of which of the following forms of organisation enjoy the benefits of limited liability?

(a) Companies. (b) Unincorporated associations. (c) Sole traders. (d) General partnerships. (e) All of the above. 2 The purpose of requiring a business to register its business name is (a) to protect its interest in the name. (b) to protect the business by making the identity of the person or company behind the business name confidential. (c) to protect the public by avoiding the potentially misleading situation of having two businesses with the same business name. (d) all of the above. 3 The owner of land is also the owner of the (a) fittings. (b) fixtures. (c) tenant’s fixtures. (d) all of the above. 4 Ownership of Torrens system land is established by (a) good chain of title. (b) the name on the registered title. (c) payment of the purchase price to the vendor of the land. (d) possession of the land. 5 Which of the following is a difference between a lease and a licence? (a) A licence can be of uncertain duration. (b) A licence can be non-exclusive. (c) A licence cannot grant a right to exclusive possession of the property. (d) All of the above. 6 Which of the following statements about leases is true? (a) A lease cannot be retrospective. (b) All leases of Torrens system land must be recorded on the registered title. (c) A lease is not a contract. (d) None of the above. 7 A ratchet clause in a lease is (a) a clause requiring payment of an up-front fee for the privilege of being granted a lease of the premises. (b) a clause providing that the rent can increase but not decrease. (c) a clause requiring payment of a sum of money by a lessee as security for unpaid rent or other costs incurred by the lessor. (d) a clause requiring payment of expenses associated with leased premises. 8 Most commercial leases contain: (a) An option to renew. (b) An option to purchase. (c) An option to sell. (d) An option to merge. 9 In which State or Territory are retail trading hours least restricted? (a) South Australia. (b) Queensland. 544  PART 3 Managing a business

(c) Victoria. (d) Western Australia. 10 A ‘cybersquatter’ is: (a) A computer hacker who engages in web address and domain name harvesting. (b) A scammer who downloads malicious software onto personal computers via email services. (c) A scammer who monitors sites with high traffic for the purpose of stealing personal information by means of spyware. (d) Someone who registers a domain name using the trademark of a well-known company and then tries to sell it to them.

EXERCISES EXERCISE 14.1 — PROPERTY OWNERSHIP

Johnny has found a property for sale in Martens Street that would be ideal for the Organicola factory and offices. Assume that the property is on Torrens system land located in your own State or Territory. What is the process by which Johnny and Ash will become the owners of the Martens Street property? EXERCISE 14.2 — PROPERTY OWNERSHIP

Johnny and Ash have decided to purchase the Martens Street property in their own names and to rent the property to their company Organicola Pty Ltd. Should Johnny and Ash own the property as joint tenants or as tenants in common? EXERCISE 14.3 — PROPERTY OWNERSHIP

When Johnny initially inspected the Martens Street property he was impressed by the air-conditioning throughout the factory, the large refrigerated room at the rear of the factory, the polished timber floorboards in the offices, the satellite dish on the roof, and the outdoor seating on the lawn to the side of the factory. When he again inspects the property on the morning of the day of settlement he is alarmed to discover that the seller has removed all of these items. None of the items were expressly referred to in the contract of sale. Can Johnny insist that any of these items be included in the sale? EXERCISE 14.4 — PROPERTY OWNERSHIP

After settling the purchase of the Martens Street property, Ash instructs Jodi, one of the trainee lawyers in her law firm, to register the transfer of the property in the local Land Title Registry. Why this is such an important step in the conveyancing process? EXERCISE 14.5 — LEASES

List what you consider to be the five most important provisions of the commercial/retail shop lease legislation in your jurisdiction in terms of protecting the interests of the lessee. Explain why you think each provision is important.

KEY TERMS agent  A person who acts on behalf of a principal who is legally responsible for the actions of the agent. assign  To transfer rights or property. bailment  One person is in temporary possession of property belonging to another person. beneficiary  The equitable owner of trust property. bequeath  To arrange for the transfer of property by will upon one’s death. bond  A sum of money paid by a lessee to a lessor as security for unpaid rent or other costs incurred by the lessor. The amount is usually based upon the rent payable by the lessee. business name  The trading name of a business person or business organisation. CHAPTER 14 Managing a business: start-up  545

business structure  The legal form of a business organisation, e.g. sole trader, partnership or company. caveat  A recording on the land title register that informs others of an unregistered interest and prevents further dealings with the property without the consent of the caveator or the removal of the caveat. certificate of title  The title document proving ownership of Torrens system land. Also known as a ‘folio identifier’. charge  A security for a loan over property. chose in action  An intangible form of personal property, e.g. a share, intellectual property rights or contractual rights. chose in possession  A tangible form of personal property, e.g. a car, a book, clothing or food. civil liability  Liability to another person under civil law. common property  Part of strata titled or community titled property that is owned by the body corporate on behalf of the individual lot owner, e.g. gardens, stairwells. community title  The subdivision of land into, for example, a residential complex, with the common property consisting of shared pathways and facilities. company  A corporation incorporated under and regulated by the Corporations Act 2001 (Cth). Consumer Price Index (CPI)  A national index measuring changes in the price level of consumer goods and services. conveyance  The process of preparing for and effecting the transfer of ownership of real property from one person to another. conveyancer  A non-lawyer who is licensed to act on behalf of a purchaser in a conveyance. cooling off period  A period within which a person can change their mind about proceeding with a contract or application. corporation  An artificial legal entity separate from its owners and able to make contracts, own property and be a party to litigation in its own name. Crown  The government (either Federal or State). cybersquatting  The act of registering a domain name incorporating the name or trademark of a well-known company and then attempting to sell it to the company for a large sum of money. debt capital  Money borrowed by a business from lenders. domain name  The name given to an internet site address allowing it to be distinguishable from other sites. easement  A right of way across real property. economic loss  Financial loss, as opposed to injury to the person or damage to property. equitable interest  An interest in property that is recognised by equity. equity  The category of case law rules and remedies based on fairness and justice, developed to supplement the common law. equity capital  Money raised by a business from investors. estate  (1) An interest in real property less than full ownership. (2) The sum total of a person’s property. exclusive possession  The right to sole possession of property, including the right to exclude all others from the property. fee simple  A type of freehold estate in real property. The holder of fee simple effectively has unrestricted ownership of the real property, subject only to the rights of the Crown. fitting  An object that has been attached to land or a building but is not a fixture. fixed term lease  A lease that gives the lessee exclusive possession of the premises for a specific period of time. fixture  An object that has been attached to real property and has become part of the real property, e.g. buildings and things attached to buildings. freehold  An interest in real property of uncertain duration, often equated with ownership of the real property. gearing ratio  The ratio of debt capital to equity capital. incorporated association  A not-for-profit association of members that is a separate legal entity and has limited liability. 546  PART 3 Managing a business

incorporated limited partnership  A partnership where some of the partners have limited liability, and the partnership itself is a separate legal entity. indefeasibility of title  A person who registers their interest in land (e.g. as owner, mortgagee or lessee) under the Torrens system takes priority over any earlier, unregistered interest, even if they knew about it. intellectual property  A form of intangible creation such as the expression of an idea, a trade mark, a new technology or a design. joint tenancy  Co-owners who have an equal and undivided interest in the property characterised by the four unities and the right of survivorship. key money  An up-front fee charged by a lessor for the privilege of being granted a lease of the premises. lease  A grant by the owner of real property to another person of the right to occupation and possession of the real property for a limited period in return for the payment of rent. Also known as a ‘tenancy’. leasehold  An interest in real property in which the holder is entitled to possession of the real property for a limited period of time, after which the right to possession of the real property ‘reverts’ to the owner. legal interest  An interest in property that is recognised by the common law. lessee  The person entitled to possession of the lease property under the terms of the lease. Also known as ‘tenant’. lessor  The owner of the leased property. Also known as ‘landlord’. licence  (1) Permission from a statutory authority to engage in a particular type of conduct that is illegal if engaged in without such a licence (e.g. a licence to drive a car or erect an advertising sign). (2)  A non-exclusive right to do something in relation to real property (e.g. a licence to occupy part of the property or remove timber from the property). life estate  A type of freehold estate in real property. The holder of a life estate is effectively the owner of the real property for their own lifetime (or sometimes the lifetime of another) after which the property automatically passes to another person, who is said to be entitled to the ‘remainder’. limited liability  The liability of the members of an organisation for the debts of the organisation is limited to the amount (if any) unpaid on their shares or to the amount guaranteed by the members. limited partnership  A partnership where some of the partners (known as limited partners) have limited liability. local government  A statutory authority such as a city council or a shire council that exercises legislative power delegated to it by a State or Territory government. lot  An individual parcel of land. mortgage  A security for a loan given over real property owned by the borrower. negligent misstatement  The giving of careless advice that leads to economic loss. old system title  A system of proving ownership of real property by establishing a chain of title through a series of documents. option to purchase  A term of a lease giving the lessee the right to purchase the premises upon the condition that they give notice and satisfy other requirements stipulated in the option. option to renew  A term of a lease giving the lessee a right to call for a new lease upon expiry of the original lease. outgoings  Expenses associated with leased premises and the centre or building of which the leased premises are a part. ownership  The owner of property has extensive legal rights in relation to that property, including the right to transfer ownership of that property to another person. Also known as ‘title’. periodic tenancy  A lease that continues indefinitely from one period to another. personal property  All forms of property other than real property. Also known as ‘chattels’. possession  Someone in possession of property has temporary control and custody of the property. principal  A person represented by an agent and who is legally responsible for the actions of the agent. CHAPTER 14 Managing a business: start-up  547

property  Any thing, right or interest that can be owned by a person. public liability insurance  Insurance against the risk of being sued by a third party who has been injured or suffered harm or loss as a result of the actions of the insured. quiet enjoyment  Possession and use of real or personal property without interruption. Also known as ‘quiet possession’. ratchet clause  A clause in a lease stating that the rent can increase but not decrease. rates  A form of tax calculated on the basis of the unimproved value of land owned by the tax payer, and applied to fund the provision of basic services to that land. real property  Land, buildings and fixtures. remainder  The interest in real property that automatically passes to another upon the expiry of a life estate. retrospective  Something that is deemed to have commenced before it was actually created, e.g. retrospective legislation. rezoning  The formal consent of the State, Territory or local government to a change in the permitted use of real property. right of survivorship  If one joint tenant dies, their share of the property automatically passes to the remaining owner or owners, even if the deceased’s will provides otherwise. secured creditor  A lender entitled to seize and sell the property over which the loan is secured in the event that the borrower defaults. separate legal entity  A legal person able to own property, enter into contracts and be a party to litigation in its own name. This includes individuals and corporations. settlement  The stage in the process of transferring ownership of real property when the purchaser hands over payment in return for title to the property. Also known as ‘completion’. settlor  A person who creates a trust. sole trader  An individual who directly owns and operates a business by himself or herself. special conditions  Additional terms negotiated by the parties to a contract and inserted into a standard form contract. specific performance  A court order directing a party to fulfil their contractual obligations. stamp duty  A form of tax paid to the government upon certain transactions, calculated on the basis of the value of the transaction. standard form contract  A contract in the form of a written document containing pre-printed terms that are not negotiated. strata title  The vertical subdivision of the airspace above land into, for example, a high rise accommodation block, with the common property consisting of shared areas such as stairwells, elevators, reception areas and gardens. subdivision  The division of a lot into smaller lots. tenancy in common  A form of co-ownership that is not a joint tenancy. tenants’ fixtures  Fixtures attached by a lessee to leased premises for the purpose of trade, ornament or domestic convenience. title documents  Documents proving ownership of property. Torrens system  The Registrar of Titles in each State or Territory maintains a register in which they record the details of all land and all persons holding interests in the land. trade mark  A ‘mark’ such as a distinctive word, phrase or symbol used in commercial dealings to show a connection between a product and a particular business. trespass to land  A tort committed when one person interferes directly with land in the rightful possession of another. trust  An arrangement whereby one person (the trustee) legally owns property for the benefit of one or more other people (the beneficiaries). trust account  A bank account maintained by an agent or other fiduciary in which they hold funds on behalf of the principal or client. trust deed  A written document setting out the terms of a trust. 548  PART 3 Managing a business

trust property  Property that is held on trust for another. trustee  The legal owner of the trust property. turnover rent  Rent based upon the lessee’s turnover. unincorporated association  A not-for-profit association of members that is not a separate legal entity, e.g. a club or sporting association.

ACKNOWLEDGEMENTS Photo: © milie zhang / Shutterstock.com Photo: © Mark William Richardson / Shutterstock.com Article: © Sam Holmes, ‘Fed: Tina Arena wrests namesake site from cybersquatters’, Australian Associated Press (Sydney), 24 April 2007 Text: © CCH Australia

QUIZ ANSWERS

1. a  2. c  3. b  4. b  5. d  6. d  7. b  8. a  9. c  10. d CHAPTER 14 Managing a business: start-up  549

CHAPTER 15

Managing a business: business ownership LEA RN IN G OBJE CTIVE S 15.1 W  hat is a sole trader? What are the key features of the ‘sole trader’ business structure? What are the advantages and disadvantages of being a sole trader? 15.2 What is a partnership? What are the key features of the ‘partnership’ business structure? What are the rights and obligations of the members of a partnership? 15.3 What is a trust? What are the key features of the trust? What are the powers and rights of a trustee? 15.4 What is a franchise, and what are the benefits of becoming a franchisee? What are the rights and obligations of a franchisee?

JOHNNY AND ASH

[Ash is sat in the small office of the new Organicola factory, typing quickly and competently on the keyboard of her laptop. The calm smile on her lips shows that she is enjoying her work. Suddenly, Johnny bursts into the office.] Johnny — Damn! It’s 5.00pm already! Ash — Yes it is. Don’t you have to be somewhere? Johnny — Yes! I was supposed to be at The Lame Duck restaurant an hour ago! Ash — You had better get moving. Johnny — I know!  .  .  .  I’m not sure how much longer I can keep this up. Getting our new organic soft drink business started is exhausting enough by itself without me still having to spend my evenings at the restaurant running my other business. Ash — Can’t you start to let your partner Maria take more responsibility for the restaurant? Johnny — We are still partners! We are still supposed to do everything together! If I’m not there she can’t make any important decisions. Ash — Actually, that isn’t how partnerships work. While it is true that you share responsibility for the business, it is in fact possible for partners to act independently. Johnny — Really? So what can I let Maria take responsibility for?

CHAPTER PROBLEM

As you make your way through this chapter, consider how responsibility for running the restaurant is shared by Johnny and his partner Maria, and the scope of Maria’s authority to act independently.

Introduction In the previous chapter we identified the four main types of business structure: the sole trader, the ­partnership, the company, and the trust. In this chapter and the next we consider each of these structures in more detail, focusing on the advantages and disadvantages of each, and on the ongoing obligations of the owners of and managers within each type of business organisation. We conclude this chapter with an examination of the advantages and disadvantages of the franchise.

15.1 The sole trader LEARNING OBJECTIVE 15.1 What is a sole trader? What are the key features of the ‘sole trader’ business structure? What are the advantages and disadvantages of being a sole trader?

When Johnny operated his restaurant The Lame Duck by himself he was a sole trader. He was both owner and manager of the business. If a person is an individual who directly owns and operates a business alone, they are a sole trader. A sole trader is an individual who directly owns and operates a business by themselves. A sole trader may engage employees but they are the sole owner of the business. They have sole responsibility for raising the funds to start the business; they have sole control over the operation of the business; the profits of the business are their own personal income; and they have unlimited personal liability for the debts and other legal obligations of the business. This is the simplest form of business structure. There are no formal legal requirements that need to be satisfied to establish this type of business structure. Johnny did not, for example, have to apply for registration as a sole trader (unlike forming a company), and there was no need to draw up a ‘sole trader’ agreement (unlike a partnership). Of course, as CHAPTER 15 Managing a business: business ownership  551

a sole trader, Johnny still had to comply with his other legal obligations, such as licensing and business name requirements, his obligations as a taxpayer, and his obligations as an employer. ACTIVIT Y 15.1 — REFLECT

What are the advantages and disadvantages of being a sole trader?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 15.1 Why is the choice of business structure an important decision? 15.2 What is a sole trader? 15.3 What are the key features of the ‘sole trader’ business structure?

15.2 The partnership LEARNING OBJECTIVE 15.2 What is a partnership? What are the key features of the ‘partnership’ business structure? What are the rights and obligations of the members of a partnership?

What if, rather than going into business by themselves, a person wishes to do so with one or more ­members of their family, some friends or some business associates? Then, instead of becoming a sole trader, they may find themselves becoming a partner in a partnership. A partnership is a group of two or more people who directly own and operate a business together. When Maria purchased a half-share in The Lame Duck restaurant from Johnny, Maria and Johnny became partners. As we will explain in the next chapter, the benefits of incorporation have made the company the most popular business structure in Australia, but many business people continue to choose to form partnerships due to the ease and low cost of formation, the flexibility of the structure, and the privacy (partnerships do not have to be registered with any government authority). Each partner remains personally liable for the business debts, and this usually encourages a greater degree of commitment than that expected from shareholders and employees. Partnerships also have a number of advantages over the sole trader, including the opportunity to pool resources, and more opportunities to raise money (lenders are generally more willing to loan money to multiple borrowers than a single borrower). A number of important legal consequences attach to being a partner in a partnership. The most important of these is mutual liability: each partner is both the principal and the agent of the other partners. This means that each partner is liable for the actions, contracts and debts of the other partners. If, for example, Maria commits the tort of negligence while engaged in partnership business, Johnny will be liable and may be the subject of legal proceedings. If Maria incurs a debt while carrying on partnership business, both she and Johnny will be personally liable for repayment of that debt. Each partner has unlimited personal liability for the debts of the partnership. If there are insufficient partnership funds for the partnership to pay its debts and meet its other liabilities, the partners must contribute their own funds. Unlike a company, a partnership is not a separate legal entity (although it may sue or be sued in the firm’s name, and a partnership tax return must be lodged). Because a partnership is not a separate legal entity, it does not have perpetual succession, and in the absence of agreement to the contrary, the death or retirement of a partner automatically dissolves the partnership. A partnership is no more than a particular group of specific partners, and if membership of the group changes — by a partner joining the group or a partner leaving the group — then, strictly speaking, the old partnership ceases to exist and a new partnership is created. 552  PART 3 Managing a business

Partnerships are regulated in Australia by State and Territory legislation, which is based upon the Partnership Act 1890 (UK), and which is almost identical in each jurisdiction (the section numbers are different).1 However, the rules in the partnership legislation are not comprehensive, and partnerships are also regulated by a wide range of case law principles.2 Partnerships are also regulated by the terms of the contract between the partners, known as the partnership agreement (see below). ACTIVIT Y 15.2 — REFLECT

Why are partnerships regulated by State and Territory legislation rather than Federal legislation? (Hint: Refer back to what you learned about the Australian Constitution in an earlier chapter.)

A partnership is often referred to as a ‘firm’. In fact, the partnership legislation states that the words ‘partnership’ and ‘firm’ mean the same thing.3

Forming a partnership There are no legal formalities associated with the establishment of a partnership. A partnership exists as long as the definition of partnership in the partnership legislation is satisfied, regardless of the stated intentions of the parties. This means that it is possible for someone to have formed a partnership, and to be legally responsible for the actions of their partners, without knowing it. This is a situation that arises relatively frequently, particularly where family members, such as spouses or siblings, go into business together.

Definition of partnership According to the definition in the partnership legislation, a partnership is ‘the relation which subsists between persons carrying on a business in common with a view of profit’.4 The legislation also states that the relation between owners (shareholders) of a company or association is not a partnership.5 The statutory definition is an important one. The question whether two or more people have formed a partnership will arise, for example, if one partner claims an entitlement to a share of the business profits, or if a creditor owed money by one partner is seeking to make the other partners liable. CHECKLIST

A business organisation will be a partnership if all of the following requirements are satisfied. ◼◼ There are two or more persons involved. ◼◼ Those persons are carrying on a business. ◼◼ They are carrying on the business in common. ◼◼ They are carrying on the business with a view of profit.

1 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) & Partnership (Limited Partnerships) Act 1992 (Vic); Partnership Act 1895 (WA). 2 Partnership Act 1963 (ACT) s 5(1); Partnership Act 1892 (NSW) s 46; Partnership Act 1997 (NT) s 4(1); Partnership Act 1891 (Qld) s 121; Partnership Act 1891 (SA) s 1C(1); Partnership Act 1891 (Tas) s 5; Partnership Act 1958 (Vic) s 4; Partnership Act 1895 (WA) s 6. 3 Partnership Act 1963 (ACT) Dictionary (definition of ‘firm’); Partnership Act 1892 (NSW) s 4; Partnership Act 1997 (NT) s 8; Partnership Act 1891 (Qld) s 4; Partnership Act 1891 (SA) s 4; Partnership Act 1891 (Tas) s 9; Partnership Act 1958 (Vic) 8; Partnership Act 1895 (WA) s 10. 4 Partnership Act 1963 (ACT) s 6(1); Partnership Act 1892 (NSW) s 1(1); Partnership Act 1997 (NT) s 5(1); Partnership Act 1891 (Qld) s 5(1); Partnership Act 1891 (SA) s 1(1); Partnership Act 1891 (Tas) s 6(1); Partnership Act 1958 (Vic) s 5(1); Partnership Act 1895 (WA) s 7(1). 5 Partnership Act 1963 (ACT) s 6(2); Partnership Act 1892 (NSW) s 1(2); Partnership Act 1997 (NT) s 5(2); Partnership Act 1891 (Qld) s 5(2); Partnership Act 1891 (SA) s 1(2); Partnership Act 1891 (Tas) s 6(2); Partnership Act 1958 (Vic) s 5(2); Partnership Act 1895 (WA) s 4.

CHAPTER 15 Managing a business: business ownership  553

CAUTION!

It is important to remember that if the four statutory requirements are satisfied, the arrangement is a partnership, regardless of the stated intentions of the parties. ‘Persons’

At least two persons are required to form a partnership. If there is only one business owner they are more likely to be a sole trader. There is also a maximum number of partners in a partnership: no more than 20.6 Certain professional partnerships, however, are excluded from this limitation (see table 15.1).7 TABLE 15.1

Professional partnerships

Type of partnership

Maximum number of partners

Actuaries, medical practitioners, patent attorneys, sharebrokers, stockbrokers, trade mark attorneys

  50

Architects, pharmacists, veterinary surgeons

 100

Legal practitioners

 400

Accountants

1000

ACTIVIT Y 15.3 — REFLECT

Professional practices such as doctors, lawyers and accountants were traditionally prohibited from incorporating as companies and were required instead to form partnerships. Why do you think that was so?

Each member of the partnership must have contractual capacity (see an earlier chapter). A minor can be a partner but may not be personally liable to third parties dealing with the partnership. Any ­non-minor partners, however, will be liable to the third party in full.8 ‘Carrying on a business’

A business is defined in the partnership legislation as including a ‘trade, occupation or profession’.9 Since this definition is inclusive rather than comprehensive (see a previous chapter), in deciding whether or not an alleged partnership is carrying on a business, the courts sometimes refer to common law interpretations of the word ‘business’. Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540

Between 1979 and 1981, Evans made more than $800  000 from gambling on horse racing. The F ­ ederal Commissioner of Taxation insisted that the winnings were taxable as business income because Evans was carrying on the business of punting. Was Evans carrying on a ‘business’? The court decided that he was  not carrying on a business because his activities lacked system and organisation. The court explained (at 4554–4555): ‘There is no one factor that is decisive of whether a particular activity constitutes a business  .  .  .  Profit motive, scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on, repetition and a permanent character, continuity and system are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is being carried on.’

6 Corporations Act 2001 (Cth) s 115. 7 Corporations Regulations 2001 reg 2A.1.01. 8 Whundo Copper Syndicate v Ferrari [1962] WAR 24. 9 Partnership Act 1963 (ACT) s 2; Partnership Act 1892 (NSW) s 1B; Partnership Act 1997 (NT) s 3; Partnership Act 1891 (Qld) s 3; Partnership Act 1891 (SA) s 1B; Partnership Act 1891 (Tas) s 4; Partnership Act 1958 (Vic) s 3; Partnership Act 1895 (WA) s 3.

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The requirement that the partners be ‘carrying on’ a business suggests that there must be a continuity or repetition of trading activities. If a person works together with others to engage in a single transaction, organise a single event, or participate in an isolated act, it is unlikely that they will be deemed to have formed a partnership. Smith v Anderson (1880) 15 Ch D 247

A trust was set up to invest in submarine telegraph companies. Each of the approximately 4000 subscribers contributed funds on the understanding that they would share in the gains from the investment. Smith claimed that the trust was a partnership between the 4000 subscribers, and that it should be wound up as illegal since there were more than 20 partners. Was the investment trust a partnership? The court decided that it was not a partnership because it was not ‘carrying on’ a business. The trust was formed for the purposes of a single investment.

It is not the case that two or more people working together in relation to a single transaction can never be deemed to have formed a partnership. They will have formed a partnership if it was intended to be the first of several transactions, or if it was intended by the parties to be a partnership even though it was for a single transaction.10 The key consideration is whether the parties entered into the commercial venture with the necessary business intent. The partnership commences from the date the partners begin to carry on business together. This is not necessarily the same date as the date the business itself actually opens or commences. If the partners have been working together to prepare or establish an identifiable business, the partnership commenced from the date they began to work together.11 ‘In common’

The persons carrying on business together will only be partners in a partnership if they are doing so ‘in common’. This means that each person is acting on behalf of the others as well as on their own behalf. This was referred to earlier as ‘mutual liability’: each partner is the agent of the other partners. An employer and an employee are carrying on business together but they are not partners in the legal sense because while the employee is acting on behalf of the employer, the employer is not acting on behalf of the employee. The ­directors of a company are carrying on a business together but they are not partners because each director is acting on behalf of the ­company itself rather than on behalf of the other directors. The relationship between a franchisor and a franchisee is not normally seen as a partnership because they are not carrying on business on each other’s behalf. Degiorgio v Dunn [2004] NSWSC 767

Degiorgio and Dunn formed an AC/DC cover band at Dunn’s instigation. Degiorgio claimed that he and Dunn had formed a partnership and that he was therefore entitled to a share of the profits. The court decided that although the parties were carrying on a business together with a view of profit, they were not doing so ‘in common’: Dunn had paid all of the establishment costs himself, and Degiorgio was paid a fixed fee for each performance. Degiorgio was acting on behalf of Dunn, but Dunn was not acting on behalf of Degiorgio.

The requirement that partners act ‘in common’ does not mean that all of the partners must take an active part in the business. One or more partners may be ‘silent’ or ‘sleeping’ partners who have invested in the business but do not participate in the daily running of the business. Maria, for example, had originally intended to be a silent partner. It does, however, mean that all of the partners have accepted partnership rights and obligations. Even silent partners are legally responsible for the actions of the other partners. CAUTION!

Even ‘silent’ or ‘sleeping’ partners are legally responsible for the actions of the other partners.

10 Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321. 11 Khan v Miah [2000] 1 WLR 2123.

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‘With a view of profit’

The final requirement is that the persons are carrying on the business together to make a profit. The requirement is that they are seeking to make a profit. If they expect to make a loss in the short term and/ or they in fact make a loss, they will still be a partnership.12 A group of people carrying on a business together for a non-profit purpose, such as a charitable organisation, an amateur theatre group, a sporting club or religious organisation, are likely to have formed an unincorporated association rather than a partnership. LAW IN CONTEXT: LAW IN PRACTICE

National partnerships An increasing number of lawyers, accountants and other professionals are forming large national firms, with partners residing in and conducting business from each State and Territory. Examples of national accounting firms in Australia include Ernst & Young and KPMG. Partnerships are regulated by State and Territory legislation rather than by Federal law. So which legislation regulates a national firm? The better view appears to be that a large national firm is not a single partnership but a partnership (or joint venture, see below) between separate partnerships in each jurisdiction: it is a partnership of partnerships. This means that Queensland partners are regulated by Queensland partnership law, New South Wales partners are regulated by New South Wales partnership law, and so on. This potentially confusing situation is somewhat addressed by the fact that the various Partnership Acts around Australia are very similar, but it has nevertheless prompted many national firms to adopt an alternative business structure, usually a corporation.

Indicators of partnership If there is any doubt about whether or not a partnership exists, the partnership legislation sets out some rules ‘to which regard shall be had’ to resolve any uncertainty.13 These rules are as follows. 1. Co-ownership of property does not of itself create a partnership. This means that just because someone owns real estate with another person and shares in the rental income or proposes to share in the profit upon sale of the property, they have not necessarily formed a partnership.14 Similarly, if a bank account is in joint names the account holders are not necessarily partners.15 2. Sharing of gross returns does not of itself create a partnership. If two or more persons engage in a joint enterprise where they share the gross returns but each of them retains responsibility for their own expenses, they are likely to have formed a joint venture rather than a partnership: see below. For example, an author may be paid a percentage of gross returns from book sales but they will not be considered to have formed a partnership with the publisher. Cox v Coulson [1916] 2 KB 177

Coulson rented a theatre in which a touring company owned by Mill was performing a play. Mill and Coulson shared the box office receipts, with 40 per cent payable to Mill and 60 per cent payable to Coulson. Mill was responsible for travelling expenses and paying the actors, and Coulson was responsible for the theatre rent, the lighting and the advertising. During a performance Cox, a member of the audience, was injured when a prop gun that had been accidentally loaded with real ammunition discharged. Cox sued Coulson, arguing that Coulson was liable as Mill’s partner. Had Coulson and Mill formed a partnership? The court decided that they had not. They had only agreed to share gross returns, and each was responsible for their own liabilities and expenses.

12 Minter v Minter (2000) 10 BPR 18, 133. 13 Partnership Act 1963 (ACT) s 7; Partnership Act 1892 (NSW) s 2; Partnership Act 1997 (NT) s 6; Partnership Act 1891 (Qld) s 6; Partnership Act 1891 (SA) s 2; Partnership Act 1891 (Tas) s 7; Partnership Act 1958 (Vic) s 6; Partnership Act 1895 (WA) s 8. 14 Koh v Chan (1997) 139 FLR 410. 15 AAT Case 7675 (1991) 92 ATC 131.

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3. Receipt of a share of the profits of the business is prima facie evidence of partnership. However, the rules also provide that the following will not necessarily amount to a partnership. (a) Repayment of a debt by instalments that are paid out of accrued profits of the business does not mean that the creditor and debtor are partners. (b) A contract of employment that includes a provision for payment to the employee of a percentage of the profits of the business does not mean that the employee and the employer are partners. (c) The receipt of an annuity paid out of the profits of the business to a relative of a deceased partner does not mean that the payee and the payer are partners. (d) The advance of money in return for a share of the profits of the business does not make the lender and the borrower partners. (e) The sale of goodwill of a business in return for a share of the profits does not make the vendor and the purchaser partners. Whywait Pty Ltd v Davison [1997] 1 Qd R 225

Davison entered into an agreement with Cheers according to which they would build and sell four townhouses, and share the net profits. The agreement expressly referred to the relationship as a ‘joint venture’. Had Davison and Cheers in fact formed a partnership? The court decided that they had, since they were carrying on a business in common and for profit. Joint ventures

A joint venture is a contract between two or more parties to cooperate in some project or undertaking. Members of a joint venture are not partners and do not have mutual liability. They do not necessarily owe each other fiduciary obligations; it depends upon the terms of the arrangement.16 It is important that the joint venture agreement be drafted very carefully. If the arrangement satisfies the elements of a partnership it will be classified as a partnership regardless of the name given to it by the parties. Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321

Fourth Media Management Pty Ltd (FMM) organised a series of concerts to be performed by celebrities Elton John and Cilla Black. FMM entered into an arrangement with Volume Sales (Finance) Pty Ltd (VS) according to which VS would finance the concerts in return for which FMM transferred to VS a half-­interest in the contracts with the performers. The arrangement was described as a ‘joint venture’, and provided that the profits were to be shared equally, that policy decisions affecting the joint venture were to be mutually agreed, and that any disagreements were to be resolved by arbitration. The court decided that although the parties explicitly referred to the arrangement as a joint venture, it was in fact a partnership.

ACTIVIT Y 15.4 — REFLECT

Why would some business operators who propose to work together prefer a joint venture to a partnership?

CAUTION!

Not every cooperative venture involving two or more persons or organisations will be a partnership. It is necessary to carefully consider whether or not the legal requirements for a partnership have been satisfied. The label attached by the participants to the arrangement is not conclusive: an arrangement that is labelled as something other than a partnership may still be a partnership, and vice versa.

16 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1.

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Palermo v Palermo [No 2] [2014] WASC 6

Two brothers spent 30 years in business together in accounting, property development, share dealing, corporate consulting and farming.  Over that time, they had used structures such as companies, discretionary trusts and unit trusts. The relationship deteriorated and the court had to decide if the brothers were in a partnership. The court decided that to say the brothers were in a partnership would be to  ignore the complex legal structures set up in order to limit liability, minimise their tax burden and overcome any regulatory problems. Therefore, the brothers were not in a partnership.

Partnership agreement The partnership relationship is a contractual relationship. The contract between the partners is known as the ‘partnership agreement’. The partnership agreement may be a formal written document, it may be partly in writing and partly oral, or it may be wholly or partly implied from the conduct of the partners. A written partnership agreement is not essential to the existence of a partnership. It is nevertheless a very good idea to have one, because a written agreement: 1. clearly establishes that a partnership exists, 2. clearly sets out the rights and obligations of the partners, and 3. will set out a clear process for resolving disputes between the partners. LAW IN CONTEXT: LAW IN PRACTICE

What to include in a partnership agreement When going into business with one or more other people it is very important that a written partnership agreement be prepared at the outset. A written and signed partnership agreement will clarify the expectations of the partners, impress upon the partners the importance of the legal relationship that has been created, and resolve potential disputes between the partners. A written and signed partnership agreement is a good idea even if the partners are spouses or family members. A written partnership agreement should address the following matters. • The names of the partners and the name of the partnership (see the information on business names later in this chapter). • The nature of the partnership business — What is it that the partnership has been set up to achieve? • The term of the partnership — When will the partnership commence? Is the partnership to last for a fixed period or the duration of a particular project or series of projects, or is the partnership an ongoing one? • Each partner’s contribution to the partnership — How much capital will each partner contribute? Will any partners contribute property, equipment, goods or services? How will these contributions be valued? What percentage interest in the business will each partner have? Will the partners be entitled to receive interest on the amount of their capital contribution? • Sharing of profits and losses — How will profits and losses be shared by the partners? Will they be shared equally, or in proportion to each partner’s percentage interest in the business? When will profits be distributed? Can partners draw upon profits periodically or must they wait until the end of the year? Can partners request an advance, and if so, must they pay interest on the advance? Are partners entitled to be paid a salary in addition to sharing in the profits? • Authority of partners — What is each partner authorised to do on behalf of the partnership? In the absence of agreement to the contrary each partner has implied authority to bind the other partners to debts and other contracts. The extent of each partner’s actual authority should be spelled out clearly in the partnership agreement. • Decision-making — How do the partners make collective decisions? Unanimously or by majority? Is there a difference between minor operational decisions and major business decisions? • Duties and obligations — Are particular partners responsible for particular duties or tasks, or for particular aspects of the business? • Admitting new partners — What is the procedure for admitting a new partner to the partnership? • Withdrawal or death of a partner — What if one of the partners dies or is declared bankrupt? What happens to their share of the business? What if one of the partners wishes to leave? Can the other partners buy them out? What is the procedure for doing so?

558  PART 3 Managing a business

• Expulsion of a partner — In what circumstances can a partner be expelled from the partnership? What is the procedure for doing so? • Dispute resolution — What if the partners cannot agree on a particular decision or course of action? How will the dispute be resolved? Are the partners obliged to make use of alternative dispute resolution before resorting to litigation? One of the advantages of the partnership as a business structure is flexibility: the partnership agreement can be varied at any time with the agreement of all of the partners. CAUTION!

A written partnership agreement is not a legal requirement but it is nevertheless a very good idea.

The partnership agreement is only binding on the partners themselves. It is not binding on third parties dealing with the partnership (see a previous chapter and the doctrine of privity of contract). For example, a partnership agreement may state that a lone partner is only permitted to write partnership cheques up to a limit of $10 000, and that cheques in excess of this amount must be signed by two partners. If a partner writes a partnership cheque for $15 000, the person to whom it is delivered is still entitled to insist on payment because they are not bound by the partnership agreement (unless they were aware of the $10 000 limit). The partner who wrote the $15 000 cheque will, however, be in breach of the partnership agreement and liable to the other partners.

Other forms of partnership Each State and Territory has enacted legislation allowing for the existence of two alternative forms of partnership: limited partnerships and incorporated limited partnerships. Limited partnerships

A partnership where some of the partners have the benefit of limited liability is called a limited ­partnership. In a limited partnership there are two types of partner: 1. general partners, who manage the business and who have unlimited personal liability, and 2. limited partners, who do not participate in the management of the business and whose liability is limited to an agreed amount. Limited partners are more like investors than true partners. Limited partnerships must have at least one general partner with unlimited personal liability. Unlike normal partnerships, limited partnerships must be registered. In most other respects the rules regulating normal partnerships apply to limited partnerships. Limited partnerships are not separate legal entities. Limited partnerships are, however, treated in the same manner as companies for taxation purposes. Incorporated limited partnerships

Most States have enacted legislation allowing for the existence of incorporated limited partnerships or ILPs. An incorporated limited partnership is intended to facilitate the investment of international venture capital in Australia. Like a company, an ILP is a separate legal entity able to own property, be a party to litigation and enter into contracts in its own name rather than in the names of the partners. Like a limited partnership, an ILP must be registered and must have at least one general partner with unlimited personal liability. ACTIVIT Y 15.5 — REFLECT

Make a list of the advantages and disadvantages of the partnership as a business structure.

Authority of partners Each partner is the agent of the firm, i.e. they are the agent of the other partners. Each partner in a partnership has express authority, implied authority and apparent authority to act on behalf of the CHAPTER 15 Managing a business: business ownership  559

other  partners when dealing with third parties such as financiers, suppliers and customers of the firm. (You should review the section on agency and authority in a previous chapter.)

Express authority The express authority of each partner is the authority expressly granted by the other partners. This express authority may be set out in a written partnership agreement or some other written statement, or it may be granted verbally. For example, Johnny may expressly authorise Maria to negotiate a renewal of the lease of the business premises on behalf of the partnership.

Implied authority In the absence of express agreement to the contrary, partners have implied authority to act on behalf of the other partners in doing all the usual things that are necessary to carry on the business of the partnership, including implied authority to: •• sell the firm’s property (including trading stock), •• buy goods of the kind usually employed in the firm’s business, •• hire employees for the carrying out of the firm’s business, •• borrow money, incur debts, give security for those debts and pay debts on behalf of the firm, •• receive payment of debts due to the firm and give effective receipts for those debts, and •• write cheques in the name of the firm.17 CAUTION!

The implied authority of a partner or other agent can be overridden by an express agreement or instructions to the contrary. For example, if the partnership agreement clearly states that an individual partner is not permitted to hire employees without the approval of the other partners, individual partners do not have implied authority to hire employees.

Partners do not, however, have implied authority to: execute a deed on behalf of the partnership, give a guarantee on behalf of the partnership, mortgage the partnership property, or borrow money on behalf of the partnership for a purpose not apparently connected with the partnership’s ordinary course of business. Thus if Maria wanted to hire a new waiter for the restaurant she could do so without seeking ­Johnny’s consent since the hiring of employees falls within the scope of Maria’s implied authority. However, if Maria wanted to borrow money from a bank to buy a new car for herself, she would not have the authority to make Johnny liable under the loan contract as well, since such a loan is not connected to the partnership’s business and is therefore beyond the scope of Maria’s implied authority. •• •• •• ••

Apparent authority In addition to express and implied authority, a particular partner may have apparent authority to act on behalf of the other partners. According to the partnership legislation: Every partner is an agent of the firm and his or her 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 of business of the kind carried on by the firm of which the partner is a member bind the firm and his or her partners, unless (1) the partner so acting has in fact no authority to act for the firm in the particular matter, and (2) the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner.18 17 Bank of Australasia v Breillat (1847) 13 ER 642, 657–658. 18 Partnership Act 1963 (ACT) s 9; Partnership Act 1892 (NSW) s 5; Partnership Act 1997 (NT) s 9; Partnership Act 1891 (Qld) s 8; Partnership Act 1891 (SA) s 5; Partnership Act 1891 (Tas) s 10; Partnership Act 1958 (Vic) s 9; Partnership Act 1895 (WA) s 26.

560  PART 3 Managing a business

CHECKLIST

Where a partner acts without the actual authority of the firm, the other partners will be still liable for the actions of the partner — including debts incurred by the partner and torts committed by the partner — if four requirements are satisfied. ◼◼ The partner was carrying on business of the kind carried on by the firm. ◼◼ That business was being carried on by the partner in the usual way. ◼◼ The person with whom the partner was dealing knew or believed that they were a partner. ◼◼ The person with whom the partner was dealing did not know or suspect that the partner had no actual authority.

This means that Maria will be liable for the actions of Johnny relating to partnership business, unless Johnny was not actually authorised to undertake that action on Maria’s behalf and the person with whom Johnny was dealing either knew that Johnny was not authorised or did not know that Johnny was Maria’s partner. If Johnny was not actually authorised to act on Maria’s behalf (i.e. he did not have express or implied authority) but the person with whom Johnny was dealing did not know that, Maria will still be liable for Johnny’s actions. Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541

A partnership agreement between Tambel (A/asia) Pty Limited and Hexyl Pty Ltd expressly provided that when Tambel entered into a construction contract with Construction Engineering (Aust.) Pty Ltd (CE), Tambel would do so on its own behalf and not on behalf of the partnership. Tambel executed a contract with CE. At the time CE was not aware of Tambel’s partnership with Hexyl. When the contract was breached, CE commenced proceedings against both Tambel and Hexyl. Hexyl argued that they were not liable because Tambel was not authorised to act on Hexyl’s behalf. The court agreed with Hexyl: Tambel did not have actual authority because of the partnership agreement, and Tambel did not have apparent authority because at the time the contract was executed CE did not know about the partnership with Hexyl.

Crouch and Lyndon (a Firm) v IPG Finance Australia Pty Ltd [2013] QCA 220

Wood was a partner in the firm Crouch and Lyndon. IPG loaned money to the firm on the basis of false representations made by Wood. The money was provided to Wood, who misappropriated the money. Scott, the only remaining partner of the firm, had no knowledge of the loan. Nevertheless Scott was liable for Wood’s actions as Wood had acted with the firm’s apparent authority.

In deciding whether or not a partner was engaged in the ‘usual business’ of the partnership, the court will consider: •• what the usual business of the partnership actually is, and •• what transactions a partnership of that kind would usually engage in. Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103

Garrod and Parkin were partners in a garage business. Parkin ran the business and Garrod was a ‘silent’ partner. The partnership agreement stated that buying and selling cars was not to be a part of the partnership business. Without authority from Garrod, Parkin fraudulently sold a car to Mercantile Credit. Mercantile Credit sued the partnership to recover the purchase price. Garrod denied liability, arguing that Parkin had acted outside the scope of the partnership business. Was selling cars ‘business of the kind carried on by the firm’? The court decided that this phrase included not only business actually carried on by the firm but also business carried on by a firm of this type. Since it was not unusual for a garage to carry on the business of buying and selling cars, Parkin had been ‘carrying on business of the kind carried on by the firm’ and Garrod was liable for his actions.

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Even if the transaction in question falls within the ‘business of the kind carried on by the firm’, the other partners will only be liable if the business was carried on in the ‘usual way’. If it is not being carried on in the usual way, the person dealing with the partner in question should suspect that the partner lacks the authority to act on behalf of the firm. Goldberg v Jenkins & Law (1889) 15 VLR 36

A partner borrowed money on behalf of the firm, but without the actual authority of the other partners. The interest rate was more than 60 per cent. The court decided that although borrowing money was within the usual business of the partnership, borrowing money at that rate was not in the ‘usual way’ and therefore the other partners were not liable for the loan.

The borrowing of money on behalf of the firm is also dealt with expressly by the partnership legislation: Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound unless the partner is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.19

If someone lends money or provides credit to a partner and they know or should know that the transaction is not connected with the usual business of the firm, the creditor cannot recover from the other partners unless the partner was actually authorised by the other partners. The creditor can, however, recover from the partner they actually dealt with. ACTIVIT Y 15.6 — REFLECT

How can the rule that Johnny is liable for Maria’s actions — even if Johnny has told Maria not to do something — be justified?

What if the firm holds out as a partner a person — such as an employee of the firm — who is not, in fact, a partner? The partnership legislation specifically states that if the firm allows a third party to deal with someone in the belief that they are partner, the firm will be liable as if that person was a partner.20 In circumstances where the third party loans money or provides credit to the firm, not only will the firm be liable to the third party but the person who allowed themselves to be held out as a partner will also be liable to the third party. According to the partnership legislation, if: •• a person makes a representation that they are a partner or allows themselves to be represented as a partner, •• credit is given to the partnership, and •• the credit is given on the faith of the representation, then that person is jointly liable with the other partners for repayment of the debt.21 This would include retired partners who do not give adequate notice of their retirement.

19 Partnership Act 1963 (ACT) s 11(1); Partnership Act 1892 (NSW) s 7(1); Partnership Act 1997 (NT) s 11(1); Partnership Act 1891 (Qld) s 10(1); Partnership Act 1891 (SA) s 7(1); Partnership Act 1891 (Tas) s 12; Partnership Act 1958 (Vic) s 11; Partnership Act 1895 (WA) s 14. 20 Partnership Act 1963 (ACT) s 10; Partnership Act 1892 (NSW) s 6; Partnership Act 1997 (NT) s 10; Partnership Act 1891 (Qld) s 9; Partnership Act 1891 (SA) s 6; Partnership Act 1891 (Tas) s 11; Partnership Act 1958 (Vic) s 10; Partnership Act 1895 (WA) s 13. 21 Partnership Act 1963 (ACT) s 18; Partnership Act 1892 (NSW) s 14; Partnership Act 1997 (NT) s 18; Partnership Act 1891 (Qld) s 17; Partnership Act 1891 (SA) s 14; Partnership Act 1891 (Tas) s 19; Partnership Act 1958 (Vic) s 18; Partnership Act 1895 (WA) s 21.

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Lynch v Stiff (1943) 68 CLR 428

Williamson owned a law firm. The names of two of his employees, Lynch and Salmon, appeared on the firm’s letterhead as partners. The plaintiff, Stiff, was a client of the firm who usually dealt with Lynch. Stiff trusted Lynch and believed him to be a partner of the firm, and Stiff authorised the firm to invest some money on his behalf. Williamson misappropriated the money. Stiff sued Lynch and Salmon on the basis that they had allowed themselves to be held out as partners and were therefore liable for the actions of Williamson. The court decided that Lynch was liable because Stiff’s decision to invest the money was influenced by his belief that Lynch was a partner. Salmon, however, was not liable because although Stiff believed Salmon to be a partner, Stiff ‘took no interest in him in the business at all’.

CAUTION!

An employee who allows himself or herself to be described or portrayed as a partner might end up being personally liable for partnership debts.

Liability of partners Unlike a company, a partnership is not a separate legal entity, and each partner has unlimited personal liability for the debts and obligations of the business. If the partnership assets are not sufficient to repay the debts and other obligations of the partnership, the partners themselves have unlimited individual liability, and their personal assets can be called upon. ACTIVIT Y 15.7 — REFLECT

In what way is the unlimited personal liability of partners (1) a disadvantage, and (2) an advantage of the partnership as a business structure?

Partners may be liable under contract law, tort law and even criminal law.

Debts and contracts The partnership legislation states that partners are jointly liable for debts and other contractual obligations incurred while they are partner. Every partner in a firm  .  .  .  is liable jointly with the other partners for all debts and obligations of the firm incurred while a partner, and, if the partner is an individual, after the partner’s death the partner’s estate is also severally liable in a due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of the partner’s separate debts.22

Joint liability means that each partner is liable for the whole amount, and that the partners must be sued collectively for the debt to be recovered or the obligation enforced. If, for example, Maria is sued

22 Partnership Act 1963 (ACT) s 13; Partnership Act 1892 (NSW) s 9; Partnership Act 1997 (NT) s 16; Partnership Act 1891 (Qld) s 12; Partnership Act 1891 (SA) s 9; Partnership Act 1891 (Tas) s 14; Partnership Act 1958 (Vic) s 13; Partnership Act 1895 (WA) s 16. CHAPTER 15 Managing a business: business ownership  563

for a business debt, and the debt is not recovered from her, Johnny cannot subsequently be sued for the balance (although Maria can recover a contribution from Johnny.) Kendall v Hamilton (1879) 4 App Cas 504

Wilson, McLay and Hamilton were partners. Kendall loaned money to Wilson and McLay, unaware that ­Hamilton was a partner. Wilson and McLay fell into financial difficulties and were unable to repay the loan to Kendall. Kendall sued Wilson and McLay and recovered part of the amount owing. Kendall then learned that Hamilton was a partner, and sued Hamilton for the balance. The court decided that ­Kendall was not permitted to sue Hamilton. Partners are jointly liable for partnership debts, which means that (1) if one partner is sued for a partnership debt they can insist that all of the partners be joined as defendants, and (2) once some of the partners have been sued the creditor cannot sue the remaining partners, even if at the time of the first action the creditor was unaware of their existence.

Note that the court rules in each jurisdiction now allow all of the partners to be sued collectively in the partnership name.

Torts and crimes In relation to torts and crimes, the partnership legislation states that if one partner causes injury or damage to another person (tort) or incurs a penalty (crime) all of the partners are liable provided that: •• the partner committing the wrongful act was acting in the ordinary course of the business of the partnership, or •• the other partners authorised the action.23 As with apparent authority, in deciding whether or not a partner was acting in the ordinary course of the business of the partnership, the court will consider both the usual business of the firm and the types of transactions a firm of that kind would usually engage in. In relation to torts and crimes, partners are jointly and severally liable, which means that each partner is liable for the whole amount, and that if a plaintiff sues some of the partners and does not recover the full amount owing, they can sue the other partners for the balance. National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251

Davis and Batty were partners in an accounting firm. Davis defrauded one of the firm’s clients by depositing money payable to the client into the firm’s trust account and then withdrawing the money for his own use. The client successfully recovered compensation from the bank, NAB, which then sued Davis and Batty for indemnity. The court decided that Batty was not liable for Davis’s tort. In fraudulently depositing the client’s money into the trust account and withdrawing it for his own use, Davis was not acting with Batty’s authority and was not acting in the ordinary course of the partnership’s business.

The partnership legislation states that all of the partners will be liable for the misapplication of money or property by one of the partners, provided that the fraudulent partner had apparent authority to receive the money, or the money was received by the partnership in the course of its business.24 If the fraudulent partner was clearly acting independently, the other partners will not be liable.

23 Partnership Act 1963 (ACT) ss 14–17A; Partnership Act 1892 (NSW) ss 10–13; Partnership Act 1997 (NT) ss 17–20; Partnership Act 1891 (Qld) ss 13–16; Partnership Act 1891 (SA) s 10–13; Partnership Act 1891 (Tas) ss 15–18; Partnership Act 1958 (Vic) ss 14–17; Partnership Act 1895 (WA) ss 17–20. 24 Partnership Act 1963 (ACT) s 15; Partnership Act 1892 (NSW) s 11; Partnership Act 1997 (NT) s 15; Partnership Act 1891 (Qld) s 14; Partnership Act 1891 (SA) s 11; Partnership Act 1891 (Tas) s 16; Partnership Act 1958 (Vic) s 15; Partnership Act 1895 (WA) s 18. 564  PART 3 Managing a business

Rights and duties of partners The relationship between partners is a fiduciary one in addition to being a contractual one.25 This means that each partner is obliged to act in good faith for the common good of the partnership. According to common law, each partner must: •• not profit personally from their position or from information gained as a result of that position, •• not put themselves in a position where there will be a conflict of interest without keeping their partners informed, •• fully disclose to the other partners all matters likely to affect the partnership, •• account for any private profits made without the consent of the other partners as a consequence of the above, and •• not compete with the partnership. Chan v Zacharia (1984) 154 CLR 178

Chan and Zacharia were partners who leased the premises for their medical practice. The lease contained an option to renew for a further term. Chan and Zacharia agreed to dissolve the partnership. Before the dissolution was complete, Chan renewed the lease of the premises in his own name. The court decided that the fiduciary relationship between partners continues until the partnership is finally wound up, and that Chan had breached his fiduciary obligation to Zacharia by taking for himself an asset or opportunity that was for the benefit of the partnership.

Battye v Shammall (2005) 91 SASR 315

Battye and Shammall entered into a partnership to train and race horses. Battye agreed to pay Shammall $25  000 for a half share in the horses. Shammall did not tell Battye that he had only paid $30  000 for the horses, and therefore made a $10  000 profit on the transaction. The court decided that this was a breach of Shammall’s fiduciary duty, and ordered Shammall to pay $10  000 compensation to Battye.

CAUTION!

Even if the partnership has come to an end, the partners may still owe each other fiduciary obligations.

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22

Farah entered into a joint venture with Say-Dee to develop units at 11 Deane Street in Burwood, NSW. Say-Dee provided the capital and Farah managed the project. To develop No. 11, the land at numbers 13 and 15 Deane Street also needed to be bought. Elias was a director of Farah. Elias’ family purchased some of the units at Nos 13 and 15 Deane St, and did not disclose this to Say-Dee. Say-Dee alleged that the units at Nos 13 and 15 had been purchased in breach of Farah’s and Elias’s fiduciary duties to Say-Dee as its joint venturer. The High Court accepted that although Farah and Say-Dee were in a joint venture rather than partnership, Elias and Farah owed fiduciary duties to Say-Dee as its joint venturer.

25 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384.

CHAPTER 15 Managing a business: business ownership  565

The partnership legislation also sets out a number of duties owed by each partner. •• Duty of disclosure — each partner must provide to their partners true accounts and full information about all things affecting the partnership.26 If one partner knows more about the partnership’s affairs than the others they must pass it on rather than keep it to themselves. This duty complements the right of each partner to access the partnership financial records (described below). Law v Law [1905] 1 Ch 140

William Law and James Law were partners in a manufacturing business. James was the active partner, and William agreed to sell his share to James for £10  000. After the sale William discovered that James had not disclosed to William all of the partnership assets, and that William’s share was in fact worth more than £10  000. The court decided that James had breached his duty of disclosure.

•• Duty to share profits — each partner must account to the other partners for any benefit derived from any transaction concerning the partnership or from use of the partnership property, name or business connections. A partner is not permitted to use their position in the partnership to make a private profit.27 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384

John Porter was a partner in a real estate firm. When he died his partners discovered that Porter had been conducting a business with one of the firm’s clients involving speculative land development projects. The court decided that Porter had breached his duty to share profits, and ordered his estate to pay to the surviving partners a share of the profits made from the projects.

•• Duty not to compete — a partner must not, without the consent of their partners, carry on another business of the same nature in competition with the partnership business. If they do, they have to account for and pay to the partners all of the profits they make from the competing business.28 In order to be in breach of this duty, the business carried on by the partner must be ‘of the same nature’ as the partnership business, and it must in fact compete with the partnership business. There is an overlap between this duty and the previous duty to share profits. The rights of the partners will usually be set out in a written partnership agreement. In the absence of a written or verbal agreement to the contrary, the partnership legislation provides certain rules relating to the rights of partners. •• Right to share in capital, profits and losses — all partners have a right to share equally in capital and profits, and must contribute equally to any losses.29 This is regardless of the amount of capital, time and effort contributed by each of the partners. The statutory entitlement to share equally is ‘subject to any agreement express or implied between the partners’. Regarding the equal sharing of capital, the courts have demonstrated a willingness to imply a contrary intention. 26 Partnership Act 1963 (ACT) s 33; Partnership Act 1892 (NSW) s 28; Partnership Act 1997 (NT) s 32; Partnership Act 1891 (Qld) s 31; Partnership Act 1891 (SA) s 28; Partnership Act 1891 (Tas) s 33; Partnership Act 1958 (Vic) s 32; Partnership Act 1895 (WA) s 39. 27 Partnership Act 1963 (ACT) s 34; Partnership Act 1892 (NSW) s 29; Partnership Act 1997 (NT) s 33; Partnership Act 1891 (Qld) s 32; Partnership Act 1891 (SA) s 29; Partnership Act 1891 (Tas) s 34; Partnership Act 1958 (Vic) s 33; Partnership Act 1895 (WA) s 40. 28 Partnership Act 1963 (ACT) s 35; Partnership Act 1892 (NSW) s 30; Partnership Act 1997 (NT) s 34; Partnership Act 1891 (Qld) s 33; Partnership Act 1891 (SA) s 30; Partnership Act 1891 (Tas) s 35; Partnership Act 1958 (Vic) s 34; Partnership Act 1895 (WA) s 41. 29 Partnership Act 1963 (ACT) s 29(1); Partnership Act 1892 (NSW) s 24(1)(1); Partnership Act 1997 (NT) s 28(1)(a); Partnership Act 1891 (Qld) s 27(1)(a); Partnership Act 1891 (SA) s 24(1)(a); Partnership Act 1891 (Tas) s 29(1)(a); Partnership Act 1958 (Vic) s 28(1); Partnership Act 1895 (WA) s 34(1).

566  PART 3 Managing a business

Kelly v Tucker (1907) 5 CLR 1

Kelly and Tucker formed a partnership to buy and sell racehorses. They agreed to share the profits equally. Tucker initially contributed £800 and Kelly contributed his expertise as a trainer. When the partnership was dissolved Kelly insisted upon receiving half of the £800 contribution. The court decided that because the express agreement between the partners was only to share profits there was an implied agreement that capital should be repaid to partners before the remaining funds were shared.

