Introduction to business law in Australia
 9780455237671, 0455237670

Citation preview

INTRODUCTION

TO BUSINESS AUSTRALIA

LAW

IN

ii Thomson Reuters (Professional) Australia Limited 100 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] www.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only)

INTERNATIONAL AGENTS & DISTRIBUTORS

NORTH AMERICA Thomson Reuters Eagan United States of America

ASIA PACIFIC Thomson Reuters Sydney Australia

LATIN AMERICA Thomson Reuters São Paulo Brazil

EUROPE Thomson Reuters London United Kingdom

Introduction to Business Law in Australia COMPILED BY ALEXANDRA OTEVREL BA in Management (UC), LLB (BC) , LLM (ANU) Lecturer University of Canberra

LAWBOOK CO. 2016

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW ISBN: 9780 455 237 671 © 2016 Thomson Reuters (Professional) Australia Limited Copyright of Commonwealth legislative material: All Commonwealth legislative material is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. For reproduction or publication beyond that permitted by the Copyright Act 1968 (Cth), permission should be sought in writing from the current Commonwealth Government agency with the relevant policy responsibility. Editors: Nikki Savvides and Patrick Wu Product Developer: Vickie Ma Publisher: Robert Wilson Typeset by Thomson Reuters (Professional) Australia Limited Printed by Ligare Pty Ltd, Riverwood, NSW This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests. For more info: http://www.pefc.org

PUBLISHER’S NOTE Text compilation This publication has been prepared by drawing upon material from the following Thomson Reuters (Professional) Australia titles:  Davenport and Parker, Business and Law in Australia (2nd ed, Lawbook Co, 2015)  Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015)  Turner, Trone and Gamble, Concise Australian Commercial Law (3rd ed, Lawbook Co, 2015) Pagination, paragraphs, cross-references and footnotes The content of this book has been re-paginated and re-paragraphed to run consecutively. Where a reference is made to text not contained within this publication, the original reference remains, with an indication of its origin, that is:. Publication title Davenport and Parker, Business and Law in Australia (2nd ed, Lawbook Co, 2015) Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015) Turner, Trone and Gamble, Concise Australian Commercial Law (3rd ed, Lawbook Co, 2015)

Cited as Davenport Turner CACL

Footnoting in the text has been re-numbered to run sequentially within each chapter.

TABLE OF CONTENTS Publisher’s Note............................................................................................................................................................................ v Table of Cases ............................................................................................................................................................................... ix Table of Statutes........................................................................................................................................................................ xxv An Introduction to Studying Law Units .................................................................................................................................. xli

Chapter 1: The Australian Legal System.......................................................................................................... 1 Chapter 2: Introduction to the Law of Contract......................................................................................... 57 Chapter 3: Offer and Acceptance.................................................................................................................. 69 Chapter 4: Intention to Create Legal Relations .......................................................................................... 97 Chapter 5: Consideration, Promissory Estoppel and Formalities........................................................... 109 Chapter 6: Contractual Capacity .................................................................................................................. 131 Chapter 7: Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts ............ 139 Chapter 8: Legality of Object ....................................................................................................................... 169 Chapter 9: Contents and Interpretation of the Contract ........................................................................ 191 Chapter 10: Operation of the Contract....................................................................................................... 225 Chapter 11: Termination of a Contract ....................................................................................................... 235 Chapter 12: Remedies..................................................................................................................................... 261 Chapter 13: The Law of Electronic Commerce........................................................................................... 285 Chapter 14: Law of Torts .............................................................................................................................. 305 Chapter 15: Consumer Protection ................................................................................................................ 351 Chapter 16: Property ..................................................................................................................................... 429 Chapter 17: Intellectual Property ................................................................................................................ 455 Chapter 18: Agency........................................................................................................................................ 549 Chapter 19: Business Structures other than Companies.......................................................................... 581 Chapter 20: Company Law ........................................................................................................................... 633 Chapter 21: The Law of Trusts ..................................................................................................................... 679 Index .......................................................................................................................................................................................... 699

Table of Cases A A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478 .............. 17.110 A Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308 ........................ 8.520 AGC v McWhirter (1977) 1 BPR 9595 ................. 3.120 ALDI Stores (A Limited Partnership) v EFTPOS Payments Australia Ltd [2011] FCA 1114 ....................................................... 15.640 ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338 ...................................... 10.160 ANZ Banking Group v Frost [1989] VR 695 ........ 3.640 ATCO Controls Pty Ltd (In liq) v Newtronics Pty Ltd (In liq) (2009) 25 VR 411 .................... 4.220 AWA v Daniels (1992) 7 ACSR 759 .................... 20.550 Abdurahman v Field (1987) 8 NSWLR 158 .......... 8.650 Abela v Public Trustee [1983] 1 NSWLR 308 ..... 16.210 Abram v AV Jennings Ltd (2002) 84 SASR 363 .................................................................... 9.60 Adams v Lindsell (1818) 106 ER 250 ................... 3.540 Adeels Palace Pty Ltd v Mourabak (2009) 239 CLR 420 ................................................. 14.600 Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431 ........................................ 15.900 Adicho v Dankeith Homes Pty Ltd [2012] NSWCA 316 .................................................... 9.190 Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd (1998) 194 CLR 171 .............................................................. 17.1820 Aequitas Ltd v AEFC Leasing Pty Ltd [2001] NSWSC 14 ..................................................... 20.165 Akron Securities v Iliffe (1997) 41 NSWLR 353 ............................................................... 15.1150 Alati v Kruger (1955) 94 CLR 216 ............ 7.480, 7.490 Alexander v Rayson [1936] 1 KB 169 ................... 8.330 Aliotta v Broadmeadows Bus Service Pty Ltd [1988] ATPR 40-873 ...................................... 18.610 Allcard v Skinner (1887) 36 Ch D 145 ...... 7.590, 7.640 Allergan Inc v Di Giacomo (2011) 199 FCR 126 .............................................................. 17.2360 Amber Size Chemical Co v Menzel [1913] 2 Ch 239 ............................................................. 8.410 Anaesthetic Supplies Pty Ltd v Rescare Ltd (1994) 50 FCR 1 .......................................... 17.1840 Ancher Mortlock Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278 ..................................... 17.190, 17.360 Anderson v Glass (1868) 5 WW & AB (L) 152 .................................................................. 5.120

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 ...... 12.360 Andrews v Parker [1973] Qd R 93 ........................ 8.210 Andrews Bros (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17 .................................... 9.490 Angus & Coote Pty Ltd v Render (1989) 16 IPR 387 ........................................................ 17.2840 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 ................................................................. 11.360 Anton Piller KG v Manufacturing Processes Ltd [1976] 1 Ch 55 ...................................... 17.1260 Apand Pty Ltd v Kettle Chip Co Pty Ltd (No 2) (1999) 88 FCR 568 .................................. 17.2770 Apand Pty Ltd v The Kettle Chip Co Pty Ltd (1994) 52 FCR 474 ........................................ 15.180 Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 88 ALJR 261 ............... 17.1840, 17.2110 Architects (Australia) Pty Ltd v Witty Consultants Pty Ltd [2002] QSC 139 ............. 13.280 Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 .......................................... 16.60; 16.70, 16.510 Argyll v Argyll [1967] 1 Ch 302 ........................ 17.2790 Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564 .................................... 17.1220 Armagas Ltd v Mundogas SA [1986] 1 AC 717 ................................................................ 18.650 Ascot Four Pty Ltd v Australian Competition and Consumer Commission (2009) 176 FCR 106 ........................................................ 15.530 Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828 ....................... 8.150 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 ..................................................... 9.250 Association for Molecular Pathology v Myriad Genetics Inc 596 US 12-398 (2013) .......................................................... 17.1850 Astley v Austrust Ltd (1999) 197 CLR 1 ............ 12.290, 14.680 Attorney-General v RT Co Pty Ltd (No 2) (1957) 97 CLR 146 ........................................ 16.400 Attwood v Lamont [1920] 3 KB 571 .................... 8.410 Atwell v Roberts (2013) 43 WAR 507 ................ 19.970 Aurel Forras Pty Ltd v Graham Karp Developments Pty Ltd [1975] VR 202 ............ 11.630 Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 .................................... 5.380 Australasian Performing Right Assoc v Canterbury-Bankstown League Club Ltd [1964] NSWR 138 ......................................... 17.380

x

Introduction to Business Law in Australia

Australasian Performing Right Assoc Ltd v Commonwealth Bank of Australia (1992) 40 FCR 59 ..................................................... 17.390 Australasian Performing Right Assoc Ltd v Tolbush Pty Ltd [1986] 2 Qd R 146 ............... 17.380 Australian Capital Television Pty Ltd v Commonwealth (1992) 177 CLR 106 .............. 1.100 Australian Capital Territory v Munday (2000) 99 FCR 72 ....................................................... 8.580 Australian Communications Network Pty Ltd v Australian Competition and Consumer Commission (2005) 146 FCR 413 ................. 15.820 Australian Communications and Media Authority v FHT Travel Pty Ltd [2011] FCA 550 ........................................................ 13.420 Australian Communications and Media Authority v Mobilegate Ltd (No 9) [2010] FCA 1383 ...................................................... 13.400 Australian Competition and Consumer Commission v AirAsia Berhad Co [2012] FCA 1413 ...................................................... 15.840 Australian Competition and Consumer Commission v Apple Pty Ltd [2012] ATPR 42-404; [2012] FCA 646 ................................ 15.970 Australian Competition and Consumer Commission v Apple Pty Ltd [2012] FCA 646 ................................................................ 15.980 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 .................... 15.340, 15.350 Australian Competition and Consumer Commission v Channel Seven Brisbane Pty Ltd (2009) 239 CLR 305 ............................... 15.320 Australian Competition and Consumer Commission v Chen (2003) 132 FCR 309 .... 13.260, 13.340 Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Limited (No 2) [2014] FCA 1022 ............................................................... 15.110 Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 634 .................. 15.110 Australian Competition and Consumer Commission v Dell Computer Pty Ltd (2002) 126 FCR 170 ...................................... 15.510 Australian Competition and Consumer Commission v Excite Mobile Pty Ltd (No 2) [2013] ATPR 42-454; [2013] FCA 1267 .... 15.1220 Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (1999) 95 FCR 302 ................................. 15.860 Australian Competition and Consumer Commission v Gordon Superstore Pty Ltd [2014] ATPR 42-474; [2014] FCA 452 .......... 15.540 Australian Competition and Consumer Commission v Halkalia [2012] FCA 534 ..... 15.1230 Australian Competition and Consumer Commission v Harvey Norman Holdings Ltd [2011] FCA 1407 ..................................... 15.950

