Business law [Second edition.] 9780195593990, 0195593995

Table of contents :
CONTENTS
Preface
Guidelines for Answering Questions
List of Figures
PART ONE THE LEGAL FRAMEWORK
Chapter 1: The Australian Legal System
The nature of law
The purpose of the law
Business law
Sources of law
Doctrine of precedent or stare decisis
The courts
The rules of precedent
Origins of Australian law
The Australian constitutional system
Approaches to the interpretation of legislation
Ethics and business law
PART TWO CONTRACT LAW
Chapter 2: Making The Contract: Offer and Acceptance
Introduction
Definition of a contract
Essential elements of a contract
Meaning of offer
Invitation to treat
Revocation of an offer: importance of communication
Acceptance must be in response to an offer
Counter-offer
Acceptance of offer must be final and unqualified
The postal acceptance rule
Chapter 3: Formation of Contract
Introduction
Intention to be legally bound
Social and domestic agreements
Commercial agreements
Particular agreements
Consideration
Promissory estoppel
Privity of contract
Capacity to contract
Chapter 4: Contract: Terms and Remedies for Breach
Introduction
Express terms
Implied terms
Exclusion clauses
The contra proferentem rule
Common law remedies for breach
Equitable remedies for breach
PART THREE THE CONSUMER AND BUSINESS LAW
Chapter 5: Consumer Protection Law
Introduction
ACL and consumer protection
Misleading or deceptive conduct under the ACL
False or misleading representations under the ACL
The statutory regime governing consumer guarantees
Guarantee as to title
Guarantee that goods are of acceptable quality
Guarantee that goods are fit for disclosed purpose
Guarantee relating to the supply of goods by description
Guarantee relating to the supply of goods by sample or demonstration model
Consumer guarantees relating to the supply of services
State consumer protection legislation
Chapter 6: Banking and Finance
Introduction
The regulatory framework: an overview
Financial institution-customer relationship
Cheques and negotiable instruments
Chapter 7: E-commerce and Business
Introduction
Acceptance of e-commerce
Agreements and e-commerce
Disputes over terms in online agreements
Relevant legislation: Electronic Transactions Act
The electronic funds transfer system
E-banking and payments systems
E-commerce and domain names
Chapter 8: The Law of Negligence in the Business World
Introduction
What is the tort of negligence?
The application of the neighbour principle
Negligent misstatement
The concept of misleading or deceptive conduct
Manufacturers’ liability under the ACL
Prerequisites for manufacturers’ liability
Actions against manufacturers for goods with safety defects
PART FOUR FORMS OF BUSINESS ORGANISATION AND OWNERSHIP
Chapter 9: Choice of Business Structure
Introduction
Unincorporated business organisations
Incorporated business structures: companies
Chapter 10: Introduction to Company Law
Introduction
Statute regulating companies: Corporations Act
Concept of separate legal entity
The concept of the corporate veil
Forms of companies which are registered
Public companies
Companies created by registration
Adherence to constitution or replaceable rules
Contracts with the company
The statutory assumptions
Chapter 11: Duties of Company Directors
Introduction
Duties and liabilities of directors
Duty to exercise reasonable degree of care and diligence
The duty to act in good faith
Prohibitons in respect of insider trading
Directors’ duty not to improperly use their position
Duty to prevent insolvent trading: section 588 g
Enforcement of members’ personal rights: the rule in Foss v Harbottle
PART FIVE INSOLVENCY
Chapter 12: Bankruptcy and Corporate Insolvency
Introduction
Bankruptcy law: its objectives
Bankruptcy proceedings
Effects of bankruptcy
Voluntary and involuntary bankruptcy
Acts of bankruptcy
Effects of a sequestration order
Date of bankruptcy and commencement of bankruptcy
Alternatives to bankruptcy
Corporate insolvency
Table of Cases
Table of Statutes
Index

Citation preview

BUSINESS LAW GUIDEBOOK

Second Edition

Charles YC Chew

BUSINESS LAW GUIDEBOOK

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BUSINESS LAW GUIDEBOOK

Second Edition

Charles YC Chew

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1 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries. Published in Australia by Oxford University Press 253 Normanby Road, South Melbourne, Victoria 3205, Australia © Charles YC Chew 2014 The moral rights of the author have been asserted. First published 2008 Second edition published 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographics rights organisation. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. National Library of Australia Cataloguing-in-Publication data Chew, Charles Y. C., author. Business law guidebook / Charles Chew. 2nd edition. ISBN 978 0 19 559399 0 (paperback) Includes index. Commercial law—Australia—Handbooks, manuals, etc Commercial law—Handbooks, manuals, etc 346.9407 Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, 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) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited Level 15, 233 Castlereagh Street Sydney NSW 2000 Telephone: (02) 9394 7600 Facsimile: (02) 9394 7601 Email: [email protected] Text design by Aisling Gallagher Edited by Bette Moore Typeset by diacriTech, Chennai, India Proofread by Julie King Indexed by Julie King Printed by Markono Print Media Pte Ltd, Singapore Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

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CONTENTS Preface Guidelines for Answering Questions List of Figures

ix x xiii

PART ONE THE LEGAL FRAMEWORK

1

Chapter 1: The Australian Legal System The nature of law The purpose of the law Business law Sources of law Doctrine of precedent or stare decisis The courts The rules of precedent Origins of Australian law The Australian constitutional system Approaches to the interpretation of legislation Ethics and business law

3 3 4 4 5 6 7 8 8 10 16 19

PART TWO CONTRACT LAW

23

Chapter 2: Making The Contract: Offer and Acceptance Introduction Definition of a contract Essential elements of a contract Meaning of offer Invitation to treat Revocation of an offer: importance of communication Acceptance must be in response to an offer Counter-offer Acceptance of offer must be final and unqualified The postal acceptance rule

25 25 26 26 27 29 31 32 33 35 36

Chapter 3: Formation of Contract Introduction Intention to be legally bound Social and domestic agreements Commercial agreements Particular agreements Consideration Promissory estoppel Privity of contract Capacity to contract

39 39 40 40 42 42 43 48 51 51

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CONTENTS

Chapter 4: Contract: Terms and Remedies for Breach Introduction Express terms Implied terms Exclusion clauses The contra proferentem rule Common law remedies for breach Equitable remedies for breach

59 60 60 65 69 72 73 77

PART THREE THE CONSUMER AND BUSINESS LAW

79

Chapter 5: Consumer Protection Law Introduction ACL and consumer protection Misleading or deceptive conduct under the ACL False or misleading representations under the ACL The statutory regime governing consumer guarantees Guarantee as to title Guarantee that goods are of acceptable quality Guarantee that goods are fit for disclosed purpose Guarantee relating to the supply of goods by description Guarantee relating to the supply of goods by sample or demonstration model Consumer guarantees relating to the supply of services State consumer protection legislation

81 81 82 83 85 88 88 88 89 90 90 91 92

Chapter 6: Banking and Finance Introduction The regulatory framework: an overview Financial institution-customer relationship Cheques and negotiable instruments

96 96 97 99 104

Chapter 7: E-commerce and Business Introduction Acceptance of e-commerce Agreements and e-commerce Disputes over terms in online agreements Relevant legislation: Electronic Transactions Act The electronic funds transfer system E-banking and payments systems E-commerce and domain names

115 115 116 117 117 118 119 121 123

Chapter 8: The Law of Negligence in the Business World Introduction What is the tort of negligence? The application of the neighbour principle

127 127 128 130

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CONTENTS

Negligent misstatement The concept of misleading or deceptive conduct Manufacturers’ liability under the ACI Prerequisites for manufacturers’ liability Actions against manufacturers for goods with safety defects

132 135 136 137 138

PART FOUR FORMS OF BUSINESS ORGANISATION AND OWNERSHIP

143

Chapter 9: Choice of Business Structure Introduction Unincorporated business organisations Incorporated business structures: companies

145 145 146 157

Chapter 10: Introduction to Company Law Introduction Statute regulating companies: Corporations Act Concept of separate legal entity The concept of the corporate veil Forms of companies which are registered Public companies Companies created by registration Adherence to constitution or replaceable rules Contracts with the company The statutory assumptions

160 160 161 162 164 164 168 168 169 170 172

Chapter 11: Duties of Company Directors Introduction Duties and liabilities of directors Duty to exercise reasonable degree of care and diligence The duty to act in good faith Prohibitons in respect of insider trading Directors’ duty not to improperly use their position Duty to prevent insolvent trading: section 588 g Enforcement of members’ personal rights: the rule in Foss v Harbottle

177 177 177 178 179 181 183 183 184

PART FIVE INSOLVENCY

189

Chapter 12: Bankruptcy and Corporate Insolvency Introduction Bankruptcy law: its objectives Bankruptcy proceedings Effects of bankruptcy Voluntary and involuntary bankruptcy Acts of bankruptcy

191 192 192 193 193 194 195

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CONTENTS

Effects of a sequestration order Date of bankruptcy and commencement of bankruptcy Alternatives to bankruptcy Corporate insolvency Table of Cases Table of Statutes Index

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PREFACE In preparing the second edition, I have continued the tradition of expressing complex legal concepts in a simple and concise style, thus rendering business law into user-friendly, plain English. The headings, that express the important questions for a work of this level, are themselves signposts to the map that the chapters represent. My main objective in the new edition is to provide updated information on business law as new developments have occurred since the publication of the first edition in 2008. The book extracts essential aspects of the law, and provides the opportunity to gather together these aspects in a single accessible collection. Each chapter ends with a series of brief questions which are intended to test basic understanding of the content. The fact that this is called a Guidebook reflects the functional approach of the work, and in particular, the way in which it attempts to guide or show the reader through the myriad issues involved in the study of business law. At Oxford University Press, I am especially grateful to have Bette Moore as editor. Bette’s general editorial skills, and her eye for detail and clear expression have been invaluable and the final work bears her mark. She edited the book with great skill and judgment, kept all deadlines, showed incredible patience, and provided guidance on layout and formatting. I would also like to thank the publisher, Michelle Head, and the editorial coordinator, Tiffany Bridger, as they piloted the book through to fruition, ensuring thereby that the whole project did not falter from the start. Many thanks are due to Elaine Miller and Tim Campbell as editors of the first edition, and Karen Hildebrandt, publisher of the first edition, which has built a solid basis for this continuing work. Gratitude is also owed to Kim Chew for helping out with the illustrations in that edition. I would like to dedicate this text to Anna, Kim, Leon, Tali, Caleb, Toby, Nathaniel, Gemma, Deslyn, Christine, Alysia and Ben. Dr Charles YC Chew, Sydney, October 2014

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GUIDELINES FOR ANSWERING QUESTIONS Essay Type Questions In an essay type question, you should define precisely what the question is all about. It is most likely that you will be given a topic which focuses on a particular area in the subject you are studying. You are expected to research the question, present an analysis of the topic and show an understanding of the area. You should note carefully the following points in regard to essay writing: • Start by outlining a plan of your proposed answer in draft form. It is a good idea to map out on paper the approach you are intending to take and the points you wish to develop. Such a draft plan will allow you to make amendments where appropriate. You are given an opportunity here to reflect on what has been written and to add any new ideas that may come your way. • When you are actually writing the essay, you should have an introduction that brings forward for consideration the topic of the essay. You should then discuss briefly the definitions that may arise; address the topic and explain the structure of the essay, thus setting the tone for the rest of the essay to come. • You now go to the body of the essay. This should have in it a discussion of the key areas you wish to deal with. There should be a continuous movement and flow of ideas in a logical sequence from one paragraph to another. You should be thoughtful in the way you construct each paragraph. Here, you could have an introductory sentence that sets out what is to be covered in each paragraph. You can then develop the theme by way of detailed discussions, the use of examples, facts, appropriate quotations from judgments etc. Each paragraph should be written in such a way that there is a connection with and a transition to the next paragraph. • You should keep referring back to the question or topic to make sure that what you are writing is relevant and not off the point. • You should make sure that you acknowledge your sources (with, for example, footnotes). • You should provide a short conclusion which summarises the main ideas of the essay and brings together the various strands of arguments that have been canvassed. You must not take for granted that you and your examiner agree completely on the meaning of the words and phrases used. Write simply, clearly and concisely. As regards words or phrases that may have more than one meaning, supply your chosen meaning and only use it in that context right through your essay.

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You should avoid emotional and subjective statements as these are irrelevant. Try also to stick to legal principles. For example, in writing an essay based on the legal system (Chapter 1), do not say: ‘Law is quite wonderful. If there is no law we would be in serious trouble. You should perhaps have written: ‘Law provides a means of resolving conflicts. Without the law and the legal system, such conflicts would have a deleterious effect on society generally’. When the relevant terms have been defined, an argument can be formed. You should not simply state a series of propositions, but should bring facts and ideas together in a logical sequence, and make conclusions that follow from your arguments.

Problem-Type Questions What we have done in this book is give you some problem questions that test your understanding of each chapter. You are given sample questions and we show you how to approach the answers, applying legal reasoning. We suggest that you attempt these questions and then see whether you are right by reading the answers online at www.oup.com.au/chew2e. Problem questions are usually hypothetical fact situations sometimes involving more than one area of the law or more than one legal principle in a specific area of the law. When you are confronted with a legal problem in an examination situation or in an assignment, a recommended way is to attempt to write the answer in a systematic way. There is a helpful acronym we can use to describe a basic approach to solving a legal problem. Let us call it IPAC which stands for Issue, Principle, Application, Conclusion. This is how the IPAC approach works: • Issue. Identify the key legal issue or issues, that is, what the parties are arguing about. To do that you have to have a clear picture of the order of events, and how they fit together. A question in an examination or assignment comprises a set of facts followed by instructions (e.g. ‘Advise John'). It is possible that not all facts are pertinent or relevant to answering the question. You have now to ascertain what facts are relevant and which type of law (for example, company law or which aspect of company law in Chapters 10 and 11) applies to those facts. • Principle. The second major step in legal problem solving is to state the legal principle or principles that are applicable to the facts. You need to make a decision about which legal principle or principles are pertinent here. Mention and discuss where applicable the legal authority for statements of legal principles you have made. This can be done by reference to the appropriate section of a relevant statute and/or appropriate case law. • Application. The third step in the proposed method is applying the law to the facts. This step involves explaining how the law or legal principles apply to the

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facts of the current problem. This is an important step. Explain also why the law applies to the facts. The facts of a given problem may not be sufficiently detailed to fit neatly within a given rule or principle. You may now have to consider the merits of one party’s case and also consider the arguments of the other side even though the question requires you to advise only one party. Here you have an answer that is not clear-cut so that alternative applications are recommended. • Conclusion. A conclusion should be arrived at and affirmed on the basis of your answer. A good conclusion is a proposition inferred from the answer you have made. This is where you give your overall summing up linking facts and legal principles together. The examiner is interested in the way you deal with points of law and arguments raised by the question and you are assessed on this basis. It is a good idea to have your conclusion firmly in your mind and then make sure that each step of your argument leads to that conclusion. It is nevertheless important to point out that there is often no right or wrong answer to a problem question. You are assessed on your ability to identify the key issues and your analysis of the relevant principles of law that apply to those issues. A problem question may not give you all the facts you require to solve the problem. You can in this case make assumptions, although you should make these in the context of the facts given in the problem.

Some General Points to Remember As mentioned in our advice on writing essays, do not use emotional and subjective statements. Apply legal principles to a problem question even if practical considerations come to mind. For example, if you have to write an answer to a problem question on contract law (Chapters 2–4), you would not give your examiner a good impression if you had written: ‘Since the other party, the landlord, an extremely wealthy man breached contract, there is nothing this poor tenant can do except to tell her story to the commercial radio and television stations’.

Answers to Questions in this Book For this book, the steps to answering problem questions are illustrated in the form of ‘model answers’ and these can be accessed online. This is to help you understand how to handle problem questions in law, and to appreciate the principles of law and how they are applied. It should be pointed out that not all chapters have model answers and you are encouraged in these chapters to work out the answers yourself using the IPAC method. Guidelines will be given to help you. Please refer to: www.oup.com.au/chew2e.

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LIST OF FIGURES Figure 1.1: Sources of law

6

Figure 1.2: Hierarchy of courts

8

Figure 1.3: Division of law-making powers Figure 1.4: Separation of powers

13

15

Figure 2.1: Elements of a simple contract Figure 2.2: The nature of an agreement Figure 2.3: Auction as invitation to treat Figure 2.4: What happens to the offer

27 29 30

35

Figure 3.1: Different types of contracts

44

Figure 3.2: Different types of consideration Figure 4.1: Different kinds of terms

46

63

Figure 4.2: Significance of the terms of a contract Figure 4.3: Different kinds of damages Figure 5.1: Consumer contracts

64

76

83

Figure 5.2: Elements of a contract of sale Figure 6.1: Example of a cheque

91

105

Figure 6.2: A cheque with a ‘not negotiable’ crossing Figure 6.3: Basic form of a bill of exchange

107

108

Figure 7.1: The analysis of offer and acceptance on the Web Figure 8.1: Prerequisites of the tort of negligence Figure 8.2: When a duty of care exists Figure 8.3: Usual duties of care

117

129

131

135

Figure 9.1: Choice of business structures Figure 9.2: Different kinds of trusts

146

153

Figure 9.3: Stages a small business may go through before it becomes a public company 158 Figure 10.1: Public companies

166

Figure 10.2: Proprietary companies

168

Figure 10.3: Companies classified by membership Figure 11.1: Duties of directors

Figure 11.2: Fiduciary duties of directors

181

Figure 12.1: Procedures under the Bankruptcy Act Figure 12.2: Alternatives to Bankruptcy Figure 12.3: Corporate insolvency

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180 197

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PART ONE THE LEGAL FRAMEWORK

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CHAPTER 1

THE AUSTRALIAN LEGAL SYSTEM COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • explain what is meant by law • outline the rules of precedent • identify the main sources of law and understand the origins of Australian law • understand the Australian Constitution and the federal system • understand the exclusive and concurrent powers of the Commonwealth • understand the doctrine of the separation of powers • explain how the Constitution can be changed • explain the different approaches to the interpretation of legislation • have an appreciation of law and ethics.

CASES TO REMEMBER Mabo v State of Queensland (No 2) (1992) Commonwealth of Australia v Tasmania (1983)

INTRODUCTION THE NATURE OF LAW This chapter introduces us to the legal framework under which commercial or business law operates. To understand how such legal principles can be applied, it is necessary, in the first place, to have an understanding of the nature of law itself. Law, which has always held a fascination for many, is difficult to define and many legal writers and philosophers have, for centuries, attempted to do so. Such attempts at defining law have led to different conclusions, inferring that any view on what the law is may be shaped in the long run by an individual’s moral, religious, political or ethical views and the general influence of the society in which he or she lives. Yet, despite the lack of agreement on a precise definition of ‘law’, it is still possible to identify common themes. A useful general definition may be that ‘law’ is a system of rules that operate in our society to regulate, control and influence the behaviour or relations of individuals and groups. Where people live together in social groups, it is in their interests that some limitations should be placed on the freedom to act

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as they like. A society without rules will be in absolute disorder and confusion. Yet rules must be distinguished from laws. There are many rules governing behaviour that are not laws. They include rules that control how sporting contests are played and our rules for social interaction. To determine when rules become laws, consideration should be given to questions such as: • Where do the rules come from? • When rules are broken, will the offenders be punished? How will the offenders be dealt with? • Will the offenders be punished and by whom? The rules we have come from laws made in two main ways: by Parliament enacting Acts of Parliament or statutes, and by the courts. Australia has inherited many of its laws, together with its legal system, from England. These inherited laws have evolved, developed and been modified to suit the Australian context. They are made by our parliamentarians and judges, are legally enforceable, and have established standards of conduct between citizens and between citizens and government. The law maintains a balance between the interests of those in business and answers to the needs of persons as manufacturers, retailers, buyers and consumers. It serves as a regulator of business transactions, and in so doing applies, for example, contract law, consumer law, competition law, company law and finance law. It also regulates the business structures and entities in the commercial world—for example, companies, partnerships, joint ventures and franchises—and their funding, banking and insurance requirements, as well as their registration where necessary.

THE PURPOSE OF THE LAW The purpose of the law, as alluded to earlier, is to regulate the conduct of the individuals for the benefit of society. The rule of law excludes arbitrary power. Thus, if there is conflict arising, the legal system makes available a mechanism to hear and settle disputes by an independent and impartial process through, for example, the court system. At the same time, it must be reminded that the law is enforceable, and has been developed to set standards of behaviour between the citizen and the state. If these standards of conduct are blatantly breached, the law penalises those who are responsible for doing so. Yet, it should be remembered that the law also plays other roles in a democracy, such as fostering freedom for all citizens and guaranteeing free enterprise where few restrictions are placed on business activities and ownership.

BUSINESS LAW Business law, with which this book is concerned, has evolved as a set of rules to control and preserve economic and commercial endeavours. In Australia, it comprises the rules that determine the rights, duties and obligations of people who are engaged in commercial activities. People are involved in commercial

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transactions every day, although they do not necessarily think about the legal implications of their acts. For example, when taking a bus, who would think about contract law when paying the fare, the statutes that have had to be enacted by Parliament to get them to their destination, and the remedies to which they may be entitled if they are hurt on the way? In recent years, there have been enacted statutes to regulate specific aspects of business or commercial law. The statutes that come to mind include, for example, the Australian Competition and Consumer Act 2010 (Cth) (formerly, the Trade Practices Act 1974 (Cth) which control restrictive trade practices and provide protection to consumers; and the Corporations Act 2001 (Cth) which is concerned with the legal principles applying to the formation and general operation of companies. There are still, nevertheless, areas of business law that are not regulated by statute, but are determined by the principles of the common law, that is, the law developed by the decisions of courts in cases over a period of time, such as contract law. The evolution and development of this law is a dynamic rather than a static process. Thus, it has to be reinterpreted and amended to adequately reflect and serve the needs and requirements of a rapidly evolving Australian society.

SOURCES OF LAW The main sources of law can be identified as: • Enacted law. This is the law made by Parliament, defined as statute law or legislation and delegated legislation. Statute law or legislation is established by the people through their federal or state parliamentary representatives (members of Parliament). Delegated legislation is established by government departments and instrumentalities in the form of by-laws, orders, rules and regulations. • Unenacted law. This is law that is made by means of decisions of the courts, and is known as case law. These are the primary sources of law. The secondary sources are textbooks and legal journals, which supply commentaries, explanations and speculations about the law or the need for reform in the law. Both enacted law and unenacted law are often known as the ‘common law’. Common law can be classified as: • Civil and criminal law. Civil law involves matters between one person and another regarding the enforcement of rights and the carrying out of obligations. A civil action is undertaken by an individual, and where successful, will result in the granting of a remedy. Criminal law includes all statute and case law recognising certain actions as constituting offences, and is enforced by the state. • Common law and equity. The common law traditionally only gave a remedy of damages, which may not be that useful to prevent the continuing occurrence of harm or the continuing breach of a contract. Historically, the common law

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refers to rules developed by the common law courts, which originally were the Courts of King’s Bench and Common Pleas. As an alternative to the common law courts (which had very rigid procedural requirements in the early days), equity law developed by direct appeal to the sovereign, then to the sovereign’s Chancellor and in time to the Court of Chancery. The body of rules devised by the Court of Chancery, which supplemented common law and procedures, became known as ‘equity’. It developed through appeals to the king where it was felt that decisions had been unjust. Equity law, which is another form of case law, provides more flexible remedies in that it can grant remedies where common law remedies were inadequate. Equity, unlike common law, can grant, for example, an injunction or an order for specific performance, and these remedies are defined as ‘equitable remedies’. These equitable remedies will be discussed further in Chapter 4. Equity law is now fused with the common law, resulting in both systems being administered by the same courts. The principles of equity, such as unconscionability, continue to have a significant influence on the development of modern law, and specifically to modern business law.

FIGURE 1.1 Sources of law Sources of Law

Parliaments: - Commonwealth - states

Courts: - judge-made law

DOCTRINE OF PRECEDENT OR STARE DECISIS The basis of the doctrine of precedent is this: like cases should be decided alike. In other words, the legal principles applied in similar situations should be consistent. The common law gives effect to this by what is called stare decisis (‘the decision stands’). What this means, in simple terms, is that where a court has decided a case in a certain way on a particular set of facts, subsequent cases involving similar facts should be decided in the same way in the lower courts in the same court hierarchy. For example, a decision of the Supreme Court of New South Wales is binding on District Courts should they have to decide the same question in a later case. It should be noted that not every aspect of a higher court’s judgment is necessarily binding on a lower court. Only the reason or reasons given for deciding, called the

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‘ratio decidendi’ and often abbreviated as the ‘ratio’, constitutes a binding precedent. So it is only the ratio decidendi of a previous case that is binding upon a subsequent court. The ratio must be distinguished from a statement made in a judge’s decision that was not strictly necessary or relevant. Such a statement is called an obiter dictum (plural obiter dicta) (‘remarks in passing’), and is not binding but may be persuasive.

EXAMPLE: PRECEDENT Suppose that Elaine sues Frank for damages, claiming that Frank acted negligently and caused her injury. Suppose that Elaine is in the right. In court the judge may say this: Frank acted negligently. This was because he knocked down Elaine while cycling on the footpath at excessive speed and fractured Elaine’s left leg and badly bruised her left shoulder. If Frank had been more cautious by cycling slowly and by being aware of his surroundings, he would not have acted negligently.

The judge made three statements. The judge’s first statement is her decision. Her second statement is her reason for her decision: the ratio decidendi. Her third statement is something said by the way: an obiter dictum. The judge’s ratio decidendi or ratio is a binding precedent. Her obiter dictum is only of persuasive value.

THE COURTS Like most countries, Australia has adopted a hierarchical or tiered court system. Both the states and the Commonwealth have adopted such a system. Under the hierarchical court system, the position of a court in the hierarchy indicates the types of cases that it will hear, as well as providing an appeal process for a decision from a lower court to a higher court. Where a matter goes to court for the first time, the court that hears the case is called a ‘court of first instance’ and is said to have an original jurisdiction. If the decision in the case goes on appeal to a higher court, the court hearing that appeal is known as the appeals or appellate court, and is said to have an appellate jurisdiction. To understand how the doctrine of precedent or stare decisis works, it is necessary to have some understanding of the court hierarchies in Australia. Each state has its own hierarchy of courts. Legal matters and legal disputes in Australia are heard in a variety of courts. Each state has a roughly similar hierarchy of courts, with the High Court the highest court of appeal. In addition, Chapter 111, s 71 of the Constitution provides for a federal court hierarchy. The courts within this federal court hierarchy that are of importance to business law are the High Court of Australia and the Federal Court.

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The Federal Court was created under s 71 of the Constitution in 1976 to cover areas of Commonwealth jurisdiction, such as bankruptcy, tax, industrial law, intellectual property and trade practices. FIGURE 1.2 Hierarchy of courts High Court of Australia

Federal Court

State Supreme Court

District Court or County Court

Magistrates’ Court

THE RULES OF PRECEDENT From what has been said above, some rules of precedent can be discerned: • A judge in a lower court must follow the decisions of a higher court in the same judicial hierarchy but not the decisions of other judges at the same level in the same hierarchy. At the same time, a higher court can overrule a prior decision of a lower court in the same hierarchy. • Courts in Australia do not have to follow the decisions of higher courts in a different judicial hierarchy. However, such decisions may be persuasive: that is, although they are not binding, they may be considered by the court in making its decisions, and may be followed. This is especially so in respect of the decisions of the superior courts in the English hierarchy. The reason for this is that the common law of Australia, as mentioned, is derived from English common law. • The highest court (the High Court of Australia) can overrule its previous decisions, although it will not do so lightly and without due consideration, unless a decision is clearly wrong or unless it is in the interests of justice.

ORIGINS OF AUSTRALIAN LAW To properly understand our laws and our legal system, we must look at the origins of the common law and equity, and how they became part of the law of Australia.

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In 1788, Captain Arthur Phillip was given authority by the British Government to establish a colony in New South Wales. The country was largely treated as uninhabited, and consequently the laws of England became its laws. The presence of indigenous people did not make any difference to this view. The English settlers considered the Aborigines’ complex system of laws and customs as a type of ‘primitive law’ and had little regard and respect for them. They did not recognise any Aboriginal rights to the land they inhabited. The view that the colony was terra nullius (literally ‘unsettled’ or ‘empty’ land) in 1788 has now been comprehensively rejected by the High Court of Australia in the following case.

A CASE TO REMEMBER Mabo v State of Queensland (No 2) (1992) 175 CLR 1 Facts: This celebrated case has a ten-year history. In May 1982, Eddie Mabo and four other Murray Islanders, who were members of the Meriam people, initiated legal proceedings in the High Court, claiming ownership of most of the land of the Murray Islands in the Torres Strait, on the basis that they could trace their occupation back to before white settlement (implying thereby the existence of a continuous ownership in the land). Decision: In 1992 the High Court held in a majority decision (6–1) that the Murray Islanders were entitled to possession, occupation, use and enjoyment of their land on the basis that Australia at the time of settlement was not terra nullius. On that basis, the common law of Australia recognised a form of native title which reflected the rights of the indigenous inhabitants to their traditional land in accordance with their laws and customs. The Meriam people were entitled to the occupation, use and enjoyment of the lands of the Murray Islands. The High Court noted that native title could be extinguished by the Crown enacting legislation that showed a clear intention to nullify native interests, or by traditional title holders. However, any such action may be subject to the Racial Discrimination Act 1975 (Cth).

In Mabo, the High Court noted that the common law recognised a form of native title, namely, the rights of the indigenous inhabitants to their traditional lands in accordance with their laws and customs. The colony was therefore not terra nullius when the first British settlers arrived. There was a form of ownership recognised by the Aboriginal people and the settlers dispossessed the Aboriginal people of most of their traditional lands. The court held that these rights should be acknowledged unless there was subsequent exercise of control by the appropriate parliament over the particular landholding. The question of the reception of English law into Australia was an important consideration in the Mabo case, and the decision has been of continuing importance for contemporary Australia. An important common law case since Mabo was the decision of the High Court in the Wik Peoples v the State of Queensland (1996) 187 CLR 1,

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where it was held that native title was not necessarily extinguished (terminated) by certain pastoral leases (Crown land the government allows to be leased, for the purposes of farming). It is also now clear that the Aboriginal peoples had a form of law based on social custom, which included a system of land ownership. The Aborigines had, in the words of Blackburn J in Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141, a ‘subtle and elaborate system highly adapted to the country’. There was perhaps in their law no formal structure of a type then acknowledged by English law. Within 50 years after the settlement of New South Wales, colonies were also established in Tasmania, Queensland, Victoria, South Australia, and Western Australia. In the 1850s, the various colonies formed their own parliaments. However, these parliaments were still subject to the British Parliament and their powers were restricted. The colonial governments were still appointed by the British Government. In the years between 1850 and 1890 the colonies prospered greatly, became more complex and sophisticated politically and socially, and were granted more local powers in the form of responsible government, whereby the executive was elected by the citizens. There was soon strong agitation for the Australian colonies to unite. Eventually, in 1899, the colonies formally expressed their willingness to become a single nation under a federal system of government. The British Parliament heeded their request and gave them approval to form a federation by passing the Commonwealth of Australia Constitution Act in 1900. From then on, every colony surrendered certain powers to a central parliament called the Commonwealth or Federal Parliament.

THE AUSTRALIAN CONSTITUTIONAL SYSTEM A FEDERAL SYSTEM Australia is a federation. It consists of a central Commonwealth Government, and a number of states or territories, all having law-making powers. As a result, there are two legal systems for each citizen: the central or federal legal system (the Commonwealth), and that of his or her state or territory. The main feature of the Australian federal system is that there is a written constitution that sets out the powers of the Federal Government and its legal relationship with the states or territories. In Australia, this is found in the Commonwealth of Australia Constitution Act 1900, an Act of the United Kingdom Parliament, which came into effect in 1901. The Constitution itself is a broad charter of principles, which sets out how government institutions will work, and their relations to each other. It is a legal document which was instrumental in the formation of a federation of the former Australian colonies. This federation can be seen as a political and economic union. Thus the significance of the Constitution was to create a united Australia.

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COMMONWEALTH JURISDICTION Section 51 of the Constitution gives the Commonwealth Parliament 39 powers to make laws for peace, order and good government. They include the following important categories: • trade and commerce with other countries and among the states: s 51(i) • taxation: s 51(ii) • postal, telegraphic, telephone and other like services: s 51(v) • currency, coinage, and legal tender: s 51(xii) • banking: s 51(xiii) • insurance: s 51(xiv) • bills of exchange and promissory notes: s 51(xvi) • foreign corporations, and trading or financial corporations: s 51(xx) • marriage: s 51(xxi) • immigration and emigration: s 51(xxvii) • external affairs: s 51(xxix). The Commonwealth Parliament has only those powers that are given to it by the Constitution, as enumerated in s 51. In contrast, the powers of the state parliaments are general. In some areas, it appears that the powers have been increased, widened, and interpreted in favour of the Commonwealth. For example, the enactment of the Competition and Consumer Act 2010 (Cth) (formerly, the Trade Practices Act 1974 (Cth)) was authorised through the use of the corporations power (s 51(xx)), which enabled the Commonwealth to pass laws with respect to the regulation of restrictive trade practices and the protection of consumers. In the same way, the external affairs power (s 51(xxix)) has been used to support the regulation of environmental activity by a federal law translating international obligations contained in a treaty into municipal (domestic Australian) obligations. For example, the World Heritage Properties Conservation Act 1883 (Cth) and the National Parks and Wildlife Conservation Act 1975 (Cth) are each associated with the Convention for the Protection of the World Cultural and Natural Heritage 1972. An example of such an interpretation of the external affairs power by the High Court was seen in Commonwealth of Australia v Tasmania (1983) 158 CLR 1 (the Tasmanian Dam case). There the Commonwealth relied on the external affairs power to prevent the construction of a dam that it regarded as environmentally unacceptable. This case will be remembered in the law because of what the High Court said about external affairs. The World Heritage Properties Conservation Act also invoked the corporations power for the first time outside the area of trade practices and consumer protection.

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A CASE TO REMEMBER Commonwealth of Australia v Tasmania (1983) 158 CLR 1 Facts: The case involved a controversial proposal to construct a dam and a power station on the Gordon River below its junction with the Franklin River, an area in the renowned Western Tasmanian Wilderness National Parks. On the basis of persuasion by environmentalists and a commitment to an election promise, the new Hawke Labor Government, in addition to making regulations under the National Properties Conservation Act 1983 (Cth), passed the World Heritage Properties Conservation Act 1983 (Cth). Section 6 of the latter Act authorised a proclamation to be made in relation to certain identified property. The proclamation brought s 9 into operation and applied to property suitable for entry into the World Heritage List under the Convention for the Protection of the World Cultural and Natural Heritage, ratified by Australia in 1974. Section 9(1) (h) prohibited any person, without the Minister’s consent, from engaging in acts specifically prescribed in relation to the property, and Regulation 4(2) of the World Heritage Properties Conservation Regulations 1983 prescribed construction work for a dam within the proclaimed area. The construction of the dam and the power station to generate cheap electricity was empowered by the Gordon River Hydro-Electric Power Development Act 1982 (Tas), a law of Tasmania that came into force on 12 July 1982. However, the Commonwealth Government wanted to stop the construction of the dam because it would cause considerable damage to a wilderness area that was of historical national and international significance and capable of World Heritage listing. The High Court had to decide whether it was lawful for the Hydro-Electric Commission of Tasmania, a trading company under the corporations power (s 51(xx)), to build the proposed dam. Decision: As Australia was a signatory to the Convention for the Protection of the World Cultural and Natural Heritage, the Commonwealth could use the ‘external affairs’ power of the Constitution in s 51(xxix) to enact certain provisions (ss 9(1) and 10(4)) of the World Heritage Properties Conservation Act 1983). The external affairs power enables the Commonwealth Parliament to make laws with respect to any matter dealt with by an international convention. On this basis, the Commonwealth would now have power to make laws for carrying out international agreements, even though the topic would not normally come within federal power. The High Court upheld the validity of the Commonwealth legislation that gave effect to the World Heritage Convention. The result was that under the Act, the Commonwealth Government was able to stop the Tasmanian Hydro-Electric Commission’s preparatory construction work for the dam on the Gordon-below-Franklin River, an area that had been entered into the World Heritage List.

RESIDUAL POWERS If the Constitution has not given the Commonwealth specific powers to make laws in a certain area, only the states can enact valid laws. These powers are called the residual law-making powers of the states. Powers that have not been given by the

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Constitution to the Commonwealth remain with the states. Accordingly, in order to determine whether the Commonwealth has powers to legislate, we have to search the Constitution to find a specific grant of legislative power. Where the power is not given, then the Commonwealth cannot legislate.

EXCLUSIVE POWERS When the states agreed to federate, they decided that some laws should be exclusively made by the Commonwealth Parliament. The powers of the Commonwealth Parliament to make such laws are sometimes called the exclusive powers of the Commonwealth. Only the Commonwealth Parliament, not the states, can make valid laws in these areas—for example, customs and excise (s 90); military forces (s 114); currency (s 115) and free trade between the states (s 92).

CONCURRENT POWERS As mentioned above, the Constitution also gives the Commonwealth Parliament the power to make laws in 39 areas as listed in s 51 under different headings called placita (the singular form is placitum). These are concurrent powers which are powers that allow both the Commonwealth and state parliaments to pass laws on the same matter. There is potential for conflict here. The Commonwealth may pass a law in one of these areas and so might a state. The question then arises: Which law is to be obeyed? Section 109 of the Constitution provides that if there is a valid Commonwealth law that is inconsistent with an otherwise valid state law, then the Commonwealth law prevails. The state law is, to the extent of the inconsistency, invalid.

FIGURE 1.3 Division of law-making powers State

Commonwealth

Concurrent powers (s51) Residual powers of states ɒEducation ɒ/RFDO government ɒ7UDQVSRUW

Potential area of conflict between the law-making powers of the states and those of the Commonwealth

Exclusive powers of the Commonwealth ɒ&XVWRPV and excise (s90) ɒ0LOLWDU\ forces (ss114 and 119) ɒ&XUUHQF\ (s115) ɒFree trade between the states (s92)

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EXAMPLE: THE OPERATION OF S 109 A hypothetical example of the operation of s 109 can be seen in a situation where the Commonwealth passes a law that the maximum speed on all roads is to be 90 kilometres per hour, and the Victorian State Parliament passes a law that the maximum speed on all roads in Victoria is to be 100 kilometres per hour. Let us assume that both the Commonwealth and the Victorian Parliaments have a right to make such a law. A motorist driving in Victoria is booked for driving at 95 kilometres per hour. There is an inconsistency between the two laws regarding the maximum speed allowable, and the motorist can argue this in a court of law. The court will in this instance allow the Commonwealth law to prevail over the Victorian law.

Where one law permits something and another law prohibits it, there is an inconsistency. The High Court has, in fact, gone beyond this and has applied a ‘covering the field’ test: if the Commonwealth expressly or by implication has made known that a Commonwealth statute is to be the whole law on a subject, then any state law on that subject is invalid under s 109.

FREEDOM OF INTERSTATE TRADE There are limitations in the Constitution on the exercise of the law-making powers of the Commonwealth, and sometimes that of the states. For example, s 92 which applies to both the Commonwealth and the states, declares that interstate travellers, or anyone else who engages in any kind of business between states, shall be ‘absolutely free’. This provision seems to imply that neither the Commonwealth nor a state can interfere with a trader going interstate. Accordingly, the High Court has over the years interpreted s 92 as capable of striking down laws that impede or burden interstate trade.

DOCTRINE OF SEPARATION OF POWERS The Australian Constitution is based on the Constitution of the United States in a number of ways. One notable characteristic that the two constitutions share is a doctrine (a set of beliefs) known as the separation (or division) of powers, first formulated by the French philosopher and jurist Charles Montesquieu in 1784. Its main principle is that there are three distinct functions of government, which should be kept strictly apart. The legislative power means the power to make laws. In Australia, the legislative power vests in the federal parliament (consisting of the House of Representatives and the Senate) and the respective state and territorial parliaments. The executive power is the power to execute and administer the laws. This power primarily vests in the different ministers of the Crown.

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Judicial power means the power to interpret and enforce laws, and the power to declare a law unconstitutional. This power is vested in the High Court and such other courts as the Parliament creates.

FIGURE 1.4 Separation of powers The Constitution

Legislative power of the Parliament

House of Representatives

Executive power of the Cabinet

Senate

Judicial power of the courts

State and territorial courts

Federal Court

High Court

In practice, there is no strict separation in Australia between the executive power and the legislative power, since the Prime Minister and the executive ministers are required under our Westminster system to be elected members of the Commonwealth Parliament.

DELEGATED LEGISLATION Parliament enacts laws reflecting broad principles. It then authorises other bodies to pass more detailed laws. These laws are known as delegated legislation, and comprise the regulations of government departments and instrumentalities and of local government. Examples of delegated legislation are by-laws, ordinances, rules, proclamations, and orders. The legislative power often passes to a wide range of people or bodies, including ministers, government officers, government bodies, and local councils. There are a number of arguments in support of delegated legislation: • it saves parliamentary time for important matters of public concern • relevant specialist or expert administrative bodies can make laws in areas where Parliament does not have the technical expertise • it allows for flexible enactment and a quick response to changing circumstances. Delegated legislation generally has the force of law and requires obedience to it. For example, Parliament may delegate to a municipal council power to make

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laws about local issues to apply to all people who live in a certain area. These laws may be rules and regulations in respect of traffic, libraries, hospitals, schools and universities, with which Parliament may not have the time, expertise or inclination to be involved. Parliament does have some degree of control over delegated legislation. Much of it must be tabled, that is, presented to Parliament. Each House of Parliament can then resolve to disallow it. If there is no disallowing resolution, the delegated legislation will become law.

CHANGING THE CONSTITUTION Section 128 of the Constitution provides that it can only be amended (changed) if all of the following requirements are met: 1 The proposed amendment is passed by an absolute majority (over 50 per cent of all elected members) in both the House of Representatives and the Senate. 2 The proposal is put to a referendum, which is a procedure of referring or submitting measures proposed or passed by the legislature to the vote of the Australian people for approval, within two to six months after the absolute majority vote referred to above. 3 The proposal is approved by a majority of voters—that is, more than 50 per cent of voters—and there is majority approval in a majority of states. In other words, more than 50 per cent of the voters and a majority of voters in four states must be in favour. A proposal would fail, for example, if 60 per cent of Australian voters were in favour but the only majority votes in favour were in Victoria, New South Wales and Queensland. 4 The Governor-General (representing the Queen) gives the royal assent to the amendment. Since federation there have been 43 proposals to change the Constitution, but not surprisingly, in view of the strict requirements for amendment, only eight have been successful.

APPROACHES TO THE INTERPRETATION OF LEGISLATION If any kind of communication is to be effective, the receiver of information must understand the message in the way the sender intended. Although great care is taken in the choice of words used to convey the information, the receiver may put a different interpretation on the message. This problem applies equally to statute law. The courts have accordingly adopted a number of approaches or techniques to assist in the interpretation of statutes.

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In theory, the object of the courts in the interpretation of statutes is to give effect to the intention of Parliament, but in practice the courts may have difficulty determining what the intention of Parliament is. In giving effect to these propositions, the courts apply one or more of the following approaches to statutory interpretation.

THE LITERAL RULE Applying this rule, the courts are to give a literal interpretation of the words used; that is, they must give the words their natural and ordinary meaning. This is premised on the assumption that Parliament’s intention is expressed in the actual words used. This strict and narrow approach to statutory interpretation can at times lead unfortunately to a result that may not have been intended by Parliament. Such an approach was more popular in the past than it is today. There is now a tendency for a court, especially the High Court, to take a more realistic and purposive interpretation of statutes, as will be discussed below.

THE GOLDEN RULE A more commonsense approach to the interpretation of statutes is the golden rule. This qualifies and moderates the literal approach by allowing the courts to disregard the literal or actual meaning of the words used in the statute if they would produce an absurd result. This means the court initially takes the ordinary, everyday meaning of the words. If this gives an absurd result or a result that is clearly inconsistent with the rest of the statute, the court must use a meaning that will remove the absurdity or inconsistency. Applying the golden rule, the court is to read the whole statute and interpret it so as to give the words their ordinary significance, unless they clearly produce an absurd, inconsistent, unjust or meaningless result.

THE PURPOSE APPROACH The purpose or purposive approach tries to determine the intention of Parliament when it passed the Act and requires the interpretation of the words in the legislation to help those words achieve their purpose. The purpose approach is itself a development of the mischief rule. That rule seeks to discover the wrong that Parliament tried to fix or correct by the statute, and to interpret the Act accordingly. For this reason, the purpose approach is sometimes referred to as the ‘avoidance of the mischief’ rule. The High Court in the 1980s recommended to the lower courts that the purpose approach is the preferable approach to the interpretation of statutes. The Acts

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Interpretation Act 1901 (Cth) was amended in 1981 by the addition of s 15 AA (1), which provides that: In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

THE USE OF EXTRINSIC MATERIALS It is only in the event of ambiguity or doubt that legislation in some jurisdictions provides for the use of extrinsic materials (those outside the Act) to assist interpretation. It is important to note that the principle that extrinsic materials may be used does not operate to alter the correct technical construction of legislation or to rewrite the intention of Parliament as expressed in the legislation. The courts would generally refuse to consider materials such as parliamentary debates when interpreting an Act. Nevertheless, an amendment to the Acts Interpretation Act now allows the court to take into consideration certain extrinsic materials in interpreting, for example, an ambiguous or obscure provision in an Act. Section 15AB (1) provides that materials that may be considered extrinsic include: • all editorial and typographical additions to the text of the published Act, including margin notes, headings and endnotes and punctuation • any tabled reports related to the legislation, including reports of Royal Commissions, Law Reform Commissions, committees of inquiry, etc. • reports of parliamentary proceedings • any international agreements referred to in the Act • any explanatory memorandum to the bill before it became an Act, or other documents presented to Parliament.

BASIC PRINCIPLES OF STATUTORY INTERPRETATION In addition to the general approaches already canvassed, judges have employed further principles of interpretation. These principles require that words should be: • read and considered in their context • interpreted consistently throughout the Act • given their technical meaning if they have such a meaning • given their legal meaning if they are not technical words. There are two further principles used in statutory interpretation, these being aids to construction rather than inflexible rules: 1 The ejusdem generis rule. Where two or more specific words are followed by a general word, the meaning given to the general word is limited to include only

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things of the same class as the specific words. Thus, a law that applies to ‘any shrub, hedge, bush, bramble, or other plant’ would not extend to a tree. The noscitur a sociis rule, often referred to as the ‘words of a feather flock together’ rule, is the principle that a word or phrase is to be derived from its context. For example, a law that prohibits drinking alcohol in any home, canteen, or restaurant should not extend to drinking in a public lane because the previous specific places indicate that the law applies to enclosed areas.

ETHICS AND BUSINESS LAW This part of the chapter outlines some of the issues that are relevant in considering the role of ethics and how ethics should apply in business and the people and institutions that it interacts with. In recent years there have been many examples where a business has been shown to not to have acted ethically but also illegally. Ethics applies to all parties in business, the corporation itself, the directors, employees and the advisers to a commercial transaction, that is, the lawyers, accountants, bankers, and various other parties who are involved in making decisions that affect others in the community, such as shareholders, clients and the public in general. As a result of the recent cases of corporate collapses, such as that of HIH, the corruption issues in the Australian Wheat Board and the mismanagement of retirement funds whereby business persons were found to be engaged in questionable or illegal practices, ethics has become a subject of topical interest. Such practices have undermined business and investment confidence in Australia and have caused corporate managers, for example, to consider their legal responsibilities as well as their ethical ones, taking into account the social, political and environmental consequences of their decisions. To determine appropriate business conduct for decisions that are not guided by a legal standard, businesses have begun to adopt industry codes of conduct to guide them when considering ethical issues during the decision-making process. For example, the Code of Banking Practice requires banks that subscribe to it to act fairly and reasonably towards their customers in a consistent and ethical manner: cl 2.2. The Homeworkers Code of Practice, which has been adopted by the Textile Clothing and Footwear Union and the Council of Textile and Fashion Industries, requires that homeworkers (workers who sew clothing in private dwellings or premises other than registered factories) are paid award wages and are entitled to workers’ compensation and superannuation: Schedule 3. The consumer protection provisions of the Australian Consumer Law prohibit unethical business practices such as misleading or deceptive conduct, passing off, unconscionable conduct, false representations, bait advertising, and pyramid selling.