The courts are less willing to imply a contrary intention regarding the equal sharing of profits and losses. Profits and losses will be shared equally unless the partners have clearly reached an agreement to the contrary. If the partners believe that the profits and losses should be shared differently — e.g. in proportion to the capital invested by each partner — then they should have a partnership agreement drawn up accordingly. Joyce v Morrissey [1998] TLR 707

The parties were members of the band ‘The Smiths’. Morrissey, the lead singer, and Marr, the lead guitarist, claimed that it had been agreed that they were entitled to 40 per cent each of the profits, and that the other two members, including Joyce, were only entitled to 10 per cent each. Joyce denied that there was any such agreement. The Smiths accountant had sent copies of accounts to Joyce that showed that he would receive 10 per cent and he had not objected. The court decided that Joyce’s failure to object did not prove the existence of an agreement that the profits would not be shared equally. Joyce was entitled to 25 per cent of the profits.

•• Right to indemnity — partners are entitled to be indemnified for payments made or liabilities incurred in conducting the partnership’s business.30 Partners must provide an official receipt to claim the indemnity. •• Right to interest on loans — partners are entitled to receive interest on money lent to the partnership.31 The statutory provision sets out a rate of interest, although the rate varies between jurisdictions. •• Right to interest on capital contributions — partners are not entitled to receive interest on their capital contribution.32 Like shareholders, the partners’ return is usually in the form of a share of the profits rather than interest on their investment. •• Right to participate in management — every partner has the right to take part in the management of the partnership business.33 In practice, partners often provide in their partnership agreement that only active partners — and sometimes only certain of them — are to manage the firm. Some agreements provide for the appointment of a ‘managing partner’. •• Right to wages — no partner is entitled to remuneration for acting in the partnership business.34 This means that partners are not entitled to be paid wages or a salary, although they are of course entitled to share in the profits. As usual, this is in the absence of express agreement to the contrary, and partnership agreements often provide that some partners are entitled to a salary in addition to receiving a share of the profits. 30 Partnership Act 1963 (ACT) s 29(2); Partnership Act 1892 (NSW) s 24(1)(2); Partnership Act 1997 (NT) s 28(1)(b); Partnership Act 1891 (Qld) s 27(1)(b); Partnership Act 1891 (SA) s 24(1)(b); Partnership Act 1891 (Tas) s 29(1)(b); Partnership Act 1958 (Vic) s 28(2); Partnership Act 1895 (WA) s 34(2). 31 Partnership Act 1963 (ACT) s 29(3); Partnership Act 1892 (NSW) s 24(1)(3); Partnership Act 1997 (NT) s 28(1)(c); Partnership Act 1891 (Qld) s 27(1)(c); Partnership Act 1891 (SA) s 24(1)(c); Partnership Act 1891 (Tas) s 29(1)(c); Partnership Act 1958 (Vic) s 28(3); Partnership Act 1895 (WA) s 34(3). 32 Partnership Act 1963 (ACT) s 29(4); Partnership Act 1892 (NSW) s 24(1)(4); Partnership Act 1997 (NT) s 28(1) (d); Partnership Act 1891 (Qld) s 27(1)(d); Partnership Act 1891 (SA) s 24(1)(d); Partnership Act 1891 (Tas) s 29(d); Partnership Act 1958 (Vic) s 28(4); Partnership Act 1895 (WA) s 34(4). 33 Partnership Act 1963 (ACT) s 29(5); Partnership Act 1892 (NSW) s 24(1)(5); Partnership Act 1997 (NT) s 28(1)(e); Partnership Act 1891 (Qld) s 27(1)(e); Partnership Act 1891 (SA) s 24(1)(e); Partnership Act 1891 (Tas) s 29(1)(e); Partnership Act 1958 (Vic) s 28(5); Partnership Act 1895 (WA) s 34(5). 34 Partnership Act 1963 (ACT) s 29(6); Partnership Act 1892 (NSW) s 24(1)(6); Partnership Act 1997 (NT) s 28(1)(f); Partnership Act 1891 (Qld) s 27(1)(f); Partnership Act 1891 (SA) s 24(1)(f); Partnership Act 1891 (Tas) s 29(1)(f); Partnership Act 1958 (Vic) s 28(6); Partnership Act 1895 (WA) s 34(6).

CHAPTER 15 Managing a business: business ownership  567

ACTIVIT Y 15.8 — REFLECT

Why would a partnership agreement state that some partners are entitled to a salary and others are not?

•• Right to introduce new partners — a new partner cannot be introduced without the consent of all of the other partners.35 This is consistent with the idea that the foundation of a successful partnership is mutual trust, confidence, understanding and goodwill. •• Right to resolution of disagreements — differences of opinion about ordinary matters connected with the partnership business are to be decided by a majority of partners, but all partners must consent to any change in the nature of the partnership business.36 •• Right to access financial records — the partnership financial records must be kept at the firm’s place of business, and every partner has the right to access, inspect and copy them at any time.37 Bevan v Webb [1901] 2 Ch 59

The silent partners in a brewery business decided to sell their interest to the active partners. In order to calculate a fair price the silent partners requested that their accountant be given access to the partnership financial records. The active partners refused, insisting that the partnership legislation only permitted access to the financial records by ‘a partner’. The court decided that all partners are entitled to have the financial records inspected by an agent such as an accountant, as long as the agent undertakes to only use the information to advise the partner.

•• Right to remain a partner — a partner cannot be expelled from the partnership unless the partnership agreement expressly gives this power to a majority of partners.38 Even then this power must be exercised in good faith and not for any improper purposes.39 LAW IN CONTEXT: LAW IN PRACTICE

Partnerships and discrimination Anti-discrimination legislation in each jurisdiction prohibits discrimination on grounds that are not relevant to the activity in question. Section 17 of the Sex Discrimination Act 1984 (Cth), s 21 of the Age Discrimination Act 2004 (Cth) and s 18 of the Disability Discrimination Act 1992 (Cth) all refer explicitly to partnerships. They make it unlawful for a partner or partners to discriminate against someone on the basis of sex, marital status, pregnancy or potential pregnancy, age or disability when determining who should be invited to become a partner or the terms upon which they are invited to become a partner. They also make it unlawful for the partners to discriminate against a partner by denying or limiting their access to any benefit, expelling the partner, or subjecting them to any other detriment. A person who believes that they have been discriminated against in breach of one or more of these legislative provisions should contact the Australian Human Rights Commission: www.humanrights.gov.au.

35 Partnership Act 1963 (ACT) s 29(7); Partnership Act 1892 (NSW) s 24(1)(7); Partnership Act 1997 (NT) s 28(1)(g); Partnership Act 1891 (Qld) s 27(1)(g); Partnership Act 1891 (SA) s 24(1)(g); Partnership Act 1891 (Tas) s 29(1)(g); Partnership Act 1958 (Vic) s 28(7); Partnership Act 1895 (WA) s 34(7). 36 Partnership Act 1963 (ACT) s 29(8); Partnership Act 1892 (NSW) s 24(1)(8); Partnership Act 1997 (NT) s 28(1)(h); Partnership Act 1891 (Qld) s 27(1)(h); Partnership Act 1891 (SA) s 24(1)(h); Partnership Act 1891 (Tas) s 29(1)(h); Partnership Act 1958 (Vic) s 28(8); Partnership Act 1895 (WA) s 34(8). 37 Partnership Act 1963 (ACT) s 29(9); Partnership Act 1892 (NSW) s 24(1)(9); Partnership Act 1997 (NT) s 28(1) (i); Partnership Act 1891 (Qld) s 27(1)(i); Partnership Act 1891 (SA) s 24(1)(i); Partnership Act 1891 (Tas) s 29(1)(i); Partnership Act 1958 (Vic) s 28(9); Partnership Act 1895 (WA) s 34(9). 38 Partnership Act 1963 (ACT) s 30; Partnership Act 1892 (NSW) s 25; Partnership Act 1997 (NT) s 29; Partnership Act 1891 (Qld) s 28; Partnership Act 1891 (SA) s 25; Partnership Act 1891 (Tas) s 30; Partnership Act 1958 (Vic) s 29; Partnership Act 1895 (WA) s 35(1). 39 Blisset v Daniel (1853) 68 ER 1022.

568  PART 3 Managing a business

•• Right to assign interest — a partner can assign their share in the partnership without the consent of the other partners. However, the assignee will only be entitled to the assignor’s share of the profits and has no right to participate in management.40 Re Garwood’s Trusts; Garwood v Paynter [1903] 1 Ch 236

Garwood was one of three partners in a partnership. Each partner received a share of the profits but no remuneration. Garwood assigned his share in the partnership to his wife as part of a separation agreement. The other two partners then decided that because they were now doing more work they should each be paid a salary in addition to a share of the profits. Garwood’s wife objected to this change in the partnership agreement because it resulted in a reduction in profits and therefore a lower return for her. The court decided that she was not entitled to object. The new arrangement was a legitimate management decision, and as she was an assignee she was not entitled to participate in the management of the firm.

CAUTION!

All of these statutory rights are subject to agreement to the contrary. In other words, the partners are free to have a partnership agreement that grants them different rights.

ACTIVIT Y 15.9 — REFLECT

If Johnny and Maria were to draw up a partnership agreement, which of the above rights do you think they would want to change?

Partnership property It is important to distinguish between property that belongs to the partners personally and property that is owned by the partnership as a whole. If Johnny uses a motor vehicle that he originally owned himself for his restaurant business, has the motor vehicle become partnership property? If it does then the value of the motor vehicle is taken into account as part of Johnny’s capital contribution, and upon dissolution of the partnership any loss in the value of the vehicle is shared by the partners. If it is not partnership property then it remains Johnny’s own property and he must bear the loss alone. The partnership legislation states that in the absence of agreement, all property originally brought into the partnership stock or acquired by it later is partnership property, which means that it is owned jointly by the partners.41 For example, if three people form a partnership, with one contributing the premises, one contributing equipment, and one contributing intellectual property, none of them will retain ownership of the individual assets. Rather, everything will become partnership property, and will have to be sold when the partnership is dissolved.

40 Partnership Act 1963 (ACT) s 36(1); Partnership Act 1892 (NSW) s 31(1); Partnership Act 1997 (NT) ss 35(1)-(2); Partnership Act 1891 (Qld) s 34(1); Partnership Act 1891 (SA) s 31(1); Partnership Act 1891 (Tas) s 36(1); Partnership Act 1958 (Vic) s 35(1); Partnership Act 1895 (WA) s 42(1). 41 Partnership Act 1963 (ACT) s 24; Partnership Act 1892 (NSW) s 20; Partnership Act 1997 (NT) s 24; Partnership Act 1891 (Qld) s 23; Partnership Act 1891 (SA) s 20; Partnership Act 1891 (Tas) s 25; Partnership Act 1958 (Vic) s 24; Partnership Act 1895 (WA) s 30.

CHAPTER 15 Managing a business: business ownership  569

Robinson v Ashton (1875) LR 20 Eq 25

Robinson and Ashton formed a partnership. Robinson contributed the cotton mill and some fixed plant and machinery. When the partnership was dissolved twelve years later, Robinson claimed for himself the full proceeds of the sale of the mill and the fixed plant, which had increased in value. The court decided that from the circumstances it was clear that the mill and the fixed plant had been intended to be, and had therefore become, partnership property. The increase in value was therefore a partnership profit to be shared by the partners.

Whether and at what stage property initially owned by a partner becomes partnership property is a question of fact to be determined in the circumstances of each case. Harvey v Harvey (1970) 120 CLR 529

Harold Harvey owned a farm that he was too unwell to manage on his own, but which he wanted to pass on to his then 6-year-old son. He entered into a partnership with his brother Horace L Harvey according to which Horace and his sons would manage the farm including making capital improvements, and profits and expenses would be shared equally by Harold and Horace. The partnership continued for 20 years. During that period, extensive improvements were made to the farm that increased its value considerably. After 20 years the partnership was dissolved, and Horace claimed that the farm had become partnership property and that he was therefore entitled to share in the capital gain. The court decided that, in the circumstances, the farm had not become partnership property, but instead remained the property of Harold. Both Harold and Horace had intended that the farm be passed on to Harold’s son when he was old enough.

The partnership legislation also states that in the absence of contrary intention, property bought with partnership money will be deemed to have been bought for the partnership.42 Once property is identified as partnership property, it must be held and applied by the partners exclusively for the purposes of the partnership unless the partners consent to it being used otherwise. ACTIVIT Y 15.10 — REFLECT

How can uncertainty about the ownership of property used in the partnership business be avoided?

In the final chapter we will consider the ways in which a partnership can be brought to an end. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  15.4 What is a partnership?  15.5 What are the key features of the ‘partnership’ business structure?  15.6 Explain each of the elements of the statutory definition of ‘partnership’.  15.7 What are the statutory rules that assist in identifying the existence of a partnership?  15.8 What matters should be included in a written partnership agreement?  15.9 What is (a) a limited partnership, and (b) an incorporated limited partnership? 15.10 In what circumstances will a partner have (a) express authority, (b) implied authority, and (c) apparent authority to act on behalf of the other partners? 15.11 Describe a partner’s liability under contract law. 15.12 Describe a partner’s liability under tort law. 15.13 What are the fiduciary obligations of a partner at common law? 42 Partnership Act 1963 (ACT) s 26; Partnership Act 1892 (NSW) s 21; Partnership Act 1997 (NT) s 25; Partnership Act 1891 (Qld) s 24; Partnership Act 1891 (SA) s 21; Partnership Act 1891 (Tas) s 26; Partnership Act 1958 (Vic) s 25; Partnership Act 1895 (WA) s 31. 570  PART 3 Managing a business

15.14 How does the partnership legislation regulate the relationship between partners in the absence

of a comprehensive partnership agreement? 15.15 What are the rules regulating partnership property?

15.3 The trust LEARNING OBJECTIVE 15.3 What is a trust? What are the key features of the trust? What are the powers and rights of a trustee?

When Johnny and Ash set up their new business, Ash wished to do so in such a way that others — such as members of her family — would benefit from the success of the business. She could of course have simply shared her profits with them, but if this was not done carefully the profits would have been taxed twice: once when earned by the business and a second time when ‘earned’ by her family members. The desire to avoid such unsatisfactory tax implications as well as a wish to protect her family’s assets from creditors of the business prompted Ash to adopt the structure of the trust. A trust arises whenever a person (either an individual or a corporation), called the trustee, owns property for the benefit of one or more other people, called the beneficiaries (see figure 15.1). The trustee is the legal owner of the trust property, and the beneficiaries are the equitable owners. The trust property may be a single asset or an entire business. The person who sets up the trust is known as the settlor. The settlor is usually the original owner of the trust property and they may or may not become the trustee themselves. The trustee may or may not be one of the beneficiaries. The terms of the trust may be set out in writing in a trust deed, which can be rather complex.

Settlor

original owner Trust property p

hi

n

s er

l ga

ow

e ow quit ne abl rsh e ip

le

Beneficiary Trustee

FIGURE 15.1

The trust

CHAPTER 15 Managing a business: business ownership  571

Because the trustee owns the trust property on behalf of the beneficiaries, the trust property is not available to the trustee’s creditors in the event of bankruptcy (if the trustee is an individual) or l­iquidation (if the trustee is a corporation). The trust as a business structure can be used as a substitute for the company structure. The trust has a number of advantages over the company, including the fact that a trust does not have to be registered. However, it is more likely that the trust will be used in conjunction with the company structure. For example, Ash decided that her share of the business assets will be owned by a proprietary company acting as trustee for the Redcliffe Family Trust. As owner of the company she has the benefit of limited liability, and if the company is wound up her family, as beneficiaries under the trust, will still get the benefit of the business assets. Trusts are regulated by State and Territory legislation.43 The relationship between the trustee and the beneficiaries is a fiduciary one. This means that the trustee has an obligation to look after the trust property for the beneficiaries and to otherwise act in the best ­interests of the beneficiaries. The trustee distributes the income arising from the trust property to the beneficiaries and, eventually, distributes the trust property itself amongst the beneficiaries. CAUTION!

The trustee is the legal owner of the trust property, but equity views the trustee as ‘looking after’ the trust property for the benefit of others (the beneficiaries) and therefore imposes important restrictions upon what the trustee can do with the trust property.

Types of trust The trust structure is used in a wide range of different contexts, and not only as a form of business structure. The four principal types of trust are: 1. the express trust, 2. the implied trust, 3. the resulting trust, and 4. the constructive trust.

Express trust An express trust is a trust deliberately and explicitly set up by a settlor, either verbally or in writing. It is also known as a direct or a declaratory trust. To set up an express trust the settlor must clearly identify the trust property, the trustee, the beneficiaries, and the nature and purpose of the trust. When the beneficiaries are members of the settlor’s family, the trust is referred to as a family trust. When the trust property under an express trust is an entire business it is referred to as a trading trust. A trading trust may be used in conjunction with the corporate form, with the trustee being a company. Alternatively, the trustee under the trading trust may be a sole trader who is conducting the business for the benefit of others. A type of express trust often used as a business structure is the discretionary trust. This is a trust where the trustee is given a discretion regarding the way in which the trust income and trust property are distributed to beneficiaries. The discretion may even extend to the choice of who from members of a defined class of persons the beneficiaries are going to be. Such an arrangement allows the trustee to pay beneficiaries according to their needs (or in response to their behaviour and lifestyle — useful in family trusts) and to structure income distributions in such a way that the tax liability is minimised. If the trustee has no such discretion it is referred to as a fixed trust. 43 Trustee Act 1925 (ACT); Trustee Act 1925 (NSW); Trustee Act 1893 (NT); Trusts Act 1973 (Qld); Trustee Act 1936 (SA); Trustee Act 1898 (Tas); Trustee Act 1958 (Vic); Trustees Act 1962 (WA).

572  PART 3 Managing a business

Another type of express trust often used in business is the unit trust. Under a unit trust the trust property, which may be real property or a set of shares, is divided into units that can be bought and sold on the open market. Each holder of one or more units (a unit holder) is a beneficiary under the trust, with all of the associated income rights and property entitlements.

Implied trust An implied trust will arise when the settlor has not expressly established a trust but their conduct indicates that their intention is that they or a transferee are intended to own property as a trustee for the benefit of others. An implied trust is also known as a presumptive trust.

Resulting trust A resulting trust automatically arises when property is owned by a trustee for the benefit of the settlor. This situation may occur when an express trust has failed because, for example, the beneficiary has died and no provision was made in the trust deed for such an occurrence. It will also arise when one person buys property and requests that ownership of the property be transferred to a third person; if that third person did not provide any consideration for the property, they are deemed to hold it on trust for the purchaser under a resulting trust. Nelson v Nelson (1995) 184 CLR 538

Mrs Nelson purchased a house in the names of her adult daughter and son as joint tenants. She did so to qualify for a subsidised loan from the Commonwealth — if she owned a house at the time she made the application for the loan she would not have qualified for the loan. Later, when the daughter and son sold the house, Mrs Nelson insisted that she was entitled to the proceeds from the sale. The court decided that the daughter and son held the house as trustees under a resulting trust and that Mrs Nelson was, therefore, entitled to the sale proceeds.

Constructive trust A constructive trust is one that is deemed to arise regardless of the actual intentions of the parties. It is a mechanism used by the courts to address particular types of inequity. If the court forms the view that someone has become the owner of property that really belongs to someone else, they may state that the first person owns the property as trustee for the second person under a constructive trust.44 ACTIVIT Y 15.11 — REFLECT

Make a list of the advantages and disadvantages of the trust as a business structure.

Trustees and beneficiaries Ash owns her half share of the Organicola business premises as a trustee under the Redcliffe Family Trust. As such, she has various duties, powers and rights.

Duties of a trustee Ash, as a trustee, owes a range of duties to the beneficiaries in addition to her obligations as a director and shareholder of Organicola. These duties include: •• distributing the trust income (in this case, the rent paid by Organicola) and, eventually, the trust property in accordance with the terms of the trust deed, •• preserving and protecting the trust property, 44 Muschinski v Dodds (1985) 160 CLR 583.

CHAPTER 15 Managing a business: business ownership  573

•• managing the trust property for the beneficiaries in the manner of a reasonable trustee, •• avoiding or at least disclosing any conflict between her role as trustee and her personal interests, so that she cannot profit personally from her position as trustee, •• keeping proper accounting records and being able to give a full and proper account to the beneficiaries upon request, •• not delegating her responsibilities as trustee, unless she is expressly authorised to do so by the trust deed, and •• investing any trust funds. Re Mineworkers Pension Scheme Trusts; Cowan v Scargill [1985] Ch 270

A miners’ pension fund was administered by ten trustees. Five of the trustees were appointed by the National Coal Board, and five were appointed by the miners’ union. The trustees made a decision not to invest trust funds overseas because it was union policy to invest onshore, and not to invest in oil and gas industries because they were in competition with coal. The court decided that the trustees had breached their duty to the beneficiaries. In exercising their power to invest, a trustee must ‘take such care as an ordinary, prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide’. The court explained that trustees cannot refuse to make an investment for social or political reasons if that investment would be financially beneficial to the beneficiaries.

If Ash breaches any of the above duties she will be personally liable to the beneficiaries for any harm or loss that they incur.

Powers of a trustee Both the trust legislation and the trust deed itself will authorise Ash to do certain things as trustee, including exercising the power to: •• lease or sell the trust property when necessary, •• invest the trust property, •• repair or improve the trust property, and •• insure the trust property.

Rights of a trustee As trustee, Ash will only be entitled to remuneration for her time and effort in managing the trust if: •• it is provided for in the trust deed, •• all of the beneficiaries expressly consent to that remuneration, or •• it is authorised by the court. Ash is entitled to be indemnified for any expenses she incurs in carrying out her duties or exercising her powers. Hardoon v Belilos [1901] AC 118

The trust property consisted of partly paid shares in a bank. As the legal owner of the shares, the trustee had to pay calls on the shares. The court decided that the trustee was entitled to be indemnified from the trust property for the calls, and that if there were insufficient funds in the trust property, the trustee was entitled to be indemnified by the beneficiaries themselves as long as they were of full legal capacity and absolutely entitled.

If Ash breaches one of her duties as a trustee, but the breach of duty was consented to by one or more beneficiaries, she is entitled to be indemnified by those beneficiaries. If Ash is ever unsure about her obligations as a trustee she is entitled to apply to the court for guidance. 574  PART 3 Managing a business

Rights of the beneficiaries As explained earlier, while Ash is the legal owner of the trust property, she is obliged to manage the property in the interests of and for the benefit of the beneficiaries. If all of the beneficiaries are of full age and capacity, they have the right to direct Ash to terminate the trust and distribute the trust property to them, unless the trust deed provides otherwise. The beneficiaries have the right to insist that Ash provide them with up to date information and accounts relating to her management of the property. If necessary, they also have the right to seek a court order compelling Ash to perform her obligations and comply with her duties as trustee. The beneficiaries may also have the right to replace Ash as trustee, or to appoint an additional trustee, depending upon the terms of the trust deed. If they are unsure about their rights, the beneficiaries are entitled to apply to the court for guidance. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 15.16 What is a trust? 15.17 What are the key features of the trust as a business structure? 15.18 What are the four types of trust? 15.19 What is (a) a discretionary trust, and (b) a unit trust? 15.20 What duties are owed by a trustee and what are the consequences of breaching these duties? 15.21 What are the powers and rights of a trustee? 15.22 What are the rights of a beneficiary of a trust?

15.4 The franchise LEARNING OBJECTIVE 15.4 What is a franchise, and what are the benefits of becoming a franchisee? What are the rights and obligations of a franchisee?

When starting a new business, a businessperson may choose to become a franchisee in an existing franchise rather than ‘start from scratch’ by attempting to market and sell an unknown product in a little understood market. Or if they are successful selling their own product, they may decide to become franchisors themselves, allowing others to use their trade mark and sell their product.

What is a franchise? A franchise is a contractual arrangement between a franchisor and a franchisee according to which the franchisor permits the franchisee to: •• use the franchisor’s business name and/or trade mark, •• manufacture or sell the franchisor’s products, and/or •• use the franchisor’s business system. In return the franchisee pays to the franchisor a regular fixed fee and/or a percentage of their income or profits. A franchise is not a legal business structure; it is better understood as a commercial relationship. The key feature of the franchise arrangement is that the franchisor and the franchisee are (usually) not partners, employer and employee, or principal and agent. Instead, they are separate contracting parties who are generally not responsible for each other’s actions. A franchisor may be liable for harm caused by the franchisee to another if: •• the harm was a result of compliance with the franchisor’s system, or •• the franchisor exercises such extensive control over the franchisee that the franchisee is the franchisor’s agent.45 45 Singleton v International Dairy Queen Inc 332 A 2d 160 (Del Sup Ct, 1975).

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CAUTION!

A franchisor and a franchisee are not legally responsible for each other’s debts and actions except in a relatively narrow range of circumstances.

Note that some apparently legitimate franchises may in fact be pyramid schemes or other illegal schemes intended to separate enthusiastic but naïve franchisees from their investment money. Franchising in Australia is now regulated by the mandatory Franchising Code of Conduct as well as by the basic rules of contract law and the competition regulation provisions of the ­Competition and Consumer Act 2010 (CCA). ACTIVIT Y 15.12 — RESEARCH

Visit the website of the Franchise Council of Australia at www.franchise.org.au. What resources are provided for a person interested in becoming a franchisee?

There are two main types of commercial franchise. 1. ‘Product and trade name’ franchises are where the franchisee manufactures and/or distributes the product of the franchisor under the business name of the franchisor. It includes: –– manufacturer–retailer franchises where the franchisee is a retailer who sells the franchisor’s product directly to the public (e.g. car dealerships and petrol stations), and –– manufacturer–wholesaler franchises where the franchisee is licensed to manufacture and distribute the franchisor’s product (e.g. soft drink bottlers). 576  PART 3 Managing a business

2. ‘Business format’ franchises are where the franchisor supplies a network of franchisees with the product, the trade mark and business name, a comprehensive system for operating the business, and so on. Most franchises in Australia are business format franchises. An example of a business format franchise is a fast food outlet such as McDonald’s. LAW IN CONTEXT: LAW IN PRACTICE

Franchising in Australia Franchising is an enormously popular business strategy in Australia. According to the Franchising ­Australia 2014 report:46 • There were approximately 1160 business format franchisors in Australia in 2014, compared with 1180 in 2012.  • There were an estimated 79  000 units operating in business format franchises, reflecting an increase of 8.2 per cent since 2012. • More than 460  000 people were employed directly in franchising. • Sales turnover of the entire franchising sector was estimated at $144 billion. • 86 per cent of franchise systems originated in Australia. • 30 per cent of franchisors had entered international markets. • 1.5 per cent of franchisees were involved in a substantial dispute with a franchisor over the past twelve months. • 45 per cent of franchise systems engaged in online sales with customers.

Franchising offers a range of advantages to both the franchisor and the franchisee. For a franchisee, joining an existing franchise is much less risky than attempting to start a stand-alone business. The other advantages for the franchisee include the following. •• The franchisor may provide detailed training. •• The franchisee owns their own business. •• The franchisee operates under the name and established reputation of the franchisor. •• The franchisee will usually need less capital than they would if they were setting up a business independently. •• The franchisor may provide advice in identifying suitable trading locations or operating territories. •• The franchisee benefits from the franchisor’s advertising and promotional activities. •• The franchisee benefits from the bulk purchasing power and negotiating capacity of the franchisor. •• The franchisee has access to a knowledge base developed from the franchisor’s own experience, as well as that of all the franchisees in the system. The advantages for the franchisor include the following: •• The growth of the franchise network is achieved using the financial and labour resources of the franchisee. •• The franchisor need not be concerned with the day-to-day operation of each franchise outlet. •• The franchise network has the potential to grow rapidly. •• The management of each outlet is the owner of the business, and will therefore tend to be motivated to be successful. ACTIVIT Y 15.13 — REFLECT

What are the possible disadvantages of franchising for (1) the franchisor and (2) the franchisee?

46 Lorelle Frazer, Scott Weaven and Kelli Bodey, ‘Franchising Australia 2014’ (Report, Franchise Council of Australia, 2014) http://www.franchise.org.au/process/knowledgebase/knowledgeBaseAnswers.html?categoryId=275&answerId=1039.

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The Franchising Code of Conduct The Franchising Code of Conduct is a mandatory industry code of conduct that has the force of law under Part IVB of the Competition and Consumer Act 2010 (Cth) (CCA) and the Competition and Consumer (Industry Codes — Franchising) Regulation 2014. The Code is administered and enforced by the Australian Competition and Consumer Commission (ACCC). The Code is also enforceable by private individuals. The Code regulates the conduct of franchisors and seeks to ensure that franchisees are sufficiently informed about a franchise before entering into it. The Code also seeks to provide a cost-effective dispute resolution scheme for franchisees and franchisors. On 1 January 2015, the previous Franchising Code was repealed and replaced with a new Franchising Code of Conduct. The new Code: •• introduces an obligation under the Code for parties to act in  good faith  in their dealings with one another, •• introduces financial penalties and infringement notices for serious breaches of the Code, •• requires franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising, •• requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees, •• requires additional disclosure about the ability of the franchisor and a franchisee to sell online, and •• prohibits franchisors from imposing significant capital expenditure except in limited circumstances.

The franchisor’s disclosure obligations Under the Code, the franchisor must, before the franchise agreement is signed, give the franchisee: •• a copy of the Code, •• a disclosure document in the prescribed form, and •• the franchise agreement in the form it is to be signed. A franchisor must also: •• inform the franchisee of any materially relevant facts about the franchise (e.g. certain court proceedings) within 14 days of the franchisor becoming aware of them, and •• give a copy of a current disclosure document to the franchisee within 14 days of a written request being made by the franchisee. A franchisor must give an existing franchisee six months notice if they are not going to renew the franchise agreement.

The franchise agreement The Code requires that franchisors provide their franchisees with certain rights in relation to franchise agreements. •• The franchisee has the right to terminate the franchise agreement within a cooling-off period of 7 days after entering the agreement, or paying any non-refundable money, whichever is earlier. •• The franchisor is prohibited from inducing franchisees or prospective franchisees not to form an association or associate with other franchisees or prospective franchisees for a lawful purpose. •• The franchise agreement must not contain, or require the franchisee to sign, a statement that releases the franchisor from general liability towards the franchisee. •• The franchise agreement must not contain, or require the franchisee to sign, a waiver of any verbal or written representation made by the franchisor.

Dispute resolution The franchise agreement must set out a dispute resolution procedure that complies with the Code. Any party to a franchise agreement who has a dispute with another party to the agreement may engage the Code’s dispute resolution procedure. 578  PART 3 Managing a business

Burger King Corporation v Hungry Jack’s Pty Limited [2001] NSWCA 187

Hungry Jacks was a franchisee of US Burger King Corporation. Hungry Jack’s promised to develop four new restaurants per year in Western Australia, South Australia and Queensland. Burger King wanted to decrease Hungry Jack’s participation in the Australian market, and increase its own. To that end Burger King implemented a freeze on approving new franchisees and withdrew financial and operational approval for new restaurants. It then purported to terminate the agreement with Hungry Jack’s for breach, on the basis that Hungry Jack’s was not able to open the required number of new restaurants. The question was whether the termination of the agreement was valid. The court decided that the termination was not valid because the agreement included implied terms of reasonableness and good faith that had been breached by Burger King.

Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127

Spanline Weatherstrong Building Systems Pty Ltd (Spanline) was franchisor of a business involving the installation of home additions such as carports. Spanline had entered into separate franchise agreements with RPR and Marmax. These agreements granted the franchisees exclusive rights to conduct business in certain adjacent territories. Without RPR’s knowledge, Spanline allowed Marmax to service customers located in RPR’s territory. RPR lodged numerous complaints to Spanline but Spanline insisted that it was not required to investigate these complaints as the dispute was between Marmax and RPR. The court decided that Spanline had breached an implied obligation not to allow other franchisees to engage in business within an exclusive franchise territory.

LAW IN CONTEXT: LAW IN THE MEDIA

It really pays for franchisees to do their due diligence — here’s how Why the need for due diligence? These are the views of many naive investors. Potential franchisees need to know what they are committing to before they decide to buy a franchise. This homework is known as due diligence. It is the process of ensuring that investors get what they think they are buying — and that what they buy is actually worth what they pay. You wouldn’t buy a car before taking it for a test drive, having it checked by a mechanic and making sure there was no money owing on it. Franchisees should take a franchise purchase even more seriously, for two reasons. First, a franchised business is likely to cost much more than a car. Second, unlike when you buy a car, there are no consumer warranties when you buy a franchise. Franchisees must take responsibility for their own investment decisions. The Disclosure Document will tell a prospective franchisee about who the franchisor is and will provide copious information about the actual business the franchisee will be running. Most franchisors operate within a group of companies. The Disclosure Document will not provide information about most others in the group. Who owns them? Have the directors and all of the companies in the group got a good credit rating? Do they own the companies that the franchisee will have to rely on? Might this influence them? It’s OK to rely on friends and family to tell you your new haircut looks great, but buying a franchise is a big step. When you are considering such an expensive commitment it is time to visit a lawyer and an accountant who really understand franchising. As franchisees and franchisors have very different interests you’ll need to make sure your advisers have experience in advising franchisees. Time spent in reconnaissance is seldom wasted You can do a lot of homework yourself by googling the brand, the industry (to study trends), and the franchisor themselves. You should check out regulators’ websites. You can find out from the ACCC’s site whether the franchisor has the regulator’s permission to require you to buy from specific suppliers.

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The ACCC investigates breaches of the Franchising Code of Conduct and publishes information about these investigations. The ACCC does not investigate breaches of franchise agreements so you could search on austlii to find out whether the franchisor has had any court battles. Disputes that are still in progress may not appear in austlii so it pays to also dig around in blogs or online media. And, remember that most Australian franchise disputes are resolved through confidential mediation so you will not find anything published about them. You can find out a lot about the trade marks and patents the franchisor will require you to use by searching IP Australia. By entering the name of the franchisor and each of its directors on the ASIC website you can find out about their corporate activities. Even though it costs a bit you should also do a credit check on the franchisor. A credit check will give you a very good picture of your franchisor’s and their directors’ attitude to paying bills on time. There are blogs such as bluemaumau where you can ask questions and, of course, you should visit existing franchisees. Don’t just call them — actually visit them at work to see what the vibe is in their business. Remember an existing franchisee might be bound not to say anything about a dispute they have had with the franchisor. They might have signed a confidentiality agreement at the end of a mediation. Don’t just passively accept everything you are told. You can educate yourself by visiting the ACCC’s site and searching under ‘franchise’. The ACCC has funded an online pre-entry franchise education program run by Griffith University. This will help you decide whether franchising is for you. Don’t rely totally on any one source of information. Remember, there is always going to be another franchise opportunity so if you are not completely happy, do not rush into buying. Franchisors want satisfied and successful franchisees just as much as you want to be happy and run a profitable franchise. Demonstrate dispassionate interest Research has revealed that potential franchisees are often complacent about conducting proper due diligence. Many do not devote enough time or are unwilling to pay for expert advice. Their emotional attachment to the brand often overrides objective information. To undertake effective due diligence a prospective franchisee needs to keep an open mind and to seek out and dispassionately question all information. Source: Lorelle Frazer and Jenny Buchan, 28 October 2015, http://theconversation.com/it-really-pays-for-franchiseesto-do-their-due-diligence-heres-how-49297.

Consequences of breaching the Code If a franchisor fails to comply with the Code they will contravene CCA pt IVB. Legal action may be commenced against the franchisor by either the ACCC or other affected parties including the franchisee. In the event that the franchisor is found to be in breach, the court can make a range of orders including: •• an injunction to stop the conduct, •• an order for damages, •• an order setting aside or varying any relevant contracts, and/or •• an order for corrective advertising. LAW IN CONTEXT: LAW IN THE MEDIA

Updated franchise industry code of conduct comes into effect today Operators in the $144 billion franchise sector in Australia risk new, heavy fines if they breach an updated code of conduct, which comes into force today. Small Business Minister Bruce Billson said Australians wanting to buy into a franchise would now have clearer information about the financial and legal risks, and expectations. ‘There had been some concern about malicious conduct where franchise systems were pushing around franchisees, the mums and dads investing in franchise businesses, and then seeing the same business put up for sale again’, he said. ‘Where disputes emerged and there wasn’t a genuine commitment to pursue mediation, and some examples where franchisees paying marketing funds into an account then learned those funds were being used to pursue legal action against other franchisees.’

580  PART 3 Managing a business

The new code of conduct focuses on greater information sharing and transparency, and both sides of a franchise arrangement will have an enforceable obligation to act in good faith. Mr Billson likened the business arrangement to ‘a commercial marriage’. Big penalties for unscrupulous franchise operators ‘It’s all about doing the right thing by your business partner, keeping that adult-to-adult, mutually supportive, shared purpose relationship’, he said. ‘That’s what good franchising is all about; that’s why it’s so popular.’ The Australian Competition and Consumer Commission (ACCC) will oversee a new penalty regime as part of the new code of conduct, including infringement notices of up to $8500 for companies that breach the code and $1700 for individuals. The ACCC would also be able to take more substantial matters to court to pursue penalties of up to $51  000. The code of conduct was a Coalition election promise, but it was only finalised in November. The General Manager of the Franchise Council of Australia (FCA), Kym De Britt, said while it was a significant set of changes, it was welcome. ‘It’s all aimed at making it easier and simpler, and more cost efficient, but (for) people looking at going into franchising there’s risks with everything’, Mr De Britt said. ‘So when someone is looking to go into a franchise they really need to do their homework beforehand.’ ‘We highly recommend they get independent legal advice and independent financial advice and that’s part of what was introduced into the new code.’ In recent years, there have been high profile problems with fast food franchises such as Krispy Kreme and more recently Pie Face, which announced a deal to keep operating yesterday. But Mr De Britt said the new code was not just a response to those cases. ‘The situations like Pie Face are not nice, but that’s not representative’, he said. ‘It (the code) is more to keep it up to date and include changes in how businesses operate nowadays.’ The FCA said the sector experienced 9 per cent growth over the past two years, but it reflected the broader economy’s challenges, with franchises in the retail sector experiencing flat conditions. With unemployment rising, a significant drop in commodity prices affecting the federal budget, and general economic growth slowing, the Small Business Minister was hoping the sector could drive a turnaround in economic conditions. ‘Interest rates are quite supportive’, Mr Billson said. ‘You look at other impacts, the currency’s been quite helpful in other places, this is a really useful time for people to be involved in small business and family enterprises, and that’s why I’m optimistic, realistic but optimistic, about the year ahead.’ The holiday season has once again been accompanied by calls from some in the hospitality and retail sector for penalty rates to be changed. The Government said businesses could apply for relief and changes through the Fair Work ­Commission, but it was up to them to make the case for change. Mr Billson encouraging them to submit their views to the Productivity Commission’s review of ­Australia’s industrial relations system [sic]. ‘That’s another crucial area where small businesses, in my view, should be front and centre having their voice loudly heard influencing that policy debate’, he said. That review is due to be handed to the Government in November. Source: Naomi Woodley, 1 January 2015, http://www.abc.net.au/news/2015-01-01/updated-code-of-conduct-toprotect-franchisees/5995084.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 15.23 What is a franchise? 15.24 What are the two main types of franchise? 15.25 What is the Franchising Code of Conduct? 15.26 What are the franchisor’s disclosure obligations under the Code? 15.27 What limitations upon franchising agreements are imposed by the Code? CHAPTER 15 Managing a business: business ownership  581

In conclusion •• A sole trader is an individual who directly owns and operates a business by themselves. •• A partnership is a group of two or more people who directly own and operate a business together. Partners have mutual liability, express, implied and apparent authority to act on each other’s behalf, joint liability for debts, and joint and several liability for torts and contracts. They also owe fiduciary and statutory obligations to each other. •• A trust is an arrangement whereby one person (the trustee) legally owns property for the benefit of one or more other people (the beneficiaries). Trustees owe duties to the beneficiaries of the trust, and also have a number of important powers and rights. •• A person may choose to reduce the risks associated with starting a new business by joining a franchise. A franchise is a contractual arrangement between a franchisee and a franchisor according to which the franchisor permits the franchisee to use the franchisor’s business name and trademark, manufacture or sell the franchisor’s products and/or use the franchisor’s business system. In return the franchisee pays to the franchisor a regular fixed fee and/or a percentage of their income or profits. JOHNNY AND ASH

[Ash and Johnny are still in the office of the new Organicola factory, Ash sat in her swivel char and Johnny perched on the edge of her desk.] Ash — So you see how being partners does not mean that you and Maria have to make every single decision together. Johnny — I get it now. While we should discuss and agree upon any major decisions, when it comes to the day-to-day stuff there are lots of situations where either of us can act independently. Ash — The simple fact that you are partners means that you have, by implication, agreed that each of you has the authority to do certain things on behalf of the other partner. Johnny — Things like ordering goods, dealing with customers  .  .  .  and even hiring new employees? Ash — Yes. And of course it is always possible for the two of you to expressly agree to extend the authority of one or both of you. Johnny — So Maria and I could reach agreement that she now has sole responsibility for running the restaurant? Ash — Yes, if that’s what you want to do. But don’t forget that even if the two of you have agreed to make Maria responsible for the running of the restaurant, you will still be legally liable for her actions if it can be shown that she acted with apparent authority. Johnny — Ah yes, ‘apparent authority’. I imagine that is something that gets a lot of people into trouble. Ash — It certainly is. Of course, now that you understand the concept it won’t happen to you. Johnny — I hope not!

582  PART 3 Managing a business

QUIZ 1 A sole trader

(a) has limited liability for the debts of the business. (b) cannot have any employees. (c) must be registered as a sole trader with ASIC. (d) owns the assets of the business directly. 2 A sole trader must comply with (a) the terms of the sole trader legislation. (b) the terms of the sole trader agreement. (c) the conditions of registration as a sole trader. (d) none of the above. 3 In a partnership (a) each partner is the agent of the other partners. (b) each partner is the principal of the other partners. (c) each partner is both the principal and the agent of the other partners. (d) each partner is neither the principal nor the agent of the other partners. 4 A partnership is only formed when (a) the partnership is registered. (b) the partners execute a written partnership agreement. (c) the partners expressly agree to become partners. (d) the statutory definition of partnership is satisfied. 5 Which of the following statements is not correct? (a) Receipt by a person of a share of the profits of the business is not evidence of partnership. (b) Sharing of gross returns does not of itself create a partnership. (c) The advance of money in return for a share of the profits of the business does not make the lender and the borrower partners. (d) Co-ownership of property does not of itself create a partnership. 6 A partner does not have implied authority to (a) give a guarantee on behalf of the partnership. (b) hire employees. (c) sell the trading stock. (d) buy trading stock on credit. 7 If a partner is negligent in the course of carrying on the partnership business, the other partners (a) are not liable for the negligence. (b) are jointly liable for the negligence. (c) are severally liable for the negligence. (d) are jointly and severally liable for the negligence. 8 In the absence of agreement to the contrary, a change to the nature of the business carried on by a partnership (a) can be made by a single partner. (b) must be agreed to by a majority of the partners. (c) must be agreed to by all of the partners. (d) is not possible. 9 A beneficiary of a trust (a) is the legal owner of the trust property. (b) owes fiduciary obligations to the trustee. (c) cannot also be the trustee. (d) none of the above. CHAPTER 15 Managing a business: business ownership  583

10 A trustee does not usually have the power to

(a) sell the trust property. (b) improve the trust property. (c) distribute the trust income. (d) delegate their responsibilities to another. 11 A franchise is (a) a contractual agreement. (b) a business structure. (c) a partnership. (d) an agency. 12 Before the franchisee enters into a franchise agreement, a franchisor must give a franchisee (a) a copy of the Franchising Code. (b) a signed copy of the franchise agreement. (c) a statement that releases the franchisor from general liability towards the franchisee. (d) all of the above. (e) none of the above.

EXERCISES EXERCISE 15.1 — PARTNERSHIPS

Johnny and Ash have not yet incorporated their new company. However, each has already invested $50  000 into the business by depositing the money into Johnny’s business account. Johnny is negotiating the purchase of a small factory in his own name, and is purchasing the equipment and materials he will need to start manufacturing Organicola. Ash has also started spending 2 or 3 hours every evening writing a business plan and a marketing plan. (a) Have Johnny and Ash formed a partnership? (b) If so, what are the legal consequences? EXERCISE 15.2 — PARTNERSHIPS

Draft a brief partnership agreement between Johnny and Ash according to which they will share equally in financial contribution and the sharing of profits, Johnny will be responsible for the manufacturing of the organic cola and Ash will be responsible for marketing and distribution. Include whatever other terms you consider to be fair and appropriate. EXERCISE 15.3 — PARTNERSHIPS

Maria decides to purchase a delivery van for The Lame Duck restaurant for $40  000 without discussing it with Johnny first. She buys the van on credit with finance provided by Will, the seller of the van. The interest rate is 25 per cent. When Johnny finds out he is furious and insists that Maria will have to pay off the interest on the loan from her own share of the profits. If Maria is unable to make the payments, can Will recover the money owing from Johnny? EXERCISE 15.4 — PARTNERSHIPS

While working late in the kitchen one evening on an online order, Maria carelessly uses rancid tofu in preparing a meal. The customer, Lyra, suffers food poisoning and has threatened to sue the restaurant for compensation. Will Johnny be personally liable for Maria’s carelessness? EXERCISE 15.5 — PARTNERSHIPS

One of Johnny’s regular customers at the restaurant tells Johnny that he is thinking about setting up a catering business and he would like Johnny to be involved. Should Johnny inform Maria about this opportunity? What would be the consequences of his failing to do so? 584  PART 3 Managing a business

EXERCISE 15.6 — TRUSTS

Johnny wants to ensure that his sister Cathy and his nephews Dan and Sam benefit from his share of the Organicola business. Johnny is considering setting up a trust in their favour. Explain to Johnny the process and the consequences of doing so. EXERCISE 15.7 — FRANCHISES

Jenna is the franchisee of a Dynamo Pizza outlet. She has won ‘Franchisee of the Month’ for the past three months. She regularly scores a perfect score on the twice-weekly Store Inspection Report conducted by a manager from the Dynamo Pizza head office. Jenna is supervising the afternoon mid-shift store cleanup — a requirement set out in the Dynamo Pizza Franchisee Handbook — when one of the pizza delivery drivers, Tracey, slips on the wet floor and cracks his skull. Tracey had been sprinting to collect his next pizza because Dynamo Pizza has a ‘30 minutes or it’s free’ customer service policy. Tracey wishes to sue both Jenna and the franchisor, Dynamo Pizza Australia Ltd. In what circumstances will Dynamo Pizza Australia be liable for the accident?

KEY TERMS agent  A person who acts on behalf of a principal who is legally responsible for the actions of the agent. apparent authority  Authority conferred upon an agent unintentionally when the principal holds the agent out as having authority and the holding out is relied upon by a third party. Also known as ‘ostensible authority’ or ‘authority by estoppel’. arbitration  A form of dispute resolution where an independent and expert third party (an arbitrator) resolves the dispute. assign  To transfer rights or property. Australian Competition and Consumer Commission (ACCC)  The Australian regulatory body primarily responsible for administration of the Competition and Consumer Act and Australian Consumer Law. bankruptcy  A statutory process whereby the assets of an insolvent individual are sold and used to repay their creditors. beneficiary  The equitable owner of trust property. business structure  The legal form of a business organisation, e.g. sole trader, partnership, company. consideration  The price paid for the other party’s performance of a contract. constructive trust  If the court forms the view that someone has become the owner of property that really belongs to someone else, they may state that the first person owns the property as trustee for the second person under a constructive trust. contractual capacity  The legal ability to make a contract. Capacity may be limited due to the age or the intellectual ability of the person in question. damages  Monetary compensation; a type of civil remedy. deed  A written contract that (1) has been signed by the parties before a witness, ‘sealed’ and ‘delivered’, or (2) is expressed to be a deed. Also known as a ‘formal contract’. discretionary trust  A trust where the trustee is given a discretion regarding the way in which the trust income and trust property is distributed to beneficiaries. express authority  Authority explicitly and intentionally conferred upon an agent by the principal. express trust  A trust explicitly and intentionally set up by a settlor, either verbally or in writing. Also known as a ‘direct trust’ or a ‘declaratory trust’. family trust  A trust, the beneficiaries of which are members of the settlor’s family. fiduciary  A position of trust and confidence held by a person such as an agent, trustee or partner. franchise  A contractual arrangement between a franchisor and a franchisee that permits the franchisee to use the franchisor’s business name and trademark, manufacture or sell the franchisor’s products and/or use the franchisor’s business system. franchisee  The person to whom a franchise is granted. CHAPTER 15 Managing a business: business ownership  585

franchisor  The person who grants a franchise to a franchisee. guarantee  An arrangement whereby one person (called the guarantor) promises to repay a loan in the event that the debtor refuses or is unable to do so. implied authority  Authority conferred upon an agent intentionally but not explicitly. implied trust  A trust that arises when a settlor has not expressly established a trust but their conduct indicates that their intention is that they or a transferee are intended to own property as a trustee for the benefit of others. Also known as a ‘presumptive trust’. incorporated limited partnership  A partnership where some of the partners have limited liability, and the partnership itself is a separate legal entity. indemnify  To compensate a person for an expense they have incurred or for damage or loss they have sustained. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. joint and several liability  When two or more persons are jointly and severally liable each is liable for the whole amount and they may be sued individually. joint liability  When two or more persons are jointly liable, each is liable for the whole amount and they must be sued collectively. joint venture  Two or more parties engaged in a joint enterprise. limited partnership  A partnership where some of the partners (known as limited partners) have limited liability. liquidation  A statutory process where the assets of an insolvent corporation are sold and used to repay the corporation’s creditors. Also known as ‘winding up’. minor  A person under the age of 18 years. mortgage  A security for a loan given over real property owned by the borrower. mutual liability  Each member of a group of individuals is both the principal and the agent of the other members, and as such is liable for the actions of the other members. option to renew  A term of a lease giving the lessee a right to call for a new lease upon expiry of the original lease. partnership  A group of two or more people who directly own and operate a business together. partnership agreement  The contract between the partners in a partnership. perpetual succession  The notion that although the owners and managers of an organisation such as a company may change, the organisation itself remains the same legal entity. prima facie  (‘on its first appearance’) On first examination, a matter appears to be self-evident from the facts. principal  A person represented by an agent and who is legally responsible for the actions of the agent. pyramid scheme  A product distribution scheme where new participants must pay to join after being induced to do so by the prospect that they will be entitled to payment upon the introduction of further participants. remuneration  Payment made in return for work or a service. resulting trust  A trust that automatically arises when property is owned by a trustee for the benefit of the settlor. separate legal entity  A legal person able to own property, enter into contracts and be a party to litigation in its own name. This includes both individuals and corporations. settlor  A person who creates a trust. shareholders  The owners of a company limited by shares. sole trader  An individual who directly owns and operates a business by himself or herself. third party  A stranger to a transaction or relationship. trading trust  An express trust where the trust property is an entire business. trust  An arrangement whereby one person (the trustee) legally owns property for the benefit of one or more other people (the beneficiaries). 586  PART 3 Managing a business

trust account  A bank account maintained by an agent or other fiduciary in which they hold funds on behalf of the principal or client. trust deed  A written document setting out the terms of a trust. trust property  Property that is held on trust for another. trustee  The legal owner of the trust property. unit trust  A trust where the trust property is divided into units which can be bought and sold on the open market.

ACKNOWLEDGEMENTS Photo: © TK Kurikawa / Shutterstock.com Article: © ABC News, Naomi Woodley, 1 January 2015, ‘Updated franchise industry code of conduct comes into effect today’, http://www.abc.net.au/news/2015-01-01/ updated-code-of-conduct-to-protect-franchisees/5995084 Article: © The Conversation, Lorelle Frazer, 28 October 2015, http://theconversation.com/ it-really-pays-for-franchisees-to-do-their-due-diligence-heres-how-49297

QUIZ ANSWERS

1. d  2. d  3. c  4. d  5. a  6. a  7. d  8. c  9. d  10. d  11. a  12. a CHAPTER 15 Managing a business: business ownership  587

CHAPTER 16

Managing a business: companies and corporate governance LEA RN IN G OBJE CTIVE S 16.1 What are the consequences of setting up a new business as a company? What are the advantages and disadvantages of this type of business structure? 16.2 How does the law regulate fundraising by companies? 16.3 How does the law regulate the relationship between directors and shareholders?

JOHNNY AND ASH

[Johnny and Ash are sitting behind a long table at the head of a large room slowly filling up with shareholders. There is a podium with a microphone on the table. Johnny and Ash are speaking quietly to each other while they wait for an extraordinary general meeting of their company to begin.] Johnny — Remember how it all started? Ash — Remember? It was only six months ago. Johnny — I know! I can’t believe how quickly Organicola has grown! It seems like only yesterday that we moved into the first factory and hired our first employees. And do you remember how we celebrated? Ash — How can I possibly forget? By the way, how is Maria doing at the restaurant? Johnny — Not so good. I’m so annoyed that I am still involved with the business. Every time it looks like everything is ready for me to hand it over to Maria, something comes up that needs my attention. Ash — Hey, I didn’t tell you. I was watching that cop drama last night on television and one of the characters was drinking Organicola Red. You could see the label and everything. Johnny — Wow, that’s great! More free advertising. [Pause.] So how do you think it will go today? Ash — I don’t know. The other two directors support the proposed change from a proprietary company to a public company, but it’s a big shift for us. It’s up to the shareholders. Johnny — See, that’s what I don’t understand. It’s our company, we should be able to do what we want with it. Ash — Actually, it’s not only our company, it belongs to the shareholders collectively. Anyway, I’ll explain it after the meeting. It’s time to start. Johnny — Okay. Good luck. Ash — [Ash stands up, and as she moves to the microphone behind the podium it’s obvious that she is pregnant.] Ladies and gentlemen, good evening. My name is Ashwina Redcliffe and I am the Chair of this Extraordinary General Meeting of Organicola Pty Ltd.

CHAPTER PROBLEM

As you make your way through this chapter, consider the ways in which Johnny and Ash must now share responsibility for management of Organicola with the other directors and shareholders.

Introduction Johnny and Ash are the directors and shareholders of a new company, Organicola Pty Ltd (soon to become Organicola Ltd). There are many important differences between the company and other types of business structure. Many of these important differences arise because of the separation of ownership and control that occurs in large companies: the people who run the business (the directors) are separate from the people who own the business (the shareholders). In the previous chapter we considered three types of business structure: the sole trader, the partnership, and the trust. In this chapter we consider the company in detail, focusing on the advantages and disadvantages of the company as a business structure, the ways in which companies raise money, and the rights and obligations of the directors and shareholders. CHAPTER 16 Managing a business: companies and corporate governance  589

16.1 The company LEARNING OBJECTIVE 16.1 What are the consequences of setting up a new business as a company? What are the advantages and disadvantages of this type of business structure?

A company is a corporation incorporated under and regulated by the Corporations Act 2001  (Cth). A corporation is an artificial legal person separate from its owners and able to make contracts, own property and be a party to litigation in its own name. A corporation may be a company, a statutory corporation such as a university, an incorporated association, or a body corporate (see figure 16.1).

Corporation

Company

FIGURE 16.1

Statutory corporation

Incorporated association

Body corporate

Types of corporation

CAUTION!

Although the terms are often used interchangeably, a ‘corporation’ and a ‘company’ are not, strictly speaking, the same thing.

One of the main attractions of the company as a business structure is the concept of limited liability. Limited liability means that if the company is unable to pay all of its debts, the shareholders (the owners of the company) are not liable to contribute any more than what they have agreed to pay. They are, therefore, able to keep their personal wealth and assets safe from business creditors. There are many different types of company. The main distinction is between a public company and proprietary company. However, all companies must have at least one owner or member (owners are often referred to as shareholders, but not every company is limited by shares). All companies must also have at least one director, who is responsible for managing the company’s business. Most companies also have a secretary who fulfils certain administrative responsibilities. The Australian Securities and Investments Commission (ASIC) is the main regulator of companies in Australia. ASIC’s main functions include: •• registering companies, •• gathering and disseminating information about companies, •• educating companies and individuals about the law, •• modifying the operation of the Corporations Act in certain circumstances, •• registering company auditors and liquidators, •• investigating breaches of the law, and •• enforcing the law. Unlike sole traders and partnerships, which come into existence automatically, companies only come into existence through a process of registration. If Johnny and Ash wish to establish a company, they must apply to ASIC for the registration of a new company and, provided all of the conditions for registration are met, ASIC will create a new company by registering it. A company’s existence comes to an end when it is deregistered. 590  PART 3 Managing a business

Key features of the company The key features of the corporate form are separate legal personality, corporate capacity, and limited liability.

Separate legal personality Separate legal personality refers to the law’s treatment of a company as a legal entity separate from its owner or owners. The company can incur debts in its own name. It can own property in its own name. It can be the plaintiff or the defendant in legal proceedings. The company continues unchanged if the shareholders sell it to another person, known as perpetual succession. The company can even enter into legal relationships with the shareholders. Salomon v Salomon & Co Ltd [1897] AC 22

Salomon was a sole trader. He sold his business to a company he set up, Salomon & Co Ltd. He and six family members were the shareholders. Salomon made a loan to the company that was recorded as a debt owed by the company to Salomon secured by a charge over the company’s property. When the business failed and the company went into liquidation, Salomon attempted to realise his security and seize the company’s property. The liquidator opposed this, arguing that in reality Salomon and the company were one and the same and that it was not appropriate that Salomon be able to seize the property of his own failed business leaving his business creditors unpaid. The court decided that although the business was run by Salomon and he was the majority shareholder of the company, Salomon and the company were separate legal entities and Salomon was legally entitled to be a secured creditor of the company. Salomon was permitted to seize the assets.

ACTIVIT Y 16.1 — REFLECT

Do you agree with the decision in the Salomon case? Why or why not?