Australian Competition and Consumer Commission v Jutsen (No 3) (2011) 206 FCR 264; 285 ALR 110 ................................. 15.820 Australian Competition and Consumer Commission v Luv-A-Duck Pty Ltd [2013] FCA 1136 ....................................................... 15.105 Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90 .......................................... 15.410 Australian Competition and Consumer Commission v Lux Pty Ltd [2004] FCA 926 ................................................................ 15.400 Australian Competition and Consumer Commission v MSY Technology Pty Ltd (No 2) (2011) 279 ALR 609 ........................... 15.980 Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 ....................... 15.870 Australian Competition and Consumer Commission v Marksun Australia Pty Ltd [2011] ATPR 42-363; [2011] FCA 695 ........... 15.570 Australian Competition and Consumer Commission v McCaskey (2000) 104 FCR 8 .................................................................... 15.870 Australian Competition and Consumer Commission v Metricon Qld Pty Ltd [2012] FCA 797 ............................................. 15.220 Australian Competition and Consumer Commission v Pirovic [2014] FCA 21 ............ 15.105 Australian Competition and Consumer Commission v Radio Rentals Ltd (2005) 146 FCR 292 ................................................. 15.380 Australian Competition and Consumer Commission v Samton Holdings (2002)117 FCR 301 ....................................... 15.360 Australian Competition and Consumer Commission v Stott [2013] ATPR 43-439; [2013] FCA 88 ............................................. 15.1220 Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2012] HCA 54; (2013) 250 CLR 640 ............ 15.90, 15.1170 Australian Competition and Consumer Commission v Taxsmart Group Pty Ltd [2014] ATPR 42-473; [2014] FCA 487 ......... 15.650, 17.2890 Australian Competition and Consumer Commission v Turi Foods Pty Ltd [2012] FCA 19 ........................................... 15.105, 15.1210 Australian Competition and Consumer Commission v Turi Foods Pty Ltd [2013] FCA 665 ........................................................ 15.105 Australian Consolidated Press v Uren (1966) 117 CLR 185; [1969] 1 AC 591 ....................... 1.500 Australian Development Corporation Pty Ltd v White (2001) 189 ALR 266 ......................... 10.120 Australian European Finance Corp Ltd v Sheahan (1993) 60 SASR 187 .......................... 4.220 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 307 ALR 512 ................................................................ 12.490

Table of Cases

Australian Mutual Provident Society v Gregory (1908) 5 CLR 615 ............................ 10.210 Australian Postal Corporation v Digital Post Australia Pty Ltd (No 2) (2012) 96 IPR 532 .............................................................. 17.2470 Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 ............... 16.120; 16.380 Australian Securities and Investments Commission v Adler (2002) 168 FLR 253 ..... 20.400, 20.570, 20.590, 20.640 Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 ...... 20.590, 20.600 Australian Securities and Investments Commission v Somerville (2009) 77 NSWLR 110 .................................................. 20.680 Australian Style Pty Ltd v .au Domain Administration Ltd [2010] VSCA 184 ............ 13.310 Australian Video Retailers Association Ltd v Warner Home Video Pty Ltd (2001) 114 FCR 324 ........................................................ 17.430 Australian Woollen Mills Pty Ltd v Commonwealth of Australia (1954) 92 CLR 424 .......................................................... 4.227 Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472 ................................................. 17.1200 Autodesk Inc v Dyason (1992) 173 CLR 330 ..... 17.160 Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300 ........................................................ 17.160 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 ................ 20.500 Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88 ........................................ 17.370 Avery v Bowden (1855) 5 E & B 714 .................. 11.330

B BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 ................................................... 8.550 BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSWCA 224 ................................ 15.200 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1978) 180 CLR 266 ....... 9.640, 9.650 Bahr v Nicolay (No 2) (1988) 164 CLR 604 ....... 16.270 Balfour v Balfour [1919] 2 KB 571 ......................... 4.40 Ball-Guymer v Livantes (1990) 102 FLR 327 ..... 16.120, 16.380 Baltic Shipping Co v Dillon (1991) 22 NSWLR 1 ........................................................ 9.410 Baltic Shipping Co v Dillon (1993) 176 CLR 344 ................................................... 12.230, 12.270 Bank of America Australia Ltd v Ceda Jon International Pty Ltd (1988) 17 NSWLR 290 ................................................................... 8.110 Bank of Australasia v Breillat (1847) 13 ER 642 ................................................................ 19.730 Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 ....................................................... 4.140, 4.222

Barac (t/as Exotic Studios) v Farnell (1994) 53 FCR 193 .......................................................... 8.210 Barclays Bank v Quistclose Investments [1970] AC 567 ................................................. 21.50 Barton v Armstrong [1976] AC 104 ...................... 7.530 Bateman v Slatyer (1987) 71 ALR 553 .............. 17.2890 Bathurst Regional Council v Standard & Poor’s, Local Government Financial Services and ABN Amro [2012] FCA 1200 ..... 14.710 Baumgartner v Baumgartner (1987) 164 CLR 137 ..................................................... 21.80, 21.180 Beck v Montana Constructions Pty Ltd [1964] NSWR 229 ....................................... 17.1080 Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 ....................... 17.2140 Beloff v Pressdram Ltd [1973] 1 All ER 241 ...... 17.270, 17.2820 Berlei Hestia Industries Ltd v Bali Co Inc (1973) 129 CLR 353 .................................... 17.2470 Bermingham v Corrective Services Commission of New South Wales (1988) 15 NSWLR 292 ............................................... 1.310 Bernstein of Leigh (Baron) v Skyviews & General Ltd [1978] 1 QB 479 ........................ 16.310 Beswick v Beswick [1968] AC 58 ............... 10.50, 10.60 Bettini v Gye (1876) 1 QBD 183 ................ 9.240, 9.270 Bhasin v Hrynew (2014) SCC 71 .......................... 9.720 Birdanco Nominees Pty Ltd v Money (2012) 36 VR 341 ....................................................... 8.470 Black v Smallwood (1966) 117 CLR 52 .............. 20.165 Blackwell v Wadsworth (1982) 64 FLR 145 ........ 17.50, 17.310 Blyth v Birmingham Waterworks Co (1856) 11 Exch 781 ................................................... 14.430 Boardman v Phipps [1967] 2 AC 46 ...... 21.250, 21.380 Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536 282 ALR 571 ....... 15.430 Boghani v Nathoo [2011] EWHC 2101 ............ 19.1020 Bojczuk v Gregorcewicz [1961] SASR 128 .............. 6.50 Bolton v Mahadeva [1972] 2 All ER 1322 ............ 11.80 Bolton v Stone [1951] AC 850 ............................ 14.490 Bolton, Re; Ex parte Beane (1987) 162 CLR 514 .................................................................. 1.320 Boncristiano v Lohmann [1998] 4 VR 82 ........... 12.280 Bond v The Queen (2000) 201 CLR 213 .............. 20.40 Boyd v Ryan (1947) 48 SR (NSW) 163 ............... 12.460 Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd (2012) 210 FCR 21 .................................. 17.1900, 17.2030 Brakoulias v Karunaharan (Ruling) [2012] VSC 272 ........................................................ 14.520 Break Fast Investments Pty Ltd v PCH Melbourne Pty Ltd (2007) 20 VR 311 ........... 16.320 Breskvar v Wall (1971) 126 CLR 376 ................. 16.270 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 ............... 20.220 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandels-gesellschaft mbH [1983] 2 AC 34 ................................................ 3.590 Bridges v Hawkesworth (1851) 21 LJ QB 75 ..... 16.590, 16.680

xi

xii

Introduction to Business Law in Australia

Bristol-Myers Co v Beecham Group Ltd [1974] AC 646 ............................................. 17.1930 Bristol-Myers Company’s Application, Re [1969] RPC 146 ........................................... 17.1900 Bristol-Myers Squibb Co v FH Faulding & Co Ltd (2000) 97 FCR 524 .......................... 17.1840 Brunninghausen v Glavanics (1999) 46 NSWLR 538 .................................................. 20.530 Bryan v Maloney (1995) 182 CLR 609 ............... 14.110 Buckland v Massey [1985] 1 Qd R 502 .................. 8.90 Buckley v Tutty (1971) 125 CLR 353 ................... 8.500 Burge v Swarbrick (2007) 232 CLR 336 ............ 17.200, 17.210 Burmic Pty Ltd v Goldview Pty Ltd [2003] 2 Qd R 477 ........................................................... 8.30 Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 ............ 14.510, 14.720, 14.730 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 ...................................... 12.190 Buseska v Sergio (1990) 102 FLR 157 ................ 18.310 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 ...................................... 15.310 Butler v Craine [1986] VR 274 ............................. 5.490 Byers v Dorotea Pty Ltd (1986) 69 ALR 715 ........ 9.230 Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344 ............................................ 3.260 Byrne v Hoare [1965] Qd R 135 ......................... 16.710