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The restrictive trade practices provisions of the Competition and Consumer Act 2010 (Cth) proscribe (prohibit) unethical business practices involving, for example, price fixing, misuse of market power, resale price maintenance, and exclusive dealing. The Corporations Act 2001 (Cth) demands ethical behaviour from company directors by imposing certain duties, which include the duty to exercise reasonable care and diligence, the duty to act in good faith and for a proper purpose, the duty not to use inside information improperly, and the duty not to use one’s position improperly. Issues related to business law which have ethical implications include: • the advantages to business of adhering to business ethics • ethical aspects of general business law principles • industry codes of practice • respect for personal privacy • respect for intellectual property rights, involving copyrights, patents, designs and trademarks • the ethical obligations of business managers • the importance of ethical forms of investment • employees’ use of employers’ time for personal gain • discrimination against employees on grounds such as race, gender or marital status. It is now accepted that businesses conducted according to ethical standards will in the long run achieve an enhanced reputation, and will do better in terms of profits than businesses that are unethical. The value of adopting good business ethics is aptly expressed in the following terms: A good reputation … is of enormous financial benefit to the companies that continue to maintain their good name. Although individual transactions may be foregone, other customers will continue to use such companies because they know that if a poor purchase has been made it is easy to exchange or get a refund. The basic issue here is whether or not one wishes to foster a continuing relationship: it would be as well to behave as if one had such a relationship in mind. (Ronald D Francis, Ethics and Corporate Governance, UNSW Press, Sydney, 2000, p.2).

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TEST YOUR KNOWLEDGE 1. Distinguish between ‘statute law’, ‘common law’ and ‘equity’. Where does the common law originate? Is it possible to say that equity is part of the common law? 2. Explain what the doctrine of precedent (stare decisis) is and how it operates. 3. What is the ratio decidendi of a case? What is the difference between ratio decidendi and obiter dicta? 4. Distinguish between a binding precedent and a persuasive precedent. 5. Explain briefly the difference between concurrent and exclusive legislative powers of the federal parliament. 6. Explain what is meant by saying that there is an inconsistency between a state law and a Commonwealth law. 7. Discuss the doctrine of separation of powers. Explain how this doctrine applies to the different arms of government in Australia. 8. What is a court hierarchy? Explain its importance. 9. In interpreting statutes, what rules will the court follow? 10. A case concerning company law came before the Supreme Court of Victoria which handed down a decision. Explain the impact this decision has on later decisions by: (a) other Victorian courts (b) the Supreme Court of New South Wales (c) Papua New Guinea courts. 11. Explain what is meant by native title. 12. Explain the effect of the Mabo case (Mabo v State of Queensland (No 2) (1992) 175 CLR 1) on native title. 13. What was the finding of the High Court in the Tasmanian Dam case (Commonwealth of Australia v Tasmania (1983) 158 CLR 1)? 14. It is said that there are benefits for people in the business world to be ethical. Discuss. For answers to the Test Your Knowledge questions, please refer to: www.oup.com.au/chew2e.

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PART TWO CONTRACT LAW

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MAKING THE CONTRACT: OFFER AND ACCEPTANCE COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • explain the difference between a contract and an agreement • define a contract • outline the elements of a simple contract • explain what an offer is • explain what an invitation to treat is • define revocation of an offer and the need for communication of this • explain the acceptance of an offer • define counter-offer • distinguish between counter-offer and request for information • explain why acceptance of an offer must be final and unqualified • explain the postal acceptance rule • outline and discuss instantaneous communications.

CASES TO REMEMBER Australian Woollen Mills Pty Ltd v Commonwealth (1954) Harvey v Facey [1893] Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] Carlill v Carbolic Smoke Ball Co. (1893) Dickinson v Dodds (1876) Powell v Lee (1908) R v Clarke (1927) Hyde v Wrench (1840) Stevenson, Jacques & Co. v McLean (1880) Masters v Cameron (1954)

INTRODUCTION The law of contract is the basis of commercial transactions and is a fundamental part of people’s daily lives. Contracts are an important aspect of every business transaction, and are therefore constantly being entered into by individuals engaged in commerce.

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DEFINITION OF A CONTRACT A valid contract is an agreement containing promises made between two or more parties with an intention of creating certain legal rights and obligations that are enforceable. A promise is seen as a commitment or undertaking by a person that something will or will not happen. The person who makes the promise is the promisor, and the person to whom a promise is made is the promisee. Every day people enter into contracts, such as purchases of goods and services, loans, mortgages, leases of premises, the hiring of employees, franchises and the carriage of goods. Contracts are classified according to performance. In an executed contract, the object of the contract is performed and completed at the time of making it. For example, if Tony mows my lawn for $40, and I pay him when he finishes, the agreement has been fulfilled and the contract expires. In the case of an executory contract, one party promises to do something in the future. For example, Tony agrees to mow my lawn next week for $40. Both of the promises here are not yet performed. They are to be performed in the future. The main purpose of the law of contract is to establish under what circumstances people are legally bound by promises made. In order to determine when a person is bound by a promise made, the essential elements of a valid contract must be present.

ESSENTIAL ELEMENTS OF A CONTRACT For there to be a contract—that is, an agreement enforceable at law—four essential elements must be present. In the absence of one or more of these elements, the agreement between the parties will not constitute a contract and will not be enforced by the courts. These elements are: • Offer • Acceptance • Intention to create legal relations • Consideration. Where these elements are present, a contract exists. To make sure that the contract is valid, the following things remain to be considered: legal capacity of the parties to enter into a contractual relationship; genuine consent between the parties; and legality of the objects or the purpose of the contract. This chapter deals with the rules relating to offer and acceptance, which together constitute agreement. Without agreement there is no ‘meeting of the minds’. There will be no unity of intent, and the individuals will be at cross purposes. The next chapter will deal with the issues of intention to create legal relations and consideration.

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FIGURE 2.1 Elements of a simple contract Offer Agreement and Acceptance + Simple Contract Intention + Consideration

MEANING OF OFFER Once we have established that the parties intend to create legal relations, we then have to determine whether they have reached an agreement. For the purposes of the law, there must be an exact correlation between the two sides of the agreement: that is, the parties must have consensus in that they have the same thing in mind. This requires that there is an offer by one party (the offeror) to another party (the offeree) and that there is a willingness to enter into a contract on certain terms. An offer is therefore a definite undertaking which is not too vague, and which is made with the intention that it will become binding on the person making it as soon as it is accepted by the person to whom it is addressed. To put it simply, it is a proposition which will become a contract upon its acceptance. It should be pointed out that an offer may be ‘express’, using written or spoken words, or it may be ‘implied’ from the conduct of the offeror. Whether it is express or implied, an offer must be promissory. What this means is that the offeror must have the intention that it be converted into a binding obligation by acceptance. To put this in another way, the offeror must be prepared to honour the terms of the offer if required to do so. The following case is an example of what is claimed to be an ‘offer’ being in fact not an offer.

A CASE TO REMEMBER Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 Facts: The Commonwealth Government, in trying to reduce the cost of woollen goods, announced in June 1946 that it would pay a subsidy for the purchase of wool by a woollen manufacturer. The plaintiff company bought wool for which it received

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a subsidy between 1946 and 1948. When the scheme later ended, the company had wool it had purchased but for which it had not received the subsidy. When the Commonwealth refused to pay, the company brought an action against it alleging breach of contract. Decision: The High Court found that there was no contract because the announcement of the subsidy was merely a statement of government policy and not an ‘offer’ capable of valid acceptance. There was no intention on the part of the Commonwealth to create legal relations. There was only a government scheme to promote the woollen industry.

Sometimes, in the process of negotiating a contract, the concept of an offer is not as clear-cut as it seems. In some situations, the parties cannot even agree on the question of who made the offer and who is accepting it. It is also sometimes not easy to decide whether a statement by one party constitutes an offer or is merely a supplying of information (in response to a request for information).

A CASE TO REMEMBER Harvey v Facey [1893] AC 552 (Privy Council) Facts: The case involved a dispute over a property called Bumper Hall Pen. The property was owned by Facey. Harvey wanted to buy it. Harvey telegraphed Facey: ‘Will you sell us Bumper Hall Pen? Telegraph lowest price.’ Facey replied: ‘Lowest cash price for Bumper Hall Pen, £900.’ Harvey responded: ‘We agree to buy Bumper Hall Pen for the sum of £900 asked by you.’ Facey did not reply and refused to proceed with the sale, and Harvey sued for breach of contract. Harvey argued that Facey’s reply constituted an offer, which Harvey had then accepted. Decision: The Privy Council rejected this argument. Facey was merely supplying information as requested. There was no intention to make an offer. In fact, the only offer was made by Harvey.

In the above case, Facey, the property owner, was simply saying that if he did decide to sell, the minimum price would be £900. This is a mere supplying of information, and is not an offer to deal. It was only a statement of future possibility. It would be wrong to interpret it as an offer. It is not reasonable under these circumstances to say that Facey intended to enter into a binding agreement.

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FIGURE 2.2 The nature of an agreement Agreement

Offer

Acceptance

Offeror who makes the offer

Offeree who accepts the offer

INVITATION TO TREAT Not all proposals are offers. Some proposals are only invitations to treat. An invitation to treat may also be called an invitation to negotiate. It is an invitation to others to make an offer (indicating in some detail the terms in which the offer should be worded to make its acceptance likely). It is normally made to ‘start the ball rolling’, with the inviter proclaiming that he or she is ready to receive offers. The difference between an offer and an invitation to treat can easily be seen in day-to-day commercial transactions. If, for example, a shopkeeper advertises a willingness to deal on certain terms, it is always possible that there will be more acceptors than can be accommodated by the supply of available stock. If the mere advertising of the shopkeeper’s goods was held to be an offer, then he or she could be sued for breach of contract by all those customers who purported to ‘accept’ the offer, but who could not be satisfied by the shopkeeper, who may not have the particular goods in stock if they have been completely sold out.

DISPLAYING GOODS FOR SALE IN SHOPS Retail stores display their goods in shop windows and on the shop floor, usually with the prices clearly marked. Such display of goods is generally regarded as an invitation to treat. It is merely inviting customers to make an offer: Fisher v Bell [1961] 1 QB 394.

A CASE TO REMEMBER Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 (Court of Appeal) Facts: The defendant, Boots, operated a self-service pharmacy, including an area of poisons and drugs that could only be purchased under the supervision of a qualified

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pharmacist according to the Pharmacy and Poisons Act 1933 (UK). Customers would pick up their drugs and proceed to an exit supervised by a registered pharmacist. Boots was prosecuted for selling the poisons without the sale being properly supervised as required by the statute. If the goods on display were an offer, then the customer, by selecting the items from the shelves, accepted the offer and would not be able to return the goods to the shelf since the contract had been concluded there and then. Decision: The English Court of Appeal held that the display of goods on display constituted an invitation to treat and not an offer. The offer took place when the goods were taken to the cash register, where the cashier accepted or rejected the offer to purchase on behalf of the shopkeeper. The transaction at the checkout counter was supervised by a registered pharmacist, so Boots was not guilty of contravening the Act.

AUCTIONS In an auction, the calling for bids is an invitation to treat. The bidder is the offeror and acceptance occurs when the auctioneer indicates by the fall of the hammer that a particular bid (an offer of a price for the property being sold) made by the buyer has been accepted: Payne v Cave (1789) 3 TR 148; 100 ER 502. Some auction sales are ‘without reserve’; that is, the seller has not placed a minimum price on what the goods are to sell for. In such a case, if the auctioneer refuses to knock goods down to the highest bidder, the bidder cannot sue on the contract of sale since there has been no acceptance. It appears, nevertheless, that the bidder may have a personal action against the auctioneer. In sales without a reserve price, sometimes termed the ‘upset price’, auctioneers contract with all potential bidders that they will sell to the highest bidder. Such a contract arises quite apart from the contract of sale and it authorises a separate and independent action for any breach: Warlow v Harrison (1859) 120 ER 925; Boulas v Angelopoulos (1991) 5 BPR 11, 477 (NSW CA). FIGURE 2.3 Auction as invitation to treat Auction: the calling of bids

With reserve—seller sets minimum price

Without reserve—seller has not set minimum price

TENDERS Advertisements calling for tenders are invitations to treat and it is the person who submits the tender who makes the offer. The person inviting the tender is then free

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to accept or reject the offer: Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195; Harvela Investments Ltd v Royal Trust Company of Canada (CI) Ltd [1985] 3 WLR 276.

OFFERS TO THE WHOLE WORLD An advertisement placed in the newspapers may amount to an offer or to an invitation to treat. In most circumstances, a trader does not make an offer by advertising goods for sale through a catalogue. The same principles would probably apply to a website on the Internet. However, it is possible for a statement in an advertisement aimed at the public generally to be an offer and not an invitation to treat if that is the intention of the person authorising the advertisement. Such an offer is not directed to any specific group, but to anyone who becomes aware of it. Only the person or persons for whom the offer is intended may accept it. An offer may be made to the whole world at large, and a separate contract is made with each person (the offeree), who accepts by performing acts that are consistent with the terms of the offer. A binding contract comes into existence at the time the offeree undertakes the act of performance.

A CASE TO REMEMBER Carlill v Carbolic Smoke Ball Co. (1893) 1 QB 256 (Court of Appeal) Facts: The Carbolic Smoke Ball Company advertised its special medical preparation that it claimed would stop users from catching influenza and many other ailments. To show its confidence in its products, the company promised to pay a reward of £100 to any purchaser who used the smoke ball in accordance with the printed instructions and yet caught influenza. The advertisement stated that the company had deposited £1000 with a bank as a sign of its sincerity in the matter. Mrs Carlill, the plaintiff, bought the product, used it as directed and still caught influenza. When Mrs Carlill sued the company for £100, it refused to pay, arguing inter alia that the advertisement had not been an offer but a ‘mere puff’ (sales talk). It also said that an offer could not be made to the world at large. Decision: The Court of Appeal found that the decision was an offer to all the world. Mrs Carlill had accepted the offer by buying the product and using it as instructed. The setting aside of £1000 indicated the company’s intention to pay anyone who fulfilled the conditions as advertised. Accordingly, the company was liable to Mrs Carlill for the promised sum of £100.

REVOCATION OF AN OFFER: IMPORTANCE OF COMMUNICATION Revocation or withdrawal of an offer must be communicated. The offeror can revoke or withdraw the offer at any point before the offeree accepts it: Routledge v Grant (1828) 130 ER 920.The offeror does not necessarily have to inform the offeree of the

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revocation of the offer. The revocation can be brought to the attention of the offeree by a reasonably reliable source: Dickinson v Dodds (1876) 2 Ch D 463. What amounts to a reasonably reliable source will depend on the circumstances of the case.

A CASE TO REMEMBER Dickinson v Dodds (1876) 2 Ch D 463 Facts: On 10 June, Dodds offered to sell certain houses to Dickinson. His letter stated that the offer was ‘to be left over until Friday [12 June] 9 a.m.’. On Thursday, 11 June, Dodds sold the houses to a third party. Dickinson was advised of this sale by Berry on Thursday evening. Before 9 a.m. on Friday morning, Dickinson then purported to accept Dodds’ offer by handing a letter of acceptance to Dodds. What was at issue here was whether there was a binding agreement between Dickinson and Dodds. Decision: It was held that there was no binding agreement. By selling the houses to a third party, Dodds clearly indicated his wish to revoke his offer to Dickinson. The revocation had been communicated by Berry to Dickinson prior to his acceptance. The court considered Berry to be a reasonably reliable source of the information.

Generally speaking, acceptance must be communicated by the offeree or by an agent duly appointed for that purpose. In this respect, the law differs from, say, the law regarding communication of revocation. With revocation, as was seen above in Dickinson v Dodds, it is immaterial how or from whom the offeree becomes aware of it. Once the revocation comes to the offeree’s attention, the offer terminates. Where acceptance of an offer is to be communicated, the general rule is that only the offeree or his or her duly authorised agent may communicate the acceptance.

A CASE TO REMEMBER Powell v Lee (1908) 99 LT 2 84 Facts: The plaintiff Powell had applied for the position of headmaster of a school. The board of managers of the school passed a resolution (by a narrow majority) appointing him. The board did not immediately notify Powell of its decision but a member of the board privately and without authority told him that the board had accepted his offer of employment. The board met again later, rescinded its decision and appointed another person. Powell sued for breach of contract. Decision: Powell’s action failed. Acceptance is not effective unless it is communicated by the offeree or by an authorised agent. Because the acceptance of Powell’s offer was made by someone without authority, it was invalid, and there was no contract to be breached.

ACCEPTANCE MUST BE IN RESPONSE TO AN OFFER The existence of the offer must be in the offeree’s mind at the time of the acceptance, and the acceptance must be both in response to and as a result of the offeree’s knowledge of the offer. A person professing to accept an offer must be aware that the

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offer exists. So if Ben has found Andrew’s gold watch and returns it to Andrew, and if Ben later learns of the reward offered for the lost watch, Ben cannot claim the reward.

A CASE TO REMEMBER R v Clarke (1927) 40 CLR 227 Facts: Clarke was arrested and charged with murder. After his arrest, Clarke gave information that led to the arrest and conviction of the actual murderers. He was aware of a reward offered by the Western Australian Government but in the circumstances of his arrest had forgotten about it. Clarke was then released and claimed the government reward of £1000 for the information. Decision: It was held that Clarke was not entitled to the reward because he did not have the offer in mind and had not acted in reliance on the offer, but rather to secure his own safety from the hand of the law. His action could not be taken as an acceptance of the offer of a reward and he was unsuccessful in claiming the reward.

COUNTER-OFFER An offeree can accept an offer or reject it. Rejection can be quite straightforward, as when the offeree indicates clearly that he or she is not accepting the offer. Yet rejection of an offer may not be done in such an obvious manner. Rejection may occur in the making of a counter-offer. Put simply, the effect of a counter-offer is the rejection of the original offer. What, then, is a counter-offer? A counter-offer occurs when the offeree puts an alternative proposition to the offeror. This contradicts the terms of the original offer, and destroys the terms of the original offer. For example, a second-hand car dealer offers to sell a car to a customer for $15 000, and the customer responds by saying that she would be prepared to buy the car for $14 000. A counter-offer of this kind can be seen in the following case.

A CASE TO REMEMBER Hyde v Wrench (1840) 3 Beav 334 Facts: Wrench offered to sell his farm to Hyde for £1000. The plaintiff Hyde replied, offering £950, which Wrench refused. Hyde then agreed to pay the former amount of £1000. Wrench did not reply and subsequently refused to transfer the farm to Hyde. Wrench had at no stage withdrawn his offer to sell for £1000. The defendant, although he had not withdrawn his offer at that stage, neither assented to nor rejected this proposal, but he subsequently refused to go through with the sale. The plaintiff sued. Decision: The court held that Wrench was under no obligation to sell. Hyde had rejected the offer of Wrench with a counter-offer and could therefore not revive the offer of Wrench by attempting to accept it. Hyde’s final communication was an offer to buy for £1000 and this had never been accepted by Wrench.

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A counter-offer does not have to be as explicit as the one in Hyde v Wrench. Any change in the terms of the offer can constitute a counter-offer. Accordingly, it is important to be careful when restating the original offer as part of the purported acceptance: Turner Kempson & Co. Pty Ltd v Camm [1922] VLR 498. A counter-offer can also occur when the offeree purports to accept the offer, but in doing so, adds terms to those of the offeror, in which case the terms of the original offer are destroyed: Butler Machine Tool Co. Ltd v Ex-Cell-O Corporation (England) Ltd [1979] 1 All ER 965.

COUNTER-OFFER OR REQUEST FOR INFORMATION There is a difference between qualified acceptance which amounts to a counter-offer and a mere request for information. The latter does not necessarily cause an existing offer to lapse. A mere inquiry is not an acceptance, nor is it a rejection. It has an entirely neutral effect on the offer, and when the offeror replies, the offeree still has the option of accepting or rejecting.

A CASE TO REMEMBER Stevenson, Jacques & Co. v McLean (1880) 5 QBD 346 Facts: The plaintiff, McLean, telegraphed the defendant Stevenson offering to sell certain iron ‘at 40s nett cash per ton, open till Monday’. Stevenson asked whether delivery at McLean’s price could be over a two-month period or if not, the longest period he would give. There was no reply, and Stevenson sent a telegram to McLean accepting the original offer made by McLean. The defendant, however, sold to a third party and advised Stevenson of this. The plaintiff sued for breach of contract. Decision: The court was of the view that the main issue was the nature of the plaintiff’s request about delivery. The important question for the court to determine was whether it was a counter-offer or whether it was a request for information. If it was a counter-offer, then the previous offer lapsed and there was no existing offer to accept. If it was a request for information or clarification of the contract, then the offer remained on foot and was capable of acceptance. The court concluded that the plaintiff had made a mere inquiry or request for information, not a counter-offer, and because he accepted before receiving notice of revocation a binding contract existed. Lush LJ said (at 350): Here there is no counter-proposal. The words are: ‘Please wire whether you would accept forty for delivery within two months, or if not, the longest limit you would give.’ There is nothing specific by way of offer or rejection, but a mere inquiry which should have been answered and not treated as a rejection of the offer.

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FIGURE 2.4 What happens to the offer

Offeror may revoke the offer

Offeree may make a counter-offer

Offer

Offeree may accept the offer: this leads to an agreement

Offer may lapse due to passing of time or death of offeror or offeree

Offeror may reject the offer

ACCEPTANCE OF OFFER MUST BE FINAL AND UNQUALIFIED Acceptance of an offer must be unqualified. A conditional assent is not an acceptance. If, for example, a document contains a clause to the effect that it is ‘subject to contract’ or ‘subject to a formal contract being prepared’, a contract does not come into existence until a formal document has been drawn up and accepted by the parties. It was evident that the parties in Masters v Cameron, a pivotal case in this area of the law, did not intend to make a concluded bargain until after they had the solicitor’s approval.

A CASE TO REMEMBER Masters v Cameron (1954) 91 CLR 353 Facts: Cameron entered an agreement to sell his farm to Masters. The purchaser Masters paid a deposit. Included in the agreement was a clause indicating that the agreement was ‘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 had to decide

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whether this statement made the acceptance conditional on the solicitor accepting or changing the offer. Decision: The court held that the acceptance was conditional and therefore no contract existed. If the language of the agreement clearly indicated that both parties intended to be immediately bound by the terms in the agreement, then there would be a binding contract between the parties. No such language was present here.

THE POSTAL ACCEPTANCE RULE This rule has been developed by the courts, and it provides that where acceptance by post is contemplated by the parties as the preferred method of communication, then the acceptance is complete as soon as the letter of acceptance is properly posted, not when the letter is delivered: Henthorn v Fraser [1892] 2 Ch 27. The rule operates as an exception to the rule that acceptance must be actually communicated, because with the post, acceptance is deemed to have occurred at the time the letter is posted and is not affected by delay or loss of the letter in the course of its transport: Household Fire & Carriage Accident Insurance Co. Ltd v Grant (1879) LR 4 Ex D 216. There are forms of communication that share some of the features of the postal acceptance rule, and courts have had to make determinations about the applicability of the rule to such forms of communication. For example, the rule has been extended to telegrams (Leach Nominees Pty Ltd v Walter Wright Pty Ltd (1986) WAR 244) although not to instantaneous modes of communication.

INSTANTANEOUS COMMUNICATIONS Where the communication of acceptance is instantaneous, or almost so, the contract is formed when the acceptance is received. This means that in cases of agreements communicated by means of telephone, teleprinter, fax, or e-mail, the contract is formed when and where the offeror hears or receives the offeree’s acceptance: Entores Ltd v Miles Far East Corp [1955] 2 QB 327. The Electronic Transactions Act 1999 (Cth) (which is a template for the uniform state and territory legislation now in place across Australia) contains rules for the determination of when and where an electronic communication is sent and received. An electronic communication is taken to have been sent by the sender when it first enters an information system outside the control of the originator. It is received when it enters an information system designated by the addressee as the system for the receipt of electronic communications or, if no system is designated, when it comes to the attention of the addressee. Subject to any agreement between the parties to the contrary, an electronic communication is taken to have been sent from the sender’s place of business and to have been received at the addressee’s place of business. A person is not bound by an electronic communication unless the communication was sent by, or with the authority of, that person: Electronic Transactions Act 1999 (Cth), s 15(1).

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TEST YOUR KNOWLEDGE 1. 2. 3. 4. 5. 6. 7.

8.

9.

10. 11. 12. 13. 14. 15.

Are all agreements legally binding? Distinguish between an offer and an invitation to treat. Does the acceptance have to be communicated? If John makes an offer to Tom and Tom decides to accept it, is there a contract? What is an offer to the whole world? Distinguish between a counter-offer and a request for information. Decide whether the following statements are true or false: (a) A counter-offer occurs when an offeree indicates a willingness to deal on terms slightly different from those of the original offer. (b) Like the offer itself, any revocation does not have to be communicated to the offeree. (c) Notice of the revocation must be brought to the knowledge of the offeree by the offeror. (d) An offer may be described as a proposal the acceptance of which establishes an agreement, and may be revoked at any time prior to its acceptance. (e) Where communication between parties is instantaneous, agreement is only concluded when the offeror receives the acceptance. In the following question, indicate which statement is the correct one. An acceptance made through the post is effective: (a) if it is read by the offeror (b) if it arrives at the offeror’s postal address (c) if it is put in a post box belonging to Australia Post. In the following question, indicate which statement is the correct one. An acceptance when given: (a) can be revoked within three days (b) cannot be revoked at all (c) cannot be revoked except with the consent of the offeror. Can we say that ‘subject to contract’ in an agreement is sufficiently certain? Discuss. What rule applies as to acceptance of an offer where the communication between the parties is instantaneous? When can an offer be terminated? Explain the meaning of ‘tender’. Explain when the postal rule applies. Is it possible to revoke an acceptance?

ASSESSMENT PREPARATION Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problem questions.

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Ken places an advertisement in the newspaper. It reads: ‘Lost. 1 blue cattle dog, answers to the name of Evelyn. Reward $200. Telephone 91448503’. Lyn sees the dog in the street and, by reading the dog-tag on its collar, determines that it belongs to Ken. She returns the dog and Ken thanks her. The next day she reads the Telegraph and sees the advertisement. Advise whether she can claim the reward. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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FORMATION OF CONTRACT COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • discuss the need for legal intention in a contract • explain what is meant by intention to contract • define and explain consideration • outline the rules of consideration • discuss the concept of promissory estoppel and its implications • explain privity of contract and its association with consideration • discuss the importance of capacity to contract • explain in terms of capacity to contract the position of minors, corporations, persons of unsound mind, intoxicated persons and bankrupts

CASES TO REMEMBER Edmonds v Lawson [2000] Balfour v Balfour [1919] Wakeling v Ripley (1951) Rose and Frank Co. v JR Crompton & Bros and Brittains [1925] Ermogenous v Greek Orthodox Community (2002) Chappell & Co. Ltd v Nestlé Co. Ltd [1960] Roscorla v Thomas (1842) Placer Development Ltd v Commonwealth (1969) Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] Stilk v Myrick (1809) Je Maintiendrai Pty Ltd v Quaglia (1980) Waltons Stores (Interstate) Ltd v Maher (1988) De Francesco v Barnum (1890) Hamilton v Lethbridge (1912) Blomley v Ryan (1956)

INTRODUCTION This chapter covers a number of issues. First, the chapter looks at the element of intention to create legal relations. Second, there is the essential element of consideration in the formation of a simple contract. Third, the chapter discusses the doctrine of promissory estoppel, which prevents a person from going back

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on a promise notwithstanding the fact that no consideration was given to support the promise. Fourth, there is a brief discussion of privity of contract, a doctrine associated with consideration. Finally the chapter looks at the important issue of capacity to contract.

INTENTION TO BE LEGALLY BOUND Agreement on its own does not create a contract. To be contractual, the parties to the agreement must have an intention to create legal relations, and to be legally bound. Often what the parties intended will be clear from the nature of their agreement. Without such intention to create legal relations, the agreement will not have contractual force, and the parties can only rely on social or moral pressures to encourage compliance with its terms. The test of intention of the parties is objective. The court takes into account what was agreed, the surrounding circumstances, the words used by the parties, the effect of the agreement on the parties, and whether they have subsequently acted as though the agreement is binding.

A CASE TO REMEMBER Edmonds v Lawson [2000] QB 501 Facts: Rebecca Edmonds, a criminal pupil barrister was doing an unfunded pupillage in Lawson QC’s chambers. The arrangement was to provide Edmonds with twelve months of practical legal training at the end of which she would receive her qualification. Therefore she was only to be paid for work she did that ‘warranted payment’. She later sued, alleging that there was a contract between herself and the members of the chambers, entitling her to be paid wages, and not paid at anything less than a specified minimum level under the National Minimum Wage Act 1998 (UK). Lawson argued that the pupillage was not contractual because the parties had not intended to create legal relations. He claimed that the arrangement involved only a voluntary and gratuitous offer by the chambers to provide Edmonds with education and training in respect of the practical aspects of legal practice. Decision: The question of whether the parties had intended to enter into legal relations was something that had to be determined in an objective way. In this case, the chambers’ offer of pupillage had come after a long, time-consuming and expensive procedure. There were also important, long term consequences for both the pupil and members of chambers. Under these circumstances, it was clear that the parties had intended to create legal relations. There was therefore a contract.

SOCIAL AND DOMESTIC AGREEMENTS Social agreements are those which are made between friends, and domestic agreements are those which are made between members of the same household. In social and domestic agreements, there is a presumption that the parties do not

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intend to create any legal relations. As it is only a presumption, it may be readily rebutted (refuted) if there is evidence that indicates a contrary intention. The ultimate question is always whether a reasonable person would conclude from looking at the words and conduct of the parties that they intend to be legally bound by their agreement: see, for example, Air Great Lakes Pty Ltd v KS Ester (Holdings) Pty Ltd [1985] 2 NSWLR 309. The following case is a good example of a domestic agreement.

A CASE TO REMEMBER Balfour v Balfour [1919] 2 KB 571 Facts: An English public servant who was based in Ceylon (Sri Lanka) was holidaying in England with his wife when she became too ill to accompany him back to Ceylon. Before the husband left for Ceylon, he agreed to pay the wife a monthly allowance of £30 a month to maintain her until she rejoined him. The husband ceased the payment he had promised. The wife sued for breach of their agreement. Decision: There was no contract since Mr and Mrs Balfour, the parties to the domestic arrangement, never intended that the agreement should have legal consequences. Therefore, the action by Mrs Balfour failed.

However, circumstances may indicate that the parties to an arrangement that appears to be domestic may be legally bound if evidence shows that, when the agreement was made, they intended to be bound by it: Simpkins v Pays [1955] 1WLR 975. This is illustrated by the following case.

A CASE TO REMEMBER Wakeling v Ripley (1951) 51 SR (NSW) 183 Facts: The defendant, an elderly bachelor living alone in a large house in Sydney, invited his sister and her husband to move from England and live with him in order to care for him in his old age. He promised to provide them with a home and a living and that he would leave them all his property upon his death. On the basis of this promise, the couple sold their home in England, and the husband resigned his position as a university lecturer to move to Australia. After about a year in this new arrangement, a major dispute occurred and the elderly man sold his house and changed his will to exclude his sister and brotherin-law as beneficiaries. The English couple sued for breach of contract. The defendant appealed, arguing that the agreement was of a social or familial (domestic) nature and was therefore not legally binding. Decision: It was held that the parties intended to enter into a binding contract. There was ample evidence to show that the parties did intend to enter into an enforceable contract, since the consequences for the couple were so very serious.

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COMMERCIAL AGREEMENTS In commercial agreements, there is a presumption that the parties intended to be legally bound. The effect of this is that the courts will enforce such agreements unless there is evidence to show that is not what was intended. Clear words are needed to rebut the presumption that the commercial agreement was intended to be legally binding, as shown in the following case.

A CASE TO REMEMBER Rose and Frank Co. v JR Crompton & Bros and Brittains [1925] AC 445 Facts: Three companies entered into an arrangement under which an American company had the exclusive right to sell carbon paper, manufactured by two British companies, in the United States. This arrangement appeared, on the surface, to be binding. However, it included an ‘honourable pledge clause’, which indicated that the arrangement was not a legal one but merely an honourable pledge based on ‘mutual loyalty and friendly cooperation’. One of the parties to the agreement opted out of the arrangement without giving notice, and the plaintiff sued for breach of contract. Decision: The court held that the agreement was not binding. The ‘honourable pledge’ clause showed that it was intended to be binding in honour only and not intended to create legal obligations.

PARTICULAR AGREEMENTS Recently, the requirement of ‘intention’ was looked at in a ‘neutral’ context, one which did not seem to come under the heading of social or domestic agreements, or under the heading of business or commercial agreements. The circumstances under which such an interpretation of intention was arrived at can be seen in the following case.

A CASE TO REMEMBER Ermogenous v Greek Orthodox Community (2002) Facts: The appellant Ermogenous had been the Archbishop of the Greek Orthodox Church in Australia. Upon termination of his employment, he asked to be paid out for his unused annual and long service leave. He argued that he had been ‘employed’ by the community organisation under a contract. The question was whether a minister of religion can be an employee of the church, and whether there was a clear indication of contemplation of a legal relationship. The respondent Church argued that there was no contract as the Archbishop was appointed in a spiritual role and there was no intention to create a contract of employment. Decision: The High Court discussed the use of presumptions and said that it had doubted their application in this kind of agreement. The judges noted that although presumptions

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do serve a useful purpose, it was necessary to give consideration to the circumstances surrounding any specific agreement or contract. They argued that although the relationship between a minister of religion and the church was pre-eminently spiritual in nature, aspects of the relationship could nevertheless give rise to legally enforceable rights and duties. The fact that a person was appointed to perform work of essentially a spiritual nature did not necessarily mean there could not be a contract of employment. There was here, in reality, an employment contract encompassing proprietary and economic entitlements and there was no reason to presume that there had been no intention to enter into legal relations.

The matter was therefore to be decided solely on the parties’ intentions, as demonstrated by the facts, and on that basis Ermogenous was entitled to recover. In Shahid v The Australian College of Dermatologists [2008] FCAFC 72 the Full Court of the Federal Court in applying Ermogenous came to the view that there was evidence to support an intention to contract on the part of the voluntary association (referring here to the college).

CONSIDERATION After offer, acceptance, and intention to create legal relations, the other essential element for the creation of a contract is consideration. Consideration is an aspect of the concept of mutuality underlying the law of contract. It is what each contracting party bargains with and gives in exchange for the return promise or performance of the other party. Therefore persons who wish their promises to be enforced must show that the promises were supported by consideration. Consideration is usually payment of money, but it can also be doing something or promising to do or not do something. The important point is that something has been given in return for the promise of the promisor. Put simply, consideration is something for something. Generally speaking, if there is no consideration, an agreement will only be enforceable if it is in the form of a deed. Deeds are often used to ensure that contracts not supported by consideration are enforceable. They must be signed by the party executing it, attested by a witness who is not a party to it, and sealed and delivered. Understanding what consideration is enables us to draw a distinction between promises that are gratuitous—that is, freely given (such as gifts)—and those that are onerous or ‘paid for’.

EXAMPLE: A GRATUITOUS PROMISE Diana promised to give Nick a television set for passing his examinations, without Nick doing or giving anything in return. Nick could not enforce the promise because no consideration had flowed from Nick to Diana in response to Diana’s promise.

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FIGURE 3.1 Different types of contracts Contracts

Formal contracts—deeds

Simple contracts

Consideration is not required

Consideration is required

EXAMPLE: GOOD CONSIDERATION Nick promised to pay $300 to buy Diana’s television set, and Diana took the television set to Nick at his home in response to the promise that Nick made. Diana can sue Nick for the $300 if he does not pay it. Here the transfer of the possession and ownership of the television would be the consideration for the promise of payment.

The majority of contracts are simple contracts, and all simple contracts to be valid require consideration. A simple contract may be: • totally oral • totally written, or • partly oral and partly written. Consideration, as explained earlier, is what each contracting party bargains with and gives in exchange for the return promise or performance of the other party. Consideration is therefore the price you pay for the other person’s promise: see Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] AC 847. As mentioned in the last chapter, the promisor is the person undertaking the promise, while the promisee is the person who is receiving the promise. Consideration may be: • something the promisee gives to the promisor • the carrying out of some act • perhaps not doing something that the promisee had a legal right to do.

RULES FOR CONSIDERATION 1 Value: Consideration must have some value, but it does not have to be adequate.

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A CASE TO REMEMBER Chappell & Co. Ltd v Nestlé Co. Ltd [1960] AC 87 Facts: To promote sales of their chocolate bars, Nestlé, the manufacturer, offered to give audio records to anyone who sent in a postal order for 1s 6d plus three Nestlé chocolate wrappers. A dispute arose with Chappell & Co. Ltd, the copyright holder of a tune on one of the records, about whether the selling price on which royalties were calculated included the value of the three empty wrappers. The copyright holder claimed that the wrappers increased the value on the basis of which the royalties were calculated. The central issue was whether the wrappers did in fact form part of the consideration, which would ultimately determine the copyright holder’s percentage entitlement to the royalties in question. Nestlé’s argument was that the wrappers were not part of the consideration, and that they had no value to them and were thrown away when received. Decision: It was held that the wrappers were part of the selling price of the records and did form part of the consideration The argument that the wrappers were of no value to Nestlé Co. Ltd was irrelevant. They had value to the company because they required them to be sent in promoted Nestlé’s sales. A purchaser could not get the records without sending the three wrappers and the money. It was irrelevant that Nestlé had discarded the wrappers after receiving them. The offer was to sell each record not for a monetary value alone, but for a monetary value plus three wrappers. The court concluded that royalties were to be paid by Nestlé on the full price of the record, and that price included the value of the wrappers.

Chappell’s case illustrates the reluctance of the court to become involved in the question of the adequacy of value. It appears that as long as there is something of value, the court will be satisfied. The law looks at consideration from the point of view of the promisor. If the price given for the promise is sufficient to the promisor then even if it is trivial it is acceptable. 2 Past consideration is not sufficient: Consideration may be executory or executed, but it cannot be past. Consideration is said to be executory when all the parties have done is exchange promises. Although such a contract has not yet been performed by either party, it is enforceable. Consideration is said to be executed when a party to a contract has performed his or her obligations under that contract. Such a contract is enforceable. Consideration is said to be past when the promise is made after the performance of an act and independently of it. Because consideration is defined as the price paid in exchange for a promise, past acts can never amount to consideration sufficient to support a subsequent contract. So past consideration is no consideration. The following case is an illustration of past consideration.

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A CASE TO REMEMBER Roscorla v Thomas (1842) 3 QB 234 Facts: Roscorla bought a horse from Thomas and after the sale was concluded, Thomas, as requested, gave a promise that the horse was in good condition and not vicious. In fact, the horse was very vicious and Roscorla sued Thomas for breach of that promise. Decision: It was held that the promise was not binding because it was made after the contract had been completed. It did not form part of that contract but was in fact a new and independent promise, for which fresh consideration was needed in order for it to be binding on the person who made it. As no such consideration had been given by Rorscorla, the promise could not be enforced against Thomas.

FIGURE 3.2 Different types of consideration Consideration

Present consideration

Past consideration

Future consideration

—can support a valid contract

—cannot support a valid contract

—can support a valid contract

3 Consideration must be definite: It is important that consideration be definite and not be so vague as to be illusory and not real. A court must be able to identify the consideration with sufficient certainty of meaning for it to be enforceable. Consideration provided has to be definite because the court must be able to place a legal value on it. If the court cannot do this, it will characterise the consideration provided as so vague as to be illusory and therefore to be no consideration at all, as the following case demonstrates so clearly.

A CASE TO REMEMBER Placer Development Ltd v Commonwealth (1969) 121 CLR 353 Facts: In 1952 the parties entered into a written agreement whereby the plaintiff was to establish an overseas timber company to produce timber products in Papua New Guinea, which were subsequently to be imported into Australia. One of the terms of the agreement provided that the Commonwealth would pay a subsidy to the plaintiff company in relation to customs duties on timber imported into Australia. Decision: The term was held to be unenforceable because it was either uncertain or illusory, as it depended upon the payment of a subsidy ‘of an amount or a rate determined by the Commonwealth from time to time’.

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4 Consideration must move from the promisee: The party who intends to enforce a contract must be able to show that he or she has provided the consideration. The following case illustrates this principle.

A CASE TO REMEMBER Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] AC 847 Facts: Dunlop, a tyre manufacturer, sold its tyres to dealers at a reduced price in return for an undertaking by them that those tyres would not be sold to a customer at less than Dunlop’s list price. The dealers also agreed to obtain a similar undertaking from any retailer to whom they sold the tyres. Dew & Co., a dealer, entered into such an agreement with Dunlop. It subsequently sold tyres to Selfridge & Co. and received the required undertaking from that company. However, in breach of its agreement, Selfridge & Co. sold the tyres to a customer below the list price. Dunlop brought an action against Selfridge for breach of contract. Decision: The action failed. Dunlop had not provided any consideration for Selfridge’s promise. Dunlop was not even a party to the agreement, which was in fact between Dew & Co. and Selfridge & Co.

It should be noted that although consideration must move from the promisee, it need not move to the promisor: Pico Holdings Inc v Ware Vistas Pty Ltd (2005) 214 ALR 392. 5 Performance of an existing obligation is not sufficient: There is no consideration if all that the promisor does is no more than performing an existing obligation. The performance by A of a contractual duty which A already owes to B is no consideration for a promise made by B to A. The statement of this principle comes from the following case.

A CASE TO REMEMBER Stilk v Myrick (1809) 170 ER 1168 Facts: Myrick, the captain of a ship, hired a crew in London to carry out duties on a voyage to the Baltic Sea and back. Two of the crew deserted during the trip, and the captain could not find replacements for them. The captain therefore promised the remaining crew members that he would share the wages of the deserters among them if they could bring the ship safely back to London. The crew successfully brought the ship back to London, but the captain refused to pay the extra amount, claiming that there was no new consideration offered because the crew members were hired in the first place to do all they could in cases of emergency during the voyage. Decision: It was held that the desertion of the two crew members was such an emergency, and that therefore, by taking the ship back to London, the crew members were only doing what they were already contractually bound to do.

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PROMISSORY ESTOPPEL The principle that consideration must be provided in every simple contract if it is to be valid has sometimes allowed a person to break an agreement and walk away without suffering legal consequences, leaving the injured party with no remedy. The equitable doctrine (principle) of promissory estoppel has been developed to provide a remedy to an innocent party by preventing this party from suffering a serious loss. As a general rule, a promisor who has entered an agreement that lacks consideration may be estopped (stopped) from unfairly breaking that promise if the other party suffers a significant loss because he or she relied on the promise given. In keeping with equity’s interest in fairness, it would be unconscionable or extremely unfair if the promisor, who is usually the dominant party in the agreement, is allowed to break that promise. The modern law of promissory estoppel was established by Lord Denning in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (‘High Trees’). In the Australian case of Legione v Hateley (1983) 152 CLR 406, the High Court acknowledged a modified version of promissory estoppel. The general principles formulated in this case for when promissory estoppel is appropriate were: • a representation must be made • the representation must be clear, whether expressed or implied, and • the party relying on the representation must be placed at a material disadvantage because that representation has not been honoured. Promissory estoppel was only applied in defence as a ‘shield’ until the case of Waltons v Maher (1988) 164 CLR 387, which held that the principle can be used by the plaintiff ‘as a sword’—that is, in commencing an action. In the above-mentioned High Trees case, Lord Denning was of the view that proof of detriment is not necessary in estoppel situations as long as a representation is made which was intended to influence the judgment of the other party and that party acted on the representation. Such a view has been considered to be too wide. In Australia, detriment has therefore been considered to be a necessary element of promissory estoppel, as the following case illustrates well. It is important to understand the concept of detriment in promissory estoppel. Failure by the promisor to carry out the promise will not in itself amount to a detriment. Promisees must show that they acted in reliance on the promise and that as a result of doing so, they will suffer a material disadvantage if the promisor does not honour the promise.

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A CASE TO REMEMBER Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 Facts: Quaglia leased a shop in a shopping centre from the plaintiff. The shops in the centre were often vacant and in an attempt to induce Quaglia to stay, the plaintiff company agreed to reduce the rental. Quaglia paid the reduced rent for 18 months, but when the company found out that he was soon to leave the premises, it sued him for the arrears. Quaglia argued that the doctrine of promissory estoppel should apply to prevent the lessor from going back on its implied promise not to demand the balance of the rent. The basis on which the whole issue was to be decided was whether Quaglia suffered a detriment. Decision: The court narrowly decided that there was a detriment, not in the requirement to pay the arrears of rent, but in the fact that Quaglia would have to pay it in a lump sum rather than in instalments as required by the lease. Accordingly, the landlord company was held to be estopped from going back on its subsequent promise to reduce the rent.

It was not until 1988 that the High Court was really presented with a significant case that illustrated how promissory estoppel was to apply in Australia.

A CASE TO REMEMBER Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Facts: Maher owned a property with a brick building on it. He entered into negotiations with Waltons Stores, a retailer, to lease the land to Waltons, demolish the old building and construct a new building to meet Waltons’ plans and specifications. A draft agreement was received by Maher’s solicitors concerning the building to be constructed. A number of amendments were discussed. Some days later, Waltons’ solicitors were advised that if the agreement was not settled in the next few days, it would not be possible to complete the new building within the time agreed upon. Maher’s solicitors added that Maher did not wish to demolish the old building altogether until he was sure there would be no problems with the agreement. Waltons’ solicitors were also told that construction of the new building had to begin as soon as possible if the completion date was to be met. On the same day they forwarded to Maher’s solicitors a new agreement incorporating the amendments, together with a letter stating: ‘we have not yet obtained our client’s specific instructions to each amendment requested but we believe that approval will be forthcoming. We shall let you know tomorrow if any amendments are not agreed to.’ A few days later Maher’s solicitors sent a copy of the amended agreement signed by Maher to Waltons’ solicitors ‘by way of exchange’. Hearing nothing further from Waltons’ solicitors, Maher proceeded to tear down the remainder of the old building and construct the new building. Waltons was aware of this. The next time Waltons made contact with Maher, it was to notify him that it did not wish to proceed with the agreement. By that time, the old building had been completely demolished and the new building was almost half built. Waltons had not signed the agreement, nor had an exchange of contracts taken place. When Waltons refused to proceed with the deal, Maher sued for breach of contract.

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Decision: The High Court by a majority applied the doctrine of promissory estoppel. Three of the judges (Mason CJ, Wilson and Brennan JJ) found that Maher’s mistaken assumption was that an exchange of contracts would take place and that, relying on this assumption, Maher had proceeded to demolish one building and partially construct another. Deane and Gaudron JJ, on the other hand, found that estoppel existed on the basis of a well-founded assumption by Maher that a contract existed between the parties. Despite the difference in their approach, the justices agreed that an action in promissory estoppel now lay, not only in relation to subsequent statements made in the context of a pre-existing contract (as was the case in the High Trees case and the case law that followed it), but also in relation to pre-contractual statements as to future intention, that is, to statements made by a promisor as to intended future conduct in a non-contractual context. The majority held that Maher had acted to his detriment on the belief that there was going to be an exchange of contracts, and Waltons was aware that Maher was so acting. In these circumstances, it would be unconscionable (unfair) to allow Waltons to renege on its implied promise that the contracts would be exchanged. The court treated the matter as if there was a contract between the parties and awarded damages to Maher.

A number of observations can be drawn from the above decision in respect of the doctrine of promissory estoppel. There is, first of all, nothing intrinsically wrong with Waltons attempting to keep their commercial options open. It is, however, wrong for Waltons to cause Maher to understand that the contract would come about. There was no pre-existing contractual relationship between Waltons and Maher. It is no longer necessary to have a pre-contractual agreement the terms of which are subsequently changed by one of the parties before promissory estoppel can be applied. To establish a case for promissory estoppel, it must be shown that there is reliance on the assumption by the plaintiff—that is, the plaintiff must have acted or refrained from acting on the assumption, and the defendant intended the plaintiff to act on the assumption. The plaintiff must have acted to his or her detriment on the basis of the defendant’s promise. For example, in Waltons, there was an implied promise that the transaction would be or had been completed. Unconscionability would arise if defendants were allowed to go back on their representation. It can been argued, as a result of the High Court’s ruling, that in the application of promissory estoppel, it is now not necessary that there be consideration and that the consideration must move from the party who is suing to the party who is being sued. Promissory estoppel can now be used not only as a shield, that is, to defend an action (as the High Trees case proposed), but as a sword, that is, to commence an action. The court allowed Maher to use the principle to commence an action against Waltons on the basis of its pre-contractual statements and conduct. Maher, therefore, was able to use estoppel as a sword, and not merely as a shield.

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PRIVITY OF CONTRACT One doctrine which has underpinned contractual relationships is that only parties to a contract may sue or be sued on it. This is known as ‘the doctrine of privity of contract’. The contract is a private matter between the contracting parties and only an original party may enforce or be bound by the terms of that contract. A third party would not normally be able to acquire any rights or incur any liabilities under a contract.

EXAMPLE: PRIVITY OF CONTRACT A had a contract with B to mow C’s lawn. A started mowing but did not finish the job. B can sue A for breach of contract, because the contract is between A and B. Despite the fact that C receives benefits from the contract, C is not a party to it, and does not have a right to sue A.