Lee v Lee’s Air Farming Ltd [1961] AC 12

Lee was a pilot who operated a crop-dusting business. The business was owned by Lee’s Air Farming Ltd, and Lee was the managing director and majority shareholder of the company. He was also employed by the company as chief pilot. He was killed while crop dusting for the company, and his wife claimed workers compensation. The insurer refused to pay, arguing that as owner of the business Lee was not an employee. The court decided that although Lee was the owner of the company he was also an employee of the company, since the company was a separate legal entity. His wife was entitled to the workers compensation payout.

In exceptional circumstances, courts may lift the corporate veil, disregard the separate legal personality of the company, and find the shareholders or the directors personally liable for the actions of the company. This may occur: •• where the corporate form is being used to avoid an existing legal duty,1 •• where the company is acting as the shareholders’ agent or partner,2 or •• through the use of the insolvent trading provisions of the Corporations Act 2001 (Cth). 1 Gilford Motor Co Ltd v Horne [1933] Ch 935. 2 Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116.

CHAPTER 16 Managing a business: companies and corporate governance  591

Corporate capacity Corporate capacity refers to the legal capacity of the company to do a particular act or thing. A company has the legal capacity of a natural person, plus the power to do things that an individual cannot do, such as issue shares or grant a floating charge.3 A businessperson can choose to include restrictions on their company’s capacity in the company’s constitution. If, however, the company enters into a transaction in breach of its constitutional capacity it has no effect upon the enforceability of the transaction by third parties.4

Limited liability Limited liability means that the shareholders are not liable for any debts of the company beyond the subscription price of their shares. Where a shareholder holds fully paid shares, they will be not required to contribute any further amount to cover the company’s debts. Where they hold partly paid shares, they will be required to pay the balance of the issue price when the company makes a call on them to do so. Note, however, that since a new business will (at first) be a relatively small one, it is likely that a creditor will ask a new businessperson to provide a personal guarantee of any amount lent by the creditor to the company. The effect of such a guarantee is to negate the benefits of limited liability in respect of the debt. Limited liability continues to apply, however, to the company’s other liabilities, such as legal liability arising from a civil action commenced by another person against the company. LAW IN CONTEXT: LAW AND CRITIQUE

The corporation: psychopath? The Corporation is a 2003 documentary that looks critically at the concept and role of the corporation from its historical origins up to its present-day dominance. The film reflects upon the legal notion that the corporation is an artificial legal person and explores the consequences of this notion given that the corporation has become a dominant economic, political and social force around the globe. The film undertakes an in-depth psychological examination of the corporation as a ‘person’ through various case studies. It argues that the usual behaviour of this ‘person’ indicates that the typical corporation appears to be a dangerously destructive psychopath without conscience.

Types of companies Companies can be classified in two main ways: according to the nature of the members’ liability (see figure 16.2), and according to whether they are a public company or a proprietary company (see figure 16.3).

Company

Company limited by shares FIGURE 16.2

Unlimited company

Types of members’ liability

3 Corporations Act 2001 (Cth) s 124. 4 Corporations Act 2001 (Cth) s 125.

592  PART 3 Managing a business

Company limited by guarantee

No liability company

Company

Proprietary company

Small proprietary company

FIGURE 16.3

Public company

Large proprietary company

Unlisted public company

Listed public company

Proprietary and public companies

Companies can be classified according to members’ liability in four ways.5 1. Companies limited by shares — the members (referred to as ‘shareholders’) contribute money or property as share capital and in return are issued with fully or partly paid shares. The liability of the shareholders for the debts and obligations of the company is limited to the amount (if any) unpaid on their investment. This is the most common type of company. 2. Companies limited by guarantee — the liability of members is limited to the amount that the members have guaranteed to contribute in the event that the company is wound up. Schools, sporting organisations and other not-for-profit organisations often use this type of company. 3. No liability companies — the company has no right to recover from members any amounts unpaid on their investment. Only mining companies can be no liability companies. 4. Unlimited companies — members have no limit placed on their liability for the debts and obligations of the company. If professionals such as doctors or lawyers are permitted to incorporate they are often obliged to use this type of company. Where the liability of members is limited (i.e. companies limited by shares and companies limited by guarantee), the company name must include the term ‘Ltd’ or ‘Limited’ in its name as notice to people dealing with the company that the members will not be personally liable for the company’s debts. No liability companies must include the term ‘NL’ in their name. In this chapter we focus upon companies limited by shares, although many of the principles apply to other types of company as well. Proprietary companies are privately owned companies. They: •• must be either a company limited by shares or an unlimited company, •• are not permitted to have more than 50 non-employee shareholders, and •• are not allowed to undertake fundraising activities that require the issue of a prospectus.6 Any company that is not a proprietary company is a public company.7 Public companies may be either listed on the stock exchange or unlisted. The advantage of a proprietary company is that it is not subject to as many obligations under the ­Corporations Act as a public company. For example: •• a public company must have at least three directors, but a proprietary company requires only one director,8 and •• a public company must hold an annual general meeting every year.9

5 Corporations Act 2001 (Cth) s 112. 6 Corporations Act 2001 (Cth) s 113. 7 Corporations Act 2001 (Cth) s 9. 8 Corporations Act 2001 (Cth) s 201A. 9 Corporations Act 2001 (Cth) s 250N.

CHAPTER 16 Managing a business: companies and corporate governance  593

Proprietary companies are often small, family-owned companies. It is even possible for a proprietary company to have a single director and a single shareholder who are the same person. Proprietary companies are divided into small proprietary companies and large proprietary companies.10 A large proprietary company is one that satisfies at least two of the following three requirements. 1. The consolidated revenue of the company for the financial year is $25 million or more. 2. The value of the consolidated gross assets of the company at the end of the financial year is $12.5 million or more. 3. The company has 50 or more employees at the end of the financial year. Large proprietary companies are subject to more extensive disclosure and reporting obligations than small proprietary companies.11 CAUTION!

The status of a proprietary company as either ‘large’ or ‘small’ may change from year to year, depending upon the size and performance of the company.

Many larger businesses are conducted through groups of companies rather than individual companies. A corporate group exists when ownership and/or control of one or more companies is in the hands of another company. The controlling company is called the holding company, and the company controlled is called the subsidiary company (see figure 16.4).12 Although the holding company can in some circumstances be liable for the actions of a subsidiary, they are still viewed as separate legal entities.

Holding company

Subsidiary company A

FIGURE 16.4

Subsidiary company B

Corporate group

How to form a company A company is created by being registered with ASIC. To form a company, a businessperson lodges an application for registration with ASIC and pays the prescribed fee.13 ASIC registers the company and issues a 9-digit Australian Company Number (ACN).14 The company comes into existence on the date the certificate of registration is issued.15 All companies must have a company name: either one chosen by the applicant or the company’s ACN. All limited liability companies must include the word ‘Limited’ or ‘Ltd’ in their name. Proprietary companies must include ‘Proprietary Limited’ or ‘Pty Ltd’, and no liability companies must include 10 Corporations Act 2001 (Cth) s 45A. 11 Corporations Act 2001 (Cth) s 292. 12 Corporations Act 2001 (Cth) ss 46, 47. 13 Corporations Act 2001 (Cth) s 117. 14 Corporations Act 2001 (Cth) s 118. 15 Corporations Act 2001 (Cth) s 119.

594  PART 3 Managing a business

‘No Liability’ or ‘NL’. The businessperson is obliged to display the company name prominently in every place where their company carries on business involving the public. They are also obliged to display the company name together with its ACN on: •• every public document issued, signed or published by or on behalf of the company, •• every negotiable instrument (such as a cheque) issued, signed or published by or on behalf of the company, and •• all documents required to be lodged with ASIC. If a company has been issued with an Australian Business Number (ABN), the 11-digit ABN will include the 9-digit ACN. ACTIVIT Y 16.2 — RESEARCH

Visit the ASIC website and summarise the steps necessary to register a proprietary company limited by shares.

Other business organisations such as incorporated and unincorporated associations and foreign companies that wish to carry on business interstate must register with ASIC as an Australian Registered Body.16 ACTIVIT Y 16.3 — REFLECT

Make a list of the advantages and disadvantages of the company as a business structure.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 16.1 What is a company and is it the same thing as a corporation? 16.2 What are the key features of the corporate form? 16.3 In what circumstances will a court ‘lift the corporate veil’? 16.4 How can companies be classified according to members’ liability? 16.5 What is the difference between a public company and a proprietary company? 16.6 What is the difference between a large proprietary company and a small proprietary company? 16.7 How is a company formed?

16.2 Corporate finance LEARNING OBJECTIVE 16.2 How does the law regulate fundraising by companies?

In an earlier chapter we described how a business has two main sources of funding: debt capital and equity capital. In this section we explain the rules that apply to the raising of debt capital and equity capital by companies. A company’s equity capital typically takes the form of share capital.

Borrowing by companies The Corporations Act 2001 (Cth) closely regulates certain aspects of borrowing by companies. As explained above, a company has the legal capacity and powers of a natural person.17 This includes the power to borrow money and the power to mortgage or charge its assets as security for the debt. A loan to a company may be secured or unsecured. 16 Corporations Act 2001 (Cth) pt 5B.2. 17 Corporations Act 2001 (Cth) s 124.

CHAPTER 16 Managing a business: companies and corporate governance  595

A debt payable by a company is called a debenture.18 More specifically, a debenture is usually defined as a secured transferable loan stock (often listed on the stock exchange) with the security being by way of a charge over the assets of the company. If debentures are offered by the company to members of the public, the debentures are ‘securities’ for the purposes of the Corporations Act, which means that the disclosure requirements in ch 6D apply (see below). A company charge is a security given by a company over some or all of its property in favour of a creditor. There are two types of company charge. •• A fixed charge attaches to a specific item of property, and the company cannot dispose of the security property without the consent of the creditor. •• A floating charge covers a class of property such as trading stock but does not attach to any specific item until the happening of a certain event. The company is free to dispose of property within that class until that event, at which point the charge ‘crystallises’ into a fixed charge. A floating charge may crystallise by operation of law, e.g. if the company enters into a transaction not within the ordinary course of its business or if the company ceases to carry on its business. The charge may also crystallise on the happening of nominated events in the loan contract, e.g. a failure to make a repayment, a breach of restrictions on further borrowings, or breach of a particular gearing ratio. If a company creates a charge (other than a mortgage over real property), it must register the charge on the Personal Property Securities (PPS) Register (see the next chapter). Registration has two main effects. 1. Without it, the charge will be unenforceable against not only third parties but also a liquidator. 2. Registration will mean the lender has priority over the holders of other unregistered or later charges granted by the company. ACTIVIT Y 16.4 — REFLECT

What are the advantages of a company granting to a lender a floating charge rather than a fixed charge?

Share capital A company’s share capital is the amount of money or assets contributed by shareholders when they subscribe for shares in the company.19 A share is one of the fractional parts into which the equity of a corporation is divided. It is a legal claim against the company to which certain distribution and control rights attach. A company can issue different types or classes of shares with different rights attaching to each type of share.20 The most common classes of shares are: •• ordinary shares, and •• preference shares. The differences between the two classes of shares are set out in table 16.1. TABLE 16.1

Ordinary shares and preference shares

Ordinary shareholders

Preference shareholders

• Share equally in dividends (if declared) with all other ordinary • Receive a fixed dividend provided there are profits available for distribution and a dividend is declared shareholders after all other claimants have been paid • Vote at general meetings

• Have no voting rights unless dividends are in arrears, except in certain circumstances

• Are repaid capital on a winding-up only after all other claimants have been repaid

• Are repaid capital on a winding-up in priority to ordinary shareholders

• Share pro rata in any surplus assets on winding-up

• Have no right to share in surplus assets on a winding-up

18 Corporations Act 2001 (Cth) s 9 (definition of ‘debenture’). 19 Corporations Act 2001 (Cth) s 124. 20 Corporations Act 2001 (Cth) s 254B.

596  PART 3 Managing a business

A company may choose to issue shares that are partly paid.21 The person subscribing for the share pays only part of the subscription price at the time the share is issued, with the balance to be paid when the company makes a call. A company may issue options over their unissued shares that entitle or require the option holder to subscribe for shares at an agreed price at or by a specified time in the future. Options can also be granted by existing shareholders giving the taker of the option the right or the obligation to acquire the option-writer’s shares in the future.

Issuing shares When a company is formed, a certain number of shares are issued to the initial shareholders.22 The company may later decide to raise money by increasing the number of issued shares. A decision to issue new shares is usually made by the directors. Shareholder approval is also required in certain circumstances (see below). An offer of shares may be made privately or to the public. The most common types of share issues are: •• a public offering of new shares in the company (a float), •• a private placement of new shares to particular investors, •• a rights issue, where existing shareholders are entitled to purchase additional shares in proportion to their existing holdings, •• a dividend reinvestment plan, where the company issues additional shares to shareholders instead of dividends, and •• a bonus issue, where all of the shareholders are issued with additional shares, free of charge, in proportion to their existing holdings. Many large share issues made by public companies are underwritten. This means that an underwriter (usually a stockbroking firm or financial intermediary) agrees to take up any shares that are not subscribed for by other people. ACTIVIT Y 16.5 — REFLECT

What are the benefits to a company of arranging for a share issue to be underwritten?

•• •• •• ••

The law imposes certain restrictions on the types of people to whom shares can be issued. A proprietary company cannot invite the public to subscribe for shares.23 The company’s constitution may require that new shares first be offered to existing shareholders.24 Shares cannot be issued to people under 18 years of age or to other people lacking contractual capacity. Shares cannot be issued to the company itself or to any of its subsidiaries.25

Disclosure documents If a company decides to issue new shares, it must comply with the disclosure obligations set out in the Corporations Act 2001 (Cth).26 Generally, the company must provide investors with a prospectus containing detailed information about the company and the shares before the investors decide to subscribe for those shares, unless the issue falls within one of the exemptions set out in the Act.27 A prospectus is required for the raising of both debt capital and equity capital by a company, including options.28 21 Corporations Act 2001 (Cth) pt 2H.3. 22 Corporations Act 2001 (Cth) s 120(2). 23 Corporations Act 2001 (Cth) s 113(3). 24 Corporations Act 2001 (Cth) s 254D. 25 Corporations Act 2001 (Cth) s 259C. 26 Corporations Act 2001 (Cth) ch 6D. 27 Corporations Act 2001 (Cth) ss 9 (definition of prospectus), 709(1), 710. 28 Corporations Act 2001 (Cth) s 700(1).

CHAPTER 16 Managing a business: companies and corporate governance  597

Certain types of share offers by a company will not need a prospectus.29 These include: •• personal offers to no more than 20 investors in 12 months and for no more than $2 million, •• offers to sophisticated investors, •• offers to professional investors, •• offers to officers of the company or related companies, and •• offers to existing shareholders.30 Where the capital being raised is $10 million or less, the company can issue an ‘offer information statement’ instead of a full prospectus.31 If the company is obliged to issue a prospectus, it is an offence to issue an application form for shares without the prospectus attached.32 The prospectus must contain all information that investors and their professional advisers would reasonably require to make an informed investment decision.33 The information in the prospectus must be worded and presented in a clear, concise and effective manner.34 ACTIVIT Y 16.6 — RESEARCH

Go to the ASIC website at www.asic.gov.au. What information must be included in a prospectus?

A person must not offer securities if: •• the prospectus is misleading or deceptive, •• the prospectus has a material omission, or •• a new circumstance has arisen that would require disclosure.35 Any person who suffers loss or damage as a result of a defective prospectus is entitled to sue the company for damages.36 The persons liable for the defective prospectus include not only the company itself but also its advisers such as solicitors and accountants. If the prospectus is defective, the investor is also entitled to cancel the investment and have their money refunded.37 Breaches of the Corporations Act can also give rise to criminal liability.

Equity capital maintenance The law requires a company to maintain its equity capital by prohibiting certain actions that have the effect of reducing its equity capital. •• Dividends can only be paid out of profits.38 If the directors pay a dividend other than out of profits, the amount of the dividend is a debt incurred by the company.39 If the company is insolvent at the time, the directors may be personally liable to compensate the company’s creditors for the amount paid to shareholders.40 •• There are restrictions on a company purchasing its own shares or those of its holding company.41 There are also restrictions on a company giving financial assistance to a person to purchase shares in the company or its holding company.42 29 Corporations Act 2001 (Cth) s 706. 30 Corporations Act 2001 (Cth) s 708. 31 Corporations Act 2001 (Cth) ss 9 (definition of ‘offer information statement’), 709(4), 715. 32 Corporations Act 2001 (Cth) s 721. 33 Corporations Act 2001 (Cth) s 710. 34 Corporations Act 2001 (Cth) s 715A. 35 Corporations Act 2001 (Cth) s 728. 36 Corporations Act 2001 (Cth) s 729(1). 37 Corporations Act 2001 (Cth) s 737. 38 Corporations Act 2001 (Cth) s 254T. 39 Corporations Act 2001 (Cth) s 254V. 40 Corporations Act 2001 (Cth) s 588G. 41 Corporations Act 2001 (Cth) pt 2J.2. 42 Corporations Act 2001 (Cth) pt 2J.3.

598  PART 3 Managing a business

In certain circumstances the law permits a company to reduce its capital by buying back shares from shareholders.43 The buy-back must not materially prejudice the company’s ability to pay its creditors, and the company must follow the procedures laid down in the Act. ACTIVIT Y 16.7 — REFLECT

What is the rationale for requiring a company to maintain its levels of equity capital?

Listing the company A listed company is a company that has elected to be admitted to the official list of the Australian Securities Exchange (ASX) and have its shares granted Official Quotation for trading on the stock market conducted by the ASX. The criteria and procedure for listing are set out in the ASX Listing Rules.

CAUTION!

Not all public companies are listed companies.

43 Corporations Act 2001 (Cth) pt 2J.1.

CHAPTER 16 Managing a business: companies and corporate governance  599

ACTIVIT Y 16.8 — RESEARCH

Go to the ASX website at www.asx.com.au. Briefly summarise the steps necessary to have a public company listed on the stock exchange. What are the benefits of listing a company?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  16.8 What is a company charge?  16.9 What is the difference between a fixed charge and a floating charge? 16.10 What are the consequences of failing to register a company charge? 16.11 What is a share? 16.12 What are the differences between ordinary shares and preference shares? 16.13 What is a share issue? 16.14 What are the disclosure obligations of a company that proposes to issue shares to members of the public? 16.15 How does the law prohibit a company from reducing its equity capital? 16.16 What does it mean to list a company?

16.3 Corporate governance LEARNING OBJECTIVE 16.3 How does the law regulate the relationship between directors and shareholders?

The way in which a company is managed and controlled is referred to as corporate governance. In a very small company, the directors and the shareholders are often the same people, but in larger companies this will certainly not be the case. One of the distinguishing features of a large company as a business structure is the separation of ownership and control; i.e. the division of decision-making responsibility between the board of directors and the shareholders in a general meeting. The specific powers of each body are defined by the company’s constitution as well as by the general principles of company law. Typically, the directors have the power to generally manage the business of the company, and the shareholders are only entitled to vote on limited matters. Decisions made by the directors or by the shareholders of a company are the decisions of the company itself. The directors of Organicola are more than just the agents or the delegates of the shareholders: they are an organ of the company with the power to bind the company with respect to the matters within the scope of their authority. Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34

A shareholder in Automatic Self-Cleansing Filter Syndicate Co Ltd proposed that the company sell certain of its assets. At a general meeting the shareholders resolved to direct the directors to sell the assets. The directors refused to comply with the direction because they believed that the sale would not be in the best interests of the company. The court decided that the directors were entitled to refuse to obey the shareholders. The company constitution gave the power to make such decisions to the directors, not the shareholders.

CAUTION!

The directors are not the servants, agents or employees of the shareholders. They are responsible for the management of the company, and the shareholders do not have the power to tell the directors how to do their job.

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The process by which decisions are made within a company is closely regulated by c­ ompany law. The law imposes numerous procedural requirements designed to maximise transparency and accountability, and to prevent the decision makers exercising their power in an unfair manner.

Company constitution A company’s constitution is the set of rules that regulate how the company will operate. The constitution will consist of: •• the replaceable rules set out in the Corporations Act 2001 (Cth), •• a customised constitution, or •• a combination of both.44 The company’s constitution will deal with matters such as: •• the appointment, removal and powers of the directors, •• the procedure for convening and conducting board meetings, •• the procedure for convening and conducting general meetings of shareholders, •• any special rights attaching to classes of shares, •• rules relating to dividends, and •• rules relating to the issue and transfer of shares. The constitution has effect as a contract: •• between the company and each shareholder, •• between the company and each director, and •• between the individual shareholders.45 This means that the constitution is only capable of being enforced by another party to the relevant contract. ACTIVIT Y 16.9 — REFLECT

If one of the Organicola directors breaches the company constitution, who will be entitled to bring a legal action against the director? Do you see any practical problems with this?

The Corporations Act contains a set of ‘replaceable rules’ that a company can use as its constitution if it so wishes. These are the default rules if the company does not have its own constitution.46 The replaceable rules do not apply to single director/shareholder companies.47 Instead, the Act contains certain provisions that govern the operation of the company.48 Listed companies cannot use the replaceable rules, and must instead adopt a constitution consistent with the requirements of the Australian Securities Exchange (ASX) Listing Rules. ACTIVIT Y 16.10 — RESEARCH

What does the Corporations Act 2001 (Cth) say about the governance of a single director/shareholder company? Why are special rules required for this type of company?

44 Corporations Act 2001 (Cth) s 134. 45 Corporations Act 2001 (Cth) s 140. 46 Corporations Act 2001 (Cth) s 135. A table of the replaceable rules is set out in s 141. 47 Corporations Act 2001 (Cth) s 135. 48 Corporations Act 2001 (Cth) ss 198E, 201F, 202C.

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Instead of relying upon the replaceable rules, a company may choose to adopt its own constitution. Public companies must lodge a copy of their constitution with ASIC, and the constitution is then publicly available. Proprietary companies are not obliged to lodge a copy of their constitution, unless ASIC requests it.49 The shareholders of a company have the power to modify or repeal the company constitution by passing a special resolution, i.e. a resolution passed by at least 75 per cent of the voting shareholders present at a general meeting.

Company directors Directors are responsible for the management, or supervising the management, of the company. Every proprietary company must have at least one director, and every public company must have at least three directors.50 The functions undertaken by the directors vary according to the size and type of company. In a small company the directors may work in the business and make the day-to-day decisions. In a larger company the directors may concentrate on setting broad strategic goals, and appointing and supervising managers. A number of different types of directors are recognised by the Corporations Act. •• Executive directors are involved in the full-time management of the company and are employees of the company. Many companies have a chief executive officer (CEO) or managing director who is in charge of the day-to-day management of the company. Companies can also have other executive directors, such as a chief finance officer (CFO), who are part of the senior management of the company. Johnny is the CEO of Organicola. •• Non-executive directors are not involved in the full-time management of the company and are not employees of the company. They attend meetings of the board of directors. Non-executive directors are either affiliated with the company in some way (e.g. as an employee representative, a major shareholder or a creditor of the company) or independent. The other directors of Organicola, including Ash, are non-executive directors. ACTIVIT Y 16.11 — REFLECT

Good corporate governance dictates that at least some of the directors of a company be independent directors. Why?

•• A governing director is a director, usually of a small family company, who has been given very extensive management powers by the constitution of the company. •• A nominee director is a director appointed to represent the interests of a particular group, e.g. the employees. •• A de facto director is a person who acts in the position of a director but has not been appointed as a director. •• A shadow director is a person who is not validly appointed as a director but whose instructions are usually followed by the directors of the company. This means that a person who is disqualified from being a director but who is nevertheless directing a company from ‘behind the scenes’ can still be held legally liable as a director. CAUTION!

A person who has not been formally appointed as a director may nevertheless be legally liable as a director under the Corporations Act 2001 (Cth).

49 Corporations Act 2001 (Cth) s 138. 50 Corporations Act 2001 (Cth) s 201A.

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Every public company must have a secretary.51 The secretary is responsible for record-keeping, such as maintaining the registers required by the Corporations Act and the minutes of meetings. The Corpor­ ations Act makes the secretary the person primarily responsible for ensuring that the company meets its obligations in relation to its registered office and for providing the required information about the ­company’s officers to ASIC.52 As well as being a director, Ash is the secretary of Organicola.

Appointment In order to be a director a person must be at least 18 years old, and they must not be disqualified from being a director (see below).53 Only an individual can be a director: a corporation cannot be the director of another corporation. CHECKLIST

A person can only be a director if all of the following requirements are satisfied. ◼◼ They are at least 18 years old. ◼◼ They are not disqualified from being a director. ◼◼ They are an individual and not a corporation.

Each director must consent in writing to their appointment.54 In the case of a new company, the first directors of the company are named in the application to register the company lodged with ASIC. In the case of an existing company, new directors are usually appointed by the shareholders of the company,55 although the constitution may allow the directors themselves to appoint additional directors. Johnny and Ash were named as directors in the application to register Organicola as a proprietary company. Two other directors were recently appointed by Johnny and Ash. Directors usually remain appointed until the expiry of their term. Shareholders of a public company can remove a director by ordinary resolution.56 If the company is a proprietary company, however, the constitution may impose restrictions on the power of shareholders to remove a director. If a director becomes disqualified from holding office, they automatically cease to be a director at that time. A director becomes disqualified if: •• they are convicted for any offence involving dishonesty and punishable by imprisonment of three months or more,57 •• they become bankrupt,58 •• the court orders disqualification due to breach of a civil penalty provision,59 •• the court orders disqualification due to involvement in two or more failed companies,60 •• the court orders disqualification due to repeated breaches of the Corporations Act,61 or •• ASIC orders disqualification due to an adverse report of a liquidator.62

51 Corporations Act 2001 (Cth) s 204A. 52 Corporations Act 2001 (Cth) s 188. 53 Corporations Act 2001 (Cth) s 201B. 54 Corporations Act 2001 (Cth) s 201D. 55 Corporations Act 2001 (Cth) s 201G. 56 Corporations Act 2001 (Cth) s 203D. 57 Corporations Act 2001 (Cth) s 206B(1). 58 Corporations Act 2001 (Cth) s 206B(3). 59 Corporations Act 2001 (Cth) s 206C. 60 Corporations Act 2001 (Cth) s 206D. 61 Corporations Act 2001 (Cth) s 206E. 62 Corporations Act 2001 (Cth) s 206F.

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Board meetings Directors are usually obliged to exercise their power collectively. The directors as a group — called ‘the board of directors’ or simply ‘the board’ — usually have the general power to manage the business of the company conferred upon them by the company’s constitution.63 The board is generally not subject to the wishes of the shareholders in exercising the power to manage the business of the company, and the decisions of the board cannot be overridden by the shareholders. Shareholders who disagree with the management decisions made by the board may be able to remove or refuse to re-appoint the directors, or amend the constitution to limit the directors’ discretion. The procedural rules that apply to board meetings are usually contained in the company’s constitution. Usually, a board meeting can be called by any director upon the giving of reasonable notice to the other directors. Decisions are usually made by ordinary resolution. The constitution may allow a resolution to be passed without an actual meeting if the resolution is signed by all the directors. The board can delegate its powers to committees, to a CEO, to particular directors, to employees, or to other persons.64 The directors do, however, remain responsible for the actions of the delegate.65 ACTIVIT Y 16.12 — REFLECT

Why is it important that a board be able to delegate its powers to others?

Corporate contracting A company is a separate legal entity with corporate capacity to own property and make contracts in its own name. However, lacking physicality, a company will usually interact with others by acting through agents. These agents are usually the directors, although they may be employees and other authorised persons. A company can execute a written contract directly in any of three possible ways. 1. The common seal is affixed to the written contract and signed by two directors.66 2. The written contract is signed by two directors, without use of the company seal.67 3. The company can use any other procedure set out in the company’s constitution. Obviously, these approaches are only applicable to formal written contracts. Most of a company’s dealings with others will be through agents. As you will recall from an earlier chapter and from the description of partners’ authority above, an agent can have: •• express authority, •• implied authority, and •• apparent authority. Express authority exists when an agent, such as a director, has been given authority expressly, either through the Corporations Act or by a resolution of the board. For example, the Organicola board may expressly authorise Johnny to negotiate a lease of a new factory on behalf of the company. When a person is appointed to a particular position, there is a grant of implied authority to do whatever is usually incidental to the duties of that position. This applies to company directors, although a director acting on their own does not have implied authority to bind the company unless they are a governing director or CEO. (In a single director company, the single director would be equated with the position of CEO.) As CEO of Organicola, Johnny has implied authority to do all such acts necessary to carry on the company’s business in the ordinary way. He may, for example, on his own initiative borrow money and give security over the company’s property, and engage others to provide services for the company. Ash, on the other hand, would not have such implied authority. 63 Corporations Act 2001 (Cth) s 198A. 64 Corporations Act 2001 (Cth) s 198D. 65 Corporations Act 2001 (Cth) s 190. 66 Corporations Act 2001 (Cth) s 127(2). 67 Corporations Act 2001 (Cth) s 127(1).

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ACTIVIT Y 16.13 — REFLECT

Should a single director have authority to make a contract on behalf of the company? Why or why not?

A company will also be bound by the act of a person to whom it has not given authority if the company has behaved so as to lead outsiders to reasonably believe that the person had been given authority. That person is said to have apparent authority. Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

Kapoor was a director of Buckhurst Park Properties. He was not formally appointed as a managing director (CEO), but he acted in that role with the consent of the other directors. Kapoor engaged Freeman & Lockyer to do some work for the company. When Freeman & Lockyer sought to recover payment of their fees from the company, the other directors claimed that Kapoor did not have authority to make the contract on behalf of the company and that the company was, therefore, not liable to pay the fees. The court decided that although Kapoor did not have actual authority to act on behalf of the company he did have apparent authority.

CAUTION!

A director acting alone does not have implied authority to act on behalf of the company, although they may have express authority (if it has been granted by the board) or apparent authority (if the company has in some way held the director out as having authority to act on behalf of the company).

When someone is dealing with an Organicola representative, how do they know whether the person they are dealing with, such as the CEO, has been actually authorised by the board of directors to do what it is they are doing? According to the indoor management rule, persons dealing with a company in good faith may assume that acts within its constitution and powers have been properly and duly performed, and are not required to check whether acts of internal management have been regular. For example, a person dealing with Johnny, the CEO of Organicola, is entitled to assume that Johnny was validly appointed as CEO of the company and that he has the usual express and implied authority of a CEO. If it turns out that Johnny was, for example, not validly appointed CEO because of non-­ compliance with Organicola’s constitution, that is not the person’s concern and Organicola is still bound by Johnny’s actions. A person cannot rely upon the indoor management rule if they: •• actually know about an irregularity, or •• fail to make inquiries where a reasonable person in their position would have done so. Under the Corporations Act, a person contracting with a company may assume that: •• anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or secretary has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director or secretary of a similar company,68 and •• anyone who is held out by the company to be an officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.69 68 Corporations Act 2001 (Cth) s 129(2). 69 Corporations Act 2001 (Cth) s 129(3).

CHAPTER 16 Managing a business: companies and corporate governance  605

Directors’ duties The law imposes a number of important duties upon the directors of a company (see figure 16.5).

Duty of care

Duty to disclose conflicts of interest

Duty to act for a proper purpose

FIGURE 16.5

Directors’ duties

Duty to prevent insolvent trading

Duty to act in good faith

Directors’ duties

The main function of directors’ duties is to ensure the loyalty of directors to the company. The directors are in a position of trust: the shareholders rely upon the directors to manage the company in an appropriate manner. The law seeks to ensure that the directors do not abuse this trust. Duties are owed by the directors under both common law and statute law. The statutory duties are enforced by ASIC, and the common law duties are enforced by the company itself. A director found to be in breach of a common law duty may be forced to pay damages to the company. If a director is found to have breached one or more of their statutory duties to the company they may be subjected to: •• an order disqualifying them from being a director, •• a penalty of up to $200  000 for each breach of duty, •• an order to compensate the company for any loss incurred by the company, •• an order to pay to the company any profits made by the director as a result of the breach, and/or •• an order to pay punitive damages. If the breach was deliberate and fraudulent the director may be subjected to criminal penalties, including in some circumstances a jail term.

The duty of care According to the Corporations Act, a director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a company in the company’s circumstances, and occupied the office held by, and had the same responsibilities within the company as, the director.70

70 Corporations Act 2001 (Cth) s 180(1).

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The law of negligence also imposes a duty upon directors to exercise reasonable care. Each director of Organicola must exercise the level of care of the reasonable person in the circumstances. ‘Reasonableness’ is in the context of the director’s background and position. Generally, this means that directors are to take reasonable steps to place themselves in a position to guide and monitor the management of the company. They should familiarise themselves with Organicola’s business, ensure that they are appropriately informed about the operations of the company, and regularly attend board meetings. ASIC v Hellicar [2012] HCA 17

Seven non-executive directors of James Hardy Industries Ltd (JHIL) issued a misleading media release to the Australian Stock Exchange. The media release stated that the company had a trust that would fully fund its asbestos disease liabilities. However there was in fact a shortfall of more than $1 billion. The High Court decided that the directors had breached s 180(1) of the Corporations Act 2001 (Cth) by failing to exercise due care and skill in releasing the information.

When directors make decisions they usually do so in reliance upon information provided to them by company employees and advisers. Reliance by a director upon advice provided by others is not a breach of the duty of care where the reliance was made in good faith and after having made an independent assessment of the advice.71 Australian Securities and Investments Commission v Healey [2011] FCA 717

The Centro Group’s 2007 financial statements misrepresented the company’s funding obligations and risks. The court decided that this constituted a failure by the directors of the company to exercise their duties with the degree of care and diligence required by law. The court imposed a minimum standard of financial skill on directors. The directors could not avoid liability by insisting that it was their advisers who did not pick up on the error. Directors must consider whether what they are approving is consistent with their understanding of the company’s position and make appropriate further enquiries.

The business judgment rule recognises that just because a decision by a director turns out to be a decision that causes harm or financial loss to the company, it is not necessarily a breach of the director’s duty of care. CHECKLIST

According to the business judgment rule, a director or other officer of a company will have complied with their duty of care, despite their decision having caused the company to suffer harm, if all of the following requirements are satisfied. ◼◼ They made the decision in good faith for a proper purpose. ◼◼ They did not have a material personal interest in the subject matter of the decision. ◼◼ They informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate. ◼◼ They rationally believed that the decision was in the best interests of the company.

ACTIVIT Y 16.14 — REFLECT

What do you imagine to be the intended effect of the ‘business judgment rule’?

71 Corporations Act 2001 (Cth) s 588G.

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The duty to prevent insolvent trading If Organicola were to find itself in financial difficulty, Johnny and Ash would be obliged to be especially cautious. Directors have a statutory duty to prevent insolvent trading. The Corporations Act imposes personal liability upon a director who knowingly permits the company to continue trading while insolvent.72 CHECKLIST

A director will have breached their duty to prevent insolvent trading if all of the following requirements are satisfied. ◼◼ The company was insolvent when it incurred a debt or became insolvent because it incurred the debt. ◼◼ When the company incurred the debt there were reasonable grounds for suspecting that the company was insolvent or would become insolvent. ◼◼ The director was aware at the time the debt was incurred that there were reasonable grounds for suspecting the company was insolvent, or a reasonable person in a similar position in the company and in the company’s circumstances would have been aware.

If the directors knowingly allow Organicola to continue trading while insolvent they may be personally liable for any debts incurred by the company during that period. It is, therefore, extremely important that directors stay fully informed about the financial position of the company. A director will not be liable for insolvent trading if: •• at the time the debt was incurred, the director had reasonable grounds to expect that the company was solvent and would remain solvent, •• the director reasonably relied on information provided by others about whether the company was solvent, •• at the time the debt was incurred, the director did not take part in the management of the company (e.g. due to serious illness), or •• the director took all reasonable steps to prevent the company from incurring the debt.73 A director found to have breached their duty to prevent insolvent trading may be ordered to pay: •• compensation to creditors for any loss,74 •• compensation to the company for any loss,75 •• a civil penalty of up to $200  000,76 and/or •• a criminal penalty of up to $200  000 or 5 years prison if the breach involves dishonesty.77 Insolvent trading will again be considered in a later chapter in relation to corporate insolvency and the liquidation process.

The duty to act in good faith Directors have a duty to: •• act in good faith, and •• act in the best interests of the company.78 The requirement that directors act in good faith simply means that each director must act honestly and reasonably.

72 Corporations Act 2001 (Cth) s 588G. 73 Corporations Act 2001 (Cth) s 588H. 74 Corporations Act 2001 (Cth) s 588M. 75 Corporations Act 2001 (Cth) s 588J. 76 Corporations Act 2001 (Cth) s 1317E. 77 Corporations Act 2001 (Cth) s 588G(3). 78 Corporations Act 2001 (Cth) s 181(1)(a).

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The requirement that directors act in the best interests of the company requires the director to act in the interests of the company as a whole, and not necessarily in the best interests of the majority of shareholders. For example, if Johnny as the CEO of Organicola decides to give in to shareholder pressure and declare a substantial dividend at a time when Organicola should be reinvesting its profits in preparation for an anticipated downturn in sales, Johnny may be in breach of his duty to act in the best interests of the company, despite doing what is apparently in the best interests of its shareholders. In determining if this duty has been breached, the court will ask whether an intelligent and honest person in the position of the director could have reasonably believed that the decision was for the benefit of the company. This means that if in the opinion of the court no reasonable director or board of directors could consider a decision by the board to be within the interests of the company, the decision will be a breach of the duty of good faith. There is no duty owed by directors to act in the best interests of the general public, or of the ­company’s employees.

The duty to act for a proper purpose Directors and other officers of the company must exercise their powers for a proper purpose.79 In determining if this duty has been breached, the court will: •• ascertain what the particular power in question is, •• ascertain the legal purposes for which this power may be used, and •• examine the facts of the case and the intentions of the director and decide the actual purpose for which the director exercised the power. A director will breach this duty if they exercise their powers for a purpose that they think is proper but the court considers to be improper. For example, if the board of Organicola decides to issue shares, the directors will not be in breach of this duty if the decision was made for the purpose of raising capital required by the company, or to distribute reserves of profits by way of bonus shares. However, the directors will be in breach of this duty if the decision was made to destroy an existing majority block of shares, or to otherwise manipulate the shareholders’ voting power.

The duty to disclose conflicts of interest Under common law, a director must not place themselves in a position where there is an actual or substantial possibility of conflict between a personal interest and their duty to act in the interests of the company, unless they have the permission of the company. Permission of the company means full disclosure, usually to a general meeting of shareholders. This rule will apply if, for example: •• Johnny as CEO decides that Organicola is going to purchase Johnny’s car to use as a delivery vehicle, •• Johnny learns about an investment opportunity for Organicola, and decides to take it for himself, or •• Organicola enters into a long-term supply contract with a packaging company of which Johnny is also a director. It is not uncommon for a company’s constitution to provide that a director is not disqualified because they are interested in a contract or a transaction with the company, and as long as the director discloses the nature and extent of their interest to the board: •• the director is entitled to keep any profit they make from the contract or transaction, •• the contract or transaction cannot be set aside by the company, •• the director can vote at the meeting in respect of the contract or transaction, and •• the director can sign the contract on behalf of the company. The Corporations Act contains a replaceable rule of similar effect.80 A director who has a material personal interest in a matter that relates to the affairs of the company is required under the Act to give the other directors notice of the interest (unless the interest is exempt).81 79 Corporations Act 2001 (Cth) s 181(1)(b). 80 Corporations Act 2001 (Cth) s 194. 81 Corporations Act 2001 (Cth) s 191.

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The Act imposes a restriction upon directors of public companies being present and voting at meetings that consider a matter in which they are interested unless the other directors approve.82 A director, secretary, other officer or employee of a company must not improperly use their position, or improperly use information they obtained because of their position, to gain an advantage for themselves or another person, or cause harm to the company.83 Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; ASIC v Adler (2002) 168 FLR 253

The collapse of HIH Insurance Ltd was one of the largest corporate collapses in Australia’s history (see chapter 1). Rodney Adler was a director of HIH. In 2000, prior to the collapse, a subsidiary of HIH transferred $10 million to a company owned and controlled by Adler. Some of the money was used to purchase shares in HIH, giving the market the impression that Adler had such confidence in HIH that he was willing to invest his own money in the company (when in fact he was using money advanced by a HIH subsidiary). Adler’s company then became trustee of a trust that used the balance of the $10 million to purchase three investments from another company owned and controlled by Adler. All three investments made a loss. Following the collapse of HIH, the court decided that Adler had breached ss 182 and 183 of the Corporations Act by improperly using his position as director, and information acquired as a director, to obtain an advantage for himself.

Hurd v Zomojo Pty Ltd [2015] FCAFC 147

Zomojo was an Australian financial technology development and high frequency trading company. From 2005 to 2011, Hurd was the head of Zomojo’s R&D team and co-managing director. Without Zomojo’s knowledge, Hurd established another business, Zeptonics, and began developing and marketing his own high speed trading devices. Zomojo alleged that Hurd’s conduct amounted to a breach of his employment contract, his fiduciary obligations and his directors’ duties. The court decided that Hurd had breached his contractual, statutory and fiduciary obligations to Zomojo. The breaches included failing to disclose trading devices he had developed while employed by Zomojo with the assistance of Zomojo’s expert engineers; and using Zomojo’s confidential information in developing and marketing the suite of trading devices offered by Zeptonics.

LAW IN CONTEXT: LAW AND GENDER

Homogeneous boards have left big business lacking in the ideas department The business community may be slowly recognising that women are still as rare as hen’s teeth in senior ranks, but new research shows the decision makers at the top of many corporates remain alarmingly homogeneous in several other key ways. Australia’s largest listed companies have an over-abundance of white, male directors with finance and legal backgrounds, according to a Board Diversity Index just released by executive search firm Watermark Search International. And despite all the business rhetoric about operating in an increasingly globalised world, international expertise is sorely lacking from many boards too, according to another new survey released by BNP Paribas Securities Services and the Australian Institute of Superannuation Trustees. Only 11 per cent of respondents, mostly senior managers and trustees with superannuation funds, believed they will have international directors on their boards by 2025, despite super funds increasing their overseas investment products, the survey found.

82 Corporations Act 2001 (Cth) s 195. 83 Corporations Act 2001 (Cth) ss 182, 183.

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This parochial approach may also have something to do with another Board Diversity Index finding: just 14.2 per cent of directors in the boardrooms of the ASX 200 have overseas heritage, despite 2011 census data finding that 47 per cent of Australians come from first or second generation migrant backgrounds. There’s also a worryingly narrow mix of skills and experience on top boards, with about 44 per cent of ASX 200 directors from a finance background, 19.4 per cent from industry, 9.5 per cent from the law and only 3 per cent with technology experience. Meanwhile, women occupy 19.3 per cent of ASX 200 directorships, while 34 boards have no women directors and 31 companies have more than 33 per cent women directors. It may not be a rosy picture but it’s still a significant improvement from 2009 when 8.3 per cent of directors were women. Since then, a burst of activity from business, the Australian Institute of Company Directors, and the introduction of diversity reporting guidelines for listed companies in 2011 helped boost the number of women directors. But the percentage drops to about 12 per cent for women on ASX 500 boards and there are concerns the pace of change in larger companies is slowing. No doubt this was one of the reasons for last month’s announcement by the AICD of a target of 30 per cent women directors by the end of 2018, which it wants ASX 200 companies to handle voluntarily rather than via legislation. Targets for women in management and multiculturalism were needed too, John Brogden, AICD chief executive, told the Financial Review. ‘Our boards are quite unrepresentative of Australia as a multicultural nation,’ he said. Thirty per cent of women directors doesn’t sound like a stretch, but it’s been hard to meet in many economies, including the UK where a group called the 30 Percent Club was formed in 2010 to tackle the same problem. Women directors make up 20.7 per cent of directors at FTSE 100 companies, an increase from 12.5 per cent in 2011 according to the 2014 Davies Review Annual Report. Launching an Australia arm this week, the 30 Percent Club’s aim is also to increase the number of women on boards through voluntary compliance by 2018. Although 30 per cent is seen as the tipping point for changing the complexion of a group, it’s still a long way from reflecting the fact women make up 50.1 per cent of the population and more than half of higher education graduates. Research studies in the past couple of years from McKinsey and Credit Suisse have concluded there is a correlation between more diverse boards and better company outcomes, probably because homogeneous groups have less new thinking and insights. Australian business is missing an opportunity to introduce different perspectives, and different ways of solving challenges by having largely homogeneous boards, the Board Diversity Index research states. Ignoring large swathes of the educated population is also a risk factor for organisations concerned about having enough skilled workers in the future. One reason the Australian Institute of Superannuation Trustees wanted to run a survey in this area was concern about having a pipeline of talent that is both capable and diverse as the sector changes, says Cathy Doyle, BNP Paribas head of HR. There’s clearly much more to do to change the gender, racial and skills composition of the senior management and board ranks in Australia to reflect the community and customers they serve, and future workforce needs. But the boys’ club dynamic at the top is proving remarkably resilient. Source: Catherine Fox, 6 May 2015, http://www.abc.net.au/news/2015-05-06/fox-homogeneous-australian-boards/6449050.

Shareholders All companies must have at least one owner or ‘member’.84 As explained above, most companies in Australia are limited by shares, and most company members in Australia are therefore ‘shareholders’. Organicola presently has 20 shareholders, including Johnny and Ash. Each shareholder is part-owner of the company. Shareholders invest money with the company in the hope that they will receive a return on their funds if the company is successful, either in the form of dividends paid out of the company’s profits, or in the form of growth in the value of their investment in the company over time. 84 Corporations Act 2001 (Cth) s 114.

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A person becomes a shareholder upon registration of the company by being named in the application for registration as a proposed shareholder.85 A person may become a shareholder after registration of the company either by subscription (i.e. subscribing for new shares in the company), or by acquiring already-issued shares from another shareholder. When Organicola was first registered the only shareholders were Johnny and Ash. Since registration Johnny and Ash have both issued and transferred shares to the new shareholders. Shareholders typically have at least three types of rights. •• Voting rights — shareholders generally have the right to vote at general meetings of the company. •• Distribution rights — distributions by companies to shareholders can be in the form of dividends, a return of capital, or a share in the company’s assets on winding up, if there is a surplus. •• Rights to receive information — these rights include the right to inspect the company’s financial records,86 the right to inspect the minutes of meetings of the company,87 and the right to receive annual financial reports.88

General meetings Decision-making power is exercised by shareholders at general meetings. The Corporations Act sets out detailed requirements for general meetings. These requirements are designed to ensure that all of the shareholders have the opportunity to know the business of the meeting and participate in the ­decision-making process. Public companies are required to hold an annual general meeting at least once in every calendar year.89 Companies may also hold: •• extraordinary general meetings (general meetings other than an annual general meeting, usually called to pass a particular resolution or resolutions), and •• class meetings (meetings of particular classes of shareholders). General meetings are usually convened by the directors.90 However, the Act also gives the shareholders the right to convene general meetings.91 This is an important right that cannot be altered by the company’s constitution. •• A group of shareholders holding at least 5 per cent of the voting rights, or 100 shareholders, can insist that the directors hold a general meeting. If the directors fail to hold a general meeting within 2 months, the shareholders can convene the meeting themselves.92 •• Alternatively, a group of at least 5 per cent of shareholders may directly convene a general meeting, but they must pay the expenses of the meeting personally.93 The law imposes strict requirements in relation to who must be given notice of the general meeting, the amount of notice that must be given, the content of the notice, and the matters that may be dealt with at the meeting. The law also imposes procedural requirements relating to the conduct of the meeting. These include quorum requirements, requirements for the conduct of the meeting via technology, proxy rules, and rules about who is entitled to speak at the meeting. Generally the person who convenes the meeting will determine its agenda. At the meeting, shareholders will be requested to vote on various resolutions. Voting is done by either a show of hands or by a poll. Particular decisions may be required by law to be by ordinary resolution (majority agreement), by special resolution (75 per cent majority) or by unanimous consent.

85 Corporations Act 2001 (Cth) s 120. 86 Corporations Act 2001 (Cth) pt 2F.3. 87 Corporations Act 2001 (Cth) pt 2G.3. 88 Corporations Act 2001 (Cth) pt 2M.3. 89 Corporations Act 2001 (Cth) s 250N. 90 Corporations Act 2001 (Cth) s 249C. 91 Corporations Act 2001 (Cth) ss 247E, 249D. 92 Corporations Act 2001 (Cth) s 249E. 93 Corporations Act 2001 (Cth) s 249F.

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If a company only has one shareholder, a resolution can be passed by the shareholder recording the resolution and signing the record.94 Any proprietary company with more than one shareholder can pass a resolution without a general meeting being held if all of the shareholders sign a document stating they are in favour of the resolution.95 Types of shareholder resolutions

The general rule is that the directors’ decision-making powers extend to all things not expressly reserved to shareholders by the Corporations Act or by the company’s constitution. The types of decisions on which shareholders are usually entitled to vote include the following: •• Decisions relating to the structure or constitution of the company, including: –– the adoption of or the making of amendments to the constitution,96 –– changes to the company name or type of company,97 –– changes to class rights,98 and –– certain transactions affecting share capital. •• Decisions relating to the composition of the board of directors, including: –– decisions about the appointment and removal of directors, and –– decisions regarding directors’ remuneration and other benefits.99 The shareholders of a proprietary company may have the right under the company’s constitution to vote on the appointment and removal of directors. The shareholders of an unlisted public company may have the right under the company’s constitution to vote on the appointment of directors, but always have the right to vote on the removal of directors. The ASX Listing Rules require that shareholders of a listed public company always have the right under the company’s constitution to vote on the appointment and removal of directors. To assist the shareholders to make decisions about directors’ remuneration the directors are obliged to provide ‘remuneration reports’ justifying any proposed increases in remuneration. •• Decisions to veto certain transactions, including: –– related party transactions by public companies100 (transactions by the public company with a person with a close connection to the company such as a director, a shareholder, a close family member of a director or a shareholder, or another company owned by a director or a shareholder), and –– certain significant commercial transactions by listed companies, such as a significant change in the nature or scale of the company’s activities, or a sale of the company’s main undertaking.101 •• The decision to initiate a shareholders’ voluntary winding up.102 ACTIVIT Y 16.15 — REFLECT

Generally speaking, shareholders in public companies have more extensive voting rights than shareholders in proprietary companies, and shareholders in listed companies have more extensive voting rights than shareholders in unlisted companies. Why do you think this might be so?

 94 Corporations Act 2001 (Cth) s 249B.  95 Corporations Act 2001 (Cth) s 249A.  96 Corporations Act 2001 (Cth) s 136.  97 Corporations Act 2001 (Cth) ss 157, 162–4.  98 Corporations Act 2001 (Cth) pt 2F.2.  99 Corporations Act 2001 (Cth) ss 202A, 211. 100 Corporations Act 2001 (Cth) s 208. 101 Australian Securities Exchange, Listing Rules, ch 11. 102 Corporations Act 2001 (Cth) s 461(1)(a).

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CAUTION!

If the board of directors decides that the company is to enter into a transaction with a ‘related party’, such as a director, a shareholder, a close family member of a director or a shareholder, or a company owned by a director or a shareholder, the board may be obliged to first convene a general meeting and seek the permission of the shareholders.

Cody v Live Board Holdings Limited [2014] NSWSC 78

The board of directors of Live Board Holdings issued preference shares to Bligh Capital, a new shareholder. An existing shareholder challenged the validity of the preference share issue, arguing that Live Board Holding’s constitution provided that if a share issue directly or indirectly varied the rights of a class of shares, the variation would require the approval of at least 75 per cent of holders of shares of that class. The board sought a declaration that it had the power to issue those preference shares without such approval. The board relied upon the Shareholders’ Agreement, which provided that the management of the company was under the direction and control of the board with exceptions including the issue of shares, which were to be approved by a simple majority of the shareholders. The Shareholders’ Agreement provided that in the case of any conflict between the provisions of that Agreement and the constitution, the provision in the Agreement would prevail. The Directors contended that the approval of 75 per cent of the affected shareholders was therefore not required. The court decided that there was no inconsistency between the constitution and Shareholders’ Agreement. The clause in the constitution was aimed at protecting the interests of the holders of shares, while the purpose of the provision in the Shareholders’ Agreement was to reserve the power to issue shares to the shareholders. Both the Constitution and the Shareholders’ Agreement could be, and had to be, complied with. Since the rights attached to the existing ordinary shares ‘would be varied, at least indirectly, by the issue of preference shares which would  .  .  .  rank ahead of them’, approval of 75 per cent of the existing shareholders was required, and therefore the preference share issue was invalid.

Shareholders’ remedies What can the shareholders do if they believe that the directors are not running the company properly or in their best interests? A shareholder may be entitled to commence a legal action against the company if they can establish oppressive conduct. Oppressive conduct is conduct of the company’s affairs, an act by the company, or a shareholders’ resolution that is either contrary to the interests of the shareholders as a whole, or oppressive to or unfairly prejudicial to or unfairly discriminatory against a particular shareholder or shareholders.103 Examples of oppressive conduct include: •• a director taking advantage of a company’s business opportunities for themselves, •• the exclusion of a minority shareholder from participating in the management of the company, •• majority shareholders or directors unfairly restricting dividends, •• general meetings being conducted in an unfair manner, •• issuing shares in circumstances where the main purpose is to reduce a shareholder’s interest in the company, and •• directors failing to act in the interests of the company. An individual shareholder may seek to wind up the company because: •• it is just and equitable to do so, •• the directors are acting in their own interests, or •• there is oppressive or unfairly prejudicial or unfairly discriminatory conduct.104

103 Corporations Act 2001 (Cth) s 232. 104 Corporations Act 2001 (Cth) s 461.

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A shareholder could seek an injunction to stop a director, shareholder or other person breaching the Corporations Act.105 A shareholder may have the right to bring a statutory derivative action in the event of a breach of duty by a director. Ordinarily it is the company that enforces the duties owed to it. However, the court may allow a shareholder to bring an action against the directors if: •• it is probable that the company will not itself bring the proceedings, •• the applicant is acting in good faith, •• it is in the best interests of the company that the applicant be granted leave, and •• there is a serious question to be tried by the court.106 ACTIVIT Y 16.16— REFLECT

Why is the statutory derivative action such an important right for the shareholders?

LAW IN CONTEXT: LAW AND ETHICS

The ethical business manager In this section we have considered the legal obligations of the business owner and manager, but what about their ethical obligations? Consider the following extract from the HIH Royal Commission Report: From time to time as I listened to the evidence of specific transactions or decisions, I found myself asking rhetorically: did anyone stand back and ask themselves the simple question — is this right? This is by no means the first time I have been prone to similar musings. But I think the question gives rise to serious thoughts. We live in a dirigiste age. Each year there is a dramatic increase in the size of the statute books. Almost every facet of life is governed by rules, regulations, proclamations, orders, guidance notes, codes of conduct, and so on, prescribed by governments or recognised agencies. The courts, through the common law, add to the plethora of rules to which we must have regard. There is no doubt that regulation is necessary: peace, order and good government could not be achieved without it. But it would be a shame if the prescription of corporate governance models and standards of conduct for corporate officers became the beginning, the middle and the end of the decision-making process. Right and wrong are moral concepts, and morality does not exist in a vacuum. I think all those who participate in the direction and management of public companies, as well as their professional advisers, need to identify and examine what they regard as the basic moral underpinning of their system of values. They must then apply those tenets in the decision-making process. The education system — particularly at a tertiary level — should take seriously the responsibility it has to inculcate in students a sense of ethical method. [Emphasis added.] In an ideal world, the protagonists would begin the process by asking: is this right? That would be the first question, rather than: how far can the prescriptive dictates be stretched? The end of the process must, of course, be in accord with the prescriptive dictates, but it will have been informed by a consideration of whether it is morally right. In corporate decision making, as elsewhere, we should at least aim for an ideal world.107

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 16.17 What is ‘corporate governance’ and why is it important? 16.18 What is the constitution of a company and what types of matters does it typically address? 16.19 What are the ‘replaceable rules’? 16.20 What is the role of the directors of a company? 16.21 What are the different types of director? 105 Corporations Act 2001 (Cth) s 1324. 106 Corporations Act 2001 (Cth) s 237. 107 Commonwealth, The HIH Royal Commission, The Failure of HIH Insurance (2003) vol 1, 41.

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16.22 How are directors (a) appointed, and (b) removed? 16.23 How can a company execute a contract directly? 16.24 In what circumstances will a person have (a) express authority, (b) implied authority, and

(c) apparent authority to act on behalf of a company? 16.25 What is the significance of the indoor management rule? 16.26 What are the consequences of a director breaching (a) a common law duty, and (b) a statutory 16.27 16.28 16.29 16.30 16.31 16.32 16.33

duty owed to the company? What are the five duties owed by a director? What is the ‘business judgment rule’? What is the role of a shareholder? What types of rights are usually possessed by a shareholder? Who can call a general meeting of the company? What types of decisions must be made by the shareholders rather than the directors? What can the shareholders do if they believe the company is not being managed properly?