C CAJ Investments Pty Ltd v Lourandos (1998) 83 FCR 189 ................................................. 15.1050 CAL No 14 Pty Ltd v Motor Accidents Board (2009) 239 CLR 390 ...................................... 14.220 CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 ...................................................... 17.1860 CSR Ltd v Resource Capital Australia Pty Ltd (2003) 128 FCR 408 ...................................... 13.240 Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851 ..................... 17.2670 Caj Amadio Constructions Pty Ltd v Kitchen (1991) 23 IPR 284 ....................................... 17.1140 Caltex Oil (Aust) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 ............... 14.270 Cameron v Murdoch (1986) 60 ALJR 280 ......... 19.210 Camila Pty Ltd v Actus Australia Ltd [1994] ATPR 41-367 ............................................... 17.2890 Re Cancer Care Institute of Australia Pty Ltd [2013] NSWSC 37 ......................................... 16.460 Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 ........................... 19.90, 19.320 Cantarella Bros Pty Ltd v Modena Trading Pty Ltd [2014] HCATrans 157 (5 August 2014) ........................................................... 17.2270 Caparo Industries Plc v Dickman [1990] 2 AC 605 ................................................................ 14.410 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 ................................... 3.90, 3.180, 3.430, 3.480 Carney v Herbert [1985] 1 AC 301 ....................... 8.690 Carter v Hyde (1923) 33 CLR 115 ....................... 3.340

Case of Mines (1658) 1 Plow 310; 75 ER 472 .... 16.110 Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 .................................. 12.200 Catnic Components Ltd v Hill & Smith Ltd [1982] RPC 183 ........................................... 17.2120 Causer v Browne [1952] VLR 1 ............................ 9.450 Cedar Hill Flowers & Foliage Pty Ltd v Spierenburg [2003] 1 Qd R 482 ....................... 8.530 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 ....................... 5.320 Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 509 ........... 14.760 Chairman, National Crime Authority v Flack (1998) 86 FCR 16 .......................................... 16.600 Chan v Zacharia (1984) 154 CLR 178 ............... 19.560 Chapman v Hearse [1961] 106 CLR 112 ............ 14.160 Chappel v Hart (1998) 185 CLR 232 ................. 14.600 Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 .............................................................. 5.100 Chiarabaglio v Westpac Banking Corp [1989] ATPR 40-971; [1991] ATPR (Digest) 46-067 ........................................................... 14.390 Chief Executive Officer of Customs v Biocontrol Ltd (2006) 150 FCR 64 .................. 1.370 Childrens Television Workshop Inc v Woolworths (NSW) Ltd [1981] 1 NSWLR 273 .............................................................. 17.2700 Chin Keow v Government of Malaysia [1967] 1 WLR 813 .................................................... 14.440 Chitts v Allaine [1982] Qd R 319 ........................... 8.50 Church of the New Faith v Commissioner of Pay-roll Tax (Victoria) (1983) 154 CLR 120 ................................................................ 21.140 City of London Corp v Appleyard [1963] 1 WLR 982 ....................................................... 16.700 Clarendon Homes (Aust) Pty Ltd v Henley Arch Pty Ltd (1999) 46 IPR 309 .................... 17.190 Clark v Macourt (2013) 304 ALR 220 ............... 12.100 Claude Neon Ltd v Hardie [1970] Qd R 93 ........ 11.600 Clough v London and North Western Railway Co (1871) LR 7 Exch 26 .................... 7.480 Coastal Estates Pty Ltd v Melevende [1965] VR 433 ............................................................ 7.480 Coca-Cola Trade Marks [1986] 1 WLR 695 ..... 17.2210 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 .................................... 9.50, 9.660, 11.520 Cody v Nelson (1947) 74 CLR 629 ...................... 1.370 Coghlan v Pyoanee Pty Ltd [2003] 2 Qd R 636 ................................................................. 11.150 Collins v Godefroy (1831) 1 B & Ad 950; 109 ER 1040 .................................................... 5.190 Comcare v Thompson (2000) 100 FCR 375 ......... 1.310 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 ...... 1.510, 1.520, 7.660, 7.670, 15.330 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 .................. 12.70, 12.80, 12.210 Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39 ......................... 17.640, 17.2820

Table of Cases

Commonwealth v Tasmania (1983) 158 CLR 1 ...................................................................... 1.100 Commonwealth Disposals Commission v McRae (1951) 84 CLR 377 ............................ 11.380 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 ...................... 9.660, 9.680 ConAgra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302 ...................................... 17.2680 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 ............................ 15.70 Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577 .............................................................. 17.1080 Construction Engineering Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 ............................... 19.810 Conway v Critchley [2012] NSWSC 1405 ............ 4.140 Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297 ............................................... 1.340, 1.350 Cope Allman (Marrickville) Ltd v Farrow (1984) 3 IPR 567 ........................................... 17.310 Cork v Kirby McLean [1952] 2 All ER 402 ........ 14.600 Corkery v Carpenter (1951) 1 KB 102 .................. 1.360 Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1998) 155 ALR 714 ............ 15.240 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 ........................................ 10.30 Council of the City of Sydney v West (1965) 114 CLR 481 ............................. 9.530, 9.540, 9.570 Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 ............... 3.620 Cowen v Piggott [1989] 1 Qd R 41 ...................... 7.590 Cowern v Nield [1912] 2 KB 419 ......................... 6.100 Cox v Coulson [1916] 2 KB 177 ......................... 19.150 Cox v Hickman (1860) 11 ER 431 ..................... 19.460 Cox v Mosman [1909] QSR 45 .......................... 18.140 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 ........................... 18.130, 18.310 Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 ......... 11.140 Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 ............... 7.550 Cribb v Korn (1911) 12 CLR 205 ....................... 19.440 Cruttwell v Lye (1810) 34 ER 129 ...................... 19.650 Cummings v Sir William Arrol & Co Ltd [1962] 1 WLR 295 ......................................... 14.600 Currie v Misa (1875) LR 10 Ex 153 ....................... 5.10 Curtis v Chemical Cleaning & Dyeing Co Ltd [1951] 1 KB 805 .............................................. 9.460 Cut Price Deli Pty Ltd v Jacques (1994) 49 FCR 397 ...................................................... 17.2890 Cutter v Powell (1795) 101 ER 573 ...................... 11.40

D DC Comics v Cheqout Pty Ltd (2013) 212 FCR 194 ...................................................... 17.2390

xiii

Dargusch v Sherley Investments Pty Ltd [1970] Qd R 338 ........................................... 18.400 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 ...................... 9.570, 9.580 Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101 .................................... 17.2140 Data Access Corpn v Powerflex Services Pty Ltd (1999) 202 CLR 1 ................................... 17.160 David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 ................ 14.390 Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642 ..................................................... 9.520 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 ..................... 11.390 Dawson v World Travel Headquarters Pty Ltd [1981] FCA 103 ............................................. 15.720 Day v O’Leary (1992) 57 SASR 206 ................... 12.160 Day Ford Pty Ltd v Sciacca [1990] 2 Qd R 209 .................................................................. 8.690 De Francesco v Barnum (1890) 45 Ch D 430 ......... 6.90 De Garis v Neville Jeffress Pidler Pty Ltd (1990) 37 FCR 99 ............................. 17.290, 17.650 Dearle v Hall (1828) 3 Russ 1; 38 ER 475 .......... 10.210 Deatons Pty Ltd v Flew (1949) 79 CLR 370 ...... 14.770, 18.660 Debenham v Mellon (1880) 5 QBD 394 ............. 18.190 Degiorgio v Dunn [2004] NSWSC 767 ............... 19.380 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 ............................................... 7.340, 15.260 Dennison Manufacturing Co v Monarch Marketing Systems Inc (1983) 66 ALR 265 .... 17.1900 Derbyshire Building Co Pty Ltd v Becker (1962) 107 CLR 633 ........................................ 9.670 Derry v Peek (1889) 14 App Cas 337 .................... 7.330 Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491 .......... 17.120, 17.130, 17.140 Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 37 IPR 477 ........................ 17.1080, 17.1090 Dick Bentley Productions Limited v Harold Smith (Motors) Ltd [1965] 1 WLR 623 ........... 9.150 Digga Australia Pty Ltd v Norm Engineering Pty Ltd (2008) 166 FCR 268 ....................... 17.1780 Director of Public Prosecutions v Esso Australia Pty Ltd (No 2) (2001) 126 A Crim R 13 ...................................................... 20.130 Director of Public Prosecutions v Le (2007) 15 VR 352 ....................................................... 1.320 Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 .......................................... 8.350 Dobler v Halverson [2007] NSWCA 335 ............ 14.580 Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106 ................................. 17.220, 17.230, 17.250 Donoghue v Stevenson [1932] AC 562 ..... 14.50, 14.90, 14.150, 14.300 Dow Jones & Co Inc v Gutnick (2003) 210 CLR 575 ........................................................ 13.330 Ducret v Colourshot Pty Ltd [1981] FCA 9; 35 ALR 503 ................................................... 15.620 Duff v Blinco (No 2) [2007] 1 Qd R 407 .............. 5.450 Duke Group Ltd v Pilmer (1999) 73 SASR 64 .... 19.880

xiv

Introduction to Business Law in Australia

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 ....................................... 5.50 Dura-Post (Australia) Pty Ltd v Delnorth Pty Ltd (2009) 177 FCR 239 ............................. 17.2090 D’Arcy v Myriad Genetics Inc [2014] FCAFC 115 ............................................................... 17.1850