This doctrine owes a lot to the bargain theory of contract. If each party bargains with or gives something in return for the promise or performance of the other party, it makes sense that only the parties to the contract have incurred obligations under the contract, and only the parties to the contract have gained enforceable rights from it. A contract only binds those persons who are parties—or privy—to the contract; persons who are not parties to a contract cannot have rights imposed or enforceable benefits conferred on them. The doctrine of privity is closely associated with the rules of consideration, in that it is sometimes said that an alternative explanation for why a person cannot enforce the benefit of a contract to which he or she is not a party is that one is not able to enforce a promise for which he or she has not given consideration. The notion is reflected in the maxim that consideration must move from the promisee: Tweddle v Atkinson 121 ER 762. The better view now seems to be that privity and consideration, though related, are distinct rules: Coulls v Bagot’s Executor and Trustee Co. Ltd (1967) 119 CLR 460.

CAPACITY TO CONTRACT A contract that is otherwise properly made may nevertheless not be binding where one of the parties lacks the necessary legal capacity to contract. Contracts made with a person lacking contractual capacity are generally voidable, that is, able to be set aside. The reason for the law to deny such individuals contractual capacity is to protect them from the consequences of acts that they may not be in a position to fully understand or assess. The types of individuals who lack capacity are, for example, minors, people who have impaired mental capacity and the intoxicated. Married women until the early

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part of the twentieth century were considered to lack the capacity to enter into contracts. Legislation has altered this situation which is not canvassed in this chapter.

MINORS AND THEIR POSITION AT COMMON LAW In Australia, in all jurisdictions, 18 is the age of majority and anyone under this age is called a minor. The capacity of minors, that is, persons under the age of 18, to contract is governed by the common law, or the common law as altered by legislation. At common law there are two types of contract that will be binding on a minor. These are contracts for ‘necessaries’ and contracts for the provision of beneficial services. The common law aims to give protection to minors from harsh or oppressive contracts, and to enable minors to contract to their benefit.

Binding contracts Necessaries Contracts for necessities or ‘necessaries’ are prima facie valid and enforceable. The word ‘necessaries’ is not confined to articles for the maintenance of life but includes goods and services fit to maintain the person in question at the standard of living and in the position in life that he or she ordinarily enjoys. Such contracts are not confined to the bare necessities of life. It is not possible to give an exhaustive list of what goods would be ‘necessaries’, but luxuries are excluded. ‘Necessaries’ includes at least food, clothing, medical treatment, education, and accommodation. The circumstances of each minor and his or her actual requirements at the time of entering into the contract must be considered in deciding whether the contract is for necessaries: Chapple v Cooper (1844) 153 ER 105. An issue that is of more contemporary relevance is whether a car is a necessary. In Alliance Acceptance Co Ltd v Hinton (1964) 1DCR (NSW) 5 a car was held not to be a necessary. On the other hand, in Mercantile Credit v Spinks [1968] QWN 32 a car was found to be a necessary for a minor who worked as a salesman. In terms of services, those which have been considered as necessaries include, for example, legal services (Helps v Clayton (1964) 144 ER 222); medical services (Huggins v Wiseman (1960) 90 ER 669) and career instructions (Minister for Education v Ox Well [1966] WAR 39). There are no established rules or principles as to what a minor will be made liable to pay for, as the position will differ with the case. In Scarborough v Sturzaker (1905) 1 Tas LR 117, for example, it was held that a minor who had to cycle more than twelve miles from home to his place of work was liable to pay for a new bicycle, this being necessary to his job and thus to his station in life. On the other hand, in Bojczuk v Gregorcewicz [1961] SASR 128, a minor who lived in Poland and was permanently employed there, but who wished to emigrate

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to Australia, could not be forced to repay moneys spent by a relative with respect to such migration, this being not ‘necessary’ at the time it was made available to her. Where the court determines that the goods or services sold are not within the classes of ‘necessaries’, or were not in fact necessary, then the minor cannot be sued for the price. However, even if the goods are found to be necessaries, the minor is not bound to pay the contract price but only a reasonable price. It should be pointed out that a contract for necessaries will not be binding on a minor if it is harsh or oppressive, and on balance, detrimental, and is not beneficial to him or her. See for example:

A CASE TO REMEMBER De Francesco v Barnum (1890) 45 ChD 4 Facts: De Francesco entered into a seven-year apprenticeship with a minor, Barnum, aged 14. During the apprenticeship, the minor agreed, inter alia, that she would not marry, and would not accept any professional engagements without De Francesco’s permission. The contract stated that De Francesco was not obliged to provide for her in periods of unemployment and her salary, while employed, was extremely low. It also provided that De Francesco could terminate the contract at any time at his own discretion. The minor signed to dance for Phineas T Barnum. De Francesco sued for injunction and for an account of the money the minor earned while being employed. Decision: The Court held that the terms of the contract were oppressive and unreasonable and therefore could not be enforced. The minor was at Francesco’s absolute disposal. The contract was unenforceable against the minor because on balance it was not of benefit to her. Accordingly, de Francesco was not entitled to injunction or damages.

Beneficial contracts of service Taking into account that minors may have to work for a living or acquire skills to enable them to gain such work, courts have for a long time recognised that certain contracts of service entered into by minors may be binding on them despite their tender age. Accordingly, the term ‘beneficial contracts of service’ usually refers to all those agreements of employment by which minors provide themselves with a means of livelihood, or with a means of obtaining instruction or education to equip themselves to pursue an apprenticeship, trade or profession. If a contract with a minor is not one of service or apprenticeship, a requirement of a trade or profession, or closely related to one of these, it will not be binding on the minor. This is so despite the fact that the contract may even be beneficial to the minor. A contract of service will be binding on a minor if, viewed as a whole, the contract is for the minor’s benefit. Nevertheless, given that many contracts of service contain some terms that are onerous, a court may have to objectively assess the entire contract (not just some portion of it) and decide whether, on balance, it will be to the minor’s benefit.

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A CASE TO REMEMBER Hamilton v Lethbridge (1912) 14 CLR 236 Facts: The defendant Lethbridge, a minor, had contracted with Hamilton to be an articled clerk for the latter. The contract contained a clause to the effect that Lethbridge would not, when qualified, practise law within 50 miles of his principal’s (Hamilton’s) practice in the same town. The defendant, on qualifying as a solicitor, opened up a practice within the same town as the plaintiff. Decision: It was held by the High Court that although the contract contained clauses that on one view could be considered to be onerous, on balance, the contract was beneficial to Lethbridge and therefore enforceable. Accordingly, Hamilton was granted an injunction preventing Lethbridge from continuing the practice he had subsequently set up within 50 miles of his principal’s practice.

Minors’ contracts under statute The common law position of minors in respect of certain contracts has been changed somewhat by various statutes in the states or territories. Three states, New South Wales, South Australia, and Tasmania now have legislation in respect of minors’ contracts. The Law Reform Commission of Victoria and Western Australia have recommended similar legislation, but it has not yet been enacted. In Victoria, for example, the common law rules had merely been modified by the Supreme Court Act 1986 (Vic). Division 4 of Part 5 of this Act relates to ‘Contracts of Minors’. The Act makes void contracts entered into by a minor: contracts for the repayment of money lent or to be lent; and contracts for the payment of goods supplied or to be supplied, other than necessaries. Further, the Act provides that no proceedings can be brought to enforce a promise made after attaining majority to pay a debt made during minority or on a ratification made on attaining majority of a promise or contract made during minority: s 50. In Australia, statutory modifications of the common law have had an effect in a general sense on the common law with minors’ contracts. These modifications can be seen from an examination of the legislation introduced into New South Wales and South Australia as typical or representative.

The New South Wales legislation The Minors (Property and Contracts) Act 1970 (NSW) repealed the common law in respect of the contractual capacity of minors. Under the Act, many of the difficulties experienced in the interpretation of the common law have been removed. The general thrust of the legislation is to make minors liable in contract provided they have the ability to understand what they are getting themselves into at the time that they make the contract.

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The Act replaces the common law with a statutory code governing what it calls ‘civil acts’. The liability of minors is based on their participation in a civil act: s 16. The legislation defines ‘civil act’ to include a contract, disposition of property, or any act relating to contractual or proprietary rights or obligations: s 6 (1). In the case of a minor entering into a contract that is beneficial, it will be presumptively binding (the court presumes that the contract is valid) unless it is proven that the minor lacked the understanding necessary for participation in the civil act: s 18. A minor may, under s 30, affirm a civil act after his or her eighteenth birthday, making the civil act presumptively binding. A civil act may be affirmed by the courts before the minor turns 18 either on the minor’s application or on the application of the other party to the act. If a civil act is not repudiated by a minor, either during his or her minority or before turning 19, then it becomes presumptively binding under s 31. The thrust of the legislation is to protect minors from being taken advantage of by adults in a contractual situation. Except for certain situations, contracts are generally not enforceable against minors since the intention of the legislation is to protect minors because of their lack of experience and understanding.

The South Australian legislation The relevant legislation in South Australia is the Minors Contracts (Miscellaneous Provisions) Act 1979 (SA). The aim of this legislation is to make provision in respect to contracts entered into by minors, and for related purposes. The law governing minors in South Australia, which is the common law as amended by the above mentioned statute, is not as comprehensive as the New South Wales statute. The legislation has the following features: 1 Any contract that was unenforceable against a minor at common law will remain unenforceable unless it is ratified in writing after the minor reaches full age: s 4. 2 Guarantors continue to be liable as if the minor were of full age: s 5. 3 An infant can seek prior approval from the Supreme Court or a local court of full jurisdiction to enter into a contract that the infant would not otherwise have legal capacity to enter into: s 6. 4 The Supreme Court or a local court has discretion to order restitution of some or all of the property to the infant in certain circumstances: s 7. 5 The Supreme Court or a local court of full jurisdiction may, upon application of the minor or his or her parent or guardian, appoint an agent to act on the infant’s behalf, in which case the liabilities under the authorised contract are enforceable against the minor: s 8.

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CORPORATIONS A corporation can be defined as a legal entity with the legal capacity of a natural person: Corporations Act 2001 (Cth), s 124. Because a corporation is an artificial entity, it is only able to make, vary, ratify, or discharge a contract through a human agent acting with the company’s express or implied authority and on behalf of the company. The need for a corporation to act through human agents may give rise to problems for persons who deal with corporations. The human intermediaries of the corporation may act in a way which is beyond their actual authority, and then the person dealing with them has no certainty as to the binding nature of the transaction. Under s 129(3), a person may assume that anyone who is held by the company to be an officer or agent of the company has been duly appointed and has the authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.

MENTAL INCAPACITY AND INTOXICATION A contract made by a person who has been declared by a court to be of impaired mental capacity is absolutely void (has no legal effect), even if it has been made during a lucid interval. To avoid being bound by the contract, such persons must prove that: • they were so incapable at the time of entering into the contract that they did not know what they were doing, and • the other party knew of their condition. In Lampropoulos v Kolnick [2010] WASC 193, for example, the parties entered into an agreement that allowed the plaintiff estate agent the option to buy a property from an elderly man who suffered from impaired mental capacity, potentially dementia. It was held that the contract was unenforceable because the man lacked mental capacity, and the plaintiff had knowledge of this which could have been inferred from factors such as the man’s age, the fact that he was prepared to sell his house at a substantial undervalue and from the general extreme untidiness of his home. The contracts must be repudiated within a reasonable time of the party recovering his or her mental capacity. However, should the mentally incapacitated confirm the contract upon regaining soundness of mind, he or she cannot subsequently refuse to be bound by it on the grounds of impaired mental capacity. The rules in relation to persons of impaired mental capacity also apply to those wishing to avoid a contract on the grounds of intoxication. Persons seeking to do so will have to prove that they were so intoxicated at the time of contracting that they did not understand what they were doing, and that the other party knew or ought to have been aware of their condition.

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If intoxication is successfully pleaded, the contract entered into is rendered voidable. In order to satisfy the onus of proof, all that the defendant needs to show is that he or she was incapable of forming a rational judgment about the terms of the transaction when the contract was entered into. A contract may be repudiated by the intoxicated party so long as this is done within a reasonable time of the person becoming sober and being aware of what has transpired.

A CASE TO REMEMBER Blomley v Ryan (1956) 99 CLR 362 Facts: Ryan, a 78-year-old alcoholic man, during one of his drinking bouts with Bromley, was induced by Blomley to sell his grazing property outside Goodiwindi. After a number of negotiations, Ryan signed a contract on extremely generous terms and at a substantial undervaluation (much less than its true value). There was drawn up a written contract which was signed. When Ryan eventually became sober, he sought to repudiate the contract. The plaintiff demanded performance arguing that Ryan’s intoxication had not been such as to prevent him understanding what he had agreed. Decision: The High Court set aside the contract. At the time it was negotiated, Ryan was, to the knowledge of Blomley, seriously affected by alcohol so that he was incapable of understanding the general nature of the contract, meaning that he did not possess the requisite contractual capacity.

BANKRUPTS Bankrupts are not by reason of bankruptcy deprived of the capacity to contract, but the Bankruptcy Act 1966 (Cth) imposes limitations on that capacity. Thus, a person who is declared a bankrupt cannot, under s 269 obtain credit or enter into contracts to purchase goods of $3000 or more without disclosing that he or she is an undischarged bankrupt.

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TEST YOUR KNOWLEDGE 1. ‘Contract law is based on the concept of a bargain’. Explain. 2. Why do parties require an intention to create legal relations to contract? 3. Discuss the presumptions which apply to (a) domestic or social agreements and (b) commercial agreements. 4. ‘Consideration must move from the promisee.’ Discuss. 5. Distinguish between ‘executed’, ‘executory’ and ‘past’ consideration. 6. The decision in Ermogenous v Greek Orthodox Community has an effect on the question of intention to create legal relations. Discuss briefly. 7. It is said that consideration must not be vague. Discuss. 8. What do you think is meant by saying that consideration must be sufficient. 9. What are the changes in the application of promissory estoppel as a result of the decision of the High Court in Waltons Stores (Interstate) Ltd v Maher? 10. Explain whether the promises in each of the following agreements are enforceable: (a) Michael’s niece Nina promised him that he could use her expensive tennis racket if he would help her out with her high school assignment. Michael helped Nina all Saturday morning to complete her assignment, but Nina refused to let him use her tennis racket. (b) John, who owns a sandwich shop, promised to increase Anna’s wages, but later decided he could not afford to and broke his promise. (c) Peter owes Olivia $250. He cannot pay and offers $50 and a box of pencils in full settlement. At first Olivia accepts but later demands the balance. 11. Explain what is meant by the term ‘necessaries’. 12. Can minors form a legally binding contract? 13. Explain what must be proved by a party who is attempting to avoid being bound by a contract on the grounds of mental illness or intoxication. 14. What is the underlying purpose of the privity of contract rule?

ASSESSMENT PREPARATION Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problem questions. Ken’s pharmacy had been broken into many times in the past few years. Finally, after a robbery last month, Ken rang the local police station and explained what had happened. The police station sent Eric, a police officer, to Ken’s pharmacy to make the necessary investigations. Ken said to Eric: ‘If you can find the thief I will reward you with $2000.’ Eric conscientiously worked on the case. After two weeks of sustained effort, he had found the thief and had him arrested. He asked Ken for the $2000. Ken decided to break his promise by refusing to give Eric the money. Advise Eric. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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CONTRACT: TERMS AND REMEDIES FOR BREACH COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • identify and explain the types of terms found in a contract • explain the meaning and importance of express terms • understand the parol evidence rule and exceptions to the rule • explain what collateral contracts are • distinguish between conditions and warranties • define intermediate and innominate terms • define what implied terms are • explain what is meant by uncertain terms • explain how terms can be implied by the court, through customs or trade usage and by statute • define and discuss exclusion terms • understand common law remedies for breach of contract • understand the principle of remoteness of damage • understand the distinction between liquidated and unliquidated damages • discuss the importance of the concept of mitigation of damages • define and explain the concept of equitable remedies

CASES TO REMEMBER Van den Esschert v Chappell [1960] L Shuler AG v Wickham Machine Tool Sales Ltd [1974] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) Hillas & Co Ltd v Arcos Ltd (1932) Causer v Browne [1952] Thornton v Shoe Lane Parking Ltd [1971] Olley v Marlborough Court Ltd [1949] Curtis v Chemical Cleaning and Dyeing Co. [1951] Council of the City of Sydney v West (1965) Darlington Futures Ltd v Delco Australia (1996) White v John Warwick & Co. Ltd [1953] Hadley v Baxendale (1854) Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949]

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INTRODUCTION Once it has been established that a contract exists, the precise content of the contract must be considered. This chapter deals with the problem of what the contract says— that is, what the terms of the contract are. These may be express terms, implied terms, or innominate or intermediate terms. At the same time, there will be a discussion of exclusion terms, which are terms that exclude one party from liability for loss. The chapter also looks at the main remedies that are available to the victim of a breach of contract. These stem from the common law and equity.

EXPRESS TERMS Whenever a dispute arises as to the meaning of a contract, it becomes necessary to construe (interpret) the terms of the contract in order to ascertain the intention of the parties. These terms are sometimes described as clauses, stipulations or provisions. Express terms are terms specifically created by the parties, which they intended to be part of the contract. In written contracts, express terms will be terms that are written and agreed to by the parties negotiating the agreement: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (1994) 218 CLR 471. In oral contracts, express terms will be those that are spoken and actually agreed upon between the parties. It should be remembered that in the course of negotiations, some of the statements made have no contractual importance. These are called ‘mere representations’ or ‘non-contractual representations’. Such mere representations confer no rights on the party to whom they are directed. If the parties had wanted these statements to be binding, they could have made them binding by stating their contractual intention that this be so.

PAROL EVIDENCE RULE Where the parties have expressed their agreement wholly in writing, the ‘parol evidence rule’ will apply. The rule states that if the written document is intended by the parties to contain a complete record of their transaction, extrinsic evidence is not admissible to add to, or vary, or contradict it. The rule was enshrined in Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252 where it was concisely stated by Innes J (at 252) thus: Where a contract is reduced into 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 to or varying it in any way.

Exceptions to the parol evidence rule The rigorous application of the parol evidence rule could lead to injustice and hardship. Therefore, the rule is subject to certain qualifications as discussed below:

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1 Usage: Extrinsic evidence is admissible to show that a custom or local usage is part of the contract, even though it was not specifically referred to. In the same way, evidence of usage to explain the meaning of terms of art or technical words in a document is admissible: Hutton v Warren (1836) 150 ER 517. 2 Clarification of ambiguity: Oral evidence of surrounding circumstances may be admissible to clarify any ambiguity in language where, for example, the words in the written contract are not adequately articulated or are susceptible to more than one meaning: Rankin v Scott Fell & Co. (1904) 2 CLR 164 at 172–4 (Griffith CJ). 3 Subject matter or parties: Evidence may be given of the subject matter of the contract or of the identity of the parties to it, provided the evidence is only given to explain the terms used, but not to alter them: Abram v AV Jennings Ltd (2002) 84 SASR 363. 4 Where contract is partly oral: Since the parol evidence rule only applies if the agreement is totally in writing, evidence is admissible to show that an agreement is partly written and partly oral. This is clearly illustrated in the following case.

A CASE TO REMEMBER Van den Esschert v Chappell [1960] WAR 114 Facts: Van den Esschert agreed to sell a house to Chappell. Just before signing the contract, the purchaser Chappell asked the seller whether there were any white ants in the building. The seller said there were none and, on that basis, Chappell proceeded to buy the house. The written contract made no mention of white ants. After the sale, the purchaser found that the house was infested with white ants. Chappell spent money eradicating them and sued the seller for breach of contract. Decision: The court, having referred to the importance of white ant infestation, held that the seller’s oral assurance that the house was free of white ants was intended to form part of the agreement between the two parities. The reasons given were that a reasonable purchaser would not have proceeded except for the assurance given by the seller; and that the assurance was made prior to the agreement in writing.

5 Collateral contract: A party whose statement has been excluded from a written contract by the operation of the parol evidence rule can, in the alternative, plead collateral contract, sometimes called collateral warranty. Although the statement is not a term of the contract, it was seriously made, and without it, the main contract would probably not have come into being. In such cases, the court recognises that the promise is collateral to, or ‘related to’, or ‘in addition to’ the main contract. Here, if the necessary preconditions are fulfilled, the statement may, on its own, be enforceable as a contract. A collateral contract, however, must not be inconsistent with the main contract. See for example, De Lassalle v Guildford [1901] 2 KB 215 and Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1.

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6 Misrepresentation: Oral evidence is admissible to show that the contract is invalid because of misrepresentation: Howard Marine and Dredging Co. Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574.

IMPORTANCE ATTACHED TO EXPRESS TERMS Once it has been established that a particular statement has become a term of the contract, it then remains for the court to determine what kind of a term it is, and hence the importance to be attached to it. This is necessary because the remedies available for breach of a term vary according to the significance of the term. As can be expected, the greater the significance of the term, the greater the remedy.

Conditions and warranties In relation to the importance of contractual terms, it has been traditional to distinguish between ‘conditions’ and ‘warranties’, and this distinction remains the most important. A condition is a major term of the contract. It is a term that ‘goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract … a thing different in substance from what the defendant has stipulated for’: Bettini v Gye (1876) 1QBD 183 at 188. If a condition is breached, the innocent party can terminate the contract (at his or her election) and can also claim for damages. A warranty is regarded as being of less significance or importance and therefore as a minor term of the contract, the breach of which renders the contract different but not substantially different. Generally speaking, a breach of warranty can be compensated for by damages only for the loss suffered, and does not give the innocent party a right to terminate the contract. The rationale for this is that if a minor term is breached, the contract may still be performed in substance and damages will be sufficient to compensate the innocent party for any loss or inconvenience. Whether a term of a contract is a condition or warranty depends on the intention of the parties to the contract. A court will examine the contract as a whole and decide whether the statement is of such importance that the innocent party would not have entered into the contract unless that promise was made. This is the test of essentiality. For example, in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1939) 38 SR (NSW) 632, the Supreme Court of New South Wales stated that when determining the remedy for breach of the contract, the nature of the promise broken is one of the most important matters. If the term is of such fundamental importance that it would go to the root of the contract, then the term would be a condition. On the other hand, if the term is not of such importance, it is a warranty, or a nonessential or subsidiary term.

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FIGURE 4.1 Different kinds of terms Terms

Express (verbal or written)

Condition

Implied

Intermediate or innominate term

Warranty

Intermediate or innominate terms It is sometimes difficult for a court to determine whether a term of a contract is a condition or a warranty. It is possible, for example, that the importance of the term may not have been contemplated by the parties at the time of the formation of the contract. Yet where there is a breach, the consequences may be so serious as to make it almost impossible for the contract to be performed. It may also happen that a term cannot be classified as a condition or a warranty until after a breach of contract has occurred. The courts have identified a new class of terms that lie between conditions and warranties, called innominate, intermediate or hybrid terms. When determining whether termination is justified for breach, and the appropriate remedies, they focus on how severe the effects of the breach are on the contract, rather than attempting to classify the terms. In Hong Kong Fir Shipping Co. v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, the English Court of Appeal identified the new category of innominate or intermediate terms, saying that such a category would provide remedies that were similar to those for breach of conditions and warranties on the basis of the effect of the breach. An innominate or intermediate term is one that lies somewhere between a condition and a warranty. Where the breach of such a term is serious, this would entitle the innocent party to sue for damages and terminate the contract. If, on the other hand, the consequences of the breach are minor, the innocent party would be entitled only to claim for damages. Another example of the concept of an innominate term can be seen in the following case.

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A CASE TO REMEMBER L Shuler AG v Wickham Machine Tool Sales Ltd [1974] AC 235 Facts: A German firm Schuler granted an English company Wickham, as distributor, the sole right to sell its panel presses in Britain. It was a condition of the contract that Wickham shall send its representatives to visit six of Schuler’s listed major British firms each week for four years (the duration of the contract) for the purpose of soliciting orders for panel presses. Wickham found it difficult to successfully complete all the visits to the listed firms (where not everyone was present because of, for example, illness etc.) whereby Schuler would inform the distributor of material breaches and demand a remedy. After Wickham, having initially committed some material breaches, and later some minor breaches, Schuler attempted to repudiate the contract. Decision: The House of Lords did not agree with the repudiation. The obligation of the distributor to visit was not a condition in the ordinary sense. The court said that it was now made clear that there lies intermediate between conditions and warranties a large ‘innominate’ class of contractual terms ‘any breach of which does not give rise to a right in the other party to terminate the contract, but only a material breach, immaterial breaches merely giving rise, like breaches of warranty, to a right to claim damages’.

The High Court of Australia has recognised the existence of the innominate or intermediate term as a term standing between a condition and a warranty in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549. Such a term is seen as being capable of operating as either a condition or a warranty, according to the seriousness or gravity of the breach, thus bringing a greater flexibility to the law of contract. The term was also adopted more recently as the principal

FIGURE 4.2 Significance of the terms of a contract

Condition

Intermediate or innominate term

Essential, vital, fundamental

Breach of which leads to damages and termination

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Warranty

Of less importance, not essential

Breach of which leads to damages or termination in serious cases

Breach of which leads to damages only

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ground for the decision in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 82 ALJR 345. There the right of repudiation for breach of contract may arise even if the breach is not of an ‘essential term’ of the contract, where there has been a sufficiently serious breach of a non-essential term as to justify termination.

IMPLIED TERMS The most carefully written contract cannot provide for every eventuality. In less formal or oral contracts, there will even be terms not discussed by the parties. Generally speaking, courts are unwilling to imply (or ‘read’) terms into a contract, maintaining that it is not their task to make the contract for the parties, but to interpret what the parties have agreed. Sometimes, however, it is evident that certain terms were intended by both parties, but through inadvertence, oversight or inadequate drafting, were not incorporated in the contract. In such circumstances, the courts may imply terms into the contract to overcome this omission, which if left uncorrected, would defeat the presumed intention of the parties. Terms may, in certain circumstances, be implied into a contract by: • the court • custom or trade usage, or • statute. Implied terms may be conditions, warranties, or innominate terms.

TERMS IMPLIED BY THE COURT Courts have an inherent power to imply terms into a contract where it is obvious that the parties intended them to be included, but for one reason or another, failed to include them in their express agreement. One situation where this can occur is where there has been a prior course of dealings between the parties over a certain length of time. The terms that are implied by the court in such circumstances are those used to cure obvious omissions or to give the contract ‘business efficacy’: that is, to give the effect intended by the parties. In order for the court to imply a term, it must be necessary to do so to give business efficacy to the contract: The Moorcock (1889) 14 PD 64; Breen v Williams (1996) 186 CLR 71. This principle was acknowledged in the following case.

A CASE TO REMEMBER BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Facts: The Shire Council entered into a preferential rating agreement with the company BP Refinery (Westernport) Pty Ltd giving the latter discounted rates to encourage it

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to establish an oil refinery in Victoria. As a result of the restructure of BP the parent organisation, the company gave up occupation of the refinery site, but some time later, the site was transferred to another BP subsidiary. The defendant shire argued that there was an implied term of the preferential rating agreement that concessions would only apply while the company was in occupation of the site and would have terminated when that company ceased occupation. The preferential rating agreement contained no express provision enabling the company to assign the benefit of the agreement to any other company. The question arose as to whether the preferential rating agreement applied to the subsidiary of BP. The agreement in fact provided that it would cease to have effect after 40 years, but it contained no express provision for its termination should the company cease to occupy the land prior to that date. Decision: On appeal, the Privy Council held that the rating concessions were a part of the incentives to induce investment in the site. Since BP was expected to restructure from time to time, it was necessary to give business efficacy to the rating agreement (that is, to give the agreement the effect intended by the parties) by implying a term which allowed the assignee of the company’s rights to continue to receive the preferential rate. Such a term would provide that the rights of the appellant company under the preferential rating agreement could be assigned to a subsidiary of BP.

However, in the following case, the position was quite different:

A CASE TO REMEMBER Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Facts: Codelfa entered into a contract with the New South Wales State Rail Authority to excavate an underground railway tunnel for the Eastern Suburbs railway, under the assumption that the work would proceed on the basis of three eight-hour shifts per day (that is, working 24 hours a day) for six days a week. However, the noise created by the excavation caused the local residents to obtain an interim injunction preventing Codelfa from working between 10 p.m. and 6 a.m. each day. Therefore, the job was going to take longer to complete than expected, thus causing Codelfa additional costs and loss of profit. The company claimed that there was an implied term in the contract to the effect that if it was restrained from carrying out the work in the manner contemplated, the additional costs thereby incurred must be the responsibility of the State Rail Authority. The implication of such a term was necessary to give the contract ‘business efficacy’. Decision: The High Court held that such a term could not be implied. The court was not convinced that it was obvious that if the parties had contemplated the possibility of an injunction, they would have agreed to the term allowing for additional payment to the company. In addition, the term was not necessary to give business efficacy to the contract because, inter alia, there was no gap in the contract that had to be filled in order for it to work.

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TERMS IMPLIED THROUGH CUSTOM OR TRADE USAGE Terms can be implied where there is an established custom or practice in a particular trade or profession, industry, market or workplace, even if those terms are not expressly agreed upon. Terms can form part of the contract because parties in the particular trade or profession always contract on the basis of such terms. Where terms are incorporated into a contract in this way, they can be said to be implied on the basis of custom or trade usage, and can be enforced in precisely the same way as the agreement’s express terms. An example of a term being implied through custom or usage can be seen in Hutton v Warren (1836) 150 ER 517. In that case, a tenant who had been asked to quit his leased farm was able to claim a right, conferred by local custom, that he be paid a reasonable rebate (allowance) for both seed he had used and his labour on the farm. This was so even though there was no express term in the written lease to that effect. Two observations can be made regarding terms implied on this basis. One is that there is a presumption that the parties intended their agreement to be subject to the alleged custom or trade usage, and such a presumption can be rebutted. The other is that the custom or trade usage relied on must be clearly established. In the more recent case of Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, the High Court endorsed the following propositions that are relevant to establish whether a term will be regarded as implied on the basis of custom or usage: • The existence of a custom is a question of fact. • A person need not have actual knowledge of the custom in order to be bound by it. • The custom need not be universally accepted, but it must be so well known that everyone making a contract in that situation can be reasonably presumed to have imported that term into the contract. • A term is not implied on the basis of custom if it is contrary to the express terms of the contract.

TERMS IMPLIED BY STATUTE A statute in its provisions can imply terms into a contract. Since statute can override common law (which allows parties to determine their own terms), it can imply terms to which the parties have not freely agreed. For example, the Australian Consumer Law (ACL) provides statutory guarantees in contracts for the supply of goods and services to consumers. These are the so-called consumer guarantees, and they include guarantees as to title, correspondence with description, acceptable quality and fitness for purpose. For a fuller discussion of the ACL, see Chapter 5 on consumer protection.

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TABLE 4.1 Summary of the different ways that terms may be implied FORMATION

TERMS IMPLIED

By the court

Terms implied by the court to overcome an oversight or omission to give the contract ‘business efficacy’, that is, to give it the effect intended by the parties.

By custom or usage

Terms implied on the basis of established practice or custom in a particular trade, industry, market or workplace, or between members of a particular group under which agreements are carried into effect in a certain way. Such terms are so well known that by implication they will become part of contracts of the same type.

By statute

Some kinds of contract terms are implied by statutory provisions. The Australian Consumer Law provides for statutory consumer guarantees for the protection of consumers irrespective of the intention of the parties to the contract.

UNCERTAIN TERMS Where a contract contains uncertain terms, the court will try and give effect to the intention of the parties to preserve the contact. The court here may be prepared to imply, add to the uncertain terms and enforce the contract.

A CASE TO REMEMBER Hillas & Co Ltd v Arcos Ltd [1932] ALL ER Rep 494 Facts: Hillas & Co Ltd had agreed to purchase 22 000 standards of softwood goods of fair specification over the season 1930 from Arcos Ltd. There was contained in the agreement an option to buy 100 000 standards in 1931, but the option did not specify particulars as to the kind, size of timber, or the manner or date of shipment. There were no difficulties with the original shipment in 1930. However, when Hillas decided to exercise his option with Arcos in 1931, Arcos refused to deliver the timber, arguing that the option was not enforceable because no attempt had been made to define the above-mentioned particulars indicating that there was no intention on the part of either party to be bound. Decision: The House of Lords did not agree with this argument. It held that the wording used had to be interpreted in light of the previous course of dealings and the usual practice in the timber industry that equivalent timber would be supplied. The court assumed that in a transaction such as this, where there was a written agreement, and the parties had been engaged in this kind of trade, it was found there was no uncertainty, and it was possible to ascertain the parties’ intentions. Therefore, the contract was enforceable, and Arcos was bound to sell the timber to Hillas or be liable to damages in default. It can be seen that the House of Lords was prepared to imply, add to, or ‘read’ into the meaning of the uncertain terms in an option agreement, and the details of the subject matter, timber, were held to be the same as those specified in the course of previous dealings in the year before.

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EXCLUSION CLAUSES It is not unusual in business to find a party attempting to limit or exclude its liability in certain situations by having an exclusion clause (also called an exemption, exception, or limitation clause) in the contract. Such clauses are frequently found in ‘standard form’ contracts that apply to persons making a particular type of contract, for example, a booking contract with an cruise ship or railway, or parking one’s car at a car park. It is not difficult to imagine situations where a person who is handed a document pays virtually no regard to its contents. Such a document is sometimes a voucher or ticket which is regarded as evidence of payment for services provided. Yet the document often contains a statement intended to limit or exclude the liability of the person providing the service. The issue that arises here is: Do such statements form part of the contract? The answer lies in whether a reasonable person would expect to find such terms in a document of this nature. If the answer to that question is no, then the exclusion term will be ineffective, as the following case demonstrates.

A CASE TO REMEMBER Causer v Browne [1952] VLR 1 Facts: The plaintiff’s husband took one of the plaintiff’s dresses to the defendant Browne for dry cleaning and was given a docket. When the plaintiff collected the dress, it was stained and some threads had been pulled out. Causer sued and the defendant sought to rely on a clause printed on the front of the docket. The clause provided that the cleaners would not be liable for any loss or damage to articles, regardless of the cause. Decision: The court held that Browne was not entitled to rely on the exclusion clause to escape liability. The document was not one that a reasonable person would consider to be contractual. It appeared only to be a receipt. Any reasonable person who was given the docket would regard it as one that required presentation on collection of the articles. It was held that no notice of the exclusion clause had been given.

The courts generally look at exclusion clauses with hostility because these have great potential for abuse, and also because there is often little opportunity for a person to read the ‘fine print’ on the contract. They have endeavoured to alleviate the position of the parties prejudiced by the use of exclusion clauses by construing (interpreting) the document in which they are contained to their advantage wherever possible. The courts over time have laid down a number of rules in the interpretation of exclusion clauses: 1 For the exclusion clause to be enforceable, it must be shown that it has become a term of the contract. This can done by the ‘notice requirement’, that is, by showing that the exclusion clause was brought to the notice of the injured party before or at the time the contract was made, so that there was at least an opportunity to agree to its inclusion or to refuse to contract because of it. This argument can be seen in the following case.

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A CASE TO REMEMBER Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 Facts: Thornton took his car to a car park operated by the defendant. He had never been to the car park before. When Thornton drove into the car park, he got a ticket from the automated gate. The ticket listed certain conditions that were also displayed inside the garage. The conditions of entry attempted to exempt the car park owner from liability for a variety of occurrences. One of the clauses excluded the garage proprietor from liability for personal injury suffered on the premises. Thornton was injured and proceeded to sue for damages. Decision: The court held that the contract for parking was entered into prior to the ticket being dispensed; the ticket was merely a voucher that evidenced the contract and the customer had not been aware of the conditions before entering into the contract. Thus, insufficient notice of the exclusion was given and the court would not uphold it. Thornton therefore could recover compensation for his injuries.

If the notice of the exclusion clause is not given until after the contract has been completed, the clause will be ineffective. The question of whether or not the notice comes before the contract will depend on when the contract was made, that is, when there was acceptance of the offer. A party cannot be bound by statements, promises, or representations made after the contract has been formed.

A CASE TO REMEMBER Olley v Marlborough Court Ltd [1949] 1 KB 532 Facts: The Olleys visited a hotel and paid for a week in advance. When they arrived at their room, they found on one of the walls a notice to the effect that ‘the proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody’. When Mrs Olley’s furs were stolen in her absence, she sued the owners of the hotel, who relied on the notice displayed in the room to escape liability. Decision: It was held that the hotel could not rely on the notice and was therefore liable. The contract was completed at the reception desk before the Olleys went up to their room, so any notice given after that could not be part of the contract.

2 If the party who relies on the exclusion clause misrepresents the clause, the full protection of the clause will be lost: Liaweena (NSW) Pty Ltd v McWilliams Wines Pty Ltd (1991) ASC 56-038 (NSW CA). This is clearly illustrated by the following case.

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A CASE TO REMEMBER Curtis v Chemical Cleaning and Dyeing Co. [1951] 1 KB 805 Facts: The plaintiff, Mrs Curtis, took a white satin wedding dress with beads and sequins to the defendant dry-cleaner. The shop assistant asked her to sign a document, which had the heading ‘Receipt’. Mrs Curtis asked why her signature was required. The assistant replied that it exempted the defendants from liability for damage that might occur to the beads and sequins on the dress, whereupon Mrs Curtis signed the document. When the dress was returned stained, Mrs Curtis sued for damages, and the defendants relied on the exclusion clause to deny liability. In fact the receipt had an exclusion clause exempting the company from liability ‘for any damage howsoever arising’. Decision: The court disagreed with the defendant and said that an exclusion clause is not effective if its effect is misrepresented. Here, the clause had been represented as only affecting beads and sequins, and did not extend to exclude liability for stains.

3 Under the ‘four corners’ rule of interpretation, an exclusion clause will not normally be considered to limit or exclude liability for acts done outside the scope or objects of the contract. This rule simply means that unless the exclusion clause specifically refers to other matters, the courts will apply an exclusion clause only to events falling within the four corners of the contract. A good example of the ‘four corners’ rule can be seen in the following case.

A CASE TO REMEMBER Council of the City of Sydney v West (1965) 114 CLR 481 Facts: Before West parked his car at the defendant’s car park he was issued with a ticket. On the back was a clause which stated that ‘the council does not accept any responsibility for the loss or damage to any vehicle … however such loss … may arise or be caused’. It also stated: ‘This ticket must be presented for time stamping and payment before taking delivery of the vehicle.’ A thief broke into the car, and tricked the car park attendant into giving him a duplicate ticket and allowing him to drive the car away. West sued for breach of contract. Decision: It was held that the validity of an exclusion clause is a matter of construction— how it fits into the overall contract. The unauthorised release of West’s car was an act that went beyond the scope and terms of the contract. West could not have anticipated that his car would have been released to a stranger without a ticket or identification. It was not just a negligent act, but a delivery not authorised under the contract. Therefore, the Council was liable for the loss.

The ‘four corners’ principle as espoused in Council of the City of Sydney v West has general application in contract law. For example, unless the term clearly states

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otherwise, an exclusion clause in a contract of carriage will not exempt the carrier from liability where the carrier deviates from the route that was contemplated or authorised by the contract: Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353. The High Court echoed the approach it had taken in Council of the City of Sydney v West in the following case, noting that the exclusion clause cannot be relied on because the activity complained of was outside the ambit of the contract.

A CASE TO REMEMBER Darlington Futures Ltd v Delco Australia (1996) 161 CLR 500 Facts: Delco Australia, the plaintiff, was a client of Darlington Futures, which acted as a broker in the futures markets. Delco entered into a written contract with the defendant broker, which was authorised to undertake certain transactions on behalf of the plaintiff. After the broker undertook a number of unauthorised transactions on behalf of the plaintiff, the latter sustained heavy losses and commenced an action to recover them. The broker relied on an exclusion clause contained in the contract, which read as follows: The client …acknowledges that the agent (Darlington Futures Ltd) will not be responsible for any loss should the client follow any of the agent’s trading recommendations or suggestions, nor for any loss, in the case of discretionary accounts, arising from trading by the agent on behalf of the client. The client finally acknowledges that the agent will not be responsible for any loss arising in any way out of any trading activity undertaken on behalf of the client whether pursuant to this agreement or not …

Decision: On the basis of the test applied in Council of the City of Sydney v West, the High Court held that the words of the exclusion clause should be construed according to their natural meaning in view of the contract as a whole, thereby giving due weight to the context in which the clause appears. The broker had acted without authority, far beyond the scope of the contract, and for this reason, the broadly worded exclusion clause was ineffective and the defendant could not rely on it.

THE CONTRA PROFERENTEM RULE Considering the courts’ hostility towards exclusion terms, it is no wonder that they will do their best to limit the effectiveness of such terms. Accordingly, courts will apply the contra proferentem rule in cases of ambiguity. In other words, where the exclusion clause is ambiguous, it will be construed strictly against the party relying on it. In effect, this means that courts will adopt a meaning that is favourable to the party against whom it is to be used. The following case is a good example of the operation of the rule.

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A CASE TO REMEMBER White v John Warwick & Co. Ltd [1953] 1 WLR 1285 Facts: A contract for the hire of a tricycle had the following exclusion clause: ‘Nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired’. While riding the tricycle, White was thrown off it, and suffered a knee injury. He sued John Warwick for both breach of contract (failure to supply a tricycle reasonably fit for its purpose), and in the tort of negligence (breach of a duty of care). John Warwick relied upon the exclusion clause for his defence to both counts. Decision: The Court of Appeal, applying the contra proferentem rule, found that the exclusion clause was not appropriately worded. The court interpreted the clause as narrowly as the facts allowed, and found that it exempted the company from liability in contract only, but did not relieve Warwick from its liability under the tort of negligence.

COMMON LAW REMEDIES FOR BREACH When there is a breach of contract, remedies are available to the innocent party who has suffered loss as a result of that breach. These remedies vary according to the seriousness of the breach. Breach of a contract occurs where one or other of the parties fails to perform all or some of the obligations required. Any such failure constitutes a breach of a term and each breach entitles the innocent party to some form of relief. Where the breach is a breach of a condition, the innocent party may elect to treat the contract as discharged and can also sue for damages. Where the breach is a breach of warranty or a minor breach of a term, the innocent party may only sue for damages.

DAMAGES RECOVERABLE IN CONTRACT At common law, the award of damages has been the traditional way of compensating a party for the actual loss suffered as a result of the other party’s failure to perform the contract—at least insofar as money can do so. The aim of granting these damages is to compensate the injured party for the loss sustained by the breach and not to punish the defaulting party. Damages are awarded to place the innocent party in the position that he or she would have occupied had the contract been performed as agreed: Commonwealth of Australia v Amman Aviation Pty Ltd (1991) 174 CLR 64.

THE PRINCIPLE OF REMOTENESS The party who breaches a contract will not be held responsible for every consequence of the breach. Losses that result from the breach of contract are not compensable if they are too remote. Once it was found that the breach caused the loss, the next question to be asked is whether the loss was a natural consequence of the breach, or reasonably within the contemplation of the parties, and a consequence that is reasonably foreseeable at the time of formation of the contract.

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THE RULE IN HADLEY V BAXENDALE The courts have developed guidelines to be used in deciding appropriate damages for breaches of contract. The main guidelines were formulated in the landmark case of Hadley v Baxendale.

A CASE TO REMEMBER Hadley v Baxendale (1854) 156 ER 145 Facts: Hadley owned a mill, which was forced to close down when the mill’s crankshaft broke. Hadley contracted with Baxendale to take the crankshaft to the manufacturers so that a new one could be made. Baxendale, a carrier, was ignorant of the operations at the mill and the importance of the crankshaft. Owing to Baxendale’s negligence, there was a delay in its transportation to the manufacturers. This meant that the mill was idle for longer than necessary. The plaintiff sued for the loss of profits caused by the delay in delivery (that is, the defendant’s breach of contract). Decision: It was held that the carrier was not liable for the loss of profits caused by the delay, as loss did not flow directly from the breach of contract. It was too remote to have been foreseen. It was, for example, reasonably possible that the mill would have a spare crankshaft. The court said there are two types of loss for which the party who breaches contract will be liable: a loss occurring in the usual or normal course of things as a result of the breach; b

loss ‘as may reasonably be supposed to have been in the contemplation of both parties’: that is, occurring as a result of special or exceptional circumstances that would be likely to lead to loss in the event of a breach, where such circumstances were made known to the defendant at the time the contract was entered into.

Any loss that does not fall within either of these two categories will not give rise to an award of damages because it will be treated as being unforeseeable, or too remote. In other words, it will not be seen as a loss that the offending party could have contemplated as a result of the breach. If a plaintiff wishes to recover in such a situation, he or she must put the offending party on notice of the special or exceptional circumstances that may apply. The following case clearly demonstrates the distinction between the two types of loss as formulated in Hadley v Baxendale.

A CASE TO REMEMBER Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 Facts: Victoria Laundry operated a laundry and dry-cleaning business. It agreed to buy from the defendant a boiler, which it needed in order to procure certain ‘highly profitable’

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dry-cleaning contracts. The defendant promised to sell and deliver the required boiler in June, but was unable to deliver it until the following November. The defendant did not know of the ‘highly profitable’ dry-cleaning contracts for which the plaintiffs were negotiating. Victoria Laundry sued for loss of profits. Decision: It was held that the plaintiff was entitled to damages for the loss of normal or usual profits that could reasonably be expected to have been earned in its normal business. These damages came under the first branch of the Hadley v Baxendale rule. The plaintiff was not allowed any damages for the loss of profits in relation to the ‘highly profitable’ contracts which is the second branch of the rule in Hadley v Baxendale.

THE AMOUNT OF DAMAGES TO BE AWARDED Once the court has established the basis of the claim for damages, the amount to be awarded must be determined. The court must decide how much money will adequately compensate the injured party.

Liquidated damages and unliquidated damages The contract may stipulate the amount of damages to be awarded in the event of a breach. Liquidated damages are those damages that are either specified or capable of being specified by the use of arithmetical calculation. It must be a genuine or bona fide pre-estimate of actual loss that will flow from the breach. The party who breached the contract will then have to pay that amount without the innocent party having to prove the actual damage. As an illustration, if the rental owing by a tenant of a flat, at $300 per week, has accrued for a period of ten weeks, a claim for such arrears would be made from an arithmetical calculation in the form of liquidated damages. Unliquidated damages, on the other hand, are those damages that are not specified or are not capable of being specified by the use of an arithmetical calculation. For example, a plaintiff may not be able to assess accurately what should be the amount of recoverable damages for his or her pain, suffering and disappointment. The contract in such cases usually does not mention the amount of damages, and it is up to the court or jury to determine the amount that should be paid out.

Penalties The stronger party to a contract often includes a term in the contract that bears little if any relationship to the loss likely to be incurred as a result of a breach. Such a term requires the weaker party to pay excessive damages if that person breaches the contract. The purpose of these penalty clauses is to frighten and force the weaker party to perform the obligations under the contract. Where the damages specified are (a) excessive and (b) obviously a penalty rather than a genuine pre-estimate of

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damage caused by a breach, the courts will not award the specified amount. The party seeking the penalty amount loses the right to any damages: Ford Motor Co. (England) v Armstrong (1915) 31 TLR 267.

Nominal damages In cases where there is a breach of contract, but the plaintiff is not able to establish that he or she has suffered any actual loss, the court may award nominal damages to the plaintiff for ‘proving a point’ in commencing the legal action. What this means is that the plaintiff may be awarded with a token sum of, say, $1: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.

Exemplary damages These are damages awarded in addition to general damages, where the court wishes not only to compensate the victim but to punish the defendant. Such damages are not compensatory in nature and extend beyond the general principle of damages. Thus, in exceptional circumstances, the courts will award damages for inconvenience or discomfort caused by breach of contract: Bailey v Bullock [1950] 2 All ER 1167.

Mitigation of loss A person who suffers loss resulting from a breach of contract has a legal obligation to mitigate that loss—that is, to keep that loss to a minimum and not to do anything to inflate or exaggerate that loss. Such a person will not be allowed to claim compensation for any damage that has been incurred as a result of a failure to mitigate the loss. Loss that could have been avoided by reasonable action cannot be recovered through court action: Koutsonicolis v Principe (No. 2) (1987) 48 SASR 328. FIGURE 4.3 Different kinds of damages Damages

Nominal (no actual loss involved)

Ordinary

Exemplary (punitive, to punish defendant)

Liquidated (specified or a genuine pre-estimate of actual loss)

Unliquidated (to be determined by the court)

Penalty to penalise a party which is excessive, and out of proportion with the loss suffered

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EQUITABLE REMEDIES FOR BREACH At common law, the only remedy available for breach of contract is damages. It is obvious that while this remedy is appropriate in some cases, it is inadequate in others. For example, an award of damages is not the most suitable compensation for a buyer of a Picasso painting, if the seller, in breach of the contract, refuses to deliver it: Lumley v Wagner (1852) 42 ER 687. Where money is not an appropriate remedy, the common law is not really capable of giving a different just solution, and in such situations, equity can intervene with orders that are intended to ensure that justice is done. Two equitable remedies that may be available in the event of breaches of certain contracts are: • the decree of specific performance, and • the injunction.