In conclusion •• A company is an artificial legal entity separate from its owners and able to make contracts, own property and be a party to litigation in its own name. •• Special rules apply to borrowing by companies and the granting of fixed and floating company charges. Companies raise money from investors by issuing shares and other types of security; if securities are issued to members of the public the company is obliged to comply with statutory disclosure obligations. •• The relationship between the directors and shareholders of a company is regulated by the principles of corporate governance and by the constitution of the company. Certain decisions must be made by the shareholders in general meeting. Otherwise the management of the company is the responsibility of the directors, who owe a range of common law and statutory duties to the company. JOHNNY AND ASH

[Johnny and Ash are still behind the long table at the head of the room, but the room is now empty. Ash is drinking a herbal tea, Johnny is drinking from a carton of Organicola Green.] Ash — I like the new packaging. Johnny — Yeah, it’s weird not drinking it from a can, but this new packaging is made from recycled paper and is completely biodegradable. Feedback from the test groups was overwhelmingly positive. It rolls out on Monday. [Pauses.] So, it looks like we’re going to become a public company. Ash — It does indeed. Fortunately the shareholders were in favour. You realise that they are the owners of the business now. We no longer own a majority of the shares so we aren’t in complete control any more. Johnny — But I am the CEO! Ash — Yes, but that doesn’t mean that you can do whatever you want with the company. You owe a range of duties, and you are still ultimately answerable to the shareholders on some important questions, including decisions to change the company from a proprietary company to a public company. Johnny — Yeah, I know. ‘The separation of ownership and control’, and all that. Ash — So are you still meeting with Maria tomorrow morning? Johnny — Yeah. I’m pretty sure that this time she is finally going to pay me the $100  000 for my share of the restaurant, and I can start to focus completely upon Organicola. Ash — Hmm, I hope so. Johnny — The meeting’s not until midday. We can stay up and go out dancing tonight if you want. Ash — Very funny. [She stands up slowly, waving away Johnny’s offered hand.] Let’s just go home.

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QUIZ 1 Which of the following is the best description of the significance of the decision in Salomon v

Salomon & Co Ltd [1897] AC 22? (a) The notion of limited liability should not apply to companies owned and operated by a single person. (b) The concept of separate legal personality cannot be used by a sole trader to avoid liability to creditors. (c) A shareholder who is also involved in the management of the company is not entitled to the benefit of limited liability. (d) The benefits of incorporation extend to companies effectively under the control of a single person. 2 Which of the following is the best definition of a ‘public company’? (a) A type of company, not permitted to have more than 50 members or to raise money by conducting a public offer of shares. (b) A type of company, able to raise capital from members of the public but subject to more onerous regulation. (c) A type of corporation, formed by being registered under the Corporations Act. (d) A company that has its shares listed for quotation on the Australian Securities Exchange. 3 Which of the following is the best description of ‘limited liability’? (a) The directors of the company are not personally liable for the debts of the company. (b) The shareholders of the company are not personally liable for the debts of the company. (c) The liability of directors to contribute to the debts of the company is limited to the amount (if any) remaining unpaid on their shares. (d) The liability of shareholders to contribute to the debts of the company is limited to the amount (if any) remaining unpaid on their shares. 4 Members of which of the following forms of organisation enjoy the benefits of limited liability? (a) Companies. (b) Unincorporated associations. (c) Sole traders. (d) General partnerships. (e) All of the above. 5 Which of the following statements is not correct? (a) A proprietary company must always include the words ‘Proprietary Limited’ or the abbreviation ‘Pty Ltd’ after its name. (b) A proprietary company cannot have less than 50 shareholders. (c) A public company is permitted to raise funds from the public. (d) A public company must have a secretary. (e) A proprietary company can have a single director. 6 If a charge over a company’s assets is not registered on the PPS Register (a) it is unenforceable against the company. (b) it is unenforceable against the lender. (c) it is unenforceable against a liquidator of the company. (d) all of the above. 7 Which of the following is a characteristic of a preference share in a company? (a) The shareholder is entitled to vote at general meetings. (b) The shareholder has unlimited personal liability. (c) The shareholder has no right to share in any surplus upon winding up of the company. (d) The shareholder is entitled to insist upon receiving a fixed dividend every year. CHAPTER 16 Managing a business: companies and corporate governance  617

 8 In which of the following types of share offering could a person who is not an existing

shareholder apply to purchase shares? (a) A rights issue. (b) A dividend reinvestment plan. (c) A float. (d) A bonus issue.  9 Which of the following types of company cannot be listed on the ASX? (a) A company limited by guarantee. (b) A public company. (c) A limited liability company. (d) A company that did not declare dividends in the previous financial year. 10 If a company does not make a profit (a) dividends can be paid to ordinary shareholders but not to preference shareholders. (b) dividends can be paid to preference shareholders but not to ordinary shareholders. (c) dividends can be paid to both ordinary shareholders and preference shareholders but only if the company made a profit in the previous financial year. (d) dividends cannot be paid to either ordinary shareholders or preference shareholders. 11 Which of the following statements about management of a company is correct? (a) The directors are always answerable to the shareholders. (b) The shareholders are the agents of the directors. (c) Certain decisions are made by shareholders and certain other decisions are made by directors. (d) Shareholders owe certain duties to the directors. 12 The constitution of the company does not have effect as a contract between (a) the company and each shareholder. (b) the company and each director. (c) the shareholders and each director. (d) the individual shareholders. 13 A director of a company (a) may have express authority to make a contract on behalf of the company. (b) always has implied authority to make a contract on behalf of the company. (c) never has apparent authority to make a contract on behalf of the company. (d) all of the above. 14 According to the business judgment rule, a director who makes a business decision that results in harm or loss to the company (a) will be in breach of their duty of care to the company. (b) may not be in breach of their duty of care to the company. (c) will be in breach of their duty of good faith to the company. (d) may not be in breach of their duty of good faith to the company. 15 Shareholders are unlikely to have the right to (a) vote at general meetings. (b) participate in board meetings. (c) share in the company’s assets upon winding up. (d) receive annual financial reports. 16 Shareholders in which type of company must always have the power to appoint the directors? (a) Small proprietary companies. (b) Large proprietary companies. (c) Unlisted public companies. (d) Listed public companies. 618  PART 3 Managing a business

17 A statutory derivative action is the right of a shareholder to

(a) (b) (c) (d)

have the company wound up. compel the company to bring legal proceedings against a director. compel a director to bring legal proceedings against the company. bring a legal action against a director.

EXERCISES EXERCISE 16.1 — THE COMPANY

Ash has suggested to Johnny that they set up a proprietary company. (a) Briefly explain to Johnny the nature of the company, including explanations of the key features of the company, and the differences between a partnership and a company. (b) Should Ash and Johnny’s new company be a public company or a proprietary company? Explain the differences between the two, and why one may be more appropriate than the other. EXERCISE 16.2 — CORPORATE FINANCE

Johnny and Ash have been looking for a source of funding to finance Organicola’s next stage of expansion. Lee is willing to invest $2 million into the company in return for 30 per cent of the issued shares. What are the legal advantages and disadvantages for Lee in subscribing for shares in the company rather than lending Organicola the money? Should Lee purchase preference shares or ordinary shares? EXERCISE 16.3 — COMPANY CHARGES

Lee decides to lend the $2 million to Organicola rather than purchase shares in the company. Organicola has offered as security: (1) its factory and the Torrens System land on which it is located; (2) its two delivery vehicles; and (3) its stock of inventory. Advise Lee about the nature of his interest in each of these securities and how they can best be protected. EXERCISE 16.4 — COMPANY CHARGES

(Refer to the facts of exercise 16.3.) Lee’s charge over the Organicola delivery vehicles was documented but the charge was not registered on the PPS Register. Organicola subsequently borrows another $10  000 from Common Bank in return for a charge over Organicola’s delivery vehicles. The bank’s charge is registered correctly. What are the consequences of the failure to register Lee’s charges? EXERCISE 16.5 — DIRECTORS

Ash’s grandmother, Shashi, is considering investing some money in Organicola Pty Ltd. However, she has stated that if she were to invest she would like to be appointed as a director. Shashi is aged 78, never finished high school, and has no formal business qualifications or experience. In 2004 while visiting Australia, she was convicted of driving while under the influence of alcohol and given a $1000 fine. Is she eligible to be appointed as a director of Organicola Pty Ltd? EXERCISE 16.6 — DIRECTORS

Shashi, who is now a director of Organicola Pty Ltd, meets with Serafina, the CEO of Witch Networks (an online marketing company). Serafina tells Shashi about Witch Networks’ innovative new marketing system. Shashi is convinced that the system is ideal for the distribution of Organicola’s products, and offers Serafina $500  000 for a 2-year licence. Serafina produces a licensing contract and Shashi signs the contract ‘for and on behalf of Organicola Pty Ltd’. A week later Johnny receives the contract. He is not as enthusiastic as Shashi about the marketing system. He contacts Witch Networks and tells them that Organicola will not be proceeding with the arrangement. Can Witch Networks enforce the licensing agreement against Organicola? In your answer, consider whether Shashi was acting with: (a) express actual authority; (b) implied actual authority; and (c) apparent authority. CHAPTER 16 Managing a business: companies and corporate governance  619

EXERCISE 16.7 — DIRECTORS’ DUTIES

Wal is Organicola’s bookkeeper. After Wal is accused of misleading the board, Leigh is appointed to replace Wal, and Wal is instead given responsibility for setting up Organicola’s new organic vegan confectionary business. The new business makes a substantial loss but Wal initially conceals the full extent of the problem in his monthly reports. Do either of the following involve a breach of the Organicola directors’ statutory duty of care? (a) The directors’ reliance on Wal’s false income reports. (b) The directors’ decision to set up the organic vegan confectionary business.

KEY TERMS agent  A person who acts on behalf of a principal who is legally responsible for the acts of the agent. annual general meeting  A general meeting of members of an organisation held once every year. apparent authority  Authority conferred upon an agent unintentionally when the principal holds the agent out as having authority and the holding out is relied upon by a third party. Also known as ‘ostensible authority’ or ‘authority by estoppel’. Australian Business Number (ABN)  An 11-digit number issued by the Australian Taxation Office to a business. Australian Company Number (ACN)  The 9-digit number issued by ASIC upon registration of a company. Australian Securities and Investments Commission (ASIC)  The statutory authority responsible for monitoring compliance with the Corporations Act. Australian Securities Exchange (ASX)  The primary stock exchange in Australia. bankrupt  An insolvent individual who has been declared bankrupt by the court. board of directors  The directors of a company, acting collectively. body corporate  A corporation owned by the registered proprietors of the lots in a community title or strata title property. Also known as an owners’ corporation. business judgment rule  The rule that even though their decision caused the company to suffer harm, a director has not breached their duty of care if the decision was made in good faith, for the right reasons, and after taking appropriate steps to inform themselves. business structure  The legal form of a business organisation, e.g. sole trader, partnership, company. chief executive officer (CEO)  The senior executive director of a company. Also known as a managing director. civil action  Legal proceedings brought by one member of the community against another. Also known as ‘litigation’. class meeting  A meeting of shareholders of a particular class. common seal  A stamp with the company name and ACN, traditionally used by a company to execute documents. company  A corporation incorporated under and regulated by the Corporations Act 2001 (Cth). company charge  A charge given by a company over some or all of its assets. constitution  The set of rules determining how (a) a nation or state or (b) an organisation such as a corporation will be governed. corporate capacity  The legal capacity of a corporation to, for example, issue shares, enter into contracts and own property. corporate governance  The way in which a company is managed and controlled. corporate group  A corporate group exists when one or more companies (subsidiaries) are owned and/ or controlled by another company (the holding company). corporation  An artificial legal entity separate from its owners and able to make contracts, own property and be a party to litigation in its own name. de facto director  A person who acts in the position of a director but has not been appointed as a director. debenture  A debt payable by a company. debt capital  Money borrowed by a business from lenders. 620  PART 3 Managing a business

delegate  A person who is empowered to exercise authority or make a decision on behalf of the person making the delegation. director  A person who is responsible for the management of a company. equity capital  Money raised by a business from investors. executive director  A director who is involved in the full-time management of the company and is an employee of the company. express authority  Authority explicitly and intentionally conferred upon an agent by the principal. extraordinary general meeting  A general meeting of members of an organisation other than an annual general meeting, usually called to pass a particular resolution or resolutions. fixed charge  Security for a loan to a company over a particular asset of the company. float  A public offering of new shares in a company. floating charge  Security for a loan to a company over a class of assets or all of the assets of the company. general meeting  A meeting of the members of a company or association. good faith  Honesty and reasonableness. governing director  A director who has been given very extensive management powers by the constitution of the company. guarantee  An arrangement whereby one person (called the guarantor) promises to repay a loan in the event that the debtor refuses or is unable to do so. holding company  The company in a corporate group that owns and/or controls one or more other companies (subsidiaries). implied authority  Authority conferred upon an agent intentionally but not explicitly. indoor management rule  The rule that a person dealing with a company in good faith is entitled to assume that the actions of the company and its directors are consistent with the requirements of its constitution. injunction  A court order forbidding someone from engaging in particular conduct that will be a breach of the law or infringe the legal rights of another. insolvent  A person or organisation is insolvent if they are unable or unwilling to pay their debts as and when they fall due. insolvent trading  Permitting a business organisation to continue trading despite the fact that it is insolvent. lift the corporate veil  A court ‘lifts the corporate veil’ when it disregards the separate legal personality of a corporation and identifies the individuals responsible for the corporation’s actions. liquidator  The person appointed to wind up a corporation. listed company  A public company, the shares in which can be bought and sold at the stock exchange. member  An owner of a company or association. negotiable instrument  A signed document that facilitates the transfer of money from one person to another, such as a cheque. nominee director  A director appointed to represent the interests of a particular group. non-executive director  A director who is not involved in the full-time management of the company and is not an employee of the company. oppressive conduct  Conduct by a company, its directors or its shareholders that is either contrary to the interests of the shareholders as a whole, or oppressive to a particular shareholder or shareholders. option  A right to buy or sell property at a certain price and before or after a certain date. ordinary resolution  Resolution passed by at least 50 per cent of the persons present at a meeting who are entitled to vote. ordinary shares  The basic class of share in a company, entitling the shareholder to voting rights, distribution rights and information rights. partly paid shares  The person subscribing for the share pays only part of the subscription price at the time the share is issued, with the balance to be paid when the company makes a call. poll  A vote made in writing. CHAPTER 16 Managing a business: companies and corporate governance  621

preference shares  A class of share in a company entitling the shareholder to dividends at a fixed rate and to repayment upon winding up in preference to ordinary shareholders. proprietary company  A privately owned company with less than 50 non-employee shareholders and prohibited from selling its shares to the public. prospectus  A document in a prescribed form containing information about a company and required to be provided to investors before they invest in the company. proxy  A representative of someone unable to attend a meeting personally and entitled to vote on their behalf. public company  A company other than a proprietary company. quorum  The minimum number of voting members required to attend a meeting for it to be constitutionally valid. related party transaction  A transaction between an individual or company and a related party of the individual or company. replaceable rules  A set of rules set out in the Corporations Act that a company can use as its constitution if it so wishes. resolution  A collective decision made by a group, e.g. of directors or members of a company. secretary  The company officer who is primarily responsible for ensuring compliance with the administrative requirements of the Corporations Act. shadow director  A person who is not validly appointed as a director, but the directors of the company act in accordance with the person’s instructions or wishes. share  One of the fractional parts into which the equity (ownership) of a corporation is divided. special resolution  A resolution passed by at least 75 per cent of the persons present at a meeting and entitled to vote. statutory derivative action  An action brought by a shareholder against directors of a company in circumstances when the company itself should, but will not, bring the action. subscription  The process of applying for and being issued with shares in a company. subsidiary  A company in a corporate group that is owned and/or controlled by another company (the holding company). underwritten  A share issue is underwritten when an underwriter (usually a stockbroking firm or financial intermediary) agrees to take up any shares that are not subscribed for by other people. veto  (1) A right to reject or override a decision or proposal. (2) To exercise such a right. winding-up  A statutory process where the assets of an insolvent corporation are sold and used to repay the corporation’s creditors. Also known as ‘liquidation’.

ACKNOWLEDGEMENTS Photo: © Passion Images / Shutterstock.com Article: © ‘Homogenous boards have left big business lacking in the ideas department’, Australian Financial Review, Catherine Fox

QUIZ ANSWERS

1. d  2. b  3. d  4. a  5. b  6. c  7. c  8. c  9. a  10. d  11. c  12. c  13. a  14. b  15. b 16. d  17. d

622  PART 3 Managing a business

CHAPTER 17

Managing a business: making payments and recovering debts LEA RNIN G OBJE CTIVE S 17.1 What are the various ways in which payments can be made and what are the rules regulating these forms of payment? 17.2 How does a creditor recover an unpaid debt? What if the debtor is a consumer?

JOHNNY AND ASH

[Johnny and Ash are in their local branch of the Common Bank waiting to meet with the bank manager. Ash is calm and patient, hands resting gently on her belly. Johnny looks uncomfortable in a poorly fitting suit, and is restless and fidgeting.] Johnny — I hate banks. Ash — I don’t think you are the only person in the country to feel that way. But what, exactly, is bothering you about banks today? Johnny — The paperwork! And the meetings! And the interest rates and the bank fees and  .  .  . [He pauses, takes a deep breath, and slows down.] As I see it, it’s pretty simple. Organicola is doing really well. We need some more money to move to a bigger factory and hire some more employees. The bank has heaps of money. We borrow some of it, use it to make more money, and then repay the bank’s money with interest. Simple! Ash — Well, I don’t know if it’s quite that  .  .  . Johnny — [He interrupts.] But no! Instead of just giving us a cheque and trusting us to pay it back they want us to sign mortgages and guarantees and take out insurance. I should be back in the factory inventing new flavours, not sat here dressed like a  .  .  .  a damn lawyer! Ash — Johnny! Johnny — Sorry. [He claws at his collar.] It’s this stupid tie. I hate ties. Ash — Forget the tie. Look, I’m not a big fan of the banks either, but sometimes it’s helpful to try and look at things from their point of view. We know we are going to be able to repay the money they lend us, but they don’t know that, and so we have to reassure them about our credit worthiness, and about how we manage the business. And they naturally want to know that if something does go wrong and we can’t repay the loan they will still be able to recover their money, hence the mortgages and charges and guarantees and insurance. Johnny — Yeah, but if we don’t have any money there really isn’t much they can do about it is there? Ash — Actually there is quite a lot a creditor can do when a debtor refuses to pay the debt.

CHAPTER PROBLEM

As you make your way through this chapter, consider the ways in which a creditor can ensure the debt is repaid.

Introduction Business necessarily involves the flow of funds between individuals and organisations, retailers and customers, purchasers and vendors, lenders and borrowers, and so on. In this chapter we explore in detail the regulation of financial flows, focusing upon the making of payments by cash, cheque, credit card or online payment; and the recovery of outstanding debts.

17.1 Making payments LEARNING OBJECTIVE 17.1 What are the various ways in which payments can be made and what are the rules regulating these forms of payment?

Organicola makes payments to its employees, its suppliers, its creditors and its investors. It also collects payments from its customers and its debtors. In this section we consider the various ways in which payments can be made and the legal rules regulating the different forms of payment. 624  PART 3 Managing a business

The four main forms of payment are set out in figure 17.1. Forms of payment

Cheques and bills of exchange

Cash

FIGURE 17.1

Credit and debit cards

Electronic funds transfer

Forms of payment

Cash payments Cash is money in the form of notes and coins. Cash is often used as a form of payment in transactions involving small sums of money, such as the sale of relatively low value products. What if someone attempts to pay for an expensive product or to repay a large debt using cash? A payee need only accept payment in the form of cash if it is legal tender. Legal tender is currency that cannot legally be refused in payment of a debt. All Australian notes are legal tender.1 This means that a person could, for example, pay for a motor vehicle with notes. Coins, on the other hand, are only legal tender for payment of amounts up to the following limits:2 •• 5c, 10c, 20c and 50c coins up to $5 in value, and •• $1 and $2 coins up to $10 in value. If payment is tendered in the form of coins in excess of these limits the payee is entitled to refuse to accept payment and to insist upon payment in legal tender. A payee is also entitled to refuse to accept other forms of cash as payment, provided that it was made clear to the payee before the transaction was entered into that payment was required to be in a particular form, such as by bank cheque, or that cash payments would not be accepted.

Australian Transaction Reports and Analysis Centre If a person attempts to make a cash payment in excess of $10  000, the payee may be obliged to report the transaction to the Australian Transaction Reports and Analysis Centre (AUSTRAC). AUSTRAC is Australia’s anti-money laundering and counter-terrorism financing regulator. It is responsible for administering and enforcing the Financial Transactions Reports Act 1988 (Cth) and the Anti-Money ­Laundering and Counter-Terrorism Financing Act 2006 (Cth). Cash dealers are obliged to report certain transactions to AUSTRAC. ‘Cash dealers’ include: •• banks and other financial institutions, •• financial corporations, •• insurance companies, •• securities dealers such as stock brokers, •• unit trust managers and trustees, •• travellers cheque or money order issuers, •• cash carriers and payroll preparation businesses, and •• casinos and bookmakers. The types of transaction that must be reported by a cash dealer to AUSTRAC are: •• payments in cash of $10  000 or more, •• transfers of funds either into or out of Australia of any amount, and

1 Reserve Bank Act 1959 (Cth) s 36. 2 Currency Act 1965 (Cth) s 16.

CHAPTER 17 Managing a business: making payments and recovering debts  625

•• suspicious transactions of any kind, being transactions that the cash dealer reasonably suspects of being connected to tax evasion or criminal activities. Members of the public are obliged to report to AUSTRAC if they carry cash in the amount of $10  000 or more (or the equivalent in a foreign currency) into or out of Australia. It is an offence for anyone to split a transaction into two or more parts with the purpose of avoiding the reporting rules and thresholds. Certain types of transaction are exempt from the reporting requirements, including those engaged in by businesses that typically deal with transfers and payments in large amounts, such as some retailers and operators of vending machines. Cash dealers are also obliged to identify their customers. Accounts can only be operated by an identified customer. Identification requirements normally take the form of the ‘100 points’ test: various documents such as a drivers licence, a passport or a birth certificate are each given a points value and a total of 100 points must be presented by the customer for the customer’s identity to be established. It is a criminal offence punishable by a fine or up to 2 years imprisonment for a person to open or operate an account with a cash dealer under a false name.

ACTIVIT Y 17.1 — RESEARCH

Go to the AUSTRAC website at www.austrac.gov.au. What is ‘AUSTRAC Online’?

Cheques and bills of exchange Payments of sums of money too large to be in the form of cash have traditionally been made in the form of a cheque. A cheque is a particular type of bill of exchange. A bill of exchange is a written order by one person (the drawer) directed to another person (the drawee) instructing them to pay money to a third party (the payee). The drawee usually owes money to the drawer. For example, Johnny may be owed $10  000 by Dan, and Johnny may owe $10  000 to Sam. Rather than pay Sam in cash, Johnny could issue a bill of exchange instructing Dan to pay the $10  000 directly to Sam. Johnny would give the bill of exchange to Sam in payment of his debt, and Sam could then collect the money from Dan (see figure 17.2).

Johnny — Drawer

o

626  PART 3 Managing a business

yt

Bills of exchange

e on

FIGURE 17.2

sm

de l ex ivers ch an bill o ge f to

e ow

Sam — Payee

collects payment from

Dan — Drawee

A bill of exchange is negotiable. This means that it can be transferred to another person, and whoever has possession of the bill of exchange can enforce it. For example, once Johnny has given the bill of exchange to Sam, Sam could use the bill of exchange to pay for goods purchased from Gaia, and Gaia could then collect payment from Dan. A key feature of negotiability is that the transferee will have the right to enforce the bill of exchange even if the transferor did not have ‘good title’. In other words, a negotiable instrument is not subject to the nemo dat quod non habet rule (see an earlier chapter). For example, if Talila steals the bill of exchange from Sam and uses it to pay for goods purchased from Gaia, Gaia will still be able to enforce the bill of exchange and collect payment from Dan. Bills of exchange are regulated by the Bills of Exchange Act 1909 (Cth). A cheque is a bill of exchange where the drawee is a financial institution such as a bank. When Johnny writes a cheque payable to Sam, the cheque is a written order by Johnny directed to his bank, the Common Bank, instructing the bank to pay money to Sam. Johnny gives the cheque to Sam, and Sam can then collect payment from Johnny’s bank (see figure 17.3). Alternatively, Sam could simply present the cheque at his own bank, the State Bank (i.e. deposit the cheque into his own account) and the State Bank can then collect payment from the Common Bank, provided of course that there are sufficient funds in Johnny’s account (see figure 17.4). If there are insufficient funds in Johnny’s account to cover the value of the cheque, the cheque is likely to be dishonoured, and Johnny will be charged a dishonour fee by his bank. Cheques are regulated by the Cheques Act 1986 (Cth). A cheque is defined in the Act as: •• an unconditional order in writing, •• addressed by a person to a financial institution, •• signed by the person giving it, and •• requiring the financial institution to pay on demand a sum certain in money.3 As long as the written order satisfies these four requirements it will be a cheque. In practice, most cheques are on pre-printed forms issued by the financial institution, but the use of such a pre-printed cheque is usually a matter of convenience rather than a legal obligation. The amount payable is usually written out in both words and figures, for example, ‘one hundred dollars only — $100.00’. If there is a discrepancy between the two amounts, it is the lesser amount that is the amount payable.4

Johnny — Drawer

d ch elive eq rs ue to

on ds fun f of lds al ho beh

Sam — Payee

FIGURE 17.3

collects payment from

Common bank — Drawee financial institution

A cheque presented to the drawer’s financial institution

3 Cheques Act 1986 (Cth) s 10(1). 4 Cheques Act 1986 (Cth) s 15.

CHAPTER 17 Managing a business: making payments and recovering debts  627

Johnny — Drawer

d ch elive eq r s ue to

on ds fun f of lds al ho beh Common bank — Drawee financial institution

Sam — Payee

pa col ym lec en ts tf ro m

s sit h po wit de ue eq ch State bank — Collecting financial institution FIGURE 17.4

A cheque deposited into the payee’s account at their financial institution

LAW IN CONTEXT: LAW IN POPULAR CULTURE

The cow and the cheque In his series ‘Misleading Cases in the Common Law’, originally published in Punch magazine, British humorist AP Herbert described the fictitious case of Board of Inland Revenue v Haddock. The case involved Albert Haddock, who was in disagreement with the Collector of Taxes in relation to the size of his tax bill. One morning Haddock appeared at the offices of the Collector of Taxes, and delivered to him a large white cow. On the cow was stencilled in red ink: ‘To the London and Literary Bank, Limited — Pay the Collector of Taxes, who is no gentleman, or Order, the sum of fifty seven pounds (and may he rot!) £57/10/0 — ALBERT HADDOCK.’ Haddock presented the cow to the Collector in payment of his tax bill and demanded a receipt. The Collector declined to accept the cow, arguing that it would be impossible to pay the cow into a bank account. Haddock suggested that the Collector could endorse the cow to any third party to whom the Collector might owe money. The Collector endeavoured to endorse the cheque to another person by writing the endorsement on the back of the cheque (i.e. on the abdomen of the cow) but ‘[t]he cow  .  .  . appeared to resent endorsement and adopted a menacing posture’. The Collector abandoned the attempt, and refused to accept the cheque. When sued for payment by the Collector, Haddock argued that he had tendered a cheque in payment of his tax liability. He argued that a cheque was only an order to a bank to pay money to the person in possession of the cheque or a person named on the cheque, and there was nothing in statute or customary law to say that that order must be written on a piece of paper of any specified dimensions. A cheque could be written on a piece of notepaper, and he testified that he himself had drawn cheques on the backs of menus, on napkins, on handkerchiefs, and on the labels of wine bottles. All of these cheques had been duly honoured by his bank. He argued that there was no distinction in law between a cheque written on a napkin and a cheque written on a cow. The judge, being sympathetic to Haddock, decided in his favour. (This fictitious case is so well known that many assume it to be a real case, and it has in fact been referred to as a real case in some court decisions.)

628  PART 3 Managing a business

Like other bills of exchange, cheques are negotiable. However, if the words ‘not negotiable’ are written across the face of the cheque, the cheque can still be transferred to another person but that person can no longer acquire better title than the transferee.5 The nemo dat rule is restored, and a person who acquires possession of a stolen cheque can no longer enforce the cheque. Marking a cheque as ‘not negotiable’ is therefore a sensible security measure, and some pre-printed cheques are now issued with the words ‘not negotiable’ already on the cheque. CAUTION!

The words ‘not negotiable’ written across the face of a cheque do not render the cheque unable to be transferred to another person. The cheque can still be transferred to another, but a person will only be entitled to cash the cheque if they legitimately obtained the cheque from a person who was themselves entitled to cash the cheque.

A bearer cheque is a cheque made payable to ‘bearer’, that is, to anyone who has possession of the cheque. A cheque made payable to ‘cash’ is a bearer cheque. An order cheque is a cheque made payable to a particular person, and is seen as generally more secure than a bearer cheque. The payee of an order cheque can still transfer the cheque to another person but they must do so by endorsement, that is, they must write on the back of the cheque the name of the transferee, and sign it. A bearer cheque is transferred by simply handing over the cheque. The bearer, payee or transferee of the cheque is entitled to approach the drawer’s financial institution directly and insist that the cheque be paid in cash. However, if the cheque has been crossed by the making of two parallel lines across the face of the cheque, the cheque can only be paid into the bearer’s, payee’s or transferee’s own bank account.6 Crossing the cheque is therefore another sensible security measure, and many cheques now come pre-printed with the crossing. CAUTION!

When a person writing a cheque draws two lines across the cheque and inserts the words ‘not negotiable’ between the lines, they are actually creating two separate protection measures.

ACTIVIT Y 17.2 — REFLECT

Why is (a) an order cheque more secure than a bearer cheque, and (b) a crossed cheque more secure than an uncrossed cheque?

If a cheque is not presented for payment within 15 months of the date of the cheque it becomes a ‘stale cheque’ and the drawee financial institution is no longer obliged to pay it.7

Bank cheques Most cheques are personal cheques. A bank cheque is a cheque drawn by a financial institution upon itself. Because the drawer of the cheque is the financial institution itself, it is far less likely to be dishonoured and is thus seen as more reliable than a personal cheque. If a transaction involves a large sum of money (e.g. the purchase of real property) payment is often expected to be by way of bank cheque.

5 Cheques Act 1986 (Cth) s 55. 6 Cheques Act 1986 (Cth) s 93. 7 Cheques Act 1986 (Cth) s 89.

CHAPTER 17 Managing a business: making payments and recovering debts  629

ACTIVIT Y 17.3 — RESEARCH

Go to the website of your bank or financial institution. What tips do they provide for their customers about writing cheques and avoiding cheque fraud?

Credit and debit cards A credit card is a plastic card that facilitates a system of payment whereby the card issuer (usually a bank or other financial institution) undertakes to pay for a product on behalf of the card holder, and the amount paid becomes a debt payable by the card holder to the card issuer. A credit card is regulated by a complex series of contracts between: •• the card holder and the card issuer, •• the card holder and the vendor selling the product, •• the vendor and its own bank, •• the vendor’s bank and the card issuer, and •• the card issuer and a credit card association (e.g. Mastercard or Visa). If Johnny allows Humphrey, a customer at his restaurant, to pay for a meal using a credit card issued by the State Bank, the steps in the credit card transaction will be as set out in figure 17.5 and described below. •• Step 1: Authorisation — Humphrey presents his credit card to Johnny. Johnny contacts his own bank, the Common Bank — referred to as the acquiring bank — either by telephone or electronically, and tells them the transaction details: the credit number, the transaction type, and the amount of the transaction. The Common Bank contacts the card issuer, the State Bank, and verifies the transaction details with them. Provided the card is valid and Humphrey has not already exceeded his credit limit, the State Bank will inform the Common Bank that the transaction is approved, and the Common Bank will in turn inform Johnny. (If approval is being sought electronically, all of this will happen in a few seconds.) Humphrey will be obliged to establish his identity by either providing his signature or entering a personal identification number (PIN). If Humphrey’s card is payWave (Visa) or PayPass (MasterCard) enabled he will not be obliged to provide a PIN or signature for transactions less than $100.00. •• Step 2: Batching — Johnny stores all of the authorised credit card transactions at the restaurant in batches and submits them to the Common Bank periodically, usually at the end of each business day. •• Step 3: Clearing and settlement — the Common Bank sends the batches to the relevant credit card association, which debits the State Bank for payment and credits the Common Bank. In effect, the State Bank pays to the Common Bank the value of the transaction. Humphrey — Card holder

issues card to

Card issuer — State Bank

presents card to

make payment to (via association)

credits account of (less processing fee) Johnny — Payee

FIGURE 17.5

Credit card transactions

630  PART 3 Managing a business

contacts

confirms details with

owes payment (plus interest) to

Acquiring bank — Common Bank

•• Step 4: Funding — the Common Bank pays to Johnny the value of the transaction, less a processing fee. The payment will be deposited directly into Johnny’s account with the Common Bank. •• Step 5: Statement — the State Bank will periodically issue statements to Humphrey listing the most recent credit card transactions, setting out the interest charged on the amounts paid on Humphrey’s behalf, and requiring payment of a minimum amount. If the card holder wishes to challenge a transaction that appears on their credit card statement they must contact the card issuer as soon as possible. The card issuer will contact the acquiring bank, which will in turn contact the vendor and demand proof of the transaction. The onus will be upon the vendor to establish the validity of the transaction and in the event that they are unable to do so, the acquiring bank will recover the money from the vendor’s account (or refuse to pay the money into the account if payment has not yet been made) and the transaction will be reversed. When making credit card payments online, card holders have important rights and obligations under the ePayments Code. These are described below. CAUTION!

When a customer challenges a credit card transaction that has appeared on their statement, it is the responsibility of the merchant to prove that the transaction took place, not the responsibility of the customer to prove that the transaction did not take place.

Debit cards A debit card differs from a credit card, in that, rather than borrowing money from the card issuer to pay for the transaction, the card holder uses their own funds. The card holder deposits money into an account with the card issuer and then periodically ‘tops it up’. In most other respects a debit card can be used in the same way as a credit card. ACTIVIT Y 17.4 — RESEARCH

Go to the ACCC’s Scamwatch website at www.scamwatch.gov.au. What tips do they provide about avoiding credit card fraud?

Electronic funds transfer Electronic funds transfer (‘EFT’) payments are regulated by the ePayments Code. The ePayments Code is a voluntary code of practice: businesses may choose whether to sign up to the Code. If they do, they must follow the Code in their dealings with customers. The ePayments Code regulates all electronic payments including ATM, EFTPOS, debit and credit card transactions (including contactless transactions), online payments, internet banking and BPAY. All banks, credit unions and building societies that provide retail banking products have subscribed to the ePayments Code. ASIC also encourages providers of consumer electronic payment products from outside the traditional banking sector to voluntarily subscribe to the Code. The ePayments Code: •• requires subscribers to give consumers clear and unambiguous terms and conditions, •• stipulates how terms and conditions changes (such as fee increases), receipts and statements need to be made, •• sets out the rules for determining who pays for unauthorised transactions, and •• establishes a regime for recovering mistaken internet payments. The Code sets out how subscribers should conduct themselves when dealing with consumers. For example: •• a consumer whose electronic payment account has been hacked into and used by a third party to make purchases without their authorisation will not bear the monetary loss if the account provider is a subscriber to the Code, CHAPTER 17 Managing a business: making payments and recovering debts  631

•• a consumer is not liable for any unauthorised transactions on their debit card that were done without a PIN or signature, and •• subscribers need not provide receipts for their low value products, but must provide consumers with ways to check their balance and transaction history.

LAW IN CONTEXT: LAW IN PRACTICE

Protecting the PIN and password It is very important that the customer keep their PIN or password confidential. If they fail to do so, they may not be able to recover losses resulting from unauthorised transactions. The ePayments Code includes the following rules for protecting a PIN or password. • The customer must not tell their PIN or password to anyone, including a family member or friend. Most unauthorised transactions occur because a person told someone else their PIN or password. • If the customer uses a card to access their account, they must not write their PIN or password on the card or keep an undisguised record of their PIN or password together with items they may lose or have stolen at the same time as the card (for example, in their purse or wallet). • Where the customer’s account institution tells the customer not to choose a PIN or password that represents their birth date or a recognisable part of their name, as well as what will happen if they do choose a PIN or password of this kind, the customer must not choose such a PIN or password. • The customer must not act with ‘extreme carelessness’ in failing to keep their PIN or password confidential. An example of extreme carelessness would be storing their internet banking password in their diary or personal organiser or computer under the heading of ‘internet banking password’. ACTIVIT Y 17.5 — RESEARCH

Go to the ACCC’s Scamwatch website at www.scamwatch.gov.au. What tips do they provide about avoiding online auction and shopping scams?

632  PART 3 Managing a business

LAW IN CONTEXT: LAW IN THE MEDIA

Consumers warned over tap-and-pay technology It is a time-saving temptation for busy people, but tech experts say consumers must be aware of the risks when opting for the technology. Contactless credit cards and mobile phone chips connect to payment terminals via a short range radio frequency identification (RFID). Unlike traditional payment methods, they do not require a signature or PIN to verify the card holder’s identity. Rob Livingstone from the University of Technology says it is a win-win for banks and retailers because cash is expensive. ‘There’s a number of benefits, some of which relate to increased customer service, a lower per-­ transaction cost and more importantly the potential elimination of cash,’ he said. ‘For many organisations that are dealing with the public, the cost of maintaining cash is quite expensive.’ ‘Moving to the cashless environment has got distinct advantages in that context.’ Mr Livingstone says perhaps the biggest benefit to companies is the creation of a digital signature — a complete record of spending habits, no matter how small. And that data is worth money. ‘For each transaction that you put through the financial system you essentially have got a trail. That is worth something in terms of your spending pattern,’ he said. But internet vulnerability experts warn that data can be vulnerable to third parties. ‘Cloning is a big problem with RFID solution, being able to read the data remotely with various tools and software so you can track people, you can collect information,’ Hacklab.com’s Chris Gatford said. ‘There’s been some very famous attacks where people have been reading passport numbers and other serial numbers from RFID-enabled cards.’ ‘Proximity cards, such as the one that you use to get into your secured building, those have been cloneable for quite some time.’ ‘There’s all sorts of attack methods available to wireless communication.’ While he says it is unlikely tap-and-pay credit cards will be cloned, there are other ways criminals can maliciously access both your money and your details. ‘Probably one of the first attacks that we’re most likely to see being used by criminals are probably relay attacks,’ he said. ‘When you have your phone in your pocket or your card in your wallet and attackers work out a mechanism to activate the card in your pocket, relay the transaction somewhere else, maybe not even in the country and perform a transaction at a terminal by another party, stealing money from that particular account. ‘That’s probably the most likely attack that we’ll see occurring in the future.’ Source: Eleanor Bell, 31 January 2012, http://www.abc.net.au/news/2012-01-30/consumers-warned-over-tap-and-paytechnology/3801162.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  17.1 What are the four main forms of payment?  17.2 What is legal tender?  17.3 Which cash transactions must be reported to AUSTRAC?  17.4 What is a bill of exchange and who are the parties to a bill of exchange?  17.5 What is the difference between a bill of exchange and a cheque?  17.6 Who are the parties to a cheque?  17.7 What is ‘negotiability’?  17.8 What is the difference between an order cheque and a bearer cheque?  17.9 What is the effect of (a) crossing a cheque, and (b) marking a cheque ‘not negotiable’? 17.10 What is a bank cheque? 17.11 What is a credit card? 17.12 What are the steps in a credit card transaction? 17.13 What is a debit card? 17.14 To which transactions does the ePayments Code apply? 17.15 How does the ePayments Code regulate unauthorised transactions?

CHAPTER 17 Managing a business: making payments and recovering debts  633

17.2 Recovering debts LEARNING OBJECTIVE 17.2 How does a creditor recover an unpaid debt? What if the debtor is a consumer?

What can a business do if a customer doesn’t pay their bill or a debtor doesn’t pay the money they owe to the business? An arrangement between a business and another person according to which the business has loaned the person money or sold them goods on credit will be a contract, and a failure by the person (the debtor) to pay the debt will be a breach of contract entitling the business (the creditor) to all of the remedies described in a previous chapter. In the following section we explain the process of recovering money from a debtor: see figure 17.6. This process is relevant if a business is owed money by another person. It is also relevant if the business owes money to another. Issue letter of demand

Consider ADR

Resolve dispute

Issue statement of claim

Debtor’s response

Admission of liability

Denial of liability

Failure to respond

Court hearing

Default judgment

Enforcement of judgment

Examination summons FIGURE 17.6

Writ of execution The process for debt recovery

634  PART 3 Managing a business

Seize security

Garnishee order

Bankruptcy/ liquidation

The debt recovery process LAW IN CONTEXT: LAW IN PRACTICE

A credit policy If a business is going to extend credit to its customers it is a very good idea to draft a comprehensive credit policy. This policy should address the following questions. • In what circumstances will a customer be given credit? • How will the business check the identity and credit worthiness of the customer? • How much credit will be given? • What are the repayment terms? • What repayment methods will the business accept: cash; credit card; online payments? • How often will the business send out reminders to its debtors? • Will the business grant a discount for prompt or early repayment? • How much interest will be charged for overdue payments? (A creditor can only charge interest on overdue payments if that is a term of the loan contract or contract of sale.) • What if a customer requests an extension of the due date for payment? • What is the process for recovering an outstanding debt? • When should this process be activated?

LAW IN CONTEXT: LAW IN PRACTICE

Credit reports Before loaning money to another person it is often a good idea to access their credit report. This is a report prepared by a reputable credit reporting agency that sets out the borrower’s personal history and credit details, including: • any credit applications they have made in the past, • credit defaults, • serious credit infringements, and • information on the public record such as judgment debts and bankruptcy proceedings.

ACTIVIT Y 17.6 — RESEARCH

Go to the Dun and Bradstreet website at www.dnb.com.au. What is the procedure for ordering a credit report on (a) an individual borrower, and (b) a company borrower?

Letter of demand Assuming that the business has already sent the customer or other debtor an invoice and/or an account rendered that has not been paid, the next step is to send them a formal letter of demand. This will set out the details of the outstanding debt and include a clear statement that if the outstanding amount is not paid within a specified time (usually 7 to 28 days), litigation will be commenced. The example of a letter of demand in figure 17.7 is from the chapter on finding, understanding and using the law.

Consider ADR Despite such a threat, litigation will not always be appropriate. If the amount outstanding is a relatively small amount, the potential cost of litigation may mean that it is more economical to simply write off the debt and refuse to deal with that customer again. As we saw in an earlier chapter, litigation can be both stressful and destructive, and the business may decide that it is more important that they preserve their relationship with the debtor than pursue recovery of the debt in a court of law. CHAPTER 17 Managing a business: making payments and recovering debts  635

Organicola Pty Ltd 14 Martens Street Up Town 1111 18 January 2016 Bob Recalcitrant 999 Stubborn Street Difficult 9999 Dear Mr Recalcitrant Outstanding invoice in the amount of $1000.00 I am writing in relation to our outstanding invoice dated 1 January 2016 in the amount of $1000.00. A copy of the invoice is enclosed. Payment of our invoice was required by no later than 18 January but to date payment has not been received. Please make payment in full by no later than 5 pm on Friday 25 January. You can pay the invoice by depositing the money directly into our account. The account details are on the invoice. In the event that we do not receive payment in full by that date, we will be instructing our solicitors to promptly commence legal proceedings to recover the outstanding amount. I hope that such action will not be necessary. Yours sincerely Accounts Manager Organicola Pty Ltd FIGURE 17.7

Example of a letter of demand

It may be worth considering alternative dispute resolution (ADR) as a way to resolve the dispute with the debtor. ADR was described in a previous chapter. To resolve the dispute without resorting to litigation, mediation or arbitration could be used. ACTIVIT Y 17.7 — REFLECT

When might it be preferable to resolve a dispute over an unpaid debt with ADR rather than with litigation? In what circumstances would ADR be inappropriate?

If ADR is unsuccessful or inappropriate, the business may elect to resort to litigation. Alternatively, the matter may be passed over to a debt collection agency, which will recover the debt on behalf of the business in return for a fee.

Statement of claim The process of litigation was described in a previous chapter. As you will recall, the process begins with the drafting of a statement of claim. This is a document that sets out the details of the claim, and identifies the business as the plaintiff and the debtor as the defendant. A copy of the statement of claim is lodged in the court registry to formally notify the court that proceedings have commenced. (The choice of court is based on the jurisdiction of each court as described in an earlier chapter.) 636  PART 3 Managing a business

A copy of the statement of claim is then served upon the debtor. Service is a manner of delivering a document in such a way that delivery to the relevant person can be subsequently proven in a court of law. It can be effected by personally handing it to the debtor, or (if they refuse to take it) leaving it in their presence and verbally informing them of its contents, or delivering it to the debtor’s home or place of business and leaving it with an apparently reliable person who has ongoing contact with the debtor. The specific rules regulating the service of court documents are set out in the rules of the relevant court, and may differ from state to state. In some states, for example, it is possible to effect service by post.

The debtor’s response Broadly speaking, there are three possible responses by the debtor. 1. The debtor may admit liability and offer to repay the debt. An agreement setting out how repayment is to be made should be drawn up and registered with the court. The debtor is entitled to apply to the court for an order permitting them to pay by instalments, known as an instalment order. 2. The debtor may deny liability and seek to rely upon some form of defence. This defence may take the form of a denial that the debt is owed in the first place, or a claim that the amount owing has been calculated incorrectly, or a claim that the amount owing should be offset against an amount owing by the business to the debtor. The defence will be formally drafted and lodged in the court registry. 3. The debtor may fail to respond to the statement of claim.

The court hearing If the debtor has denied liability the matter will proceed to trial in the usual way. If the business has not already done so, it may be directed by the court to first attempt to resolve the dispute using ADR. If the matter proceeds to trial, each side will present their side of the argument, supported by witnesses and other evidence, and the court will make a decision about the debtor’s liability. If the debtor has failed to respond to the statement of claim the business will be entitled to apply to the court for default judgment. This is a decision of the court made without a formal hearing and declaring that the debtor is liable as claimed by the business in its statement of claim, provided that the business can prove that the debtor was in fact served with the statement of claim. This is usually done by way of affidavit of service, a sworn statement about the way the statement was served. The business will also be required to lodge an affidavit of debt setting out the amount owed by the debtor.

Enforcing the judgment If the court hearing is decided in favour of the business the court will make an order for judgment. This is an order directing the debtor, now referred to as the judgment debtor, to pay the debt. It is likely that the debtor will also be ordered to pay the legal costs of the business, now referred to as the judgment creditor. What if the judgment debtor continues to refuse to pay the debt? If that is the case, the judgment creditor has a number of options available to them. •• An examination summons is a process by which the court examines the judgment debtor’s financial position to ascertain their ability to pay the debt. It is sometimes known as an investigation summons or an unsatisfied judgment summons. If the judgment debtor refuses to attend at the court or otherwise refuses to cooperate they may be found to be in contempt of court and subjected to criminal penalties. •• A writ of execution, also known as a warrant of execution, is an order of the court directing an officer of the court such as a sheriff to enforce the judgment by seizing the judgment debtor’s property (including land and goods), auctioning it, and using the proceeds to repay the judgment debt. •• If the judgment creditor was given security for the loan in the form of a charge over goods or a mortgage over real property, they will be entitled to seize the goods, or foreclose or exercise their power of sale over the real property (see below). CHAPTER 17 Managing a business: making payments and recovering debts  637

•• A garnishee order is an order of the court directing a third party who owes money to the judgment debtor to pay that money directly to the judgment creditor. For example, if the judgment debtor is employed, a garnishee order may order their employer to pay a portion of the judgment debtor’s wages directly to the judgment creditor. In some jurisdictions the garnishee order must be renewed periodically, and in others it remains in force until the judgment debt is repaid in full. •• If none of the other methods are successful or appropriate, the judgment creditor may need to consider commencing bankruptcy proceedings against the judgment debtor (provided that the outstanding amount exceeds the statutory minimum). If the judgment debtor is a company, the judgment creditor may need to consider winding up proceedings (subject to the same proviso). Both of these options are considered in more detail in the final chapter. Australian Securities and Investments Commission v Accounts Control Management Services Pty Ltd [2012] FCA 1164

ACM purchased outstanding debts from financial institutions and large companies at a discount of between 79 per cent and 99 per cent. ASIC commenced proceedings against ACM alleging that ACM contravened the Australian Securities and Investments Commission Act when dealing with eight debtors between November 2008 and June 2010. ASIC presented to the Court the ACM debt collector training manual that was in use at the relevant time as evidence of ACM’s misconduct. The Court found that ‘the manual made it very plain that debtors should be threatened with litigation’, and decided that ACM had engaged in widespread misleading and deceptive conduct when recovering money from debtors. Examples of the harassment or coercion included threats to inform a debtor’s husband about her indebtedness, threats to call a debtor’s friends and employer until the debt was repaid, and a threat to issue a warrant for a debtor’s arrest. Examples of the misleading conduct included ACM implying that it was a firm that specialised in commencing legal proceedings for the recovery of debts and that ACM would cause NSW police officers to attend a debtor’s home to serve documents (when no papers had yet been prepared).

Secured debts A loan may be secured or unsecured. If it is a secured loan, the lender (referred to as a secured creditor) will be entitled to seize and sell the property over which the loan is secured in the event that the borrower defaults. The security over the property is referred to as a charge on the property. If the security is over real property, it is usually called a mortgage.

Mortgages A mortgage is security for a loan over real property owned by the borrower. When an individual or a business purchases real property it is frequently the case that the purchaser does not have enough of their own money to pay the purchase price in full, and they therefore need to borrow the money from a lender, usually a bank or other financial institution. That lender will usually insist upon being granted a mortgage over the property purchased. An owner of real property can also mortgage that property to raise additional funds for other purposes. The mortgagee is the person to whom the property is mortgaged — that is, they are the lender of the money. The mortgagor is the person who mortgages the property — that is, they are the borrower of the money. Old system land

If the mortgaged land is under old system title, the mortgage is in fact a transfer of ownership. ­Ownership of the land is transferred to the mortgagee who becomes the legal owner of the land while the mortgagor remains the equitable owner, entitled to have the legal ownership of the land returned to them when the debt is repaid. The mortgagor’s interest in the land is protected by a covenant in the deed of conveyance. This is a contractual obligation by the mortgagee to return legal ownership of the land to the mortgagor. It is 638  PART 3 Managing a business

called the ‘legal right of redemption’ and is usually subject to the condition that it will be lost in the event of breach by the mortgagor of the loan contract. The common law courts historically enforced this condition strictly, which meant that a mortgagor who was, for example, only one day late with a repayment could lose the right of redemption. The courts of equity considered this approach to be too harsh, and allowed a mortgagor to redeem the land even in the event of a late payment. This right was called the ‘equity of redemption’. When the mortgagor loses the right to redeem the property, the mortgagee becomes both legal and equitable owner of the land. This is known as ‘foreclosure’. Torrens system land

Most real property in Australia is now held under the Torrens system of title. Under the Torrens system, a mortgage operates as a charge instead of a transfer of ownership, and the mortgagor remains the owner of the mortgaged property. The mortgage is created by registration of the mortgage document in the land title registry. The only means of removing the mortgage is by registration of a release of the mortgage. Once registered, the mortgagee enjoys the benefits of indefeasibility of title. ACTIVIT Y 17.8 — REFLECT

What are the practical consequences of the differences between an old system mortgage and a Torrens system mortgage?

CAUTION!

Contrary to popular perception, when a person mortgages their home or other real property the bank or other lender does not become the owner of the real property. Rather, the mortgage is a type of charge on the real property, and the real property continues to be owned by the mortgagor.

Since it is registration that creates the mortgage, and not transfer of ownership as under old system title, it is possible to have more than one legal mortgage over a piece of land. Priority between registered mortgages usually depends upon the order of registration. An unregistered mortgage over Torrens system land is called an equitable mortgage. Unregistered interests in Torrens system land can be protected by caveat. While the terms ‘redemption’ and ‘foreclosure’ are still used in relation to Torrens system mortgages, their meanings have been modified. Redemption refers to the right of the mortgagor upon repayment of the loan to insist upon execution by the mortgagee of a registerable release of the mortgage. ­Foreclosure refers to the seizure of ownership of the land by the mortgagee upon default by the mortgagor (see below). Terms implied into a mortgage

The following terms are implied into mortgages by the common law, unless expressly varied or negated by the parties. •• The mortgagor must repay the principal and pay interest to the mortgagee in accordance with the terms of the mortgage. •• The mortgagor must insure against loss or damage by fire all buildings and improvements on the mortgaged property for their full insurable value. •• The mortgagor must pay all rates, taxes and charges as they become due. •• The mortgagor must keep all buildings and improvements on the mortgaged property in good repair. CHAPTER 17 Managing a business: making payments and recovering debts  639

•• The mortgagee is entitled to enter upon the mortgaged property at all reasonable times to inspect the buildings and improvements. •• If the mortgagor fails to insure the property or to keep it in good repair, or fails to pay any rates, taxes and charges, the mortgagee can remedy the default at the cost of the mortgagor. •• In the event of the property being destroyed or damaged by fire, the mortgagee can at their option apply the fire insurance money either in reinstatement of the mortgaged property or in repayment of the mortgage. •• All money spent by the mortgagee on insurance premiums, repairs, rates, taxes and charges, or in exercising any of their powers under the mortgage, are a further charge on the mortgaged property and the mortgagor must pay interest on the amount. •• If the mortgagor is in default for two months in payment of principal and interest or in the performance of any condition (express or implied) in the loan agreement, and the mortgagee has given the mortgagor one month’s notice of their intention to do so, the mortgagee can sell the mortgaged property. •• On default by the mortgagor, the mortgagee can demand payment of the principal and interest in full, notwithstanding that the date fixed for repayment has not yet arrived. •• The mortgagee must release the mortgage on payment of all money due under the mortgage. Remedies of the mortgagee

In the event of default by the mortgagor, the mortgagee has a number of remedies available to them (see figure 17.8).

Enforce the terms of the loan contract

Take possession of the mortgaged property

Exercise power of sale

Default by mortgagor

Foreclose

FIGURE 17.8

Appoint a receiver

Mortgagee’s remedies

•• Enforce the terms of the loan contract — the loan contract is a contract and as such the mortgagee can enforce it in the usual way. The mortgagee can bring a legal action to recover the amount of the debt. This is an unusual remedy because it does not take advantage of the mortgagee’s security for the debt. 640  PART 3 Managing a business

It would only be relied upon where the value of the property is less than the debt and the mortgagee is seeking to recover the shortfall after exercising their power of sale (see below). This remedy is not available if the mortgagee has elected to foreclose. •• Take possession of the mortgaged property — this process was much simpler under the old system of title. The mortgagee’s right to possession of the property was not dependent upon default by the mortgagor, but existed because the mortgagee was the legal owner of the property. The mortgagee could therefore take possession at any time. Under the Torrens system of title, however, the mortgage is only a charge on the land. The mortgagee is therefore only entitled to take possession in accordance with an express condition in the mortgage to that effect, or under the relevant State or Territory Torrens legislation, which empowers a mortgagee to take possession in the event of default. A mortgagee in possession is entitled to take all steps necessary to maintain the property, including incurring any costs necessary to bring the property into a saleable condition. If the mortgaged property is leased to a lessee, the mortgagee takes possession of the mortgaged property by receiving the rent payments directly from the lessee. •• Appoint a receiver — a receiver is a person appointed either by the court or by the mortgagee to manage the mortgaged property and to receive any rents and profits. A receiver is usually appointed if there is a business being operated by the mortgagor upon the mortgaged property. (Receivership is described in more detail in a later chapter.) Most mortgage documents expressly authorise the mortgagee to appoint a receiver in the event of default by the mortgagor. •• Foreclose — as explained above, under the Torrens system foreclosure is the process whereby the mortgagee becomes the owner of the mortgaged property. The mortgagee must first serve a statement of claim upon the mortgagor demanding payment of the principal and interest by a fixed date. If the mortgagor fails to comply for a statutory period — usually 6 months — the mortgagee can then foreclose. The default by the mortgagor must be a failure to repay all or part of the principal; a failure to pay interest or to comply with some other condition in the loan contract is not sufficient. In some jurisdictions the mortgagor cannot foreclose without first attempting to exercise their power of sale by public auction. Any shortfall between the value of the mortgaged property and the amount of the outstanding debt cannot be recovered from the mortgagor. These days it is unusual for a mortgagee to rely upon this remedy. The process is complicated and lengthy, and courts prefer to order a sale rather than grant foreclosure. Further, the mortgagee does not end up with any cash, only property. It may be used by a vendor-mortgagee who wants to recover the property due to the purchaser-mortgagor’s default. It could also be used when the market value of the property is less than the amount owed but the mortgagee anticipates that the value will increase in the near future. •• Exercise power of sale — the power of sale is the most effective, convenient and popular remedy available to a mortgagee. Most mortgage documents expressly authorise the mortgagee to sell the property in the event of default by the mortgagor. However, this power must be exercised subject to the requirements of State and Territory real property legislation protecting the interests of the mortgagor. This legislation usually provides that before the mortgagee can exercise their power of sale: •• a default must be made by the mortgagor, •• a notice of exercise of power of sale must have been served upon the mortgagor, and •• 30 days must elapse after service of the notice without payment or rectification. The legislation also requires the mortgagee to take reasonable care to ensure that the property is sold at market value. This requirement is an important protection for the mortgagor: if the mortgagee sells the property for less than market value, the shortfall between the sale proceeds and the debt payable by the mortgagor will be larger than necessary. However, this does not oblige the mortgagee to wait until a poor market has improved; the mortgagee is entitled to recover their money as soon as possible. CHAPTER 17 Managing a business: making payments and recovering debts  641

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949

Mutual Finance Ltd was the mortgagee of land owned by Cuckmere Brick Co Ltd to the sum of £50  000. The mortgage provided that if Cuckmere did not develop the land within 2 years of purchase Mutual Finance could exercise its power of sale. Cuckmere successfully obtained planning approval, but did not proceed with the development in time. Mutual Finance exercised its power of sale, and sold the property by auction. The advertisement did not refer to the planning approval. The property sold for £44  000. Cuckmere insisted that the property would have sold for £75  000 if the planning approval had been emphasised in the advertisement. The court decided that Mutual Finance had breached its duty to Cuckmere to take reasonable care to obtain a proper price, and that Mutual Finance was obliged to pay damages to Cuckmere.