E E v Australian Red Cross Society (1992) 31 FCR 299 ...................................................... 15.1330 EBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450 ........................................ 9.590, 13.160, 15.130 EJ Gallo Winery v Lion Nathan Australia Pty Ltd (2010) 241 CLR 144 .............. 17.2200, 17.2440 EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd (2011) 191 FCR 444 ........ 17.330 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 .......................................................... 20.320 Edsonic Pty Ltd v Cassidy (2010) 189 FCR 271 ................................................................ 17.270 Elder Smith Goldsbrough Mort Ltd v McBride [1976] 2 NSWLR 631 ........................ 9.510 Elders Lensworth Finance Ltd v Australian Central Pacific Ltd [1986] 2 Qd R 364 ............ 7.290 Electricity Generation Corp t/a “Verve” v Woodside Energy [2014] HCA 7; (2014) 88 ALJR 447 .................................................... 9.480 Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88 .............. 20.190 Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995) 63 SASR 235 .................................. 3.560 Elwes v Brigg Gas Co (1886) 33 Ch D 562 ......... 16.630 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 .......... 3.380 Energy Brix Australia Corporation Pty Ltd v National Logistics Coordinators (Morwell) Pty Ltd (2002) 5 VR 353 .................................. 5.300 Erlanger v New Sombrero Phosphate Co [1878] 3 App Cas 1218 .................................. 20.165 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 .................. 4.10, 4.130 Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260 .......................................................... 11.420 Erven Warnink v J Townend & Sons (Hull) Ltd [1979] AC 731 ....................................... 17.2650 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 ................. 14.420 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] 2 AC 269 ..................... 8.580 EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 ......................... 8.410, 8.560

F Facton Ltd v Erdogan (No 1) (2012) 99 IPR 46 ................................................................ 17.1220 Facton Ltd v Toast Sales Group Pty Ltd (2012) 205 FCR 378 .................................... 17.1170

Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109 ...................................... 17.100 Falko v James McEwan & Co Ltd [1977] VR 447 ................................................................ 12.240 Famestock Pty Ltd v Body Corporate for No 9 Port Douglas Road Community Title Scheme 24368 [2013] QCA 354 ....................... 9.620 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 ........... 1.500, 1.530, 16.270 Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037 .................................................... 3.400 Fibrosa Spolka Akcyjna v Fairbairn, Lawson, Combe, Barbour, Ltd [1943] AC 32 .............. 11.640, 11.660 Fiorelli Properties Pty Ltd v Professional Fencemakers Pty Ltd (2011) 34 VR 257 ......... 12.400 First National Securities Ltd v Jones [1978] 1 Ch 109 ............................................................. 5.300 Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 .......................................................... 8.160 Fitzgerald v Penn (1945) 71 CLR 637 ................. 12.110 Fleming Bros (Monaro Agencies) Pty Ltd v Smith [1983] ATPR 40-389 .............................. 8.680 Foakes v Beer (1884) 9 App Cas 605 .................... 5.210 Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 ........................................................ 11.290 Forbes v New South Wales Trotting Club Ltd (1979) 143 CLR 242 ...................................... 20.190 Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42 ................................................. 7.270 Forrest v ASIC [2012] HCA 39 ............................... 2.60 Foster v Mountford and Rigby Ltd (1977) 14 ALR 71 ........................................................ 17.2790 Foti v Banque Nationale de Paris [1990] Aust Torts Reports 81-025 ..................................... 14.390 400 George Street (Qld) Pty Ltd v BG International Ltd [2012] 2 Qd R 302 ............... 5.300 Francis Day & Hunter Ltd v Bron [1963] Ch 587 ................................................................ 17.330 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 ......................... 7.280, 7.290 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 ................................................................ 20.430 Fraser v Thames Television [1984] 1 QB 44 ...... 17.2800 Frazer v Walker [1967] 1 AC 569 .......... 16.270; 16.280 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 ..... 18.130, 18.210, 18.240, 18.250 Frost v Warner (2002) 209 CLR 509 .................. 14.760 Fry Consulting Pty Ltd v Sports Warehouse Inc (No 2) (2012) 201 FCR 565 ................... 17.2390 Fry v Oddy [1999] 1 VR 557 ............................ 19.1050 Fulcher & Ors v Knott Investments Pty Ltd & Ors [2012] QSC 232 .................................... 15.1590

G GMA Garnet Pty Ltd v Barton International Inc (2010) 183 FCR 269 .................................... 9.50 Gaffney v Ryan [1995] 1 Qd R 19 ........................ 8.100

Table of Cases

Galaxy Electronics Pty Ltd v Sega Enterprises Ltd (1997) 75 FCR 8 ..................................... 17.850 Gambotto v WCP Ltd (1985) 182 CLR 432 ....... 20.300 Garcia v National Australia Bank (1998) 194 CLR 395 .......................................................... 7.710 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 ................................. 15.1020 Geipel v Smith (1872) LR 7 QB 404 ................... 11.250 Geraghty v Minter (1979) 142 CLR 177 .............. 8.410 Gett v Tabet (2009) 254 ALR 504 ........................ 1.500 Getup Ltd v Electoral Commissioner (2010) 189 FCR 165 ................................................... 13.60 Gibbons v Wright (1954) 91 CLR 423 .................. 6.170 Gibson v Manchester City Council [1979] 1 All ER 972 ......................................................... 3.50 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 ........................... 3.470 Giles v Thompson [1994] 1 AC 142 ...................... 8.280 Gilford Motor Co Ltd v Horne [1933] Ch 935 ................................................................. 20.110 Giliberto v Kenny (1983) 48 ALR 620 .................... 9.70 Gipps v Gipps [1978] 1 NSWLR 454 ................... 7.380 Gippsreal Ltd v Registrar of Titles (2007) 20 VR 127 ............................................................ 2.110 Giumelli v Giumelli (1999) 196 CLR 101 ............. 5.400 Given v Pryor (1979) 24 ALR 442; (1980) 30 ALR 189 ........................................................ 15.590 Glasbrook v Glamorgan County Council [1925] AC 270 ................................................. 5.200 Re Gleebs Pty Ltd [1933] VLR 293 ..................... 16.810 Gluckstein v Barnes [1900] AC 240 .................... 20.165 Godecke v Kirwan (1973) 129 CLR 629 .............. 3.630 Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479 ....................... 17.1160, 17.1240 Goldberg v Jenkins (1889) 15 VLR 36 ................ 19.790 Goldsbrough, Mort & Co Ltd v Quinn (1910) 10 CLR 674 .......................................... 3.240 Goodridge v Macquarie Bank Ltd (2010) 265 ALR 170 ........................................... 10.160, 10.180 Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435 ................................................................ 15.370 Goudberg v Herniman Associates Pty Ltd [2007] VSCA 12 ............................................. 19.350 Gould v Vaggelas (1984) 157 CLR 215 ................. 7.410 Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 ......................... 14.250, 14.540 Grainger v Gough [1896] AC 325 ........................... 3.70 Great Northern Railway Co v Swaffield (1874) LR 9 Exch 132 ................................... 18.170 Green v Bestobell Industries Ltd [1982] WAR 1 .................................................................... 20.100

H H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1 QB 791 ................................ 12.150 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 ...... 15.1040 Hadley v Baxendale (1854) 9 Exch 341 ............. 12.110, 12.120

Halal Certification Authority Pty Ltd v Scadilone Pty Ltd (2014) 107 IPR 23 ........... 17.2530 Hall & Barker, Re [1878] 9 Ch D 538 .................. 11.50 Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488 .... 19.850 Hamilton v Bank of New South Wales (1894) 15 LR (NSW) 100 .......................................... 16.800 Hamilton v Lethbridge (1912) 14 CLR 236 ............ 6.70 Hannah v Peel [1945] 1 KB 509 .............. 16.90, 16.520 Harris v Nickerson (1872–73) LR 8 QB 286 ........ 3.110 Harrods Ltd v Dow Jones & Co Inc [2003] EWHC 1162 .................................................. 13.340 Hart v O’Connor [1985] AC 1000 ....................... 6.170 Hartley v Ponsonby (1857) 7 E & B 872 .............. 5.250 Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1986] AC 207 .............................. 3.160 Harvey v Facey [1893] AC 552 ............................... 3.60 Harvey v Harvey (1970) 120 CLR 529 ............... 19.630 Hatt v Magro (2007) 34 WAR 256 ................... 15.1080 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 ....................... 7.570 Hawkes & Son (London) Ltd v Paramount Film Service Ltd [1934] 1 Ch 593 .................. 17.330 Health World Ltd v Sin-Shun Australia Pty Ltd (2010) 240 CLR 590 ............................. 17.2410 Health and Aged Care, Minister for v Harrington Associates Ltd (2000) 107 FCR 212 ........................................................ 15.140 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 ............................ 14.320, 14.330 Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1 ............................... 9.670 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 .......................................................... 18.225 Henderson v Radio Corp Pty Ltd (1960) 60 SR (NSW) 576 ............................................. 17.2740 Henjo Investments Pty Ltd v Collins Marrickville (1988) 79 ALR 83 ...................... 15.250 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 41 ................................. 9.470 Henthorn v Fraser [1892] 2 Ch 27 ........................ 3.530 Herbert Morris Ltd v Saxelby [1916] 1 AC 688 ....................................................... 8.410, 8.420 Hermann v Charlesworth [1905] 2 KB 123 ......... 8.360, 8.710 Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 ........................................................... 11.480 Hickman v Kent or Romney Marsh Sheep Breeders Association [1915] 1 Ch 881 ............ 20.260 Hinchliff v Abu-Dabat (1998) 41 IPR 400 ........ 17.1120 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169 ........................................... 8.410 Hoenig v Isaacs [1952] 2 All ER 176 .................... 11.70 Hogan v Koala Dundee Pty Ltd (1988) 20 FCR 314 ...................................................... 17.2710 Holland v Hodgson (1872) LR 7 CP 328 ............ 16.390 Hollis v Vabu Pty Ltd (2001) 207 CLR 21 .......... 14.740 Holwell Securities Ltd v Hughes [1974] 1 All ER 161 ............................................................. 3.550 Honey v Australian Airlines Ltd (1989) 14 IPR 264 ........................................................ 17.2760