SPECIFIC PERFORMANCE Specific performance is an order sought from the court to require a party to perform an obligation that he or she undertook to perform but has failed or refused to carry out. A good example of a situation in which specific performance might be ordered is where the seller of something unique, such as the above-mentioned seller of the Picasso painting, refuses to deliver it to the buyer, who cannot just go out and buy an identical substitute. Specific performance will not be available where damages provide an adequate remedy, or where the contract involves personal services: Loan Investment Corp of Australasia Ltd v Bonner [1970] NZLR 724; Giles [CH] & Co. Ltd v Morris [1972] 1 WLR 307.

INJUNCTION An injunction is a court order that has the power to restrain a person from doing a certain act such as breaching a contract. In this context, an injunction is an order restraining (prohibiting) a party from breaching its contractual obligations. An injunction is not likely to be given where, for example, the plaintiff has been guilty of delay, or is in breach of his or her obligations under the contract. When a court grants an injunction, it is sometimes criticised for having indirectly compelled the party who is breaching the contract to specifically perform the contract even though the court had made no order with respect to specific performance: Lumley v Wagner (1852) 42 ER 687.

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TEST YOUR KNOWLEDGE 1. The terms of a contract may be either express or implied. Explain what is meant by this statement in some detail. 2. When does the parol evidence rule apply? What are the exceptions to this rule? 3. Explain the guidelines that you think the court may have to use in determining whether a statement was intended to form part of a contract. 4. The terms of a contract are categorised according to their significance. What are the important terms and what are the less important terms? 5. What is an intermediate or innominate term? 6. Explain briefly under what circumstances are implied terms used. 7. What is the court’s attitude to uncertain terms? 8. Exclusion terms are commonly used express terms. Yet the courts are generally hostile to exclusion clauses and have even developed rules to limit their effectiveness. Why is this so? 9. Where a party signs a document containing an exclusion term, is he or she bound by such a term? 10. What remedy is available to an innocent party where a warranty has been breached? 11. Explain what is meant by the contra proferentem rule. 12. What is the purpose of awarding damages in contract law? 13. Explain the two issues a court has to consider in looking at the question of damages. 14. Explain what is meant by saying that a person claiming damages must mitigate the loss. Who has the burden of proving that the damage was not mitigated? 15. Explain briefly the rule in Hadley v Baxendale. 16. What are liquidated and unliquidated damages?

ASSESSMENT PREPARATION Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering questions’ and be acquainted with the IPAC method of writing answers to problem questions. Nancy owns Polstar Printing, which prints stationery, brochures, business cards, and other materials. In 2006 the printing press broke down and had to be repaired. Tiptop Machinery Ltd was contracted to take the printing press to its factory to have it repaired. Tiptop promised that the printing press would be returned and installed in two days. Nancy had managed to secure a lucrative contract with the Defence Department to print brochures to publicise its work and to recruit young people into the army. This contract required Polstar to complete the order of brochures on a date that happened to be one day after the printing press was due to be returned. The printing press was repaired and returned in seven days’ time, not two days’ time as promised. The officers in the Defence Department were furious at Polstar for not being able to fulfil its promise to deliver on time, and cancelled the contract. Nancy sues Tiptop for breach of contract. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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CONSUMER PROTECTION LAW COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • explain the framework which creates the Australian Consumer Law (ACL) • identify a consumer in a contract involving the sale of goods and provision of services • explain the significant part that the ACL plays as a major source of protection to consumers • explain the nature and purpose of the implied consumer guarantees of the ACL • explain the consumer’s rights where the supplier fails to comply with a consumer guarantee • explain how the ACL is enforced

CASES TO REMEMBER Hartnell v Sharp Corp of Australia Pty Ltd (1975) Barton v Croner Trading Co Pty Ltd (1985) Barton v Croner Trading Co Pty Ltd (1985) ACCC v Target Australia Pty Ltd (2001) TPC v Advance Bank Australia Ltd (1993) Rowland v Divall [1923] David Jones v Willis (1939) Grant v Australian Knitting Mills [1936] Ashington Piggeries Ltd v Christopher Hill [1972] Dillon Baltic Shipping Co v Dillon 'Mikhail Lermontov' (1990)

INTRODUCTION 1 January 2011 can be acknowledged as an important date in the development of Australian consumer protection law. On that day, following consultations between the Commonwealth, the states and territories, the Australian Consumer Law (ACL) came into operation. The Trade Practices Act 1974 (TPA) was replaced by the Competition and Consumer Act 2010 (Cth) (CCA). The ACL which is set out in Schedule 2 of the CCA mirrors the former consumer protection provisions of the TPA and state and territory Fair Trading Acts, and became the uniform consumer protection regime that applies throughout Australia.

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It was drafted in plain English, making it accessible, clear and user friendly reflecting thereby the drafting conventions applied in the original TPA. The ACL is Schedule 2 of the CCA. In this chapter, section references are to the ACL and case examples are those which were generally decided under the TPA. The Australian Competition and Consumer Commission (ACCC) as a 'regulator' continues with its administration and enforcement role in respect of its responsibilities under the ACL as it did under the TPA.

ACL AND CONSUMER PROTECTION OVERVIEW There has been an increasing awareness of the need to legislate as regards undesirable business practices. This chapter deals with legislation which protects consumers at both state and federal levels from undesirable business practices in, for example, the supply of defective goods and services or unfair methods of trading. The enactment of the ACL signalled the Commonwealth Government taking an increasingly active role in the area of consumer protection. This legislation, in general terms, is concerned with providing protection to consumers against unconscionable conduct, false representations and other unfair practices in connection with the supply of goods and services. It is a single national framework for the protection of consumers against unfair business conduct and practices, and is also a product safety regime. How is a ‘consumer’ defined under the ACL? The concept of a consumer is central to the provisions of the ACL. A person is defined under ACL s 3 (1) as a consumer if: • the person acquires goods or services not exceeding $40 000 • the person acquires goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption (of any value) • the person acquires a commercial road vehicle (of any value), that is, a vehicle or trailer acquired for use mainly in the transport of goods on public roads. Under s 3 (2) a person is not a consumer if: • the person acquired the goods for the purpose of re-supply, or • for the purpose of using them up or transforming them, in trade or commerce: in the course of a process of production or manufacture; or in the course of repairing or treating other goods or fixtures on land.

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FIGURE 5.1 Consumer contracts

Consumer under ACL s3 (1)

Applies to contracts under $40 000

Applies to contracts over $40 000, that is, contracts for personal, domestic or household use or consumption, or commercial road vehicles

MISLEADING OR DECEPTIVE CONDUCT UNDER THE ACL Section 18 (1) of the ACL provides: ‘A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. It was originally introduced into Australian law as s 52 of the TPA, and has now moved into the ACL. Because the wording of the two sections has remained substantially the same, previously decided cases which involved the application of s 52 of the TPA are still valid for the application of s 18 of the ACL. There is no definition of ‘misleading or deceptive’ conduct. In Weitmann v Katies Ltd (1977) 29 FLR 336, a dictionary meaning was adopted. Thus ‘misleading or deceptive ‘denotes that the conduct must ‘lead into error’. The most appropriate meaning for the word ‘deceive’ is to cause to believe what was false, to mislead as to a matter of fact, to delude or take in. In most cases, the view has been that the words ‘misleading’ and ‘deceptive’ are plain and simple. All we need to do is examine the conduct complained of and decide if it is misleading and deceptive: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83. The words ‘likely to mislead or deceive’, according to McWilliams Wines Pty v McDonald’s Systems of Australia Pty Ltd (1980) ATPR 40–188, mean ‘may mislead or deceive’ or ‘may be expected to mislead or deceive if there is a real or not remote chance or possibility regardless of whether it is less or more than 50 per cent (per Northrop J at 42, 590). The words ‘likely to mislead or deceive’ make it clear that the section applies without requiring that anyone was actually misled or deceived, only that this is the likely outcome of the conduct. To put it in another way, there is no need to show

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that anyone was actually misled by the conduct in question: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191. Section 18 (1) has the potential to cover a wide range of activities. The section provides in very general terms that: ‘A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. Basically, s 18 imposes a duty not to make misleading statements or act in a misleading way. To mislead or deceive means to lead into error as mentioned earlier. Thus, misleading or deceptive conduct should usually involve some form of misrepresentation. Such misrepresentation may be conveyed by words, statements of fact, images or even by silence. In terms of consumer protection, the key to s 52 is that any claims about products must not be misleading of false. To succeed in a claim under s 52 it is not necessary to establish intent on the part of the corporation whose conduct is in question. The section has been interpreted widely and this has allowed it to be applied in a variety of situations not usually associated with consumer protection. In this sense, it has had an impact on Australian law that was not anticipated when it was introduced as part of the TPA in 1974. It has become one of Australia’s most litigated statutory provisions, and has developed into what has been described as a ‘front line commercial weapon’. Here are some important applications of s 18 which are found in cases that involve: • misleading and deceptive advertising. For instance, two rival companies were in dispute over the use by one of advertising a new brand which was very similar to the one already on the market where the court said that the similarity amounted to misleading and deceptive conduct: WD & HO Wills (Australia) Pty Ltd v Philip Morris (1997) ATPR 1–590. • misrepresentation by a real estate agent, to intending buyers, about the potential for redevelopment of a block of land it was offering for sale: Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112. • misrepresentation by the owner of a commercial property to an intending buyer, concerning the terms upon which the property was leased to an existing tenant. • rival traders seeking to restrain another rival trader in engaging in conduct which infringes the legislation, for instance, as an alternative to what is commonly known as a ‘passing off’ action. Passing off, a conduct which is prohibited by s 52, occurs where one trader puts onto the market a product which so closely resembles the product of a rival that a prospective purchaser would be likely to be misled. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, the High Court had to decide whether the sale of Parkdale furniture, which was similar in appearance to another more ‘up-market’ range of furniture manufactured by Puxu, could be considered to be misleading or deceptive conduct.

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the claim by one manufacturer that another shoe manufacturer had put on sale shoes that looked like those of the former, and to that extent had engaged in misleading conduct: Dr Martens (Australia) Pty Ltd v Rivers (Australia) Pty Ltd (1999) ASAL 55-038. It should be noted that silence may amount to ‘misleading and deceptive conduct’. Usually, silence will only amount to ‘conduct’ where there is some obligation to act or divulge the information. There is a requirement that the silence is intentional: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83. •

FALSE OR MISLEADING REPRESENTATIONS UNDER THE ACL Section 29 of the ACL (formerly s 53 of the TPA) provides the making of a false or misleading representation in connection with the supply which deals with false representations is another provision which must be considered when making decisions concerning advertising, promoting and selling products. This section prohibits certain types of false and misleading or deceptive representations rather than the wider concept of misleading or deceptive conduct in s 18. Section 29 of the ACL prohibits a number of forms of false representation by corporations in trade and commerce as specified in the paragraphs of that section. Unlike s 18, the terms of s 29 are sufficiently specific to impose criminal liability for a breach even though an intention to mislead has not been established. That is to say, s 29 imposes strict liability. Section 29 (1) provides: A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services: (a) make a false or misleading representation that goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use (b) make a false or misleading representation that services are of a particular standard, quality, value or grade (c) make a false or misleading representation that goods are new (d) make a false or misleading representation that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits (e) make a false or misleading representation that the person making the representation has a sponsorship, approval or affiliation (f) make a false or misleading representation with respect to the price of goods or services

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(g) make a false or misleading representation concerning the availability of facilities for the repair of goods or of spare parts for goods (h) make a false or misleading representation concerning the place of origin of goods (i) make a false or misleading representation concerning the need for any goods or services (j) make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy. The representations referred to in s 29 above are of a type which is likely to impress consumers and lead them to enter into a transaction. If the representations are untrue, the consumer has been misled or deceived. A consumer can be misled where the qualities of goods and services being provided are misleadingly stated. Contravention of some parts of s 29 can be seen in the following cases.

A CASE TO REMEMBER Hartnell v Sharp Corp of Australia Pty Ltd (1975) 5 ALR 439 Facts: Sharp claimed in a number of advertisements that: ‘Every Sharp microwave oven is tested and approved by the Standards Association of Australia’ (SAA). The company had made similar claims in its advertising brochures in which there also appeared a facsimile of the registered trademark of the Standards Association of Australia (now Standards Australia) with the words ‘approved to Australian standards certificate numbers’ and certain numbers. The claim that every Sharp microwave oven was tested and approved by SAA was completely false. In actual fact, the SAA had never tested or approved any of the ovens. The SAA did not authorise the use of its registered trademark nor had it issued the certificates. Decision: The defendant company was guilty of ten charges that, in advertising the supply of goods, it had falsely represented that the goods were of a particular standard in breach of TPA s 53(a) (now ACL s 29(1)(a)). It was fined $10 000 for each offence, and a total of $100 000 for the ten offences.

A CASE TO REMEMBER Barton v Croner Trading Co Pty Ltd (1985) ATPR 40–525 Facts: The defendant importer supplied 10 000 toy koala and toy kangaroos to Woolworths. The toys had affixed to them labels ‘Made in Australia’. There was claimed for the toys the sponsorship of ‘Advance Australia’. These representations were false and the toys were made in Korea.

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Decision: The court held that, where the defendant importer sold falsely labelled goods to the retailer who then placed the toys on display, the false representations continued to be made while the goods were on display. After its initial defences were rejected, the defendant importer was fined under: (1) TPA s 53 (eb)) (now ACL s 29(1) (k)). There was a false representation that the toys were made in Australia. (2) TPA s 53(c) (now ACL s 29(1) (h)). There was a false representation that the toys had the sponsorship of the Advance Australia Company.

A CASE TO REMEMBER ACCC v Target Australia Pty Ltd (2001) ATPR 41–840 Facts: The defendant, Target, a large discount department store had advertisements on TV and newspapers such as ‘25% off all clothing’. There was a fine print exclusion of certain clothing items and ‘15%–40% off housewares’ which also contained small print exclusions. Decision: The defendant breached TPA s 53 (g) (now ACL s 29 (l) (m)) because certain exclusions were either not mentioned, or were in small print. The court granted an injunction and ordered corrective advertising.

A CASE TO REMEMBER TPC v Advance Bank Australia Ltd (1993) ATPR 41–229 Facts: Advance Bank published advertisements for mortgage protection for ‘Home loan protection for $2 a week’ based on a mortgage of $60 250. The advertisements promised home mortgage insurance cover against (1) unemployment and (2) sickness or disability for in total $4104 a year. They incorrectly stated that for $2 per week mortgagors with the bank could arrange cover for redundancy, retrenchment and illness, whereas for the stated premium only redundancy and retrenchment cover was offered. Decision: The advertisements breached TPA s 53 (e) (now ACL s 29 (1) (i)), and Advance Bank was fined. It had made false representations about the price of the insurance cover, which covered only unemployment but not sickness or disability not related to unemployment as advertised.

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THE STATUTORY REGIME GOVERNING CONSUMER GUARANTEES Under the ACL, implied warranties and conditions which were found in the TPA and the state and territory fair trading laws have been replaced by consumer guarantees. The ACL under ss 51–53, for example, imposes consumer guarantees that the supplier has the right to sell (dispose of) the goods (title), can give undisturbed possession, and that there are no undisclosed securities (mortgages, credit) over the goods. These guarantees become part of the contract between the purchaser and the seller without the parties actually agreeing to them or without the parties mentioning them.

GUARANTEE AS TO TITLE Where goods are sold to a consumer, there is a guarantee under ACL s 51 that the supplier has the legal right to sell (dispose of) the goods when the time comes to pass ownership to the purchaser.

A CASE TO REMEMBER Rowland v Divall [1923] 2 KB 500 Facts: Rowland, a car dealer, bought a car from Divall and used it for four months. He then found out that the car was stolen. Divall had to give the car back to its true owner. The question is whether Rowland could recover the full amount he had paid Divall although he had used the car for four months. Decision: Although Rowland had had the use of the car for some time, he was able to recover the full price of the car because Divall had no right to sell it to him as it was stolen. There had been a complete failure of consideration as Rowland was not able to have property (title) in the car.

GUARANTEE THAT GOODS ARE OF ACCEPTABLE QUALITY ACL s 54 provides that suppliers of goods must guarantee that the goods are of acceptable quality. Goods are of acceptable quality if they are: • fit for the purposes for which such goods are normally used • acceptable in finish and appearance • free from defects • safe, and • durable.

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However, s 54 also provides that goods do not fail to be of acceptable quality if: (a) the defects are drawn to the attention of the consumer before the contract is made (b) the consumer has examined the goods and the examination ought to have revealed that the goods were not of acceptable quality.

A CASE TO REMEMBER David Jones v Willis (1939) 52 CLR 110 Facts: Mrs Willis went to the shoe department of David Jones and told the saleswoman that she wanted a comfortable pair of walking shoes. She was shown three pairs and decided to purchase a particular pair which she had tried on. The third time she wore the shoes the heel broke off one of them, causing her to fall and break her leg. The evidence showed that the shoes were not well made and that the heels had not been properly fastened on to the shoes. Decision: It was held that there was evidence to show that the shoes had been bought by description, and that there had been a breach of the consumer guarantee of acceptable quality.

GUARANTEE THAT GOODS ARE FIT FOR DISCLOSED PURPOSE ACL s 55 provides that suppliers are required to supply goods which are fit for their disclosed purpose. Where the consumer makes known to the supplier expressly or by implication, the particular purpose for which the goods are acquired, there is a consumer guarantee that the goods supplied will be reasonably fit for that disclosed purpose. The guarantee is implied where the circumstances show that the consumer relies on the seller’s skill and judgment and the goods must be of a description which it is in the normal course of the supplier to supply.

A CASE TO REMEMBER Grant v Australian Knitting Mills [1936] AC 85 Facts: The plaintiff, Grant, an Adelaide doctor bought woollen underwear from a shop that specialised in selling goods of that description. After wearing the garments for a short time, he developed severe dermatitis and was bed-ridden for some time because the garments contained chemicals left over from the processing of the wool. Decision: The goods were not reasonably fit for their only proper use. The consumer guarantee of fitness for (disclosed) purpose was breached because of Grant’s reliance on the retailer’s choice of a quality product suitable to be worn next to the skin without being washed first. Since the goods were unfit to be worn next the skin they were also not of acceptable quality.

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GUARANTEE RELATING TO THE SUPPLY OF GOODS BY DESCRIPTION ACL s 56 provides that where there is a contract for the supply of goods, the supplier must make sure that the goods correspond (comply with) their description. This section may apply where the buyer has not seen the goods and is relying on the seller’s description. A sale by description can arise, for example, where the consumer selects goods on the basis of the description of the goods, or the consumer agrees to buy goods to be made to their specification. So, the consumer who buys a mobile phone which is described as one that takes films, and gets one that does not do so has rights against the supplier, retailer, seller, or manufacturer. Generally speaking then, if goods are bought on the basis of a description, and they do not correspond to that description, s 56 is infringed. Incidentally, this consumer guarantee is concerned with identity of the goods rather than quality.

A CASE TO REMEMBER Ashington Piggeries Ltd v Christopher Hill [1972] AC 441 Facts: Food prepared for mink was sold to a mink breeder by a company that prepared animal foodstuffs according to a given formula. An ingredient used was herring meal which was supplied by a Norwegian firm. Unknown to any of the parties, the herring meal had become contaminated by the use of a preservative and as a result was highly toxic to mink. Many of the mink when fed with the food died. The mink breeder then sued the company that sold him the food. The issue here was whether there was a breach of description on the part of the seller. Decision: The mink food did conform to description. The guarantee that goods match their description was concerned with identity, not quality or fitness. The food, even though was contaminated, was still mink food as described. There was therefore no breach of ACL s 56.

GUARANTEE RELATING TO THE SUPPLY OF GOODS BY SAMPLE OR DEMONSTRATION MODEL ACL s 57 provides that where goods are sold by reference to a sample or demonstration model, there is a guarantee that the goods correspond with (match) the sample or demonstration model in quality, state or condition. There is a requirement here that a defect must be apparent on an ordinary examination (s 57 (1) (e)). The consumer must have a reasonable opportunity to compare the goods with the sample or the demonstration model. The goods must comply with the sample or

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demonstration model, and they must also be of acceptable quality unless the defect could have been discovered by reasonable examination of the sample, whether or not there has been any actual examination (s 57 (1) (e)). The supply by sample contracts includes those for the supply of say, rice, nuts, wheat or cloth by reference to a sample. In the case of a vehicle, it may be sold on the basis of a test drive in a demonstrator. However, the fact that a sample was shown will not convert a sale into a sale by sample unless the parties had agreed that this is so. In saying that the goods shall correspond with the sample, it should be noted that if the differences are only of a minor nature, and the quality of the goods is still the same, s 57 will not be breached. The buyer shall have, as alluded to earlier, a reasonable opportunity and time to compare the goods with the sample or demonstration model, and once this is done, acceptance of the goods will take place. FIGURE 5.2 Elements of a contract of sale Contract for sale of goods—ACL

Supply of goods must be ‘in course of trade or commerce’

Supplier’s conduct must be ‘in trade or commerce’

Buyer must be a consumer: s 3

Subject to consumer guarantees: e.g. ɒ 5LJKWWRVHOOV ɒ &RUUHVSRQGHQFH  ZLWKGHVFULSWLRQ  V ɒ $FFHSWDEOHTXDOLW\  V ɒ)LWQHVVIRU  SXUSRVHV ɒ&RUUHVSRQGHQFH  ZLWKVDPSOHV

CONSUMER GUARANTEES RELATING TO THE SUPPLY OF SERVICES The ACL implies certain guarantees in contracts for the provision of services. Section 60 provides a guarantee to consumers that services will be rendered with due care and skill.

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Section 61 requires suppliers to provide a consumer guarantee as regards to services that any materials that are supplied in connection with those services will be reasonably fit for the purpose for which they are supplied. In Ruaro v Holcomm Marine Pty Ltd [2002] FCAFC 174, for example, the appellants could not establish that they were entitled to recover the cost of damage to their boat, moored at the respondent’s marina when another boat in the marina pulled its moorings and collided with the appellants’ vessel. It appeared that there was no failure to take due care of the boat. Section 62 requires suppliers to provide a consumer guarantee that services will be supplied within a reasonable time.

A CASE TO REMEMBER Dillon Baltic Shipping Co v Dillon ‘Mikhail Lermontov’ (1990) ATPR 40–992 Facts: The ship on which Dillon was a passenger struck a shoal which holed the ship, causing it to sink. Dillon was injured and lost her luggage and, as a result, sued Baltic Shipping. She succeeded at first instance and on appeal to the Court of Appeal. Baltic Shipping appealed to the High Court. Decision: Dillon was not only entitled to the damages awarded for her disappointment and distress, but also damages under s 60 which extend to the transportation and storage of goods (Dillon’s luggage).

STATE CONSUMER PROTECTION LEGISLATION The principles of the common law relating to the sale of goods were codified in the United Kingdom in the Sale of Goods Act 1893 (UK). Each Australian state and territory passed an equivalent statute based on the United Kingdom legislation. The Sale of Goods Acts of the states and territories seek to provide protection to buyers in the form of implied conditions as to: • correspondence with description • fitness for purpose • merchantable quality • sale by sample • title. It is important to note that the state Sale of Goods Acts, unlike the ACL allow sellers and suppliers of goods to exclude the implied terms that the Acts provide. The use of exclusion terms exposes buyers to the risk that the goods that have been supplied could be faulty, and the buyer would have no legal remedy. Amendments to the Acts were subsequently passed which provided additional protection to contracts that could be broadly described as consumer or consumer-type transactions.

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There is a sale of goods when ownership of the goods is transferred from the seller to the buyer for a money consideration called the price. Where no money consideration is present, there can be no sale of goods contract. There is instead either a barter or exchange. Where there is a sale, the seller has a right to sue the buyer for the price of the goods, so long as the goods have been delivered to the buyer. At the other end, the buyer has the right to sue the seller for damages if the seller commits a breach. The key distinguishing element with an agreement to sell is that ownership or property in the goods has not yet passed to the buyer. Typically, property or ownership in the goods is transferred when the goods are delivered. With an ‘agreement to sell’ the goods remain the property of the seller until the time of delivery has arrived and the buyer has ‘accepted’ the goods, or the conditions subject to which the property is to pass to the purchaser are fulfilled. The definition of ‘goods’ provided by s 5 (1) of the Sale of Goods Act 1923 (NSW) is typical. Goods include all personal chattels other than things in action and money. It embraces a wide range including clothes, food, motor cars, machinery, furniture and growing crops such as potatoes and wheat. The term, however, does not include land or any interest in land, as well as shares or debentures.

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TEST YOUR KNOWLEDGE 1. What is the Australian Consumer Law (ACL)? Why was it enacted? 2. What is the ‘regulator’ of the ACL? 3. The concept of a consumer is central to the provisions of the ACL. How is a consumer defined? 4. What is the consumer guarantee of acceptable quality? 5. When will the consumer guarantee of acceptable quality not apply to defective goods? 6. What is the consumer guarantee that goods must be fit for their disclosed purpose? 7. When is the consumer guarantee of fitness for purpose not applicable to goods bought by a consumer? 8. What is the consumer guarantee that the goods must match their description? 9. Discuss in some detail what is meant by consumer guarantees in relation to the supply of goods by sample or by demonstration model. 10. What are the consumer guarantees in contracts for the provision of services? 11. Does s 18 of the ACL act as a catch-all provision requiring that misleading or deceptive conduct be deliberate? 12. It is said that s 29 of the ACL prohibits certain types of false representations as opposed to the broader concept of misleading or deceptive conduct. Explain. 13. Is it possible for the consumer guarantees of the ACL to be excluded?

ASSESSMENT PREPARATION It is important that you clarify your understanding of the legal principles in this chapter by comprehending the statutory provisions involved in consumer protection law. It is also important that you understand the facts of the relevant cases discussed and their decisions. To help you to understand the legal issues and to save you time later on in the semester when you need to formulate legal arguments when writing your assignments or preparing for exams, we encourage you to make summaries. To write summaries for this chapter, here are some steps that you may wish to follow: • Understand that consumers of goods and services need protection from unfair practices, and that this protection is provided by legislation at the state and federal levels. • Understand the definition in s 3 of the ACL which is based on two criteria. The price of goods must not exceed $40 000. If the price of goods exceeds $40 000, the goods must be of a kind ordinarily acquired for personal, domestic or household use or consumption. • Identify the material or important facts in consumer protection law, such as the consumer guarantees of the ACL which afford a great deal of protection for consumers. The definition of a consumer is important. If you come within the definition of a consumer you can get the full protection of the legislation.

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• Identify the main issues raised and their application. The material illustrates the application of the consumer guarantees. It also illustrates the application of ss 18 and 29 of the ACL which are important tools in consumer protection law. • Identify the decisions on consumer guarantees and s 29 of the ACL, for example, and state their ratios. Underline, highlight or take notes of the key points of the above. You can use the principles and cases you have identified in this chapter in your legal arguments as authority for legal principles. If you have to solve a problem on consumer protection in an assignment, you can consider the facts of the problem and analyse whether or not they are similar to the cases, and the legal issues that you have summarised. If they are similar, you can argue that the court would be likely to decide that the legal precedents arising from the case decisions apply to your problem. For answers to the Test Your Knowledge questions, please refer to: www.oup.com.au/chew2e.

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BANKING AND FINANCE COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • explain the regulation of banks • understand what is an authorised deposit-taking institution • explain the relationship between a financial institution and its customers • discuss what protection is available for a financial institution • discuss how a customer of a financial institution is defined • discuss the duty of a customer in the drawing of cheques • explain the financial institution’s duty of confidentiality • explain what a negotiable instrument is • define a cheque • discuss the importance of crossing cheques • define a bill of exchange • differentiate between a cheque and a bill of exchange • explain what is meant by the dishonour of a bill of exchange • explain what is noting and protesting a bill of exchange • discuss what is meant by the discharge of a bill of exchange • explain what promissory notes are and the differences between promissory notes and bills of exchange

CASES TO REMEMBER Commissioners of Taxation v English, Scottish & Australian Bank Ltd [1920] Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] National Australia Bank v Hokit (1996) Tournier v National Provincial and Union Bank of England [1924]

INTRODUCTION The financial system of Australia in the 1980s and the 1990s experienced great changes because of deregulation, technological developments and globalisation. In many ways, the changes reflected a process of more fundamental reform involving deregulation which helped to bring about a more competitive financial system. Deregulation removed the constraints that restricted the growth of the banking

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sector and resulted in, for example, changes to the way that banks conducted their business. As a result, the entire financial system was affected. The Wallis Committee of Inquiry, whose report was released by the Treasurer way back in April 1997, had repercussions for the reform of the financial system in the twenty-first century. It focused its attention on the main aspects of financial regulation, including those that aimed to improve market conduct, disclosure, safety, stability and competition. The changes brought about by the Financial Services Reform Act 2001 (Cth) which takes a broader approach than the Corporations Act 2001 (Cth) were widespread and culminated in a number of fundamental reforms to the way financial markets would be regulated. The legislation introduced a new disclosure regime for financial markets, services and products. As a result of legislative activity, there are now a number of entities that are responsible for the regulation of the finance sector. These entities can be divided into two general categories: • Government regulators. These primary regulators are, the Reserve Bank of Australia; the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. They maintain the stability of the financial system, promote the integrity of financial markets, and protect the interests of those dealing with financial institutions and corporations. • Market regulators. These are the currently licensed market operators in Australia and they include the Australian Stock Exchange Ltd and the Sydney Futures Exchange Ltd. The Australian Stock Exchange Ltd (ASX) was established in 1987 and now provides a market for trading in securities, options, debt and warrants. It does this by setting standards for the behaviour of listed entities through its Listing Rules. • The Sydney Futures Stock Exchange Ltd (SFE) operates a derivative market covering equities, interest-rates, currencies, commodities and energy.

THE REGULATORY FRAMEWORK: AN OVERVIEW Despite the focus in the past few decades on deregulation of the financial system, banking and financial institutions are heavily regulated. The intensity of the regulation of banking and financial institutions is reflective of the impact of the financial system on contemporary Australian society, a point made forcefully by the Global Financial Crisis in 2008 and its aftermath. The Wallis Inquiry contained a number of recommendations on a wide variety of financial system issues. It recommended, for example, a regulatory framework for the financial system which is composed of a diversity of regulators. Thus, one important recommendation was the establishment of three new regulatory bodies. The three

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regulatory bodies would then be coordinated by the Council of Financial Regulations which was given the responsibility of providing prudential and regulatory supervision of the Australian financial sector. The three regulatory bodies are: 1 Reserve Bank of Australia (RBA) 2 Australian Prudential Regulation Authority (APRA) 3 Australian Securities and Investment Commission (ASIC) (formerly known as the Australian Securities Commission (ASC). We shall now look at the functions of each of these regulators: 4 The RBA is responsible for administering the monetary and banking policy in Australia. Major functions of the RBA include the mobilisation of foreign currency, regulation of foreign exchange, and oversight of the gold reserves. The RBA can directly affect the level of interest rates the banks and other financial institution can charge. In these ways, the RBA has an influential role in the economy, and can contribute to the stability of currency, full employment and the economic prosperity and welfare of Australians. 5 APRA is responsible for the prudential regulation of banks, credit unions, building societies, insurance companies, friendly societies, and superannuation funds. APRA is to operate independently and be free from government intervention. It must, however, notify the responsible Minister as soon as practicable if it considers that a body regulated by it is in financial difficulty. 6 ASIC is the body which is responsible for the sole administration of companies, securities and futures industries regulation in Australia. It is responsible for ensuring that companies comply with the requirements of the Corporations Act 2001 (Cth). In this way ASIC is able to make sure that there is market integrity, and there is protection given to investors. From 1 July 1998 ASIC took on further responsibilities in the area of general insurance, life insurance, superannuation, and the consumer protection areas of banking and trade practices. Although the RBA, APRA and ASIC are the main banking and financial regulators, other more general market regulators play a role in the financial sector. One such body is the Australian Competition and Consumer Commission (ACCC) which is Australia’s competition and consumer protection regulator. This regulator has the responsibility for advancing the growth of competition and fair market practices in keeping with the Competition and Consumer Act 2010 (Cth). This includes retaining the ‘four pillar policy’ to keep the top four banks separate and in competition. Not only are banks subjected to prudential regulation and oversight by APRA, the Banking Act 1959 (Cth) is also used to regulate the banking business. This legislation provides generally for those companies entitled to carry on banking transactions in Australia. Such companies are described collectively as authorised deposit-taking institutions (ADIs): s 5 (1). Following the Wallis Reforms (1997), any company which

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carries on the ‘business of banking’ must obtain authorisation from APRA as an ADI. ADIs include not only banks but also other non-bank nonfinancial institutions which carry on the banking business, such as building societies and credit unions.

FINANCIAL INSTITUTION-CUSTOMER RELATIONSHIP There is a relationship between a financial institution and a customer, which is regarded as a contractual relationship by the law. Apart from this, the legal relationship of the financial institution and the customer has been established as one of debtor and creditor: Foley v Hill [1843–60] All ER Rep 16 and Joachimson v Swiss Bank Corp [1921] 3 KB 110. The financial institution has borrowed money from the customer and is under an obligation to repay the customer. The financial institution has an obligation to honour the customer’s cheques and the customer has a right to make a demand for payment. A financial institution will not pay without a mandate or demand from the customer and this mandate usually takes the form of a cheque. ‘A cheque drawn by the customer is in point of law a mandate to the bank to pay the amount according to the tenor of the cheque’: per Lord Finlay LC in London Joint Stock Bank Ltd v Macmillan [1918] AC 777 at 789. Funds deposited into customers’ accounts may be in the form of cash or cheques, or electronic transfer. When cheques are drawn and presented to the institution for payment, the institution is acting as the drawee (paying) institution.

THE CUSTOMER OF A FINANCIAL INSTITUTION The question of who is a customer is important because of the special relationship and duties which arise between a financial institution and its customer at general law, and also the statutory protections available to a financial institution in dealing with its customer’s cheques. However, the Cheques Act 1986 (Cth) contains no definition of a ‘customer’, and the determination will depend on the application of the common law decisions to the facts of each case. What kind of relationship must be established, and how long it must be is an important question.

A CASE TO REMEMBER Commissioners of Taxation v English, Scottish & Australian Bank Ltd Privy Council [1920] AC 683 Facts: A man who gave his name as Stewart Thallon entered the head office of the respondents’ bank and stated that he wished to open an account with a cash deposit. He gave an address in Sydney and signed the signature book, but the bank did not check the address. The account was opened in the ordinary form, but no inquiry was instituted to check whether the signature was authentic. Thallon subsequently deposited a cheque

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which the bank collected for him. Not long after this, he withdrew the entire amount from his account. It turned out that the cheque was stolen, and ‘Thallon’ was an assumed name, and no such person lived in the address given. The bank was sued for conversion of the cheque, that is, paying someone who is not entitled to it. The issue was whether Thallon was a customer of the bank. Decision: The word ‘customer’ signifies a relationship in which duration is not of the essence. A person whose money has been accepted by the bank is a customer of the bank, regardless of whether his connection with the bank is of short or long standing. In respect of the question of negligence of the bank, the court said: ‘The test of negligence is whether the transaction of paying in any given cheque was so out of the ordinary course that it ought to have aroused doubts in the banker’s mind and caused him to make inquiry’.

So what has been said above implies that a person becomes a customer of a financial institution when he or she opens an account with the financial institution or enters into a contract with it. The key feature of the contract (the ‘relationship’) is the account. The relationship is that of a debtor and creditor. These days, when a customer opens a bank account, identification is required. The Financial Transactions Reports Act 1988, s 18 provides that a statement in relation to an account with a financial institution must specify the account in sufficient detail for it to be identified. The legislation imposes stringent obligations on financial institutions to verify the identity of persons opening accounts or becoming signatories on existing accounts. It seems unlikely that situations such as those in Commissioners of Taxation v English, Scottish & Australian Bank Ltd would occur after the enactment of the Financial Transactions Reports Act.

THE DEFENCE OF THE COLLECTING FINANCIAL INSTITUTION It is possible that when collecting cheques on behalf of customers, the financial institution runs the risk that some of the cheques may not have been lawfully deposited. It is also possible that the cheques may be paid by someone who does not have title to them, and whose action in depositing the cheques was a wrongful interference with the rights of the true owner. At common law the collecting institution would be liable in such a case to an action in conversion by the true owner of the cheques. Section 95 of the Cheques Act gives the collecting institution some protection. The essential effect of this provision is to absolve the collecting institution from liability to the true owner where it collects a cheque in good faith and without negligence for a customer who either has no title, or a defective title to the cheque. In most cases, the crucial question is whether the collecting bank acted ‘without negligence’. The defence of s 95 is reflected in the test of negligence of Commissioners of Taxation v English, Scottish & Australian Bank.

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THE MEANING OF ‘IN GOOD FAITH’ Section 3(2) of the Cheques Act 1986 (Cth) imposes honesty as the test of good faith. There have been relatively few instances where the honesty of the financial institution has been doubted in proceedings by a customer. In situations where dishonesty has been found to exist, it has usually been the dishonesty of an employee of a financial institution rather than that of the financial institution itself.

CUSTOMER’S DUTY TO TAKE CARE WHEN DRAWING CHEQUES Customers at common law owe a duty to their financial institution to take reasonable care in the drawing of cheques. When writing a cheque, for example, customers must make sure that a cheque cannot be fraudulently altered. They can do this by being careful not to leave large gaps between the ‘$’ sign and the written amount. There have been cases that have looked at the extent of the customer’s duty. The High Court has, in the following case, given a clear statement of the extent of a customer’s duty when drawing cheques.

A CASE TO REMEMBER Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 148 CLR 304 Facts: Sydney Wide had drawn cheques in favour of an organisation called ‘Computer Accounting Services’ with which it had dealings. The cheques were made out ‘Pay CAS or order’. An employee of Sydney Wide fraudulently altered ‘CAS’ to ‘CASH’, making use of the gap left by Sydney Wide between ‘CAS’ and the pre-printed words ‘or order’. The cheques were deposited by the employee in his own bank account and his bank collected the proceeds from the plaintiff bank that debited the amount from Sydney Wide’s account. The bank argued that Sydney Wide Stores was at fault because there is a duty on the customer to take usual and reasonable precautions in drawing cheques in such a way that they could not be fraudulently altered. Decision: The High Court held that arising from the contract between banker and customer, there is a duty upon the customer to take all usual and reasonable precautions to prevent a fraudulent alteration if such an alteration could cause loss to the bank. The court emphatically argued that whether a customer has adopted all usual and reasonable precautions in the circumstances is a question of fact which has to be determined on the merits of each case.

There is a duty on the part of customers to inform their financial institution immediately they become aware of any real or suspected forgeries in cheques: Greenwood v Martins Bank Ltd [1933] AC 51. This is required so that the institution

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can do whatever it can to prevent further loss and, perhaps, to even recover what has already been lost. Where customers become aware of forgeries, but do not inform the financial institution about them, they will be estopped from denying that those transactions were legitimate and authorised, and would not be entitled to recover, but have to bear the loss. In 1985, in the landmark case of Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 426, the Privy Council had to decide whether a customer owed a wider duty of care to his banker in the overall management and operation of his bank account.

A CASE TO REMEMBER Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 Facts: An accounts clerk of the Tai Hing Cotton Mill (textile manufacturer) for over a period of four years forged 300 cheques on the company’s account with its three banks to a total of $HK 5 million. It appeared that the company’s internal financial controls and audit procedures were inadequate and the forgeries were unnoticed. They were only detected when a newly appointed accountant commenced reconciling bank statements with the company’s books after the last of the forged cheques had been honoured. The paying banks contended that the negligence of the company (the customer) disentitled it from recovering the amount paid out on the forged cheques. The Hong Kong Court of Appeal accepted the banks’ argument that the company had been in breach of a duty of care owed to the banks in failing to supervise the work of the accounts clerk, and in not checking their monthly statements. The company appealed to the Privy Council. Decision: The Privy Council held that the duty of care owed by a customer to its bank in the operation of its current account was limited to a duty to refrain from drawing a cheque in such a manner as to facilitate fraud or forgery and also a duty to inform the bank of any forgery drawn on the account as soon as it became aware of it. Unless there is some express contractual provision to say so, the company was not under a duty to take reasonable precautions in the management of its business with the bank to prevent forged cheques being presented for payment. The company was also not under a duty to check bank statements to enable it to notify the bank of any unauthorised debit items because these wider duties were not the necessary requirements of the relationship between banker and customer.

The above decision was subsequently followed in Australia in National Australia Bank v Hokit (1996) 39 NSWLR 377.

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A CASE TO REMEMBER National Australia Bank v Hokit (1996) 39 NSLR 377 Facts: More than 530 cheques totalling more than $675 000 were forged over a four-year period by Mrs Banno, a bookkeeper employed by several family companies operating a number of hairdressing salons in Sydney. Mrs Banno signed her employer’s name with his knowledge on many company cheques for company purposes. She also signed his name without his knowledge on some company cheques for her own benefit. The companies soon came to know of the fraud and sued the bank for the amounts debited against their accounts as a result of the personal forgeries. Decision: The court followed the Sydney Wide case and the Tai Hing case and held that customer’s duties were limited to the duties to take usual and reasonable precautions in drawing a cheque to prevent it from being fraudulently altered and to inform the bank of any forgery as soon as the customer becomes aware of it. It also held that those duties should not be extended to require customers to take precautions in the management of their accounts to prevent forgeries being presented.

FINANCIAL INSTITUTION’S DUTY OF CONFIDENTIALITY The relationship of a bank and customer, like that of a solicitor and client, doctor and patient, accountant and client, is a relationship of confidence which includes a duty to maintain secrecy. This duty is a legal, and not a moral one. It is not based on legislation but rests in common law. The duty can be best explained by saying that the financial institutions cannot reveal details about either their customers or their customers’ financial affairs unless they have been specifically authorised to do so.

A CASE TO REMEMBER Tournier v National Provincial and Union Bank of England [1924] 1 KB Facts: Tournier, a customer of the defendant bank, was overdrawn in his account by £9 8s 6d, and signed a document agreeing to repay the bank £1 per week until the overdraft was cleared. The plaintiff wrote on the document the name and address of a certain company, whose employ he was about to enter on a three-month contract. When the agreement to repay was not observed, the acting manager of the branch telephoned the company to find out the plaintiff’s address, and he spoke to two of the company’s directors. The plaintiff alleged that in those conversations the acting manager had disclosed that his account was overdrawn and that promises for repayment were not being carried out, and had expressed the opinion that the plaintiff was gambling heavily, the bank having traced a cheque or cheques passing from the plaintiff to a bookmaker. As a result

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of those conversations, the company refused to renew the plaintiff's employment when the three months had expired. The plaintiff brought an action against the bank for slander, and also for breach of an implied contract that they would not disclose to third persons the state of the account or any transaction related to it. Judgment was entered for the bank, and the plaintiff appealed. Decision: The appeal was allowed. The bank did owe a duty of secrecy or confidentiality to its customers. The duty was a legal one arising out of contract, and that duty was not absolute but qualified. It was not possible to frame any exhaustive definition of the duty. The most that could be done was to classify the qualifications under a number of heads: ‘(a) where disclosure is made under compulsory by law; (b) where there is a duty to the public to disclose; (c) where the interests of the bank require disclosure; (d) where the disclosure is made by the express or implied consent of the customer’: per Bankes LJ at 471–3.

Notice that the court in Tournier’s case did, however, acknowledge that the duty of confidentiality is not absolute but qualified. In particular, the court accepted that banks and other financial institutions can disclose information about their customers under the four qualifications mentioned above.

NEGLIGENCE OF THE FINANCIAL INSTITUTION Generally speaking, when a financial institution pays a cheque mistakenly or without the authority of the customer, the financial institution will have to recover the wrongly paid sum from the third party: Australian and New Zealand Banking Group v Westpac Corporation (1988) 164 CLR 662. In respect of the giving of loans to customers, the financial institution owes a duty if it knows of circumstances that would adversely affect a borrower’s ability to repay the money lent. In the recent case of Politarhis v Westpac Banking Corporation [2009] SASC 96, Politarhis with a gambling problem contended that the bank should not be allowed to sell his property on account of his defaulting in paying his mortgage. Politarhis argued that the bank should not have given him the loan since his default in payment was due to his gambling habit. It was reasonably foreseeable on the part of the bank that he would develop a gambling problem with the substantial loan given to him and his wife.

CHEQUES AND NEGOTIABLE INSTRUMENTS Negotiable instruments are important in the conduct of business and personal affairs. Commerce would not be possible without negotiable instruments. Two common examples of negotiable instruments are cheques and bills of exchange. A cheque comes under the Cheques Act 1986 (Cth) and a bill of exchange or a promissory note comes under the Bills of Exchange Act 1909 (Cth).

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The quality of negotiability is important to the law of negotiable instruments. It allows the holder to pass these instruments on from hand to hand by simple delivery so as to give a bona fide holder for value a good title to the instrument. That is, negotiable instruments must be freely transferable to subsequent parties because they are used as a substitute for money. Thus, all negotiable instruments are transferable by negotiation. DEFINITION OF A CHEQUE cheque is defined by the Cheques Act 1986 as follows: (1) A cheque is an unconditional order in writing that (a) is addressed by a person to another, being a financial institution, and (b) is signed by the person giving it, and (c) requires the financial institution to pay on demand a sum certain in money.

(2) An instrument that does not comply with subsection (1), or that orders any act to be done in addition to the payment of money is not a cheque. Previously, this definition referred to a bank rather than a financial institution. The extension of the definition of a cheque to a financial institution rather than simply banks means that cheques are now issued by credit unions, building societies, banks and other financial institutions. What arises from the definition is that a cheque is an order expressed to require payment on demand. A cheque is in fact an unconditional order which requires that it is not simply an authorisation or request to pay and that it is not subject to any condition or contingency (possibility), for example, ‘Pay $500 if accommodation is given’. We should note the following facts about cheques: (a) A cheque is always drawn on a financial institution and it involves a special relationship between the financial institution and its customer. (b) A cheque is payable on demand; no days of grace are available. (c) A cheque is mainly used for paying debts. (d) The use of the financial system and cheques is widespread in both the general consumer community and in business. FIGURE 6.1 Example of a cheque

Eastpac Bank Pay The sum of

or bearer

Date Amount $ Signature

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•

• •

•

•

•

The following observations can be made about Figure 6.1, example of a cheque: The drawer—that is, the person who signs the cheque and on whose account it is drawn—is Greg Smith. Sum certain (that is, capable of calculation) in money is $500. The drawee bank (John Rock’s bank) is the financial institution on which the cheque is drawn and which, it is anticipated, will make payment. The payee is John Rock. When the cheque is given to him, he will be referred to as the ‘holder’ in due course of the cheque. The cheque may be transferred by negotiation by John Rock to another person (bearer of the cheque) who becomes the new holder in due course. To ‘negotiate’ a cheque is to ‘transfer’ it. John Rock will need to indorse the cheque by signing his name on the back, making it payable to the person to whom he wishes to transfer the cheque. The cheque is a bearer cheque if it is made payable to the holder or bearer of the cheque. If the cheque has no person specified with reasonable certainty, it is taken to be a cheque payable to the bearer.

CROSSED CHEQUES According to habits and usage of customers and banking practice, the common method of crossing cheques in Australia is to add to the face of the cheque two parallel, transverse lines simply, either with or without the words ‘not negotiable’. A crossed cheque has distinctive notations placed on them which have certain legal significance. A crossed cheque gives a specific direction to the drawee financial institution not to pay the cheque over the counter of the institution upon presentation. It must be paid into an account: Cheques Act, s 54. Crossing therefore acts as a protection to the drawer in case the cheque gets into the hands of wrong parties. Where the financial institution pays the cheque in a way that is contrary to the crossing, the financial institution becomes liable if the true owner suffers loss: s 93. This is the case unless the institution is able to rely on one of the specific defences as laid down in the Act. Sections 53 of the Cheques Act 1986 has simplified and standardised the crossings of cheques. The provision recognises only two crossings. Section 53 enacts as follows: 53 (1) Where a cheque clearly bears across the front of the cheque the addition of— (a) 2 parallel transverse lines, or (b) 2 parallel transverse lines with the words ‘not negotiable’ between, or substantially between, the lines. The addition is a crossing of the cheque, and the cheque is a crossed cheque.

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(2)

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Nothing written or placed on a cheque, other than an addition of the kind referred to in subsection (1), is effective as a crossing of the cheque.

Where the words ‘not negotiable’ are part of a crossing on a cheque they have the effect of destroying one of the important elements of a cheque as a negotiable instrument. What this means is that the transferee of the cheque is able to obtain the instrument free from defects in the title of the person who negotiated it to him or her. Accordingly, s 55 of the Cheques Act states that where a cheque crossed ‘not negotiable’ is transferred by negotiation to a person, the person does not receive, and is not capable of giving, a better title to the cheque than what the original person possessed. The transferability of a cheque is, however, in no way impaired or restricted by a ‘not negotiable’ crossing. The marking ‘not negotiability’ simply withdraws that aspect of negotiability which enables a bona fide holder for value to achieve a good title. However, a transferee should be cautious. Despite the fact that the transferee becomes the holder of the cheque in an absolutely honest manner, he or she has not and cannot acquire a better title than his transferor had. As Griffiths CJ observed in Commissioners of State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 467: In my opinion the words ‘not negotiable’, on a crossed cheque are a danger signal held out before every person invited to deal with it and are equivalent to say ‘Take care: this cheque may be stolen’.