The sale proceeds must first be applied to cover the cost of the sale, then to discharge the mortgages over the property in the order of priority. Any residue is payable to the mortgagor. If there is any shortfall between the sale proceeds and the outstanding amount, it can be recovered from the mortgagor as an unsecured debt. ACTIVIT Y 17.9 — REFLECT

Why is exercising the power of sale the ‘most effective, convenient and popular remedy available to a mortgagee’?

Securities over personal property The above rules relating to mortgages apply only when the security for a loan is real property. Charges over personal property are regulated by a different set of rules. Until recently, charges over personal property — referred to variously as ‘bills of sale’, ‘goods mortgages’ and ‘security interests’ — were regulated differently in each State and Territory. Since 2011, personal property charges have been regulated by Commonwealth legislation, the Personal Property Securities Act 2009 (Cth). Under the Act, ‘personal property’ means property other than land or fixtures. It includes: •• goods, •• inventory, •• motor vehicles, •• financial property including cash, bank accounts, and financial instruments, •• agricultural property including crops and livestock, •• intangible property including intellectual property and licences, •• certain personal and contractual rights, and •• proceeds of personal property. The Personal Property Securities (PPS) Register maintained by the PPS Registrar allows lenders to register their charges over personal property on a single, national register. Secured parties, buyers and other interested parties throughout Australia can search the PPS Register to find out if a charge is registered over personal property. A failure to register a charge over personal property on the PPS Register will not prevent the lender enforcing the charge against the borrower, but it will result in the charge being unenforceable against third parties. For example, if Johnny takes a loan from a bank in order to purchase a piece of equipment and the bank insists upon being granted a charge over the equipment as security for the loan, a failure by the bank to register the charge on the PPS Register will not prevent the bank from seizing the equipment upon default by Johnny as long as the equipment is still in Johnny’s possession. However, if Johnny has sold the equipment to Huang, the bank cannot seize the equipment from Huang. If the equipment is seized by another lender with a registered charge over the equipment, the bank cannot seize the property 642  PART 3 Managing a business

from the other lender. If, on the other hand, the charge was registered the bank can enforce its right to seize the equipment against any buyer or other person in possession of the equipment. This demonstrates the importance of any person making a substantial purchase of personal property checking the PPS Register before finalising the purchase. ACTIVIT Y 17.10 — RESEARCH

Go to the PPS Register website at www.ppsr.gov.au. What is the process for registering a charge over personal property?

Guarantees If Organicola borrows money from a lender it is likely that Johnny and Ash will be asked to provide personal guarantees for the loan. A guarantee is an arrangement whereby a third party (called the guarantor) promises to repay the loan to the lender/creditor in the event that the borrower/debtor refuses or is unable to do so. A lender will insist that a loan be guaranteed if the lender lacks confidence in the borrower’s ability to repay the loan, or if the borrower is unable to provide adequate security for the loan. A guarantee is a type of contract and as such the basic principles of contract law are applicable.

In the event that the guarantor is called upon to satisfy the debtor’s obligations, the rights of the creditor against the debtor are passed to the guarantor. This means that the guarantor can recover the money directly from the debtor. In practice, this right is usually of little benefit, since if the debtor has the money, the creditor would not have had to call upon the guarantor in the first place. CHAPTER 17 Managing a business: making payments and recovering debts  643

A guarantee will be automatically discharged if: •• the creditor discharges the debtor (e.g. upon payment of the debt), •• the creditor modifies the loan contract (e.g. by extending the time for payment) without the consent of the guarantor, or •• the creditor destroys or gives up any security for the loan. ACTIVIT Y 17.11 — REFLECT

Of what relevance is the decision of the High Court of Australia in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 to the granting of guarantees? (See an earlier chapter.)

Consumer credit If the business creditor is in the business of providing consumer credit, the business creditor is obliged to comply with the requirements set out in the National Credit Code. These requirements apply not only to recovery of an outstanding debt but also to the process of granting credit in the first place. The National Credit Code obliges providers of consumer credit to tell the debtor about their rights and obligations prior to entering into any credit arrangement, as well as the interest rates, fees and commissions. This is information that in the past was often hidden from the debtor until it was too late. Further, if the debtor loses their job or becomes sick, they can ask to have the loan contract changed so that they can better meet their repayments. Providers of consumer credit are required to be careful not to make credit contracts with debtors who would find it difficult to meet their repayments. A court can order changes to a contract if it is considered unjust. And in the event of default by the debtor, the credit provider can only recover the debt in accordance with the provisions of the National Credit Code. ACTIVIT Y 17.12 — RESEARCH

Visit the ASIC website at www.asic.gov.au/credit. What guidance is provided for lenders on this website?

The National Credit Code can be found in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth). It is administered by the Australian Securities and Investments Commission (ASIC).

Credit licences Any business that engages in credit activities in Australia must have an Australian credit licence (or an authorisation from a licensee).8 The term ‘credit activities’ includes: (a) providing credit to consumers in the form of a credit contract such as a personal loan, a credit card, a pay day loan or a housing loan; (b) providing credit to consumers in the form of a consumer lease such as a rental agreement for furniture or white goods where ownership never passes to the consumer (a lease containing a right to purchase the goods, such as a hire purchase contract, is regulated as a credit contract); and (c) providing credit services to consumers in relation to a credit contract or consumer lease, such as giving credit assistance to consumers or acting as an intermediary between lenders and consumers. The National Credit Code applies only to credit that is: (a) provided to a natural person or a strata corporation; (b) provided wholly or predominantly for personal, household or domestic purposes, or for residential investment; (c) charged for (or that may be charged for) by the lender; and (d) provided in the course of carrying on a business of providing credit in Australia or as part of, or incidental to, any other business carried on in Australia.9 8 National Consumer Credit Protection Act 2009 (Cth) ch 2. 9 National Credit Code s 5.

644  PART 3 Managing a business

Credit providers typically covered by the National Credit Code include banks, credit unions, building societies, finance companies and businesses offering sales contracts by instalment (i.e. hire purchase agreements). CAUTION!

The National Credit Code does not apply to all consumer credit. For example, if credit is provided to a consumer but the consumer is not required to pay interest or other fees, the National Credit Code will not apply.

CAUTION!

If a person is a financial adviser and their advice amounts to credit assistance under the National Credit Code, they will need to hold a credit licence or to be covered by a principal’s credit licence.

Some types of credit are not covered by the National Credit Code. A retailer who allows their customers to pay for goods or services on credit is exempted from the National Credit Code, unless the item being supplied is an interest in land or the supply of goods or services to the consumer is the result of unsolicited contact with the consumer. Other exemptions include: (a) short-term credit (i.e. credit for less than 62 days) except where the fees and charges exceed 5 per cent of the amount of the loan or where the interest rate is greater than 24 per cent per annum; (b) credit without express prior agreement (e.g. when a savings account falls into debit); (c) credit for which only an account charge is payable; (d) joint credit and debit facilities; (e) bill facilities (e.g. credit provided by an authorised deposit-taking institution); (f) insurance premiums payable by instalment; (g) credit provided by pawnbrokers; (h) credit provided by a trustee of a deceased person’s estate; (i) employee loans; and (j) margin loans (i.e. borrowing money to invest in shares and other financial products; this is regulated by Chapter 7 of the Corporations Act 2001 (Cth)).10 ACTIVIT Y 17.13 — RESEARCH

Visit the ASIC website at www.asic.gov.au/credit and briefly describe the process of applying for an Australian credit licence.

If the debtor declares that the loan is for business or investment purposes, the National Credit Code will not apply.11 Unfortunately, some credit providers encourage debtors to sign statements to the effect that the loan is for business or investment purposes in an attempt to avoid the application of the National Credit Code. In return the debtor is given a lower interest rate. Under National Credit Code s 13 such a statement is only presumptive rather than conclusive, and will therefore not necessarily relieve a credit provider of its obligations under the National Credit Code.

Responsible lending The National Consumer Credit Protection Act 2009 (Cth) imposes upon all holders of an Australian credit licence an obligation to engage in responsible lending.12 There are expected standards of behaviour that apply when a credit provider enters into a consumer credit contract or lease, suggests a credit 10 National Credit Code s 6. 11 National Credit Code s 13. 12 National Consumer Credit Protection Act 2009 (Cth) ss 117, 130, 140, 153.

CHAPTER 17 Managing a business: making payments and recovering debts  645

contract or lease to a consumer, or assists a consumer to apply for a credit contract or lease. The main obligation imposed upon credit providers is to ensure that they do not provide a credit contract or lease to a consumer, or suggest or assist a consumer to enter into a credit contract or lease that is unsuitable for them. The Act requires credit providers to assess whether the credit contract or lease is unsuitable for the consumer’s requirements and whether the consumer has the capacity to meet their financial obligations under the credit contract or lease. In addition to prohibiting a credit provider from entering into a loan contract before a proper credit assessment has been conducted, the Act also prevents a credit provider from making an unconditional representation the consumer is eligible to have the loan or enter into the lease prior to the assessment. Breaches of the responsible lending obligations can result in a range of sanctions including criminal penalties of up to 2 years imprisonment and/or 200 penalty units ($22  000), and civil penalties up to 2000 penalty units ($220  000). LAW IN CONTEXT: LAW IN PRACTICE

Payday lenders Payday lenders offer short-term cash loans between paydays to people who are often ineligible for a loan from formal institutions. They attract customers with the promise of quick, easy and convenient cash, but often there are hidden traps, including exceedingly high interest rates. These interest rates may initially appear reasonable — say, 10 per cent interest on a two week loan — but when the interest rate is converted into an annual rate, one realises just how high they are: sometimes up to 70 times higher than credit card interest rates. If they are not paid by the due date, these small payday loans can quickly become large amounts to be repaid. Payday lenders are obliged to comply with the National Credit Code. Like all credit providers, they are required to be careful not to make contracts with debtors who would find it difficult to make the repayments. A court can order changes to a contract if it is considered unjust. The National Credit Code also provides protection for the debtors if they get into financial trouble. In 2013 the National Credit Code was amended and new restrictions were imposed upon payday lenders. Short term credit contracts (where the term is 15 days or less and the amount is $2000 or less) have been banned. Small amount credit contracts (where the term is between 16 days and 1 year, the amount is $2000 or less and the loan is unsecured) are subjected to the following additional restrictions. • In conducting a credit assessment the credit provider must check the debtor’s bank statements over the last 90 days. • There is a presumption of unsuitability where the debtor is already in default under another small amount credit contract or where they have already entered into 2 or more such credit contracts in the last 90 days. • If the debtor receives more than half of their income from social security, the repayments cannot exceed 20% of their gross income. • Credit providers in the business of providing small amount credit contracts must display certain warning signs and notices on their premises, on their website and when contacted by phone. Note that these restrictions do not apply if the credit provider is an ‘authorised deposit taking institution’ such as a bank.

Consumer protection In this section we consider the range of other measures included in the National Credit Code to protect debtors. Documents and information

Any credit arrangement between the credit provider and the debtor must be in the form of a written contract signed by both parties.13

13 National Credit Code s 14.

646  PART 3 Managing a business

Before having the debtor sign a credit contract the credit provider must provide the debtor with: •• a pre-contractual statement, which sets out the details of the fees and charges, and •• an information statement, which sets out the debtor’s rights and obligations.14 The pre-contractual statement must set out:15 •• the amount of credit to be provided, or if the amount is not ascertainable then the maximum amount of credit to be provided, •• the annual percentage rate or rates under the contract, •• the method of calculation of the interest charges and the frequency with which interest charges are to be debited, •• if the contract is to be paid out within 7 years, the total amount of interest payable, •• the amount of the repayments or the method of calculating the amount, the number of the repayments, and if the contract is to be paid out within 7 years, the total amount of the repayments, •• the amount and frequency of any credit fees and charges, •• how the debtor will be informed of any changes to the interest rate, fees or charges, •• any default rate of interest, •• whether enforcement expenses would be paid by the debtor in the event of a breach, and •• details of any commission to be paid. The pre-contractual statement must be accompanied by an information statement. The information statement is Form 5 of the Regulations to the National Credit Code, and explains the debtor’s rights and obligations under the Code. ACTIVIT Y 17.14 — RESEARCH

Download a copy of the Form 5 Information Statement from www.asic.gov.au. Make a list of the matters addressed in the statement.

Once the contract is signed by the credit provider, a copy of the signed contract must be sent to the debtor within 14 days, and regular account statements sent: •• at least every 40 days for continuing credit contracts accessed by a card, •• between 40 days to 3 months for other continuing credit contracts, and •• no longer than every 6 months for any other credit contract. Restrictions on advertising

If a credit provider places an advertisement that refers to the cost of any credit available, it must contain the annual percentage rate or rates, and a statement detailing any fees or charges that may apply. It is an offence under the National Credit Code to make a false or misleading representation about the credit contract or any material relating to it. If a debtor loses any money as a result of a false or misleading representation then the credit provider will be liable to refund them this money.16 The National Credit Code provides that a comparison rate must be included in any advertisement for a fixed term credit product that contains an annual percentage rate. A comparison rate is a tool to help debtors identify the true cost of a loan. It is a rate that includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.17 Early repayment

Regardless of the terms of the credit contract, the debtor always has the right to pay out the contract early.18 14 National Credit Code s 16. 15 National Credit Code s 17. 16 National Credit Code pt 9. 17 National Credit Code pt 10. 18 National Credit Code ss 26, 82.

CHAPTER 17 Managing a business: making payments and recovering debts  647

Varying the loan contract

The terms of the credit contract may entitle the credit provider to make a change to the credit contract by, for example, varying the interest rate or the fees and charges.19 If the credit provider wants to change the amount of a fee or charge or the frequency or time for its repayment or change the way in which interest is calculated, at least 20 days’ written notice to the debtor is required before the change takes effect (unless the change reduces the debtor’s obligations). If the credit provider wants to change the interest rate, it is generally required to notify the debtor not later than the day on which the change takes effect. If the credit provider wants to change the amount, frequency or method of calculation of repayments, it must give the debtor at least 20 days’ written notice before the change takes effect (again, unless the change reduces the debtor’s obligations). Hardship

If the debtor is unable to make repayments due to temporary hardship, such as illness or unemployment, and they are unable to come to any arrangement with the credit provider directly, they have the right to apply to a court for an order that changes be made to the credit contract.20 The court may decide that the debtor’s circumstances entitle the debtor to a more lenient arrangement and may order the credit provider to make changes to the contract, such as by reducing the quantity or frequency of repayments. Unjust credit contracts

A court can ‘re-open’ and order that changes be made to a contract, mortgage or guarantee that it considers to be unjust.21 In deciding whether a credit contract is unjust the court will consider a range of factors including: •• the relative bargaining power of the parties, •• whether the provisions were the subject of negotiation, •• whether any of the provisions are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of the party, •• the age or physical or mental condition of the debtor, •• the form of the contract and the intelligibility of the language used, •• whether independent legal or other expert advice was obtained, •• the extent to which the provisions and their practical effect were explained to the debtor, •• any unfair pressure, undue influence or unfair tactics, •• steps taken to ensure the debtor understood the nature and implications of the transaction, •• whether the credit provider knew or could have ascertained by reasonable inquiry that the debtor could not pay or could not pay without substantial hardship, and •• the terms of other comparable transactions involving other credit providers. LAW IN CONTEXT: LAW IN PRACTICE

Low-doc loans A ‘low-doc’ (low documentation) loan is one where the debtor is not required to give the credit provider as many documents to prove their income, assets and liabilities when applying for the loan. The debtor is still required to apply in writing and sign the loan agreement, but they may not be required to produce the payslips, tax returns or other proof of income that a credit provider would normally require. Low-doc loans are useful if the debtor is unlikely to qualify for a standard loan, but there are usually special conditions that apply. The debtor may have to: • pay a higher interest rate, • pay additional fees and charges, including ‘risk fees’,

19 National Credit Code pt 4 div 1. 20 National Credit Code s 74. 21 National Credit Code s 76.

648  PART 3 Managing a business

• pay for mortgage indemnity insurance (insurance that protects the credit provider in the event of default by the debtor), • contribute more of their own money towards the purchase price, • offer additional security for the loan, and/or • accept a loan for a shorter period, such as 12 months, which may mean that the loan will have to be refinanced at the end of this period with additional costs. Low doc loans are usually marketed to people with a poor credit history, casual workers or self-employed people. The credit provider may base their decision to offer the loan on whether they can recover the amount of the loan from selling the security property. In other words, the fact that they approve the loan does not mean the credit provider believes the debtor can afford the repayments. It is therefore important that the debtor realise that they have to decide for themselves whether or not they can afford the loan. Restrictions on enforcement

The National Credit Code imposes substantial restrictions upon the credit provider’s ability to enforce the credit contract.22 •• The credit provider will usually have to serve a default notice on the debtor before it can commence enforcement proceedings. This default notice will give the debtor 30 days from the date of the notice to catch up on payments or seek further advice. •• A debtor can negotiate for a postponement of enforcement proceedings. If that is unsuccessful, they can apply to the court for a postponement. •• The credit provider must obtain a court order before repossessing mortgaged goods if the amount outstanding is less than 25 per cent of the total credit provided or $10  000 (whichever is less). This restriction doesn’t apply to a continuing credit contract (e.g. a credit card) or if the credit provider has reasonable grounds to believe the debtor has or intends to remove or dispose of the goods. •• The credit provider cannot enter any part of residential premises to take possession of mortgaged goods without authorisation from the court or the written consent of the occupier. •• Within 14 days after taking possession of goods, the credit provider must give the debtor a written notice stating the estimated value of the goods; the enforcement expenses; the debtor’s rights (they can recover the goods by paying arrears and expenses or by paying out the credit contract within 21  days); and the debtor’s obligations (failure to pay within 21 days may result in the goods being sold). If the debtor does not exercise their rights within 21 days, the credit provider can sell the goods for the best price reasonably obtainable. •• After the sale the credit provider must give the debtor a written notice detailing the amount realised on sale; the net proceeds of the sale; the net amount still due under the credit contract; and details of further recovery action to be taken against the debtor. If the proceeds from the sale of the mortgaged goods do not fully discharge the debt, the debtor is still liable for the balance remaining under the credit contract.

Consequences of breach If the credit provider breaches the Code it may be subjected to: •• civil penalties up to $550  000 and criminal penalties up to $11  000, and •• civil action by any person suffering loss or affected by the breach. ACTIVIT Y 17.15 — RESEARCH

What is the procedure for making a complaint about a breach of the National Credit Code?

22 National Credit Code s 88.

CHAPTER 17 Managing a business: making payments and recovering debts  649

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 17.16 What is the process for recovering an outstanding debt? 17.17 How are legal proceedings commenced against a debtor? 17.18 What are the three possible responses by a debtor to legal proceedings? 17.19 In what ways can a judgment debt be enforced against a judgment debtor? 17.20 What is the difference between a secured loan and an unsecured loan? 17.21 What is the difference between a mortgage of (a) old system land, and (b) Torrens system land? 17.22 What are (a) the equity of redemption, and (b) foreclosure? 17.23 What conditions are implied into mortgages? 17.24 What are the remedies available to a mortgagee in the event of default by a mortgagor? 17.25 What are the rules regulating the exercise by a mortgagee of their power of sale? 17.26 What is a personal property security? 17.27 What are the consequences of failing to register a personal property security? 17.28 What is a guarantee and when will a guarantee be required by a creditor? 17.29 How does the National Credit Code seek to protect debtors? 17.30 What is a ‘credit provider’ within the meaning of the National Credit Code? 17.31 What is a ‘payday lender’ and how are they regulated? 17.32 To what kinds of loan does the National Credit Code not apply? 17.33 What documentation is a credit provider obliged to provide to the debtor? 17.34 How often must a credit provider issue account statements? 17.35 What limitations are imposed upon credit providers when advertising? 17.36 When can the credit provider change the credit contract? 17.37 In what circumstances can the debtor apply for changes to be made to a contract? 17.38 When a credit provider wishes to enforce the credit contract, what are their obligations? 17.39 What are the consequences of breaching the National Credit Code?

In conclusion •• The four principal forms of payment are cash; cheques and bills of exchange; credit cards; and online payments. Cash payments must be in legal tender. A bill of exchange, of which a cheque is a particular type, is a written order by one person (the drawer) directed to another person (the drawee) instructing them to pay money to a third party, called the payee. A credit card transaction is regulated by a complex series of contracts between the card holder and the card issuer, between the card holder and the vendor selling the product, between the vendor and its own bank, between the vendor’s bank and the card issuer, and between the card issuer and a credit card association such as MasterCard or Visa. Online payments are regulated by the ePayments Code, which among other things addresses liability for unauthorised transactions. •• A creditor can recover an unpaid debt by issuing a letter of demand, attempting ADR, commencing proceedings, and enforcing the judgment debt by issuing of a writ of execution, exercising of power of sale, seeking a garnishee order, and/or commencing bankruptcy or winding up proceedings. Loans may be secured by a mortgage of real property or a charge over personal property. Special rules apply if the debt is covered by the National Credit Code.

650  PART 3 Managing a business

JOHNNY AND ASH

[Johnny and Ash are in the back of a taxi returning from their meeting with the bank manager. They both look pleased with themselves.] Johnny — That went well. Ash — Yes, it looks like they will give us the money. They seem satisfied that we are managing our financial obligations, and we have provided adequate security for the loan. Johnny — I am a little nervous about putting the factory equipment up as security. Ash — Yes, but they were never going to loan us the amount we were looking for without some kind of security. Johnny — Doesn’t that mean we could lose the equipment if we default on the loan? Ash — Yes it does. Johnny — Well then, we had better make sure that making our loan repayments is a priority. Ash — It is a priority. But then, so is paying tax, paying for insurance and paying our employees. Johnny — Argh! Will there be any money left over for us?

CHAPTER 17 Managing a business: making payments and recovering debts  651

QUIZ 1 A vendor can refuse to accept payment in fifty cent pieces if the total amount payable is more

than (a) $5. (b) $10. (c) $50. (d) there is no such limit. 2 If in the same day a person makes two separate deposits of $5000 each in cash into a bank account (a) the transactions do not have to be reported to AUSTRAC. (b) the money is automatically forfeited to AUSTRAC. (c) the person may be found to have committed a criminal offence. (d) the bank is not obliged to pay interest on the deposits. 3 If a cheque is crossed with two parallel lines (a) it is cancelled. (b) it is payable only to the person named as payee on the cheque. (c) it is only payable into an account with a financial institution. (d) it cannot be transferred or endorsed to another person. 4 A credit card payment is regulated by the contract between (a) the card issuer and the card holder. (b) the card holder and the vendor. (c) the vendor and the acquiring bank. (d) the acquiring bank and the card issuer. (e) all of the above. 5 If a thief uses a bank customer’s credit card, the customer may not be entitled to insist that the transaction be reversed if (a) the customer did not know that their card had been stolen. (b) the vendor did not require the thief to use a PIN. (c) the transaction took place after the customer told the bank that the card had been lost or stolen. (d) the customer was careless in keeping their PIN confidential. 6 An order of the court directing an officer of the court such as a sheriff to enforce a judgment by seizing and selling the judgment debtor’s property is called (a) a garnishee order. (b) a sequestration order. (c) a writ of execution. (d) an examination summons. 7 ‘Foreclosure’ in relation to a mortgage of Torrens system land refers to the mortgagee’s right to (a) become the owner of the mortgaged property. (b) take possession of the mortgaged property. (c) see the mortgage property. (d) sue the mortgagor for breach of contract. 8 A ‘mortgage’ is (a) a written order by one person directed to another person instructing them to pay money to a third party. (b) a type of cheque. (c) a charge over real property. (d) a receipt. 652  PART 3 Managing a business

 9 If a charge over a company’s assets is not registered on the PPS Register

10

11

12

13

(a) it is unenforceable against the company. (b) it is unenforceable against the lender. (c) it is unenforceable against a liquidator of the company. (d) all of the above. Which of the following is not one of the requirements that must be satisfied before a lender will be a ‘credit provider’ within the meaning of the National Credit Code? (a) The lender must be a bank, building society, credit union, or finance company. (b) The lender must provide credit to customers. (c) The credit must be mostly for personal, household or domestic purposes. (d) The lender must charge for the credit. The National Credit Code does not apply to (a) credit cards. (b) pawnbrokers. (c) bank overdrafts. (d) housing loans. According to the National Credit Code, when do the pre-contractual statement and the written contract have to include the total amount of repayments? (a) Never. (b) Only if the loan is for less than 7 years. (c) Only if the loan is for more than 7 years. (d) Always. According to the National Credit Code, a mortgagee can repossess mortgaged goods without a court order if (a) the mortgagor is in default. (b) both the mortgagor and the guarantor are in default. (c) the amount outstanding is less than 25 per cent of the loan amount. (d) the credit contract is a continuing credit contract.

EXERCISES EXERCISE 17.1 — CHEQUES

Johnny writes a cheque on behalf of Organicola payable to Marissa. Charles steals the cheque from Marissa, and endorses it to Will. Can Will present the cheque for payment by Organicola’s bank? Include in your answer consideration of the distinction between an order cheque and a bearer cheque, and the effect of crossing the cheque and marking it ‘not negotiable’. EXERCISE 17.2 — CREDIT CARDS

When Ash receives her monthly credit card statement she notices a transaction in the amount of $500 for the purchase of an airline ticket that she did not authorise. (a) What should Ash do to get the transaction reversed? (b) In what circumstances will Ash be unable to have the transaction reversed? EXERCISE 17.3 — DEBT RECOVERY

Johnny has ordered some office furniture from Monkey Pty Ltd. When the furniture is delivered, the delivery truck causes substantial damage when it backs into the door above the delivery dock at the back of the Organicola factory. The quote for repair to the door is for $5000. Monkey Pty Ltd agrees to reimburse Johnny for the cost, but fails to send Johnny the money as promised. Advise Johnny about how he can recover the debt from Monkey Pty Ltd. CHAPTER 17 Managing a business: making payments and recovering debts  653

EXERCISE 17.4 — MORTGAGES

Maria’s house, presently worth $1.25 million, is mortgaged to the State Bank. (The property is under the Torrens system.) Maria still owes the bank $900  000 under the mortgage, and has missed her last four monthly mortgage payments. (a) What are the options available to the State Bank to recover the outstanding debt, and what are the bank’s legal responsibilities in exercising each of those options? (b) How would your answer differ if the bank’s mortgage was not registered? EXERCISE 17.5 — NATIONAL CREDIT CODE

In an effort to encourage greater customer loyalty, Maria has come up with a scheme where customers at The Lame Duck can apply to join the Monthly Munchers Club. In return for payment of a monthly fee, the customers only pay for their meals at the end of the month. At the end of the month they are emailed an invoice for the total cost of their meals for the month plus the monthly fee in the amount of 7 per cent of the cost of their meals. The invoice is payable within 7 days. Is this scheme regulated by the National Credit Code?

KEY TERMS affidavit of debt  An affidavit supporting the existence of a debt. affidavit of service  An affidavit describing the way in which a notice or document such as a statement of claim was served on another person. alternative dispute resolution (ADR)  A range of non-litigious methods for resolving disputes, including mediation, arbitration and conciliation. arbitration  A method of dispute resolution where an independent and expert third party (an arbitrator) resolves the dispute. Australian Transaction Reports and Analysis Centre (AUSTRAC)  Australia’s anti-money laundering and counter-terrorism financing regulator. bank cheque  A cheque drawn by a financial institution upon itself. bankruptcy  A statutory process whereby the assets of an insolvent individual are sold and used to repay their creditors. bearer cheque  A cheque made payable to ‘bearer’, i.e. anyone who has possession of the cheque. bill of exchange  A written order by one person (the drawer) directed to another person (the drawee) instructing them to pay money to a third party (the payee). cash  Money in the form of notes and coins. caveat  A recording on the land title register that informs others of an unregistered interest and prevents further dealings with the property without the consent of the caveator or the removal of the caveat. charge  A security for a loan over property. cheque  An unconditional order in writing requiring a financial institution to pay on demand a sum of money. common law  The category of case law rules and principles developed by the common law courts in Britain. contempt of court  A failure to follow a court order or the direction of a judge. covenant  A contractual obligation. credit card  A plastic card that facilitates a system of payment whereby the card issuer undertakes payment on behalf of the card holder, and the amount paid becomes a debt payable by the card holder to the card issuer. creditor  A person to whom money is owed by another. crossing  The making of two parallel lines across the face of a cheque. A crossed cheque can only be paid into the bearer’s, payee’s or transferee’s own bank account. debit card  A plastic card where the cardholder deposits money into an account with a card issuer and then periodically ‘tops it up’. 654  PART 3 Managing a business

debtor  A person who owes money to another. default judgment  Judgment automatically issued in favour of the plaintiff in the absence of a defence filed by the defendant. defendant  The person against whom either a civil action or a criminal action has been brought. drawee  The financial institution or person to whom a cheque or bill of exchange is directed and who is obliged to make payment. drawer  The person who writes a cheque or bill of exchange. endorsement  A cheque is endorsed if the payee writes on the cheque that it is now payable to a transferee and signs it. equity  The category of case law rules and remedies based on fairness and justice, developed to supplement the common law. examination summons  A process by which the court examines a debtor’s financial position to ascertain their ability to pay the debt. Also known as ‘investigation summons’ or ‘unsatisfied judgment summons’. foreclosure  Upon default by the mortgagor, the mortgagee is entitled to seize (Torrens system land) or retain (old system land) ownership of the mortgaged property. garnishee order  A court order facilitating repayment of an outstanding debt by directing a third party such as the debtor’s employer to make payment directly to the creditor. guarantee  An arrangement whereby one person (called the guarantor) promises to repay a loan in the event that the debtor refuses or is unable to do so. guarantor  A person who agrees to accept responsibility for repaying a loan in the event that the debtor fails to do so. improvements  Buildings, fixtures and other additions to real property. indefeasibility of title  A person who registers their interest in land (e.g. as owner, mortgagee, or lessee) under the Torrens system takes priority over any earlier, unregistered interest, even if they knew about it. judgment debtor  A debtor ordered by the court to repay the debt. judgment creditor  A creditor recognised by the court as entitled to repayment of the debt. legal tender  Currency that cannot legally be refused in payment of debt. letter of demand  A letter insisting upon payment of an outstanding debt or performance of an outstanding obligation by a fixed date. litigation  Legal proceedings brought by one member of the community against another. Also known as ‘civil action’. mediation  A method of dispute resolution whereby a third party (a mediator) assists the parties to settle the dispute themselves. mortgage  A security for a loan given over real property owned by the borrower. mortgagee  A person who takes a mortgage over real property, typically in exchange for a loan to the owner of the real property. mortgagor  A person who grants a mortgage over real property, typically in exchange for a loan from the mortgagee. negotiable  Able to be transferred, where the transferee will acquire good title even if the transferor did not have good title. nemo dat quod non habet  (‘no one gives what one does not have’)  The rule that a purchaser of goods from a seller who does not own the goods cannot acquire or pass on ownership of the goods. not negotiable  A cheque with ‘not negotiable’ written across its face can still be transferred to another person, but that person can no longer acquire better title than the transferee. old system title  A system of proving ownership of real property by establishing a chain of title through a series of documents. order cheque  A cheque made payable to a particular person. personal property  All forms of property other than real property. Also known as ‘chattels’. CHAPTER 17 Managing a business: making payments and recovering debts  655

plaintiff  The person who commences a civil action against another person. power of sale  The ability of a secured creditor such as a mortgagee to sell the charged property upon default by the debtor and to apply the proceeds of sale towards repayment of the debt. real property  Land, buildings and fixtures. receiver  A person appointed to manage an asset or a business on behalf of a secured creditor with a view to realising the asset or business and ensuring repayment of the debt. redemption  The right of the mortgagor upon repayment of the loan to a release of the mortgage (Torrens system land) or to once again become owner of the land (old system land). release  A document removing a mortgage from over real property. secured creditor  A lender entitled to seize and sell the property over which the loan is secured in the event that the borrower defaults. service  Formal delivery of a document or notice. Torrens system  The Registrar of Titles in each State or Territory maintains a register in which they record the details of all land and all persons holding interests in the land. winding up  A statutory process where the assets of an insolvent corporation are sold and used to repay the corporation’s creditors. Also known as ‘liquidation’. writ of execution  An order of the court directing an officer of the court such as a sheriff to enforce a judgment by seizing the debtor’s property, auctioning it, and using the proceeds to repay the debt. Also known as a ‘warrant of execution’.

ACKNOWLEDGEMENTS Photo: © Goodluz / Shutterstock.com Photo: © Nonwarit / Shutterstock.com Article: © ABC News, Eleanor Bell, 31 January 2012, ‘Consumers warned over tap-and-paytechnology’, http://www.abc.net.au/news/2012-01-30/consumers-warned-over-tap-and-pay-technology/3801162

QUIZ ANSWERS

1. a  2. c  3. c  4. e  5. d  6. c  7. a  8. c  9. c  10. a  11. b  12. b  13. d 656  PART 3 Managing a business

CHAPTER 18

Managing a business: insurance and taxes LEA RNIN G OBJE CTIVE S 18.1 How can insurance minimise the risk of something going wrong? What are the rights and obligations of the insurer and of the insured? 18.2 What are the tax implications of operating a business? What are the different forms of tax payable by a business?

JOHNNY AND ASH

[Johnny and Ash are in office of their new Organicola factory. Ash is sipping from a carton of Organicola Red and looking out through the open door and into the factory. Johnny is reading a document on his laptop screen.] Johnny — Well, I can see why we still aren’t making as much money as we thought we would. Ash — I think we are doing just fine for a relatively new business. But what do you mean? What are you looking at there? Johnny — It’s the latest P&L from our accountant. Do you realise how much we are spending on insurance premiums for the business? And don’t get me started about this tax bill. Ash — Well, both of those types of payment are important, and largely unavoidable. Johnny — Well, I suppose we have to pay taxes, but insurance isn’t compulsory is it? Ash — Some insurance is compulsory, such as workers compensation insurance and certain forms of motor vehicle insurance, but most insurance isn’t compulsory. Johnny — So do we really need it? We seem to have quite a few different types of insurance policy, and many of them are expensive! And we don’t seem to get any benefit from the insurance. We pay these regular premiums but since we haven’t made any claims we aren’t getting anything in return. Ash — I don’t agree. We are at least getting peace of mind in return. More importantly, the payment of these insurance premiums is a strategic investment. Johnny — What do you mean?

CHAPTER PROBLEM

As you make your way through this chapter, consider the ways in which the payment of insurance premiums by a business is a strategic investment.

Introduction In this chapter we explore in detail two financial matters that have been touched upon briefly in previous chapters: paying tax, and taking out insurance to protect the business from the financial consequences of something going wrong. An understanding of the legal rules associated with these two matters is essential for any business organisation, large or small.

18.1 Taking out insurance LEARNING OBJECTIVE 18.1 How can insurance minimise the risk of something going wrong? What are the rights and obligations of the insurer and of the insured?

There are many ways in which a business might suffer loss or harm. The loss may arise from natural causes, from the deliberate or careless actions of another, or from legal proceedings brought against the business for breach of tort law or breach of contract. Insurance is a way for the business to minimise the financial consequences of such loss, and in this section we consider the rules regulating insurance. Insurance does not abolish the risk of loss entirely. Rather it is a way of ‘spreading’ the risk amongst a large group of participants. Instead of one member of a group bearing the loss alone, each member of the group makes a relatively small financial contribution (the payment of insurance premiums) and the member who suffers actual loss from an unexpected event is compensated from the collective funds. 658  PART 3 Managing a business

Types of insurance The two main categories of insurance are: 1. life insurance, and 2. general insurance.

Life insurance With a life insurance policy, the insurer agrees to pay an agreed sum upon the insured’s death or upon the attainment by the insured of a particular age. There is typically no relationship between the amount paid out and the loss incurred as a result of the death or other trigger event. There are various types of life insurance policy. •• A whole of life policy provides for the payment of a specific sum upon the insured’s death. •• A term policy provides for the payment of a specific sum upon the insured’s death during a specific period. •• An endowment policy provides for the payment of a specific sum when the insured dies or reaches a certain age. •• A pure endowment policy is the same as an endowment policy except that if the insured dies before the specified date, the insurer is only obliged to refund the premiums. •• An annuity policy provides for the payment by the insurer to be made following the retirement but prior to the death of the insured; the payment is in the form of periodic amounts paid by the insurer until the insured’s death. •• An accident and sickness or disability policy provides for the payment of a specific sum upon the insured becoming ill or injured. Provision can also be made for the loss of earnings as a result of illness or injury. CHAPTER 18 Managing a business: insurance and taxes  659

General insurance Forms of general insurance include property insurance, liability insurance and motor vehicle insurance. A property insurance policy provides for the insured to be indemnified upon the occurrence of loss of or damage to particular real or personal property. Property can be insured against loss from fire, storm and tempest, water damage, theft, explosion, lightning, and the impact by vehicles. A liability insurance policy provides for the insured to be indemnified in the event of a legal claim against them by a third party. Examples of liability insurance include the following. •• A public liability insurance policy protects the insured against legal claims against them by third parties for death, injury, loss or damage caused by their negligent acts or omissions. •• A professional indemnity insurance policy protects professionals such as solicitors, accountants and doctors against legal claims by third parties. •• A product liability insurance policy protects manufacturers, distributors and importers of products against legal claims by third parties arising as a result of defects in the product. There are also various types of motor vehicle insurance: •• Each jurisdiction has legislation that obliges all motorists to take out a compulsory third party motor vehicle insurance policy to protect them against legal claims by third parties for death or injury caused by the motorist’s careless driving. •• A motorist can also elect to take out third party property motor vehicle insurance, which will protect them against legal claims for damage caused to the property of third parties. •• A comprehensive motor vehicle insurance policy will also permit the motorist to be indemnified for injury to them and damage to their own property.

Indemnity versus contingency insurance Most insurance contracts are indemnity contracts. This means that the purpose of the contract is to indemnify the insured person for the loss that they have suffered. The insured is not to make a profit from the loss. The most that they can recover from the insurer is the amount necessary to compensate them for their loss. Life insurance and personal accident policies are contingency contracts rather than indemnity contracts. This means that upon the happening of the particular event, the insured will be paid a fixed sum regardless of the actual amount of their loss.

Insurance regulation In this section we consider how the law regulates insurance contracts.

Legislation The basic principles of insurance law are common law principles, but a number of important Federal statutes replace, add to or modify the common law principles. The Insurance Act 1973 (Cth) sets out the minimum levels of capital and solvency required for insurers in the market. The Health Insurance Act 1973 (Cth) regulates public health care in Australia (i.e. ­Medicare). The Insurance Contracts Act 1984 (Cth) applies to most insurance contracts and seeks to ensure that a fair balance is struck between the interests of the insurer and those of the insured. The Insurance Acquisitions and Takeovers Act 1991 (Cth) regulates the ownership and control of Australian insurance companies. The Life Insurance Act 1995 (Cth) and the Marine Insurance Act 1909 (Cth) regulate life insurance and marine insurance respectively. And the Corporations Act 2001 (Cth) ch 7 regulates the business activities of insurers as well as insurance agents and brokers. In some States, additional State legislation empowers various statutory authorities to regulate certain types of statutory insurance. For example, in New South Wales the Motor Accidents Compensation Act 1999 (NSW) empowers the Motor Accidents Authority to regulate compulsory third party motor liability insurance.

Codes of practice The Australian Prudential Regulation Authority (APRA) is the regulator of banks, insurance companies and superannuation funds in Australia. It administers prudential frameworks for both general 660  PART 3 Managing a business

insurance providers and life insurance providers. APRA, in conjunction with the insurance companies, has also developed a number of insurance codes of practice. These codes of practice are voluntary. The General Insurance Code of Practice has been adopted by almost all of the general insurers in ­Australia. The Code seeks to ensure that consumers are fully informed about insurance products and documentation, that insurers offer improved standards of service, and that consumers have a fair complaints and dispute resolution system. ACTIVIT Y 18.1 — RESEARCH

View the General Insurance Code of Practice at www.codeofpractice.com.au. Summarise the process of making a complaint about a provider of general insurance.

Insurance contracts An insurance contract is a contract whereby an insurer, in return for the payment of a sum of money (the insurance premium), agrees to indemnify the insured against the risk of particular loss or the happening of a particular event.

Making the contract If Johnny decides to take out insurance, the process of arranging the insurance contract will be as set out in figure 18.1. A cover note is a form of temporary or interim insurance that will cover Johnny for a relatively short length of time, usually one month. It will usually be issued by the insurer over the telephone as soon as Johnny contacts the insurer, so that Johnny can be reassured that he is protected immediately. The proposal form is a document — either in hard copy or electronic format — issued by the insurer. It asks Johnny a series of questions, the answers to which will enable the insurer to assess the risk and make a decision whether or not to grant insurance. The completion and submission of the proposal form by Johnny is an offer by Johnny that the insurer then decides whether or not to accept.

Johnny contacts insurer to request insurance

Insurer issues cover note (temporary insurance)

Insurer sends proposal form to Johnny

Johnny pays premium

Insurer accepts risk

Johnny completes and returns proposal form

Insurer issues insurance policy

. FIGURE 18.1

The process of arranging insurance

The premium is the amount payable by Johnny in return for the protection provided by the insurance contract. The premium can be paid either as a lump sum or at regular intervals. The insurance policy is the document that sets out the terms of the insurance contract. CHAPTER 18 Managing a business: insurance and taxes  661

ACTIVIT Y 18.2 — RESEARCH

Visit the website of a major Australian insurance company. Does the company offer business insurance? What does this insurance cover? What is the process of applying for business insurance?

Insurance agents and brokers It is common for insurance to be arranged through an intermediary. An insurance agent acts on behalf of a particular insurer. The insurer will be liable for the acts or omissions of the insurance agent. An insurance broker, on the other hand, operates independently and arranges insurance on behalf of the insured. An insurance broker owes a duty of care to the insured.

Insurable interest At common law, the insurance contract will not be enforceable unless the insured had an insurable interest in the subject matter of the contract at the time the contract was made. This means that the insured will benefit from the property being preserved and suffer a loss if the property is damaged or destroyed. One of the reasons for this requirement is that it prevents an insurance contract from being no more than a contract of wager: if the insured could insure property in which they have no interest, the arrangement with the insurer would be nothing more than a bet that the property would somehow be damaged or destroyed. The Insurance Contracts Act 1984 (Cth) has modified the common law position. In relation to general insurance (other than personal accident or disability insurance), the insurance contract will not be regarded as void simply because the insured lacked an insurable interest at the time the contract was made. The Act also provides that it is not necessary for the insured to have a property interest in the subject matter of the contract. The only requirement is that the insured would suffer some form of financial loss in the event of damage to or destruction of the subject matter of the contract. Examples of persons with insurable interests include: •• the owner of property, •• the mortgagor of property, •• the lessor and the lessee of property, •• a person responsible for transporting goods, and •• a creditor in relation to a debtor. A person can also take out life insurance even if they did not have an insurable interest in the life insured at the time the contract was made.

Duty of disclosure At common law a contract of insurance is a contract uberrimae fidei, which means a contract of utmost good faith. This is reflected in the Insurance Contracts Act 1984 (Cth) which provides that: 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.1

This duty of utmost good faith will be breached by the insured if they fail to inform the insurer about a matter of relevance to the risk being assumed by the insurer. For example, if a business taking out public liability insurance fails to inform the insurer about a letter received from a customer threatening legal action, the business will have breached its duty of utmost good faith. The duty of utmost good faith will be breached by the insurer if, for example, they fail to bring to the insured’s attention the consequences of a breach of a term of the insurance contract. 1 Insurance Contracts Act 1984 (Cth) s 13.

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Australian Associated Motor Insurers Ltd v Ellis & Ellis (1990) 54 SASR 61

The insured failed to notify their car insurer that they intended to put ‘mag’ wheels on their car. The insurer, however, failed to notify the insured that they were required to do so and of the consequences of failing to do so. The court decided that the insurer had breached its duty of utmost good faith and that it was not entitled to refuse to pay the insured’s claim.

Frewin v Emmdale Sports Club & Anor [2004] NSWSC 860

The Emmdale Gymkhana was run annually to fundraise for charity. In 1989, Frewin suffered serious permanent injury while competing in the Gymkhana. The club was alleged to have been negligent in failing to ensure the track was in a safe condition and in failing to install guardrails. The club was however insolvent by the time Frewin commenced proceedings, so he sought to join the club’s insurer, GIO, to the proceedings. In negotiations with GIO, the club’s treasurer had emphasised that ‘total cover for all activities is required’, including annual events such as the gymkhana. However, the policy issued by GIO excluded claims by any participant in any contest organised by the club. The Court decided in favour of Frewin because giving an insurance policy for a gymkhana that did not cover participants was useless and in breach of the duty of good faith. GIO was obliged to pay Frewin’s claim.

Both parties to the insurance contract have a duty to disclose all material facts to the other party. An insurer would, for example, breach the duty of disclosure if they failed to disclose to the insured any matters not covered by the policy. However, this is a duty usually enforced by the insurer against the insured: an insurer may refuse to pay a claim by the insured because of their failure to disclose a material fact. According to the Insurance Contracts Act 1984 (Cth) 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. (2) The duty of disclosure does not require the disclosure of a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer. (3) 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. Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 112 ALR 353

The insured failed to notify the insurer that the quantity of flammable material stored at the insured premises had increased. The insured made a claim when the insured premises were damaged by fire. The insurer refused to pay the claim because the insured had failed to disclose a material fact. The court decided that the insurer was entitled to refuse to pay the claim.

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The insurer will be automatically deemed to have waived compliance with the duty of disclosure unless, before the contract is entered into:2 •• the insurer requests that the insured answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms, and/or •• the insurer expressly requests that the insured disclose each exceptional circumstance that is not a matter that the insurer could reasonably be expected to make the subject of a specific question. The Act requires the insurer to notify the insured in writing, before the contract is entered into, of the consequences of breaching the duty of disclosure.3 Failure to inform the insured will result in the insurer losing the rights they would have had as a result of the non-disclosure, unless the non-disclosure is fraudulent. Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Insurance Cas 60–986

When the insured renewed her household contents insurance policy she failed to disclose to the insurer her criminal conviction for growing and selling cannabis. Her home was broken into and all of her furniture was stolen. The insurer refused to pay the insurance claim, on the grounds that the insured had failed to disclose a material fact. The court decided that the insurer was not entitled to refuse to pay the claim because the renewal notice did not notify the insured of the consequences of breaching her duty of disclosure.

Change in circumstances

The duty of disclosure is usually expressed to continue throughout the term of the insurance contract. If the insured becomes aware of a change in circumstances that increases the risk then they have an obligation to notify the insurer of those changes. For example, if Johnny’s insured motor vehicle was initially parked in a garage but subsequently had to be parked regularly on the street, he has an obligation to notify his insurer. The insured must also comply with their duty of disclosure whenever the contract of insurance is renewed. Failure to disclose a material fact

The consequences of the insured failing to comply with the duty of disclosure depend upon whether the failure was innocent or fraudulent. If the insured’s failure to disclose was innocent, the insurer is not entitled to avoid the contract. The liability of the insurer to pay a claim is reduced to an amount that would place the insurer in the same position it would have been in had the failure to disclose not occurred.4 Thus, if the insurer can show that it would not have granted the insurance if full disclosure had been made, the insurer’s liability is reduced to nil. If, however, the insurer would only have charged higher premiums, then the insurer’s liability is reduced by the difference between the premiums. Orb Holdings Pty Ltd v Lombard General Insurance Co Australia Ltd [1995] 2 Qd R 51

The plaintiff insured a shopping arcade with the defendant insurance company. The shopping arcade was described in the proposal as being constructed of brick/iron. However, two of the walls were brick but the other two were made of wood with an iron roof. When the plaintiff made a claim under the insurance policy, the insurance company refused to pay. The court was satisfied that the misrepresentation was innocent. However, the court was also satisfied that if the insurer had known the correct position at the time the insurance contract was made it would have refused to grant insurance. Therefore, the liability of the insurer under the insurance contract was reduced to nil.

2 Insurance Contracts Act 1984 (Cth) s 21A. 3 Insurance Contracts Act 1984 (Cth) s 22. 4 Insurance Contracts Act 1984 (Cth) s 28(1).

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If the insured’s failure to disclose was fraudulent, the insurer is entitled to avoid the contract, or at least reduce its liability to the amount that it would have been if the misrepresentation had not been made.5 The court can disallow an avoidance of the contract by an insurer if it would be harsh and unfair not to do so.6 If the insurer is aware of a material non-disclosure but it continues to accept premiums, the insurer will be regarded as having chosen to affirm the contract and cannot later insist that the contract is void on the basis of the non-disclosure. CAUTION!

If the insured has failed to disclose a relevant matter to the insurer, the insurer is not automatically entitled to refuse to pay a claim. It will depend upon whether the non-disclosure by the insured was fraudulent or innocent, and what the insurer would have done had it known the truth at the time the insurance contract was made.

Misrepresentation of a material fact

A misrepresentation is a false statement of fact made to induce a person to enter into a contract (see an earlier chapter). What if the insured makes a false statement of fact on the proposal form? The false statement will not be a misrepresentation unless the insured did not believe it to be true, and they knew or should have known that the statement was relevant to the decision of the insurer whether or not to insure.7 The insured will not be regarded as having made a misrepresentation simply because they failed to answer, or gave an incomplete answer to, a question on the proposal form.8 The consequences of misrepresentation again depend upon whether the misrepresentation was fraudulent or innocent. The consequences are the same as for non-disclosure.9 Cancellation

An insurance company can cancel the insurance policy if the insured has: •• failed to comply with the duty of utmost good faith, •• failed to comply with the duty of disclosure, •• made a misrepresentation, •• made a fraudulent claim, or •• breached a term of the insurance contract.10 The cancellation must be in accordance with the provisions of the Act or it will be ineffective.11 Written reasons for the cancellation must be given if requested by the insured.12

Making a claim The amount recoverable upon the making of a successful claim will depend upon the terms of the insurance policy. The possibilities include: •• the market value of the subject matter of the insurance at the time of the loss or destruction, •• the amount required to repair or replace the subject matter of the insurance following the loss or destruction, or •• the amount previously agreed upon by the parties.  5 Insurance Contracts Act 1984 (Cth) ss 28(2)-(3).  6 Insurance Contracts Act 1984 (Cth) s 31.  7 Insurance Contracts Act 1984 (Cth) s 26.  8 Insurance Contracts Act 1984 (Cth) s 27.  9 Insurance Contracts Act 1984 (Cth) s 28. 10 Insurance Contracts Act 1984 (Cth) s 60. 11 Insurance Contracts Act 1984 (Cth) s 63. 12 Insurance Contracts Act 1984 (Cth) s 75.

CHAPTER 18 Managing a business: insurance and taxes  665

ACTIVIT Y 18.3 — RESEARCH

Visit the website of a major Australian insurance company. What is the process for making an insurance claim? Time limits

The insurance policy may state that the insured must notify the insurer of a claim within a specified time. However, the insurer cannot refuse to pay a claim on the basis of late notification, although the insurance claim may be reduced if the insurer has been prejudiced by a delay in notification.13 Excess clauses

The insurance policy may contain an excess clause. This will require the insured to pay the first part of a claim themselves. An excess clause reduces the liability of the insurer (a reduction that should be reflected in the premium payable) and discourages the insured from making claims for small amounts. Over-insuring the property

Consistent with the principle of indemnity, the insured is only entitled to recover the amount of their actual loss. This is so even if they have insured the property for more than its true value. If Johnny’s car worth $30  000 is insured for $40  000, in the event of total loss or destruction of the motor vehicle, Johnny is entitled to receive only $30  000. This does not, of course, apply to contingency contracts such as a contract for life insurance. It is also possible to take out what is called a valued policy. Here the insured and the insurer have agreed in advance on the value of the insured property and if the property is subsequently lost or destroyed, the insured recovers the agreed amount regardless of the actual value of the property at the time of the loss or destruction. Under-insuring the property

What if the property in question is insured for less than its actual value? The property insurance policy is likely to contain an average clause. This is a clause that provides that if the insured has under-insured the property, the insurer’s liability upon paying a claim is reduced proportionately. Amount payable = amount of loss × (insured value/actual value) For example, if Johnny’s property is insured for $900  000 and its actual value is $1 million, and Johnny makes a claim for $200  000 worth of damage to the property, the insurer is only obliged to pay 90 per cent of the claim, or $180  000. An insurer is only entitled to rely on an average clause if the existence and effect of the clause is notified in writing to the insured before the contract of insurance is made. If the insured property is used for residential purposes, the average clause cannot be relied upon by the insurer where the sum insured is at least 80 per cent of the value of the property.14 For example, if in the example above the insured property was Johnny’s home, the insurer would be obliged to pay the full amount of the claim. Where the sum insured is less than 80 per cent of the actual value of the residential property, the liability of the insurer is calculated as follows: Amount payable = amount of loss × (insured value/80% of actual value) Double insurance

The insured under an indemnity insurance contract cannot profit from their loss, and they are only entitled to recover compensation for their actual loss. Therefore, if the insured has insured the property with two insurers, they must choose which insurer to claim from, and that insurer is then entitled to a pro rata contribution by the other insurer. 13 Insurance Contracts Act 1984 (Cth) s 54. 14 Insurance Contracts Act 1984 (Cth) s 44.

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Clauses limiting or excluding the insurer’s liability because the insured has entered into another contract of insurance will be void.15 Subrogation

In most indemnity insurance contracts, the insurer is granted a right of subrogation. This means that upon payment of the insurance claim, the insurer assumes all of the insured’s rights in relation to the subject matter of the insurance, including the right to sue a third party if they are the cause of the loss. For example, if the subject matter of the insurance contract is Johnny’s motor vehicle, and the motor vehicle is damaged in an accident caused by Simon’s carelessness, upon paying Johnny’s claim the insurer is entitled to commence legal proceedings against Simon. The insured has an obligation not to make any statement or do any act that might impact negatively on the insurer’s right of subrogation, for example, by admitting liability after a car accident. The Insurance Contracts Act will limit the right of subrogation of the insurer where the third party is: •• related to the insured,16 or •• the insured’s employee.17

Dispute resolution If the insured has a complaint about general insurance or life insurance with an insurance company they can approach the Financial Ombudsman Service. ACTIVIT Y 18.4 — RESEARCH

Visit the Finance Ombudsman Service website at www.fos.org.au. Summarise the process of resolving a dispute with the assistance of the FOS.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  18.1 How can insurance address the risk of harm?  18.2 What is life insurance? What are the various examples of life insurance?  18.3 What is general insurance? What are the various examples of general insurance?  18.4 What is the difference between indemnity insurance and contingency insurance?  18.5 How is insurance regulated in Australia?  18.6 What is an insurance contract and how is an insurance contract usually formed?  18.7 What is (a) a cover note, (b) a proposal form, (c) a premium, and (d) a policy?  18.8 What is the difference between an insurance agent and an insurance broker?  18.9 What is an insurable interest? Must the insured have an insurable interest in the subject matter of the insurance contract? 18.10 What is a contract uberrimae fidei? 18.11 What if one of the parties to an insurance contract fails to disclose a material fact? 18.12 What if the insurer fails to notify the insured about their duty of disclosure? 18.13 What if the circumstances change during the term of the insurance contract? 18.14 What if the duty of disclosure is breached? 18.15 What if the insured misrepresents a material fact? 18.16 What if the insurer wishes to cancel the insurance contract? 18.17 How does an insured make an insurance claim?

15 Insurance Contracts Act 1984 (Cth) s 45. 16 Insurance Contracts Act 1984 (Cth) s 65. 17 Insurance Contracts Act 1984 (Cth) s.66.

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18.18 18.19 18.20 18.21 18.22 18.23 18.24

How soon must the claim be lodged? Does the insurer pay for everything? What if the insured has over-insured the property? What if the insured has under-insured the property? What if the insured has insured the property with two insurers? What is the insurer’s right of subrogation? How can an insured resolve a dispute with an insurer?

18.2 Paying tax LEARNING OBJECTIVE 18.2 What are the tax implications of operating a business? What are the different forms of tax payable by a business?

Like any business, Organicola has to pay tax. There are many forms of tax to which Australian businesses are subjected. Taxation in Australia is administered by and payable to all three levels of g­ overnment: Commonwealth, State/Territory, and local (see table 18.1). TABLE 18.1

Forms of tax

Federal taxes

State/Territory taxes

Local taxes

• Income tax • Fringe benefits tax • Capital gains tax • Goods and services tax • Excise duty

• Payroll tax • Land tax • Stamp duty

• Rates

Each jurisdiction has its own tax or revenue office (see table 18.2). TABLE 18.2

Tax and revenue offices

Jurisdiction

Tax and revenue office

Website

Commonwealth

Australian Taxation Office

www.ato.gov.au

Australian Capital Territory

ACT Revenue Office

www.revenue.act.gov.au

New South Wales

Office of State Revenue

www.osr.nsw.gov.au

Northern Territory

Territory Revenue Office

www.revenue.nt.gov.au

Queensland

Office of State Revenue

www.osr.qld.gov.au

South Australia

Revenue SA

www.revenuesa.sa.gov.au

Tasmania

State Revenue Office

www.sro.tas.gov.au

Victoria

State Revenue Office

www.sro.vic.gov.au

Western Australia

State Revenue

www.osr.wa.gov.au

LAW IN CONTEXT: LAW AND ECONOMICS

What is the purpose of tax? Throughout history, the money raised through taxation has been used by governments for a wide range of purposes including the enforcement of law and order, the protection of property, creating and maintaining economic infrastructure, public works, foreign aid, expenditure on war, and the day-to-day operations of government itself. Most modern governments also use taxes to fund welfare and public services including schools, public health care, pensions for the elderly, unemployment benefits and public transport.

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Governments create different kinds of taxes and vary the tax rates to distribute the tax burden among individuals or classes of individuals fairly, or to redistribute resources between individuals or classes. Adjustments by government to types and rates of tax can also be used to influence the performance of the economy, or to modify patterns of consumption or employment within an economy by making some types of transaction more or less attractive. Some economists argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimise this distortion. Others argue that most or all forms of taxes are immoral due to their involuntary and therefore essentially coercive nature. An extreme anti-tax view is anarcho-capitalism, according to which the provision of all social services should be a matter of voluntary private contracts.