xv

xvi

Introduction to Business Law in Australia

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1952] 2 QB 26 ....... 9.290, 11.360 Hopcroft v Edmunds (2013) 116 SASR 191 ....... 18.230 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 4 ..................... 21.350 Hotmail Corporation v Van$ Money Pie Inc 47 USPQ 2d 1020 (ND Cal 1998) ................. 13.150 Household Fire & Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216 .................................................................. 3.530 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 .......................................................... 18.140 Howe v Teefy (1927) 27 SR (NSW) 301 ............. 12.220 Hoyts Pty Ltd v Burns (2003) 201 ALR 470 ....... 14.600 Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 ....... 9.190 Hubbard v Vosper [1972] 2 QB 84 ..................... 17.620 Humberstone v Northern Timber Mills (1949) 79 CLR 389 ........................................ 14.740 Humphries v Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597 ................................................... 8.690 Hurst v Bryk [2002] 1 AC 185 ............................ 19.990 Hyde v Wrench (1840) 49 ER 132 ........................ 3.300

I IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 .................................................................. 8.680 IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 .................. 17.130, 17.140 Imbree v McNeilly (2008) 236 CLR 510 .............. 1.500 Ingram v Little [1961] 1 QB 31 ............................. 7.200 Insight SRC IP Holdings Pty Ltd v Australian Council for Educational Research Ltd (2013) 101 IPR 484 ....................................... 10.170 Insight Vacations Pty Ltd v Young [2011] HCA 16; (2011) 243 CLR 149 .............. 1.490, 9.500 Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [1989] 2 QB 433 ........................ 9.430 International Business Machines Corp v Commissioner of Patents (1991) 33 FCR 218 .............................................................. 17.1860 Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534 ......................... 17.500, 17.510

J J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyds Rep 1 .................................................. 11.620 JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 ........................................ 12.440 JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 ........................................ 9.210, 9.220 Jaensch v Coffey [1984] HCA 52 ........................ 14.180 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 ................................................. 15.1050 Jardin v Metcash Ltd (2011) 285 ALR 677 ........... 8.440 Jarvis v Swans Tours Ltd [1973] 1 QB 233 ......... 12.260 Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 ......................................................... 5.340

Jeanette Winterson (Case No. D2000-0235) ....... 13.290 Jewellery Group Pty Ltd v Australian Competition and Consumer Commission [2013] FCAFC 144 ........................................ 15.530 John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd; Walker Corporation Pty Ltd v White City Tennis Club Ltd [2010] HCA 19 ......................................................... 21.370 Johnson v Buttress (1936) 56 CLR 113 ...... 7.590, 7.600 Johnson Tiles Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692 .................. 14.290 Jones v Commonwealth (1987) 71 ALR 497 ......... 1.500 Jones v Dumbrell [1981] VR 199 .......................... 7.350 Jones v Vernon’s Pools Ltd [1938] 2 All ER 626 .................................................................. 4.210 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 .... 11.630 Joseph Saliba v Thomas Tarmo [2009] NSWSC 581 ................................................... 21.190 Juric-Kacunic v Vaupotic [2013] NSWSC 41 ........ 5.300

K K-Generation Pty Ltd v Liquor Licensing Court (2009) 237 CLR 501 ............................. 1.320 Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392 .................................... 1.100, 7.690, 7.720 Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35 ........................................ 15.1090 Keen Mar Corp Pty Ltd v Labrador Shopping Centre (1989) ATPR 46-048 ........................... 15.300 Keene v Muncaster (1980) RTR 377 ..................... 1.350 Keighley, Maxsted & Co v Durant [1901] AC 240 ................................................... 18.330, 18.580 Keith Spicer Ltd v Mansell [1970] 1 All ER 462 ................................................................ 19.360 Keller v LED Technologies Pty Ltd (2010) 185 FCR 449 ............................................... 17.1610 Kelly v The Queen (2004) 218 CLR 216 ............... 1.340 Kelner v Baxter (1866) LR 2 CP 174 .................. 18.560 Khan v Miah [2000] 1 WLR 2123 ......... 19.340, 19.350 Khoury v Khouri (2006) 66 NSWLR 241 ............. 5.450 Kiama Constructions v MC Casella Building Co Pty Ltd (1980) 10 IPR 345 ..................... 17.1160 Kimberly-Clark Australia Pty Ltd v Multigate Medical Products Pty Ltd (2011) 92 IPR 21 ................................................................ 17.2120 Kiriri Cotton Co Ltd v Dewani [1960] AC 192 .................................................................. 8.630 Knight v Bell (1887) 13 VLR 878 ..................... 19.1000 Knight v Beyond Properties Pty Ltd (2007) 242 ALR 586 ................................................. 15.140 Koninklijke Philips Electronics NV v Remington Products Australia Pty Ltd (2000) 100 FCR 90 ...................................... 17.2460 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 .......... 9.280, 11.360, 11.370, 12.30 Kooragang Investments Pty Ltd v Richardson & Wrench Ltd [1982] AC 462 ....................... 18.670 Koufos v Czarnikow Ltd [1969] 1 AC 350 ......... 12.140

Table of Cases

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 ................................................... 7.360 Krell v Henry [1903] 2 KB 740 ........................... 11.470 Ku-ring-gai Co-operative Building Society, Re (No 12) Ltd (1978) 36 FLR 134 ...................... 15.70

xvii

Louth v Diprose (1992) 175 CLR 621 ....... 1.520, 7.690 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 ......... 12.310 Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 ................................................................ 18.480 Lynch v Stiff (1944) 68 CLR 428 ........................ 19.880

L M L J Hooker Ltd v W J Adams Estate Pty Ltd (1977) 138 CLR 52 ........................................ 18.490 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 ......................................... 11.350 LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24 ......................................... 17.1180 LED Technologies Pty Ltd v Elecspess Pty Ltd (2008) 80 IPR 85 .......................... 17.1610, 17.1660 LED Technologies Pty Ltd v Roadvision Pty Ltd (2012) 199 FCR 204 ............................... 10.120 L’Estrange v F Graucob Ltd [1934] 2 KB 394 ..... 9.350, 9.590 La Macchia v Minister for Primary Industries and Energy (1992) 110 ALR 201 ..................... 1.500 Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 ...... 17.90, 17.110, 17.330 Lancashire Loans Ltd v Black [1934] 1 KB 380 .................................................................. 7.590 Larkin v The Queen [2012] WASCA 238 ............ 13.370 Laurinda Pty Ltd Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 .............. 11.310 Laws v GWS Machinery Pty Ltd (2007) 209 FLR 53 ......................................................... 15.1290 Le Mans Grand Prix Circuits Pty Ltd v Illiadis [1998] VSC 331 ............................................... 9.370 Leaf v International Galleries [1950] 2 KB 86 ......... 7.80 Lee v Lee’s Air Farming Ltd [1961] AC 12 ............ 20.70 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 .................. 20.130 Leonard v PepsiCo 88 F Supp 2d 116 (1999) ........ 3.200 Leslie v Sheill [1914] 3 KB 607 ............................. 6.150 Lewis v Averay [1972] 1 QB 198 ............... 7.190, 7.480 Lift Capital Partners Pty Ltd v Merrill Lynch International (2009) 73 NSWLR 482 ............... 5.300 Liftronic Pty Ltd v Unver (2001) 179 ALR 321 ................................................................ 14.680 Lindner v Murdock’s Garage (1950) 83 CLR 628 .................................................................. 8.410 Lintrose Nominees Pty Ltd v King [1995] 1 VR 574 .......................................................... 18.380 Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 .................................................... 8.430 Lloyd v Citicorp Australia Ltd (1986) 11 NSWLR 286 .................................................. 14.390 Lloyd v Coote [1915] 1 KB 142 ............................ 7.590 Lloyd v Grace, Smith & Co [1912] AC 716 ........ 19.950 Lloyd’s Bank Ltd v Bundy [1975] QB 326 ............ 7.630 Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505 ................................... 8.390 Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (No 2) (2007) 235 CLR 173 .............................................................. 17.1910