Section 53 (3) of the Cheques Act states that the additional of the words ‘not negotiable’ to a cheque otherwise than between, or substantially between two parallel transverse lines across the front of the cheque is not effective as a crossing of the cheque. Accordingly, it is now clear that the words ‘not negotiable’ will not be effective in uncrossed cheques and secondly they must appear on the front or face of the cheque.

FIGURE 6.2 A cheque with a ‘not negotiable’ crossing

AUSTRALIA BANK

Date otia Not

The sum of

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or bearer

$

Neg

Pay

ble

Melbourne

Signature

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A cheque with the words ‘not negotiable’ on or near a crossing on a cheque offers the drawer and holder protection because no one can have a better title than the previous holder. It affords the drawer and holder as much protection as can be reasonably given against dishonesty or accidental loss in transit. The crossing of a cheque this way does not affect its transferability. Cheques drawn in this way do circulate freely.

BILLS OF EXCHANGE Bills of exchange were developed by merchants from an early time in the history of commerce as an alternative to the risk and inconvenience of physically carrying bags of gold and silver to pay foreign debts. Bills of exchange are negotiable instruments like cheques and promissory notes. The law relating to bills of exchange and promissory notes is governed by the Bills of Exchange Act 1901 (Cth). Originally, the law relating to cheques was also governed by the Bills of Exchange Act. However, a separate statutory provision was enacted in respect of cheques by the Cheques and Payment Orders Act 1986 (Cth), later renamed the Cheques Act 1986 (Cth). A bill of exchange is an instrument or document drawn up by one person (the drawer) making an order to another person (the drawee) to pay a certain sum of money (usually in return for goods sold or money loaned) to the person drawing up the instrument or to some other person (payee). When the drawee accepts the bill, that is, when the drawee agrees in writing on the bill to pay the sum at the time stipulated on the bill (the acceptor), the drawer will transfer the bill to the payee. The payee in turn may negotiate the bill to some other person to whom he or she is indebted and so on. Ultimately, the person who possesses the bill at its maturity (the holder) will then present the bill to the acceptor for payment. A bill of exchange is defined in s 8 of the Bills of Exchange Act 1909 (Cth) as: an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer: s 8. FIGURE 6.3 Basic form of a bill of exchange

Wollongong, $ 60 000.00 Six months after date pay to Guy Ford or order the sum of Sixty Thousand Dollars. To:

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Referring to Figure 6.3, a bill of exchange contains the following essential elements as required in s 8 of the Bills of Exchange Act: • order (that is, a command) • unconditional (that is, entirely unqualified) • in writing • addressed to drawee Tom Jones • signed by drawer giving it George Davidson • a sum certain in money (that is capable of calculation) ($60 000) • on demand or at a fixed or determinable future time (six months after date bill is drawn) • payable to or order of a specified person, the payee, Guy Ford. If Tom Jones ‘accepts’ the above bill, he will write across the face of the bill ‘Accepted’ and indicate the bank where it is payable. His signature should appear under his acceptance thus: Accepted, payable at Eastpac Bank, Sydney. Tom Jones

Negotiating Bills of Exchange The distinguishing characteristics of a bill of exchange is its negotiability. Negotiating a bill of exchange simply means that title to a debt is transferred from one party to another without the need to physically transfer the money. Section 36 of the Bills of Exchange Act explains the process of negotiation in the following terms: a bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill. Like a bearer cheque, a bill is negotiated by delivery, that is, by just handing it over. Nothing needs to be written on it. A bill is negotiated by the endorsement of the holder completed by delivery.

Dishonour of a Bill of Exchange A bill is dishonoured through non-acceptance or non-payment. A bill cannot be said to be ‘dishonoured’ until it has been presented for acceptance or payment. When a bill is dishonoured, a right of recourse against the drawer and endorsers is given to the holder. There is dishonour by non-acceptance when the bill is presented for payment and acceptance is refused or cannot be obtained, or presentment for acceptance is excused (not required), and the bill is not accepted: s 48. A bill is dishonoured by non-payment when the bill is presented for payment, and payment is refused or cannot be obtained. A bill will also be dishonoured if presentation for payment is excused (not required), and the bill is overdue and unpaid: s 52. The notice of

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dishonour should be given to the drawer and the endorser. In the case of a drawer or endorser being given notice, he or she will be discharged from liability.

Noting and Protesting Where a domestic (inland) bill of exchange is dishonoured by non-payment, it is only necessary to give notice of that dishonour to the relevant parties. However, where a foreign bill is dishonoured, steps have to be taken to make sure that there is evidence of the dishonour and the time of the dishonour so as to facilitate enforcement against parties in foreign countries: Bills of Exchange Act 1909 (Cth), s 56 (2). When bills of exchange are dishonoured, the procedure of noting and protesting is adopted. The services of a notary public are used for such a purpose. A notary public who is usually a solicitor is appointed to perform the procedure. When the bill of exchange is ‘noted’, minute is made by a notary public on the dishonoured bill at the time of its dishonour. A protest is a formal document (a notarial certificate), drawn up by the notary, that notes the non-acceptance or non-payment of the bill. Delay in protesting or noting is excused where the delay is caused by circumstances beyond the control of the holder and not by his or her default, misconduct or negligence. The delay is excused for the duration of the excusing circumstances: Bills of Exchange Act 1909 (Cth), s 55 (1). When these circumstances no longer operate, the bill must be noted or protested within reasonable diligence: s 56 (9). Notice of dishonour does not have to be given to an acceptor. This is because the acceptor will be liable on the bill regardless of notice of dishonour: s 57 (3).

Discharge of a Bill of Exchange Sections 64–69 of the Bills of Exchange Act specify when a bill will be discharged. A bill is discharged by payment at or after maturity of the bill to the holder in good faith and with no notice of any defect in title. When the acceptor of a bill becomes its holder (in their own right), the bill is discharged. Section 68 provides that a bill will also be discharged if it is cancelled intentionally by the holder or their authorised agent, and if the cancellation is apparent on the bill.

CHEQUES AND BILLS OF EXCHANGE: A COMPARISON Cheques and bills of exchange are both negotiable instruments. There are, however, the following differences between them: • In the case of bills of exchange, there are rules with respect to presentment and acceptance which do not apply to cheques. • A cheque must be payable on demand, but a bill of exchange may be payable on demand or at a fixed or determinable future time.

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A cheque must be drawn on a financial institution, while a bill of exchange can be drawn on anyone other than the drawer. A cheque can be crossed, but a bill of exchange cannot. A cheque must by presented for payment within a reasonable time, while a bill of exchange payable on demand is deemed to be a continuing security. As regards a cheque, a drawee or paying financial institution is obliged to pay a cheque that arises as part of the relationship between financial institutions and their customers, while in the case of a bill of exchange, the obligation arises from the acceptance of the bill. Cheques are commonly used for daily transactions. Bills of exchange are used to arrange payments for substantial commercial transactions, some of which may involve overseas parties.

PROMISSORY NOTES Promissory notes are negotiable instruments. However, a promissory note is not a bill of exchange because it is not drawn on a third party, but is simply a promise by the maker to pay a sum at a promised time. To put it another way, a promissory note, unlike a bill of exchange, involves only two parties—the maker and the payee/ bearer—rather than the three parties of a bill of exchange, which are drawer, drawee/ acceptor and holder. Thus the parties to a promissory note are the person who gives the promise (the maker) and the person to whom the note is given (the payee). Promissory notes must be written. Since a promissory note is, as mentioned, signed only by the maker and not accepted by or drawn on a drawee, it is sometimes called a one-name paper. Although promissory notes do not come within the definition of a bill of exchange, all the elements discussed in relation to bills of exchange apply equally to them, with adaptations where required: s 95 (1). It should be pointed out that the maker of a promissory note can be regarded as being the equivalent of an acceptor of a bill. The first endorser of a note can be regarded as being the equivalent of the drawer of an accepted bill payable to the drawer’s order: s 95 (2). A note that is payable to maker’s order is not a promissory note until it is endorsed by the maker: s 89 (2).The promissory note has to be in the form of a promise to pay, and in this way it can be distinguished from a bill of exchange and from a simple acknowledgement of a debt. Part 1V of the Bills of Exchange Act 1909 (Cth) sets out the main law of promissory notes. Section 89 (1) of this Act defines a promissory note as: An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a certain sum in money, to or the order of a specified person, or to bearer.

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A promissory note, sometimes known as commercial paper, is issued by an entity, whose name appears on the front of it and who undertakes to pay the amount stated on the note to the holder (investor) on a specified date. It therefore does not fall within the definition of a bill of exchange. The maker of a note is by statute deemed to be the equivalent of an acceptor of a bill. The note is held by the bank and investors have the ability to either accept physical deliver or to keep it in safe custody with the bank. If the note is kept in safe custody, the face value is redeemed from the issuer by the bank on maturity on the investor’s behalf. This is not indorsement. The issuer undertakes to repay the investor. One of the key benefits of promissory notes is increased returns. Promissory notes allow for access to higher rates of return than those generally available on alternative short-term investments such as bank bills. Another benefit is that it can be held by the bank on a safe custody basis free of charge. There is also certainty of return. Once a person has purchased an investment, the rate of return is fixed until maturity. It should be emphasised that promissory notes may be a suitable investment if you have a great deal of money to invest. You want to invest for short terms, usually between 30 and 180 days. Ratings are assigned to each promissory note issued by a rating agency (such as Standard & Poor’s or Moody’s). The ratings reflect the capacity of the issuer to meet its financial commitment. Ratings of issues currently in the Australian Commercial Paper market generally vary from A1+ (extremely strong) through to A2 (satisfactory). Promissory notes can be sued upon without the need to prove a pre-existing debt. As with other negotiable instruments, they can be enforced against the drawer by later parties if they have been negotiated to them. They can be assigned without notice.

PAYMENT If a promissory note is payable on demand and has been endorsed, it must be presented for payment within a reasonable time of the endorsement, as mentioned above. If it is not presented this way, the endorser is discharged: s 92. If a promissory note is made payable at a particular place, it has to be presented for payment at that place so as to render the maker liable. In other situations, presentment for payment is not required in order to render the maker liable.

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TEST YOUR KNOWLEDGE 1. Explain the meaning of ‘ADI’. 2. How do we know what a customer of a bank is, despite the fact that the Cheques Act 1986 (Cth) does not give us a definition? 3. Who are the parties to a cheque? 4. Why is a cheque called a particular type of bill of exchange? 5. Explain the relationship between the financial institution and its customer. 6. At common law, a customer owes to the financial institution a duty to take reasonable care when drawing cheques. Explain in some detail what that duty is. Refer to decided cases to support your answer. 7. Cecil drew a cheque for 2000 dollars for R Smith. He asked his friend William to post the cheque for him. William changed the amount by adding ‘thirty’ to the words and figures in the spaces that Cecil had left when writing out the cheque. William took the cheque to Cecil’s bank, the Sydney Bank, and got the cheque cashed. Advise Sydney Bank. What would your answer be if Cecil had crossed the cheque ‘not negotiable’? 8. What is the Tournier duty? What is the extent of that duty? 9. It has been said that the Cheques Act 1986 (Cth) has simplified the concept of crossings on cheques. Explain. 10. Jenny has stolen a cheque with a blank general crossing on it. She goes to the Austral Bank and obtains cash across the counter for the value of the cheque. What do you think are the rights of the true owner? 11. Someone is given a crossed cheque with the words ‘not negotiable’ between the lines. Explain the effect of such a cheque. 12. What are two important differences between a cheque and a bill of exchange? 13. Name the parties to a bill of exchange. 14. Why is a promissory note called a ‘one-name’ paper?

ASSESSMENT PREPARATION Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problem questions. Lester Armstrong, an English migrant and his wife Anne live with their family in an expensive suburb. Lester has been successful in the construction business and has prospered recently as a result of the recent real estate boom. Lester has friends as well as enemies in the construction business. On 2 March, a female worker of a rival construction company, Mrs Mary Weekes, opened an account with the Eastpac Bank at the local Shopping Centre in Anne’s name and deposited a cheque. Anne had become a well known charity worker and was frequently featured in the weekly newspaper. It must be stressed that Mary happened to look like Anne and

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had obviously taken advantage of this fact. She was also able to forge Anne’s signature. On 10 March Mary returned to Eastpac Bank, filled in a pink withdrawal form and withdrew all the money ($8000) from the account. On discovering this, Anne rang Tom More the manager of Eastpac Bank accusing him of wrongfully cashing the cheque and threatening to sue the bank. You are to advise Anne. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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E-COMMERCE AND BUSINESS COVERED IN THIS CHAPTER After successfully completing this chapter, you should be able to: • explain what is meant by saying that business is adapting to e-commerce • understand what is meant by internet-based activity and its use in commercial transactions • understand the range of the use of e-commerce in business activities and processes • explain the formation of an e-contract • understand how relevant legislation like the Electronic Transactions Act 1999 (Cth) provides a legal framework • explain the use of electronic funds transfer • understand the use of smart cards and electronic money • explain what is involved in the use of e-banking and payment systems • understand the meaning of domain names and their application • explain what dispute resolution is concerned with • explain the practice of cybersquatting and typosquatting and their implications

CASE TO REMEMBER Evagora v eBay Australia & New Zealand [2001]

INTRODUCTION Business is adapting rapidly to electronic commerce and internet-related activity, which refers to all monetary transactions based on the electronic processing and transmission of data, including text, sound and images. E-commerce therefore happens when any commercial transaction is facilitated by the Web or email. A transaction may simply involve a customer ordering an item from an online shop and paying for it by cheque when it is delivered. The more sophisticated e-commerce systems allows users to pay immediately via credit card for items purchased online. The use of electronic means to complete commercial transactions rather than the traditional method of doing business with the exchange of paper-based documents is becoming increasingly more popular in recent years with the continued development and growth of electronic networks including the internet. More and more business

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is being conducted by electronic means than by traditional face-to-face business transactions. E-commerce now encompasses a very wide range of business activities and processes, from e-banking to offshore manufacturing. It was only after the web became well known among the general public that security protocols had to be developed so that businesses were able to establish web sites. The use of e-commerce greatly lowered barriers to entry in the selling of many types of goods. As a result, many small home-based proprietors are able to use the internet to sell goods. Often, small sellers use online auction sites such as eBay, or large corporate sites like Amazon.com, in order to take advantage of the exposure and setup convenience of such sites.

ACCEPTANCE OF E-COMMERCE It had taken some time for the e-commerce model to be accepted by consumers. This is so even in product categories suitable for e-commerce. There are a number of reasons for the slow uptake. These include: • The issue of security. Many people are reluctant to use credit cards over the internet because they are concerned about theft and credit card fraud. • The absence of instant gratification with most purchases that are digital ones. A large amount of a consumer’s reward for buying goods comes from the instant gratification of dealing with goods on display. There is no such reward if a person’s purchase is made online, and does not arrive for days or weeks. • The problem of access to web commerce, mainly for people who cannot afford such access. The lack of internet access in some parts of the community reduces the potential for e-commerce. • The social side of shopping. Some people take pleasure in talking to and interacting with sales persons in shops and department stores, as well as with other shoppers. This social reward side of shopping does not exist to the same extent with purchasing online. • The problem of badly designed, virus-infested e-commerce web sites. These can cause concern to consumers and can discourage them from buying online. It should be noted that there are other disadvantages in the use of e-commerce, one of which is fraud. Fraud occurs where your details (name, credit card number, age, etc.) are entered into what appears to be a safe site, but is in fact not safe at all. These details, if made available, can then be used by someone to steal money from you and can be used to purchase goods online that you are completely unaware of until it is too late. If this information is disclosed and passed into the wrong hands, people are able to assume or steal your identity, and commit more fraudulent transactions under your name.

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AGREEMENTS AND E-COMMERCE E-commerce transactions involve consumers and online vendors of goods and services. Such contacts are regulated under the common law like other contracts, and also under the Trade Practices Act 1974 (Cth) and Sale of Goods legislation of the various states and territories. The formation of an e-contract is no different from the formation of any other contract. The elements of an enforceable agreement must be present. A most important element which must be present is that there is agreement between the parties, and this is done with the mouse which is used to click on to the ‘I accept’ button which can be seen at the end of the terms and conditions of an online contract. In the illustration below, electronic displays (like other conventional displays) of goods to be sold are recognised by case law as invitations to treat. See Pharmaceutical Society of Great Britain v Boots Cash Chemists in Chapter 2. The customer responding to the ‘special offer’ on the website will be seen as making the offer. The seller will have the opportunity to accept or reject the offer. FIGURE 7.1 The analysis of offer and acceptance on the web Seller’s web server Seller: ‘Special offer’ ‘Almost new Mercedes car for $70,000’

Customer’s computer Invitation to treat Offer Acceptance

Seller accepts the offer

Customer accessing the web

Customer makes the offer

DISPUTES OVER TERMS IN ONLINE AGREEMENTS Trading over the internet may involve forming contracts with people in countries or states with different laws. As to whether such electronic contracts are legal is one of the most important issues in e-commerce. There is here an obligation to know what the elements of an enforceable agreement are and what is required to satisfy each of those elements.

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In online contracting, the offeror may wish to expressly incorporate terms into a contract by including such terms on the internet. However, it may be difficult to interpret such terms because they are sometimes not clearly stated. The words used and sometimes even the background can affect the purchaser’s understanding of the nature of his or her contractual obligations as well as those of the vendor. Problems may also arise because certain representations have been made and the purchaser believed that they are terms that should be incorporated within the online agreement.

A CASE TO REMEMBER Evagora v eBay Australia & New Zealand Pty Ltd [2001] VCAT 49 Facts: After registering as an eBay customer, Evagora visited the eBay option auction site, and decided to bid for a computer online. He was successful in his bid resulting in his purchase of the computer for $2043 on 29 July 2000. The vendor emailed Evagora to inform him that he would get his computer when he made the payment in full. Accordingly, Evagora sent the money by wire transfer to the vendor on 31 July but did not receive the computer. He attempted to recover the money he had paid by relying on a number of statements made on the eBay website which claimed that purchases made on the site would be insured. In response, eBay contended that it was not liable to pay the full amount of the purchase price, but only to a payment of $270 because this had been a term in the online user agreement between Evagora and eBay. The basis of eBay’s liability was its prominent representations on its homepage to the effect that purchasing on eBay was ‘safe’ and ‘all purchases were insured’. The defendant company argued that it could limit its liability by disclaimers in the user agreement. Evagora did not read the lengthy user agreement before clicking the ‘I accept’ button at the bottom of the terms and conditions of the eBay user agreement. Decision: The Tribunal found that eBay’s disclaimers in their user agreement did not override their prominently placed statements about the safety of dealing with eBay and that the goods purchased on eBay were insured. It argued that such statements on its web page were a clear representation that a consumer could reasonably rely on. The Tribunal concluded that ‘it was not sufficient to have a user agreement with numerous clickable links that in many respects contradict the clear representations contained on the homepage and the bidding page’.

RELEVANT LEGISLATION: ELECTRONIC TRANSACTIONS ACT The Electronic Transactions Act 1999 (Cth) (ETA) provides a legal framework that supports and encourages the use of electronic transactions, promotes business and community confidence in their use, and enables business and the community to use electronic communication in their dealings with the government. It provides that the law shall treat electronic and paper-based commerce equally so that one is not given an advantage over the other.

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The legislation aims to recognise the legality of transactions or actions that might have previously been performed in writing on paper or verbally but which is now performed electronically. The main provisions of the Act are: • a transaction does not lack validity even if it takes place electronically: s 8 • a requirement to give information in writing is satisfied if it is given or delivered electronically, so long as it is reasonably accessible for future use, and the recipient consents: s 9 • a signature requirement is satisfied if a method is used to identify the person and to indicate the person’s intention in respect of the information communicated: s 10(1)(b)(i) • a document may be produced in electronic form instead of a hard copy (paper) form so long as the integrity of the document can be maintained, the information in the document is accessible for future reference, and the recipient consents: s 11.

THE ELECTRONIC FUNDS TRANSFER SYSTEM The Electronic Funds Transfer (EFT) system, also called ‘paperless banking’ has become more and more important in recent years. Transactions through the EFT at the point of sale (EFTPOS) are in the order of billions of dollars a day in Australia. As a protection for users, regulation of operating standards has become essential. For this reason, the EFT Code of Conduct was first developed in 1987 and was re-worked and revised in 1998. The operation of the Code is monitored by the Australian Securities and Investments Commission (ASIC) which ensures user compliance. The Electronic Transactions Act, referred to above, addresses concerns as to whether electronic communications satisfy the conditions of writing, signatures etc. and requires an adherence to specific guidelines. EFT refers to a set of procedures and rules governing the transfer of funds electronically. EFT is safe, secure, efficient, and less expensive than paper cheque payments and collections. It is in effect a computer-based system which is used to perform financial transactions electronically. More specifically, EFT is concerned with the authorisation of the transfer of the ownership of funds. These funds are not represented by cash. The value is transferred electronically by virtue of the authorisation. EFT involves the use of electronic impulses to bring about the transfer of funds in an account. EFT may be initiated by a cardholder when a payment card such as a credit card or debit card is used. This may take place at an automated teller machine (ATM) or point of sale (EFTPOS) and can be used for mail order, telephone order or internet purchases. EFTPOS is widely used in Australia and has been operating here since the 1980s. EFTPOS-enabled cards are accepted at almost all swipe terminals which

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are capable of accepting credit cards, regardless of the bank that issued the cards. Such cards can include Maestro cards which are issued by foreign banks, and which are accepted by most businesses. EFTPOS cards can also be used to deposit and withdraw cash over the counter at Australia Post outlets participating in giroPost, just as if the transaction was conducted at a bank branch, even if the bank branch is closed. The EFT Code was introduced as a voluntary code in December 1989 to meet the needs of the fast advancing technology. The original EFT Code had limited application and was expanded with the introduction of a revised EFT Code in April 2002. The original Code applied only to transactions that involved using a card together with a PIN. The revised EFT Code, on the other hand, applies to a greater range of transactions, including ATM, EFTPOS, telephone and internet banking.

PAYMENTS CODE The ePayments Code was released in 2011 and became fully in force from 20 March 2013. From this date on, the Code was administered by the Australian Securities and Investments Commission (ASIC), which regulates electronic payments in Australia, including ATM, EFTPOS, BPAY and credit card transactions and online payments. The ePayments Code regulates the relationship between electronic payment providers and users. It sets out the rules and procedures for payment, funds transfer and cash withdrawal which are initiated by electronic equipment (cl 2.4). It does not regulate transactions authenticated by a manual signature. The Code redrafts the EFT Code (with its technical and precise terminology) into plain English, without diminishing, in the process, the consumer protection afforded by the Code. It requires subscribers to give consumers terms and conditions, and prescribes a regime for recovering mistaken or wrongful internet payments. In the Code, there is clarification that a cardholder is liable for losses arising from unauthorised transactions that occur because a user (either the cardholder or someone they have given permission to use their card) contributed to losses by leaving a card in an ATM.

SMART CARDS Smart cards store large amounts of data digitally. Smart card technology conforms to international standards and is available in a variety of forms, including plastic cards, subscriber identification modules (SIMS) used in mobile phones, and USB-based tokens. They can be used as debit cards or credit cards. Smart cards are used in many applications worldwide, including: • the securing of identity applications—employee ID badges, citizen ID documents, electronic passports, driver’s licences, online identification devices • healthcare applications—health ID cards, physician ID cards, portable medical records cards.

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ELECTRONIC MONEY Electronic money, also known as electronic cash, electronic currency and digital cash, refers to money which is exchanged only electronically. Typically, this involves the use of computer networks, the internet and digitally stored value systems. Electronic Funds Transfer (EFT) and direct deposit are examples of electronic money. Technically, electronic or digital cash is a representation, or a system of debits and credits, used (but not limited to this) to exchange value, within another system, or itself as a stand alone system, online of offline. It is therefore not hardware-based like smart cards. Electronic money comprises of electronic impulses which are the ends and not merely the means of a transaction or value. Most money in the today’s world is electronic, so much so that tangible cash is becoming less frequently used. With the introduction of internet/online banking, debit cards, online bill payments and internet business, paper money is in fact becoming a thing of the past. Banks now offer many services whereby a customer can transfer funds, purchase stocks or contribute to their retirement plans without having to handle physical cash or cheques. Customers do not have to wait in lines, and the use of electronic money provides a lower ‘hassle free’ environment.

E-BANKING AND PAYMENTS SYSTEMS A payments system is an arrangement for transferring funds between people. In Australia, payments are usually either cash or non-cash. A payments system is an ‘organisation’ that facilitates millions of payments on a daily basis. Everyday payments are made with cash, but the majority of payments are of a non-cash type. This involves financial institutions in complex ‘clearing and settling’ arrangements. Settling occurs when the net obligations established between financial institutions in the clearing process are sorted out and ‘extinguished’, usually by adjusting accounts held with the Reserve Bank of Australia (RBA). Settlement refers to the exchange of final value between financial institutions to extinguish net obligations after payment instruments have been cleared. In the past, the Reserve Bank of Australia (RBA) had informal control over the Australian payments system as part of its general functions. In 1996, the Wallis Inquiry, formed to evaluate the deregulation of the Australian financial system, looked carefully at the payments system. It observed that Australians’ heavy reliance on the use of cheques had resulted in excessive costs to the payments system. Accordingly, it recommended the substitution of electronic forms of payment for cheques. Such a system would involve the use of electronic networks, including the internet, to offer e-payment services. The Inquiry acknowledged the RBA’s expertise in the payments system and recommended that a separate body be formed within it, namely, the Payments System Board (PBS). This body was accordingly established

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on 1 July 1998 to give the RBA stronger regulatory powers and authority to put in place the necessary reforms to the payments system. The PBS’s powers are derived from four separate Acts. These are: Reserve Bank Act 1959 (Cth); Payment Systems (Regulation) Act 1998 (Cth); Payment Systems and Netting Act 1998 (Cth), and Cheques Act 1986 (Cth). The Reserve Bank Act 1959, as amended, gives the Payments System Board the responsibility for determining the Reserve Bank’s payments system policy. It is expected to exercise this responsibility in ways that will best contribute to controlling the risk in the financial system as a whole, allow the payments system to operate efficiently, and promote competition in the market for payment services, consistent with the overall stability of the financial system. The RBA’s wide-ranging powers in the Australian payments system are set out in the Payment Systems (Regulation) Act 1998 (Cth). It may: • designate a particular payments system as being subject to its regulation • determine rules for access to and participation in a designated payments system. The major credit card systems have been designated, for example, as a result of an investigation into their fixing of fees. Once a system has been ‘designated’, the RBA can determine standards to be complied with and give directions to the participants in the designated system. In dealing with access issues, the RBA cooperates with the Australian Competition and Consumer Commission (ACCC) • arbitrate disputes in a designated system regarding access, financial safety, and risk, by request of the parties to the dispute. The Payment Systems and Netting Act 1998 (Cth) gives the Board a role in clarifying some legal uncertainties in the Australian payments system. For example, it preserves the integrity of certain payments systems by preventing transactions from being challenged in insolvency. Rather than routinely paying and receiving gross obligations, members of some payments systems pay and receive the relatively small net amounts owed rather than the full amount. This is convenient and efficient, but carries the risk that a bankrupt party could insist that solvent institutions meet their gross obligations to pay it while at the same time refusing to honour its full obligation. The purpose of the legislation is to prevent transactions from being set aside when a party is insolvent. The word ‘netting’ in the Act is used to describe the setting of one amount against another to ascertain the balance. It can reduce the risk in the payments system by making it possible for institutions to meet payment obligations without having to wait for other transactions to be settled. Under 1998 amendments to the Cheques Act 1986 (Cth), cheques that are cleared and settled in a recognised payments system (as determined by the Reserve Bank) will be deemed dishonoured if the financial institution on which they are drawn is unable to provide the funds. This allows the banks or other financial institutions at which such cheques are deposited to reverse any provisional credit given on the basis of the cheques.

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The Financial Services Reform Act 2001 (Cth) gives the Payments System Board additional responsibilities for the regulation of securities clearing and settlement systems.

E-COMMERCE AND DOMAIN NAMES Computers do not understand language, but only deal with numbers. Humans on the other hand are more at ease with words. Internet addresses, which are known as domain names, are made up of words which replace a string of numbers. These domain names also sometimes consist of letters that form an abbreviation. An example of a domain name is Every domain name ends in a top-level domain (TLD) name or contains a generic top-level domain name. Examples are ‘.edu’ (educational bodies such as universities), ‘.coop’ (co-operatives), ‘.gov’ (government entities), ‘.int’ (international organisations) and ‘.com’ (commercial). Some country code top-level domain names are, for example, ‘.au’ (Australia), ‘.nz’ (New Zealand) and ‘.uk’ (United Kingdom). In addition to top-level domain names, internet addresses have second-level domain (SLD) names. These are the names directly to the left of ‘.com’, ‘net’, and the other top-level domain names. For example, in the domain name oup.com, ‘oup’ is the second-level domain name. Domain names of third or higher level are also known as subdomain names, although this term technically applies to a domain name of any level. Traditionally, the second level domain name is the name of a company as used on the internet. The third level is commonly used to designate a particular host server. Popular domain names ending in ‘.au’ are regulated by the Australian Domain Name Authority Ltd (auDA). The Commonwealth Government has endorsed auDA to be the administrator of ‘.au’ domain names, allowing auDA responsibility for policy and industry self-regulation. In addition, auDA is able to facilitate dispute resolution policy.

RESOLUTION OF DISPUTES When dealing with commercial transactions, it is important that there are worked out viable ways of resolving disputes as they occur. The usual methods—such as litigation, arbitration, mediation and negotiation—can all be used to resolve these disputes. Inevitably, there has been a rapid growth in business activities these days across cyberspace which is increasingly becoming a source of disputes. Typical of these disputes are those which are concerned with, for example, the allocation of domain names, privacy, security, payment systems, employment contracts and delivery of services. Disputes involving the allocation of domain names are the most common because of the commercial being, or identity, attached to such names. There needs to be a process to settle disputes that occur over rights of domain names since these are registered on a first come, first served basis.

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The rules of the Uniform Domain Name Dispute Resolution Policy (UDRP) are vital here. They provide that domain names disputes be resolved by agreement, court action, or arbitration before such names can be cancelled, suspended or transferred. However, there is another dispute resolution mechanism that can be used, and that is the ICANN Uniform Domain-Name Dispute Resolution Policy (UDRP) which applies to name registrations (.com, .net, .org etc.). Yet another method of resolving domain name disputes involves the application of s 18 of the Australian Consumer Law (ACL) which prohibits corporations to engage in conduct that is misleading or deceptive conduct, or that is likely to mislead or deceive. By forbidding misleading or deceptive conduct in the internet environment, the ACL supports and encourages fair and ethical trading activities in e-commerce. Business should be aware that the Australian Competition and Consumer Commission has stepped up its monitoring of websites to make sure that they do not have claims that are misleading or deceptive and that they comply generally with consumer protection legislation.

EXAMPLES OF MISLEADING OR DECEPTIVE CONDUCT ONLINE •

A website offering online purchasers of a car the chance to win a trip to New York, but only able to give a trip to East Timor.

•

A website offering online purchasers cheap women’s clothes for sale without intending or being able to supply the clothes.

As far back as 1996, the Virtual Magistrate was established to examine how online disputes could be resolved. It is an example of an online commercial arbitration program which is a service for resolving disputes among online computer users, computer operations and people harmed by the posting of wrongful online messages. A person may need a virtual magistrate to arbitrate to reach a resolution if he or she is also involved in a dispute arising from online activity, such as spamming, defamation, or has a concern about the way he or she was treated or referred to online. In the same year of 1996, the Online Ombudsman was also established which became involved mainly with disputes arising from eBay which enables people to buy and sell items at auction. Some matters were suitable for mediation from buyers, such as those that involve items not received or damage transit. Some disputes could not be resolved because the parties refused to participate in voluntary online mediation, whereas others were easily settled.

CYBERSQUATTING Cybersquatting involves registering a domain name in ‘bad faith’, in particular: • to profit by selling that address to a business or individual (e.g. Nike, Telstra, Madonna) with the same corporate name, product name or trademark

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to deny those entities the use of the domain name to gain a benefit by confusing internet surfers, who may believe that the address is operated by a particular brand or corporate name owner. In some disputes there is no attempt to hold a trademark owner hostage. Instead the disagreement involves conflict between two entities with legitimate interests in using a domain name. Under trademark law, Ford Motors and Ford Plumbing can each have a ‘Ford’ mark, but there is only one ford.com domain name, so that one entity is going to have to use a different address. There have been cases where a trademark owner has taken action against holders of a domain name that contains that trademark, even where there is little chance of confusion. A person who registers a famous name as a domain name for the purpose of demanding a fee for its transfer is called a cybersquatter. So if you own a trademark and find that someone is holding it hostage as a domain name until you pay a large sum for it, you may be the victim of cybersquatting. You can either sue to get your domain name, or you can initiate proceedings under the authority of the ICANN and win the name back without the expense of a lawsuit. The practice of cybersquatting originated at a time when most businesses were not fully aware of the commercial opportunities on the internet. Panasonic, Hertz and Avon were among the ‘victims’ of cybersquatters. The opportunities are diminishing now because most businesses know that nailing down domain names is a high priority. • •

TYPOSQUATTING Typosquatting is a form of cybersquatting which relies on mistakes such as typographical errors made by internet users when attempting to visit a website. If a user accidentally enters an incorrect website address, he or she may be led to an alternative address owned by a cybersquatter. Generally, the victim of typosquatting will be a frequently visited website. If the victim site address is, say, ‘example. com’, the typosquatter entry will usually be of the following kinds, all similar to the victim site address: • a common misspelling of the intended site: ‘exemple.com’ • a misspelling based on typing errors: ‘xample.com’ or ‘exxample.com’ • a differently phrased domain name: ‘examples.com’ • a different top-level domain name: ‘example.com.uk’. A victim website will usually send a ‘cease and desist’ letter to the offender at first, in an attempt to quell the activity. It may also try to purchase the website address from the typosquatter, which could have been the typosquatter’s aim all along. Sometimes, lawsuits will be taken against the offending site or individual. A company may try to pre-empt typosquatting by obtaining a number of websites with common misspellings and redirecting them to the main, correctly spelt website.

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TEST YOUR KNOWLEDGE 1. 2. 3. 4. 5.

Do online contracts have the same elements as conventional contracts? Are online agreements legally binding? What are domain names? Discuss the methods of resolving online disputes. Explain the main aim of the Electronic Transactions Act 1999 (Cth).

ASSESSMENT PREPARATION Students must keep in mind that online disputes are always present. There is a need to be aware of the methods that are available to resolve such disputes. Arbitration, mediation and negotiation are some of the methods available. Some would say that these methods have limited application and that litigation is the proper way to resolve any dispute including those that have arisen online. In looking at the following problem, students are advised to focus their attention on the methods that may be useful in resolving the dispute. They should decide whether litigation is to be used here or whether alternative dispute resolution is to be preferred.

Problem Before you attempt to answer the following question, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problems. Lee lives in Sydney and has been very interested in e-commerce. Last month he decided to give up his job as a school teacher and set up a web server in his bedroom. He, like many of his friends, believed that he could make more money online than what he was getting by teaching in a small local primary school. Lee had recently discussed how to make a lot of money quickly with a friend, Thomas, and they had agreed that starting a new business enterprise would be too difficult and risky. After looking at the paper, Lee noticed that the well-known Australian rock band the ‘Silverchair’ was about to conduct a number of concerts in all the Australian capital cities and many of the Asian countries to the north. Lee thought it would be a good idea to purchase all of the domain names which involve the word ‘Silverchair’. This way, he would be able to sell them back to the Australian agents at an inflated price. Silverchair is worried about what Lee is doing. Advise them fully. For answers to the Test Your Knowledge, please refer to: www.oup.com.au/chew2e. Please note that the Assessment Preparation problem question for this chapter does not have a model answer.

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THE LAW OF NEGLIGENCE IN THE BUSINESS WORLD COVERED IN THIS CHAPTER On completion of this chapter, you should be able to: • explain the meaning of a tort and how it is different from a crime • explain what negligence is • identify the elements necessary to be proved in a negligence claim • explain what the ‘neighbour principle’ is • explain the common law duty on a person not to make a negligent statement • explain the concepts of foreseeability and proximity in the law of negligence • explain when a defendant is in breach of the duty of negligence • explain what defences are available to the defendant in an action for negligence • explain what is misleading or deceptive conduct • explain the application of the consumer protection provisions of the Australian Consumer Law • understand the principle of strict liability for manufacturers • understand the meaning of ‘defect’ in Part VA of the Trade Practices Act

CASES TO REMEMBER Donoghue v Stevenson [1932] Wyong Shire Council v Shirt (1980) Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] Shaddock & Associates Pty Ltd v Parramatta City Council (1981) San Sebastian Pty Ltd v The Minister Responsible for Administering the Environmental Planning and Assessment Act (1986) Australian Competition and Consumer Commission v Glendale Pty Ltd (1998)

INTRODUCTION A tort is a civil wrong other than a claim for breach of contract, and gives to a civil action for compensation (known as damages). A tort is a wrong because it is a departure from what the law determines should happen. A crime is also a wrong because it is also a departure from what the law determines should happen.

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However, torts and crimes are wrongs for different reasons. A tort is a wrong against a particular person, and aims to restore the injured person to the position he or she was in before the tort was committed, whereas a crime is a wrong against the common good, and is punishable by the state. Although there are overlaps between tortious and criminal conduct, there are significant differences between the two forms of liability. The law of torts is concerned with the protection of the rights of individuals and sees to it that these rights are not infringed. Rights that may be infringed may be those that involve, for example, an individual’s property, reputation or their person. The law of torts provides rules of conduct that regulate how members of society interact and works out remedies if those rules are breached resulting in damage being suffered. It is relevant to the world of business. This chapter is concerned with an examination of the law of torts, especially those torts that are pertinent to the world of business.

WHAT IS THE TORT OF NEGLIGENCE? Negligence is one of the best known torts. What then is negligence? In certain situations, the law imposes a duty on a person to act with care towards others. Where a person is in breach of such a duty, and another person suffers loss or damage, and if the loss or damage was reasonably foreseeable, then the tort of negligence has been committed. An action for negligence is basically about careless behaviour. It can therefore be applied to many types of circumstances, including, for example, actions against retailers and manufacturers for loss or injury suffered as a result of the supply of defective goods, and actions against those who fail to exercise reasonable care in carrying on a profession such as accountants, financial advisers, auditors, and solicitors. However, not every case of careless behaviour will give rise to an action in negligence. The defendant will only be liable if three conditions are present: • a duty of care is owed by one person to another • there is a breach of the duty of care • loss or damage has been suffered as a result of the breach. The development of the modern law of negligence has taken place over time. Liability for negligence will only arise if the defendant owed the plaintiff a duty to exercise reasonable care. The following decision of the House of Lords in Donoghue v Stevenson [1932] AC 562 was very important in the development of this area of law as it was the first attempt by the courts to define the concept of duty of care.

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FIGURE 8.1 Prerequisites of the tort of negligence Duty of care owed by defendant to plaintiff

Plaintiff suffered loss or damage

Defendant Breach of duty of care

A CASE TO REMEMBER Donoghue v Stevenson [1932] AC 562 Facts: Mrs Donoghue, a shop assistant from Glasgow, and a friend went to a café. It was Mrs Donoghue’s friend, Mr Minchella, who ordered ice cream and ginger beer for her. It was Mr Minchella who also poured the ginger beer with its decomposed snail into a tumbler for Mrs Donoghue. Mrs Donoghue, the plaintiff, claimed that as a result of drinking the ginger beer she suffered shock and severe gastroenteritis and mental depression, and loss of wages from work. She sued the defendant Stevenson, the manufacturer whose defence was that there was no reasonable cause of action, and there was no law to support the plaintiff’s claim. The question before the court was whether the defendant manufacturer owed a duty to the plaintiff to take reasonable care in the manufacture of the ginger beer to ensure that it was free from defects likely to cause injury to health. Decision: The House of Lords held by a majority of two to three that the defendant did owe a duty of care to the plaintiff to ensure that the bottle did not contain matters capable of causing harm. The defendant manufacturer had acted negligently and was ordered to compensate the plaintiff.

In Donoghue v Stevenson, liability for negligence will not arise unless the defendant owed the plaintiff a duty to exercise reasonable care. The classic statement of the circumstances in which a duty will arise is the ‘neighbour principle’. This principle was explained by Lord Atkin on page 580 in the following terms: The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, who is my neighbour, receives a restricted reply. You must take reasonable care to avoid acts of omissions which you can reasonably foresee would be likely to injure your neighbour. Who then, in law is my neighbour? The answer seems to be—persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when directing my mind to the acts or omissions which are called into question.

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THE APPLICATION OF THE NEIGHBOUR PRINCIPLE A good way of determining when the neighbour principle applies is to look at the types of situation in cases where the duty of care has been held to exist. There are two circumstances where a duty of care exists. These are foreseeability and proximity.

FORESEEABILITY In the case of a duty of care, it must be shown that it was foreseeable that the action of the defendant could have caused harm to the plaintiff. The test is one of reasonable foreseeability. This is an objective test. The question to be asked is whether a reasonable person would foresee that damage may result from the defendant’s action, rather than whether the defendant believed damage would follow as a consequence.

A CASE TO REMEMBER Wyong Shire Council v Shirt (1980) 146 CLR 40 Facts: The council had dug a channel in a lake which for most days was shallow. It erected signs which said ‘Deep Water’. An inexperienced water-skier fell near one of the signs and suffered injury. The water was only about 1.0 to 1.2 metres deep in that part of the lake. The plaintiff skier sued the council for damages as a result of negligence. Decision: The sign was ambiguous. A reasonable person would think that the area beyond the sign was also deep water. A skier might be induced to ski in the area believing the water there to be deep. It was therefore reasonably foreseeable that damage or injury may result. The court decided for the plaintiff.

PROXIMITY It should be pointed out that before a duty of care can exist there must be some relationship between the parties. Proximity that requires care to be taken must exist. This requirement answers the question posed by the case of Donoghue v Stevenson: Who is my neighbour? The proximity requirement is described well in the following proposition stated by Deane J in Jaensh v Coffey (1984) 155 CLR 549 at 584–5. He explained that proximity involves: the notion of nearness or closeness and physical proximity (in the sense of space and time) between the person or property of the plaintiff and the person and property of the defendant, circumstantial proximity such as an overriding relationship of employer and employee or of a professional man and his client and causal proximity in the sense of closeness or directness of the relationship between the particular act or cause of action and the injury sustained.

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FIGURE 8.2 When a duty of care exists Loss or damage

foreseeable

Is there proximity between plaintiff and defendant?

not foreseeable

NO

No duty of care exists

YES

Duty of care exists

In Caparo Industries p/c v Dickman [1990] 1 All ER 568, we have a good example of how the courts apply the two tests of foreseeability and proximity when deciding whether a duty of care exists in a given fact situation. The House of Lords in Caparo’s case and recent Australian decisions support a narrow approach to the question of liability of auditors to third parties so that it is not easy to establish a duty of care. The position both in England and Australia generally is that auditors and accountants owe no duty of care to third parties. The leading authority in Australia on negligent misstatement of auditors in the financial context is the following decision of the High Court in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241

A CASE TO REMEMBER Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 Facts: Esanda, a finance company lent money to a company, Excel, relying on an audit of Excel prepared by Peat Marwick Hungerfords (PMH). The audited accounts overstated the company’s loans and it subsequently defaulted on the loan from Esanda. As a result, Esanda incurred a loss on that loan. There was no suggestion that the audit had been conducted specially for Esanda. It was claimed by Esanda that the audit had been done

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negligently. Esanda accordingly sued PMH for negligence who argued that it owed no duty of care. Decision: The High Court examined competing Australian decisions on the issue and ruled that an auditor is not liable for negligence—unless there are factors in addition to the foreseeability of economic loss, such as an intention to induce the person affected to rely on the information or advice, to act or refrain from acting on it. Esanda failed to plead inducement. Mere knowledge by the defendant that the information or advice will be communicated to the plaintiff and reliance on the audit report would not be enough.

NEGLIGENT MISSTATEMENT The common law has imposed a duty on a person not to make a careless (negligent) statement (usually in the form of information or advice) which, when acted upon by an unsuspecting person, may cause harm to the latter. Originally, liability for carelessly made statements was virtually non-existent. A distinction was drawn between negligent words and negligent acts because the courts recognised that a statement may have far wider repercussions than a physical act. Recovery for economic loss arising out of a statement made by another person was limited to cases where the statement was intentionally false (which would give rise to an action for the tort of deceit), or was made in breach of a fiduciary relationship, for example, a solicitor-client relationship. For sometime after Donoghue v Stevenson, plaintiffs had little success trying to persuade the courts to apply the principles of negligence to misstatements of fact: recovery was refused on the basis of the distinction between words and acts. The case that broke new ground was the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.

A CASE TO REMEMBER Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Facts: The plaintiffs, advertising agents, made inquiries through their own bankers about the creditworthiness of their clients, Easipower Ltd. The inquiries were put through the defendants who gave satisfactory answers but made a disclaimer to the effect that they gave the advice ‘without responsibility on the part of the bank or its officials’. The plaintiffs relied on the answers and placed large orders for advertising space for which they did not receive payment. When Easipower went into liquidation, the plaintiffs lost a great deal of money which according to them was caused by the negligent advice of the defendants. Decision: The House of Lords held that anyone who receives a request for information which required that his or her skill and judgment are relied upon, accepts a legal duty to exercise care in replying. This is so even if he or she is not under a contractual duty of fiduciary obligation to the inquirer. It was also held that, in certain circumstances, the law

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will imply a duty of care in the making of statements, and that a negligent, though honest, statement may give rise to an action for damages. The court firmly established the tort of negligent misstatement, although on the facts of the case the bank was found not liable because of its disclaimer of liability.

In Hedley Byrne, the House of Lords did not accept previous suggestions that liability for negligent misstatement, apart from contract, was limited to where there was a fiduciary relationship. The court contended that a negligent misstatement could give rise to an action for financial loss, apart from any contractual relation between the parties. Nevertheless, it was equally clear that there could be no action unless it could be established that the person who made the statement owed a duty of care to the recipient. In the latter situation, there is no requirement for the plaintiff to be personally known to the defendant. The principles formulated by the court in Hedley Byrne represented an extension of the general principle formulated by Lord Atkin in Donaghue v Stevenson. It has long been accepted that no action would lie for a pecuniary loss suffered as a result of acting upon an innocent misrepresentation unless it constituted a term of the contract, although it may have been made negligently, as the defendant owed no duty of care to the plaintiff. In Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556, the High Court held that the defendant was liable for their negligent misstatements. A duty of care extended not only to professional advisers but also to persons who give advice in ‘serious circumstances’. Although the High Court’s view was rejected by a majority of the Privy Council, the importance of the High Court’s decision now lies in its application to the Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 where it held that the duty of care covered the giving of information and advice.

A CASE TO REMEMBER Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 Facts: The plaintiff company wished to buy land for redevelopment. The plaintiff’s solicitors contacted the defendant Council to ask whether land which the plaintiff proposed to purchase was affected by any Council road-widening proposals. The Council was not legally bound to answer such questions, but it always did. The Council issued a certificate which did not refer to any road-widening proposals. The plaintiff relied on the Council’s answer and proceeded with the purchase, but later found out that there was a road-widening proposal which would lower the value of the property and prevent any redevelopment. The plaintiff sued the defendant Council, contending that its loss had

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been caused by the Council’s negligent misstatement that there were no road-widening proposals affecting the land. Decision: The High Court upheld the plaintiffs’ claim. The Council, a public body, owed a duty to take reasonable care that it supplied advice or information to anyone they knew would rely on it. In so doing, the Council should ensure that the advice or information it supplied was correct. Such a duty extends to those whose profession or business it is to give advice or information, whether gratuitously or not.

In San Sebastian Pty Ltd v The Minister Responsible for Administering Environmental Planning and Assessment Act (1986) 162 CLR 340, the majority of the High Court attempted to bring the principles underlying the existence of a duty (in the case of negligent misstatement causing economic loss) closer to the ordinary general principles of negligence.

A CASE TO REMEMBER San Sebastian Pty Ltd v The Minister Responsible for Administering the Environmental Planning and Assessment Act (1986) 162 CLR 340 Facts: In 1969 Sydney City Council adopted a scheme for the redevelopment of Woolloomooloo, an inner-city area, as office space. Study plans were publicly exhibited until they were abandoned in 1972. The plaintiff development company in reliance upon those plans purchased areas of land in Woolloomooloo with a view to redevelopment. After the plans were abandoned the land was either compulsorily acquired or sold at a loss. The plaintiff company sought damages claiming the plans contained untrue representations and that the council had falsely represented that the plans were feasible and ought to have known that reliance would be placed on them. Decision: The study plans and documents themselves did not contain any assurances that they would be applied continuously and inflexibly and that the development would be definitely carried out. The absence of any such representation or assurances made it impossible for the court to say that a duty of care was owed to the plaintiff. More specifically, the High Court said the plaintiff company could not succeed unless it could establish that the alleged representation was made, and that the defendant council made the representation with the intention of inducing members of the class of developers to act in reliance on the representation.