Forms of tax In this section we briefly consider each of the major forms of tax.

Income tax Income tax is a Federal tax levied on the taxable income of a person or a business in a given year. Every business must lodge a tax return for any year in which it carries on business. Corporations pay income tax at a flat rate: 30 per cent in 2015–16. There is no tax free threshold for corporations. Income tax payable by individuals (including sole traders and partners) was in 2015–16 calculated as set out in table 18.3. TABLE 18.3

Income tax thresholds 2015–16

Taxable income

Tax payable

$0–$18  200

Nil (‘tax free threshold’)

$18  201–$37  000

19 per cent of amount in excess of $18  200

$37  001–$80  000

$3572 plus 32.5 per cent of amount in excess of $37  000

$80  001–$180  000

$17  547 plus 37 per cent of amount in excess of $80  000

Over $180  001

$54  547 plus 45 per cent of amount in excess of $180  000

In addition to the above rates, individuals must pay a 2 per cent ‘Medicare levy’. Taxpayers who earn more than $180  000 must also pay a 2 per cent ‘Temporary Budget Repair Levy’. A business is entitled to a range of deductions that can be offset against its income and thereby reduce the amount of income tax payable. Typical business deductions include: •• interest payments on borrowed money, •• bank fees and charges, •• employee wages, •• superannuation contributions, •• any decline in the value of certain assets (depreciation), •• lease payments for the business premises (including home business premises), •• lease or hire payments for plant and equipment, •• the cost of trading stock, •• transport and freight costs, •• motor vehicle expenses, •• the cost of business travel away from home, •• repair costs, •• advertising costs, •• phone expenses, •• power costs, and •• registered tax agent fees. CHAPTER 18 Managing a business: insurance and taxes  669

A business’s income tax liability will, therefore, be calculated as follows. •• Money earned from business activities is generally assessable income. •• The business is entitled to deduct expenses incurred in earning this income. •• If the business activity results in an overall net income, income tax is payable on that net income. •• If the business activity results in an overall loss, the business may be entitled to offset the loss against other income or carry it forward to offset against future income. Any books of account, records or documents related to preparing an income tax return must generally be retained for at least five years. ACTIVIT Y 18.5 — RESEARCH

Go to the ATO website at www.ato.gov.au. What information is provided by the ATO regarding allowable business deductions?

Commissioner of Taxation v Stone (2005) 215 ALR 61

Stone was a javelin thrower. She represented Australia in various competitions, including the 2000  Sydney Olympic Games. She was also employed by the Queensland Police Force. During her sporting career, Stone received money including prize money, government scholarships and appearance fees. For the 1999 financial year, Stone reported assessable income of $39  832 salary as a police officer. She also received a total of $136  448 from prize money, grants from the Australian Olympic Committee and Queensland Academy of Sport, sponsorship fees and appearance fees. Stone argued that these amounts were from the pursuit of a sport, not a business, and thus were not assessable. The Court decided that there was a commercial aspect to the activities and therefore Stone was not pursuing a sport, but conducting a business. The prize money and incentives flowed directly from the successful pursuit of the business activities, and were thus taxable.

Anstis v FCT [2010] HCA 40

Anstis was a fulltime student who worked as part-time sales assistant and received the youth allowance. She claimed deductions for her education expenses including travel and the depreciation of her computer. She argued that the expenses were incurred in the derivation of the youth allowance. The Commissioner denied the deduction on the basis that social security payments such as the youth allowance were income that was conferred on eligible recipients, not earned, such that no expenses could be incurred in ‘gaining’ or ‘producing’ assessable income as required to be eligible as a deduction under s 8-1 of the Income Tax Assessment Act 1997 (Cth). The Court decided that the youth allowance was assessable income under the ITAA 1997 and that the taxpayer’s education expenses were incurred in gaining or producing that income. [NOTE: Since this case, s 26-19 of the ITAA 1997 has been inserted to disallow any deductions relating to government payments.]

LAW IN CONTEXT: LAW IN THE MEDIA

Almost 600 major corporations did not pay tax in 2013–14 ­financial year, Australian Taxation Office says Almost 600 of the largest companies operating in Australia did not pay income tax in the 2013–14 financial year, figures released by the Australian Taxation Office (ATO) show. More than 1,500 companies with annual incomes of more than $100 million are on the list. Of those companies, 960 did pay tax, while 579 companies did not pay tax. The ATO said no tax paid did not necessarily mean companies had been engaged in tax avoidance. Some of those companies incurred tax losses, while others used prior financial year losses or offsets to minimise their tax payment.

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Companies with high yearly income paid little or no tax The data highlights a number of companies that paid little to no tax, but does not outline how they minimised their tax bill. However, the data does show significant differences between the total income of certain companies, and the income that was subject to tax in Australia. Technology giant Apple had total income of about $6.1 billion, but only $247 million of that was taxable income.The company’s tax payment was the largest of the multinational tech giants at just over $74 million, but that only equates to around 1 per cent of its total income in the 2013–14 financial year. Apple’s competitor Microsoft had taxable income close to $104 million, less than a fifth of its total revenue of $568 million. Its tax bill was about $31 million — just 5 per cent of its income. Google’s total income was about $358 million, but only a quarter of that was taxable. Google’s tax bill was $9 million. All three gave evidence to a Senate Inquiry about their tax affairs earlier this year. Cleaning company Spotless Group, which has been accused of underpaying its staff working at department store Myer, made about $2.2 billion, but paid no tax. Embattled car manufacturer Volkswagen made almost $2 billion in 2013–14. But its taxable income was $35 million and it only paid $10 million. Yokohama Tyres Australia paid about $220,000 tax on a taxable income of $747,000, despite earning $121 million. Other large companies that did not pay tax in the 2013–14 financial year include Qantas, Virgin ­Australia, General Motors (owner of Holden), Vodafone, petrol company ExxonMobil, online betting shop William Hill, Warner Bros Entertainment, property developer Lend Lease and media company Ten Network Holdings. Qantas reported a $2.84 billion loss in that financial year, while the Ten Network lost almost $80 million. Immigration detention centre manager Transfield also paid no tax in 2013–14. Mining and banking tax bills among the highest At the other end of the spectrum, mining giant BHP Billiton and Rio Tinto faced two of the highest tax bills in the country. BHP made more than $40 billion in 2013–14, but its taxable income was closer to $14 billion. Its tax bill was almost $4 billion. Rio Tinto’s taxable income was almost $11 billion after its total income reached $34 billion. The miner paid $3 billion to the ATO. The big four banks are the next highest tax payers. Commonwealth Bank’s income hit more than $43 billion in 2013–14, and close to $10 billion of that was taxable. It handed over close to $3 billion. Westpac’s total income was $39 billion, of which $9 billion was subject to tax, and it paid tax of close to $2.5 billion. ANZ’s taxable income was $8 billion, after its total earnings hit $30 billion in 2013–14. The ATO took close to $2 billion. NAB earned close to $43 billion in 2013–14, and more than $11 billion was taxable. Their tax bill hit more than $2 billion. Commissioner of Taxation Chris Jordan said releasing the data helped build community trust in the taxation system. ‘Community trust and confidence in the way these large companies operate matters,’ Mr Jordan said. ‘And tax should matter to these companies. It is not something to be taken lightly. ‘Collectively, these 1,500 large corporates paid almost $40 billion in company tax in the 2014 fiscal year.’ Federal Assistant Treasurer Kelly O’Dwyer reaffirmed there were many reasons why a company may not pay tax in any given year. Shadow Assistant Treasurer Andrew Leigh seized upon the data, saying it was the sort of information the Liberal party had worked hard for the public never to see. Source: Matthew Doran, 17 December 2015, http://www.abc.net.au/news/2015-12-17/almost-600-companies-did-not-paytax-in-2013-14/7036324.

Pay As You Go

If a business has employees, it is obliged to withhold income tax from the payments that it makes to them under the Pay As You Go withholding scheme. The business must register for the scheme with the ATO and make regular payments to the ATO, as well as provide annual statements to its employees and the ATO. At the end of the financial year, each individual employee completes a tax return setting out their actual income, and any difference between the total amount of tax withheld by the employer and the employee’s actual tax liability is either paid by the employee to the ATO or refunded by the ATO to the employee. CHAPTER 18 Managing a business: insurance and taxes  671

Business owners such as sole traders and partners as well as corporations must be registered under the Pay As You Go instalments scheme. Since they are not employees they are responsible for paying income tax on their earnings directly to the ATO. The ATO estimates the business owner’s annual income based upon the previous year’s income, and the business owner makes instalment payments accordingly, either quarterly or half-yearly. At the end of the financial year, the business owner’s actual tax liability is calculated, and any difference between the total instalments paid by the business owner and the business owner’s actual tax liability is either paid by the business owner to the ATO or refunded by the ATO to the business owner. LAW IN CONTEXT: LAW IN PRACTICE

Directors’ penalty notices The law previously provided that upon the winding up of a company the ATO ranked higher in priority than other unsecured creditors in relation to certain outstanding tax obligations of the company. From 1993 the ATO ceased to be a priority creditor, but it did become possible to recover a company’s ­outstanding PAYG instalments from directors of the company personally. If a company fails to comply with its PAYG obligations, the ATO is able to issue a director’s ­penalty notice to the directors of the company imposing upon them a fine equal to the amount of the ­outstanding PAYG liability if the directors fail to do one of four things:18 • cause the company to discharge its liability, • enter into an agreement with the ATO about the outstanding liability, • appoint an administrator to the company, or • cause the company to be wound up. The directors have 14 days in which to comply with the notice.

Fringe benefits tax A business will have to register for and pay fringe benefits tax if it provides certain benefits to its employees. Common fringe benefits include the use of a work car by an employee or director, and the payment of private expenses for an employee or director such as health insurance costs, club memberships, school fees, holiday expenses or onsite accommodation. Fringe benefits tax is a Federal tax calculated on the basis of the taxable value of the fringe benefit.

Goods and services tax Goods and services tax (GST) is a Federal tax of 10 per cent on the sale of most goods and services. The sale of some goods and services is GST-exempt, including: •• basic food for human consumption such as fruit, vegetables, plain milk and bread, •• exports, •• some health services and education courses, •• some activities of charitable institutions, •• childcare, •• religious services, •• water and sewerage services, and •• a sale of a going concern, e.g. a business. GST is collected by each supplier in the supply chain who is registered for GST. Each supplier will usually charge the GST to the person to whom they supply the product, and then pass on the GST collected to the ATO monthly, quarterly or annually, less the amount of GST they paid to any other person who supplied products to them (known as ‘GST credits’ or ‘input tax credits’). If a business expects to have a business turnover of $75  000 or more per annum ($150  000 or more per annum for non-profit organisations) it must register for the GST. A business can still register for the GST if its turnover is less than these amounts, and the ability to claim GST credits is one benefit of doing so. If a business does register for the GST, it must also apply for an Australian Business Number (ABN). 18 Tax Administration Act 1953 (Cth) sch 1 div 269.

672  PART 3 Managing a business

A business can register online for the GST at www.abr.gov.au. Once it is registered for the GST it must lodge regular business activity statements with the ATO. The business reports and pays GST, and claims any GST credits, by the due date shown on the activity statement. Most small businesses report GST quarterly, but some choose, or are required, to report monthly. Larger businesses may be eligible to report annually and pay by instalments, or report and pay annually.

Capital gains tax Capital gains tax is a Federal tax payable on any gain a taxpayer makes when they sell an asset such as real property or shares. The amount of the gain, as adjusted for inflation, is treated as income and subjected to income tax at the usual rate. Capital gains tax is generally not payable on any gain made from the sale of a home or motor vehicle.

Other taxes and duties Other taxes and duties include the following. •• Excise duty is a federal tax payable on the sale of certain products such as alcohol, petrol, tobacco and coal produced or manufactured in Australia. •• Payroll tax is a State tax payable on the wages paid to employees. •• Land tax is a State tax payable annually and calculated on the basis of the unimproved value of the real property of which the taxpayer is the owner. •• Stamp duty is a State tax paid upon certain transactions such as the sale of a motor vehicle, and calculated on the basis of the value of the transaction. It is also known as transfer duty or general duty. •• Rates are a form of tax calculated on the basis of the unimproved value of land owned by the taxpayer, and applied to fund the provision of basic services to that land. Rates are paid to the local authority.

Tax administration A Tax File Number (TFN) is a number issued by the ATO to all individuals and organisations to help the ATO to administer tax. Individuals and organisations are obliged to cite their TFN whenever they have any dealings with the ATO. A sole trader can use their own personal TFN in conducting their business. Partnerships, companies and trusts must obtain a separate TFN.

CHAPTER 18 Managing a business: insurance and taxes  673

A business can apply for a TFN for a partnership, a company or a trust online at www.abr.gov.au. Individuals cannot apply for a TFN online, but can download the necessary application form from www.ato.gov.au. An Australian Business Number (ABN) is a unique 11-digit number issued by the ATO to those individuals and organisations that conduct business in Australia. Each individual and organisation is entitled to a single ABN, regardless of the number of businesses they operate. Individuals and organisations with an ABN are obliged to cite their ABN whenever they have any dealings with the ATO. If a business is carrying on an enterprise or intends to register for GST it must apply for an ABN. If the business has an ABN it will also avoid having amounts withheld from payments made to it by other businesses: they are required to withhold 46.5 per cent of any payments they make to the business unless the business quotes an ABN. The business should therefore include its ABN on all of its business stationery and invoices. Similarly the business is obliged to withhold 46.5 per cent of any payments it makes to other businesses that do not quote an ABN, and then pass this amount on to the ATO. If the business does not do this, it may have to pay a penalty to the ATO equal to the amount it didn’t withhold. A business can apply for an ABN online at www.abr.gov.au. Once registered for an ABN the details of the business are included in the Australian Business Register. A company will be asked to supply its ACN (Australian Company Number) when it registers for an ABN. The 11-digit ABN issued to the company by the Australian Business Registrar will be the ­company’s 9-digit ACN plus two check digits.

Tax implications of different business structures Each of the four major forms of business structure — the sole trader, the partnership, the company and the trust (see earlier chapters) — pays tax in a different way.

Sole trader A sole trader uses their individual TFN when dealing with the ATO. Any sole trader carrying on business in Australia may apply for an ABN. A sole trader pays income tax on their business income in the same way that they pay income tax on their personal income. In fact, the business income (after deducting allowable expenses) is treated as the sole trader’s personal income and included in their personal income tax assessment. They are obliged to pay PAYG instalments towards their own anticipated end-of-year liability. A sole trader cannot claim a deduction for the money they draw from the business. The amounts drawn may be referred to by the sole trader as ‘wages’ but they are not treated as such for tax purposes and they are not a deduction. A sole trader can apply for GST registration, and is required to do so if their annual turnover is $75  000 or more. A sole trader is responsible for their own superannuation arrangements. They are obliged to pay superannuation contributions for any employees they employ.

Partnership A partnership has its own TFN separate from the TFNs of the individual partners. Any partnership ­carrying on business in Australia may apply for an ABN. A partnership is not a separate legal entity and as such does not pay income tax. The individual partners pay income tax on their share of the partnership income. Each partner pays income tax on their share of the partnership income in the same way that they pay income tax on their personal income. In fact, the partnership income (after deducting allowable expenses) is treated as the partner’s personal income and included in their personal income tax assessment. Each partner may be obliged to pay PAYG instalments towards their anticipated end-of-year liability. Although the partnership doesn’t pay tax, it does have to lodge an annual partnership income tax return that shows all income earned by the partnership, deductions claimed for expenses incurred in ­carrying on the partnership business, and each partner’s share of the net partnership income. 674  PART 3 Managing a business

CAUTION!

A partnership is not a separate legal entity. A partnership cannot own property: partnership property is jointly owned by the partners. And a partnership does not pay tax: the partners each pay tax on their share of the partnership income.

Partners cannot claim a deduction for the money they draw from the business. The amounts drawn may be referred to by the partners as their ‘wages’ but they are not treated as such for tax purposes and they are not a deduction. Partners can apply for GST registration, and are required to do so if the partnership’s annual turnover is $75  000 or more. Partners are responsible for their own superannuation arrangements as they are not employees of the partnership. Partners are obliged to pay superannuation contributions for any employees they employ.

Company A company is a separate legal entity and as such has its own TFN. Any company registered under the Corporations Act 2001 (Cth) is entitled to an ABN. A foreign company that is not registered under the Act but is carrying on business in Australia may apply for an ABN. If a business is owned by a company then the income of the business is the income of the company. A company pays income tax at the corporate flat rate. Under the self-assessment system, a company must lodge an annual company tax return, which shows the income and deductions of the company and the company’s income tax payable. A company will usually be obliged to pay PAYG instalments, which are credited against its annual income tax liability. A company can apply for GST registration, and is required to do so if the company’s annual turnover is $75  000 or more. A company must pay superannuation contributions for all of its eligible employees, including d­ irectors who are employees.

Trust A trust has its own TFN separate from the TFN of the trustee. A trustee carrying on business in Australia may apply for an ABN for the trust. Whether or not a trust has an income tax liability depends on the type of trust, the wording of the trust deed and whether the income earned by the trust is distributed (in whole or in part) to its beneficiaries. If a trust is carrying on a business, each year all income earned by the trust and deductions claimed for expenses incurred in carrying on that business must be shown on a trust tax return. The tax return also shows the amount of income distributed to each beneficiary. Trusts are not liable to pay PAYG instalments. Instead, the beneficiaries or trustees may be liable to pay instalments. A trustee can apply for GST registration on behalf of the trust, and is required to do so if the trust’s annual turnover is $75 000 or more. A trust may need to pay superannuation contributions for trustees if they are employed by the trust as employees. A trust also needs to pay superannuation contributions for other employees of the trust. ACTIVIT Y 18.6 — REFLECT

Basing your answer only upon the taxation implications, what is the best business structure for (a) a new, small business, and (b) a large successful business?

CHAPTER 18 Managing a business: insurance and taxes  675

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 18.25 What are the forms of tax payable to (a) the Federal government, (b) State/Territory governments, and (c) local authorities? 18.26 What is income tax and how is it calculated? 18.27 What is the (a) PAYG withholding scheme, and (b) PAYG instalments scheme? 18.28 What is fringe benefits tax and how is it calculated? 18.29 What is GST and how is it calculated? 18.30 What is capital gains tax and how is it calculated? 18.31 What are (a) excise duty, (b) payroll tax, (c) land tax, (d) stamp duty, and (e) rates? 18.32 What is the purpose of (a) the TFN, and (b) the ABN? 18.33 What are the tax implications of (a) a sole trader, (b) a partnership, (c) a company, and (d) a trust?

In conclusion •• Many businesses attempt to minimise the risk of harm by taking out insurance. An insurance contract is an agreement between an insurer and an insured whereby the insurer agrees to compensate the insured or pay an agreed amount upon the happening of a particular event, in return for the payment by the insured of the insurance premium. •• Business organisations pay a number of different forms of tax to the various Federal, State/­Territory and local governments, including income tax under the PAYG schemes, GST, capital gains tax, fringe benefits tax, payroll tax, stamp duty and rates. JOHNNY AND ASH

[Johnny and Ash are still in the Organicola office, discussing the latest financial report for the business.] Johnny — Alright. So we don’t really have a lot of choice when it comes to our tax obligations. Organicola Pty Ltd has to pay tax at the corporate rate on its income  .  .  . Ash — Although we are allowed to reduce our tax liability by deducting our allowable expenses. And since our expenses are still quite high relative to our income we aren’t paying a lot of income tax yet. Johnny — True. But we still have to withhold the income tax payable by our employees, and pass that on to the ATO. And we still have to charge and collect GST on the soft drink that we sell. And we still have to pay payroll tax. Ash — Sensible financial planning meant we accounted for all of that when we determined the financial viability of our new business. Johnny — In other words you knew it was coming. Ash — Yes, I knew it was coming. Don’t worry, we will still make a profit. Johnny — We would make an even bigger profit if we didn’t spend so much on insurance! Ash — Yes, it would increase profitability in the short term, but do you see why not having insurance is not a sensible move in the long term? Johnny — Yes, I suppose. While it is unlikely we will ever make a claim under some of the policies we have taken out, the potential cost of some of the events we have insured against is so large it would ruin us if we didn’t have insurance. Ash — Indeed. Imagine for example if someone gets seriously ill from one of our cartons of soft drink, and sues us for millions of dollars? Or if an employee is seriously injured in the factory? Hopefully neither of these things will ever happen to us but if they did and we didn’t have insurance it could mean the end of Organicola. Johnny — I see what you mean about peace of mind. It is almost worth the price!

676  PART 3 Managing a business

QUIZ 1 If an insurer fails to inform the insured before the contract is entered into about the

consequences of breaching their duty of disclosure, the insurer (a) will be subject to a criminal penalty. (b) will lose the rights they would have had as a result of the non-disclosure. (c) will be unable to cancel the insurance contract under any circumstances. (d) will be entitled to refuse any claim by the insured. 2 An insurance policy that provides that in the event of permanent disability the insured will receive a payment in the amount of $10 million is an example of (a) an annuity policy. (b) a contingency policy. (c) an indemnity policy. (d) an endowment policy. 3 An insurer’s refusal to pay an insurance claim cannot be based only upon (a) a failure by the insured to comply with their duty of disclosure. (b) a failure by the insured to lodge the claim within the time period specified in the insurance contract. (c) a misrepresentation by the insured. (d) all of the above. 4 The right of the insurer to exercise the legal rights of the insured in relation to harm caused by a third party is called (a) averaging. (b) subrogation. (c) uberrimae fidei. (d) insurable interest. 5 Which of the following is not an allowable business deduction? (a) Mortgage repayments on the business premises. (b) The cost of trading stock. (c) Employee wages. (d) Advertising expenses. 6 If an employee is permitted to reside on the business premises the employer may be obliged to pay (a) GST. (b) capital gains tax. (c) PAYG instalments. (d) fringe benefits tax. 7 To avoid having amounts withheld from payments made to it by other businesses, a business must have and quote its (a) ABN. (b) ACN. (c) TFN. (d) GST. 8 Which of the following business structures is not obliged to lodge an income tax return? (a) A trust. (b) A company. (c) A partnership. (d) None of the above.

CHAPTER 18 Managing a business: insurance and taxes  677

EXERCISES EXERCISE 18.1 — INSURANCE

A pizza in the oven at ‘The Lame Duck’ restaurant catches fire one evening and causes damage to the oven. The actual value of the oven at the time of the fire was $15  000. The oven was insured with HIMYM Insurance. The policy contained the following clause: ‘This contract of insurance is subject to average.’ (a) State the correct amount of the fire insurance payout in each of the following circumstances: (i) The loss amounted to $12  000 and the oven was insured for $10  000. (ii) The loss amounted to $9000 and the oven was insured for $5000. (b) Assume Johnny had insured the oven twice, the other policy covering him for $15 000. How much would he receive from both policies under (a)(ii) above? EXERCISE 18.2 — INSURANCE

Ash’s father Ray owns a small convenience store. A fire destroys the store. Ray eventually opens another store in a new location and he applies for fire insurance. The proposal that he fills out includes this question: ‘Have you made any claims on an insurance policy in the last two years?’ Ray answers ‘No’. He thought that the previous claim was more than 2 years ago. It was in fact 23 months ago. There is a fire in the new store and Ray suffers substantial damage. The insurance company refuses to pay the claim. Advise Ray. EXERCISE 18.3 — TA X ATION

(a) What is the income tax liability of (i) an individual who earns a taxable annual income of $100  000, and (ii) a corporation that earns the same income? (b) At what level of income should a sole trader consider becoming a corporation to reduce their income tax liability? EXERCISE 18.4 — TA X ATION

Prepare a table summarising the tax implications of the four basic business structures.

KEY TERMS Australian Business Number (ABN)  An 11-digit number issued by the Australian Taxation Office to a business. Australian Prudential Regulation Authority (APRA)  The regulator of banks, insurance companies and superannuation funds in Australia. average clause  A clause in an insurance contract that provides that if the insured has under-insured the property, the insurer’s liability upon paying a claim is reduced proportionately. capital gains tax  A Federal tax payable on any gain a taxpayer makes when they sell an asset such as real property or shares. cover note  A temporary insurance contract entered into pending finalisation of the actual contract of insurance. excess clause  A clause in an insurance contract reducing the liability of the insurer by requiring the insured to pay the first part of a claim themselves. excise duty  A Federal tax payable on the sale of certain products such as alcohol, petrol, tobacco and coal produced or manufactured in Australia. fringe benefits tax  A Federal tax payable by an employer on certain benefits to employees. GST  (goods and services tax)  A Federal tax of 10 per cent on the sale of most goods and services. income tax  A tax payable to the Federal government that is calculated on the basis of income earned by the taxpayer. insurable interest  An interest in insured property such that the insured will benefit from the property being preserved and suffer a loss if the property is damaged or destroyed. insurance contract  A contract whereby an insurer, in return for the payment of the insurance premium, agrees to indemnify the insured against the risk of particular loss or the happening of a particular event. 678  PART 3 Managing a business

land tax  A State tax payable annually and calculated on the basis of the value of the real property of which the taxpayer is the owner. liability insurance  A form of insurance where the insured is indemnified in the event of a claim against them by a third party. life insurance  A form of insurance where the insurer agrees to pay an agreed sum upon the death of the insured or upon the attainment by the insured of a particular age. local authority  A statutory authority such as a city council or a shire council that exercises legislative power delegated to it by a State or Territory government. Also known as ‘local government’. misrepresentation  A false statement of fact made by one person to induce another person to enter into a contract. Pay As You Go instalments scheme  A scheme whereby a business periodically pays to the Australian Taxation Office income tax instalments calculated on the basis of the previous year’s income. Pay As You Go withholding scheme  A scheme whereby a business withholds and periodically pays to the Australian Taxation Office income tax payable on payments made to employees and some contractors. payroll tax  A State tax payable on the wages paid to employees. property insurance  A form of insurance where the insured is indemnified upon the occurrence of loss of or damage to particular real or personal property. rates  A form of tax calculated on the basis of the unimproved value of land owned by the taxpayer, and applied to fund the provision of basic services to that land. separate legal entity  A legal person able to own property, enter into contracts and be a party to litigation in its own name. This includes both individuals and corporations. stamp duty  A form of tax paid to the government upon certain transactions, calculated on the basis of the value of the transaction. subrogation  Upon payment of an insurance claim, the insurer assumes all of the rights of the insured in relation to the subject matter of the insurance, including the right to sue a third party if they are the cause of the loss. superannuation  Payments by an employer and an employee to a managed fund that is used to finance the employee’s retirement. Tax File Number (TFN)  A unique number issued by the ATO to all individuals and organisations to help the ATO to administer tax. uberrimae fidei  ‘Utmost good faith’. unimproved value  The value of land as if there were no buildings on it.

ACKNOWLEDGEMENTS Photo: © Gajus / Shutterstock.com Photo: © Mattz90 / Shutterstock.com Article: © ABC News, Matthew Doran, 17 December 2015, Almost 600 major corporations did not pay tax in 2013-14 financial year, Australian Tax Office says, http://www.abc.net.au/ news/2015-12-17/almost-600-companies-did-not-pay-tax-in-2013-14/7036324 Extracts: © Commonwealth of Australia

QUIZ ANSWERS

1. b  2. b  3. b  4. b.  5. a  6. d  7. a  8. d CHAPTER 18 Managing a business: insurance and taxes  679

CHAPTER 19

Managing a business: employing workers LEA RN IN G OBJE CTIVE S 19.1 What is the difference between an employee and an independent contractor, and why is the distinction so important? 19.2 What are the legal obligations of an employer and legal rights of an employee in relation to pay and working conditions? 19.3 What are an employer’s legal obligations in relation to occupational health and safety, workers compensation, discrimination, harassment and equal opportunity? 19.4 When can a contract of employment be terminated?

JOHNNY AND ASH

[Johnny and Ash are in Johnny’s sports car, Johnny behind the wheel and Ash in the passenger seat, looking very pregnant. Johnny appears to be thoroughly enjoying the driving experience.] Ash — You seem to be much happier with your car these days. Johnny — Oh yes! My new mechanic, Cherry, is really, really good. She is much better than my previous mechanic, Karl. Cherry is not only doing a better job than Karl, she’s actually a lot cheaper. I’m so glad I changed over. Ash — That’s great. I guess it really pays to shop around. [Johnny is quiet for a few minutes, deep in thought. Suddenly, he turns to Ash, excited.] Johnny — I’ve just had an idea! Ash — Keep your eyes on the road. What is it? Johnny — Well, changing mechanics was so easy. I just decided to stop using my old mechanic and start using a different, better and cheaper mechanic. Ash — Yes. And? Johnny — Well, why can’t we do the same thing with the people who work for us in the Organicola factory? Ash — What? Johnny — Oh, most of them are good workers, I know. But some of them are a bit slack and lazy. We pay them a generous wage, we contribute to their superannuation, we give them regular holidays and sick leave. They really are getting quite a good deal, but not all of them are worth the money we pay them. Imagine if we dealt with them the same way I deal with my mechanic. I don’t pay for Cherry’s superannuation, or for her to take days off and go on holidays. We could agree to pay our factory workers a fee for each week’s worth of work that they do for us, and then if we ever decide that someone else can do a better job, or work for a lower fee, we can just tell them we have decided to use someone else. It would be so much simpler! No payroll tax, no OHS issues, no HR issues, no long service leave. Just a nice, straightforward arrangement where we pay them each week for doing a good job. Just like Cherry. Ash — Well, there is a difference between engaging someone as your mechanic and employing someone to work in your business. Johnny — I don’t agree. In both cases I am paying someone to work for me. What’s the difference?

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Organicola can treat its factory workers as independent contractors rather than employees.

Introduction Organicola Ltd employs factory workers, salespeople and administrative staff. As an employer, Organicola is legally obliged to maintain minimum standards of pay, conditions and entitlements for its employees. Most employees in Australia are covered by the Federal system of workplace relations as set out in the Fair Work Act 2009 (Cth). The Fair Work Act, or FWA, initially applied to: •• all employees in the ACT, the Northern Territory and Victoria; •• all employees in any other State employed by a corporation; and •• all employees employed by the Commonwealth. CHAPTER 19 Managing a business: employing workers  681

From 1 January 2010, New South Wales, Queensland, South Australia and Tasmania referred their industrial relations powers to the Commonwealth and thereby created a national workplace relations system that now covers all private sector employees in Australia, other than those employees in Western Australia who are not employed by a corporation. Table 19.1 sets out the coverage of the FWA. TABLE 19.1

Coverage of the Fair Work Act

Corporation

Other private sector employer (e.g. sole trader, partnership)

Commonwealth government

State or Territory government

Local government

Australian Capital Territory

X

X

X

X

X

New South Wales

X

X

X

Northern Territory

X

X

X

X

X

Queensland

X

X

X

South Australia

X

X

X

Tasmania

X

X

X

Victoria

X

X

X

Western Australia

X

Employer

X

Those employees not covered by the FWA are covered by State legislation. As it is a corporation, Organicola and its employees are covered by the FWA.

682  PART 3 Managing a business

X X

X

LAW IN CONTEXT: LAW AND POLITICS

Industrial relations reform In 2005 the Federal government, controlled at the time by the Liberal–National coalition, introduced significant changes to the Workplace Relations Act 1996 (Cth), the Federal Act regulating industrial relations in Australia. The Workplace Relations Amendment (WorkChoices) Act 2005 commenced in March 2006. Under the new ‘WorkChoices’ regime, the power to regulate employment and industrial relations matters previously regulated by the States was transferred to the Commonwealth. The Act extended the scope of Federal regulation to all employees employed by corporations, that is, the vast majority of employees in Australia. (This transfer was challenged by the States and confirmed as constitutionally valid by the High Court of Australia.) The 2005 Act encouraged employers to circumvent the collective negotiation process (and avoid having to deal with unions) and to negotiate Australian Workplace Agreements (AWAs) with employees on an individual basis. The Act also introduced wide-ranging reforms to minimum entitlements regarding pay and working conditions, and a ‘Fairness Test’ was established, to be administered and enforced by a new body known as the Australian Fair Pay Commission. In late 2007, a Labor Party government was elected to office. The new Labor government set about reforming the industrial relations regime with its own ‘Forward to Fairness’ program. The Fair Work Bill was introduced into Parliament in 2008 and commenced on 1 July 2009. The FWA completely replaced the Workplace Relations Act 1996. It abolished AWAs and other individual statutory agreements, and instead encouraged the making of enterprise agreements, that is, collective agreements between employers and employees. A new industrial relations ‘one stop shop’, Fair Work Australia, replaced the Australian Industrial Relations Commission, the Australian Fair Pay Commission and the Workplace Authority from 1 January 2010. In 2012, amendments to the FWA resulted in Fair Work Australia being renamed the Fair Work ­Commission, and in changes to the rules regulating unfair dismissals and enterprise agreements.

Under the FWA, Australian employers and employees have the same workplace rights and obligations, regardless of the State or Territory in which they work. The key features of the national workplace relations system include: •• a set of 10 minimum National Employment Standards (NES), •• modern awards that apply nationally for specific industries and occupations, •• enterprise bargaining leading to enterprise agreements, and •• protection from unfair dismissal. Each of these features is described in this chapter. We also examine some of the many other legal obligations of employers in Australia. LAW IN CONTEXT: LAW IN PRACTICE

Online resources There are many useful employment-related online resources. • The Department of Employment is the Federal authority primarily responsible for administering employment law: www.employment.gov.au. • The Fair Work Commission website (www.fwc.gov.au) and the Fair Work Ombudsman website (www.fairwork.gov.au) include information and updates about the Fair Work industrial relations system. • Jobactive matches employers with job seekers that meet their recruitment needs: www.jobsearch. gov.au. • Australian Apprenticeships provides employers with information about the benefits of hiring apprentices and trainees: www.australianapprenticeships.gov.au.

CHAPTER 19 Managing a business: employing workers  683

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 19.1 Which employees in Australia are covered by the Federal industrial relations system? How are other employees regulated? 19.2 What are the key features of the national workplace relations system?

19.1 Employee or independent contractor? LEARNING OBJECTIVE 19.1 What is the difference between an employee and an independent contractor, and why is the distinction so important?

It is very important for a business to be clear about whether its contract with a particular worker is: •• a contract of service, according to which the worker is an employee and the business is an employer, or •• a contract for services, according to which the worker is an independent contractor and the business is a principal. The differences between employees and independent contractors are significant. •• Industrial awards apply to employees but not to independent contractors. •• Employees are legally entitled to annual holidays, sick leave and long service leave; independent contractors are not. •• Employers are obliged to pay PAYG income tax instalments, payroll tax, fringe benefits tax, and compulsory superannuation contributions in relation to employees but not in relation to independent contractors (subject to certain exceptions). •• An employee is entitled to workers compensation if they are injured (see below); an independent contractor is not. •• An employer is vicariously liable for the acts of their employees but not for the acts of independent contractors unless they owe a non-delegable duty of care (see a previous chapter). While a business may be tempted to engage all of its workers as independent contractors rather than employees, it is in fact the law that determines the status of a worker, not the business. How does the law determine whether a worker is an employee or an independent contractor? The traditional test is the control test: if the person paying for the services has the right to tell the worker not only what to do but how to do it, the worker is an employee. Narich Pty Ltd v Commissioner for Pay-roll Tax (NSW) [1983] 2 NSWLR 597

A worker was engaged by Narich as an instructor in a Weight Watchers program. The written agreement clearly stated that the worker was an independent contractor. However, it also stated that the worker had to comply with a detailed practice manual issued by Narich. The Commissioner for Payroll Tax insisted that the worker was an employee and that Narich was therefore obliged to pay payroll tax. The court decided that in light of the degree of control exercised by Narich over the worker, the worker was an employee.

The key element is the right to control the worker. Someone is still an employer even if they do not actually exercise that right. More recently, courts have acknowledged that while the degree of control over the worker is an important factor to consider, it is not the only factor. 684  PART 3 Managing a business

Zuijs v Wirth Bros Pty Ltd (1955) 93 CLR 561

Zuijs was a circus trapeze artist employed by Wirth Bros. When he was injured, he claimed workers compensation. Wirth Bros resisted the claim, arguing that Zuijs was an independent contractor and not an employee. Wirth Bros argued that the control test should be applied and that since they had no control over how Zuijs performed his act, he was not an employee. The court acknowledged that the degree of control was an important consideration, but not the only consideration, and decided that Zuijs was in fact an employee.

The court will now examine the whole of the circumstances of the particular case in deciding whether or not someone is an employee. One such circumstance is whether there is a written agreement identifying the worker as an employee or an independent contractor. This is not, however, conclusive and an employer cannot ‘disguise’ one type of arrangement by labelling it as the other type of arrangement. CAUTION!

A worker described by an employer as an ‘independent contractor’ may in fact be an employee. The question whether a worker is an employee or an independent contractor is one ultimately answerable by the court, not by the employer.

Other factors likely to be taken into account by the court are set out in table 19.2. Note that none of the factors are decisive – they are merely indicative. TABLE 19.2

Employee or independent contractor? Employee

Independent contractor

Rate of pay

• Rate of pay is set by employer

• Rate of pay is set by worker

Payments

• Worker is paid consistent amounts at regular intervals

• Worker is paid inconsistent amounts at irregular intervals

Hours of work

• Employer sets clearly defined hours of work

• Worker decides upon hours of work themselves

Tools and equipment

• Tools and equipment are provided and maintained by employer

• Tools and equipment are provided and maintained by worker

Income tax

• Income tax is deducted from payments to worker by employer

• Income tax is paid independently by worker (although tax on some payments to independent contractors must now be withheld by principal)

Delegation

• Worker is not authorised to delegate their responsibilities to another person

• Worker is authorised to delegate their responsibilities to another person

Nature of task

• Worker performs a continuing series of tasks

• Worker performs a specific task

Hollis v Vabu Pty Ltd (2001) 207 CLR 21

Hollis was injured when he was knocked over by a bicycle courier who worked for Vabu Pty Ltd (which traded as ‘Crisis Couriers’). Hollis could not identify the individual courier who injured him, but he recognised the courier’s uniform, so he commenced legal proceedings against Vabu for compensation. He argued that as the courier’s employer, Vabu was vicariously liable for the courier’s actions. Vabu argued that their couriers were independent contractors because Vabu did not control how the couriers

CHAPTER 19 Managing a business: employing workers  685

performed their duties, and because the couriers were obliged to bear the costs of their own vehicle maintenance. The High Court rejected the control test in favour of an approach based on economic reality. It referred to the fact that the couriers were not skilled workers engaged in an independent enterprise, that the couriers wore a Crisis Couriers uniform, and that payments to the couriers were set by Vabu rather than negotiated, and concluded that the courier was an employee rather than an independent contractor.

ACTIVIT Y 19.1 — REFLECT

Why is an employee given legal rights and privileges that an independent contractor is not?

Approximately 10 per cent of Australian workers are independent contractors. The Independent Contractors Act 2006 (Cth) seeks to protect the interests of independent contractors by: •• preventing Federal awards and agreements and State/Territory laws from restricting or limiting the use of independent contractors, •• preventing the regulation of independent contractors as if they were employees, and •• prohibiting unfair terms in independent contracting agreements. LAW IN CONTEXT: LAW IN THE MEDIA

Melbourne train cleaner wins payout over unfair dismissal A man who was unfairly dismissed from his job cleaning Melbourne’s train fleet has won a confidential settlement from his former employer. The case brought by the man, who wants only to be known as Asim, could have wide-ranging ramifications for contract cleaning company Transclean, which has a contract with Metro Trains to clean its fleet of commuter trains. Asim’s unfair dismissal claim was heard before the Fair Work Commission in Melbourne this week. Fair Work Commissioner John Ryan admonished lawyers for Transclean for arriving unprepared to argue the case. Commissioner Ryan told them that as they had submitted no evidence in response to Asim’s claim, they did not have a case. Lawyers for Transclean and Asim agreed to try and resolve the claim of unfair dismissal, as well as claims of underpayment, through conciliation. Asim, a qualified pharmacist, began working for Transclean while completing his study at Swinburne University. He said he worked as much as 55 hours a week, often until 4:00am in the morning, and was paid an average of $737 a week. ‘[Transclean] decided that they were going to pay us per train so if you clean one train they are going to give you $22’, he said. ‘Cleaning a train means that you have to pick up all of the rubbish, you have to mop all of the floors and you have to clean all of the graffiti, if it’s inside and outside.’ He said the workers were mostly from India and Pakistan. ‘We would work very hard, we would clean all the trains but nobody was appreciating us at that time and obviously the pay rate was a huge problem for us’, he said. Asim said he was dismissed from his job after forgetting to place a flag on a train to indicate to Metro staff that it was in the process of being cleaned. Transclean working conditions ‘exploitative’ Garry Dircks, who represented Asim at the Fair Work Commission hearing, described the conditions that Asim and his colleagues were working under as exploitative. ‘There is no superannuation, there is no Workcover, they are working seven nights a week to earn about $730 a week, it’s just blatant exploitation.’

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Mr Dircks accused Transclean of attempting to circumvent its obligations to its employees by making them sign contracts that stipulated that they were subcontractors to the company. ‘The contract was designed to dodge all of the requirements, all of the employment related requirements such as complying with the award, such as providing superannuation, such as providing Workcover’, Mr Dircks said. ‘It was designed to lower the cost; no other company that was complying with the law could ever hope to win that sort of contract in a tentative tender.’ The company has since made a key concession that Asim was an employee of the company rather than an individual contractor. The union movement, United Voice, said the use of individual contracts in the cleaning industry was widespread. ‘It’s a highly cost competitive industry and labour costs are a big component’, national secretary of United Voice Jo-anne Schofield said. ‘So we’re seeing a lot of companies enter the industry to try and grab work and they do that by undercutting the award and legal rates of pay.’ Transclean has not responded to a request for comment. Source: Simon Lauder and Sam Clark, 7 October 2015, http://www.abc.net.au/news/2015-10-07/melbourne-train-cleanerunfair-dismissal-wins-payout/6834110.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 19.3 What is the difference between an employee and an independent contractor, and why is the distinction significant? 19.4 How will a court decide whether a worker is an employee or an independent contractor?

19.2 Employer obligations LEARNING OBJECTIVE 19.2 What are the legal obligations of an employer and legal rights of an employee in relation to pay and working conditions?

Common law duties Obligations are imposed upon both the employer and the employee by the contract of employment. The basic principles of contract law are therefore relevant. In addition, the common law implies a number of important duties into the contract.

Duties owed by employer An employer owes an implied duty to its employees to provide for their safety. In particular, it is obliged to: •• employ competent and qualified co-workers, •• provide a safe place of work, and •• exercise reasonable care in the supervision of the place of work. This duty is now set out in workplace health and safety legislation, which is considered in more detail below.

Duties owed by employee Employees owe their employer an implied duty to faithfully and obediently carry out the tasks that the employer assigns to them. The employees must not: •• disclose the employer’s trade secrets and other confidential information, •• help the employer’s competitors, CHAPTER 19 Managing a business: employing workers  687

•• conceal relevant information from the employer, or •• take advantage of information and opportunities for their own personal benefit. Employees must obey their employer’s commands if they are reasonable, lawful, appropriate and within the scope of the terms of employment. Australian Telecommunications Commission v Hart (1982) 65 FLR 41

An employee was fined by their employer for persisting in wearing a caftan and thongs to work despite being directed to cease doing so. The court decided that the employer’s direction was reasonable and lawful and that the employee therefore had a duty to obey it: it is reasonable for an employer to set minimum dress standards for the workplace.

Bree v Lupevo Pty Ltd [2003] EOC 93–267

Bree was a male service station attendant who was dismissed by his employer for continuing to wear an earring in breach of the employer’s ‘grooming policy’. The court decided that the employer’s direction to remove the earring was not lawful. Female employees were permitted to wear earrings and for the employer to insist that male employees not wear them was discriminatory. The employee had not breached his duty.

ACTIVIT Y 19.2 — REFLECT

How can you explain the different results in the two cases described above?

Statutory entitlements and obligations The entitlements and work conditions of an employee covered by the Federal system of workplace relations will be determined by: •• the National Employment Standards, •• the terms of the relevant award or enterprise agreement, and/or •• the terms of their employment contract.

National Employment Standards The National Employment Standards (NES) are a set of ten minimum employment standards that apply to all employees in the Federal system. The NES are established by Part 2-2 of the FWA. The NES address the following aspects of employment. 1. Maximum weekly hours of work — this is 38 hours per week, plus reasonable additional hours. 2. Requests for flexible working arrangements — parents or carers of a child under school age or of a child under 18 with a disability are entitled to request a change in working arrangements to assist with the child’s care. 3. Parental leave and related entitlements — employees are entitled to up to 12 months unpaid leave, plus a right to request an additional 12 months unpaid leave, as well as other forms of maternity, paternity and adoption related leave. 4. Annual leave — employees are entitled to 4 weeks paid leave per year, plus an additional week for certain shift workers. 5. Personal/carer’s leave and compassionate leave — employees are entitled to 10 days paid personal/ carer’s leave, 2 days unpaid carer’s leave as required, and 2 days compassionate leave (unpaid for casuals) as required. 688  PART 3 Managing a business

 6. Community service leave — employees are entitled to unpaid leave for voluntary emergency activities and leave for jury service, with an entitlement to be paid for up to 10 days for jury service.  7. Long service leave — this grants a transitional entitlement to employees who had certain LSL ­entitlements before 1 January 2010 pending the development of a uniform national long service leave standard.  8. Public holidays — employees are entitled to a paid day off on a public holiday, except where ­reasonably requested to work.  9. Notice of termination and redundancy pay — employees are entitled to up to 4 weeks notice of ­termination (5 weeks if the employee is over 45 and has at least 2 years of continuous service) and up to 16 weeks redundancy pay, both based on length of service. 10. Provision of a Fair Work Information Statement — employers must provide this statement to all new employees. It contains information about the NES, modern awards, agreement-making, the right to freedom of association, termination of employment, individual flexibility arrangements, right of entry, transfer of business, and the respective roles of the Fair Work Commission and the Fair Work Ombudsman. Many of the NES entitlements do not apply to casual employees. Casual employees are entitled to: •• 2 days unpaid carer’s leave and 2 days unpaid compassionate leave per occasion, •• maximum weekly hours, •• community service leave (except paid jury service), •• a day off on a public holiday, unless reasonably requested to work by the employer, and •• provision of the Fair Work Information Statement. Casual employees who have been employed for at least 12 months by an employer on a regular and systematic basis and with an expectation of ongoing employment are also entitled to: •• make requests for flexible working arrangements, and •• parental leave. An employer who contravenes the NES commits an offence under the FWA.1 They may face penalties of up to $6600 for an individual and $33  000 for a corporation. The NES cannot be excluded by the terms of an award or enterprise agreement.2 However, awards and enterprise agreements can supplement the NES by providing entitlements that do not disadvantage employees in comparison with the NES. They can, for example, permit: •• averaging of an employee’s ordinary hours of work, •• the cashing out of paid annual leave, •• the cashing out of paid personal/carer’s leave, •• the substitution of public holidays, and •• situations in which redundancy pay entitlements do not apply. Employers and employees who are not covered by an award or enterprise agreement can also make agreements that vary the operation of the NES in certain ways. The employment contract can provide for: •• averaging of hours of work, subject to conditions such as a maximum of 26 weeks, •• the cashing out of paid annual leave, •• the substitution of public holidays, •• extra annual leave in exchange for foregoing an equivalent amount of pay, and •• extra personal/carer’s leave in exchange for foregoing an equivalent amount of pay. In all other cases, employment contracts must provide entitlements that are equal to, or more favourable to the employee than, the NES.

1 Fair Work Act 2009 (Cth) s 44. 2 Fair Work Act 2009 (Cth) s 55(1).

CHAPTER 19 Managing a business: employing workers  689

Awards An award is an instrument prescribing employee entitlements and working conditions within a particular trade, occupation or industry. It sets out minimum employment standards that apply in addition to the NES, and is usually the result of extensive negotiation between employers, employees and unions within the particular trade, occupation or industry. On 1 January 2010, a system of ‘modern awards’ replaced thousands of federal and state-based awards. Modern awards are made by the Fair Work Commission, and now cover most workplaces. (Employees not covered by any other modern award may be covered by the Miscellaneous Award.) Modern awards contain terms relating to: •• base rates of pay, •• types of employment (e.g. full-time, part-time, casual), •• overtime and penalty rates, •• work arrangements (e.g. rosters, variations to working hours), •• annualised wage or salary arrangements, •• allowances (e.g. travel allowances), •• leave, leave loading and taking leave, •• superannuation, •• procedures for consultation, representation and dispute settlement, •• outworkers, and •• industry-specific redundancy schemes. Modern awards must also include: •• a ‘flexibility term’, allowing employers and employees to negotiate changes to meet their individual needs; and •• a procedure for settling disputes about matters covered by the award or the NES. A modern award may not apply to managers or to high income employees, even if the award covers the industry they work in. An employer who fails to recognise the minimum entitlements of an employee under an award will be prosecuted for breach of the award. It is not possible to contract out of the terms of an award. Modern awards are reviewed by the Fair Work Commission every 4 years. ACTIVIT Y 19.3 — RESEARCH

Visit the Fair Work Commission website at www.fwc.gov.au. Locate the relevant modern award for the staff at The Lame Duck restaurant. What is the minimum hourly wage for a Kitchen Attendant Grade 1?

Enterprise agreements Enterprise agreements are agreements made between employers and employees about the terms and conditions of employment. Whereas awards cover a whole industry or occupation, enterprise agreements are tailored to meet the needs of particular organisations. They are usually the result of an enterprise bargaining process involving the employer, employees and unions. Enterprise agreements can include a broad range of matters such as: •• rates of pay, •• employment conditions e.g. hours of work, meal breaks, overtime, •• consultative mechanisms, •• dispute resolution procedures, and •• deductions from wages for any purpose authorised by an employee. Enterprise agreements must be approved by the Fair Work Commission in order to be enforceable. The Fair Work Commission will only approve an enterprise agreement if: •• the agreement was made with the genuine agreement of those involved, •• the agreement passes the ‘better off overall’ test and does not include any unlawful terms, 690  PART 3 Managing a business

•• the group of employees covered by the agreement was fairly chosen, •• the agreement specifies a date as its nominal expiry date (which must not be more than 4 years after the date of approval), •• the agreement provides a dispute settlement procedure, and •• the agreement includes a flexibility clause and a consultation clause. The ‘better off overall test’ requires that each of the employees to be covered by the enterprise agreement is better off overall than under the relevant modern award. ACTIVIT Y 19.4 — RESEARCH

Visit the Fair Work Commission website at www.fwc.gov.au. What is the process for approval of an enterprise agreement?

Employment contracts Employers and employees are still able to negotiate individual employment contracts but the employee entitlements and working conditions established by the contract cannot be less favourable to the employee than those granted by the NES and the relevant award or enterprise agreement.

National minimum wage The national minimum wage is the minimum rate of pay for employees not covered by an award or enterprise agreement. National minimum wage orders are made by the Minimum Wage Panel of the Fair Work Commission. ACTIVIT Y 19.5 — RESEARCH

What is the current national minimum wage?

Fair Work Ombudsman The Fair Work Ombudsman is a statutory office created by the FWA. The Fair Work Ombudsman: •• is a single point of contact for information about Australia’s workplace relations system, •• educates employees about fair work practices, rights and obligations, •• investigates complaints about suspected contraventions of workplace laws, awards and agreements, and •• litigates to enforce workplace laws. ACTIVIT Y 19.6 — RESEARCH

Visit the Fair Work Ombudsman website at www.fairwork.gov.au. What is the process for lodging a ­complaint about a suspected breach of an award by an employer?

Tax and superannuation As an employer Organicola must register for: •• PAYG tax with the ATO, •• fringe benefits tax with the ATO, and •• payroll tax with the State or Territory revenue office. An employer’s tax obligations were described in detail in the previous chapter. CHAPTER 19 Managing a business: employing workers  691

Organicola will also have to pay superannuation contributions for most of its employees and some of its contractors. The minimum level of an employer’s superannuation contribution is 9 per cent of the employee’s earnings base. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  19.5 What common law duties are owed by (a) an employer, and (b) an employee?  19.6 What are the National Employment Standards?  19.7 What is an award?  19.8 What is an enterprise agreement?  19.9 To whom does the National Minimum Wage apply? 19.10 What roles are played by the Fair Work Commission and the Fair Work Ombudsman?

19.3 Workplace conditions LEARNING OBJECTIVE 19.3 What are an employer’s legal obligations in relation to occupational health and safety, workers compensation, discrimination, harassment and equal opportunity?

In this section we examine some of the many other rules that must be obeyed by employers. They include the rules relating to workplace health and safety, workers compensation, discrimination, harassment and equal opportunity.

Workplace health and safety Organicola must ensure that its business premises are safe for its employees and others. Each jurisdiction has its own workplace health and safety legislation and statutory authority (see table 19.3). The Commonwealth statutory authority, Safe Work Australia, coordinates the harmonisation of the various workplace health and safety laws across Australia. Most State and Territory governments have adopted workplace health and safety laws based upon the Work Health and Safety Act 2011 (Cth) (the WHS Act). TABLE 19.3

WHS legislation and statutory authorities

Jurisdiction

Legislation

Statutory authority

Commonwealth

Work Health and Safety Act 2011 (Cth)

Safe Work Australia www.safeworkaustralia.gov.au

Australian Capital Territory

Work Health and Safety Act 2011 (ACT) WorkSafe ACT www.worksafe.act.gov.au

New South Wales

Work Health and Safety Act 2011 (NSW)

WorkCover NSW www.workcover.nsw.gov.au

Northern Territory

Work Health and Safety (National Uniform Legislation) Act 2011 (NT)

NT WorkSafe www.worksafe.nt.gov.au

Queensland

Work Health and Safety Act 2011 (Qld)

Workplace Health and Safety Queensland www.worksafe.qld.gov.au

South Australia

Work Health and Safety Act 2012 (SA)

SafeWork SA www.safework.sa.gov.au

Tasmania

Work Health and Safety Act 2012 (Tas)

Workplace Standards Tasmania http://worksafe.tas.gov.au/

Victoria

Occupational Health and Safety Act 2004 (Vic)

WorkSafe Victoria www.worksafe.vic.gov.au

Western Australia

Occupational Safety and Health Act 1984 (WA)

WorkSafe WA www.commerce.wa.gov.au/WorkSafe

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The WHS Act imposes duties upon employers, directors, workers and others. Any person found to have contravened the WHS Act will be subjected to a penalty.

Employers The WHS Act imposes a statutory duty upon employers to take care for the health and safety of their employees, contractors and other persons. An employer must ensure, so far as is ‘reasonably practicable’, the health and safety of their workers — including both employees and independent contractors — while the workers are at work.3 They must also ensure, so far as is reasonably practicable, that the health and safety of other persons — including customers, suppliers and members of the public — is not put at risk from work carried out as part of the conduct of their business or undertaking.4 This includes ensuring: (a) the provision and maintenance of a work environment without risks to health and safety; (b) the provision and maintenance of safe plant and structures; (c) the provision and maintenance of safe systems of work; (d) the safe use, handling and storage of plant, structures and substances; (e) the provision of adequate facilities for the welfare at work of workers, including ensuring access to those facilities; (f) the provision of any information, training, instruction or supervision that is necessary to protect all persons from risks to their health and safety; and (g) that the health of workers and the conditions at the workplace are monitored for the purpose of preventing illness or injury.5

3 Work Health and Safety Act 2011 (Cth) s 19(1). 4 Work Health and Safety Act 2011 (Cth) s 19(2). 5 Work Health and Safety Act 2011 (Cth) s 19(3).

CHAPTER 19 Managing a business: employing workers  693

The term ‘reasonably practicable’ means that which is, or was at a particular time, reasonably able to be done in relation to ensuring health or safety, taking into account and weighing up all relevant matters including: •• the likelihood of the hazard or risk occurring, •• the seriousness of the risk, •• what the employer knows, or ought reasonably to know, about the hazard or the risk, and ways of eliminating or minimising the risk, and •• the availability and suitability of ways to eliminate or minimise the risk. After assessing these matters, the cost of ways of eliminating or minimising the risk, including whether the cost is grossly disproportionate to the risk, may also be taken into account.6

Directors If the employer is a company, the WHS Act imposes an obligation upon the directors and other officers of the company to: •• acquire and keep up-to-date knowledge of work health and safety matters, •• gain an understanding of the nature of the operations and the hazards and risks associated with those operations, •• ensure that the company has available and uses appropriate resources and processes to enable hazards associated with the operations to be identified and risks eliminated or minimised, •• ensure that the company has appropriate processes for receiving and considering information regarding incidents, hazards and risks and responding in a timely way, •• ensuring that the company has and implements processes for complying with its duties and obligations, and •• verifying all of the above.7

Workers Workers must: •• take reasonable care for their own health and safety, •• take reasonable care that their acts or omissions do not adversely affect the health and safety of other persons, •• comply with any reasonable instruction given by the employer to allow the employer to comply with the WHS Act, and •• cooperate with any reasonable policy or procedure of the employer which relates to work health or safety and that has been notified to workers.8

Others Other persons at the workplace, such as customers, suppliers and members of the public, have a duty to take reasonable care for their own health and safety and to take reasonable care that their acts or omissions do not adversely affect the health and safety of other persons. They also must comply with any reasonable instruction given by the employer to allow the employer to comply with the WHS Act.9 ACTIVIT Y 19.7 — RESEARCH

Go to the website of the workplace health and safety authority in your jurisdiction. Briefly summarise the rights and obligations of an employer in your jurisdiction.

6 Work Health and Safety Act 2011 (Cth) s 18. 7 Work Health and Safety Act 2011 (Cth) s 27. 8 Work Health and Safety Act 2011 (Cth) s 28. 9 Work Health and Safety Act 2011 (Cth) s 29.