MJA Scientifics International Pty Ltd v SC Johnson & Son Pty Ltd (1998) 43 IPR 287 .... 17.2120 MWH Australia Pty Ltd v Wynton Stone Australia Pty Ltd (in liq) (2010) 31 VR 575 .................................................................. 9.520 Mabo v State of Queensland (No 2) (1992) 175 CLR 1 ................................................ 1.80, 1.90 MacKinlay v Derry Dew Pty Ltd [2014] WASCA 24 ....................................................... 8.680 Macaura v Northern Assurance Co Ltd [1925] AC 619 ................................................. 27.80 Mackintosh v Johnson (2013) 37 VR 301 ............. 7.700 Macquarie Bank Ltd v Seagle [2008] FCA 1417 .............................................................. 13.250 Mahmoud & Ispahani, Re [1921] 2 KB 716 .......... 8.50, 8.130 Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 129 CLR 48 ................................. 16.800 Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] NSWCA 227 .................................. 4.150 Mander v O’Brien [1934] SASR 87 ..................... 17.110 March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 ................................................. 14.610 Marsh v Joseph [1897] 1 Ch 213 ........................ 18.140 Marsh & McLennan Pty Ltd v Stanyers Transport Pty Ltd [1994] 2 VR 232 ............... 18.570 Martin v Gale (1876) 4 Ch D 428 ........................ 6.140 Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 ........................... 8.80, 17.2880 Masters v Cameron (1954) 91 CLR 353 ............... 3.450 Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382 ................................... 9.40 Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 .................................... 18.580 McEvoy v ANZ Banking Group Ltd [1988] Aust Torts Reports 80-151 ............................. 14.390 McFarlane v Daniell (1938) 38 SR (NSW) 337 .................................................................. 8.680 McGuren v Simpson [2004] NSWSC 35 ............... 13.50 McHale v Watson (1964) 111 CLR 384 .............. 14.440 McLaughlin v City Bank of Sydney (1912) 14 CLR 684 .......................................................... 6.170 McMahon v National Foods Milk Ltd (2009) 25 VR 251 ....................................................... 9.230 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 ..................... 7.100 McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394 ................................................................ 15.150 Mcleod v The Queen (2003) 214 CLR 230 ......... 20.120 Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 ...................................... 19.760, 19.780

xviii

Introduction to Business Law in Australia

Mercantile Union Guarantee Corp Ltd v Ball [1937] 2 KB 498 .............................................. 6.100 Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580 .... 14.540 Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145 284 ALR 1 .... 15.1350, 15.1470, 15.1500 Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671 ........................................................ 11.540 Merritt v Merritt [1970] 1 WLR 1211 ........... 4.10, 4.60 Mersey Docks and Harbour Board v Coggins & Griffith (Liverpool) Ltd [1947] AC 1 ......... 14.750 Meskenas v ACP Publishing Pty Ltd (2006) 70 IPR 172 ................................................... 17.1530 Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 ......................................... 11.500 Meyers Taylor Pty Ltd v Vicarr Industries Ltd (1977) 137 CLR 228 .................................... 17.1900 Microsoft Corpn v Ezy Loans Pty Ltd (2004) 63 IPR 54 ..................................................... 17.1200 Microsoft Corporation v Goodview Electronics Pty Ltd (1999) 46 IPR 159 ......... 17.1260 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 ................................................. 15.280 Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506 ..... 18.550 Milliner v Milliner (1908) 8 SR (NSW) 471 ............ 4.50 Mills v Meeking (1990) 169 CLR 214 ....... 1.340, 1.360 Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240 .......................... 17.490, 17.1210, 17.1250 Ministry of Health v Simpson [1951] AC 251 ..... 21.310 Minnesota Mining & Manufacturing Co v Beiersdorf (Aust) Ltd (1980) 144 CLR 253 .... 17.1910 Mirror Newspapers Ltd v Queensland Newspapers Pty Ltd [1962] Qd R 305 ........... 17.110 Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp [1984] WAR 365 ................................................... 18.450, 18.530 Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475 ........ 3.280 Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254 ............................ 14.600 Modena Trading Pty Ltd v Cantarella Bros Pty Ltd (2013) 215 FCR 16 ......................... 17.2270 Montefiore v Smith (1876) 14 SCR (NSW) 245 ................................................................ 19.620 Moorcock, The (1889) 14 PD 64 ............... 9.620, 9.630 Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 .................. 17.2650 Moorhouse v Angus & Robertson (No 1) Pty Ltd [1981] 1 NSWLR 700 ............................. 16.770 Morris v Baron & Co [1918] AC 1 ..................... 11.190 Moss v Elphick [1910] 1 KB 846 ........................ 19.990 Mt Isa Mines v Pusey (1970) 125 CLR 383 ........ 14.180 Mulligan v Coffs Harbour City Council (2005) 223 CLR 486 ...................................... 14.240 Multisteps Pty Ltd v Source and Sell Pty Ltd (2013) 214 FCR 323 .................................... 17.1610 Munro v Willmott [1949] 1 KB 295 .................... 18.180

Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388 .................................... 15.1020 Musca v Astle Corp Pty Ltd (1988) 80 ALR 251 .............................................................. 15.1050 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 .................................................... 5.290 Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 ............................ 14.340

N NE Perry Pty Ltd v Judge (2002) 84 SASR 86 ...... 8.480, 8.530 NLS Pty Ltd v Hughes (1966) 120 CLR 583 ...... 12.390 NP Generations Pty Ltd v Feneley (2001) 80 SASR 151 ..................................................... 17.2850 NV Philips Gloeilampenfabrieken v Mirabella International Pty Ltd (1995) 183 CLR 655 .... 17.1820 Nagle v Rottnest Island Authority (1993) 177 CLR 423 ........................................................ 14.240 National Australia Bank v Blacker (2000) 104 FCR 288 .............................. 16.120, 16.380, 16.430 National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251 .... 19.910 National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90 .......................................... 20.310 National Research Development Corp v Commissioner of Patents (1959) 102 CLR 252 .............................................................. 17.1830 National Rugby League Investments Pty Ltd v Singtel Optus Pty Ltd (2012) 201 FCR 147 .... 17.970 Nationwide News Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 215 ........................................ 15.520 Nelson v Dahl (1879) 12 Ch D 568 ...................... 9.680 Nelson v Nelson (1995) 184 CLR 538 ................ 21.160 Nesbit Evans Group Australia Pty Ltd v Impro Ltd (1997) 39 IPR 56 ........................ 17.2120 Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 ......................... 17.940 New South Wales v Commonwealth (1990) 169 CLR 482 ................................................... 20.40 New South Wales v Fahy (2007) 232 CLR 486 ................................................................ 14.470 New South Wales v Lepore (2003) 212 CLR 511 ................................................................. 14.760 Ngurli Ltd v McCann (1953) 90 CLR 425 ......... 20.560 Nguyen v Nguyen (1990) 169 CLR 245 ............... 1.500 Nicaro Holdings Pty Ltd v Martin Engineering Co (1990) 91 ALR 513 ............. 17.1900 Nicolazzo v Harb (2009) 22 VR 220 ........... 9.40, 9.110 Nominal Defendant v GLG Australia Pty Ltd (2006) 228 CLR 529 ........................................ 1.320 Noonan v Martin (1987) 10 NSWLR 402 .......... 18.750 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 ................ 8.380 Norris v Sibberas [1990] VR 161 ........................ 18.610 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705 ............ 7.560

Table of Cases

Northern Territory of Australia v Collins (2008) 235 CLR 619 .................................... 17.2110 Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 ......... 20.230 Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 .................................... 3.530

O O’Brien v Smolonogov (1983) 53 ALR 107 .......... 15.70 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 .................. 12.330, 12.340 OOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 .................. 11.580 O’Toole v Charles David Pty Ltd (1991) 171 CLR 232 .......................................................... 1.530 Oceanroutes (Aust) Pty Ltd v MC Lamond [1984] AIPC 90-134 ....................................... 17.270 Ogawa v Spender (2006) 151 FCR 228 ............ 17.1500 Ogilvie v Ryan [1976] 2 NSWLR 504 ................... 21.90 Olley v Marlborough Court Ltd [1949] 1 KB 532 ....................................................... 9.400, 9.590 On Call Interpreters and Translators Agency Pty Ltd v the Commissioner of Taxation (No 3) [2011] FCA 366 .................................. 14.740 Oscar Chess Ltd v Williams [1957] 1 WLR 370 ....................................................... 7.430, 9.140 Overseas Tankship (UK) Ltd v Miller Steamship Co Pty Ltd (The Wagon Mound No 2) [1967] AC 617 ..................................... 14.650 Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound No 1) [1961] AC 388 ........................ 14.630, 14.640

P Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 ........................................................ 18.290 Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553 .............................................................. 17.2710 Pacific Film Laboratories Pty Ltd v Commissioner of Taxation (1970) 121 CLR 154 .......................................................... 17.50 Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 ...... 12.370 Page One Records Ltd v Britton [1968] 1 WLR 157 ....................................................... 12.470 Palumberi v Palumberi [1986] NSW ConvR 55-287 ........................................................... 16.420 Pan Australian Credits (SA) Pty Ltd v Kolim Pty Ltd (1981) 27 SASR 353 ............. 16.120, 16.380 Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 ........................................................ 11.130 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 ................................................................. 18.270 Pao On v Lau Yiu Long [1980] AC 614 ................ 5.140 Papathanasopoulos v Vacopoulos [2007] NSWSC 502 ................................................... 16.570