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FIGURE 8.3 Usual duties of care

Professionals (doctors, solicitors, accountants, auditors, engineers) owe a duty of care to their clients

Builders owe a duty of care to make sure their constructions are safe for later owners of the property

Suppliers are under a duty of care with regard to goods distributed to the public

Relationships giving rise to duty of care

Drivers of motor vehicles owe a duty of care to users of the road

Manufacturers and retailers owe a duty of care to consumers

Persons occupying positions requiring special skill or knowledge owe a duty not to give negligent advice which is acted upon

THE CONCEPT OF MISLEADING OR DECEPTIVE CONDUCT A court may award damages for a breach of s 18 of the Australian Consumer Law (ACL) which is incorporated as Schedule 2 to the Competition and Consumer Act 2010 (Cth). ACL s 18 provides: ‘A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’.

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This section states simply an obligation, in trade or commerce, to not engage in misleading or deceptive conduct. It is a comprehensive provision of broad application and can be seen as a norm of conduct. ACL s 18 has wide impact. Despite the fact that its primary function is to protect consumers, s 18 covers all representations made in trade or commerce, whether made in an advertisement, directed at a mass audience or made as part of precontractual negotiations to only one party. It should be noted that some negligence situations are now being litigated under this provision.

MANUFACTURERS’ LIABILITY UNDER THE ACL Most goods in our society are manufactured by a person or corporation rather than by the retail seller of the goods. The common law evolved at a time when modern methods of manufacture were not so highly developed. Legislative intervention was seen to be necessary. The ACL (Part 3–5) imposes strict liability on manufacturers and importers of defective goods that bring about personal injury or property damage. ‘Strict liability’ implies that manufacturers will be held liable without the plaintiff having to prove fault.

DEFINITION OF MANUFACTURER The manufacturer is more than a maker of goods. This is evident under ACL s 7 which defines a manufacturer to include a person: • who grows, extracts, produces, processes or assembles goods: (s 7 (1) (a)) • who holds himself or herself out to the public as the manufacturer of goods: (s 7 (1) (b)) • who allows its name, business name, brand or mark to be applied to the goods: (s 7 (1) (c)) • who permits another person to hold them out to the public as the manufacturer of the goods: (s 7 (1) (d)). Under the ACL a person who imports goods is deemed (taken) to be the manufacturer if at the time of import the manufacturer does not have a place of business in Australia (s 7 (1) (e)). A person who does not know who the manufacturer is, may, by written request given to any or all known suppliers requesting them to identify who is the manufacturer of the goods (s 147 (1)). If after 30 days, the manufacturer is unidentified, each supplier which did not respond to the request is deemed to be the manufacturer of the goods (s 147 (2)).

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A CASE TO REMEMBER Australian Competition and Consumer Commission v Glendale Pty Ltd (1998) 40 IPR 619 Facts: Barnes had a blocked drain. He purchased from Glendale a container of caustic soda, a cleaning product. A friend had advised him to pour hot water down the drain and tip the caustic soda in. He followed the advice. A column of hot water emerged from the drain and caused burns to his face and both eyes. Directions on the container instructed users to wear rubber gloves and safety glasses and to avoid contact with eyes and skin. Decision: It was found that Glendale who had only packed, but not manufactured the product was liable. It was deemed to be the manufacturer as it had caused its name to be applied to the product and there was no warning on the container about using the product with hot water that is clearly dangerous.

Manufactured goods are of all kinds. ACL s 2 provides that the term ‘goods’ include: (a) ships, aircraft and other vehicles (b) animals, including fish (c) minerals, trees and crops, whether on, under or attached to land or not (d) gas and electricity (e) computer software (f) second-hand goods, and (g) any component part of, or accessory to, goods.

PREREQUISITES FOR MANUFACTURERS’ LIABILITY To be liable under ACL Part 3–5 there must be a defective product. A court must determine whether the product is defective in some way. The meaning of ‘defect’ is outlined in s 9. Section 9 (1) provides that goods have a defect if ‘their safety is not such as persons generally are entitled to expect’. The standard of safety to be adopted here in determining whether or not goods are defective is an objective standard based on what the public or community at large, rather than a particular individual, is entitled to expect. Section 9 (2) sets out a number of considerations to be taken into account when evaluating the safety of the goods. The provision states that in determining the extent of the safety of goods, consideration is to be given to all relevant circumstances including: • the manner in which, and the purposes for which, they have been marketed: s 9 (2)(a). For example, where goods are marketed as being suitable for all persons in the community when they are unsuitable for the disabled.

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•

•

•

•

•

packaging of goods: s 9 (2)(b). For example, different types of packaging may be warranted depending on the use to which the goods are put. Certain products may need child proof packaging. the use of any mark in relation to the goods: s 9 (2)(c). For example, the use of an inappropriate mark may render the goods defective, and may also give rise to claims for misleading and deceptive conduct under s 18. any instructions for, or warnings with respect to, doing, or refraining from doing, anything with or in relation to them: s 9 (2)(d). Certain warnings or instructions may be required where the goods can be put to more than one use, or if not used in accordance with directions, give rise to injury or damage. what might reasonably be expected to be done with the goods: s 9 (2)(e). Manufacturers may be obliged to warn against particular use or misuse of products, to the point of spelling out the consequences, especially where the same goods may be used in both domestic and commercial situations. the time when they were supplied by their manufacturer: s 9 (2)(f). What consumers expect may vary according to the time a product was acquired. This provision takes consideration of the fact that some product knowledge increases over time and also product safety. For example, safety features of children’s car seats has increased greatly, so that a seat purchased 20 years ago may not have the safety features included today.

ACTIONS AGAINST MANUFACTURERS FOR GOODS WITH SAFETY DEFECTS Part 3–5 of the ACL sets out different situations where the manufacturer can be liable for defective goods. Sections 138–141 deal with a specific type of loss that is recoverable. The manufacturer will be liable for defective goods where: • an individual suffers loss or damage as a result of a defective good: (s 138) • another person suffers death or injury as a result of the loss suffered by the individual: (s 139) • other goods of a kind ordinarily acquired for personal, domestic, or household use are damaged or destroyed because of the defective product and a person using or intending to use the goods suffers damage: (s 140) • land, buildings or fixtures are damaged or destroyed because of the defective product and a person using or intending to use the land, buildings or fixtures suffers damage: (s 141).

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COMMON ELEMENTS OF CLAIMS MADE There are common elements of claims made under ss 138–141. With each of the four sections, the plaintiff consumer has to prove that: (a) there was a corporation who is the manufacturer of the defective goods (b) there was a supply of those goods in ‘trade or commerce’ (c) the product was defective (d) he or she suffered loss or damage (e) and the defect caused the loss or damage. A problem with Part 3–5 is that the plaintiff has the onus of proof that the product was defective, that he or she suffered damage, and that the defect in the product caused the damage. What this means is that the plaintiff must not only show that the goods were in some way defective, he or she must also establish that the loss or damage came about because of the defect in the goods. That is to say, the injured party has to show a causal link or connection between the defect and his or her injuries. It may not be that easy for the plaintiff to satisfy this requirement.

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TEST YOUR KNOWLEDGE 1. 2. 3. 4. 5.

Outline the elements of the tort of negligence. Give an example of a fact situation that may give rise to a claim in negligence. To whom is a duty of care owed? Explain what is meant by the neighbour principle. Read the case of Donoghue v Stevenson again and state its ratio decidendi. Here are some possible ratios from this case: (a) A manufacturer of soft drinks has a duty to persons who purchase such a drink to take care that the drink does not contain decomposed snails. (b) All people have a duty to act in such a way that their conduct does not cause harm to other people. (c) A manufacturer of food or drinks has a duty to take reasonable care that the food or drinks sold do not have in them a defect that will cause harm to the purchaser. (d) A person must take reasonable care to avoid harmful acts that he or she could foresee as likely to injure someone who is in reasonable proximity. Which one of the above possibilities is in your opinion the ratio decidendi? Give reasons. 6. Discuss the concept of negligent misstatement. 7. Explain the impact of s 18 of the Australian Consumer Law on the law of negligence. 8. Discuss what is meant by manufacturers’ liability. 9. Explain what is meant by ‘defective’ under the Australian Consumer Law. 10. What are the different situations in which the manufacturer can be liable for defective goods? 11. What is the problem with Australian Consumer Law Part 3–5 with regard to the concept of ‘defect’?

ASSESSMENT PREPARATION In a problem involving the question of negligence, students should understand that to succeed in an action in negligence, a number of steps should be followed: • Duty. The defendant owes the plaintiff a duty of care. The defendant has breached the duty of care. • Causation. The defendant’s breach of duty caused the damage suffered by the plaintiff. • Remoteness. The damage is not too remote. Damage is too remote if the damage which resulted from the defendant’s negligence was not reasonably foreseeable by the defendant. The defendant is not liable to compensate for damage which is too remote.

Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problem questions. Frank was thinking of a buying a block of land to build his house on. He contacted the Department of Main Roads in Sydney to find out whether there is a plan for road-widening

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on the land. Alan, an employee of the Department of Main Roads, informed Frank that there was no plan whatsoever to widen the road. Frank bought the block of land. Later Frank found out that the advice given by Alan was wrong. The department had plans to widen the land so that a main road could be built on it. Frank decided to sue the department. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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PART FOUR FORMS OF BUSINESS ORGANISATION AND OWNERSHIP

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CHOICE OF BUSINESS STRUCTURE COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • explain the reasons for selecting the particular business structure • understand the difference between an incorporated body and one that is unincorporated • discuss the characteristics of conducting the business enterprise as a sole trader, partnership, joint venture, trust, franchise and company • sole trader, partnership, joint venture, trust, franchise and company • explain what is meant by good faith in franchising agreements

CASE TO REMEMBER Burger King Corp v Hungry Jack’s Pty Ltd [2001]

INTRODUCTION Commerce may be conducted by the use of a variety of business structures. These business structures may be categorised as non-corporate or corporate. Anyone wishing to commence a business will have a range of questions to consider before deciding to launch their venture. The main one would be which business structure or organisation provided by law should be adopted for the venture. To some extent, the choice of business organisation has to depend on the type of venture that the person is intending to enter into. The choice of the right organisation is important, however, as this will be relevant to liability and the capacity to expand the operations of the business. This chapter describes the various business structures that are available and the features and characteristics that distinguish them from one another. There are many legal forms of association or business ownership that a person can choose from in Australia, from the sole trader, the simplest and most basic of the enterprise organisations, to the more complex—partnerships, trusts, franchises and the unincorporated and incorporated association, and companies. A number of factors have to be taken into account when selecting an appropriate business structure. These are, for example, the purpose, objective and nature of the

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business and its duration; the cost of the formation; the availability of capital and credit, management and control, the taxation advantages and disadvantages of the various structures; and the provision for expansion of the business. The final decision concerning the form that the business will take will rest with the interested person or group, usually with helpful advice from lawyers, accountants and other business advisers on the practical and legal possibilities.

FIGURE 9.1 Choice of business structures Sole trader

Partnership

Joint venture Business structures Trust

Franchise

Company

Frequently, a less ambitious form of association may be more appropriate, at least at the initial stage. As the business grows and expands, progression through multiple forms may be desirable. In the evolution of a business to that of a large scale enterprise, for example, it is possible for the organisation to have started life as a sole tradership and later developed or expanded into a large public company.

UNINCORPORATED BUSINESS ORGANISATIONS SOLE TRADER The sole trader form of organisation has the attractions of simplicity and personal control. It is indeed the simplest and most common way of conducting a business. A sole trader or sole proprietor, as the name implies, is a person who owns his or her

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own business or businesses. Such a business structure has become very popular in Australia, especially among those people who, having lost their employment, decide to start a business on their own. There are many sole traders in every state who assume the responsibilities of owner, manager and risk-taker. Such traders can be found in businesses where the owner does all the work and those in which many people are employed. In Australia, there are thousands of sole traders such as builders, plumbers, electricians, bricklayers, builders, doctors, dentists, and lawyers to name a few. There are both advantages and disadvantages for a sole trader. Advantages: • low cost in formation • ownership and control of the business • lack of formalities • retention of all profits • nature of business can easily be modified or changed • maintenance of secrecy or privacy • flexibility in carrying out business • capability of partners to combine capital and experience of partners. Disadvantages: • unlimited liability • isolated working and business environment • lacking in permanence • problems in raising large amounts of capital.

PARTNERSHIPS A partnership is a common type of business ownership and is a basic form of collective business structure and organisation. In contrast to a company, a partnership can be of an informal nature. It is an association of persons who have agreed to pursue a business objective for their mutual benefit. The test of a partnership is whether the parties actually are in fact ‘carrying on a business in common with a view of profit’. Partnerships do not have to make a profit, but they must be created with a view to profit. Associations for the purpose of pleasure, for example, bowling clubs or charities such as benevolent or friendly societies cannot be termed partnerships. This is because these associations are not being carried on with a view to monetary gain. Partnerships can be found in many parts of the Australian economy and are very common in family businesses. Individuals may, for example, enter into a partnership with their husband or wife and children. A partnership arrangement provides an inexpensive means of income splitting for family enterprises.

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The services of doctors, accountants, architects, engineers and other professional groups are also well suited to the partnership type of business structure. A typical example of a partnership would be two or more traders or solicitors pursuing their trade or profession from their office over a number of years and sharing the profits of their enterprise. It is important to point out that each partner is liable jointly (collectively) with the other partners for all debts of the firm. Thus, when someone brings a legal action against the firm, the partners are sued jointly and not individually. Where the partners are not joined in an action, the ones who are sued can have the remaining partners joined as co-defendants. They may, alternately, claim a proportionate share of the amount paid by them from the other partners. In all states (but not territories) there is legislation for limited partnerships which are a form of business organisation to provide a further alternative to running a business as a company, association etc. The partnership legislation in these states allows for the formation of a partnership in which there is at least one general partner who is subject to unlimited personal liability for all the debts of the partnership, and one or more limited partners whose liability for the debts and obligations of the partnership is limited. There is a great deal of flexibility attached to a limited partnership type of business structure. It allows for investment in capital-intensive ventures by making it possible for anyone wishing to invest in a partnership to do so without laying himself or herself open to unlimited liability. In situations where the limited partnership legislation does not apply, the rules under the relevant state Partnership Act will apply. Advantages of forming a partnership: • easy and inexpensive to form • lacking in formalities • flexibility in that the nature of business can be easily changed by agreement between the partners • management can be improved as individual partners may have different areas of expertise • maintenance of secrecy or privacy • possibility of partners pooling capital and experience • partnership not subject to income tax, and only each partner is taxed individually. Disadvantages of forming a partnership: • liability of partners is unlimited • number limited to 20 except in professional partnerships • lack of permanence in that a partnership has no existence separate from its members • difficulty in selling a partner’s interest • lacking ability to contract with the firm.

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JOINT VENTURE A joint venture is present where two or more separate and independent entities or joint venturers carry out a combined enterprise and they share the results for their individual gain. In practical terms, it is created when two or more persons enter into an agreement to exploit a business opportunity in regard to a particular project or undertaking such as land development or the exploration of a certain mineral with a view to mutual profit. It is usual for each participant in a joint venture to contribute money, property or skill. Joint ventures are frequently created for alliances in areas like mining syndicates, biotech research and development, entertainment enterprises such as film production, musical events, manufacturing and real estate developments. There are joint ventures that are essential for carrying on business in some foreign countries, where their regulations may require an Australian business to enter into a joint venture with a domestic partner, resulting in the control and technology transfer going in the direction of the domestic partner. Contributions into, and share of profit from the project are determined by the joint venture agreement. A joint venture is a type of business organisation and must be distinguished from a partnership. It usually involves a one-off undertaking rather than the formation of a continuous or ongoing business. Sometimes, there is a doubt as to whether the relationship between the parties in a joint venture amounts to a partnership. It certainly can happen that a joint venture in respect of a single undertaking can still amount to a partnership where the participants are engaged in a commercial enterprise with a view to profit. This is because the court will find that the joint venture, by virtue of the parties’ relationship and agreement, will actually be a partnership, rather than a joint venture. It is vital that the parties in a joint venture make clear that they do not intend to enter into a relationship similar to that of a partnership (business in common) which has, for example, an ongoing relationship between the parties. The joint venturers, if allowed in the agreement, can sell their interest in the joint venture, and can sell their share to another joint venturer. The joint venturers can also agree about the admission of a new member. This will normally be set out in the joint venture agreement, or it may have to be arranged whenever the need arises. Advantages: • a good way of gathering together resources, experiences and funds to undertake a commercial adventure • no liability for actions of other participants • income received by each of the participants separately • participants can maintain their independence and may compete since only the activity in respect of which they are collaborating is joint.

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Disadvantages: • transactions costs (such as legal costs) of customising a contract are extremely high. A joint venture business structure is suited for large, complex projects and not for small-scale simple projects.

TRUSTS A trust is an equitable obligation binding a person to deal with property over which he or she has control for the benefit of other persons (beneficiaries or ‘cestui que trust’), and those persons may legally enforce the obligations created by the trust. Basically, the concept of a trust is that of a person holding property for the benefit of another. Put more simply, a trust occurs when a person is given the possession and /or power over certain property to use that property for the benefit of some other person or persons. The person who is given that possession or power is known as a trustee. He or she usually has legal ownership and control of the trust property but is under an equitable obligation to deal with property for the benefit of other persons (called beneficiaries), any of whom may enforce the obligations.

HOW A TRUST WORKS A trust, as alluded to above, is a relationship recognised by the law of equity where a trustee holds property for a beneficiary or beneficiaries. A number of elements make up a trust, namely, the settlor, the trustee, the beneficiary, trust property and the trust instrument. A trust may be created inter vivos (between the living) or by the will of someone who has died.

EXAMPLE OF A TRUST Ken pays $70 000 to Nick and instructs Nick to hold the sum of $70 000 upon trust for Lina. Ken, who creates the trust, is the settlor. The person to whom the trust property is given is Nick, who is the trustee. The person who will benefit from the trust is Lina, the beneficiary. The trust property is the property that is the subject of the trust ($70 000).

DUTIES OF TRUSTEES A trustee may be an individual or natural person or a company (an artificial person) who is legally empowered to hold property in their own right. The relationship between a trustee and the beneficiaries is a fiduciary one. What this means is that the trustee owes a duty to be honest and to act in the best interests of the beneficiaries. The duties of a trustee are laid down in the trust document itself, or imposed by equity and statute. Every state in Australia has its legislation dealing with trusts. In New South Wales, for example, the Trustee Act 1925 states in general terms

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the powers, duties and obligations of trustees. In other states there is equivalent legislation, such as the Trust Act 1973 of Queensland and the Trustee Act 1975 of Victoria. The main duty of a trustee is to carry out the terms of the trust instrument. Besides this obligation, the trustee has numerous duties which include the following: • duty to preserve trust property • duty to exercise reasonable care • duty to avoid conflict of interest • duty not to make any direct or indirect profit out of the trust • duty to keep accounts • duty to provide information • duty to act in the best interests of the beneficiaries • duty to act impartially between the beneficiaries.

POWERS OF TRUSTEES Trustees traditionally derive their powers from the actual trust document. It can be said that trustees generally have the powers to protect and administer the trust property. Trustees have also obtained their powers from legislation. In accordance with the Trust Act 1925 (NSW), for example, a trustee has the power of sale as well as the power to invest trust funds in authorised securities and investments. Trustees have other powers under the Trustee Acts and these include: • power to borrow for the trust • power to apply trust funds • power to carry on a business • power to mortgage property • power to lease property • power to repair or improve property.

CLASSIFICATION OF TRUSTS There are many kinds of trusts.

EXPRESS TRUSTS An express trust is created by the intentional act of a person (a settlor). Trusts are called direct trusts or declared trusts (declared by the settlor). Such a trust can be created by words, written or spoken. The words must be clear and must indicate an intention to create a trust. They must make known the trust property, indicate the nature and purpose of the trust, and identify the beneficiaries. Non express trusts are created without any intentional action by the settlor. These can take the form of an implied trust which is a trust that arises where there is no intention to create a trust. Here is an example: Ben buys a farm and directs that the

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ownership of the farm be transferred to Elaine. In the absence of evidence that Ben intends to give the land to Elaine, the law will make the presumption that Elaine is the trustee of the farm for Ben.

TRADING TRUST This is a trust over goodwill and business assets by which a trustee or a third person conducts a business according to or under the authority of the terms of a trust instrument. The trustee is given extensive powers of trading, and is able to incur debts on behalf of the trust. The business is carried on by the trustee.

DISCRETIONARY TRUST This is a trust in which the trustee has a discretion as to when any payment from the trust fund will be made, who, among a class of beneficiaries, will receive it, and the amount of the payment. Such a trust can be found in small to medium-sized familyowned businesses. This is a widely used kind of trust. It is flexible, simple to operate, and is useful for tax purposes since it is an income-splitting device.

FIXED TRUSTS AND UNIT TRUSTS In a fixed trust, each beneficiary has an equal share in the trust, and the trustee has no discretion in the distribution of the income and property. The unit trust is a variation of the fixed trust where the number of units held by a person is evidence of that person’s entitlement to profits and property distribution. Unit trusts are offered to the public and all the beneficiaries are the unit holders.

CONSTRUCTIVE TRUSTS A constructive trust arises in situations where, by operation of the law, it would be inequitable (unfair) or unconscionable for a person to retain or keep property for their own benefit: Baumgarter v Baumgartner (1987) 164 CLR 137. It comes into existence by operation of the law and not by an express or implied intention to create a trust. It happens, for example, where two people paid for the purchase of a property, but it is in the name of only one of them, not on the basis of any actual or implied intention of the person holding the property. It would be inequitable, in these circumstances, for such a person to hold the property or interest for himself or herself. In this sense, constructive trusts, unlike express or implied trusts, are imposed to answer or fulfil the demands of good conscience and justice.

PRIVATE AND PUBLIC TRUSTS It is possible to classify all trusts into two broad groups—private and public trusts. A private trust is one that is for the benefit of private individuals (specific people). This can be an express or non-express trust. A public trust is one that benefits some public purpose via charitable institutions (i.e. a trust that benefits, for example, the Salvation Army or Wesley Mission). Such a trust may also be express or non-express.

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ADVANTAGES AND DISADVANTAGES OF A TRUST Advantages: • gives benefits to members of a family without losing control over those assets • protects assets against creditors • has limited liability if the trustee is a company • safeguards certain social security entitlements • a tax-effective structure • maintains privacy. Disadvantages: • high cost to establish the trust • high cost in maintaining the trust.

FIGURE 9.2 Different kinds of trusts Trading trusts

Discretionary trusts

Fixed trusts Types of Trusts Unit trusts

Private trusts

Public trusts

FRANCHISES A franchise is an agreement in which a person called the franchisee sells products or runs a business built up by another person or entity, the franchisor. Thus a franchise is a specialised method of business arrangement which suits people who have little

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business expertise and allows an individual or partnership to operate under the name of an already established business. It is a system in which one organisation, the franchisor (the party selling the franchise), grants the right to produce, sell, or use a developed product, service, or brand to another organisation or individual, the franchisee (the purchaser of the franchise). In return, the franchisee agrees to sell the products or services under the franchisor’s control and in the name of the franchisor, so as to ensure the continued success of the franchise system. Many businesses operate as franchises. Some well-known ones such as Mobile, Shell, McDonald’s, Subway, Burger King, and Aldi have become extremely successful businesses and can be found in all parts of the world.

THE FRANCHISING CODE OF CONDUCT The Franchising Code of Conduct (1998), released by the Commonwealth Government, came into effect on 1 July 1998 and applied to franchise agreements entered into on or after 1 October 1998. The aim of the Code was to improve the standards of conduct of franchisors and franchisees, reduce risk and increase the level of certainty for all parties concerned. The Code was updated in 2010 to take effect on any franchise entered into after 1 July 2010. A further review conducted in 2013 recommended changes which were accepted by the government committed to implementing reforms to improve the regulation of franchising and ensure the growth of the sector. The key changes include: • establishment of an effective disclosure regime by ensuring that disclosure remains relevant, timely, effective, and reflects modern changes in the economy (such as the growth of online shopping) • provision of a dispute resolution procedure which requires the party who has a dispute to set out the nature of the dispute in writing and to state what action needs to be taken to settle the dispute • clarification that the government expects franchisors and franchisees to act in good faith toward one another • acknowledgement of the fact that franchisors have to disclose unforeseen significant capital expenditure which franchisees may be required to make (for example, store remodelling) • provision of both franchisors and franchisees with termination rights in contrast to the traditional practice of only giving termination rights to the franchisor (in, for example, the case of franchisee insolvency) • enhancement of compliance and enforcement of the Code by providing additional tools to the Commonwealth regulator, the Australian Competition and Consumer Commission, and

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explanation of the policy intent of provisions of the Code which have caused an unintentional confusion and administrative burden without any corresponding benefit.

IMPORTANCE OF GOOD FAITH IN FRANCHSING Good faith has been implicit in many franchising agreements. Ideally, a franchise arrangement will last for a long time, to the mutual benefit of the franchisor and the franchisee, and it is difficult to foresee all the possible circumstances that may arise over the years. The parties must to a certain extent rely on the mutual exercise of goodwill or good faith. The concept of good faith can be seen as loyalty to the contract and requires a restraint on self-interest: Aiton Australia Ltd v Transfield Pty Ltd (1999) FCA 1541.

A CASE TO REMEMBER Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 (New South Wales Court of Appeal) Facts: The American Burger King Corp (BKC) was the operator of a worldwide chain of fast-food outlets. In 1973 BKC entered into an agreement with Hungry Jack’s (HJ), by which HJ obtained the exclusive right to develop the BKC franchise in Australia. HJ’s right to develop and operate franchises in Australia was governed by a ‘Development Agreement’. Under the agreement HJ was required, either of itself or through third-party franchisees, to develop at least four new BKC restaurants every year. Prior to opening any such restaurant, HJ had to obtain operational, financial and legal approval from BKC. Notwithstanding the agreement with HJ, BKC wished to become involved in the Australian market itself. It began negotiations with Shell with the intention of opening BKC outlets at Shell service stations. HJ was at first included in the discussions. Then in 1994 BKC and Shell clandestinely decided to shut out HJ from the negotiations, and entered into their own agreement. Later, BKC decided to withhold approvals of HJ’s new restaurants. Since HJ had not opened four new restaurants as required, BKC terminated the agreement with HJ. HJ brought an action against BKC, arguing that it was in breach of an implied obligation to act in good faith. Decision: The Court of Appeal agreed with HJ and held that BKC had breached its implied obligation of good faith when it decided not to approve the new restaurants. Where the motive is the pursuit of legitimate interests, there is normally no breach of good faith. However, if the behaviour is not directed towards furthering a party’s legitimate rights but has the aim of harming the other party, a breach of good faith is likely to be established. In this case, it appears that the actions of BKC were designed to frustrate the agreement and harm HJ, and to enable BKC to participate in the Australian market on its own.

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RELEVANT PROVISIONS OF THE AUSTRALIAN CONSUMER LAW One avenue of redress for franchisees who have been induced to enter into a franchise agreement as a result of misrepresentation by franchisors is to bring proceedings for misleading or deceptive conduct under s 18 of the Australian Consumer Law 2010 (Cth) (ACL). The aggrieved franchisee may also bring an action against the franchisor for breach of s 29 of the ACL for false representations.

ADVANTAGES AND DISADVANTAGES OF OPERATING A FRANCHISE There are advantages in operating a franchise: • The franchisee is buying an established concept that has been successful. The franchisee gains from the franchisor the entire business concept with full training, assistance with every aspect of setting up and running the business, and access to necessary materials and supplies, as well as benefiting from the franchisor’s investment in research and development. • The franchisee has access to the large company infrastructure maintained by the franchisor. This will enable the franchisee to concentrate on the management of the business and build lasting relationships with customers while the franchisor takes care of the ‘bigger picture’. • Group marketing efforts will see to it that the impact of advertisements is maximised, with combined (pooled) advertising funds spent on them. In this way individual franchisees do not have to undertake the marketing of their business. • Franchisees, as members of a network of individuals sharing similar experiences and concerns, are free to exchange ideas with the franchisor and with their peers. • The franchise will benefit from the collective purchasing power of the franchisor, since the franchisor can afford to buy in bulk and pass the savings along to the franchisees. Here we have economies of scale for purchases and supplies. • Many franchises have national brand-name recognition. Buying a franchise can be like buying a business with built-in customers. Franchisees can also take advantage of the franchisor’s goodwill in the marketplace. There are disadvantages in operating a franchise: • Franchisors have a high degree of control that the franchisees may consider to be excessive. • Franchisors may put in the franchise agreement too many constraints and restrictions on the franchisee. • Buying into a well-known franchise can be very expensive. • There are setup costs and ongoing franchise payments that the franchisee will need to make to the franchisor.

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Not all franchisors offer the same degree of assistance in starting a business and operating it successfully. Some are just start-up operations: everything after the start-up is the responsibility of the franchisee. There could be a breakdown in the relationship between franchisor and franchisee. This may be due to personality clashes or because the franchisee realises that he or she cannot live within the restraints imposed by the franchise agreement. The creative control that a small business franchise owner has can be hindered in a franchising setup. Any decision to be made requires consultation with and approval from the franchisor. This limits the authoritative control of the small business franchisee to a large extent. Generally speaking, franchisees are bound to the franchisor ‘for better or worse’. If the franchisor makes a bad business decision, the franchisee’s chances of success could be severely affected. At the operational level, franchisees look to the franchisor for direction. Frequent changes in policy by the franchisor may lead to confusion, which could bring about an erosion of confidence.

INCORPORATED BUSINESS STRUCTURES: COMPANIES A company or corporation is an association of persons who, having satisfied the requirements of the Corporations Act 2001 (Cth) for registration, are given a separate legal entity. That is, the company is recognised by the law as a person, and it has rights and obligations separate and distinct from those of the shareholders, directors, and other persons connected to its operation. For a more detailed examination of a company, see Chapters 10 and 11. Advantages: • limited liability • separate legal entity from the shareholders and members • company can sue and be sued • shares are transferable • perpetual succession. Disadvantages: • considerable cost in respect of establishment and ongoing fees • management role for shareholders is limited • reporting requirements are strict and onerous • administrative requirements are quite onerous • company officers and directors have heavy and burdensome legal responsibilities.

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FIGURE 9.3 Stages a small business may go through before it becomes a public company

Sole trader

Partnership

Proprietary company

Public company

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TEST YOUR KNOWLEDGE 1. What is the sole trader form of business organisation? 2. What are the requirements that need to be satisfied before you can say that a partnership exists? 3. Is it a requirement that partnerships be profitable? 4. Explain the essential difference between a partnership and a joint venture. 5. What is the duty of a trustee? 6. Can a trustee benefit under a trust? 7. Identify, define and explain the types of trusts in the business world. 8. What are constructive trusts? 9. How are all trusts classified? 10. Explain the concept of good faith in franchise agreements. 11. What redress can the aggrieved franchisees have under the Australian Consumer Law? 12. Discuss the advantages and disadvantages of incorporation.

ASSESSMENT PREPARATION You will occasionally come across people who have decided to go into business. They may not have any experience in business and wish to keep the administration as simple as possible. They may come to you for advice as to the most suitable business structure for their situation. First, you should first take account of the advantages and disadvantages of each of the structures we have discussed. Only then would you be in a position to advise on what business venture would be the most suitable. Second, you should look at the following factors in determining the appropriate structure: • Sole traders: the law governing sole traders and the legal significance of operating as a sole trader. • Partnerships: the legal significance of a partnership, the regulation of partnerships, liability of partnerships, limited partnerships, relations of partners to each other, what it means to be a partner. • Joint ventures: their legal implications and how they differ from partnerships. • Trusts: the structure of a trust, its features and its different forms, the parties to a trust and their relationship. • Franchises: principles of franchises, comparison of franchises with other types of business structure. • Companies: the principle that a company is a separate legal person with its own legal personality, separate from those of its members For answers to the Test Your Knowledge questions, please refer to: www.oup.com.au/chew2e.

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INTRODUCTION TO COMPANY LAW COVERED IN THIS CHAPTER On completion of this chapter, you should be able to: • define the essential characteristics of a company • have an understanding of the Corporations Act as regulation for companies • outline the work of the corporate regulator • understand the principle of separate legal identity • apply the separate legal identity principle in Salomon v Saloman • have a knowledge of different types of companies • classify companies which are registered • understand the company’s constitution and replaceable rules • understand contracts with companies • discuss the concept of statutory assumptions and their limitations • understand the powers of company officers and agents

CASES TO REMEMBER Salomon v Salomon & Co. Ltd [1897] Lee v Lee’s Air Farming Ltd [1961] Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971]

INTRODUCTION The proliferation of commerce as a result of the growth and expansion of capitalism since the Industrial Revolution has necessitated the creation of the trading company with the characteristics of legal personality. The word ‘company’ in legal theory implies an association of a number of people for some common object or objects. In common usage, however, the word ‘company’ means those associated for economic purposes, for example, to carry on a business for profit. The act of becoming a company, in the formal legal sense, is known as incorporation or registration. Although most small businesses begin with a basic structure such as that of a sole trader or a partnership, it is common for them to change structurally to a company to secure taxation benefits, for the protection from creditors, and ultimately to widen the scope for gaining additional capital.

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This chapter provides an introduction to the law of companies or corporations which may become attractive business options in Australia after other business structures have been considered. This law is concerned with the legal principles applying under the Corporations Act 2001 (Cth). Whether to incorporate or not is a difficult decision to make for many firms. However, except for professional partnerships, firms must, under the Corporations Act 2001 (Cth) form into a company when they grow beyond 20 persons. Companies are made up of a director or directors and shareholders. Small companies typically have a sole director and one or two shareholders. The director and shareholder can be the same person. An important aspect of a company which makes it a popular business structure is that unlike say, a partnership, it allows members of the public to buy into it without requiring the consent of the existing owners. This absence of legal impediments for people to move in and out of the company easily and without complication is a distinct advantage that is associated with a corporate entity.

STATUTE REGULATING COMPANIES: CORPORATIONS ACT Company law is concerned with the legal principles applying to companies. A company is essentially an association of people set up for a common object to carry on a business or other activity such as the manufacturing of some goods. Becoming a company is termed registration which is the new word for incorporation. When it is registered, a company assumes the position of a separate legal person which includes a corporate or an individual or ‘natural person’. The main statute regulating companies in Australia is, as alluded to earlier, the Corporations Act 2001 (Cth). This Act contains many of the legal rules that govern or facilitate the formation, management, operation and winding up of companies throughout Australia, thus acting as a truly national scheme. The Corporations Act also provides for the registration and management of investment schemes and sets out the licensing and disclosure rules that apply to financial products, financial services and financial markets. It is the statutory source of company law in Australia and contains many of the company law rules. It governs the obligations and duties of company officers, including directors, to shareholders, investors, creditors and others. The legislation also imposes wide-ranging duties and obligations on company officers, especially executive and non-executive directors of companies.

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ADMINISTRATION OF COMPANIES—AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION: THE CORPORATE REGULATOR Under the Australian Securities and Investments Commission Act 2001 (Cth), the Australian Securities and Investments Commission was established, better known by its acronym ASIC. This body has the sole responsibility for the administration and enforcement of the Corporations Act and for policing the activities of companies. To put it in another way, ASIC is in fact the main regulator of companies, and the body responsible for carrying out the administrative functions set out in the legislation. It formulates policy for the effective implementation of the Corporations Act. It publicises policy statements on the operation of provisions of the Act through media releases. The most easily recognised role of ASIC comes from its general powers of investigation (ASIC Act s 13), encompassing its powers to examine persons (ss 19–27), inspect books (ss 28–39A) and demand information to be disclosed about financial products (ss 40, 43). These general powers are used when ASIC has reason to believe that there is a contravention of the law. Here ASIC would have the competence to determine that either criminal (s 49) or civil (s 50) proceedings be initiated as a result of its investigations. It should be pointed out that as part of its administrative role, ASIC has formed business centres in each state and territory capital city and in certain regional centres to handle company registrations, document lodgement, registration of charges, and to provide facilities for the public to search for information in the company registers. ASIC has also formed regional offices in the capital city of each state and territory.

CONCEPT OF SEPARATE LEGAL ENTITY The word ‘company’ or ‘corporation’ is used to apply to various kinds of association in which a number of persons finance a business enterprise or joint undertaking. The acts of a company are its acts, not the acts of its members. Its assets and property belong to it, not its members. It has a perpetual existence and is a separate legal entity: It is distinct from its owners. This is illustrated in the following case.

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A CASE TO REMEMBER Salomon v Salomon & Co Ltd [1897] AC 22 Facts: Salomon originally operated his boot making business as a sole trader. He converted the business into a company, because his sons worked in the business and he wished to give them each a share. Salomon lent the company $2000 and received a debenture as security for the loan. As such, he was both a shareholder and a creditor. Later, during an economic depression, he borrowed money from an external source and lent this to the company. As security for the loan, the (mortgagee) lender received a debenture from the company. The loans were not enough to save the company and it went into receivership and later liquidation, as there were not sufficient funds to pay all the debts due to both Salomon and the external creditor. Decision: The House of Lords held that the company was a legal entity separate from its shareholders, so the debts of the company were not the debts of Salomon. It conducted business in its own right, and was not just an alias of Salomon. Accordingly, Salomon was not liable to indemnify the company.

APPLICATION OF THE PRINCIPLE IN SALOMON V SALOMON Salomon’s case has been applied in many cases so that its operation has been extended to many situations which the courts would not have anticipated. This is certainly so in the following case.

A CASE TO REMEMBER Lee v Lee’s Air Farming Ltd [1961] AC 12 Facts: Lee was a pilot who formed a company to conduct an aerial top-dressing business. The capital of the company comprised 3000 1 £ shares, of which 2999 were allotted to Lee. The remaining share was taken by his solicitor as nominee for Lee. As managing director of the company, Lee had wide powers. The company’s workers’ compensation insurance was taken out, naming Lee as an employee. Lee was unfortunately killed when his plane crashed while engaged in top-dressing. His widow made a claim of payment under the Workers’ Compensation Act 1922 (NZ) on the grounds that he was an employee of the company. The defendant company argued that Lee could not be an employee of the company because he was in fact the owner of the company. Lee’s widow, on the other hand, argued that the company was a separate legal entity and on that basis Lee could be, and was, an employee of the company. Decision: The Privy Council applied the principle in Salomon’s case strictly, stating that a company is a separate legal entity distinct from its founder Lee, and has an independent existence from its shareholders. It could enter into a contract of employment with Lee. The widow was able to claim workers’ compensation as the husband was regarded as an employee of the company.

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At law a company is regarded as a ‘person’ just as a student is a person. The Corporations Act acknowledges the fact that every company has the legal capacity and powers of an individual as well as a range of special corporate powers, such as entering into contracts, acquiring, holding and disposing of property, issuing and cancelling shares, and suing and being sued. It is only in very rare cases that the courts are prepared to depart from the separate legal entity principle in Salomon’s case and to treat the person in control of a company as though he or she were the company itself. Such cases have involved attempts to use the corporate structure to avoid existing contractual or fiduciary duties: Jones v Lipman [1962] 1 All ER 442. In Australia, the courts have tended to apply the principle in Salomon’s case strictly, even where the corporations are related. For example, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467, the Supreme Court of New South Wales said that a holding company and its subsidiary were separate legal entities and should be treated as such.

THE CONCEPT OF THE CORPORATE VEIL Salomon’s case laid down the principle that control and management of a company remain distinct from its owners. The recognition that a company is a separate entity is often depicted as the ‘veil of incorporation’. This is because once a company is incorporated, the courts will usually not look behind the ‘veil’ to inquire why the company was formed. It is as if a veil hides and separates the shareholders and the directors from the company. As a consequence, persons behind the company do not become personally liable for the company’s debts. In the case of a company limited by shares, their liability is limited to the amount, if any, that remains unpaid on the nominal value of their shares: s 516. In certain cases, however, the court may lift the ‘corporate veil’ and accord rights and obligations to parties who would not have those rights and obligations. This can be seen where the company is being created, for example, to facilitate fraud by knowingly participating in a director’s breach of fiduciary duties, breach of a contract, or avoidance of tax.

FORMS OF COMPANIES WHICH ARE REGISTERED The most important method of company registration or incorporation is formation under the Corporations Act. Under s 112 of the Act, the types of company that may be registered are: 1 proprietary companies. These are companies that are: • •

limited by shares, or unlimited with share capital.

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public companies. These are companies that are: • • • •

limited by shares limited by guarantee unlimited with share capital, or a no limited company.

COMPANIES LIMITED BY SHARES Companies limited by shares are the most common type. These companies may be public companies or proprietary (private) companies: Corporations Act, ss 9, 112(1). Such companies are formed on the principle that the liability of its members is limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up. What this means is that the extent of a member’s liability to contribute to the debts of the company, in the event of the company failing, is restricted to the amount unpaid on the issue price of the shares. Since the members of a company limited by shares have limited liability as mentioned, creditors of such a company do not have access to their personal property if the company is wound up. This is why there must be ‘Limited’ or “Ltd’ after its name, this being a way of giving notice to creditors of the extent of the liability of the shareholders. As an illustration, take Tom, a shareholder who owns 1000 shares with an issue price of one dollar per share. Tom has only paid forty cents on each of these shares. His remaining liability is limited to sixty cents per share or six hundred dollars, this being the extent of Tom’s liability to contribute to the total debts of the company.

COMPANIES LIMITED BY GUARANTEE A company limited by guarantee must be a public company. It can be differentiated from companies limited by shares in that the liability of its members is to contribute to the company in the event of it being wound up, not upon its acquisition of membership: Corporations Act, ss 9, 112(1). In that event, members agree (‘guarantee’) to provide to the company funds, up to a specified limit per member, to be used in the satisfaction of the company’s debts. Such companies are suitable for non-profit organisations such as clubs and independent schools.

UNLIMITED COMPANIES This class of companies may be public or proprietary companies, depending on whether they have share capital. If they do not have share capital, they must be public companies, and if they do have a share capital, they may be either public or proprietary companies. In this type of company, the members have no limit on their liability to contribute to the assets of the company in order to discharge the company’s debts when the company is wound up: Corporations Act, ss 9, 112 (1). It is possible that liability of members may extend to their personal assets. As the liability is unlimited, this type

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of company is generally not suitable for trading purposes. It is, however, suitable for professional firms, such as solicitors’ or accountants’ firms, which often use this type of company because professional association rules give the members some of the advantages of incorporation.

NO LIABILITY COMPANIES These companies which must be public ones are a special type of company, the activities of which are limited to the mining industry: Corporations Act, ss 9, 112 (1), 112 (2). They are unique in that the members are not legally liable for calls made by the company. These companies have ‘No Liability’ or ‘NL’ in their name as a warning to persons dealing with them. Since the shares do not carry any liability to pay calls, investors will be willing to acquire partly paid shares with a high issue price and low paid-up amount. These kind of shares are suited for the highly speculative nature of mining which demands large injections of capital from time to time. If the calls are not met within a specific period, the shares will be forfeited. The four main types of companies discussed above can also be classified, as alluded, as proprietary companies and public companies. FIGURE 10.1 Public Companies Public companies

Companies limited by shares

Companies limited by guarantee

Companies with unlimited share capital

No-liability companies

PROPRIETARY COMPANIES The vast majority of companies incorporated in Australia are proprietary companies. They are generally relatively small in size—well suited for small to medium-sized businesses. A proprietary company is sometimes referred to as a private company, as opposed to other companies which are known as public companies. A proprietary company is defined in a number of sections of the Corporations Act, including ss 9, 45A and 112–114. It is a company limited by shares, or unlimited with a share capital, and has no more than 50 non-employee shareholders. It is not possible for a ‘no liability’ company to be a ‘proprietary’ company. A proprietary company must not engage in any activity that would require disclosure to investors except an offer of its shares to existing shareholders or its

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employees: Corporations Act, s 113(3). It must not engage in any activity that would require disclosure (for example, a prospectus) to investors under Ch. 6D of the Corporations Act. This prevents a proprietary company from lodging a prospectus (a notice to the public inviting offers to subscribe for shares for fundraising purposes) and from being listed on the stock exchange. If a proprietary company does not comply with the requirements, ASIC may order the company to convert to a public company. If the company does not comply with such an order, ASIC may under s 165 change the company to a public company by altering the details of the company’s registration. When a company is registered it receives a certificate of incorporation saying that it is a proprietary company. Proprietary companies are subject to special provisions regarding the inclusion of the words ‘Proprietary’, or the abbreviation ‘Pty’. It must have the word ‘Proprietary’ or ‘Pty’ as part of its name inserted before ‘Limited’ or ‘Ltd’ (Corporations Act, s 148 (2)) if it is a limited proprietary company and if unlimited must have the word Proprietary or ‘Pty’ at the end of the name (Corporations Act, s 148(3)).

SMALL AND LARGE PROPRIETARY COMPANIES It should be pointed out that there are two types of ‘proprietary companies’: small proprietary companies and large proprietary companies: Corporations Act, s 45A. Section 45A (2) of the Corporations Act provides that a company is a small proprietary company for a financial year if it satisfies at least two of the following three tests: • the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is less than $25 million • the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million • the company and the entities it controls (if any) have fewer than 50 employees at the end of the financial year. Section 45A (3) of the Corporations Act provides that a proprietary company that does not satisfy at least two of the above tests is a large proprietary company. Although all companies must keep adequate accounting records to ensure true and fair accounts to be prepared and audited, there is no requirement for a small proprietary company to prepare formal accounts or financial statements or to have them audited unless requested by a notice to do so by shareholders holding at least 5 per cent of the voting rights in the company; or by ASIC: Corporations Act, ss 292–294. It is possible for a company to change from being a small proprietary company to being a large proprietary company (and vice versa) by a process laid down in ss 162–4 of the Corporations Act.

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FIGURE 10.2 Proprietary companies Proprietary companies

Companies limited by shares

Companies with unlimited share capital

PUBLIC COMPANIES A public company is any company which is not a proprietary company: s 9. A public company can incorporate with one shareholder (s 114) but must have three directors and a company secretary: s 201 A, s 204A. It may have an unlimited number of shareholders. It may invite the public to subscribe for any shares in, or debentures of, the company and it may be required to prepare disclosure documents when it issues shares. If it is a limited liability company, it includes the word ‘limited’ or its abbreviation, after the name of the company (for example, Hallmark Ltd). A public company is not required to be listed on the Australian Stock Exchange (ASX), but may still be able to raise capital from the public. Where a company is listed, its shares are bought and sold on the ASX. Shares of listed companies will normally be more marketable, because of the information such companies must supply before listing will be permitted.

COMPANIES CREATED BY REGISTRATION Before registration there is no company. A company is created through registration which leads to its incorporation. To register a company, a person must lodge an application with the ASIC: Corporations Act, s 117(1). The application must include a diversity of information, including the type of company that is proposed to be registered, the company’s proposed name, the name and address of each person who consents to become a member, details of initial members. directors and the company secretary, the address of the company’s proposed registered office and the proposed principal place of business, the number and class of issued shares and the proposed company name: s 117(2).

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After the application is lodged (which these days can be done online), and ASIC is satisfied that the application has been made in accordance with s 117(2), it will register the company and issue it with a Certificate of Registration: s 118. The company can choose to have a common seal, and if it does, the seal must contain the Australian Company Number (ACN) in the company name: s 123(1). A company will come into existence as a body corporate at the start of the day on which it is registered with the name stated in its certificate of registration: Corporations Act, s 119. The Certificate of Registration operates as a ‘birth certificate’ of the company. It signifies the fact that all requirements under the Corporations Act have been satisfied and that the company is registered from the date on which the certificate was issued: s 1274 (7A). FIGURE 10.3 Companies classified by membership

Proprietary companies

Small proprietary companies

Public companies

Large proprietary companies

ADHERENCE TO CONSTITUTION OR REPLACEABLE RULES Prior to the Company Law Review Act 1988 (Cth) all companies were required to have a constitution consisting of the memorandum and articles of association, two fundamental documents upon which the registration of any company was based. This Act abolished the memorandum of association, and companies are no longer required to have articles of association. From then on, a company may have a constitution, or its internal management may be governed by the ‘replaceable rules’: Corporations Act, s 135. That is to say, if an existing company repeals its constitution and does not adopt a new one in its place, the ‘replaceable rules’ will apply to that company: Corporations Act, s 135(1). The constitution of a company (if it exists) and any replaceable rules that apply to the company have, for practical purposes,

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the same effect as a contract does between the company and its members, the company and each director and secretary, and between member and member: Corporations Act, s 140 (1).