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LAW IN CONTEXT: LAW IN THE MEDIA

Coles fined over worker’s fall Supermarket giant Coles has been fined $170  000 and ordered to pay legal costs after a worker fell through a ceiling at a store in Sydney five years ago. The worker, then 42, climbed over a handrail to access promotional material stored on a suspended plasterboard ceiling at the company’s Manly store in August 2007. The plasterboard collapsed and she fell more than two metres, suffering lacerations to the head, whiplash and bruising. A WorkCover investigation found Coles knew it was dangerous to use the roof cavity for storage and had built a railing and posted a warning sign. But management had not undertaken a risk assessment to determine how much weight the plasterboard could bear, and had failed to adequately instruct staff not to access the area or use it for storage, WorkCover said in a statement on Friday. The Industrial Court of NSW fined the company and ordered it to pay WorkCover’s legal costs. ‘This business employs more than 23  000 people in 238 stores across NSW, so the safety procedures of this company are relevant to a lot of people’, WorkCover’s Work Health and Safety general manager John Watson said. ‘This particular area should never have been allowed to be used to store merchandise and Coles management should have been more vigilant. While store management knew the area was not safe, the area was still used for storage and there was no proper information or training given to staff to warn of the risk.’10 Reproduced from © AAP 2012, ‘Coles fined $170k over worker’s fall’, 27 December. See full credit on acknowledgements page.

Workers compensation What if an employee is injured while at work? Each jurisdiction has its own workers compensation legislation and statutory authority (see table 19.4). TABLE 19.4

Jurisdiction authority website

Jurisdiction

Legislation

Statutory authority

Commonwealth

Safety, Rehabilitation and Compensation Act 1988 (Cth)

Comcare www.comcare.gov.au

Australian Capital Territory

Workers Compensation Act 1951 (ACT)

WorkSafe ACT www.worksafe.act.gov.au

New South Wales

Workers Compensation Act 1987 (NSW); Workplace Injury Management and Workers Compensation Act 1998 (NSW)

WorkCover NSW www.workcover.nsw.gov.au

Northern Territory

Workers Rehabilitation and Compensation Act (NT)

NT WorkSafe www.worksafe.nt.gov.au

Queensland

WorkCover Queensland Act 1996 (Qld); Workers Compensation and Rehabilitation Act 2003 (Qld)

WorkCover Queensland www.worksafe.qld.gov.au/

South Australia

Workers Rehabilitation and Compensation Act 1986 (SA); WorkCover Corporation Act 1994 (SA)

WorkCover SA http://www.rtwsa.com/

Tasmania

Workers Rehabilitation and Compensation Act 1988 (Tas)

WorkCover Tasmania www.workcover.tas.gov.au/

Victoria

Accident Compensation Act 1985 (Vic); Accident Compensation (WorkCover Insurance) Act 1993 (Vic)

WorkSafe Victoria www.worksafe.vic.gov.au

Western Australia

Workers Compensation and Injury Management Act 1981 (WA)

WorkCover WA www.workcover.wa.gov.au

10 ‘FED: Coles Fined Over Worker’s Fall’, Australian Associated Press (Sydney) (27 April 2012).

CHAPTER 19 Managing a business: employing workers  695

Workers compensation legislation provides for the compensation and rehabilitation of employees who suffer work-related injuries. At common law, if an employee is injured in the course of their employment they have a right to seek compensation from their employer. The workers compensation legislation requires all employers to obtain workers compensation insurance from a licensed insurer covering them for liability for such claims. If an employer fails to insure all of their employees, they will be fined. If an employee is injured and the employer has not insured the employee, the employee is still entitled to compensation, and the authority will seek reimbursement from the employer. According to the legislation, an employer is strictly liable for any mental or physical injury, any aggravation of an existing injury, and any disease or illness arising out of or in the course of employment. ‘In the course of employment’ includes lunch and recreational breaks as well as the employee’s travel: •• to and from work, •• between the place of work and educational institutions, •• to receive medical services, and •• to collect wages. The employee is entitled to compensation for any medical and other expenses incurred as a result of the injury, as well as for loss of earnings attributable to the injury. An employer is also obliged to establish a rehabilitation program and an injury management plan with the injured employee. The rehabili­ tation program may include vocational re-education if necessary. An employer will not be liable if the employee’s injury was self-inflicted. If the injury arose as a result of serious and wilful misconduct on the part of the employee, the employer will only be liable for death or serious and permanent disability. ACTIVIT Y 19.8 — RESEARCH

Go to the website of the workers compensation statutory authority for your State or Territory. 1. What useful resources are provided for employers and business owners? 2. What is the procedure for lodging a claim?

Discrimination, harassment and equal opportunity An employer has an obligation to refrain from engaging in discriminatory and harassing conduct towards its employees. It must also ensure that others within the workplace do not engage in such conduct. Each jurisdiction has its own anti-discrimination and equal opportunity legislation and statutory authority (see table 19.5). TABLE 19.5

Anti-discrimination authorities: jurisdiction authority website

Jurisdiction

Legislation

Statutory authority

Commonwealth

Racial Discrimination Act 1975 (Cth); Sex Discrimination Act 1984 (Cth); Disability Discrimination Act 1984 (Cth); Human Rights and Equal Opportunity Commission Act 1986 (Cth); Age Discrimination Act 2004 (Cth)

Australian Human Rights Commission www.humanrights.gov.au

Australian Capital Territory

Discrimination Act 1991 (ACT)

ACT Human Rights Commission www.hrc.act.gov.au

New South Wales

Anti-Discrimination Act 1977 (NSW)

Anti-Discrimination Board of NSW http://www.antidiscrimination.justice. nsw.gov.au/

696  PART 3 Managing a business

Jurisdiction

Legislation

Statutory authority

Northern Territory

Anti-Discrimination Act (NT)

Northern Territory Anti-Discrimination Commission www.nt.gov.au/justice/adc

Queensland

Anti-Discrimination Act 1991 (Qld)

Anti-Discrimination Commission Queensland www.adcq.qld.gov.au

South Australia

Equal Opportunity Act 1984 (SA); Racial Vilification Act 1996 (SA)

South Australia Equal Opportunity Commission www.eoc.sa.gov.au

Tasmania

Anti-Discrimination Act 1998 (Tas)

Tasmania Office of the AntiDiscrimination Commissioner www.antidiscrimination.tas.gov.au

Victoria

Equal Opportunity Act 2010 (Vic); Racial and Religious Tolerance Act 2001 (Vic); Victoria Charter of Human Rights and Responsibilities Act 2006 (Vic)

Victorian Equal Opportunity and Human Rights Commission www.humanrightscommission.vic.gov.au

Western Australia

Equal Opportunity Act 1984 (WA)

Equal Opportunity Commission WA www.eoc.wa.gov.au

Unlawful discrimination Unlawful discrimination occurs when someone, or a group of people, is treated less favourably than another person or group because of: •• their race, colour, national or ethnic origin, •• their sex, pregnancy or marital status, •• their age, •• their disability, •• their religion, •• their sexual preference, •• their membership of a trade union, or •• some other characteristic specified under anti-discrimination or human rights legislation. Unlawful workplace discrimination by an employer can occur in relation to: •• the recruitment and selection of employees, •• the terms, conditions and benefits offered to employees, •• decisions about which employees receive training and what sort of training is offered, and •• decisions about transfer, promotion, retrenchment or dismissal of employees. Discrimination may be direct or indirect. When an unfavourable decision is made on the basis of a person’s race, sex, disability, and so on, direct discrimination occurs. An example would be a refusal by Organicola to hire someone to work in its factory because of their sex. Ansett Transport Industries (Operations) Pty Ltd v Wardley (1984) EOC 92 003

Ms Wardley unsuccessfully applied for a position with Ansett as a trainee pilot. All of the successful applicants were males, including at least one applicant who was less qualified than Ms Wardley. The Victorian Equal Opportunity Board decided that Ansett could not rebut the presumption that the decision not to employ Ms Wardley was made on the basis of her sex. Ansett was ordered to employ Ms Wardley as a trainee pilot.

When a decision is made or a rule is established that does not appear to be expressed in discriminatory terms but its effect in practice is nevertheless discriminatory, indirect discrimination occurs. Indirect CHAPTER 19 Managing a business: employing workers  697

discrimination is lawful if the decision or rule itself is reasonable and it has an important purpose. For example, if Organicola requires applicants for the position of janitor in its factory to have a high level of English language skills (even though they rarely need to speak with anyone at work) the requirement may be expressed in non-discriminatory terms but it will, in practice, disadvantage recent immigrants from non-English speaking backgrounds as they are less likely to have English skills; this is indirect discrimination. However, if Organicola is hiring people to take telephone orders, a requirement that applicants possess good English skills would not be unreasonable discrimination and would therefore be lawful.

Unlawful harassment Unlawful harassment occurs when an employee is made to feel intimidated, insulted or humiliated by their employer because of: •• their race, colour, national or ethnic origin, •• their sex, •• their disability, •• their sexual preference, or •• some other characteristic specified under anti-discrimination or human rights legislation. It can also happen if someone is working in a hostile or intimidating work environment. Harassment can include: •• telling insulting jokes about particular racial groups, •• sending explicit or sexually suggestive emails, •• displaying offensive or pornographic posters or screen savers, •• making derogatory comments or taunts about someone’s race or religion, or •• asking intrusive questions about someone’s personal life, including their sex life. An example of a potentially hostile working environment is where pornographic materials are displayed and where crude conversations, innuendo or offensive jokes are part of the accepted culture. A person has the right to complain about the effects of a sexually or racially hostile working environment, even if the conduct in question is not specifically targeted at them. Hill v Water Resources Commission (1985) EOC 92 127

Ms Hill was employed as a clerk by the Water Resources Commission (WRC). She complained to her supervisors about the conduct of her male co-workers, which included sexist remarks, displays of offensive material, nuisance telephone calls and threats to kill her pet fish. Her supervisors did nothing about the complaints. The New South Wales Equal Opportunities Tribunal found that the hostile work environment amounted to sexual harassment, and that the WRC was vicariously responsible for the conduct because they knew about it but did nothing. Ms Hill was awarded substantial damages.

An employer will be vicariously liable for any discrimination or harassment by others that takes place in the workplace unless they can show that they have taken ‘all reasonable steps’ to prevent and to address such discrimination and harassment. LAW IN CONTEXT: LAW IN PRACTICE

Preventing and addressing discrimination and harassment in the workplace Reasonable steps to prevent discrimination and harassment include: • obtaining the support of senior management for the implementation of a comprehensive strategy to address discrimination and harassment, • developing, in consultation with staff, a written policy that prohibits discrimination and harassment,

698  PART 3 Managing a business

• consulting relevant parties including staff, employer organisations, unions, industry and professional associations, the HREOC and/or State and Territory anti-discrimination agencies when developing anti-discrimination or anti-harassment policies, • regularly distributing and promoting the policy at all levels of the organisation, • translating the policy into relevant community languages where required, so it is accessible to employees from non-English speaking backgrounds, • ensuring that managers and supervisors discuss and reinforce the policy at staff meetings, • providing the policy and other relevant information on discrimination and harassment to new staff as a standard part of induction, • periodically reviewing the policy to ensure it is operating effectively and contains up-to-date information, • displaying posters on notice boards in common work areas and distributing relevant brochures, • training all line managers on their role in ensuring that the workplace is free from discrimination and harassment, • conducting awareness-raising sessions for staff on discrimination and harassment issues, • removing offensive, explicit or pornographic calendars, literature, posters and other materials from the workplace, and • developing a policy prohibiting inappropriate use of computer technology, such as email, screen savers and the internet. Reasonable steps to address discrimination and harassment include: • implementing an internal system for dealing with complaints of discrimination/harassment, • ensuring that the organisation’s policy on discrimination and harassment provides employees with advice on what to do if they are discriminated against or harassed, • depending on the size of the organisation, appointing anti-discrimination and harassment contact ­officers of both sexes at various levels, • providing employees who have been discriminated against or harassed with access to counselling services or employee assistance programs, and • providing employees who have harassed other staff members with information and training to ensure the discrimination or harassment does not occur again.

ACTIVIT Y 19.9 — RESEARCH

Go to the websites of the AHRC and the statutory authority in your State or Territory. 1. What resources are provided for employers? 2. What is the procedure for lodging a complaint about sexual harassment in the workplace?

Workplace Gender Equality The Workplace Gender Equality Act 2012 (Cth) seeks to: •• promote and improve gender equality (including equal remuneration between women and men) in employment and in the workplace; •• support employers to remove barriers to the full and equal participation of women in the workforce, in recognition of the disadvantaged position of women in relation to employment matters; •• promote, amongst employers, the elimination of discrimination on the basis of gender in relation to employment matters (including in relation to family and caring responsibilities); •• foster workplace consultation between employers and employees on issues concerning gender equality in employment and in the workplace; and •• improve the productivity and competitiveness of Australian business through the advancement of gender equality in employment and in the workplace. The Act is administered by the Workplace Gender Equality Agency (WGEA). The Act requires all non-public sector employers with 100 or more employees to report annually to WGEA on their compliance with a set of standardised gender equality indicators. These indicators include: •• gender composition of the workforce; •• gender composition of governing bodies of relevant employers; CHAPTER 19 Managing a business: employing workers  699

•• equal remuneration between women and men; •• availability and utility of employment terms, conditions and practices relating to flexible working arrangements for employees and to working arrangements supporting employees with family or caring responsibilities; and •• consultation with employees on issues concerning gender equality in the workplace The WGEA is a ‘light touch’ regulator. There are two consequences for failing to comply with the Act: 1. The employer is named in a report to the relevant Minister. 2. The organisation may not be eligible to tender for government contracts and industry assistance. LAW IN CONTEXT: LAW AND ETHICS

Ensuring an ethical workplace 1. The first step for an employer who wishes to implement an effective code of ethics in the workplace is modelling ethical behaviour themselves. If the employees see their employer engaging in unethical conduct, they are likely to do the same thing regardless of what a code of ethics says. 2. The next step is to create an ethics advisory board. This board should be comprised of a diverse range of employees and stakeholders. The advisory board’s role is to consider existing business codes of ethics and draft one suitable for the present business. The code of ethics should be a fluid document, able to be changed with advances in technology and business practice. 3. After the advisory board has settled on a code of ethics for the business, it should be distributed to all employees. The code of ethics should be referred to and discussed periodically at staff meetings. 4. The ethics advisory board should conduct annual or semi-annual audits to make sure the business is complying with the code.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 19.11 What are an employer’s obligations in relation to workplace health and safety? 19.12 What are an employer’s obligations in relation to workers compensation? 19.13 When is an employee entitled to claim workers compensation? 19.14 What is unlawful discrimination in the context of the workplace? 19.15 What is the difference between direct and indirect discrimination? 19.16 What is unlawful harassment in the context of the workplace? 19.17 To which employers does the Workplace Gender Equality Act 2012 (Cth) apply, and what are their obligations under the Act?

19.4 Termination of employment LEARNING OBJECTIVE 19.4 When can a contract of employment be terminated?

The employment contract is a contract like any other and as such can be terminated in the usual ways (see an earlier chapter). As a general rule, an employer must give an employee notice of termination. The term of such notice will usually be set out in the employment contract. If it is not, the employer must give ‘reasonable notice’, the length of which will depend upon how frequently the employee is paid: if they are paid weekly, then reasonable notice will be one week. An employer may be entitled to terminate the employment contract without notice if: •• the employee is in actual or anticipatory breach of a condition of the employment contract (and not a mere warranty), or •• the employee is neglectful or incompetent. 700  PART 3 Managing a business

An employee is entitled to terminate the employment contract without notice if: •• the employer is in actual or anticipatory breach of a condition of the employment contract, or •• the life or health of the employee is unnecessarily put at risk.

Unfair dismissal If an employee is dismissed by their employer in circumstances they believe to be unfair, they may be entitled to apply to the Fair Work Commission for a remedy under the unfair dismissal provisions of the FWA. To be eligible to apply, the employee must: •• have completed a minimum employment period of at least 6 months (or 12 months if the employer is a small business employer, i.e. they employ fewer than 15 employees), and •• at the time of dismissal, have been: –– covered by a modern award, –– covered by an enterprise agreement, or –– earning less than the statutory amount per year ($136  700 as at 2016). CHECKLIST

An employee will have been unfairly dismissed if all of the following requirements are satisfied. ◼◼ The employee was dismissed. ◼◼ The dismissal was harsh, unjust or unreasonable. ◼◼ The dismissal was not a case of genuine redundancy. ◼◼ If the employer is a small business employer, the dismissal was not consistent with the Small ­Business Fair Dismissal Code.

Gerald Mahony v Dr Daniel J White T/A Catholic Education Office Sydney [2015] FWC 1593

Mahony was employed by the Catholic Education Office (CEO) as a religious education coordinator and teacher in secondary schools. In September 2012, he was arrested and charged with sexual assault. The CEO suspended him from work with pay until the trial, which was set down for May 2014. The CEO then terminated Mahony’s employment claiming it had an obligation to ensure ‘the welfare and best interests of children and our responsibility to the wider catholic and public community’. Mahony filed an unfair dismissal claim with the Fair Work Commission. The CEO objected to the jurisdiction of the commission, arguing that the termination had come to an end by the doctrine of frustration and not by the employer’s initiative because Mahony was unable to obtain a working with children clearance after his arrest in compliance with the Child Protection (Working With Children) Act 2012 (NSW). The Fair Work Commission accepted that child protection legislation could frustrate an employment contract. However, it also stated that Mahony could continue to be employed while on suspension with or without pay, or redeployed to perform other work. Further, the CEO had not sought to rely upon the doctrine of frustration until the proceedings commenced. Mahony was free to pursue the unfair dismissal application.

In deciding whether the dismissal was harsh, unjust or unreasonable, the Fair Work Commission takes into account a range of factors including: •• whether there was a valid reason for the dismissal relating to the employee’s conduct or capacity, •• whether the employee was notified of the reason and given an opportunity to respond, •• any unreasonable refusal by the employer to allow the employee to have a support person present at any discussions relating to the dismissal, •• if the dismissal related to unsatisfactory performance, whether the employee was warned about this unsatisfactory performance before the dismissal, and CHAPTER 19 Managing a business: employing workers  701

•• the impact of the size of the employer’s enterprise on the dismissal process, including the absence of dedicated human resource management specialists or expertise. A dismissal will be a case of ‘genuine redundancy’ if: •• the employer no longer requires the employee’s job to be performed by anyone because of changes in the operational requirements of the employer’s enterprise, and •• the employer complies with any obligation in a modern award or enterprise agreement that applies to the employment to consult about the redundancy. A dismissal is not a case of ‘genuine redundancy’ if it is reasonable in all the circumstances for the employee to be redeployed within the organisation. If the Fair Work Commission decides that the employee was unfairly dismissed then it may order: •• the employee’s reinstatement, or •• the payment of compensation to the employee if reinstatement is inappropriate. CAUTION!

An employer cannot terminate the employment contract for just any breach by the employee. Recall the distinction between conditions and warranties discussed earlier in the text.

LAW IN CONTEXT: LAW IN THE MEDIA

Okay to swear at boss, says watchdog FAIR Work Australia has ordered the reinstatement of an employee who was sacked for telling his boss to ‘get f  .  .  . ed’. Security guard Craig Symes was sacked from Linfox Armaguard last year after he told his manager to get f.  .  .ed, complained about the ‘f.  .  .ing roster’ and then aggressively poked a notice board — all while carrying a loaded gun. Symes, who had worked with the Brisbane firm since 2000, cracked during a monthly meeting last December after having a fight with his wife before work. ‘He was frustrated with his wife and, in hindsight, should not have come (to the meeting)’, FWA heard. He abused manager Aryn Hala after being assigned to a faulty armoured van and stormed out. Symes later apologised in writing but was sacked the next day. FWA ruled Symes’ behaviour amounted to misconduct but found his dismissal was harsh. While finding swearing at a person was ‘of a different character’ to swearing at an object, or as an adjective, FWA Commissioner Helen Cargill said it was ‘also relevant to consider the evidence that the respondent’s workplace is one in which bad language is commonly used and in which  .  .  .  employees may have received mixed messages about such use’. She said the swearing was not ‘overheard by other employees which could have undermined Mr Halas’ authority’. Ms Cargill ordered the company reinstate Symes with back pay — less six weeks pay as a penalty. Reproduced from Padraic Murphy, ‘OK to Swear at Boss, Says Watchdog’, The Daily Telegraph (Sydney) 14 June 2012, p. 3.

ACTIVIT Y 19.10 — RESEARCH

Go to the Fair Work Ombudsman website at www.fairwork.gov.au. What are the special unfair dismissal rules that apply to employers with fewer than 15 employees?

Unlawful termination An employee dismissed for certain reasons may be entitled to rely upon the unlawful termination provisions in the FWA. According to the FWA, termination of employment will be unlawful if it is because: •• the employee was temporarily absent from work due to sickness or injury, •• the employee is or is not a member of a union, •• the employee is an employees’ representative, 702  PART 3 Managing a business

•• the employee is involved in legal proceedings against the employer, •• of the employee’s race, colour, sexual preference, age, physical or mental ability, marital status, family responsibilities, pregnancy, religion, politics, nationality, or social background, •• the employee was absent during maternity leave or other parental leave, or •• the employee was temporarily absent to engage in a voluntary emergency management activity. Unlawful termination disputes will be resolved by the Fair Work Commission, and if it is unable to resolve the dispute the matter will be heard by the Federal Court. An employer found to have dismissed an employee unlawfully may be ordered to reinstate the employee, pay damages to the employee and/or pay a pecuniary penalty. REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 19.18 In what circumstances can a contract of employment be terminated without notice? 19.19 What is (1) unfair dismissal and (2) unlawful termination?

In conclusion •• Employers are obliged to comply with a number of important legal obligations in relation to the pay and working conditions of their employees. Most employees in Australia now fall under the ­Federal industrial relations system. •• Obligations are imposed upon employers, and entitlements are accorded to employees, by various awards, enterprise agreements, minimum standards and legislative provisions. •• Employers must also comply with workplace health and safety laws, workers compensation laws and anti-discrimination laws. •• Employment contracts can only be terminated without notice in certain circumstances. Terminated employees may be entitled to bring an action against the employer for unfair dismissal or unlawful termination. JOHNNY AND ASH

[Johnny and Ash are still travelling in Johnny’s car. Johnny is now more restrained and pensive.] Ash — So do you see now why you can’t treat your employees the same way as independent contractors? Johnny — I think I get it. An independent contractor is really another business person. I engage them to do work for me, but I am not their employer. I’m really their customer. Ash — That’s right. And since they are a separate business in their own right they have more responsibility for managing their own affairs and you owe them fewer legal obligations. Johnny — But the people who work for me in the factory aren’t separate businesses. They are my employees. Ash — Yes. These people usually rely upon you as their sole source of income. They are vulnerable — in the same sense that consumers are vulnerable — and as such the law imposes a wide range of obligations upon you as their employer to ensure they are not unfairly disadvantaged. You have to pay them fairly, help them to prepare for retirement, give them breaks and holidays, make sure their workplace is safe, and so on. Johnny — It isn’t up to me to decide whether a particular worker is a contractor or an employee. It is up to the law. Ash — And you really do not want to get caught trying to manipulate the rules to save yourself money at your employees’ expense.

CHAPTER 19 Managing a business: employing workers  703

QUIZ 1 Which of the following types of employee are least likely to be covered by the Federal

industrial relations system? (a) A person employed by a partnership in Western Australia. (b) A person employed by a company in New South Wales. (c) A person employed by the Commonwealth government in the Australian Capital Territory. (d) A person employed by a sole trader in the Northern Territory. 2 Which of the following indicate that a cleaner in a factory is an independent contractor rather than an employee? (a) The cleaner is not authorised to delegate their responsibilities to another. (b) The cleaning equipment is provided and maintained by the employer/principal. (c) The cleaner is paid $500 per week. (d) The cleaner decides their own hours of work. 3 An agreement between an individual employer and their employees about the terms and conditions of employment is called (a) An enterprise agreement. (b) An award. (c) A National Employment Standard. (d) An Australian Workplace Agreement. 4 Which of the following is not referred to in the National Employment Standards? (a) Long service leave. (b) Annual leave. (c) Maximum hours. (d) Minimum pay. 5 An employer’s obligations under workplace health and safety laws are owed to (a) employees while they are on the business premises. (b) employees who ordinarily work in premises not controlled by the employer. (c) members of the public while they are visiting the business premises. (d) all of the above. 6 An employee is not entitled to workers compensation if they are injured (a) while on a lunch break. (b) while driving to work. (c) while driving from work to university. (d) while on annual leave. 7 Which of the following is unlikely to amount to unlawful harassment in the workplace? (a) Displaying an offensive screen saver. (b) Asking questions about someone’s sex life. (c) Telling a joke about a particular racial group. (d) Sending a sexually suggestive email. (e) None of the above. 8 The termination of a worker’s employment will not be unlawful simply because it is because (a) of the employee’s social background. (b) the employee is pregnant. (c) the employee is permanently incapacitated due to sickness or injury. (d) the employee is not a member of a union.

704  PART 3 Managing a business

EXERCISES EXERCISE 19.1 — EMPLOYEES AND INDEPENDENT CONTRACTORS

Ash’s niece Gaia works at the Organicola factory packing soft drinks into cartons on school holidays. They have an understanding that if Gaia wants to work on a particular day she can just show up without notice. Johnny and Ash pay Gaia $50 a day to do odd jobs given to her by the shift supervisor. One day Gaia slips over in some spilled cola that has been left on the floor and breaks her wrist. Johnny tells her that she is not really an employee. Is Johnny correct? EXERCISE 19.2 — DISCRIMINATION AND HARASSMENT

Gaia is now employed as a part-time worker in the Organicola factory. At a family dinner she tells Ash that she hates coming to work now because her new supervisor keeps staring at her, asking her personal questions and asking her out to dinner, which Gaia politely declines. What steps should Ash take next, and what are the possible legal consequences of failing to take such steps? EXERCISE 19.3 — MODERN AWARDS

Go to the Fair Work Commission website at www.fwc.gov.au. Work out which modern award applies to Gaia (see exercises 19.1 and 19.2) and briefly summarise the terms and conditions of her employment. EXERCISE 19.4 — UNFAIR DISMISSAL

Refer to the facts of exercises 19.1 to 19.3. Ash is now a permanent part-time employee at the Organicola factory. Ash wants Gaia to go to university but Gaia insists on becoming a full-time worker at the Organicola factory. On Ash’s behalf, Johnny tells Gaia that she no longer has a job at the factory, effective immediately, but refuses to tell her why. Is Gaia entitled to bring an unfair dismissal action against Organicola? What would be the consequences if her action is successful?

KEY TERMS award  An instrument prescribing employee entitlements and working conditions within a particular trade, occupation or industry. condition  A term of a contract of fundamental importance. contract for services  A contract where (1) the substance of the contract is the provision of a service rather than the transfer of ownership of goods, and (2) the person providing the service is an independent contractor rather than an employee. contract of service  A work contract according to which the worker is an employee rather than an independent contractor. control test  A test to determine whether a worker is an employee or an independent contractor. direct discrimination  An unfavourable decision made on the basis of a person’s race, sex, disability, etc. enterprise agreement  A workplace agreement made between a single employer, or single interest employers, and their employees, or between more than one employer and their employees. Fair Work Act (FWA)  Federal legislation regulating workplace relations in Australia. fringe benefits tax  A Federal tax payable by an employer on certain benefits to employees. indirect discrimination  The making of a decision or the establishment of a rule that does not appear to be expressed in discriminatory terms but the effect of which in practice is nevertheless discriminatory. National Employment Standards (NES)  A legislative ‘safety net’ of minimum wages and conditions of employment for those employees in the Federal system. non-delegable duty of care  A duty of care that cannot be delegated or passed on to another person. PAYG  Pay As You Go. CHAPTER 19 Managing a business: employing workers  705

payroll tax  A State tax payable on the wages paid to employees. strict liability  Liability where fault does not have to be proved. superannuation  Payments by an employer and an employee to a managed fund that is used to finance the employee’s retirement. unfair dismissal  Termination of an employee’s employment that is harsh, unjust or unreasonable. unlawful discrimination  Treatment of a person or a group of people less favourably because of their race, sex, age, disability, etc. vicarious liability  Liability for the conduct of another. warranty  A term of a contract of lesser importance. workers compensation  A form of compulsory insurance entitling an employee to compensation in the event of work-related injury.

ACKNOWLEDGEMENTS Photo: © 06photo / Shutterstock.com Photo: © Garsya / Shutterstock.com Article: © ABC News, Simon Lauder and Sam Clark, 7 October 2015, http://www.abc.net.au/ news/2015-10-07/melbourne-train-cleaner-unfair-dismissal-wins-payout/6834110 Article: © Coles fined over worker’s fall © AAP 2012, ‘Coles fined $170k over worker’s fall’, 27 December Article: © Padraic Murphy, ‘OK to Swear at Boss, Says Watchdog’, The Daily Telegraph (Sydney) 14 June 2012, p. 3

QUIZ ANSWERS

1. a  2. d 

3. a  4. d  5. d  6. d  7. e  8. c

706  PART 3 Managing a business

CHAPTER 20

Managing a business: closing down LEA RNIN G OBJE CTIVE S 20.1 What happens when a business gets into financial difficulty? 20.2 What does it mean for an individual to be declared bankrupt? What are the alternatives to bankruptcy? 20.3 What does it mean for a company to be liquidated? What are the alternatives to liquidation? 20.4 Apart from being bankrupted or liquidated, what are some of the other ways in which a business can be closed down?

JOHNNY AND ASH

[Johnny and Ash are in the office at Organicola. They are eating lunch together at Johnny’s desk. Johnny is opening and reading mail while he eats. Ash is simply eating. She is very pregnant.] Ash — These sandwiches are delicious. Johnny — Thanks. Good to know I haven’t lost my touch despite the desk job. [Pauses.] That’s strange. Ash — What? Johnny — I’ve just received two letters, both related to the restaurant business. One is from Luke from Vegan Lifestyle. Remember how we used to sell their tofu chickens in the restaurant? Well, he reckons he hasn’t been paid for the last month’s worth of deliveries, and he wants me to pay the outstanding account! $900! What? Maria bought me out two months ago! Ash — What about the other letter? Johnny — This other one is from an accounting firm. Some accountant called Meg who says she is Maria’s trustee in bankruptcy. Maria is bankrupt? Ash — Well, that explains why Vegan Lifestyle hasn’t been getting paid. Johnny — Huh. Well, Meg says that she is administering Maria’s bankrupt estate, and that Maria’s payment to me of $100  000 two months ago is something called an ‘unfair preference’ and that — get this — I am going to have to repay the money to her. What? Ash — Oh, this could be serious. Johnny — What? Really? Ash — Yeah, I think I just had a contraction. Johnny — WHAT? I thought you were talking about the letters! Ash — Oh, don’t worry about the letters. Help me to the car and get me to the hospital. We can talk about the letters on the way.

CHAPTER PROBLEM

As you make your way through this chapter, consider whether Johnny (1) is liable for the outstanding $900 account, or (2) will have to pay the $100  000 to Meg.

Introduction In this the final chapter we consider the rules that regulate the closing of a business. We focus upon the legal consequences of a business experiencing serious financial difficulty, including receivership, admin­ istration, bankruptcy and liquidation. We conclude by considering some other ways in which a business can be closed down, and the importance of succession planning.

20.1 Financial difficulty LEARNING OBJECTIVE 20.1 What happens when a business gets into financial difficulty?

Not every business is a successful one. Many businesses will experience periods of financial difficulty. Some will be able to trade through it and continue on to better times. Other businesses will unfortunately be forced to close their doors. 708  PART 3 Managing a business

LAW IN CONTEXT: LAW IN THE MEDIA

Why do businesses fail? It is estimated that one in three small businesses fail in their first year of operation, two in four by the end of the second year, and three in four by the fifth year. Some of the commonly cited reasons for business failure include: • financial mismanagement; • bad management; • poor record keeping; • sales and marketing problems, including poor promotion, inability to cope with seasonal factors and insufficient knowledge of competitors; • staffing problems, including lack of supervision; • a failure to seek external advice; • general economic conditions; and • personal factors such as divorce and illness. The main cause of business failure is financial mismanagement, which is cited as responsible for nearly one-third of all business failures. This includes lack of business experience, cash flow problems, being undercapitalised when starting the business, excessive private drawings, overuse of credit, a lack of budgets and inadequate provision for tax payments.1

In this chapter we describe the potential legal consequences of experiencing serious financial diffi­ culty in the operation of a business (see figure 20.1). We consider the legal consequences of personal insolvency, including bankruptcy, and the legal consequences of corporate insolvency, including liqui­ dation. We begin, however, with receivership, which applies to both individuals and corporations.

Financial difficulty

Individual and corporate

Individual

Receivership

FIGURE 20.1

Bankruptcy

Corporate

Alternatives to bankruptcy

Liquidation

Administration

Consequences of financial difficulty

Receivership A receiver is a person appointed to take control of some or all of the business and its assets. Entry into receivership can happen both to businesses owned by individuals (e.g. sole traders and partnerships) and to corporations. A receiver may be appointed by the court or by a secured creditor who wishes to enforce their security. The appointment of a receiver is usually a remedy used by a creditor whose loan is secured over an asset such as real property upon which a business is being conducted. For example, someone 1 John Petty, Start Me Up! (December 2004) University of Technology, Sydney .

CHAPTER 20 Managing a business: closing down  709

who is owed money by Maria may have the right in the loan contract, upon default by Maria, to appoint a receiver to take over The Lame Duck restaurant. The receiver is appointed with a view to turning the business around and making enough money to repay the loan. If necessary, the receiver will: •• take over the control of the bank accounts and insurance arrangements, •• work out what other property the business owns and have it valued, •• review any uncompleted contracts, •• arrange the continued supply of essential goods and services, •• terminate the employment of any employees who are not required during the receivership, •• review the system of internal control and ordering, and •• sell assets where necessary. Like a mortgagee exercising their power of sale (see an earlier chapter), the receiver is under a duty of care when selling the business’s assets. Once the receiver has sold sufficient assets or generated enough income to repay the outstanding secured debt, the management of the business is returned to the sole trader, partners or directors. If, how­ ever, the receiver is unable to recover enough money to repay the secured creditor, insolvency proceed­ ings may be commenced: bankruptcy for individuals, or liquidation for corporations. CAUTION!

The appointment of a receiver is not necessarily an indication that the life of the business is coming to an end. A business may emerge from receivership, and control of the business may be returned to the business owners or the directors of the company.

ACTIVIT Y 20.1 — REFLECT

If a loan is secured by a mortgage of real property upon which a business is conducted, what are the advantages to the mortgagee of appointing a receiver rather than simply exercising their power of sale?

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 20.1 What are the main reasons why businesses fail? 20.2 What is receivership? 20.3 What is the role of a receiver?

20.2 Personal insolvency LEARNING OBJECTIVE 20.2 What does it mean for an individual to be declared bankrupt? What are the alternatives to bankruptcy?

In this section we examine the legal consequences of an individual becoming insolvent. These conse­ quences are of relevance to sole traders and partnerships.

Bankruptcy As we reported at the beginning of this chapter, Maria has been declared bankrupt. Bankruptcy is a legal process by which a trustee is appointed to sell a person’s assets to repay their debts. At the conclusion of the process, all of the person’s debts are forgiven, even if they have not been repaid in full. It is an opportunity for a person who is experiencing serious financial difficulty to ‘start again’ and, in that  710  PART 3 Managing a business

sense, can be viewed as a positive process. There are, however, a number of serious negative conse­ quences attached to bankruptcy, such as restrictions upon the person’s ability to seek credit in future and the social stigma that attaches to bankruptcy. Only an individual can be declared bankrupt. The equivalent process for a corporation is liquidation or winding up, which is described in detail in the next section of the chapter. The rules regulating bankruptcy are set out in the Bankruptcy Act 1966 (Cth). A summary of the bank­ ruptcy process is set out in figure 20.2.

Debtor’s petition or creditor’s petition

Debtor declared bankrupt

Appointment of trustee in bankruptcy

Proof of debt by creditors

Recovery and selling of assets

Distribution of funds to creditors

Discharge

FIGURE 20.2

The process of bankruptcy

CHAPTER 20 Managing a business: closing down  711

ACTIVIT Y 20.2 — RESEARCH

Visit the website of the Australian Financial Security Authority (AFSA) at www.afsa.gov.au. What resources are provided for persons considering voluntary bankruptcy?

ACTIVIT Y 20.3 — RESEARCH

Visit the AFSA website at www.AFSA.gov.au. What is the National Personal Insolvency Index?

Debtor’s petition or creditor’s petition A person may become bankrupt voluntarily (by way of a debtor’s petition) or as a result of action taken by unpaid creditors (by way of a creditor’s petition). Debtor’s petition

Maria can elect to become bankrupt voluntarily by completing and filing with the Official Receiver at Australian Financial Security Authority (AFSA): •• a debtor’s petition, •• a statement of affairs, and •• a formal acknowledgement that she has read the prescribed information. Maria’s debtor’s petition is a formal request that she be declared bankrupt.2 The statement of affairs is a document setting out in detail the extent of her assets and liabilities. The ‘prescribed information’ is the information that is required to be given by the Official Receiver to the debtor under s 55 of the Bankruptcy Act 1966 (Cth). Maria can choose to take advantage of a statutory cooling off period prior to lodging the debtor’s pet­ ition.3 Once she has lodged a statement declaring her intention to apply for bankruptcy with AFSA, she has a 21-day stay period within which she can consider her options, seek further advice, and possibly change her mind about the decision to apply for bankruptcy. During that 21-day stay period, Maria’s creditors cannot take any action to recover their debts. Maria can use that period to try to negotiate with her creditors. (Note that a debtor can only take advantage of this cooling off period once in every 12-month period.)4 Creditor’s petition

Instead of becoming bankrupt voluntarily, Maria may be bankrupted by one or more of her creditors. A creditor can petition the Federal Court of Australia to declare Maria bankrupt by applying to the court for the hearing of a creditor’s petition.5 To qualify to apply for a creditor’s petition, the creditor (or creditors) must be owed at least the statu­ tory minimum ($5000 as at 2015), and the debtor must have committed an act of bankruptcy in the previous 6 months. CHECKLIST

A creditor is only entitled to bring a creditor’s petition seeking to have a debtor declared bankrupt if both of the following requirements are satisfied: ◼◼ The creditor is owed at least the statutory minimum or, if there is more than one creditor petitioning for bankruptcy, the creditors are owed at least the statutory minimum collectively. ◼◼ The debtor has committed an act of bankruptcy within the previous 6 months.

2 Bankruptcy Act 1966 (Cth) s 55. 3 Bankruptcy Act 1966 (Cth) s 54E. 4 Bankruptcy Act 1966 (Cth) pt IV div 2A. 5 Bankruptcy Act 1966 (Cth) pt IV div 2.

712  PART 3 Managing a business

The possible acts of bankruptcy are listed in s 40 of the Bankruptcy Act. In Maria’s case they include the following. •• Maria has arranged to transfer her property to her creditors in an attempt to generally discharge her debts. •• Maria has made a payment or a transfer of property that would, if she became a bankrupt, be void as against the trustee. Such payments and transfers are described in detail below, and include transfers of assets to others to protect them from creditors as well as transfers for less than market value while insolvent. •• Maria has left her home, her place of business, or Australia, or she has begun to ‘keep house’ (that is, started refusing to answer the door or respond to phone calls and emails) in order to avoid her creditors. •• A judgment creditor has attempted to enforce a court judgment against Maria’s property by having it seized by the sheriff. •• Following a meeting with her creditors Maria has agreed to present a debtor’s petition or to sign an authority under s 188 (see below) but has failed to do so within 7 days. •• At a meeting with her creditors Maria has admitted to being insolvent, and undertook to present a debtor’s petition or sign an authority under s 188 but failed to do so. •• Maria has failed to comply with a bankruptcy notice (a demand for repayment of a debt) within the time specified in the notice. •• Maria has notified her creditors that she has suspended or is about to suspend payment of her debts. •• Maria has entered into, breached or terminated a debt agreement under Part IX (see below). •• Maria has signed a s 188 authority (see below), or called a creditor’s meeting in pursuance of such authority, or failed to attend such a meeting. •• Maria has failed to execute a personal insolvency agreement under Part X (see below) after being required to do so following a meeting of her creditors, or the agreement is declared void or terminated. The most commonly relied upon act of bankruptcy is a failure to comply with a bankruptcy notice. A bankruptcy notice is a notice issued by the Official Receiver upon application by the creditor. The bankruptcy notice demands that the debtor repay the outstanding debt within 21 days: see figure 20.4. A creditor can only apply for the issue of a bankruptcy notice if they are owed at least the statutory minimum ($5000 as at 2015) and they have an outstanding court judgment for that amount that is no more than six years old. The bankruptcy notice must be delivered to Maria personally. Unless Maria complies with the notice or establishes that she has a counter claim against the creditor, Maria will have committed an act of bankruptcy. A bankruptcy notice is a notice issued by the Official Receiver upon application by the creditor. The bankruptcy notice demands that the debtor repay the outstanding debt within 21 days: see figure 20.4. A creditor can only apply for the issue of a bankruptcy notice if they are owed at least the statutory minimum ($5000 as at 2015) and they have an outstanding court judgment for that amount that is no more than six years old. The bankruptcy notice must be delivered to Maria personally. Unless Maria complies with the notice or establishes that she has a counter claim against the creditor, Maria will have committed an act of bankruptcy. ACTIVIT Y 20.4 — REFLECT

Why is a failure to comply with a bankruptcy notice the most commonly relied upon act of bankruptcy?

The creditor’s petition will be heard in the Federal Court of Australia. Maria will be required to be present at the hearing. CHAPTER 20 Managing a business: closing down  713

Declaration of bankruptcy Debtor’s petition

If the Official Receiver accepts her debtor’s petition, Maria will be declared bankrupt.6 A debtor’s petition will usually be accepted unless there are good grounds to reject it.7 Examples of such grounds include: •• the prior lodgement of a creditor’s petition, •• an improperly completed debtor’s petition, or •• failure to lodge a statement of affairs. Creditor’s petition

If at the hearing of the creditor’s petition the court decides that Maria should in fact be declared bankrupt it will issue a sequestration order. The effect of this order is to make Maria bankrupt.8

Appointment of trustee in bankruptcy Upon being made bankrupt, Maria’s assets will automatically vest in (pass to) the trustee in bankruptcy — either the Official Receiver or a registered trustee — so that her outstanding debts can be discharged. We are told that Maria’s trustee in bankruptcy is a chartered accountant, Meg. LAW IN CONTEXT: LAW IN PRACTICE

Who is the trustee in bankruptcy? The Bankruptcy Act 1966 (Cth) divides Australia into eight bankruptcy districts, one for each of the six  states and two mainland territories. Each bankruptcy district has an Official Receiver who is appointed by the Governor-General. The primary functions of the Official Receiver are to issue orders such as bankruptcy notices, accept debtor’s petitions, undertake investigations, collect and liquidate the bankrupt’s assets, and distribute the bankrupt’s assets to creditors. The Act also provides for the appointment of a private practitioner (usually a chartered accountant) as a registered trustee who can act as trustee in bankruptcy instead of the Official Receiver. A registered trustee has functions similar to those of the Official Receiver. Visit the AFSA website at www.afsa.gov.au for more information about becoming a registered trustee.

Within 14 days of the sequestration order, Maria must provide the trustee in bankruptcy with all documents relevant to her trade dealings, property and financial affairs as well as her passport and a completed statement of affairs.9 Meg must fulfil a number of important obligations, including: •• notifying all of Maria’s creditors of her bankruptcy, •• determining whether Maria’s estate includes property that can be sold to pay her creditors, •• determining whether Maria has made any transfers of property that are reversible, and taking appro­ priate steps to recover property for the benefit of the creditors (see below), and •• considering whether Maria has committed any offences against the Act, and referring to relevant law enforcement authorities any evidence of such a offences.10

Proof of debt by creditors Meg will contact Maria’s creditors and place advertisements calling upon any person to whom Maria owes money to identify him or herself. Each of Maria’s creditors must lodge with Meg a proof of debt. This is a document in the prescribed form that sets out the amount owed, the means by which the debt was incurred, and whether the creditor is a secured creditor or an unsecured creditor.

 6 Bankruptcy Act 1966 (Cth) s 55 (4A).  7 Bankruptcy Act 1966 (Cth) s 55 (3).  8 Bankruptcy Act 1966 (Cth) s 43.  9 Bankruptcy Act 1966 (Cth) s 54. 10 Bankruptcy Act 1966 (Cth) s 19.

714  PART 3 Managing a business

A secured creditor has a number of possible courses of action available to them in relation to the bankruptcy process. •• The secured creditor can decline to lodge a proof of debt and simply exercise their rights over the security property (see a previous chapter). Any surplus must be passed on to the trustee in bankruptcy. •• If the value of the security property is not adequate to repay the debt, the secured creditor can exercise their rights over the security property (or estimate how much they would receive) and lodge a proof of debt in relation to the balance. •• The secured creditor can allow the security property to remain as part of the bankrupt’s estate and lodge a proof of debt for the entire debt.

Recovery and selling of assets Meg becomes the legal owner of Maria’s assets for the purpose of selling them to repay her creditors. Meg also takes over control of all of Maria’s money and any superannuation that has already been paid to her. Meg automatically acquires all of Maria’s assets as at the commencement of the bankruptcy as well as any other property acquired by Maria after the commencement and prior to Maria’s discharge from bankruptcy.11 Meg is not, however, entitled to sell all of Maria’s assets. Maria is entitled to keep: •• any assets held by Maria on trust for another person,12 •• most ordinary household or personal items, and personal items that have sentimental value to Maria,13 •• tools used to earn an income, up to a set limit ($3700 as at 2015),14 •• vehicles (cars or motorbikes), where the total value of the vehicles minus the sum owing under finance is less than a set limit ($7600 as at 2015),15 •• life insurance policies in respect of Maria or her spouse or proceeds from such policies received after the commencement of bankruptcy,16 •• funds held in registered superannuation funds and payments from registered superannuation funds received after the bankruptcy commenced,17 and •• compensation for any personal injury.18 Meg is entitled to sell any other assets owned by Maria, including: •• houses, apartments, land, farms and business premises whether freehold or leasehold, •• motor vehicles other than exempt ones, •• shares and other investments, and •• lottery winnings and other competition prizes. If Maria is the part-owner of an asset with another person, Meg can sell Maria’s share. If Maria is part-owner of her home with her spouse, Meg must give the spouse the option of purchasing Maria’s share of the property. Recovery of assets

It is not only the assets that Maria owns as at the date she is declared bankrupt that Meg can sell. In certain circumstances Meg can recover assets (including monetary payments) that Maria disposed of prior to that date, including assets that she transferred to others to protect them from the bankruptcy process.

11 Bankruptcy Act 1966 (Cth) s 116(1). 12 Bankruptcy Act 1966 (Cth) s 116(2)(a). 13 Bankruptcy Act 1966 (Cth) ss 116(2)(b)–(ba). 14 Bankruptcy Act 1966 (Cth) s 116(2)(c). 15 Bankruptcy Act 1966 (Cth) s 116(2)(ca). 16 Bankruptcy Act 1966 (Cth) s 116(2)(d). 17 Bankruptcy Act 1966 (Cth) s 116(2)(d). 18 Bankruptcy Act 1966 (Cth) s 116(2)(g).

CHAPTER 20 Managing a business: closing down  715

CAUTION!

A person in financial difficulty cannot avoid the consequences of bankruptcy by transferring their assets to friends and family members prior to being formally declared bankrupt. The trustee in bankruptcy has the ability to recover assets sold or transferred by the bankrupt person prior to the commencement of their bankruptcy.

Firstly, according to the doctrine of relation back, a bankruptcy is deemed to have commenced on the date of the first act of bankruptcy within the 6 months prior to the presentation of the creditor’s pet­ ition.19 Thus any income or property received by Maria after that date is automatically passed to Meg. If any of this income or property was subsequently transferred to another person it can be recovered by Meg, subject to the exceptions below. Secondly, a number of other transactions (called voidable transactions) entered into by Maria prior to the commencement of her bankruptcy may be reversible by Meg. These include: •• property that was seized from Maria within the previous 6 months under a writ of execution or a gar­ nishee order obtained by one of her creditors,20 •• property that was transferred by Maria for no consideration (i.e. for free) or for less than market value: –– to a related entity within the previous 4 years, –– to a non-related entity within the previous 2 years, and –– to any entity within the previous 5 years if the transferee is unable to prove that the bankrupt was solvent at the time,21 •• property that was transferred by Maria with the intention of protecting her property from the bank­ ruptcy process and keeping it away from her creditors22 (there is no time limit on this category of voidable transaction, but in practice, it is difficult to prove the requisite intent), and •• property that was transferred by Maria at a time when she was insolvent to a creditor in repayment of an outstanding debt such that the creditor has received an unfair preference over the other creditors to whom Maria owes money: –– if the bankruptcy is by creditor’s petition, within the 6 months prior to the presentation of the cred­ itor’s petition, –– if the bankruptcy is by debtor’s petition and there was no creditor’s petition pending, within the 6 months prior to the presentation of the debtor’s petition, and –– if the bankruptcy is by debtor’s petition and there was a creditor’s petition pending, within the 6 months prior to the commencement of the bankruptcy.23 In practice, the most common types of property recovered by trustees are the proceeds of execution against the bankrupt’s property, unfair preferences, and transfers for less than market value. ACTIVIT Y 20.5 — REFLECT

How can the ability of the trustee in bankruptcy to recover an unfair preference be justified?

The Official Receiver has the power to issue a statutory demand on Meg’s behalf in the form of a notice requiring repayment of monies equal to the value of the property received by the creditor where the Official Receiver is of the opinion that the creditor has received an unfair preference or a transfer at less than market value.24 19 Bankruptcy Act 1966 (Cth) s 115(1). 20 Bankruptcy Act 1966 (Cth) s 118. 21 Bankruptcy Act 1966 (Cth) s 120. 22 Bankruptcy Act 1966 (Cth) s 121. 23 Bankruptcy Act 1966 (Cth) s 122. 24 Bankruptcy Act 1966 (Cth) s 139ZQ.

716  PART 3 Managing a business

Meg also has extensive powers of enquiry and investigation. The Official Receiver at Meg’s request can: •• issue a search warrant providing access to premises and books for any purpose relating to the adminis­ tration of a bankruptcy, and •• summon a person for the production of documents and/or to give evidence under oath relating to Maria’s affairs. A person to whom Maria has transferred property in the above circumstances may be able to avoid having to transfer that money or property to Meg if they can establish that: •• they had no notice of Maria’s insolvency, and •• the transaction was in good faith and in the ordinary course of business.25 Income contributions

If Maria continues to earn income while she is bankrupt she may be obliged to pass on a proportion of that income to Meg.26 If Maria’s assessed income is more than the prescribed threshold amount she must contribute 50 per cent of the amount by which her income exceeds that threshold amount. As at 2015, the threshold amount is $54  081.30 if Maria has no dependants. The amount increases incrementally for each depen­ dant that she has, from $63  815.93 for one dependant, up to $73  550.57 if she has more than four depen­ dants. Maria’s ‘assessed income’ includes her earnings, salary or wages plus other financial benefits received by her from various sources less the tax paid or payable on such amounts and, if applicable, child support or maintenance payments. However, it does not include gifts received by Maria from family and friends.

Distribution of funds to creditors Once Meg has sold Maria’s assets and recovered as much of the estate as possible, she will distribute the estate as quickly as possible among those of Maria’s creditors who have lodged a proof of debt.27 Meg will do so in accordance with the order of priority set out in figure 20.3.28

1. Costs, fees and expenses of the administration, including the trustee’s remuneration

2. Wages, superannuation and other entitlements of employees

3. Unsecured creditors

FIGURE 20.3

Distribution of estate (bankruptcy)

25 Bankruptcy Act 1966 (Cth) ss 122–3. 26 Bankruptcy Act 1966 (Cth) s 139P. 27 Bankruptcy Act 1966 (Cth) s 140. 28 Bankruptcy Act 1966 (Cth) s 109.

CHAPTER 20 Managing a business: closing down  717

If money is still remaining after all of Maria’s creditors have been repaid in full, the bankruptcy will be annulled. This is, of course, unlikely. ACTIVIT Y 20.6 — REFLECT

Why does Meg’s remuneration rank so highly in the list of priority payments?

Discharge Maria will be automatically discharged from bankruptcy three years after she lodged her statement of affairs with the Official Receiver unless: •• the bankruptcy has already been annulled, or •• an objection to discharge has been filed by Meg. Meg may object to Maria’s discharge from bankruptcy on the ground that Maria has failed to: •• provide information to and assist Meg, •• disclose to Meg all of her income, •• pay assessed income contributions, •• explain to Meg how money was spent, or •• reveal all of her assets and creditors. If the objection is successful the period of Maria’s bankruptcy may be extended to either 5 years or 8 years (see table 20.1). TABLE 20.1

Extension of bankruptcy period

Reason for objection

Extension of bankruptcy

• Making a void transfer under ss 120 or 122 (undervalued transactions and preference payments) • Continuing to manage a corporation • Engaging in misleading conduct where the amount exceeds the prescribed limit • Failing to disclose to the trustee a liability that existed at the date of bankruptcy • Failing to notify a change of address or daytime telephone number • Failing to advise the trustee of any material change to the information disclosed on the statement of affairs

5 years from the date of filing the statement of affairs

• Failing to attend a creditor’s meeting without written approval from the trustee • Failing to attend an interview or examination • Failing to disclose any beneficial interest in any property • Leaving Australia without permission

5 years from the date of returning to Australia

• Making a void transfer under s 121 (transfers to defeat creditors) • Failing to provide details of property and income when requested • After the date of bankruptcy, deliberately providing false or misleading information to the trustee • Failing to disclose details of income or expected income • Failing to pay contributions as assessed • Failing to adequately explain how money was spent or assets were disposed of • Failing to disclose to the trustee a liability that existed at the date of bankruptcy • Failing or refusing to sign a document when required • Intentionally failing to disclose to the trustee a beneficial interest in a property

8 years from the date of filing the statement of affairs

• Failing to return to Australia when requested

8 years from the date of returning to Australia

Effect of discharge

Upon being discharged from bankruptcy Maria is released from her debts, even though they have not been repaid in full. 718  PART 3 Managing a business

There are, however, certain debts for which Maria will continue to be liable, including: •• court penalties and fines, •• damages claims from accidents (e.g. car accidents) unless, before her bankruptcy, the sum of damages had been fixed by a court judgment or she had a written agreement with the other party, •• child support debts, •• maintenance debts, •• student HECS-HELP debts and student loans, and •• debts incurred by fraud. The rights of a secured creditor to seize or sell the security property (e.g. a mortgaged house) are not affected by the discharge from bankruptcy. Discharge will not release Maria from the obligation to assist Meg in the continuing administration of the bankrupt estate, or from any liability to pay outstanding income contributions. After discharge Maria’s name will always appear on the National Personal Insolvency Index as a dis­ charged bankrupt. Credit reporting organisations also keep a record of bankruptcies.

Bankruptcy offences While Maria is bankrupt, it is an offence: •• under the Bankruptcy Act 1966 (Cth) for her to borrow money or purchase goods on credit beyond a prescribed limit ($5447 as at 2015) without informing the person she is dealing with of her status as an undischarged bankrupt,29 •• under the Bankruptcy Act 1966 (Cth) for her to operate a business or trade under a name other than her own name, either on her own or in partnership, without informing every person with whom she is dealing that she is an undischarged bankrupt,30 •• under the Bankruptcy Act 1966 (Cth) for her to depart Australia without Meg’s permission,31 and •• under the Corporations Act 2001 (Cth) for her to become a director of a company without the per­ mission of the court. The Bankruptcy Act 1966 (Cth) also contains a range of offence provisions relating to Maria’s conduct prior to being declared bankrupt, and to her conduct during the bankruptcy. For example, she will have committed an offence if she: •• engaged in gambling or hazardous speculations within 2 years before she became a bankrupt and thereby increased the extent of her insolvency,32 or •• failed to disclose property or concealed property from Meg.33 Many of these offences are punishable by imprisonment, in some cases up to five years.

Alternatives to bankruptcy The bankruptcy process has substantial disadvantages for both Maria and her creditors. The conse­ quences of bankruptcy for Maria are, as we have seen, quite serious. And the disadvantages for her creditors include the following. •• The bankruptcy process can be an expensive one, and the cost of the process is deducted from Maria’s estate, leaving less for distribution to creditors. The creditors may even be obliged to bear some of the expenses themselves. •• The process is a time consuming one, and creditors may not receive payment for years. •• Creditors may be obliged to attend lengthy meetings.

29 Bankruptcy Act 1966 (Cth) s 269(1)(a). 30 Bankruptcy Act 1966 (Cth) s 269(1)(b). 31 Bankruptcy Act 1966 (Cth) s 272(1). 32 Bankruptcy Act 1966 (Cth) s 271. 33 Bankruptcy Act 1966 (Cth) s 265.

CHAPTER 20 Managing a business: closing down  719

It is in the interests of both Maria and her creditors to consider the alternatives to bankruptcy. The Bankruptcy Act 1966 (Cth) itself contains two such alternatives: debt agreements under Part IX and per­ sonal insolvency agreements under Part X.