Paris v Stepney Borough Council [1951] AC 367 ................................................... 14.510, 14.530 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 ................ 15.160 Parke v Daily News Ltd [1962] Ch 927 .............. 20.610 Parker v British Airways Board [1982] 1 QB 1004 ................................................. 16.680, 16.690 Parker v McKenna (1874) 10 Ch App 96 ............ 18.410 Parker v The Queen (1963) 111 CLR 610 ............. 1.500 Parkinson v College of Ambulance Ltd [1925] 2 KB 1 ................................................... 8.300, 8.620 Partridge v Crittenden (1968) 2 All ER 421 ............ 3.90 Paul’s Retail Pty Ltd v Sports Leisure Pty Ltd (2012) 95 IPR 151 ....................................... 17.2500 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 ........................................... 12.490, 12.500 Payzu Ltd v Saunders [1919] 2 KB 581 ............... 12.180 Pearce v Brain [1929] 2 KB 310 ............................ 6.120 Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187 .......................................................... 8.460 Peckham v Moore [1975] 1 NSWLR 353 ............. 19.60 Pedersen v Larcombe [2008] NSWSC 1362 ........ 21.390 Peek v Gurney (1873) LR 6 HL 377 ..................... 7.330 Pennington v Norris (1956) 96 CLR 10 .............. 14.680 Pepper v Attorney-General [2008] 2 Qd R 353 .................................................................. 1.370 Percival v Wright [1902] 2 Ch 421 ...................... 20.510 Perez v Fernandez (2012) 260 FLR 1 ................ 17.1480 Performing Right Society Ltd v Harlequin Record Shop Ltd [1979] 1 WLR 851 ............. 17.380 Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180 ............ 14.110, 14.280, 14.710 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 ......................... 11.210, 11.240 Petelin v Cullen (1975) 132 CLR 355 ........ 7.240, 7.250 Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1964] 1 WLR 96 .................. 17.2830 Peter Smythe v Vincent Thomas (2007) NSWSC 844 ..................................................... 9.590 Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 .......................................................... 8.580 Petrofina (Great Britain) Ltd v Martin [1966] 1 Ch 146 .......................................................... 8.370 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795 ................................................ 3.80 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 ................................................ 3.80 Phonographic Performance Company of Australia Ltd v Cattch Pty Ltd (2013) 102 IPR 286 ........................................................ 17.1220 Photo Production Ltd v Securicor Transport Pty Ltd [1980] AC 827 ............... 9.310, 9.550, 9.560 Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257 ...... 12.210 Plummer v Thomas [2002] NSWSC 1185 ........... 19.460 Polkinghorne v Holland (1934) 51 CLR 143 ..... 19.760, 19.920 Polo/Lauren Company LP v Ziliani Holdings Pty Ltd (2008) 173 FCR 266 ......................... 17.550

xix

xx

Introduction to Business Law in Australia

Polygram Records Pty Ltd v Monash Records (Aust) Pty Ltd (1985) 10 FCR 332 ............... 17.1260 Popat v Schonchhatra (1997) 3 All ER 800 ......... 19.540 Populin v HB Nominees Pty Ltd (1982) 41 ALR 471 ...................................................... 17.2120 Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1980) 144 CLR 300 .......................................................... 10.70 Positive Endeavour Pty Ltd v Madigan (2009) 105 SASR 109 ....................................... 8.400, 8.670 Potter v Minahan (1908) 7 CLR 277 .................... 1.290 Powell v Lee (1908) 99 LT 284 ............................. 3.520 Press v Mathers [1927] VLR 326 ........................ 18.200 Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 .......................... 2.30 ProCD Inc v Zeidenberg and Silken Mountain Web Services Inc 86 F 3d 1447 (1996) ........... 13.140 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 ........................... 11.320 Public Service Employees Credit Union Co-operative Ltd v Campion (1984) 56 ACTR 39 ......................................................... 8.250

Q Qualcast (Wolverhampton) Ltd v Haynes [1959] AC 743 ............................................... 14.600 Queensland Mines v Hudson (1978) 52 ALJR 399 ................................................................ 21.410 Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 .... 15.650, 15.1080

R R v Clarke (1927) 40 CLR 227 ............................. 3.420 R v Denbo Pty Ltd (1994) 6 VIR 157 ................. 20.130 R v Regos (1947) 74 CLR 613 .............................. 1.370 R v XY (2013) 84 NSWLR 363 ............................ 1.500 RA & A Bailey & Co Ltd v Boccaccio Pty Ltd (1986) 4 NSWLR 701 .................................... 17.540 RJE v Secretary to the Department of Justice (2008) 21 VR 526 ............................................ 1.500 RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011) 280 ALR 125 .............................. 17.2830 RPL Central Pty Ltd v Commissioner of Patents [2013] AIPC 92-458; [2013] FCA 871 .............................................................. 17.1860 Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88 ..................... 17.590, 17.1000 Rafferty v Madgwicks (2012) 203 FCR 1 ......... 17.2880 Raffles v Wichelhaus [1864] 159 ER 375 .............. 7.120 Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex 109 ......................................... 3.500 Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 ...................................... 17.2860 Rayfield v Hands [1960] Ch 1 ............................ 20.270 Re Baden’s Deed Trusts: McPhail v Doulton [1970] 2 All ER 228 ....................................... 21.130 Reardon v Morley Ford Pty Ltd (1980) 33 ALR 417 ........................................................ 15.750

Red Bull Australia Pty Ltd v Sydneywide Distributors Pty Ltd (2001) 53 IPR 481 ....... 17.2660 Redgrave v Hurd (1881) 20 Ch D 1 ........... 7.390, 7.450 Reference by Australasian Performing Right Assoc Ltd; Re Australian Broadcasting Corp (1985) 5 IPR 449 .................................. 17.810 Regal (Hastings) Ltd v Gulliver [1942] UKHL 1 .................................................................... 18.420 Regazzoni v KC Sethia (1944) Ltd [1958] AC 301 .................................................................. 8.320 Regent v Millett (1976) 133 CLR 679 .................. 5.510 Reid v Smith (1905) 3 CLR 656 .......................... 16.410 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 .................................................... 9.710 Renehan v Leeuwin Ocean Adventure Foundation Ltd (No 3) (2006) 17 NTLR 83 ................................................................... 11.630 Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511 ............................................................. 19.480 Re Robertson (1943) 44 SR (NSW) 103 ............. 16.200 Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd [2012] VSCA 134 ........................................................ 9.230 Review Australia Pty Ltd v Innovative Lifestyle Investments Pty Ltd (2008) 166 FCR 358 ...................................................... 17.1680 Riches v Hogben [1986] 1 Qd R 315 ...................... 4.80 Riley v Osborne [1986] VR 193 ............................ 5.490 Ringrow Pty Ltd v BP Australia (2005) 224 CLR 656 ........................................................ 12.380 Roads and Traffic Authority of NSW v Dederer (2007) 238 ALR 761 ........................ 14.500 Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42 .................................... 17.760, 17.1270 Robb v Green [1895] 2 QB 315 ............... 8.410, 18.400 Robert J Zupanovich Pty Ltd v B & N Beale Nominees Pty Ltd (1995) 59 FCR 49 ........... 17.1170 Robinson v Davison (1871) LR 6 Ex 269 ........... 11.430 Robinson v Harman (1848) 154 ER 363 .............. 12.70 Rogers v Whitaker (1992) 175 CLR 479 ........... 14.210, 14.460, 14.520, 14.580 Romeo v Conservation Commission (NT) (1998) 192 CLR 431 ............ 14.240, 14.470, 14.480 Roots v Oentory Pty Ltd [1983] 2 Qd R 745 ...... 18.610 Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445 ................................................. 4.190 Rosenberg v Percival (2001) 205 CLR 434 ......... 14.600 Ross v Allis-Chalmers Australia Pty Ltd (1980) 32 ALR 561 .......................................... 9.160 Rowland v Stevenson [2005] NSWSC 325 .......... 16.560 Royal Globe Life Assurance Co Ltd v Kovacevic (1979) 22 SASR 78 ........................ 18.630 Re Ruddock (1879) 5 VLR 51 ............................ 19.390 Ryan v Mutual Tontine Westminster Chambers Assoc [1893] 1 Ch 116 .................. 12.450 Rylands v Fletcher (1868) LR 3 HL 330 ............. 14.720