THE REPLACEABLE RULES The replaceable rules to be found throughout the Corporations Act govern the internal administration and management of companies. As the name suggests, the rules are replaceable. What this means is that a company may be formed with a constitution that replaces, displaces or modifies any one or all of the replaceable rules: Corporations Act, s 135(2). Most replaceable rules apply to both proprietary and public companies. Nevertheless, according to s 135 of the Corporations Act, some replaceable rules apply only to proprietary companies. There are also some provisions which are regarded as replaceable rules for proprietary companies but are mandatory rules for public companies: Corporations Act, s 249X. It should be noted that a failure to comply with applicable replaceable rules is not of itself a contravention of the Corporations Act. Consequently, the provisions in the Act concerning criminal liability, civil liability and statutory injunctions do not apply to breaches of the replaceable rules. The replaceable rules can be amended from time to time by legislation. Also, if a company does not wish to have one or all of the replaceable rules, it may modify or replace them by adopting a constitution: Corporations Act, s 136 (1). The companies that are formed recently may be governed by the replaceable rules and/or the company’s constitution. Those companies that were formed before the 1988 amendments to the legislation may have a constitution with a memorandum and articles of association.

CONTRACTS WITH THE COMPANY A company, being an artificial entity, can enter into contracts only through the intervention of humans. At common law, a company could only contract directly by affixing its common seal to the contract. As a result of the 1998 amendments, common seals became optional and now a company may execute a document without affixing its common seal. Section 127 (1) and (2) describe the way in which a company may execute documents. A company may execute a document without using a common seal where two directors or a director and secretary sign a document: s 127 (1). Where a company has a common seal, it may execute a document by affixing its seal in the manner described in s 127 (2) whereby two directors or a director and a secretary must witness the fixing of the seal.

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A sole director may witness the fixing of the common seal of a proprietary company that has only one director who is also the sole secretary: s 127 (2). Similarly, under s 127 (1), a proprietary company with a sole director who is also the sole secretary may execute a document without using a common seal by that person signing the document on behalf of the company. If a company executes a document as specified by s 127 (1) or (2), people are entitled to rely on s 129 (5) or (6) and assume that documents have been duly executed by the company, unless they know or suspect that this assumption is incorrect.

COMPANY CONTRACTING THROUGH AN AGENT Section 126 allows a company to contract through an agent. When this is the case, the law of agency governs the company’s contractual rights and obligations. This may involve the important question of whether the agent had the requisite authority to bind the company. Section 126 covers the situation where a person has actual authority to act on behalf of the company. Actual authority may be express or implied: An agent’s express actual authority may derive from a principal expressly giving the agent authority to do particular acts on the principal’s behalf. An agent’s implied actual authority is not expressed between the agent and the principal. The authority is implied from the conduct of the parties. Implied actual authority usually arises when an agent is placed in a particular position by the principal. For instance, an agent who is appointed to manage a business has implied authority to do all those acts that a manager in such a position usually has: Hely-Hutchinson v Brayhead Ltd [1968] 1QB 549. The company will also be liable for the acts of its agents acting within their apparent authority which is the authority the agents would be expected to have in the circumstances, given the company’s holding out: Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 1 All ER 630. A ‘holding out’ is a representation made to the outside contracting party that the agent has authority to enter into a contract on behalf of the company. An agent’s apparent authority or ostensible authority creates the agency relationship because of the appearance of authority conferred on the agent and does not depend on any agreement between principal and agent. The outsider must be induced by the representation (or holding out) to enter into the contract. In other words, the outsider must in effect rely on the representation. An example of apparent authority is where Ron is the managing director of a company and Ben is an employee of the company. Ben who has been negotiating a contract with William told William that he (Ben), an employee of the company, is authorised to negotiate the contract on behalf of the company. William rings Ron who confirmed that Ben is an employee of the company and that he had authority to

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negotiate the contract. William relies on what Ron said on the phone when he signs the contract. In this situation, the company is bound by the contract because Ben had apparent authority. There was here a holding out (Ron’s statement on the phone), the holding out being by someone with actual authority (Ron, as managing director, has implied actual authority). There was reliance on the holding out by the outsider William on the basis of Ron’s statement when he (William) entered the contract.

THE STATUTORY ASSUMPTIONS Persons having dealings with a company are entitled to make certain assumptions of regularity in relation to those dealings. Such assumptions are set out in s 129 and are binding on the company which is not able to assert that any of the assumptions are incorrect: s 128 (1). For example, a person may assume, in relation to dealings with a company, that its constitution and replaceable rules which are applicable have been complied with: s 129 (1). Section 129 (1) is a clarification and partial codification of the ‘rule in Turquand’s case’ (Royal British Bank v Turquand (1856) 6 E & B 327) which says, in effect, that outsiders transacting with a company in good faith are entitled to assume that the internal company rules, and the acts done within the company’s constitution and powers have been complied with. Outsiders do not have to check whether the acts of internal management have been regular. The rule in Turquand’s case, also known as the 'indoor management rule' is applicable in most of the common law world. The s 129 (1) assumptions apply even though an irregularity may have been apparent to the outsider had the constitution been read. Consider, for example, this practical example: the constitution of a company contains a restriction on the power of the board of directors to borrow in excess of $500 000 without the approval of the shareholders. A bank manager, an outsider who has not read the constitution, is not taken to know of this restriction (an internal rule), lent the company a sum of $600 000. The bank manager can assume that the directors have the power to borrow an amount greater than the stipulated amount. He or she can assume here that there is nothing unusual about the loan transaction, and that the directors had received approval for this transaction from the shareholders. The transaction is binding on the company because despite the fact that the company’s constitution was not adhered to, the outsider bank manager was entitled to assume that the rules had been complied with.

PERSONS NAMED AS COMPANY OFFICERS Under s 129 (2) a person who relies on the information held by ASIC in respect of the directors and company secretary of a company can assume that the information is correct. Thus, a person is entitled to assume that anyone who appears, from the ASIC records to be a director or a company secretary: has been duly appointed; and

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has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

HOLDING OUT Under s 129 (3) a person is entitled to assume, in relation to dealings with a company, that anyone who is held out to be an officer or agent of the company has been duly appointed and has the authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. The person who does the holding out must have authority (express or implied) to do so. If this person only appears to have authority, s 129 (3) will not apply. This is evident in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 where the court said that a holding out by the company can only be made by a person who has actual authority ‘to manage the business of the company either generally or in respect of those matters to which the contract relates’ (at 125 per Diplock LJ).

CUSTOMARY POWERS OF OFFICERS OR AGENTS From what has been discussed above, an officer or agent of a company under s 129 (3) only binds the company to contracts with third parties if he or she exercises the powers and performs the duties customarily exercised or performed by an officer or agent. This prompts the question: What are the customary powers and duties of, for example, directors and company secretaries? Individual directors do not generally have customary authority to bind the company in contracts with third parties: Northside Developments Pty Ltd v RegistrarGeneral (1990) 8 ACLC 611. While the customary authority of individual directors is limited, they will nevertheless bind their company if they have actual authority or have been held out as having greater authority than is customary for individual directors. This may often arise in the case of a small proprietary company where management is effectively conducted by a particular director with the acquiescence of the other director or directors. The managing director has the customary authority to do all those things related to the management of the ordinary business of the company that the board is empowered to do. This includes engaging staff and contractors to do work for the company and borrowing money for the ordinary purposes of the company. The company secretary is not defined in the Corporations Act, but is designated as an officer in the company and has duties imposed under s 204B (1) of the Act. The constitution of the company also imposes duties on the company secretary, which usually has to do with the responsibility of ensuring that the administrative requirements of the company are met. These include record keeping within the company such as maintaining all company registers, keeping minutes at directors’

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meetings and ensuring general company compliance with the Corporations Act. An important function of the company secretary is to lodge the company’s annual return which is a public document (that members of the company and the community can inspect) containing information about changes to company affairs concerning share capital, allotment of shares, the issue of share certificates and registration of transfers, directors and other matters: s 345. A modern company secretary is also considered to have customary authority to make contracts concerning the internal administrative matters of the company. The present position with respect to the customary authority of a company secretary is demonstrated by the following case.

A CASE TO REMEMBER Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 Facts: Bayne, the company secretary of Fidelis Furnishings, without authority, hired expensive cars from Panorama Developments in the name of Fidelis. Bayne told Panorama Developments that the cars were to be used to carry important customers of Fidelis. In fact, Bayne used the cars for his private purposes. When he failed to pay the hired charges, Panorama sued Fidelis Furnishings, arguing that Bayne had apparent authority to enter into the contract. Decision: The court said that a company secretary is an important officer of the company with extensive powers and duties. Third parties are entitled to believe that the secretary has the apparent authority to make contracts and incur liabilities on behalf of the company. The court upheld Panorama’s claim and decided that the customary authority of a modern company secretary extended to making contracts connected to the administrative side of the company’s affairs. Accordingly, Bayne’s actions bound the company to the contract and made it liable for the payment of the account.

THE LIMITATIONS TO THE STATUTORY ASSUMPTIONS A person is not entitled to make any assumptions set out in s 129 if, at the time of dealings, he or she knew or suspected that a particular assumption was incorrect: s 128 (4). A person may be taken to have known that an assumption was incorrect where the person is wilfully blind in the face of facts which obviously lead to an inference that there had been a breach of duty or fraud by company officers. The element of the loss of entitlement to rely on (s 129) would encompass situations where the person is aware of circumstances that arouse suspicion but does not inquire further. In this way, knowledge is acquired that an assumption is incorrect: Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48; Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 14 ACLC 670.

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TEST YOUR KNOWLEDGE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

What is company law concerned with? Discuss the body that is involved in the regulation and administration of companies. Identify the major differences between a public and a proprietary company. What are the main features of a company? Explain the different types of companies that may be created. Discuss the principle that came out of Salomon v Salomon. You can explain the principle using the facts of Salomon v Salomon or an alternative case. Explain the concept of the corporate veil. A company is created through registration. Discuss. Is it a fact that a company today must have a memorandum and articles of association? Discuss in some detail. Explain what replaceable rules are. Can a company negotiate contracts through an agent? Discuss. Terry is the majority shareholder and managing director of Titan Pty Ltd. This company operates a business. Titan Pty Ltd has few assets with little realisable value. The company owed a builder, William, who extended its premises. The company’s assets are not sufficient to cover the debt. William is concerned. Advise William as to whether he can sue Terry personally.

ASSESSMENT PREPARATION Students are reminded that questions based on this chapter will ask about: • The nature of a company—Is a company an independent legal entity with rights and powers of its own? Does this distinguish a company from say a partnership? What are the characteristics of a modern company? • The powers of a company—Does a company have full legal capacity of a natural person? Can the agents of a company execute documents on its behalf, using express or implied actual authority? • Classification of companies—What are the kinds of company that may be registered under the Corporations Act? What is the most appropriate form of company for a particular kind of business? What is the difference between a small and large proprietary company? • The company’s constitution and rules—Does a company need to have a constitution consisting of a memorandum of association and a set of articles of incorporation? What are the implications of having replaceable rules and can these be displaced? • Statutory assumptions—What are these assumptions? Are people entitled to make such an assumption if they know or suspect that the assumption was incorrect?

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Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problem questions. Zita set up her own delicatessen ‘New Deli’ after getting a loan from Eastpac Bank. She is worried that Woollies the big retail giant which is going to be built nearby may ‘kill’ her business. Zita is concerned that she would be faced with unlimited liability. She realises that her business is too small to be formed into a public company. She would nevertheless like to know what her best option is. Advise Zita. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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DUTIES OF COMPANY DIRECTORS COVERED IN THIS CHAPTER On completion of this chapter, you will be able to: • understand the role of directors to oversee the management of the company on behalf of the shareholders • understand the duty of directors to exercise a reasonable degree of care and diligence • explain the business judgment rule • understand the duty of directors to act in good faith • explain what insider trading is • understand the duty of directors not to use their position improperly • explain the director’s duty to prevent insolvent trading • explain the director’s defences under s 588 G of the Corporations Act 2001 (Cth)

CASES TO REMEMBER State of South Australia v Clark (1996) Walker v Wimbourne (1976) R v Rivkin [2003]

INTRODUCTION At general law, the director is the person appointed to such office in a company. Companies rely on such natural persons to carry out their activities. The actual management and control of the company is vested in the directors, who are appointed in accordance with the rules of the company. A public company must have at least three directors whereas a proprietary company must have at least one director. Where a company has more than one director, those directors become what are known as the board of directors: Corporations Act 2001 (Cth), s 201A.

DUTIES AND LIABILITIES OF DIRECTORS There are a number of statutory duties that are imposed on the ‘officers’ of a company: Corporations Act, ss 180–184. Such duties which are civil liability provisions (the contravention of which attracts civil sanctions) are enforceable by the Australian Securities and Investments Commission (ASIC). The term ‘officers’ refers to directors, secretaries, and persons who make decisions that affect the whole or

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a large part of the company. These can be, for example, senior executive officers, receivers or liquidators. The directors owe similar common law and fiduciary duties to their corporation. A breach of these duties may be proposed in litigation by the company or third parties.

DUTY TO EXERCISE REASONABLE DEGREE OF CARE AND DILIGENCE It is the duty of company directors to oversee the management of the company on behalf of its members. The Corporations Act vests directors of companies with duties that they owe to the company. The common law also requires them to observe fiduciary duties to their shareholders. In large companies, directors are unlikely to have involvement in the day-to-day management of the company. They will more than likely be non-executive directors whose function is to bring an independent view to, and a broader outlook on, the company’s decision-making processes. In small and medium-sized proprietary companies, the directors may have a more hands-on role where they will be involved in the day-to-day management of the company. Sections 180–184 of the Corporations Act impose specific duties upon directors. Section 180 imposes a duty of care and diligence. Sections 181, 182 and 183 impose duties concerning good faith and conflict of interest. The court may make an order for a civil penalty where the duties are breached. Each of these duties has an equivalent common law duty. Section 184 creates criminal offences for dishonest breaches of good faith.

A CASE TO REMEMBER State of South Australia v Clark (1996) 14 ACLC 1019 (South Australia Supreme Court) Facts: Clarke was the managing director and chief executive officer of the State Bank of South Australia. He was instrumental in the bank acquiring all the shares in a life assurance company for an amount that was substantially in excess of the company’s true value. Clarke failed to ensure that the bank obtained an independent valuation of the life assurance company despite the fact that the purchase was an unusually large one for the bank. Clarke also knew that the proceeds of the sale would be used by the company to repay a loan to Equiticorp Holdings Ltd, a company of which Clarke was a director and in which his family held a substantial number of shares. Clarke failed to disclose his involvement with Equiticorp to the bank. The state of South Australia and the bank claimed that Clark had breached his duty of care and claimed damages. Decision: The court held that Clark had breached his duty of care to the bank and he was ordered to pay a sum of money by way of damages.

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THE BUSINESS JUDGMENT RULE Directors must be given the latitude to make business judgments and business decisions. The rule that protects the authority of directors in the exercise of their duties is the so-called business judgment rule. The business judgment rule in s 180 (2) provides a defence for actions that may otherwise be in breach of s 180 (1) which imposes an obligation on directors to exercise care and diligence when discharging their decision-making responsibilities. The effect of the business judgment rule is to acknowledge that directors should not be liable for business decisions that may have turned out badly but were made in an honest, informed and rational way. So under this rule, directors are assumed to have acted with appropriate care and diligence if all the factors contained in s 180 (2) are satisfied. The director’s belief that the judgment is in the best interests of a corporation is a rational one unless the belief is one that no reasonable person in their position would hold: s 180 (2). The statutory business judgment rule is the equivalent of the similar obligation at common law and in equity. The rule ensures that risk-taking and entrepreneurial activities will be encouraged because directors are assured by legislation that if they acted honestly, they will not be personally liable as a result of making errors of judgment.

THE DUTY TO ACT IN GOOD FAITH Company directors under s 181 of the Corporations Act must exercise their powers and discharge their duties in good faith and for a proper purpose. Courts may intervene if an act is one that no reasonable director could regard as being in the interests of the company, or if the company is near insolvency and the interests of the creditors are not being considered. Company directors are fiduciaries, like other fiduciaries, such as partners and agents. As such, they must take care to avoid situations arising where their duties to the company and their personal duties are in conflict. This duty is strictly applied and it extends to a position whereby directors should not even appear to be acting in their own interests. The duty to act in good faith means that directors are under a fiduciary obligation to exercise their powers in good faith and in the best interests of the company. Different circumstances apply when the company is in financial difficulties. There have been cases where the courts have decided that directors must also act in the interests of the company’s creditors as well as its shareholders.

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FIGURE 11.1 Duties of directors Directors’ common law duties

Duty to exercise care and diligence when discharging decisionmaking responsibilities: s180(1)

Business judgment rule: s180(2) —a defence for actions that may be in breach of s180(2)

A CASE TO REMEMBER Walker v Wimbourne (1976) 137 CLR 1 Facts: The liquidator of an insolvent company Asiatic Electric Co Ltd, which was one of a group of associated companies, brought an action against its directors to recover money disposed of by the company before its winding up. The directors of Asiatic Electric Co Ltd made certain loans before the liquidator was appointed to these companies in circumstances where there was no prospect of repayment. At the time the loans were made, Asiatic, which was a company that had common shareholders and directors, was unable to pay its debts as they fell due. The directors used the company’s funds to pay wages of the employees of the associated companies and to pay the associated companies for work they had not in fact carried out. Decision: By majority, the High Court held that the directors owed their duty to the particular company in question and not to the associated companies as a group. The directors who made payments from the assets of Asiatic to pay off debts owed by the associated companies as a group where there was no benefit to Asiatic were in breach of their duty.

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FIGURE 11.2 Fiduciary duties of directors Fiduciary duties

Duties relating to issues of good faith, honesty and the avoidance of conflicts of self-interest. See ss 181–183

Fiduciary duties are those that consist of: ɒDFWLQJLQJRRGIDLWK ɒH[HUFLVLQJSRZHUIRUDSURSHU SXUSRVH ɒQRWPLVXVLQJLQIRUPDWLRQ ɒDYRLGLQJFRQIOLFWVRILQWHUHVW

PROHIBITIONS IN RESPECT OF INSIDER TRADING Under s 183 of the Corporations Act, a director or other officer is prohibited from trading with informational advantage—that is, improperly using insider information in an activity commonly known as insider trading. This kind of trading occurs where a director or other officer trades in shares or other financial products while in possession of price-sensitive information not generally available. It is important to note here that the information acquired or created in the course of someone’s role as director or other officer within the company belongs to the company and cannot be used for personal gain, for gain of a third party, or to harm the company. The person with whom the ‘insider‘ deals is entitled to recover compensation. Contraventions of the insider trading provisions attract the civil penalty provisions. Insider information covers a wide range of material, including that of a wide range of financial products such as derivatives, superannuation, and others which are able to be traded on a financial market. Even where the director created the information, this information still belongs to the company if it was created in the course of carrying out his or her duties as a director, or other officer. Section 1043A (1) of the Corporations Act contains the primary prohibitions against insider trading. ‘Insiders’ are persons who possess insider information defined in s 1042A. The statutory prohibitions on insider trading are imposed on

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such persons who possess ‘insider information’ and would encompass directors and officers and also include persons who have no connection with the company to which the information relates. Section 1043A (2) prohibits an insider communicating or giving inside information to another person. Such a prohibition applies only to financial products which can be traded on a financial market operated in Australia. There is a prohibition for an insider to directly or indirectly, communicate the information, or cause the information to be communicated, to another person if the insider knows that the other person would or would likely to apply for, or acquire or dispose of, any such tradable financial products. It is important to stress that the s 1043A prohibitions are not concerned with whether the insider concerned has a connection with a company. In fact they apply to anyone whether or not they have a business or employment connection with a company. The prohibitions are concerned with the possession of inside information and can be characterised as dealing with the ‘misuse of non-public information.

A CASE TO REMEMBER R v Rivkin [2003] NSWSC 447 Facts: In 2000 and 2001 Impulse Airlines' (Impulse) executive chairman and major shareholder McGowan, were involved in a price war with QANTAS. This price war had an adverse effect on both Impulse and QANTAS in terms of profitability and share price. Towards the end of April 2001, McGowan had confidential negotiations with QANTAS to sell his company’s business to QANTAS subject to obtaining ACCC approval. A few days before the public announcement of the sale to QANTAS, McGowan expressed interest in buying a house from Rivkin in the eastern suburbs of Sydney. McGowan informed Rivkin about the confidential transaction because he wanted to make the house purchase conditional on the ACCC approval. McGowan also advised Rivkin not to trade in QANTAS shares, because of the knowledge Rivkin now possessed about the proposed transaction between Impulse and QANTAS. Within a matter of hours of agreeing to the conditional sale of his house, Rivkin arranged for his family company to buy 50 000 QANTAS shares for the price of $2.78 per share. Some days later, Rivkin sold the shares for $2.85 per share after the announcement to the public of the Impulse and QANTAS deal. Decision: It was held that Rivkin was an insider when he got his family company to purchase the QANTAS shares. He was an insider because he had information that was not generally available to the public. The information was the confidential sale of Impulse’s business to QANTAS and McGowan’s declaration that approval from the ACCC was imminent. If the information had been generally available, it would probably have a material effect on the share price of QANTAS. Rivkin was convicted of contravening s 1043A (1) of the Corporations Act.

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DIRECTORS’ DUTY NOT TO IMPROPERLY USE THEIR POSITION Section 182(1) provides that directors, other officers or employees must not improperly use their position to gain an advantage for themselves or for a third party or to cause detriment to the company. This section refers to conduct that is inconsistent with the proper discharge of the duties, obligations and responsibilities of the directors, other officers or employees. The term ‘improper’ means a number of things. It is concerned with conduct that is inconsistent with the ‘proper’ discharge of the duties, obligations and responsibilities of an officer. In Grove v Flavel (1986) 4 ACLC 654, a director of a company, which was in financial difficulties, was held to have made improper use of his position when he had the company repay loans it owed him to the possible detriment of other creditors of the company. Conduct that breaches duties such as the duty to act for a proper purpose or the duty to act in the interests of the company can constitute a breach of s 182 (1). In Chew v R (1992) 173 CLR 626 the High Court held that a director may act improperly even though the director considered that he or she was acting in the best interests of the company as a whole and did not intend to act dishonestly. It is for the court to decide whether directors have made improper use of their position or information. Directors may also make improper use of their position in breach of s 182 if they do an act which they know or ought to know they have not been given authority to do. An example is a director signing a document presumably on behalf of the company where the company had not given its authority for this. In R v Byrnes (1995) 130 ALR 529 two directors of a company without the authority of the board, made arrangements for the company seal to be affixed to a guarantee and other documents that provided security for a loan to another company they controlled. It was held that the directors breached s 182 even though they reasonably but mistakenly believed that executing these documents was in the interests of the company. The reason for having s 182 is to make it difficult for directors, employees and other officers to put themselves in a situation where they may put their own interests before the interests of the company.

DUTY TO PREVENT INSOLVENT TRADING: SECTION 588 G Section 588 G of the Corporations Act imposes a duty on the director of a company to prevent insolvent trading by the company. A director contravenes the section if, when the company incurs a debt, there are reasonable grounds for suspecting that the company is insolvent or becomes insolvent.

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DEFENCES TO A CONTRAVENTION OF SECTION 588 G The four defences to s 588 G are set out in s 588 H. These are: • at the time when the debt was incurred, it could be proved that the director had reasonable grounds to expect, and did expect, that the company was solvent at that time: s 588 H (2) • the director could prove that he or she had reasonable grounds to rely on information provided by a competent and reliable person that the company was solvent: s 588 H(3) • a director did not take part in the management of the company because of illness or for some other good reason at the time when the company incurs the debt in question: s 588 H (4) • the director could prove that he or she took all reasonable steps to prevent the company from incurring the debt: s 588G H (5). The question of whether a company is able to pay its debts when they become due has to be decided on a cash flow test and not on the basis of a surplus of assets over liabilities. The company’s cash resources and the accessibility of additional debt and equity capital are all important issues to be considered. In Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699, the Federal Court held that a company was insolvent when substantial amounts owed to creditors were overdue. A number of creditors were taking or intending to take legal action if payment was not immediately made. At the same time, one creditor had applied for a court order to wind up the company. The company had some assets, but most of them were not immediately realisable. There was no doubt that the company owed substantial amounts of money, but it did not seem possible that this money would be paid in sufficient time to discharge its current debts. The court said that when looking at the concept of the inability to pay debts, it is important to consider the whole of the company’s resources, including its credit resources. In respect of determining these resources, there must be taken into account the time extended to the company to pay its creditors and also the time within which it will receive payment of its debts. The test of whether or not there were reasonable grounds to suspect insolvency was an objective test and is judged by the standard appropriate to a director of ordinary competence, and the actual state of mind or knowledge of that director is not a relevant factor.

ENFORCEMENT OF MEMBERS’ PERSONAL RIGHTS: THE RULE IN FOSS V HARBOTTLE At common law, the right of a member to bring a legal action in the name of the company to remedy a wrong committed against the company came from the old rule in Foss v Harbottle (1843) 2 Hare 461. This rule was based on the philosophy that it

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was generally proper for disputes to be resolved in accordance with the constitution and the majority vote of the members. The rule in Foss v Harbottle says that for breaches of common law duties, the company may seek redress in its own right. The duties are owed to the company and not to the shareholders. The company, as opposed to individual shareholders, must sue. That is to say, the proper plaintiff is the company. The ‘proper plaintiff’ rule in Foss v Harbottle makes sense because of the following reasons: • It stopped shareholders from interfering in the management of the company each time they disagreed with a decision of the board. If, for example, a shareholder who had only a handful of shares had the right to bring an action whenever he or she thought the directors had acted negligently, the whole business of managing the company would become somewhat impossible. There would be the possibility of hundreds of legal actions, which would make it difficult to conduct efficient litigation, and would impose great burdens on the courts. • The company is usually in a better position to decide whether to bring a legal action for a wrong done to it, rather than an individual shareholder. However, it must be pointed out that where directors, who have breached their duties to the company also constitute a majority of the board and therefore control the company, it is not likely that these directors will decide to bring an action against themselves. So the proper plaintiff rule which provides that it is only the company that can bring a legal action for breaches of duties owed to the company can be a disadvantage for the company and its shareholders or members.

EXCEPTIONS TO THE RULE IN FOSS V HARBOTTLE It should be noted that there are a number of exceptions to the rule in Foss v Harbottle. In respect of one class of exceptions, a member could complain of an infringement of personal rights as a member. Other exceptions to the rule allowed a member to bring a legal action in the name of the company to enforce a right of the company. This normally came about where the company’s directors breached their duty to the detriment of the company, but because they controlled the company they would not wish the company to remedy the breach. The right of a person at common to bring proceedings on behalf of a company has been abolished: s 236 (3). Proceedings brought on behalf of a company must now come under Part 2F.1A of the Corporations Act. Part 2F.1A provides for a statutory derivative action (proceedings on behalf of a company) which enables shareholders to bring legal action on behalf of a company where the company is unwilling or unable to do so itself. In this way, shareholders’ rights are reinforced bringing about more effective internal structures which would encourage and improve corporate governance procedures and practices of directors.

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Part 2F.1A contains, in effect, provisions which are exceptions to the proper plaintiff rule in Foss v Harbottle. For example, to make sure that the company management is not overwhelmed by vexatious and frivolous litigation, s 236(1) (b) of Part 2F.1A provides that members, directors and officers can apply to the court to obtain leave before commencing a proceeding on behalf of a company or intervening in proceedings to which a company is a party. Section 237(2) provides that the court would grant an application for leave if it is satisfied that each of the following requirements is fulfilled: • it is probable the company will not likely act in the sense that it will not itself bring the proceedings, or properly take responsibility for them: s 237 (2) (a) • it is in the best interests of the company that the applicant be granted leave: s 237 (2) (c) • there is a serious question to be tried: s 237(2) (d).

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TEST YOUR KNOWLEDGE 1. Explain what is meant by saying that directors have a duty to act in the best interests of the company. 2. To whom do directors of a company owe their duties? 3. Explain what is meant by the duty to act with due care, skill and diligence. 4. Discuss the operation of the business judgment rule. 5. Is the care owed by a non-executive director the same as that owed by an executive director? 6. Explain the purpose of s 588 G of the Corporations Act? If directors contravene s 588 G, what defences are available to them? 7. Why does an insolvent company or a company nearing insolvency have to consider the interests of creditors when making decisions concerning the allocation of resources? 8. What consequences exist for breaches of directors’ duties? 9. Explain what is meant by insider trading. 10. Discuss the indoor management rule. 11. What is the rule in Foss v Harbottle?

ASSESSMENT PREPARATION Students are reminded that questions based on this chapter will ask about: • The nature of the director’s duty—What are the duties of a modern company director? What is the duty to act in good faith? • Insider trading—What do we mean by the prohibition of insider trading? What is the reason for this prohibition? Who are the people this prohibition is targeting? What is the range of information involved? • Directors not to misuse their position—Do you agree that directors are not to abuse their position to gain advantage for themselves or for a third party? What sort of conduct will bring this about? What does improper conduct in this context mean? Is it possible for a director to act improperly even though the director thinks that he or she is acting in the best interests of the company? • Director to prevent insolvent trading—Must there be good reasons here for the director to believe that the company is on the way to insolvency? How important is cash flow a consideration? What are the defences available to the director? • The rule in Foss v Harbottle—What was the rationale for this rule? Why was the rule replaced? For answers to the Test Your Knowledge questions, please refer to: www.oup.com.au/chew2e.

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BANKRUPTCY AND CORPORATE INSOLVENCY COVERED IN THIS CHAPTER After successfully completing this chapter, you will be able to: • explain the rationale for bankruptcy law • identify the advantages and disadvantages of bankruptcy • explain the difference between a debtor’s petition and a creditor’s petition • explain the expression ‘acts of bankruptcy’ • explain the effect of a sequestration order • discuss the alternatives to bankruptcy in terms of Parts 1X and X of the Bankruptcy Act • discuss the doctrine of relation back • define corporate insolvency • explain the purpose of appointing an administrator • discuss the aims of voluntary administration • explain the role of the voluntary administrator • explain what a deed of company arrangement is and its features • explain the aims of liquidation • explain what is meant by compulsory winding up by court order • discuss the powers of a liquidator • discuss the effects of the winding up of a company • explain receivership as a form of external administration • explain why secured creditors would wish to appoint a receiver • list the duties of a receiver • discuss the effect of receivership on the company and its directors

CASE TO REMEMBER Barton v Deputy Commissioner of Taxation (1974)

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INTRODUCTION It is a fact of commercial life that some merchants and businesses become insolvent. They can get into financial difficulties when their income does not cover their expenditure for a variety of reasons, and they are unable or unwilling to pay their debts. The community requires that there should be procedures that protect creditors but do not forever condemn the insolvent party. Accordingly, the rationale behind bankruptcy law is to treat creditors equitably by dealing with the debtor’s assets in a procedural, but fair manner. This gives the debtor freedom from the demands of creditors, and a ‘breathing space’ in which to learn from his or her mistakes, and to make a fresh start without the burden of debt. The final and most serious option for a creditor in these circumstances is to take action under the bankruptcy law for an individual debtor or the insolvency law for a company. This process involves formal legal steps and does not ensure that the creditor will recover all that is owed. The first part of this chapter deals with bankruptcy of a person and the second part deals with the winding up of a company. In the past, creditors had great freedom in enforcing their own remedy against a debtor for failure to pay their debts. The debtor could be put in prison and there was no orderly way of ensuring a fair distribution of the debtor’s assets among the creditors. In this sense it can be said that bankruptcy is the modern substitute for the imprisonment of debtors. The aim of bankruptcy law is to make sure that the creditors are treated equally and to assist in the rehabilitation of the bankrupt.

BANKRUPTCY LAW: ITS OBJECTIVES The law of bankruptcy in Australia can be found primarily in the Bankruptcy Act 1966 (Cth). The Ministerial responsibility for the administration of this Act is vested in the Commonwealth Attorney-General, the Minister for Justice and the Minister for Consumer Affairs. The law of bankruptcy is intended as a remedy for individuals who have no reasonable prospect of being able to pay off their debts. The law of bankruptcy has a number of objectives which are to: • assist the debtor, once discharged to make a fresh start in life released from the demands of the creditors • protect creditors, by preventing debtors from disposing of property when bankruptcy is inevitable. The property of the debtor is realised (sold) and distributed fairly among the creditors in the quickest and most economical manner in accordance with the provisions of the Bankruptcy Act 1966 (Cth) • benefit the community, by rehabilitating the bankrupt—by allowing him or her to be discharged from bankruptcy, and to be able to resume a normal life and status, and not remain a burden on the community.

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BANKRUPTCY PROCEEDINGS Bankruptcy proceedings can only be brought under the Bankruptcy Act 1966 in respect of a person. A bankrupt under the Act is a debtor whose estate is vested in a trustee and is to be divided among the creditors. Bankruptcy is, however, not appropriate to a company winding up (discussed later), which is based on similar principles but is regulated by the Corporations Act 2001 (Cth). The debtor who presents his or her own petition to the Registrar in Bankruptcy, and if it is accepted, becomes automatically bankrupted. It is more usually the case that a creditor will initiate bankruptcy proceedings against the debtor. The creditor does this by presenting a petition by which the creditor asks the court to make a sequestration order which is an order made against the debtor’s assets. If such a petition is granted, and the court makes a sequestration order, the debtor becomes a bankrupt. In consequence of this new status, the debtor’s property will be vested in the Official Receiver or the registered trustee. When a petition is presented, and after a sequestration order is made, the bankrupt must file a statement of affairs. The assets of the bankrupt will be sold and the proceeds will be divided among the creditors. Section 149 of the Bankruptcy Act provides that the bankrupt will be discharged automatically and be freed from any further obligations to their creditors three years after the filing of their statement of affairs. Under s 149A, the period of bankruptcy will be extended if an objection to discharge is made. The period of bankruptcy can then be extended to five to eight years where the objection is based on acceptable grounds under s 149 D (1) (a)–(h). These grounds include, for example, the bankrupt leaving Australia after the bankruptcy, or engaging in relevant misleading conduct, such as obtaining credit to the extent of the prescribed amount without informing the credit provider that he or she was a bankrupt. A bankrupt may, at any time after six months from the date of the filing of the statement of affairs, apply to the trustee for an early discharge from bankruptcy. The reason for granting an early discharge is that the continuation of the bankruptcy would be unhelpful to the creditors and it would be futile to continue with the bankruptcy. However, early discharge will be permitted where the bankrupt has not engaged in conduct before or during the bankruptcy that would make it contrary to the public interest that this be allowed.

EFFECTS OF BANKRUPTCY Bankruptcy, as mentioned earlier, liberates a debtor from dealing with creditors directly, and allows the debtor to be rehabilitated and to start again. Nevertheless, it has serious consequences for the bankrupt. For example, an undischarged bankrupt

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cannot be a director of a company or a member of parliament. It is an offence for an undischarged bankrupt to obtain credit or enter into other commercial transactions either alone or jointly to the extent of $5000 or more without disclosing that they are bankrupts: s 269 (1) (a)–(ad). The bankrupt who is liable to make contributions to the bankrupt estate cannot leave the country without the permission of the trustee.

VOLUNTARY AND INVOLUNTARY BANKRUPTCY As mentioned earlier, a debtor may be made bankrupt on the debtor’s own petition. This is known as voluntary bankruptcy. Alternatively, a debtor may also be made a bankrupt by the making of a sequestration order following the presentation of one or more of the creditors.

DEBTOR’S PETITION (INVOLUNTRY BANKRUPTCY) A debtor can present to the Registrar in Bankruptcy a declaration of intention to present a debtor’s petition under s 55 of the Bankruptcy Act. This provides a procedure for a debtor who is contemplating voluntary bankruptcy to take advantage of an optional seven-day pre-bankruptcy moratorium period. If the Official Receiver accepts this procedure, the debtor‘s creditors are stayed (stopped) from endorsement action for seven days and the debtor is able to consider possible alternatives to bankruptcy. If the debtor petitions for bankruptcy, a verified statement of the debtor’s financial affairs must be filed with the Official Receiver. An Official Receiver may reject the debtor’s petition if the statement of affairs is not properly completed or if it appears that if the debtor did not become bankrupt, the debtor would be likely to be able to pay the debts within a reasonable time, or that the debtor is unwilling rather than being unable to pay. However, if the debtor’s petition has been accepted by the Official Receiver, the debtor automatically becomes a bankrupt. The Official Receiver must under s 55(3A) give the debtor sufficient information for the debtor to be convinced that bankruptcy is the only alternative, given the individual financial circumstances.

CREDITOR’S PETITION (INVOLUNTARY BANKRUPTCY) The court may, on a petition presented by a creditor or creditors, make a sequestration order against the estate of a debtor who has committed an act of bankruptcy while personally resident in Australia or while they were carrying on business in Australia either personally or by means of an agent or manager. A creditor’s petition may not be presented against a debtor unless the amount owing is at least $5000. This may be the sum of two or more debts owed to two or more creditors: s 44.

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Once a petition has been presented by a creditor, an application can be made to the court for the appointment of an interim receiver of the debtor’s estate. Orders are usually only made when the creditor can prove that there is a strong likelihood that a debtor will dispose of assets or put the assets beyond the reach of creditors. If, after considering the creditor’s petition, the court makes a sequestration order, the debtor becomes bankrupt and any assets are vested in the Official Receiver or the Trustee in Bankruptcy with some minor exceptions. The Act in ss 73–76 provides that after a sequestration order has been made or a bankruptcy has occurred as the result of a debtor’ petition, a bankrupt may make a proposal to their creditors for a composition in satisfaction of their debts or a scheme of arrangement of their affairs. If a meeting of the creditors, by special resolution, accepts the proposal, the bankruptcy is annulled. On annulment, the bankrupt’s property is still vested in the Official Receiver or in any person the court appoints.

ACTS OF BANKRUPTCY To initiate bankruptcy proceedings, a creditor must be able to establish that the debtor is insolvent. Insolvency to form the basis of a creditor’s petition is established by proof that the debtor has committed an ‘act of bankruptcy’. An act of bankruptcy is in effect a public demonstration of insolvency committed by the debtor within six months immediately before the presentation of the petition or the application for the making of a sequestration order: s 115. This is known as the doctrine of relation back and is an attempt to preserve the property of the bankrupt available for distribution to creditors by preventing the debtor from disposing of property before bankruptcy. A creditor must be able to prove that a debtor has committed an act of bankruptcy, otherwise the court will reject the creditor’s petition for a sequestration order. Among the acts of bankruptcy listed in s 40 of the Bankruptcy Act are the following: • It is an act of bankruptcy if the debtor makes a conveyance, transfer or settlement of property, creates a charge on their property; makes a payment or incurs an obligation that would, if he or she became bankrupt, be void (having no legal effect, or unenforceable) as against the trustee. • It is an act of bankruptcy for debtors to change their place of residence, move from the usual place of business, and refuse to see callers with the intention of defeating or delaying their creditors. • Where a debtor’s property has been sold because of an order of the court, or an execution issued against the debtor under court process has been returned unsatisfied, the debtor has committed an act of bankruptcy.

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•

•

•

Where the debtor consents to present to the Official Receiver, a debtor’s petition and does not do so within seven days, or if the debtor consents to sign an authority to call a meeting of the creditors and does not do so within seven days, an act of bankruptcy is committed. If a debtor admits insolvency at a meeting of creditors, and has been requested by a majority of the creditors to bring their affairs under the provisions of the Act, either through a debtor’s petition or through taking steps to make one of the private arrangements provided for in the Act, the debtor has committed an act of bankruptcy. The debtor who does not comply with a bankruptcy notice issued by the Registrar in Bankruptcy on the application of a creditor has committed an act of bankruptcy. This is the most common act of bankruptcy.

A CASE TO REMEMBER Barton v Deputy Commissioner of Taxation (1974) 131 CLR 370 Facts: Thomas Barton, a company director, left Australia suddenly by air for Paraguay without explanation, leaving a forwarding address, or even notifying the officers of a number of listed public companies of which he was a director. Not long later, an income tax assessment notice was issued for a large sum of income tax. Over 12 months later, Barton had still not returned to Australia. A creditor’s petition was submitted by the Deputy Commission of Taxation for the sequestration of the Barton’s estate. Decision: The High Court held that Barton had committed an act of bankruptcy under s 40. Barton had departed or remained outside of Australia with intent to defeat or delay his creditors although another reason for his departure may also have been the fear of criminal prosecution. The intention to defeat or delay creditors need only be one of several reasons for leaving Australia.

EFFECTS OF A SEQUESTRATION ORDER If we can assume that the debtor has committed an act of bankruptcy, and owes in excess of $5000 (the prescribed amount), the creditor may present a petition calling for the sequestration of the debtor’s estate. The effect of the order for sequestration is to make the debtor a bankrupt: s 43. The debtor continues to be a bankrupt until he or she is discharged or the sequestration order is annulled: s 43 (2). The debtor, unless excused by the trustee, or prevented by illness or other sufficient cause, is required after becoming a bankrupt, to give to the trustee all books, documents, papers and writings that are in their possession relating to relevant trade dealings, property or affairs, and a passport if available. In addition, the debtor, after being notified of the sequestration order, has to file a statement of affairs

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with the Official Receiver which gives information concerning their conduct, trade dealings, property and affairs etc.

DATE OF BANKRUPTCY AND COMMENCEMENT OF BANKRUPTCY The date of bankruptcy is the date of the petition, the sequestration order (s 43 (2)) or the date on which a debtor’s petition is accepted by the Official Receiver (s 57 A). However, the question arises as to the meaning of the commencement of bankruptcy. The commencement of bankruptcy ‘relates back’ to the earliest act of bankruptcy committed by the bankrupt in the six-month period immediately before the creditor’s petition or the application for the making of a sequestration order (s 115 (1)). It should be pointed out that the doctrine of relation back (s115) attempts to preserve the property of the bankrupt, so that it is available for distribution to creditors by preventing the debtor disposing of the property before bankruptcy.

FIGURE 12.1 Procedures under the Bankruptcy Act Bankruptcy Act 1966 (Cth)

On creditor’s petition

On debtor’s petition

Act of Bankruptcy

Debtor becomes a bankrupt

Bankruptcy notice

Creditor’s petition

Sequestration order

Debtor becomes a bankrupt

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ALTERNATIVES TO BANKRUPTCY The Bankruptcy Act provides two methods whereby a debtor who is in severe financial difficulties may make arrangements in respect of his or her debts and avoid bankruptcy. These are Part IX and Part X arrangements.

PART IX AGREEMENTS Under Part IX an individual who is insolvent enters into a formal arrangement with creditors. The arrangement is flexible and the terms may be negotiated between the individual and creditors. This debt agreement is, in many respects, similar to the arrangements with creditors which can be entered into under Part X and which is discussed below. The purpose of Part IX debt agreements is to provide a low-cost alternative to Part X arrangements. Part IX is for lower income individual debtors who have little in the way of unsecured assets, and who only owe a modest amount of unsecured debt to their creditors, but who nevertheless wish to avoid bankruptcy. Part 1X provides that low income earners who are in debt, possibly on account of unemployment or excessive use of credit, can enter a debt agreement to explore other avenues for dealing with their debts outside bankruptcy. In a debt agreement under Part IX, the debtor sees the creditors and puts a proposal for dealing with the debts (s 185). The debt agreement could take any form as long as the creditors accept the proposal and may include the following: • a lump sum payment of money or payments over a period of time • property (assets) assigned or transferred to an administrator to sell or distribute to all creditors or specific creditors • property assigned to or transferred to specific creditors directly, or • a moratorium on payments of debts to creditors for a period of time, especially if the debtor is experiencing short term financial difficulties. The proposal, as explained above, could comprise payment of less than the full amount of debt, deferring payment, or regular payments out of the debtor’s income. Once the proposal is agreed to by the creditors, the debtor gives the proposal to the Official Receiver for assessment (s 185 C). If the proposal is not accepted by the creditors, it will lapse (s 185 G). The Official Receiver organises a meeting of the creditors to get them to accept the proposal. If the majority of creditors approve the proposal, it becomes a debt agreement which is then recorded on the National Personal Insolvency Index. The effect of entering the proposal on the index is that a creditor cannot enforce or apply for the enforcement of a remedy against the debtor’s person or property in respect of their debts.

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As far as creditors are concerned, Part IX arrangements encourage plans made with creditors that are likely to give a better return to the creditors. As far as debtors are concerned, they are given a chance to make arrangements to pay their debts. Part 1X arrangements thus free the debtors from debts which would otherwise have put them into bankruptcy. FIGURE 12.2 Alternatives to bankruptcy Bankruptcy Act 1966 (Cth)

Arrangements with creditors without sequestration under Part IX is available to debtors on low income

Arrangements with creditors without sequestration under Part X

Meeting of creditors

Meeting of creditors

Proposal to pay less than full amount

Moratorium on payment

Periodic payment out of income

Debtor to provide a personal insolvency agreement (PIA) which contains a proposal giving creditors a clear picture of the amount offered by the debtor, and the order in which the debtor’s income or assets are to be distributed to creditors

PART X AGREEMENTS Part X allows an insolvent debtor to make arrangements direct with creditors outside of bankruptcy to avoid going bankrupt. The old Part X compositions, deeds of arrangement, and deeds of assignment have been replaced from 2004 with a new Part X. This results from amendments which were designed to overcome concerns that the old arrangements were being manipulated by some debtors to avoid paying their debts. The new Part X requires the debtor to provide a ‘personal insolvency agreement’ (PIA). This agreement contains a debtor’s proposal which gives creditors a clear picture of what they are being asked to accept by the debtor. It must also give details

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of how the agreement is to come to an end, the order in which the debtor’s income and or property is to be distributed among the creditors, and whether any assets have been disposed of to third parties before the agreement came into being, and whether they can be recovered. The PIA allows the insolvent debtor to avoid bankruptcy by coming to an understanding with creditors to pay their debts. This can be done by assigning property to a trustee for the benefit of creditors; by offering—whether by money, or by other property, and may be by instalments—less than the full amount due to creditors to pay off their claims; or by coming to some other mutually acceptable arrangement.

CORPORATE INSOLVENCY The law governing corporate insolvency plays an important part in corporate regulation because it is possible that from time to time companies will fail, with debts left unpaid. Insolvency can affect many people, such as, for example, employees, creditors, directors and customers. The aim of insolvency law is to provide a fair and orderly process for dealing with the financial affairs of insolvent companies. It also provides a mechanism that allows both debtor and creditor to participate with the least possible delay and expense in the collection and recovery of property for the payment of debts and liabilities of the insolvent company. If a company gets into financial difficulties there are three avenues open to it: • voluntary administration • winding up or liquidation • receivership.

VOLUNTARY ADMINISTRATION If a company gets into severe financial difficulties, an administrator may be appointed to bring into existence a ‘deed of company arrangement’ under which the struggling company might be helped to trade out of its difficulties: Corporations Act 2001 (Cth) ss 435 A–451 D. Voluntary administration is an alternative to proceedings for winding up. Voluntary administration is designed to resolve a company’s future direction quickly. In a voluntary administration, an independent and suitably qualified person (the administrator) takes full control of the company to try to work out a way to save either the company or its business. The aim is to administer the affairs of the company in a way that results in a better return to creditors than they would have received if the company had instead been placed straight into liquidation: s 435 A. A voluntary administrator is usually appointed by a company’s directors, after they decided that the company is insolvent or likely to become insolvent.

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It should be pointed out that under s 588 G of the Corporations Act 2001, directors may be personally liable for debts incurred by a company while it is insolvent. An administrator may be appointed also by the liquidator (although this is less common) or a person (secured creditor) entitled to enforce a charge (security) over all or substantially all the company’s assets. A company in voluntary administration may also be in receivership. When a company is put into voluntary administration, the parties involved, that is, the company and its creditors, may wish to come to a deed of company arrangement. This deed may take one of the following forms: (a) a moratorium under which the company is given extra time to pay its debts accrued before the commencement of voluntary administration (b) a compromise whereby the creditors agree to accept payment of a lesser amount in the settlement of the company’s debts (c) a combination of a moratorium and compromise with creditors, and (d) an orderly sale of all the company’s property over a period of time that was mutually agreed.

THE VOLUNTARY ADMINISTRATOR Once appointed, voluntary administrators take control of the affairs of the company, while directors, though retaining their office, lose their power to manage the company. Administrators, who are independent of the company, have to be registered liquidators to ensure that they are experienced insolvency practitioners. The voluntary administrator investigates and reports to creditors on the company’s business, property, affairs and financial circumstances, and on the three options available to creditors. Under s 438A of the Corporations Act 2001, these are to: • end the voluntary administration and return the company to the directors’ control • approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts, or • wind up the company and appoint a liquidator. The voluntary administrator must give an opinion on each option and recommend which option is in the best interests of the creditors. In other words, the administrator must investigate fully the financial position and circumstances of the company, and then form an assessment as to whether it would be in the creditor’s interests that the company should enter into a deed of company arrangement that would be acceptable to the company and its creditors. The administrator may also have to alternatively form an opinion as to whether to end the administration or wind up the company. In doing so, the voluntary administrator tries to work out the best solution to the company’s problems.