Debt agreements An arrangement under Part IX of the Bankruptcy Act 1966 (Cth), known as a debt agreement, is a pro­ cess by which a legally binding arrangement can be put in place between Maria and her creditors as an alternative to bankruptcy. Maria is only entitled to propose a debt agreement if: •• her after tax income is less than the threshold amount ($81  121.95 as at 2015), •• her total unsecured debts are less than the threshold amount ($108  162.60 as at 2015), •• the property that would be divisible among her creditors if she were declared bankrupt is valued at less than the threshold amount ($108  162.60 as at 2015), and •• she has not been bankrupt, utilised a Part IX arrangement, or given an authority under s 188 of the Bankruptcy Act 1966 (Cth) in the last 10 years.34 Under Part IX, Maria submits a proposal to her creditors for their consideration. Her proposal might be that: •• she be permitted to make periodic payments out of her income to the creditors, to an amount equal to or less than the full amount of all of her provable debts, •• she be permitted to make a lump sum payment of less than the full amount of all of her provable debts, •• she be granted a moratorium on payment of her debts to give her time to recover financially, or •• she be permitted to pay to her creditors the proceeds of the sale of property owned by her. A copy of Maria’s proposal must be submitted to AFSA, who ensures that the proposal is the best offer possible based on an analysis of her expected income from all sources, household expenses and circumstances. The proposal is voted on by all of Maria’s creditors. If a majority is in favour of the proposal it is accepted and binding upon all of her creditors. Maria’s creditor’s debts are fixed at the date the proposal is entered on the National Personal Insolvency Index, interest will no longer accrue, and her creditors cannot take or continue action to collect their debts. If Maria fails to comply with the debt agreement, the arrangement may be terminated and her credi­ tors will be able to resume their recovery proceedings, including having Maria declared bankrupt. CAUTION!

An individual in financial difficulty can only enter into a Part IX debt agreement with their creditors if their income, assets and debts are all below the statutory limits.

ACTIVIT Y 20.7 — RESEARCH

Go to the AFSA website at www.afsa.gov.au. What are some of the practical consequences of entering into a Part IX arrangement?

Personal insolvency agreements A Part X personal insolvency agreement is similar to a Part IX debt agreement. It involves a proposal by Maria to her creditors as an alternative to bankruptcy. Once accepted by her creditors, the proposal is binding on Maria and her creditors in respect of their unsecured provable debts. Whereas a Part IX debt agreement is only available if Maria has a smaller estate, a Part X per­ sonal insolvency agreement is only appropriate if she has a large estate. The costs of setting up and 34 Bankruptcy Act 1966 (Cth) s 185C.

720  PART 3 Managing a business

administering a personal insolvency agreement are such that there needs to be a significant level of prop­ erty or income available to creditors for it to be cost effective. Maria will need to have either a steady income, funds available from a family member, or assets to offer her creditors for a personal insolvency agreement to be acceptable. The four steps in setting up a personal insolvency agreement are to: 1. appoint a controlling trustee, 2. prepare the personal insolvency agreement, 3. issue a controlling trustee’s report, and 4. hold a meeting of creditors. The controlling trustee: Maria completes a section 188 authority, which authorises either a registered trustee, a solicitor or the Official Trustee in Bankruptcy — referred to as the controlling trustee — to call a meeting of her creditors.35 Maria must provide the controlling trustee with a statement of affairs and a draft of the personal insolvency agreement. The section 188 authority immediately hands the control of Maria’s property to the controlling trustee. The signing of the section 188 authority is irrevocable and an act of bankruptcy, and as such can assist a creditor in any attempt to bankrupt Maria in the event her attempt to establish a personal insolvency agree­ ment fails. The personal insolvency agreement: Maria’s personal insolvency agreement will contain details of: •• the property to be made available to pay her creditors, and how that property will be dealt with, •• any contributions from Maria’s income that will be made available to pay the creditors, and how the income will be dealt with, •• the extent to which Maria will be released from her provable debts, •• the conditions that need to be met for the agreement to come into operation, •• any circumstances, events or triggers upon which the agreement will terminate, •• the order in which the proceeds from realising the property and income will be distributed amongst the creditors, and •• who will be trustee of the agreement. The controlling trustee’s report: The controlling trustee prepares a report that states which option will best serve the interests of creditors: accepting the personal insolvency agreement or proceeding with bankruptcy.36 The meeting of creditors: At the meeting, the creditors make one of three possible resolutions: •• that Maria’s property no longer be subject to control by the controlling trustee, •• that Maria execute the personal insolvency agreement, or •• that Maria present a debtor’s petition within 7 days of the resolution. Where the creditors resolve that the personal insolvency agreement be entered into, they nominate a person to be the trustee of the agreement. The controlling trusteeship ends and the trustee takes over the administration of Maria’s estate in accordance with the agreement. If Maria breaches the personal insolvency agreement it will be an act of bankruptcy that permits her creditors to immediately commence bankruptcy proceedings. If on the other hand she complies with the agreement she will have the opportunity to resolve her financial difficulties without having to go through the bankruptcy process. ACTIVIT Y 20.8 — REFLECT

List the advantages for (a) Maria and (b) her creditors of entering into a Part X personal insolvency agreement instead of bankruptcy.

35 Bankruptcy Act 1966 (Cth) s 188. 36 Bankruptcy Act 1966 (Cth) s 189A.

CHAPTER 20 Managing a business: closing down  721

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions.  20.4 What is bankruptcy?  20.5 What is the difference between a debtor’s petition and a creditor’s petition?  20.6 What is the process for lodging a debtor’s petition?  20.7 What is the process for lodging a creditor’s petition?  20.8 What is an act of bankruptcy?  20.9 What is the role of the trustee in bankruptcy? 20.10 What assets are available to the trustee in bankruptcy and what assets can the bankrupt retain? 20.11 What is the doctrine of relation back? 20.12 What are voidable transactions? 20.13 How are a bankrupt’s assets distributed among their creditors? 20.14 When is a bankrupt discharged from bankruptcy? 20.15 What are bankruptcy offences? 20.16 What is a Part IX debt agreement? 20.17 What is a Part X personal insolvency agreement?

20.3 Corporate insolvency LEARNING OBJECTIVE 20.3 What does it mean for a company to be liquidated? What are the alternatives to liquidation?

In this section we examine the legal consequences of a corporation becoming insolvent.

Liquidation Bankruptcy is only applicable to insolvent individuals. If it is a company that is insolvent the relevant procedure is liquidation (also known as winding up) under the Corporations Act 2001 (Cth). The pro­ cess is similar to bankruptcy, although there are some important differences. A summary of the liquidation process is set out in figure 20.4.

Company is insolvent Insolvency is defined as an inability to pay debts as they become due and payable.37 The following is a description of the winding up of an insolvent company by one or more of its credi­ tors. A company can also be wound up voluntarily by its shareholders; this is described later in this chapter.

Application by creditors The Corporations Act 2011 (Cth) lists the persons who can apply to the court for a winding up order based on insolvency.38 In practice, it will usually be a creditor of the company. How does the applicant prove that the company is insolvent? As with bankruptcy, there are several ‘presumptions of insolvency’ listed in the Act, including: •• a failure by the company to comply with statutory demand, •• an unsuccessful attempt to enforce a judgment debt against the company, and •• the appointment of a receiver by the holder of a company charge or the taking of other steps to enforce the charge.39

37 Corporations Act 2001 (Cth) s 95A. 38 Corporations Act 2001 (Cth) s 459P(1). 39 Corporations Act 2001 (Cth) s 459C(2).

722  PART 3 Managing a business

Company is insolvent

Application by creditors

Court order that company be wound up

Appointment of liquidator

Proof of debt by creditors

Recovery and selling of assets

Distribution of funds to creditors

Deregistration

FIGURE 20.4

A summary of the liquidation process

CHAPTER 20 Managing a business: closing down  723

The most common and simple way to establish that a company is insolvent is by issuing a statutory demand. To be valid, the statutory demand must: •• be in writing, •• be in the name of the creditor, •• be signed by or on behalf of the creditor, •• exceed the statutory minimum debt ($2000 as at 2015), •• specify the amount of the debt, •• state that the debt is ‘due and payable’, •• require the company to pay the debt within 21 days after the demand is served, •• be served on the company, and •• be accompanied by an affidavit verifying the debt.40 If the company served with the statutory demand wants to dispute the debt, it must apply to the court within 21 days of the demand being served.41 If the company has not challenged the debt or paid the debt within 21 days, it has failed to comply with the demand, and it is deemed to be insolvent.42

Court order that the company be wound up Upon the making of a successful application by the creditor, the court will order that the company be wound up, and a liquidator will be appointed.43

Appointment of liquidator The functions of the liquidator are: •• to work out what debts are payable by the company and what valid claims exist against the company, •• to take possession of and sell the assets of the company, •• to distribute the proceeds of the sold assets among the creditors and others with legitimate claims against the company, •• if there are any surplus funds, to distribute these amongst the shareholders, and •• to bring about deregistration of the company. The liquidator has the power to: •• sell the company’s property or dispose of it in some other way, •• carry on the company’s business, but only to the extent necessary for the beneficial disposal or winding up of that business, •• bring or defend legal proceedings in the company’s name, •• make calls on contributories (e.g. a call on the holders of partly paid shares), and •• obtain information about the company.44 ACTIVIT Y 20.9 — RESEARCH

Go to the ASIC website at www.asic.gov.au. How does a person become a registered liquidator?

Proof of debt by creditors As with bankruptcy, the liquidator will contact the company’s creditors and place advertisements calling upon any person to whom the company owes money to identify themselves. Each of the creditors must lodge with the liquidator a proof of debt. 40 Corporations Act 2001 (Cth) s 459E. 41 Corporations Act 2001 (Cth) s 459G. 42 Corporations Act 2001 (Cth) s 459F. 43 Corporations Act 2001 (Cth) s 459A. 44 Corporations Act 2001 (Cth) s 477.

724  PART 3 Managing a business

A secured creditor need not prove in a winding up.45 Instead, upon default by the company, a secured creditor has the right to sell the security, and the liquidator has no control over this process unless it is a void charge (see below). If the sale of the security realises a surplus, the secured creditor must pay it to the liquidator. If the sale of the security does not cover the full amount of the secured debt, the balance ranks equally with the rest of the unsecured debts.

Recovery and selling of assets The funds available to the liquidator for distribution to the creditors are: •• the assets owned by the company at the time the court makes the winding up order, except for: –– assets over which a secured creditor has a valid charge, and –– assets that the company holds on trust, •• assets that come into the company’s ownership after the winding up order is made, such as: –– compensation recovered by the liquidator from a director who has breached a duty owed to the company (see an earlier chapter), –– funds received from contributories, such as owners of partly paid shares, after the liquidator has made a call on them, –– funds that the liquidator has recovered under the voidable transaction provisions (see below), and –– funds recovered from the holders of void charges (see below). Voidable transactions

A voidable transaction is a transaction entered into by the company that the liquidator is able to reverse and recover any funds paid by the company to another person. The seven types of voidable transaction are as follows. 1. An insolvent transaction entered into during the 6 months ending on the relation back day (or after that day but on or before the day the winding up began).46 The ‘relation back day’ is either the day on which an application for a liquidation order was filed or the day on which the liquidation is deemed to have begun.47 An ‘insolvent transaction’ is either an unfair preference or an u ­ ncommercial ­transaction either entered into when the company was insolvent or which caused or contributed to the company’s insolvency.48 An ‘unfair preference’ is a transaction between a company and an unsecured creditor that results in the creditor receiving more from the company than they would have received if they had to prove for the debt in a winding up.49 An ‘uncommercial transaction’ is a transaction that a reasonable person in the company’s circumstances would not have entered into.50 2. An uncommercial transaction, unfair preference, unfair loan or unreasonable director related transaction entered into on or after the relation back day where the company was in administration or under a deed of company arrangement (see below) and the transaction was entered into without the authority of the administrator.51 An ‘unfair loan’ is a loan that has an extortionate interest rate or charges.52 An ‘unreasonable director related transaction’ is a payment or transfer of property to a director of the company that a reasonable person in the position of the company would not have made.53 3. An insolvent transaction that is an uncommercial transaction entered into during the 2 years ending on relation-back day.54

45 Corporations Act 2001 (Cth) s 554E. 46 Corporations Act 2001 (Cth) s 588FE(2). 47 Corporations Act 2001 (Cth) s 9 (definition of ‘relation back day’). 48 Corporations Act 2001 (Cth) s 588FC. 49 Corporations Act 2001 (Cth) s 588FA. 50 Corporations Act 2001 (Cth) s 588FB. 51 Corporations Act 2001 (Cth) ss 588FE(2A)-(2B). 52 Corporations Act 2001 (Cth) s 588FD. 53 Corporations Act 2001 (Cth) s 588FDA. 54 Corporations Act 2001 (Cth) s 588FE(3).

CHAPTER 20 Managing a business: closing down  725

4. An insolvent transaction with a related entity entered into during the 4 years ending on relation back day.55 5. An insolvent transaction entered into for the purpose of interfering with the liquidation process during the 10 years ending on the relation back day.56 6. An unfair loan made at any time on or before winding up.57 7. An unreasonable director related transaction entered into during the 4 years ending on relation back day (or after that day but on or before the day the winding up began).58 ACTIVIT Y 20.10 — REFLECT

What is the justification for making each of these seven types of transaction reversible?

The creditor or other payee will not have to repay the money to the liquidator if at the time of the transaction: •• the creditor acted in good faith, •• the creditor had no grounds to suspect that the company was insolvent, and •• the creditor provided valuable consideration or has changed their position in reliance on the transaction.59 A creditor who has had to refund an unfair preference to the liquidator will rank as an unsecured creditor in the winding up.60 LAW IN CONTEXT: LAW IN THE MEDIA

Forest contractors call for insolvency law changes in latest shot in Gunns liquidation Australia’s peak forest contractor lobby wants Federal Industry and Innovation Minister Christopher Pyne to include changes to preferential payments in his push for company law overhaul. The liquidators of timber giant Gunns Limited have taken action against forestry contractors to recoup millions of dollars for company creditors. The Australian Forest Contractors Association (AFCA) has sent a letter to Mr Pyne asking for preferential payment changes to be included in an insolvency law review. AFCA wants monthly payments under a contract excluded as preferential payments. Mr Pyne had previously declared insolvency laws would be included in an innovation policy statement expected to be released next month. The Federal Government has signalled that there will be proposed tax and corporate law changes in next month’s innovation and science agenda, to help encourage more investment in new ventures. The association wrote to Mr Pyne that contractors were being sued because any payments made six months prior to a company becoming insolvent could be scrutinised and clawed back under current preference payment law. AFCA director Phillip Dohnt said many contractors were not aware that Gunns was insolvent. ‘The law is wrong, it needs a big review, and the Honourable Christopher Pyne hopefully will take that into account’, he said. ‘If we have a contract and that company does go into liquidation, that contract has legitimate payment clauses in it which should be recognised.’ ‘In other words, most contractors have in their contracts that they will get paid within 30 days of the end of month; that to me is a legitimate payment and it shouldn’t be seen as a preferential payment.’

55 56 57 58 59 60

Corporations Act 2001 (Cth) s 588FE(4). Corporations Act 2001 (Cth) s 588FE(5). Corporations Act 2001 (Cth) s 588FE(6). Corporations Act 2001 (Cth) s 588FE(6A). Corporations Act 2001 (Cth) s 588FG(2). Corporations Act 2001 (Cth) s 588FI.

726  PART 3 Managing a business

Gunns contractors face unfair outcome, AFCA claims Mr Dohnt said liquidator PPB Advisory was arguing that their members should have known that Gunns was operating insolvent between July 6 and September 21. But he said PPB’s Advisory’s own report on Gunns in February 2013 could not identify a specific date that the company became insolvent. ‘With all the information they had, they still couldn’t actually define a date, they suggested there could be four different dates, and yet the unsecured creditors without any financial information prior to them going into liquidation should have known’, he said. ‘It’s just ridiculous.’ In the letter, AFCA wrote that contractors had been penalised on the premise that because they made enquiries about outstanding payments in the last six months prior to Gunns’ insolvency, they should have suspected the company was insolvent and should have stopped all trading. But Mr Dohnt said that they were assured that it was a cash flow problem. ‘There was definitely cash flow issues, but a lot of businesses have cash flow businesses  .  .  .  but that doesn’t mean they are insolvent’, he said. ‘Gunns had the backing of their financiers  .  .  .  and most contractors were getting constant reassurance from the senior managers at Gunns that they were going to trade out of their issues.’ Mr Dohnt’s contracting business LV Dohnt and Company was a chipping contractor for Gunns and is being sued for $2.8 million and costs, which he said could send him out of business. He said AFCA wanted the law changed so that receiving monthly payments under a contract in the future were not included as preferential payments under insolvency law. The Innovation Minister’s office has referred the matter to Assistant Treasurer Kelly O’Dwyer, who said a review is looking at whether current insolvency arrangements are appropriate or discouraging entrepreneurs. The Treasurer is the minister responsible for the Corporations Act, which covers company insolvency. Gunns went into voluntary administration in 2012 after reporting heavy financial losses, owing millions of dollars to businesses and government departments. Sources close to the matter said 70 unsecured creditors had action brought against the company in the Supreme Court of Victoria, which included forestry contractors and Forestry Tasmania. About half of those opted to settle out of court. Of the cases settled out of court, on average they settled on 75 per cent of the disputed amount. A PPB Advisory spokesman was unavailable for comment. Source: Alexandra Blucher, 2 December 2015, http://www.abc.net.au/news/2015-12-02/forest-contactors-call-forinsolvency-law-changes-gunns/6991954.

Void charges

A void charge is a charge that has been granted by the company that is not enforceable against the liqui­ dator. Void charges include: 1. circulating security interests granted by the company during the 6 months ending on the relation back day, except where the company was solvent immediately after the interest was created, or the interest secured a benefit to the company61 — a ‘circulating security interest’ is either a floating charge or a PPSA (Personal Property Securities Act 2009 (Cth)) security interest attached to a circulating asset, and62 2. unregistered charges (see an earlier chapter).63 If a charge is found to be void the creditor will be treated as an unsecured creditor.

Distribution of funds to creditors Once the liquidator has recovered as much of the company’s funds as possible, the liquidator distributes those funds amongst the company’s outstanding creditors. As with bankruptcy, there is an order of pri­ ority. The order in which funds are distributed by the liquidator is set out in figure 20.5.64 61 Corporations Act 2001 (Cth) s 588FJ. 62 Corporations Act 2001 (Cth) s 51C. 63 Personal Property Securities Act 2009 (Cth) s 20. 64 Corporations Act 2001 (Cth) ss 555–6.

CHAPTER 20 Managing a business: closing down  727

1. Costs, fees and expenses of the administration, including the liquidator’s remuneration

2. Wages, superannuation and other entitlements of employees

3. Unsecured creditors

FIGURE 20.5

Distribution of assets (liquidation)

The employee entitlements of executive directors are usually limited to $2000 each.65 In the event that there is a surplus after payment of the unsecured creditors, it is distributed to the shareholders. If there are not enough funds to pay all employee claims, the liquidator must pay these claims before paying a secured creditor with a circulating security interest.66 Re Gunns Plantations Limited (In Liquidation) (Receivers & Managers Appointed) [2015] VSC 102 

The liquidators of Gunns Plantations sought approval of their remuneration of approximately $8 million. It was the third application regarding remuneration made by the liquidators. A grower in Gunns Plan­ tations opposed the application on the grounds that it was excessive. The Court decided that the rates were not excessive. The Court accepted that a layperson may find the rates extraordinary. However, they were acceptable given the market rate of liquidators and the fact that the Gunns liquidation was very complex.

Deregistration Deregistration of the company by ASIC brings the company’s existence to an end.67 LAW IN CONTEXT: LAW IN THE MEDIA

Unsecured creditors often left penniless Unsecured creditors receive less than 10c in the dollar in most company collapses, according to a groundbreaking report into insolvencies released by the corporate watchdog yesterday. The report, put together by the Australian Securities & Investments Commission over the past 3 years, reveals that in 96 per cent of corporate failures, unsecured creditors were lucky to get 10c in the dollar.

65 Corporations Act 2001 (Cth) s 556(1A). 66 Corporations Act 2001 (Cth) s 561. 67 Corporations Act 2001 (Cth) s 561.

728  PART 3 Managing a business

It does not spell out how much of the fees went to insolvency practitioners, who get the first charge on assets. ASIC admits the data on remuneration was ‘unreliable and unable to be meaningfully interpreted’. Liquidators can pursue expensive courses of action that keep them on the payroll. The costs of the big administrations/liquidations of recent years have been well documented. The report finds that the top three causes of corporate failure in 2007 were poor strategic management of businesses, inadequate cashflow and trading losses. In 2007, the industries with the highest failure rates were construction, representing 20.3 per cent of total administrations; services to business, which represented 13.1 per cent; and retail trade, which accounted for 12.5 per cent of total insolvencies, receiverships and administrations. NSW had the worst record, followed by Victoria, Queensland and Western Australia. In a separate report, the nation’s leading collections, credit reporting and business intelligence company Dun & Bradstreet estimates that almost one in 10 companies face a very high risk of experiencing financial distress or insolvency in the next 6 months. Using a database of 2.8 million companies, Dun & Bradstreet estimates that small businesses, enterprises based in Queensland and those in the agriculture sector have the highest likelihood of failure. ‘Small and young companies need to be particularly careful as D&B’s trends data shows they are more likely to suffer financial distress or failure than their older and larger counterparts,’ Dun & Bradstreet’s report says. The reports are timely, given the sub-prime crisis and credit crunch, record oil prices, and high inflation rates, which are combining to lift the number of liquidations. For insolvency practitioners, financial difficulties mean boom times. The extraordinary strength of the Australian economy over the past decade has made life tougher for insolvency firms, and there are claims that some have become more aggressive with their fees and disbursements to survive. The latest figures from ASIC reveal that there are about 747 registered insolvency practitioners in Australia. Insolvency practitioners have had more than their fair share of criticism. Name calling, such as ‘bottom feeders’ and ‘sharks’, are just two of the tags pronounced on an industry that makes its money out of failed or failing companies. The criticisms of liquidators range from excessively high fees, over-servicing, protracted settlements, lack of transparency and conflicts of interest. But in an economy facing tough conditions, this industry will have a big impact on its overall health. The reason is simple: liquidators need creditor approval for fees, but they don’t need approval for disbursements. This loophole means liquidators can rack up a lot of charges in disbursements — and many do. On 31 December, ASIC completed the first set of amendments to its insolvency laws in 15 years, aimed at strengthening its powers to monitor liquidators, and improve the regulation of insolvency practitioners. But the industry still lacks regulation and is in dire need of an overhaul. Instead of taking civil or criminal action itself in case of any misconduct of liquidators, it all too often refers such cases to the Companies Auditors and Liquidators Disciplinary Board, which can suspend them for 12 months. Reproduced from Adele Ferguson, ‘Unsecured Creditors Often Left Penniless’, The Australian (Sydney), 27 June 2008, p. 21.

Administration As with bankruptcy, it is often better for both the company itself and its creditors if liquidation can be avoided. The principal alternative to liquidation is voluntary administration. Similar to a Part X personal insolvency agreement, voluntary administration is a mechanism by which an insolvent company can enter a temporary ‘safety zone’ away from its creditor’s claims while a decision is made by its creditors on whether the company should: •• execute a deed of company arrangement, •• be wound up, or •• be returned to the control of its board of directors. The goal of the voluntary administration provisions in the Corporations Act 2001 (Cth) is to maximise the chance of the company continuing in business and, if that is not possible, to provide a mechanism for its creditors and shareholders to get a better return than from a winding up. CHAPTER 20 Managing a business: closing down  729

Voluntary administration commences when an administrator is appointed to manage the company pending the creditor’s decision. The administrator may be appointed by the company itself, by a liqui­ dator, or by a secured creditor.68 The directors of an insolvent company have an incentive to appoint an administrator under the voluntary administration provisions because doing this provides some protection for them from personal liability under the insolvent trading provisions. The administrator must be an independent person who is a registered liquidator.69 ACTIVIT Y 20.11 — RESEARCH

Go to the ASIC website at www.asic.gov.au. What was the National Insolvent Trading Program? What were the key findings?

The administrator’s task is to investigate the company’s financial affairs and decide on a course of action that is in the best interests of the creditors. The administrator effectively takes over control of the company’s business from the directors. The administrator has a wide range of powers.70 The powers of the directors are suspended while the company is under administration.71 During this phase of the administration: •• there are restrictions on winding up proceedings against the company, •• the lessors of property leased by the company cannot recover their property, •• legal proceedings against the company are restricted, •• enforcement processes are restricted, •• directors cannot act without the administrator’s agreement, and •• shareholders cannot transfer shares without court permission. Creditors are prevented from taking action against the company during the administration. The excep­ tion is a secured creditor with a substantial charge or a charge over perishable property. Major creditors of the company are therefore usually asked to cooperate in the administration. Within 5 days of the administrator’s appointment, a first meeting of the creditors is held to decide whether to appoint a committee of creditors to consult with and to oversee the administrator.72 As soon as practicable the administrator must investigate the company’s business, property, affairs and financial circumstances and form an opinion as to whether it would be in the interests of the creditors for the com­ pany to execute a deed of company arrangement, for the administration to end or for the company to be wound up.73 Within 21 days of the administrator’s appointment, a second meeting of creditors is held to decide the company’s future based upon the administrator’s recommendation.74 If the creditors decide that the company should execute a deed of company arrangement, the administrator prepares the document and it is executed within 21 days of the second creditor’s meeting.75 A majority of creditors in terms of both number and value must vote to adopt the deed. The deed of company arrangement will set out the arrangements made between the company and its creditors at the second meeting. It may, for example, provide that: •• the company can repay to each creditor a lesser amount than that actually owed in full satisfaction of the debt, •• the company can repay the creditors over time, 68 Corporations Act2001 (Cth) ss 436A-436C. 69 Corporations Act 2001 (Cth) ss 448B-448C. 70 Corporations Act 2001 (Cth) ss 437A, 442A. 71 Corporations Act 2001 (Cth) s 437C. 72 Corporations Act 2001 (Cth) s 436F. 73 Corporations Act 2001 (Cth) s 438A. 74 Corporations Act 2001 (Cth) ss 435C, 439A. 75 Corporations Act 2001 (Cth) ss 444A-444B.

730  PART 3 Managing a business

•• the amounts owed to the creditors is to be converted into equity, and/or •• the creditors are to supervise the management of the company. Once adopted, the deed binds all unsecured creditors so far as concerns any claims on or before the day specified in the deed. Secured creditors who voted against adoption of the deed are not barred from enforcing their security. If the company breaches the deed, the creditors will be able to immediately commence winding up proceedings against the company.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 20.18 How does liquidation differ from bankruptcy? 20.19 How is a company liquidated involuntarily? 20.20 What is the role of the liquidator? 20.21 What transactions are voidable by the liquidator? 20.22 How are a ‘wound up’ company’s assets distributed among its creditors? 20.23 What is voluntary administration?

20.4 Closing the business LEARNING OBJECTIVE 20.4 Apart from being bankrupted or liquidated, what are some of the other ways in which a business can be closed down?

Financial difficulty is not the only reason for a business organisation to come to an end. The owner of the business may pass away or decide to sell it to another, or the particular purpose for which the organ­ isation was formed may be achieved or no longer achievable. There are many legal steps that must be taken to close a business properly, including: •• deregistering the business name, •• terminating the employment of workers, •• terminating the lease or selling the business premises, •• disposing of existing stock, •• repaying any outstanding debts, •• resolving any outstanding tax liabilities, and •• dissolving the business structure.

Dissolving the business structure In this section we briefly consider the ways in which a business structure — namely a partnership, a corporation or a trust — can be terminated. As a business structure, a sole trader is not formally ‘termi­ nated’; the sole trader simply ceases to trade.

Partnership Strictly speaking, whenever a new partner joins a partnership, or an existing partner retires, dies or is expelled from the partnership, the old partnership ceases to exist and a new partnership is formed. In practice, most partnerships address this problem by stating in their partnership agreement that the new partnership will be entitled to carry on the business of the old partnership. Dissolution and continuation

In this section we consider the circumstances in which a partnership is technically dissolved and the partnership business is likely to continue with the remaining partners. CHAPTER 20 Managing a business: closing down  731

•• Death or bankruptcy of a partner — a partnership is automatically dissolved by the death or bank­ ruptcy of one of the partners.76 The partnership agreement should therefore set out a process for the orderly handing over of the partnership business to the remaining partners in return for a fair and appropriate payment to the deceased or bankrupt partner’s estate. •• Expulsion of a partner — as explained in a previous chapter, there is no automatic entitlement on the part of the partnership to compel one of the partners to leave. However, it is not uncommon for a partner­ ship agreement to grant a majority of the partners the power to expel a partner in certain circumstances. If this power is exercised, the partnership is technically dissolved but the partnership agreement will usually provide for the continuation of the partnership business by the remaining partners. •• Retirement — if one partner voluntarily decides to leave the partnership, the partnership is dissolved. Typically the business of the partnership will continue to be conducted by a new partnership made up of the remaining partners. In the absence of agreement to the contrary, a retiring partner will remain liable for debts and obli­ gation incurred while they were a partner.77 They may be also liable for subsequent debts and obligations if the requirements of apparent authority are satisfied. It is therefore very important that a retiring partner take steps to notify customers, suppliers and the general public of their retirement by contacting them directly where possible and by placing an advertisement in the Government Gazette. CAUTION!

A partner who leaves the firm but does not inform regular suppliers and clients of their departure may continue to be liable for debts incurred and torts and crimes committed by the other partners after their departure.

•• New partner — if a new partner joins the partnership, strictly speaking, the old partnership is dis­ solved and a new partnership comes into existence.78 The partnership agreement should permit the new partnership to carry on the business of the old partnership. In the absence of agreement to the contrary, the incoming partner will only be liable for debts and obligations incurred after they join. Dissolution and winding up

In this section we consider the circumstances in which a partnership is terminated and the partnership business ceases. The debts of the partnership are paid, the surplus, if any, is distributed amongst the part­ ners, and (typically) the partners go their separate ways. •• Illegality — a partnership is automatically dissolved if it becomes unlawful for the business of the partnership to be carried on.79 •• Expiry — a partnership entered into for a fixed term or a particular project will be dissolved if the term of the partnership comes to an end or the particular project is completed.80 Note that not all

76 Partnership Act 1963 (ACT) s 38(1); Partnership Act 1892 (NSW) s 33(1); Partnership Act 1997 (NT) s 37(1); Partnership Act 1891 (Qld) s 36(1); Partnership Act 1891 (SA) s 33(1); Partnership Act 1891 (Tas) s 38(1); Partnership Act 1958 (Vic) s 37(1); Partnership Act 1895 (WA) s 44(1). 77 Partnership Act 1963 (ACT) ss 21(3), (5); Partnership Act 1892 (NSW) ss 17(3), (5); Partnership Act 1997 (NT) ss 21(2), (5); Partnership Act 1891 (Qld) ss 20(3), (5); Partnership Act 1891 (SA) ss 17(3), (5); Partnership Act 1891 (Tas) ss 22(3), (5); Partnership Act 1958 (Vic) ss 21(2), (3); Partnership Act 1895 (WA) ss 24(2), (3) 78 Federal Commissioner of Taxation v Jefferies [1982] Qd R 121. 79 Partnership Act 1963 (ACT) s 39; Partnership Act 1892 (NSW) s 34; Partnership Act 1997 (NT) s 38; Partnership Act 1891 (Qld) s 37; Partnership Act 1891 (SA) s 34; Partnership Act 1891 (Tas) s 39; Partnership Act 1958 (Vic) s 38; Partnership Act 1895 (WA) s 45. 80 Partnership Act 1963 (ACT) s 37; Partnership Act 1892 (NSW) s 32; Partnership Act 1997 (NT) s 36; Partnership Act 1891 (Qld) s 35; Partnership Act 1891 (SA) s 32; Partnership Act 1891 (Tas) s 37; Partnership Act 1958 (Vic) s 36; Partnership Act 1895 (WA) s 43.

732  PART 3 Managing a business

partnerships are for a limited duration; many are open-ended (referred to as a ‘partnership at will’). If the partners in a limited duration partnership continue to conduct business together after the expiry of the duration, the partnership automatically becomes a partnership at will.81 •• Notice — a partnership at will is dissolved by any partner giving notice to the other partners of their intention to dissolve the partnership.82 •• Court order — the court has the power to dissolve a partnership on application by one or more of the partners in the event of: –– permanent insanity, –– permanent incapacity to perform partnership duties, –– conduct calculated to prejudicially affect the carrying on of the partnership business, –– wilful or persistent breach of the partnership agreement, –– inability to carry on the business other than at a loss, and –– dissolution being otherwise just and equitable.83 ACTIVIT Y 20.12 — REFLECT

In what circumstances not covered by the other sub-sections would it be ‘just and equitable’ for the court to order a partnership to be dissolved? Winding up process

Upon dissolution, the partnership funds are distributed as follows.84 1. The partnership funds are first used to repay any outstanding partnership debts and liabilities. If there are insufficient funds from profits to repay the debts, then the partners’ capital investment — including any assets contributed by the partners — are used to repay the debts. If there are still partnership debts outstanding then each partner must contribute from their personal wealth until the debts are paid in full or the partners are insolvent. 2. If, after repayment of the partnership debts, there are partnership funds remaining, any advances (loans to the firm) made by the partners are repaid. 3. If, after repayment of the advances, there are partnership funds remaining, the partners’ capital invest­ ments are repaid. 4. If, after repayment of the capital investments, there are partnership funds remaining, these are shared by the partners in accordance with the terms of the partnership agreement or, in the absence of agree­ ment, equally. This process is summarised in figure 20.6. ACTIVIT Y 20.13 — REFLECT

Why is it important that public notice be given of the dissolution of a partnership? (Refer to the notion of ‘apparent authority’ in your answer.)

81 Partnership Act 1963 (ACT) s 32; Partnership Act 1892 (NSW) s 27; Partnership Act 1997 (NT) s 31; Partnership Act 1891 (Qld) s 30; Partnership Act 1891 (SA) s 37; Partnership Act 1891 (Tas) s 32; Partnership Act 1958 (Vic) s 31; Partnership Act 1895 (WA) s 38. 82 Partnership Act 1963 (ACT) s 37; Partnership Act 1892 (NSW) s 32; Partnership Act 1997 (NT) s 36; Partnership Act 1891 (Qld) s 35; Partnership Act 1891 (SA) s 32; Partnership Act 1891 (Tas) s 37; Partnership Act 1958 (Vic) s 36; Partnership Act 1895 (WA) s 43. 83 Partnership Act 1963 (ACT) s 40; Partnership Act 1892 (NSW) s 35; Partnership Act 1997 (NT) s 39; Partnership Act 1891 (Qld) s 38; Partnership Act 1891 (SA) s 35; Partnership Act 1891 (Tas) s 40; Partnership Act 1958 (Vic) s 39; Partnership Act 1895 (WA) s 46. 84 Partnership Act 1963 (ACT) ss 45, 50; Partnership Act 1892 (NSW) ss 39, 44; Partnership Act 1997 (NT) ss 43, 48; Partnership Act 1891 (Qld) ss 42, 47; Partnership Act 1891 (SA) ss 39, 44; Partnership Act 1891 (Tas) ss 44, 49; Partnership Act 1958 (Vic) ss 43, 48; Partnership Act 1895 (WA) ss 50, 57.

CHAPTER 20 Managing a business: closing down  733

The rights and obligations of the partners continue after dissolution as far as is necessary to wind up the affairs of the partnership and to complete any unfinished transactions.85

Payment of partnership debts • out of profits, then • out of capital, then • by individual partners

Repayment of loans to partners

Repayment of capital to partners

Distribution of any remaining assets to the partners FIGURE 20.6

Distribution of partnership assets upon dissolution

Company As we saw earlier, a company can be wound up by the court. It is also possible for the shareholders to wind the company up voluntarily. Before a shareholders’ voluntary winding up can take place the directors must first make a declaration of solvency, which states that the directors have made an inquiry into the affairs of the company and have formed the opinion that the company will be able to pay its debts in full within 12 months after the commencement of winding up.86 There can only be a voluntary winding up if at the meeting the shareholders pass a special resol­ ution to that effect.87 The voluntary winding up commences when the special resolution is passed.88 The shareholders of the company are in control of the liquidation: the shareholders appoint the liquidator, fix their remuneration and exercise a general power of supervision and control over their duties.89 The winding up process is otherwise the same as that described earlier.

85 Partnership Act 1963 (ACT) s 44; Partnership Act 1892 (NSW) s 38; Partnership Act 1997 (NT) s 42; Partnership Act 1891 (Qld) s 41; Partnership Act 1891 (SA) s 38; Partnership Act 1891 (Tas) s 43; Partnership Act 1958 (Vic) s 42; Partnership Act 1895 (WA) s 49. 86 Corporations Act 2001 (Cth) s 494(1). 87 Corporations Act 2001 (Cth) s 491. 88 Corporations Act 2001 (Cth) s 513B. 89 Corporations Act 2001 (Cth) s 495.

734  PART 3 Managing a business

ACTIVIT Y 20.14 — REFLECT

Why would the shareholders of a solvent company choose to wind it up?

A ‘creditor’s voluntary liquidation’ takes place in two situations: 1. where directors call a meeting to pass a resolution to recommend voluntary winding up and fail to make a declaration of solvency, and 2. where the liquidator appointed in a shareholders’ voluntary winding up forms the opinion that the company will not be able to discharge its debts within the period specified in the declaration of solvency.90 In the first situation, notice must be given to all creditors calling a meeting that considers the resol­ ution for voluntary winding up.91 At this meeting the creditors may nominate a person to act as liquidator in place of the liquidator nominated by the shareholders and can set the liquidator’s remuneration.92 In the second situation, the liquidator is required to summon a meeting of creditors, to provide a state­ ment of the company’s assets and liabilities and to inform the creditors of their right to appoint a dif­ ferent liquidator.93 After this (whether or not a different liquidator is appointed) the liquidation proceeds as an involuntary winding up.

Trust There are a number of ways in which a trust can be wound up. •• The trust is automatically wound up once the trustee has distributed all of the trust property to the beneficiaries in accordance with the terms of the trust. •• As long as they are all of full age and capacity, the beneficiaries can choose to end the trust and release the trustee from their obligations. •• The court has the power to make an order bringing the trust to an end.

Selling the business There are many reasons why a business owner may decide to sell the business. The business owner may have run out of enthusiasm and no longer finds operating the business to be enjoyable, they may wish to retire, or they may simply be looking for a new challenge. If the business structure of the organisation is a company, the legal process of sale will be relatively straightforward: the seller can simply transfer ownership of the shares in the company to the buyer. If the business structure is a sole trader or partnership, however, the process will be more complicated because each business asset, each contract and each employee will have to be transferred from the seller to the buyer. LAW IN CONTEXT: LAW IN PRACTICE

Business for sale The actual process of selling a business can be complicated, and will be more complicated the larger the business. The following are the basic stages in the sale of a business. • Valuation — the seller determines the approximate value of the business, taking into account the value of its tangible assets, goodwill including the business name and intellectual property, past financial performance, and future prospects. • Marketing — the seller attempts to locate a buyer, either alone or with the help of an agent or broker. The seller should prepare an information package about the business for prospective buyers.

90 Corporations Act 2001 (Cth) s 496(1). 91 Corporations Act 2001 (Cth) s 497(1). 92 Corporations Act 2001 (Cth) s 499. 93 Corporations Act 2001 (Cth) s 496.

CHAPTER 20 Managing a business: closing down  735

• Negotiation — the seller and the buyer negotiate the terms of the sale, including the price, the specific details of what will be included in the sale, and the length of any period of handover or training during which the seller will assist the buyer to become familiar with the business. • Sale — a contract of sale is prepared and signed by the parties. The Real Estate Institute in each jurisdiction has issued a standard form contract for the sale of a business. • Due diligence — due diligence is the process by which the buyer and their advisers scrutinise the records of the business to create an accurate picture of the legal and financial position of the business. • Settlement — settlement occurs once the buyer has satisfied themselves about the validity of the sale, and the purchase price is handed over in exchange for any documents of title and transfer documents. • Tax implications — there are likely to be capital gains tax implications of the sale, as well as requirements that must be satisfied in terms of GST, payroll tax and superannuation of employees.

ACTIVIT Y 20.15 — REFLECT

What kinds of matters would be addressed during a due diligence preceding the purchase of a business?

LAW IN CONTEXT: LAW AND PRACTICE

Succession planning More than 95 per cent of Australian businesses are classified as family and privately owned. Together, these account for a combined wealth of around $4.3 trillion. Of these, a significant proportion are classified as ‘small business’, that is, a business employing fewer than 20 people. One of the key concerns for this sector is the level of succession planning that is in place. Succession planning is a planning process undertaken by a business owner or controller to determine the best means of exit from ownership or control of the business to ensure the continuity of the business. Succession planning is also known as ‘transition planning’ and ‘generation planning’. The MGI Family and Private Business Survey undertaken by RMIT University in 2006 found that 81 per cent of the owners and operators of family businesses plan to retire over the next 10 years. It also found that: • 80.3 per cent of the current CEOs of these family businesses have not documented management succession plans, • 75.2 per cent have not documented ownership succession plans, and • 65.1 per cent indicated that the family has not agreed upon the succession plans and succession of the next CEO. A succession plan will address not only what will happen when the present owner or controller retires or decides to sell the business, but also what will happen if they die, become permanently disabled or incapacitated, or are declared bankrupt.

REVISION QUESTIONS

Before proceeding, ensure that you can answer the following questions. 20.24 What legal steps must be taken to close a business? 20.25 What does it mean to say that a partnership lacks ‘perpetual succession’? 20.26 What is the legal effect of (1) the death of a partner, (2) the retirement of a partner, (3) the expulsion of a partner, and (4) the admission of a new partner? 20.27 What is the legal effect of (1) the partnership business becoming illegal, (2) the term of a fixed-term partnership expiring, and (3) one partner telling the other partners that they wish to dissolve the partnership? 736  PART 3 Managing a business

20.28 In what circumstances can a court dissolve a partnership? 20.29 What is the extent of liability of (1) incoming partners and (2) outgoing partners? 20.30 If a partnership is dissolved, how are the partnership funds distributed? 20.31 How is a company wound up voluntarily by the shareholders? 20.32 What is a creditors’ voluntary winding up? 20.33 How can a trust be wound up? 20.34 What is a creditor’s voluntary winding up? 20.35 What are the major steps in selling a business? 20.36 What is succession planning and why is it important?

In conclusion •• A business experiencing financial difficulty may be placed into receivership. •• An individual experiencing financial difficulty may choose to declare themselves bankrupt, or they may be bankrupted involuntarily by one or more of their creditors. The trustee in bankruptcy sells most of the individual’s assets and uses the money to repay their creditors. The trustee in bankruptcy may be able to reverse certain transactions entered into by the individual prior to being declared bank­ rupt. Alternatives to bankruptcy include debt agreements and personal insolvency agreements. •• The equivalent process for a corporation is liquidation or winding up. An alternative to liquidation is voluntary administration. •• A partnership can be voluntarily dissolved by the partners, and a company can be voluntarily wound up by the shareholders. JOHNNY AND ASH

[Johnny and Ash are at the hospital. Ash is on the bed, Johnny is seated besides her, holding her hand as she experiences another contraction, her eyes closed against the pain. She breathes calmly. The pain subsides, and Ash opens her eyes.] Ash — So, about these two letters. Johnny — What? Are you sure you want to talk about them now? Ash — Why not? I can multitask, you know. Johnny — Of course you can. Ash — Now, when you dissolved the partnership with Maria, what exactly did you do? Johnny — Well, I told her I wanted out, and we signed a contract according to which she would pay me $100  000 for my share of the restaurant. Then she gave me a bank cheque, which I deposited into my account with the Common Bank. And then of course I invested the money into Organicola. But that was all well before these outstanding debts were incurred. If Maria can’t pay Vegan Lifestyle for the tofu chickens she ordered after she bought me out, why should it be my problem? Ash — Well, remember how I explained that when you are in a partnership, each partner is the agent of the other partner? Johnny — Yeah, but that authority surely ended when the partnership ended? Ash — Not necessarily. Maria may still have had apparent authority to act on your behalf. Did you tell all of your suppliers that you had ended the partnership? Johnny — No. We deliberately kept it quiet because we didn’t want them to worry about the viability of the business. Ash — Hmm. Not so smart. That means that as far as those suppliers are concerned you were, and are, still a partner and Maria continues to have authority to act on your behalf, including making you liable for the restaurant’s debts. You had better fix that problem quickly by getting in touch with all of them and making sure they know you have left the business. You should also put an ad in the paper saying the same thing.

CHAPTER 20 Managing a business: closing down  737

Johnny — What about this $900 debt to Vegan Lifestyle? Ash — Is there any way Luke would have found out about you leaving the restaurant? Johnny — Wait a second! I remember seeing Luke at a party about a month after I sold my share to Maria. I told him what had happened, and how we had started the new business. Ash — And that was before these outstanding debts were incurred by Maria? Johnny — Yes! Ash — Then at the time the debts were incurred, Maria no longer had your apparent authority, at least not as far as Vegan Lifestyle is concerned. Phew. Now what about this letter from Maria’s trustee in bankruptcy? Johnny — Yeah, that’s the one I’m really worried about. Am I going to have to pay $100  000 to this Meg character? Ash — A trustee in bankruptcy does have the power to recover payments made by the bankrupt person prior to their being declared bankrupt. As I recall, if the bankrupt paid a creditor within the 6 months prior to their bankruptcy commencing, such that the creditor receives an unfair preference over the other creditors who have not been paid, that creditor has to pay the money to the trustee, and then ‘wait in line’ with everyone else for a possible payout. Johnny — But I had no idea that Maria was in financial trouble! Ash — I know, and that will be our defence. You received the payment in good faith and without notice of Maria’s lack of solvency. You should be okay. You just need to make that clear to Meg and possibly complete a statutory declaration to that effect. So, it looks like we have a happy ending. Ow. Johnny — Ow? [Ash squeezes Johnny’s hand, hard, as another contraction arrives.] Ow!

738  PART 3 Managing a business

QUIZ 1 A person appointed to temporarily manage an asset or a business with a view to repaying a

creditor’s outstanding debt is (a) a receiver. (b) a liquidator. (c) a trustee. (d) an administrator. 2 A person can only be declared bankrupt involuntarily if they (a) are an individual and not a corporation. (b) owe at least the statutory minimum. (c) have committed an act of bankruptcy. (d) all of the above. 3 Once a person has lodged a statement declaring their intention to apply for bankruptcy with AFSA, they can still change their mind provided they do so within (a) 7 days. (b) 30 days. (c) 12 months. (d) 3 years. 4 Which of the following is not an act of bankruptcy? (a) Failing to comply with a bankruptcy notice within the time specified in the notice. (b) Refusing to answer the door or respond to phone calls and emails. (c) Having assets seized by a sheriff. (d) Failing to pay an outstanding debt by the due date. 5 A bankrupt person is entitled to keep (a) their shares in proprietary companies. (b) a holiday home owned as trustee for their children. (c) lottery winnings. (d) their home. 6 If a bankrupt person transferred ownership of property to their spouse to keep the property away from creditors in the event of their bankruptcy, the trustee in bankruptcy can recover the property provided the transaction took place (a) after the person was declared bankrupt. (b) within 6 months prior to commencement of the bankruptcy. (c) within 4 years prior to commencement of the bankruptcy. (d) at any time. 7 Once they are discharged from bankruptcy, the bankrupt is no longer liable for (a) outstanding income tax liability. (b) HECS-HELP liability. (c) child support payments. (d) all of the above. 8 While a person is bankrupt they cannot (a) borrow money. (b) operate a business. (c) leave Australia without the permission of the trustee. (d) direct a company without the permission of the shareholders. 9 A person can only enter into a Part X personal insolvency agreement if they (a) have committed an act of bankruptcy. (b) have an after-tax income of less than the statutory limit. CHAPTER 20 Managing a business: closing down  739

10

11

12

13

14

15

(c) handed over control of their assets to a controlling trustee. (d) all of the above. A company can only be wound up if (a) it is insolvent. (b) it has failed to satisfy a statutory demand. (c) it is a company limited by shares. (d) all of the above. (e) none of the above. A transaction between a company and an unsecured creditor that results in the creditor receiving more from the company than they would have received if they had to prove for the debt in a winding up is called (a) an insolvent transaction. (b) an unfair preference. (c) an uncommercial transaction. (d) an unfair loan. When a liquidator distributes the assets of the company, the persons least likely to be paid are (a) the unsecured creditors. (b) the preference shareholders. (c) the employees. (d) the liquidator. During voluntary administration (a) no secured creditor can enforce their charge. (b) no shareholder can sell their shares. (c) no directors can act. (d) none of the above. A partnership is dissolved (a) by one partner giving notice to the other partners. (b) by the bankruptcy of one of the partners. (c) if the purpose of the partnership becomes illegal. (d) all of the above. The business structure that best facilitates the sale of a business is (a) the company. (b) the trust. (c) the sole trader. (d) the partnership.

EXERCISES EXERCISE 20.1 — BANKRUPTCY

Maria is no longer able to pay her bills as and when they become due. She is considering the benefits of bankruptcy. Explain to Maria (a) the negative consequences of bankruptcy, and (b) the available alter­ natives to bankruptcy. EXERCISE 20.2 — BANKRUPTCY

Maria has been declared bankrupt. She expects to earn a gross income in the first 12 months of her bankruptcy in the amount of $75  000. The income tax payable on this amount will be $14  000 and the Medicare levy will be $1000. Maria has one dependant. What will be the amount of her weekly income contribution to Meg, her trustee in bankruptcy? 740  PART 3 Managing a business

EXERCISE 20.3 — BANKRUPTCY

Four months prior to the commencement of her bankruptcy Maria gave a $30  000 sports car to her niece Lilly. Two months later Maria paid $2000 to her solicitor Marshall, being half of the amount that she owed Marshall, because Marshall had threatened to tell Maria’s other creditors that Maria was insol­ vent. Is Meg, Maria’s trustee in bankruptcy, able to recover (a) the car from Lilly, or (b) the $2000 from Marshall? EXERCISE 20.4 — BANKRUPTCY

Eight years ago Maria transferred the title of her house to her sister Robin. Maria’s trustee Meg has found a copy of an email Maria sent to Robin at the time that states: ‘I would prefer that you have the benefit of this house rather than those losers I owe money to.’ Can Meg recover the house from Robin? EXERCISE 20.5 — INSOLVENCY

Milton Retail Ltd, a major client of Organicola, has been placed into liquidation. The liquidator, Ted, has informed Johnny that Organicola is unlikely to receive payment of their last few months’ worth of invoices. Johnny is concerned that without payment from Milton Retail Ltd, Organicola will be unable to pay its own debts as and when they become due and payable. Advise Johnny. EXERCISE 20.6 — LIQUIDATION

Milton Retail Ltd is in liquidation. Advise the liquidator, Ted, how much each creditor should be paid, assuming that the total amount available for distribution is $252  000. (a) The CEO is owed $12  000 in director’s fees. (b) The employees are owed $100  000 in total. (c) The company’s solicitors are owed $50  000 for legal fees. (d) The company’s other unsecured creditors are owed $40  000 in total. (e) Ted’s expenses to date amount to $20  000 and his remuneration to $80  000. EXERCISE 20.7 — CLOSING THE BUSINESS

Imagine that instead of Johnny being bought out by Maria, Johnny and Maria had instead decided to close The Lame Duck restaurant. Explain the process of closing the business, including the manner in which the assets of the partnership would be distributed. Assume that the business is solvent at the time the restaurant is closed. EXERCISE 20.8 — DISSOLVING THE PARTNERSHIP

When Johnny and Maria became partners the value of their capital contributions were $200  000 and $150  000 respectively. According to their agreement, upon dissolution, capital is to be returned to the partners and any profit or loss is to be shared equally. If the partnership is dissolved, how much would each partner receive if the amount remaining after payment of the partnership debts is (1) $400  000; (2) $350  000; (2) $300  000; (4) $50  000?

KEY TERMS act of bankruptcy  An action, event or declaration listed in s 40 of the Bankruptcy Act 1966 (Cth) that can be used by a creditor to apply to the court to make a person bankrupt. administrator  A person appointed to temporarily manage the business of a company in financial difficulty while a decision is made by its creditors about whether the company should execute a deed of company arrangement, be wound up, or be returned to the control of its board of directors. affidavit  A written statement sworn or affirmed to be a true statement by the maker of the statement. annul  To nullify, abolish or make void, e.g. the annulment of a bankruptcy. apparent authority  Authority conferred upon an agent unintentionally when the principal holds the agent out as having authority and the holding out is relied upon by a third party. CHAPTER 20 Managing a business: closing down  741

Australian Financial Security Authority (AFSA)  The statutory authority responsible for the administration and regulation of the personal insolvency system, trustee services and the administration of the Personal Property Securities Register. bankruptcy notice  A demand for repayment of a debt in the prescribed format, a failure to comply with which will be an act of bankruptcy. business name  The trading name of a business person or business organisation. business structure  The legal form of a business organisation, e.g sole trader, partnership or company. capital gains tax  A Federal tax payable on any gain a taxpayer makes when they sell an asset such as real property or shares. circulating security interest  Either a floating charge or a PPSA (Personal Property Securities Act) security interest attached to a circulating asset. controlling trustee  A person appointed to administer a personal insolvency agreement under Part X of the Bankruptcy Act. cooling off period  A period within which a person can change their mind about proceeding with a contract or application. creditor’s petition  An application by one or more creditors for an order that the debtor be declared bankrupt. debt agreement  An arrangement under Part IX of the Bankruptcy Act between an insolvent debtor and their creditors as an alternative to bankruptcy. debtor’s petition  An application by an insolvent person to make themselves bankrupt. deed of company arrangement  An agreement between an insolvent company and its creditors negotiated as part of the process of voluntary administration. doctrine of relation back  The principle that a bankruptcy is deemed to have commenced on the date of the first act of bankruptcy within the 6 months prior to the presentation of the creditor’s petition. due diligence  The process by which a buyer of a business and their advisers scrutinise the records of the business to create an accurate picture of the legal and financial position of the business. estate  (1) An interest in real property less than full ownership. (2) The sum total of a person’s property. floating charge  Security for a loan to a company over a class of assets or all of the assets of the company. good faith  Honesty and reasonableness. GST (goods and services tax)  A Federal tax of 10 per cent on the sale of most goods and services. insolvent trading  Permitting a business organisation to continue trading despite the fact that it is insolvent. insolvent transaction  Either an unfair preference or an uncommercial transaction entered into when the company was insolvent or which caused or contributed to the company’s insolvency. intellectual property  A form of intangible creation such as the expression of an idea, a trade mark, a new technology or an original design. liquidation  A statutory process where the assets of an insolvent corporation are sold and used to repay the corporation’s creditors. Also known as ‘winding up’. liquidator  The person appointed to wind up a corporation. Official Receiver  The person in each bankruptcy district who issues orders such as bankruptcy notices, accepts debtor’s petitions, undertakes investigations, collects and liquidates the bankrupt’s assets, and distributes the bankrupt’s assets to creditors. payroll tax  A State tax payable on the wages paid to employees. personal insolvency agreement  An agreement under Part X of the Bankruptcy Act between an insolvent debtor and their creditors as an alternative to bankruptcy. proof of debt  A document prepared by a creditor in the prescribed form that sets out the amount to them owed by the debtor. receiver  A person appointed to manage an asset or a business on behalf of a secured creditor with a view to realising the asset or business and ensuring repayment of the debt. 742  PART 3 Managing a business

related entity  A party with a close connection to an individual or company such as (1) a business partner, spouse, parent, child or relative of the individual or (2) a director, a shareholder, a close family member of a director or a shareholder, or another company owned by a director or a shareholder of the company. Also known as ‘related party’. relation back day  Either the day on which an application for a liquidation order was filed or the day on which the liquidation of a company is deemed to have begun. secured creditor  A lender entitled to seize and sell the property over which the loan is secured in the event that the borrower defaults. sequestration order  An order of the court declaring an individual to be bankrupt. settlement  The stage in the process of transferring ownership of property when the purchaser hands over payment in return for title to the property. Also known as ‘completion’. standard form contract  A contract in the form of a written document containing pre-printed terms that are not negotiated. statement of affairs  A document setting out in detail the extent of a person’s assets and liabilities. succession planning  The planning process undertaken by a business owner or controller to determine the best means of exit from ownership or control of the business to ensure the continuity of the business. Also known as ‘transition planning’ and ‘generation planning’. trust  An arrangement in which one person (the trustee) legally owns property for the benefit of one or more other people (the beneficiaries). trustee in bankruptcy  The person responsible for administering a bankrupt person’s estate (either the Official Receiver or a registered trustee). uncommercial transaction  A transaction that a reasonable person in the position of the company would not have entered into. unfair loan  A loan that has an extortionate interest rate or charges. unfair preference  The payment by a debtor of one creditor at the expense of other creditors. unreasonable director related transaction  A payment or transfer of property to a director of the company that a reasonable person in the position of the company would not have made. voidable transaction  A transaction entered into by the bankrupt/company prior to the commencement of the bankruptcy/liquidation that may be reversible by the trustee in bankruptcy/liquidator. voluntary administration  An insolvency procedure where the directors of a financially troubled company or a secured creditor with a charge over most of the company’s assets appoint an external administrator to investigate the company’s affairs, to report to creditors and to recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.

ACKNOWLEDGEMENTS Text: © Copyright Australian Financial Security Authority. Reproduced with permission. For the most recent version of the Prescribed Information please refer to the Australian Financial Security Authority’s website: //www.afsa.gov.au Screenshot: © Commonwealth of Australia Article: © ABC News, Alexandra Blucher, 2 December 2015, http://www.abc.net.au/news/2015-12-02/ forest-contactors-call-for-insolvency-law-changes-gunns/6991954 Article: © Adele Ferguson, ‘Unsecured Creditors Often Left Penniless’, The Australian (Sydney), 27 June 2008

QUIZ ANSWERS

1. a  2. d  3. a  4. d  5. b  6. d  7. a  8. c  9. c  10. e  11. b  12. b  13. d  14. d  15. a CHAPTER 20 Managing a business: closing down  743

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