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The voluntary administrator has all the powers of the company and its directors. This includes the power to sell or close down the company’s business or sell individual assets in the lead up to the creditors’ decision on the company’s future. Another responsibility of the voluntary administrator is to report to the Australian Securities and Investments Commission (ASIC) on possible offences by people involved with the company. Although the voluntary administrator may be appointed by the directors, they must act fairly and impartially. The effect of the appointment of a voluntary administrator is to provide the company with breathing space while its future is being resolved. When the company is in voluntary administration: • unsecured creditors cannot enforce their claims against the company without the consent of the administrator or the court’s permission • except in limited circumstances, secured creditors cannot enforce their charge (security) over company property.

DEED OF COMPANY ARRANGEMENT A deed of company arrangement is one of the possible outcomes for a company that is put into voluntary administration. The Corporations Act (CA) is extremely flexible as to the terms of a deed of company arrangement so as to enable the arrangement to meet the particular needs of the company and its creditors. If the creditors resolve that the company enter into a deed of company arrangement, a person must be appointed to be the administrator of the deed: s 444A (2) CA. The administrator must prepare the instrument setting out the terms of the deed: s 444 A (3) CA. There are certain requirements regarding the contents of the deed set out in s 444A (4) CA and these include: • the property of the company available to pay creditors’ claims • the nature and duration of any moratorium period • the extent to which the company is released from its debts • any conditions for the deed to come into operation or to continue in operation • when the deed terminates • the priorities among creditors bound by the deed. In terms of the release of the company from its debts, the deed can provide for the release of the company from some, all, or part of its debts; for the order in which creditors are to be paid; for which claims are to be covered by the deed; and for when, how, and why the deed terminates. The company, its officers and members and the deed’s administrator are all bound by the deed: s 444 G CA while it is in operation.

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The court may terminate the deed on a variety of grounds based on the general concepts which provide protection from false and misleading conduct, injustice, undue delay, or oppressive or unfairly prejudicial conduct: s 445 D CA.

WINDING UP (LIQUIDATION) Liquidation, also known as ‘winding up’ is a kind of external administration that results in the company being deregistered and ceasing to exist as a legal entity. The crucial requirement for an application for winding up is that the company is unable to pay all its debts at and when they become due and payable: s 95A. Liquidation is an orderly process under which the company’s affairs are wound up, its property sold, debts owed creditors repaid, and whatever surplus is available is distributed among its shareholders in accordance with the company’s constitution. In winding up which brings a company’s existence to an end, a liquidator is appointed by the creditors and control of the company passes to the liquidator. The Corporations Act recognises two methods of liquidation: • a voluntary liquidation which comes in two forms: members’ voluntary winding up, and creditors’ voluntary winding up, and • an official compulsory liquidation by order of the court. Most liquidations are of the first type. Without regard to how they start, both types follow the same pattern. When a liquidator is appointed, all the assets are gathered together, valued, and then put to auction or sold by private agreement. He or she then initiates an investigation into the affairs of the company which may yield further assets. This may also lead to offences, if any, being reported to the ASIC. The liquidator then compiles a list of creditors. A set procedure is laid down by the Corporations Act as to how the ‘assets’ are to be paid out to the creditors. A fundamental principle here is that creditors are paid first, and then the surplus, if any, is divided among the company’s shareholders. All unsecured creditors who can prove their debts participate equally in the distribution of the company’s assets on a winding up. If there are insufficient funds available to meet them all in full, they are paid proportionately. Some liquidations become quite complex and may last for years, although most are all over within 12 months. For voluntary liquidations, a final wrap-up meeting is held by the liquidator to answer any final queries.

RECEIVERSHIP Receivership is a form of external administration that involves the appointment of an independent insolvency practitioner. Where a receiver is appointed by a secured creditor of a company, the receiver’s duty is to take possession of secured property,

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sell it, and out of the proceeds repay the secured debts owed to the company: Corporations Act ss 416–434. A receiver may be appointed by secured creditors such as debenture-holders or by the court. A secured creditor’s right to appoint a receiver arises from the terms of the loan agreement or debenture. Where the secured property includes the business of the company, the loan agreement can give the receiver the power to manage the business. In such cases, the receiver is referred to as a ‘receiver and manager’ who, as the name suggests, has the powers of a receiver, but these extend to managing the affairs of the company. A great advantage of receivership for secured creditors is the speed with which it can be put into effect. It is not necessary to obtain court approval for the appointment of a receiver. It should be noted that since receivers must be registered liquidators, they are experienced in managing insolvent companies. It should be noted that the receiver usually acts on behalf of the particular creditor who was given security over the particular asset whereas the administrator and the liquidator act on behalf of the company. A court can also appoint a receiver. Under s 1323 (1) (h) of the Corporations Act 2001 the court may appoint a receiver over the property of a person or a company that is the subject of an ASIC investigation because of a suspected infringement of the Corporations Act. Despite the fact that a company is under receivership, the company’s board of directors remain in office. However, their ability to deal with the secured property is limited. Where a receiver and manager is appointed, the directors’ management powers are set aside because the receiver and manager is there, and has the power to take charge of the company’s business. Receivership is terminated when the receiver has achieved its objective. This usually takes place when the secured property is sold and the debts of the secured creditors are discharged. Where the company is not in liquidation, the ending of receivership will result in the directors taking up again the management of the company’s affairs.

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FIGURE 12.3 Corporate insolvency Insolvent company

Voluntary administration

A deed of company arrangement which involves:  ɒ $PRUDWRULXP whereby the company is given extra time to pay its debts  ɒ $FRPSURPLVH whereby creditors accept a lesser payment in settlement of the company’s debts  ɒ $FRPELQDWLRQRI moratorium and compromise with creditors  ɒ $PXWXDOO\DJUHHG orderly sale of all the company’s property

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Liquidation or Winding up

Two methods:  ɒ 9ROXQWDU\OLTXLGDWLRQ a) Members’ voluntary winding up b) Creditors’ voluntary winding up  ɒ 2IILFLDOFRPSXOVRU\ liquidation by court order

Receivership

A receiver is appointed either by secured creditors or by the court to manage the business of the company, sell its secured property and repay the secured debts.

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TEST YOUR KNOWLEDGE 1. (a) Outline the aims of bankruptcy law. (b) Explain who can be made bankrupt. 2. Explain the function of a bankruptcy notice. 3. State the requirements that must be satisfied before a creditor can issue a creditor’s petition against a debtor. 4. Once issued, what does a creditor’s petition require a debtor to do? Give an example of an act of bankruptcy. 5. Explain what insolvency means. Is there any difference between bankruptcy and insolvency? 6. What is the effect of voluntary administration on creditors? 7. Discuss briefly the features of deeds of company arrangement. 8. Explain what is meant by saying that receivership is a form of external administration. 9. What are the aims of liquidation? 10. What are the effects of winding up a company? 11. Discuss the powers and duties of: a receiver an administrator a liquidator. 12. Explain briefly the different kinds of winding up or liquidation under the Corporations Act. 13. What is the effect of appointing a voluntary administrator?

ASSESSMENT PREPARATION Problem Before you attempt the following problem, make sure you read the ‘Guidelines for answering problems’ and be acquainted with the IPAC method of writing answers to problem questions. Celia owns a restaurant in the city. Because of escalating rentals and a fall in demand for the kind of food she sells, her business costs have increased. She owes $60 000 to a number of suppliers and seems unlikely to pay the debts of the business as they fall due. Celia is worried about the insolvent position she is in. She wants to know if there is any alternative to bankruptcy that may apply in her situation. Advise Celia. For answers to the Test Your Knowledge and Assessment Preparation questions, please refer to: www.oup.com.au/chew2e.

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TABLE OF CASES Bold entries indicate ‘Cases to Remember’. Abram v AV Jennings Ltd (2002) 84 SASR 363 61 ACCC v Target Australia Pty Ltd (2001) ATPR 41–840 87 Air Great Lakes Pty Ltd v KS Ester (Holdings) Pty Ltd [1985] 2 NSWLR 309 41 Aiton Australia Ltd v Transfield Pty Ltd (1999) FCA 1541 155 Alliance Acceptance Co Ltd v Hinton (1964) 1DCR (NSW) 5 52 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 64 Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 84 Ashington Piggeries Ltd v Christopher Hill [1972] AC 441 90 Australian and New Zealand Banking Group v Westpac Corporation (1988) 164 CLR 662 104 Australian Competition and Consumer Commission v Glendale Pty Ltd (1998) 40 IPR 619 137 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 27–8 Bailey v Bullock [1950] 2 All ER 1167 76 Balfour v Balfour [1919] 2 KB 571 41 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 174 Barton v Croner Trading Co Pty Ltd (1985) ATPR 40–525 86–7 Barton v Deputy Commissioner of Taxation (1974) 131 CLR 370 196 Baumgarter v Baumgartner (1987) 164 CLR 137 152 Bettini v Gye (1876) 1QBD 183 62 Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 31 Blomley v Ryan (1956) 99 CLR 362 57 Bojczuk v Gregorcewicz [1961] SASR 128 52–3 Boulas v Angelopoulos (1991) 5 BPR 11 30 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 65–6 Breen v Williams (1996) 186 CLR 71 65 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 155 Butler Machine Tool Co. Ltd v Ex-Cell-O Corporation (England) Ltd [1979] 1 All ER 965 34 Caparo Industries p/c v Dickman; in [1990] 1 All ER 568 131 Carlill v Carbolic Smoke Ball Co. (1893) 1 QB 256 31 Causer v Browne [1952] VLR 1 69 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (High Trees case) 48, 50 Chappell & Co. Ltd v Nestlé Co. Ltd [1960] AC 87 45 Chapple v Cooper (1844) 153 ER 105 52 Chew v R (1992) 173 CLR 626 183

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Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 66 Commissioners of Taxation v English, Scottish & Australian Bank Ltd Privy Council [1920] AC 683 99–100 Commonwealth of Australia v Amman Aviation Pty Ltd (1991) 174 CLR 64 73 Commonwealth of Australia v Tasmania (1983) 158 CLR 1 (Tasmanian Dam case) 11–12 Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 148 CLR 304 101, 103 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 67 Coulls v Bagot’s Executor and Trustee Co. Ltd (1967) 119 CLR 460 51 Council of the City of Sydney v West (1965) 114 CLR 481 71–2 Curtis v Chemical Cleaning and Dyeing Co. [1951] 1 KB 805 71 Darlington Futures Ltd v Delco Australia (1996) 161 CLR 500 72 David Jones v Willis (1939) 52 CLR 110 89 De Francesco v Barnum (1890) 45 Ch D 4 53 De Lassalle v Guildford [1901] 2 KB 215 61 Dickinson v Dodds (1876) 2 Ch D 463 32 Dillon Baltic Shipping Co v Dillon ‘Mikhail Lermontov’ (1990) ATPR 40–992 92 Donoghue v Stevenson [1932] AC 562 128–30 Dr Martens (Australia) Pty Ltd v Rivers (Australia) Pty Ltd (1999) ASAL 55-038 85 Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] AC 847 44, 47 Edmonds v Lawson [2000] QB 501 40 Entores Ltd v Miles Far East Corp [1955] 2 QB 327 36 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (1994) 218 CLR 471 60 Ermogenous v Greek Orthodox Community (2002) 42–3 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 131–2 Evagora v eBay Australia & New Zealand Pty Ltd [2001] VCAT 49 118 Fisher v Bell [1961] 1 QB 394 29 Foley v Hill [1843–60] All ER Rep 16 99 Ford Motor Co. (England) v Armstrong (1915) 31 TLR 267 76 Foss v Harbottle (1843) 2 Hare 461 184–6 Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 1 All ER 630 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 Giles [CH] & Co. Ltd v Morris [1972] 1 WLR 307 77 Grant v Australian Knitting Mills [1936] AC 85 89 Greenwood v Martins Bank Ltd [1933] AC 51 101 Grove v Flavel (1986) 4 ACLC 654 183

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171, 173

61

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Hadley v Baxendale (1854) 156 ER 145 74–5 Hamilton v Lethbridge (1912) 14 CLR 236 54 Hartnell v Sharp Corp of Australia Pty Ltd (1975) 5 ALR 439 86 Harvela Investments Ltd v Royal Trust Company of Canada (CI) Ltd [1985] 3 WLR 276 31 Harvey v Facey [1893] AC 552 28 Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] AC 465 132–3 Helps v Clayton (1964) 144 ER 222 52 Hely-Hutchinson v Brayhead Ltd [1968] 1QB 549 171 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 83, 85 Henthorn v Fraser [1892] 2 Ch 27 36 High Trees case see Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 Hillas & Co Ltd v Arcos Ltd [1932] ALL ER Rep 494 68 Hong Kong Fir Shipping Co. v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 63 Household Fire & Carriage Accident Insurance Co. Ltd v Grant (1879) LR 4 Ex D 216 36 Howard Marine and Dredging Co. Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574 62 Huggins v Wiseman (1960) 90 ER 669 52 Hutton v Warren (1836) 150 ER 517 61, 67 Hyde v Wrench (1840) 3 Beav 334 33–4 Jaensh v Coffey (1984) 155 CLR 549 130 Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 Joachimson v Swiss Bank Corp [1921] 3 KB 110 99 Jones v Lipman [1962] 1 All ER 442 164

49

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 82 ALJR 345 65 Koutsonicolis v Principe (No. 2) (1987) 48 SASR 328 76 L Shuler AG v Wickham Machine Tool Sales Ltd [1974] AC 235 64 Lampropoulos v Kolnick [2010] WASC 193 56 Leach Nominees Pty Ltd v Walter Wright Pty Ltd (1986) WAR 244 36 Lee v Lee’s Air Farming Ltd [1961] AC 12 163 Liaweena (NSW) Pty Ltd v McWilliams Wines Pty Ltd (1991) ASC 56-038 (NSW CA) Loan Investment Corp of Australasia Ltd v Bonner [1970] NZLR 724 77 London Joint Stock Bank Ltd v Macmillan [1918] AC 777 99 Lumley v Wagner (1852) 42 ER 687 77 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 76

70

Mabo v State of Queensland (No 2) (1992) 175 CLR 1 9 Masters v Cameron (1954) 91 CLR 353 35–6 McWilliams Wines Pty v McDonald’s Systems of Australia Pty Ltd (1980) ATPR 40–188 83

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Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252 60 Mercantile Credit v Spinks [1968] QWN 32 52 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 184 Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141 10 Minister for Education v Ox Well [1966] WAR 39 52 Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556

133

National Australia Bank v Hokit (1996) 39 NSLR 377 102–3 Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611 Olley v Marlborough Court Ltd [1949] 1 KB 532

173

70

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 174 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 84 Payne v Cave (1789) 3 TR 148 30 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 29–30, 117 Pico Holdings Inc v Ware Vistas Pty Ltd (2005) 214 ALR 392 47 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467 164 Placer Development Ltd v Commonwealth (1969) 121 CLR 353 46 Politarhis v Westpac Banking Corporation [2009] SASC 96 104 Powell v Lee (1908) 99 LT 2 84 32 R v Byrnes (1995) 130 ALR 529 183 R v Clarke (1927) 40 CLR 227 33 R v Rivkin [2003] NSWSC 447 182 Rankin v Scott Fell & Co. (1904) 2 CLR 164 61 Roscorla v Thomas (1842) 3 QB 234 46 Rose and Frank Co. v JR Crompton & Bros and Brittains [1925] AC 445 Routledge v Grant (1828) 130 ER 920 31 Rowland v Divall [1923] 2 KB 500 88 Royal British Bank v Turquand (1856) 6 E & B 327 172 Ruaro v Holcomm Marine Pty Ltd [2002] FCAFC 174 92

42

Salomon v Salomon & Co Ltd [1897] AC 22 163–4 San Sebastian Pty Ltd v The Minister Responsible for Administering the Environmental Planning and Assessment Act (1986) 162 CLR 340 134 Scarborough v Sturzaker (1905) 1 Tas LR 117 52 Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 133–4 Shahid v The Australian College of Dermatologists [2008] FCAFC 72 43 Simpkins v Pays [1955] 1WLR 975 41 Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 14 ACLC 670 174

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State of South Australia v Clark (1996) 14 ACLC 1019 178 Stevenson, Jacques & Co. v McLean (1880) 5 QBD 346 34 Stilk v Myrick (1809) 170 ER 1168 47 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 102–3 Tasmanian Dam case see Commonwealth of Australia v Tasmania (1983) 158 CLR 1 The Moorcock (1889) 14 PD 64 65 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 72 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 70 Tournier v National Provincial and Union Bank of England [1924] 1 KB 103–4 TPC v Advance Bank Australia Ltd (1993) ATPR 41–229 87 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1939) 38 SR (NSW) 632 62 Turner Kempson & Co. Pty Ltd v Camm [1922] VLR 498 34 Turquand’s case see Royal British Bank v Turquand (1856) 6 E & B 327 Tweddle v Atkinson 121 ER 762 51 Van den Esschert v Chappell [1960] WAR 114 61 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528

74–5

Wakeling v Ripley (1951) 51 SR (NSW) 183 41 Walker v Wimbourne (1976) 137 CLR 1 180 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 48–50 Warlow v Harrison (1859) 120 ER 925 30 WD & HO Wills (Australia) Pty Ltd v Philip Morris (1997) ATPR 1–590 84 Weitmann v Katies Ltd (1977) 29 FLR 336 83 White v John Warwick & Co. Ltd [1953] 1 WLR 1285 73 Wik Peoples v the State of Queensland (1996) 187 CLR 1 9–10 Wyong Shire Council v Shirt (1980) 146 CLR 40 130

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TABLE OF STATUTES Commonwealth Acts Interpretation Act 1901 s 15AA (1) 17–18 s 15AB (1) 18 Australian Consumer Law 2010 (ACL) 67, 81–2, 156 Parts 3–5 136–9 s 2 137 s 3 91 s 3(1) 82–3 s 3(2) 82 s 7 136 s 7(1)(a) 136 s 7(1)(b) 136 s 7(1)(c) 136 s 7(1)(d) 136 s 7(1)(e) 136 s 9 137 s 9(1) 137 s 9(2) 137 s 9(2)(a) 137 s 9(2)(b) 138 s 9(2)(c) 138 s 9(2)(d) 138 s 9(2)(e) 138 s 9(2)(f) 138 s 18 83–5, 124, 135–6, 138 s 18(1) 83–4 s 29 85–6, 156 s 29(1) 85 s 29(1)(a) 86 s 29(1)(h) 87 s 29(1)(i) 87 s 29(1)(k) 86 s 29(l)(m) 87 s 51 91 s 54 88–9, 91 s 55 89, 91 s 56 90–1 s 57 90–1 s 57(1)(e) 90–1 s 60 91–2 s 61 92 s 62 92 s 138 138–9 s 139 138–9

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s 140 138–9 s 141 138–9 s 147(1) 136 s 147(2) 136 Australian Securities and Investments Commission Act 2001 162 s 13 162 s 40 162 s 43 162 s 49 162 s 50 162 ss 28–39A 162 Banking Act 1959 s 5(1) 98

98

Bankruptcy Act 1966 192–3, 197–9 Part 1X 198–9 Part X 198–200 s 40 195–6 s 43 196 s 43(2) 196–7 s 44 194 s 55 194 s 55(3A) 194 s 57A 197 s 115 195, 197 s 115(1) 197 s 149 193 s 149A 193 s 149D(a)–(h) 193 s 185 198 s 185C 198 s 185G 198 s 269 57 s 269(1)(a)–(ad) 194 ss 73–76 195 Bills of Exchange Act 1901 Part 1V 111 s 8 108–9 s 36 109 s 48 109 s 52 109 s 55(1) 110 s 56(2) 110 s 56(9) 110 s 57(3) 110 s 64 110

108

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TABLE OF STATUTES

s 65 110 s 66 110 s 67 110 s 68 110 s 69 110 s 89(1) 111 s 92 112 s 95(1) 111 s 95(2) 111 Bills of Exchange Act 1909 Cheques Act 1986 s 3(2) 101 s 53 106 s 53(1) 106 s 53(3) 107 s 54 106 s 55 107 s 95 100

104

99, 104–5, 108, 122

Cheques and Payment Orders Act 1986 108 Company Law Review Act 1988

169

Competition and Consumer Act 2010 5, 11, 20, 81, 98 s 2 81–2 Sch 2 135 Constitution 12–13 Ch 111 7 s 51 11, 13 s 51(i) 11 s 51(ii) 11 s 51(v) 11 s 51(xii) 11 s 51(xiii) 11 s 51(xiv) 11 s 51(xvi) 11 s 51(xx) 11–12 s 51(xxi) 11 s 51(xxix) 11–12 s 51(xxvii) 11 s 71 7–8 s 90 13 s 92 13–14 s 109 13–14 s 114 13 s 115 13 s 119 13 s 128 16

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213

Corporations Act 2001 5, 20, 97–8, 157, 161–2, 164, 193, 203 Part 2F.1A 185–6 s 9 165–6, 168 s 45A 166–7 s 45A(2) 167 s 45A(3) 167 s 95A 203 s 112 164, 166 s 112(1) 165–6 s 113 166 s 113(3) 167 s 114 166, 168 s 117(1) 168 s 117(2) 168–9 s 118 169 s 119 169 s 123(1) 169 s 124 56 s 126 171 s 127(1) 170–1 s 128(1) 172 s 129 174 s 129(1) 172 s 129(2) 172 s 129(3) 56, 173 s 129(5) 171 s 129(6) 171 s 135 169–70 s 135(1) 169 s 135(2) 170 s 136(1) 170 s 140(1) 170 s 148(2) 167 s 148(3) 167 s 165 167 s 180(1) 178, 180 s 180(2) 178, 180 s 181 179 s 182 183 s 182(1) 183 s 183 181 s 201A 168, 177 s 204A 168 s 204B(1) 173 s 236(1) 186 s 236(3) 185 s 237(2) 186 s 237(2)(a) 186

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TABLE OF STATUTES

s 237(2)(c) 186 s 237(2)(d) 186 s 249X 170 s 345 174 s 438A 201 s 444A(2) 202 s 444A(3) 202 s 444A(4) 202 s 444G(4) 202 s 445D 203 s 516 164 s 588G 183–4, 201 s 588H 184 s 588H(2) 184 s 588H(3) 184 s 588H(4) 184 s 588H(5) 184 s 1042A 181 s 1043A 182 s 1043A(1) 181 s 1043A(2) 182 s 1274(7A) 169 s 1323(1)(h) 204 ss 162–164 167 ss 180–184 177–8 ss 181–183 181 ss 292–294 167 ss 416–434 204 ss 435A–451D 200 Electronic Transactions Act 1999 (ETA) 36, 118–19 s 8 119 s 9 119 s 10(1)(b)(i) 119 s 11 119 s 15(1) 36 ePayments Code cl 2.4 120

120

Financial Services Reform Act 2001 97, 123 Financial Transactions Reports Act 1988, s 18 100 National Parks and Wildlife Conservation Act 1975 11 National Properties Conservation Act 1983 12 Payment Systems and Netting Act 1998 122

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Payment Systems (Regulation) Act 1998 122 Racial Discrimination Act 1975 Reserve Bank Act 1959

9

122

Trade Practices Act 1974 s 51 88 s 52 83–4, 88 s 53 85, 88 s 53(a) 86 s 53(c) 87 s 53(e) 87 s 53(eb) 87 s 53(g) 87

117

World Heritage Properties Conservation Act 1883 11, 12 s 6 12 s 9 12 s 9(1) 12 s 9(1)(h) 12 s 10(4) 12

Australian Capital Territory Partnership Act 1963

148

Sale of Goods Act 1954

117

New South Wales Minors (Property and Contracts) Act 1970 54–5 s 6(1) 55 s 16 55 s 18 55 s 30 55 s 31 55 Partnership Act 1892

148

Sale of Goods Act 1923 Trust Act 1925

117

151

Trustee Act 1925

150

Northern Territory Partnership Act

148

Sale of Goods Act

117

Queensland Partnership Act 1891

148

Sale of Goods Act 1896 Trust Act 1973

117

151

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TABLE OF STATUTES

South Australia Minors Contracts (Miscellaneous Provisions) Act 1979 55 s 4 55 s 5 55 s 6 55 s 7 55 s 8 55 Partnership Act 1891

148

Sale of Goods Act 1895

117

Tasmania Gordon River Hydro-Electric Power Development Act 1982 12 Partnership Act 1891

148

Sale of Goods Act 1896

117

Victoria Partnership Act 1958

148

Sale of Goods Act 1958

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117

Supreme Court Act 1986 Div 4 54 Part 5 54 s 50 54 Trustee Act 1975

215

54

148

Western Australia Partnership Act 1895

148

Sale of Goods Act 1895

117

United Kingdom Commonwealth of Australia Constitution Act 1900 10 National Minimum Wage Act 1998 Pharmacy and Poisons Act 1933 Sale of Goods Act 1893 s 5(1) 92

40 30

92

New Zealand Workers’ Compensation Act 1922

163

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216

INDEX Aboriginal peoples, Aboriginal law, based on social custom 10 acceptance 26–36 must be in response to an offer 32–3 postal acceptance rule 36 on the web 117 advertisements 31 agents 171–2 customary powers 173–4 agreement 27–9 binding agreement 32 commercial agreements 42 deeds 43 domestic agreements 40–1 e-commerce and 117 express agreement 65 franchises 153–4 nature of 29 online agreements, disputes over terms in 117–18 particular agreements 42–3 preferential rating agreement 66 social agreement 40–1 ambiguity clarification of 61 contra proferentem rule 72–3 extrinsic materials use 18 apparent authority 171–2 arbitrary power 4 assets 203 associations 162, 169 assumption 50 statutory assumptions 172–4 auctions 30 ‘without reserve’ 30 Australian Competition and Consumer Act 2010 (Cth), commercial and business law regulation 5 Australian Competition and Consumer Commission (ACCC), responsibilities under ACL 82 Australian constitutional system Commonwealth jurisdiction 11–12 concurrent powers 13–14 Constitution, changing 16 delegated legislation 15–16 exclusive powers 13 a federal system 10

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freedom of interstate trade 14 residual powers 12–13 separation of powers doctrine 14–15 Australian Consumer Law (ACL) 67 ‘consumer’ definition 82–3 drafting in plain English 82 enactment 82 false or misleading representations under 85–7 misleading or deceptive conduct under 83–5 Part 3–5—strict liability on manufacturers 136–8 defective products 137–8 s 2—goods 137 s 7—definition of manufacturer 136 s 9—defective goods 137–8 s 18(1) 83–5 applications 84–5 coverage 84 wide interpretation 84 s 18(1)—misleading/deceptive conduct 135–6 s 18—dispute resolution 124 s 18—misleading/deceptive conduct 156 s 29 85–7 contravention 86–7 ss 51–53 88 TPA consumer protection provisions mirroring 81 Australian Domain Name Authority Ltd (auDA) 123 Australian federal system 10 Australian legal system 3–20 Australian Prudential Regulation Authority (APRA) 98 Australian Securities and Investments Commission Act 2001 (Cth) company administration 162 general powers of investigation 162 Australian Securities and Investments Commission (ASIC) 98 company registration 168 EFT Code of Conduct monitoring 119 enforceable director’s duties 177–8 Australian Stock Exchange (ASX) 168 authorised deposit-taking institutions (ADIs) 99

4/08/14 10:49 AM

INDEX

Banking Act 1959 (Cth) 98 banking and finance cheques and negotiable instruments 104–12 e-banking and payments systems 121–3 financial institution–customer relationship 99–104 regulatory framework 97–9 bankruptcy Acts of 195–6 alternatives 198–200 bankruptcy law, objectives 192 bankruptcy proceedings 193 corporate insolvency 200–5 date and commencement of 197 effects of 193–4 rehabilitation 193 sequestration order, effects of 196–7 voluntary administration 200–1 voluntary and involuntary 194–5 Bankruptcy Act 1966 (Cth) 192 Part IX agreements 198–9 Part X agreements 199–200 procedures under 197 s 40—Acts of bankruptcy 195–6 s 43—sequestration orders 196–7 s 44—creditor’s petition 194 s 55—debtor’s petition 194 s 115—sequestration orders 195, 197 s 149—proceedings under 193 ss 73–76—sequestration orders 195 bankrupts 57 bargain theory of contract 51 beneficial contracts of service 52 benefit, beneficial contracts of service 53–4 bills of exchange 108–10 cheques–bills of exchange comparison 110–11 discharge of 110 dishonour of 109–10 negotiating 109 noting and protesting 110 Bills of Exchange Act 1909 (Cth) 104, 108–10 Part IV—promissory notes, main law 111 s 8—bill of exchange definition 108–9 essential elements 109 s 36—bill of exchange negotiation 109 s 48—not accepted bill of exchange 109 s 52—overdue/unpaid bill of exchange 109–10

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217

s 56(2)—dishonoured bill of exchange 110 s 92—promissory notes, endorser discharge 112 ss 64–69—discharge of bill of exchange 110 breach terms and remedies 60–77 common law remedies 73–6 equitable remedies 77 of warranty 62 business business efficacy 66 business structure choice 145–58 categorisation 145 incorporated 157–8 unincorporated 146–57 e-commerce and 115–25 forms of business organisation and ownership 145–58, 160–74, 177–86 law of negligence in 127–39 undesirable business practices 82 unethical business practices 19–20 business judgment rule 179 business law 4–5 consumers and 81–93, 96–112, 115–25, 127–39 covering commercial activities 4–5 ethics and 19–20 regulation by common law principles 5 ‘by way of exchange’ 49 capacity capacity to contract 51–7 individuals lacking 51–2 minors, common law position 52–5 capitalism 160 careless behaviour 128 case law 5 ‘cease and desist’ letters 125 cheques 104–12 cheques–bills of exchange comparison 110–11 crossed cheques (not negotiable) 106–8 notations 106 customers’ duty to inform of forgery 101–3 customers’ duty to take care when drawing 101 facts regarding 105 transferability of 107

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218

INDEX

Cheques Act 1986 (Cth) 99, 104, 108–10 cheque, definition of 105 PBS’s power 122 s 3(2)—honesty as test of good faith 101 s 53—crossing cheques standardisation 106–7 s 54—cheques paid into account 106 ss 55–56(3)—not negotiable 107 civil acts 55 civil law 5 civil wrong 127–8 codes of conduct 19 colonisation 9–10 commerce commercial transactions 115–25 dispute resolution 123–4 e-commerce 115–25 negotiable instruments 104–12 see also insolvency commercial activities ACL as ‘front line commercial weapon’ 84 business law coverage 4–5 commercial law 5 commercial papers see promissory notes commercial transactions 29 common law civil law 5 common law remedies, breach 73–6 criminal law 5 equity and 5–6 minors and position at 52–5 statutes overriding—implied terms 67 Commonwealth 10 exclusive powers of 13 jurisdiction 11–12 law-making powers division 13 law-making powers limitations 14 Commonwealth of Australia Constitution Act 1900 (UK) 10 Commonwealth Parliament 11 communication electronic communication 36 importance of 31–2 instantaneous communications 36 companies 157–8 classification by membership 169 constitutions, adherence to constitution or replaceable rules 169–70 contracts with 170–2 contracting through an agent 171–2

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control and management–owners distinction 164 Corporations Act regulation 161–2 created by registration 168–9 directors, duties 177–86 forms of registered companies 164–8 limited by guarantee 165 limited by shares 165 members’ rights enforcement—Foss v Harbottle rule 184–6 exceptions 185–6 no liability companies 166 officers 172–3 customary powers 173–4 proprietary companies 166–7 small and large 167–8 public companies 168 stages to reach 158 unlimited companies 165–6 company law 160–74 adherence to constitution or replaceable rules 169–70 companies contracts with 170–2 Corporations Act regulation 161–2 created by registration 168–9 forms of registered companies 164–8 public companies 168 corporate veil concept 164 separate legal entity concept 162–4 statutory assumptions 172–4 Company Law Review Act 1988 (Cth) 169 compensation 73, 127–8 see also damages Competition and Consumer Act 2010 (Cth) restrictive trade practices provisions 20 s 51(xx)—corporations power 11 s 51(xxix)—external affairs power 11, 12 conditions 63–4, 65 ACL ss 51–53, replacement with guarantees 88 warranty–condition distinction 62 conduct misleading or deceptive conduct under 83–5 ‘passing off’ 84 silence amounting to 85 tortious conduct–criminal conduct overlaps 128 confidentiality 103–4

4/08/14 10:49 AM

INDEX

consideration 26–7, 43–7 executory or executed 45 good consideration 44 must be definite 46 must move from promisee 47 past consideration insufficient 45–6 performance of existing obligation insufficient 47 privity doctrine, association with 51 rules for 44–7 types 46 Constitution 10 Australian constitutional system 10–16 changing, requirements for 16 courts, hierarchy of 7–8 constructive trusts 152 consumer guarantees 67 companies limited by 165 guarantee as to title 88 guarantees relating to supply of goods 90–1 guarantee relating to supply of services 91–2 guarantee that goods are fit for disclosed purpose 89 guarantee that goods are of acceptable quality 88–9 statutory regime governing 88 consumer protection law ACL and 82–7 consumer guarantees 88–92, 165 state consumer protection legislation 92–3 consumers ACL definition 82–3 business law and 81–93, 96–112, 115–25, 127–39 contra proferentem rule 72–3 contract bargain theory of contract 51 breach, terms and remedies 60–77 capacity to contract 51–7 collateral contracts 61 with companies 170–2 damages recoverable 73 deeds (formal contracts) 43 definition 26 e-contracts 117 enforceability of 43, 45 essential elements 26–7

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219

exclusion clauses 69–72 executed contract 26 ‘fine print’ on 69 formation commercial agreements 42 consideration 43–7 intention to be legally bound 40 particular agreements 42–3 promissory estoppel 48–50 social and domestic agreements 40–1 making the contract, offer and acceptance 26–36 minors’ contracts under statute 54–5 online contracting 118 oral contracts 60 partly oral contracts 61 performance, classification by 26 privity of contract 51 repudiation 56, 65 for sale of goods 91 ‘standard form’ contracts 69 types 44 binding contracts 52–5 contracts for ‘necessaries’ 52–3 contracts for provision of beneficial services 52, 53–4 voidable 51, 57 contract law contract: terms and remedies for breach 60–77 formation of contract 39–57 making the contract 26–36 corporate insolvency 192–205 corporate veil concept 164 corporations corporate collapses 19 human intermediaries 56 Corporations Act 2001 (Cth) commercial and business law regulation 5 companies, regulation of 161–2 duties under 20 investment schemes and 161 liquidation methods under 203 Part 2F1A—proceedings on behalf of companies 185–6 replaceable rules 170 s 45A(2)—proprietary companies 167 s 112—company registration 164–5 s 126—contracting through agents 171–2 s 128(1)—assumptions 172

4/08/14 10:49 AM

220

INDEX

Corporations Act 2001 (Cth) cont. s 129(2)—company officers 172–3 s 129(3)—holding out 173 s 129—assumptions 172 s 180(2)—business judgment rule 179 s 181—duty to act in good faith 179–80 s 182(1)—duty not to improperly use position 183 s 183—informational advantage 181–2 s 438A—creditor options 201 s 444A—deed administrator 202 s 588 G—director liability 201 s 588 G—duty to prevent insolvent trading 183–4 defences to contravention of 184 s 1323(1)(h)—receivers 204 ss 9, 45 and 112–114—proprietary companies 166–7 ss 9, 114, 201A, 204A—public companies 168 ss 9 and 112(1)—company liability 166 ss 9 and 112(1)—company limitation 165–6 ss 127(1) and (2)—document execution 170–1 ss 180–184—specific director’s duties 178–9 ss 416–434—debts owed payment 204 ss 435A–451D—voluntary administration 200–1 ss 1043A(1) and 1042A—insider trading 181–2 counter-offer 33–5 counter-offer versus information request 34–5 courts 7–8 District/County Court 8 Federal Court 8 guidelines for damages—breach of contract 74 hierarchy of 7 High Court 8, 64 judicial power 15 law making 4 case law (unenacted law) 5 literal rule use 17 Magistrates’ Court 8 orders 77 injunction 77 State Supreme Court 8 terms implied by 65–6

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creditors 100 creditor’s petition (involuntary bankruptcy) 194–5 criminal law 5 Crown 14 custom 67 customers duty to inform of forgery 101–3 duty to take care when drawing cheques 101 financial institution–customer relationship 99–104 of financial institutions 99–100 loans to customers 104 cybersquatting 124–5 damages amount to be awarded 75–6 court guidelines for, Hadley v Baxendale rule 74 exemplary damages 76 liquidated/unliquidated damages 75 nominal damages 76 penalties 75–6 recoverable in contract 73 debtors 100 debtor’s petition (involuntary bankruptcy) 194 deeds 43 of company arrangement 202 detriment concept 48–50 directors duties 177–86 duty not to improperly use position 183 duty to prevent insolvent trading 183–4 to exercise degree of care and diligence 178–9 fiduciary duties 181 prohibitions in respect of insider trading 181–2 liabilities of 177–8 discretionary trusts 152 dispute resolution 123–4 District/County Court 8 domain names Australian Domain Name Authority Ltd (auDA), ‘au’ regulation by 123 e-commerce and 123–5 registration in ‘bad faith’ 124–5 second-level domain (SLD) names 123 top-level domain (TLD) name 123

4/08/14 10:49 AM

INDEX

e-banking 121–3 e-commerce model acceptance of 116 agreements and 117 business and 115–25 disputes over terms in online agreements 117–18 domain names and 123–5 e-banking and payments systems 121–3 electronic funds transfer system 119–21 electronic money 121 ePayments Code 120 fraud in 116 slow uptake, reasons for 116 smart cards 120 transactions 117 EFT Code of Conduct 119 EFTPOS 119–20 ejusdem generis rule 18–19 electronic money direct deposit 121 Electronic Funds Transfer (EFT) system 119–21 Electronic Transactions Act 1999 (Cth) (ETA) 36, 118–19 main provisions 119 enacted law 5 enforcement enforceability of contract 43, 45, 117 enforceable benefits 51 of exclusion clauses 69 ePayments Code 120 equity common law and 5–6 equitable remedies (for breach of contract) injunction 77 specific performance 77 essentiality test 62 ethics business law and 19–20 unethical business practices 19–20 evidence 61 extrinsic evidence 61 oral evidence 62 exclusion clauses 69–72 enforceability of 69 interpretation rules 69–72 ‘four corners’ interpretation rule 71–2 misrepresentation of 70–1 potential for abuse 69

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221

executive power 14 exemplary damages 76 express terms importance attached to 62–5 parol evidence rule 60–2 express trusts 151–2 extrinsic materials 18 fairness 48 false or misleading representations under 85–7 Federal Court 8 federal parliament 10 legislative power 14 federation 13 British Parliamentary approval for 10 see also Constitution fiduciary relationship 133 finance 97–112 financial institutions customers of 99–100 defence of collecting financial institution 100 duty of confidentiality 103–4 financial institution–customer relationship 99–104 loans to customers 104 negligence of 104 financial sector, regulating entities 97 financial system changes 96–7 deregulation 121 Wallis Committee of Inquiry 97–8 see also banking and finance Financial Services Reform Act 2001 (Cth) 97 Financial Transactions Reports Act 1988 100 fixed trusts 152 foreseeability 130 forgery 101–3 ‘four corners’ principle 71–2 franchises 153–4 advantages and disadvantages 156–7 importance of good faith in 155 relevant provisions 156 Franchising Code of Conduct (1998) 154–5 fraud 116 Global Financial Crisis (GFC) 97 golden rule 17 good faith 101 in franchising 155

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222

INDEX

goods displaying goods for sale in shops 29–30 fit for disclosed purpose (under ACL s 55) 89 goods with safety defects, actions against 138–9 guarantees for 88–91 manufactured goods 137 within ‘necessaries’ classes 53 quality of (under ACL s 54) 88–9 sale of goods contract for 91 Sale of Goods Act 1893 (UK) 91 supply of goods by description (under ACL s 56) 90 by sample/demonstration model (under ACL s 57) 90–1 goodwill 152 government federal system of 10 functions 14–15 government regulators 97 responsible government 10 High Court 8 ‘covering the field’ test 14 innominate/intermediate terms, recognition of 64 holding out 173 honesty 101 honourable pledge clause 42 human agents 56 ICANN Uniform Domain-Name Dispute Resolution Policy (UDRP) 124 implied terms implied by court 65–6 implied by statute 67–8 implied through custom or trade usage 67 uncertain terms 68 incorporated business structures 157–8 advantages and disadvantages 157 incorporation 164 Industrial Revolution 160 information 34–5 injunction 77 innominate/intermediate terms 63–5 High Court recognition 64 insider trading 181–2 insolvency 192–205 corporate insolvency 200–5 insolvent trading 183–4

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intention intention to be legally bound 40, 41, 42 intention to contract 43, 62 intention to create legal relations 26–7, 40 neutral context 42 intoxication 56–7 investment 112 invitations to treat auctions 30 auctions as 30 displaying goods for sale in shops 29–30 electronic displays 117 offers to the whole world 31 offers versus invitation to treat 29 tenders 30–1 involuntary bankruptcy 194–5 joint ventures 149–50 advantages and disadvantages 149–50 law Aboriginal law 10 Australian law Australian constitutional system 10–16 origins 8–10 bankruptcy law 192 business law 4–5 commercial law 5 common law 52–5, 67 civil law 5 criminal law 5 remedies for breach 73–6 company law 160–74 consumer protection law 81–93 courts 7–8 inherited English law 4 law of contract mutuality concept underlying 43 purpose 26 making law by courts 4 by Parliament 4 nature of 3–4 purpose of 4 sources of primary sources 5–6 unenacted law 5 statute law 16–19 themes 3–4 legal framework, Australian legal system 3–20 legal relations 26–7, 40

4/08/14 10:49 AM

INDEX

legislation delegated legislation 15–16 tabling of 16 e-commerce legislation 118–19 interpretation, approaches to 16–19 New South Wales legislation (minors’ contracts) 54–5 Partnership Acts 148 South Australian legislation (minors’ contracts) 55 state consumer protection legislation 92–3 Trustee Acts 150–1 liability criminal conduct 128 of directors 177–8 exclusion clauses 69–72 joint liability of partnerships 148 of manufacturers under ACL 136–7, 138–9 prerequisites 137–8 of minors 52–5 for misstatement 132–3 for negligence 128–9 no liability companies 166 tortious conduct 128 limited partnerships 148 liquidation 203 liquidated/unliquidated damages 75 arithmetical calculation 75 literal rule 17 golden rule qualification/moderation 17 loss mitigation of 76 pecuniary loss 133 types 74–5 Hadley v Baxendale rule 74 Magistrates’ Court 8 majority 52–5 manufacturers ACL definition 136 actions against for goods with safety defects 138–9 common elements of claims made 139 liability under ACL 136–7, 138–9 prerequisites 137–8 manufactured goods 137 markets derivative markets 97 market regulators 97

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223

members’ personal rights enforcement 185–6 mental incapacity 56–7 mere representations 60 minors civil acts and 55 common law position 52–5 liability of 52–5 minors’ contracts under statute 54–5 New South Wales legislation 54–5 South Australian legislation 55 Minors (Property and Contracts) Act 1970 (NSW) 54 Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) 55 mischief rule 17 misleading or deceptive conduct 83–5, 135–6 lack of definition 83 misrepresentation 62 of exclusion clauses 70–1 misstatement 132–5 mitigation, of loss 76 mutuality concept 43 native title, Wiks case 9–10 ‘necessaries’ 52–3 cars as necessaries? 52 negligence 100, 127–39 of financial institutions 104 liability for 128–9 negligent misstatement 132–5 prerequisites 129 what is the tort of negligence? 128–9 negotiable instruments 104–12 quality of negotiability 105 ‘neighbour principle’ 129 application 130–2 no liability companies 166 nominal damages 76 non-contractual representations 60 noscitur a sociis rule 19 ‘notice requirement’ 69–70 offer 26–36 acceptance must be final and unqualified 35–6 acceptance must be in response to 32–3 counter-offer 33–5 versus information supply 28 meaning of 27–9 offers to the whole world 31 offers versus invitation to treat 29

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224

INDEX

offer cont. revocation (withdrawal) 31–2 on the web 117 officers see directors online agreements 117–18 Online Ombudsman 124 orders bills of exchange 108–10 cheques 104–12 sequestration orders 195, 196–7 specific performance 77 ownership 93, 145–58, 160–74, 177–86 partnerships 147–8 paperless banking see Electronic Funds Transfer (EFT) system Parliament Commonwealth Parliament 11 delegated legislation 15–16 federal parliament 10, 14 intention (when passing Acts) 17 law making 4 enacted law 5 parol evidence rule 60–2 exceptions 60–2 parties 61 intention of parties to contract 62 intention of parties to preserve contract 68 partnerships 147–8 advantages and disadvantages 148 joint liability of partnerships 148 limited partnerships 148 pastoral leases 10 Payment Systems and Netting Act 1998 (Cth) 122 Payment Systems (Regulation) Act 1998 (Cth) 122 Payments System Board (PBS) 121–2 act-derived power 122 payments systems 121–3 penalties 75–6 postal acceptance rule 36 power arbitrary power 4 concurrent powers—state–Commonwealth 13–14 interpretation of, Commonwealth, in favour of 11 state parliaments, general powers of 11 precedent, doctrine of 6–7 precedent, rules of 8

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private trusts 152 privity of contract doctrine 51 association with consideration 51 promise 26, 43 gratuitous promises 43–4 promisee 26 consideration must move from 47 promisor 26 promissory estoppel 48–50 Australian application 49–50 detriment concept 48–50 use as ‘shield’/’sword’ 48, 50 promissory notes 111–12 acceptor of bill, promissory note as 111 key benefit—increased returns 112 payment 112 ‘proper plaintiff’ rule 185 proposals 29–31 invitations to treat 117 proprietary companies 166–8 proximity 130–2 public trusts 152 ‘puff’ (sales talk) 31 purpose/purposive approach 17–18 ratio decidendi (ratio) 7 receivership 203–4 receivers 204 regulatory framework (banking and finance) 97–9 relation back doctrine 195, 197 remedies 60–77 for breach 73–6 promissory estoppel 48–50 remoteness principle 73 replaceable rules 169–70 representations 85–7 repudiation (of contract) 56, 65 Reserve Bank Act 1959 (Cth), PBS’s power 122 Reserve Bank of Australia (RBA) 98, 121–2 responsible government 10 safety defects 138–9 Sale of Goods Act 1893 (UK) 91 separate legal entity concept 162–4 application in Salomon v Salomon 163–4 sequestration orders 195, 196–7 services beneficial contracts of service 53–4 guarantee relating to supply of services (under ACL ss 60–61) 91–2 within ‘necessaries’ classes 53

4/08/14 10:49 AM

INDEX

shares 165 silence 85 smart cards 120 sole traders 146–7 advantages and disadvantages 147 specific performance 77 stare decisis see precedent, doctrine of state parliaments 11 State Supreme Court 8 states courts, hierarchy of 7–8 law-making powers division 13 residual powers of 12–13 statutes commercial law regulation 5 consumer guarantees, statutory regime governing 88 minors’ contracts under 54–5 statutory assumptions (company law) 172–4 limitations 174 statutory interpretation 16–19 assistive approaches 16–19 terms implied by 67–8 statutory interpretation assistive approaches 16–19 basic principles 18–19 extrinsic materials use 18 strict and narrow 17 subject matter 61 tenders 30–1 terms clauses 60 kinds of 63 contra proferentem rule 72–3 exclusion clauses 69–72 express terms 60–5 implied terms 65–8 provisions 60 significance of 64 stipulations 60 terra nullius, Mabo case study 9 territories, courts, hierarchy of 7–8 title 88 torts 127–8 tort of negligence see negligence Trade Practices Act 1974 (Cth) see Australian Competition and Consumer Act 2010

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225

trademarks 125 trade/trading freedom of interstate trade 14 insider trading prohibitions 181–2 insolvent trading 183–4 rival traders 84 sole traders 146–7 trade usage, terms implied through 67 on the web 117–18 trading trusts 152 trusts 150–3 advantages and disadvantages 153 classifications 151–2 trustees duties 150–1 powers 151 workings 150 typosquatting 125 uncertain terms 68 unconscionability 50 Uniform Domain Name Dispute Resolution Policy (UDRP) 124 unincorporated business organisations 146–57 unit trusts 152 unlimited companies 165–6 usage (evidence of) 61 value adequacy of value 44–5 consideration, legal value 46 Virtual Magistrate 124 voidability 51, 57 voluntary administration 200–1 voluntary administrator 201–2 voluntary bankruptcy 194–5 Wallis Committee of Inquiry 97–8 warranties 63–4, 65 ACL ss 51–53, replacement with guarantees 88 breach of 62 collateral warranty 61 warranty–condition distinction 62 Westminster system 15 wilderness 12 winding up see liquidation

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Your guide to the essentials of business law. Learn how to link the key concepts from your lectures, textbooks and tutorials to get the most from your study, improve your knowledge of law and develop legal problem-solving skills. This guidebook will help you navigate through the fundamental points of business law using: • clear and concise explanations of what you need to know • guidelines for answering questions • cases to remember • test your knowledge questions • assessment preparation sections • diagrams of difficult concepts • up-to-date cases and legislation. Charles YC Chew is Senior Lecturer in the School of Law, University of Wollongong.