Table of Cases

S SJ Mackie Pty Ltd v Dalziell Medical Practice Pty Ltd [1989] 2 Qd R 87 .............................. 19.970 SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 ........................................ 8.680 SW Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466 ......................... 17.330 SZAEG v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FMCA 258 ........................................... 13.40 Sachs v Miklos [1948] 2 KB 23 ........................... 18.160 St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267 ..................................... 8.30, 8.160 Salomon v Salomon & Co Ltd [1897] AC 22 ....... 20.60, 20.90 Samsung: Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238 .................... 17.2140 San Sebastian Pty Ltd v Minister Administering Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 ................................................................ 14.380 Sanders v Snell (1998) 196 CLR 329 .................. 10.120 Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 ................................................. 11.220 Sanrod Pty Ltd v Dainford Ltd [1984] FCA 435 ............................................................... 15.1140 Saunders v Vautier (1841) 49 ER 282 ................. 21.310 Scanlon’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 ........................................ 11.550 Scarborough v Sturzaker (1905) 1 Tas LR 117 ........ 6.50 Scolio Pty Ltd v Cote (1992) 6 WAR 475 ............. 7.540, 8.260, 8.270 Scotts and Momentum Productions Pty Ltd v Lewarne [2009] FCAFC 30 ............................ 19.580 Scott v Coulson [1903] 2 Ch 249 ............................ 7.60 Scott v Scott (1904) 25 ALT 174 ........................... 8.360 Screen Australia v EME Productions No 1 Pty Ltd (2012) 200 FCR 282 ................................. 1.320 Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326 ............................................................. 7.480 Seidler v Schallhofer [1982] 2 NSWLR 80 ............ 8.220 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 ...................................................... 15.1050 Seven Network (Operations) Ltd v Warburton [2011] NSWSC 386 ......................................... 8.450 Sevmere Pty Ltd v Cairns Regional Council [2010] 2 Qd R 276 .......................................... 1.310 Shacklady v Atkins (1994) 30 IPR 387 ............. 17.1760 Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 ................ 14.350, 14.360, 14.370 Sharp v Union Trustee Co of Aust Ltd (1944) 69 CLR 539 ................................................... 19.640 Shell Co of Australia Ltd v Esso Standard Oil (Aust) Ltd (1963) 109 CLR 407 ................... 17.2470 Shelley v Paddock [1980] QB 348 ......................... 8.640 Shevill v Builders Licensing Board (1982) 149 CLR 620 ........................................................ 11.300 Shortall v White [2007] NSWCA 372 ..................... 4.50 Sidhu v Van Dyke (2014) 88 ALJR 640 ...... 5.370, 5.390

Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249 ...................................... 15.960 Siu Yin Kwan (Administratrix of the Estate of Chan Ying Lung, Decd) v Eastern Insurance Co Ltd [1994] 2 AC 199 ................ 18.580 Slee v Warke (1949) 86 CLR 271 .......................... 7.280 Smith v Anderson (1880) 15 Ch D 247 .............. 19.290, 19.300 Smythe v Thomas (2007) 71 NSWLR 537 .......... 13.130 Smythe v Thomas [2007] NSWSC 844 ................. 3.140 Snyman v Cooper (1990) 25 FCR 470 ................ 15.900 Solahart Industries Pty Ltd v Solar Shop Pty Ltd (2011) 281 ALR 544 ................................ 15.180 Soltykoff, Re; Ex parte Margrett [1891] 1 QB 413 .................................................................. 6.140 Solution 1 Pty Limited v Optus Networks Pty Ltd [2010] NSWSC 1060 ................................. 9.710 Sony Entertainment (Australia) Ltd v Smith (2005) 64 IPR 18 ......................................... 17.1230 Sopov v Kane Constructions Pty Ltd (2007) 20 VR 127 ..................................................... 11.300 Souter v Shyamba Pty Ltd (2002) 11 BPR 20,369 ............................................................. 4.170 South Australia v Lampard-Trevorrow (2010) 106 SASR 331 ................................................ 14.250 South Australian Railways Commissioner v Egan (1973) 130 CLR 506 .................... 7.480, 7.650 South Staffordshire Water Co v Sharman [1896] 2 QB 44 ................................. 16.640, 16.650 Spar Licensing Pty Ltd v Mis Qld Pty Ltd [2014] FCAFC 50 ........................................ 17.2880 Specht v Netscape Communications Corporation 306 F 3d 17 (2d Cir 2002) ......... 13.170 Spector v Ageda [1973] Ch 30 .............................. 8.660 Spencer v Harding (1870) LR 5 CP 561 ................ 3.150 Spencer Industries Pty Ltd v Collins (2003) 58 IPR 425 ........................................................ 17.2170 Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 253 ALR 364 ........................................ 8.670 Spies v The Queen (2000) 201 CLR 603 ............. 20.610 Spira v Commonwealth Bank of Australia (2003) 57 NSWLR 544 .................................. 15.380 Spirit Pharmaceuticals Pty Ltd v Mundipharma Pty Ltd (2013) 216 FCR 344 .............................................................. 17.2050 Spong v Spong (1914) 18 CLR 544 ...................... 7.620 Stamp Duties (Queensland), Commissioner of v Jolliffe (1920) 28 CLR 178 ............... 21.70, 21.120 Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290 ................................................................ 20.500 Star Energy UK Onshore Ltd v Bocardo SA [2009] EWCA Civ 579 ................................... 16.350 Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 ........................................ 20.670 Steele v Tardiani (1946) 72 CLR 386 ....... 11.90, 12.510 Sterling Engineering Co Ltd v Patchett [1955] AC 534 ........................................................ 17.2170

xxi

xxii

Introduction to Business Law in Australia

Stevens v Bodribb Sawmilling Co Ltd (1986) 160 CLR 16 ................................................... 14.740 Stevenson Jaques & Co v McLean [1880] 5 QBD 346 ......................................................... 3.320 Stilk v Myrick (1809) 2 Camp 317 ........... 5.230, 5.240, 5.270 Stoker v Picken (2012) 209 FCR 132 .................. 16.810 Strickland v Rocla Concrete Pipes Pty Ltd (1971) 124 CLR 468 ........................................ 1.100 Strong v Woolworths Limited (2012) 246 CLR 182; 86 ALJR 267 ....... 14.585, 14.590, 14.600 Sullivan v Moody [2001] HCA 59 ...................... 14.130 Sumpter v Hedges [1898] 1 QB 673 .................... 11.110 Svanosio v Macnamara (1956) 96 CLR 186 ......... 7.480 Swan Brewery Co Ltd (No 2), Re (1978) 3 ACLR 168 ...................................................... 20.340 Sweeney v Boylan Nominees (2006) 226 CLR 161 ................................................................ 14.740 Swinton v China Mercantile Navigation Co Ltd (1951) 83 CLR 553 ................................. 14.510 Sydney Organising Committee for the Olympic Games v Clarke (1998) 41 IPR 403 ............................................................... 17.1120

T TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) (2005) 145 FCR 35 ................ 17.940 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 ................ 12.70, 12.90 Tabet v Gett (2010) 240 CLR 537 ...................... 14.620 Talbot v General Television Corp Pty Ltd [1980] VR 224 .............................. 17.2790, 17.2830 Talmax Pty Ltd v Telstra Corporation Ltd [1997] 2 Qd R 444 ...................................... 15.1050 Tame v New South Wales (2002) 211 CLR 317 ................................................... 14.120, 14.190 Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 ................................. 11.380, 11.440, 11.450 Taylor v Johnson (1983) 151 CLR 422 ..... 7.210, 7.220, 7.230, 15.330 Taylor v The Owners – Strata Plan No 11564 (2014) 88 ALJR 473 ........................................ 1.310 Teen Ranch Pty Ltd v Brown (1995) 87 IR 308 .................................................................. 4.120 Telstra Corporation Ltd v Phone Directories Co Pty Ltd (2010) 194 FCR 142 .................... 17.150 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 ................................................................ 20.130 Theol v Bike Bug Pty Ltd [2014] NSWCATCD 123 ........................................... 13.100 Thomas v Ranford (1922) 24 WALR 137 ........... 16.790 Thomas v Thomas (1842) 2 QB 851 ....................... 5.70 Thompson v Henderson & Partners Pty Ltd (1990) 58 SASR 548 ...................................... 18.610 Thornley v Tilley (1925) 36 CLR 1 ....................... 9.680 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 ............................................................ 9.420 Thorp v CA Imports Pty Ltd (1990/1989) 16 IPR 511 .......................................................... 15.920

Tipperary Developments Pty Ltd v Western Australia (2009) 38 WAR 488 .......................... 5.460 Todd v Nicol [1957] SASR 72 ................................. 4.75 Todrell Pty Ltd v Finch (No 1) [2008] 1 Qd R 540 .................................................................. 5.450 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 ............ 9.360, 9.590, 18.200, 13.180 Tolmark Homes Pty Ltd v Paul (1999) 46 IPR 321 ............................................................... 17.1140 Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 .................. 5.330 Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 ...................................... 20.660 Tower Cabinet Co Ltd v Ingram [1996] 2 VR 488 ................................................................ 19.870 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 ................................................................ 20.165 Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165 .................................................................. 9.710 Transport Tyre Sales Pty Ltd v Montana Tyres Rims and Tubes Pty Ltd (1999) 93 FCR 421 .............................................................. 17.2490 Trego v Hunt [1896] AC 7 .................................. 19.650 Trevey v Grubb (1982) 44 ALR 20 ....................... 4.100 Trevor v Whitworth (1887) 12 App Cas 409 ..... 20.340, 20.370 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 ....... 1.500, 10.80, 10.90, 10.100 Triplex Safety Glass Co Ltd v Scorah (1938) 55 RPC 21 ................................................... 17.2170 Trollope (George) & Sons v Martyn Bros [1934] 2 KB 436 ............................................ 18.740 Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (2000) 200 CLR 591 .................................... 15.1000 Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 ................................................. 11.570 Turner v Bladin (1951) 82 CLR 463 ................... 12.460 Turner v Morlend Finance Corp (Vic) Pty Ltd [1990] ASC 56-006 .......................................... 1.310 Tweddle v Atkinson (1861) 1 B & S 393 ............... 10.40 Twentieth Century Fox Film Corp v South Australian Brewing Co Ltd (1996) 66 FCR 451; 34 IPR 247 ........................................... 17.2720 Twycross v Grant (1876-77) LR 2 CPD 469 ....... 20.165

U Ultramares v Touche 255 NY 170 [1931] 179 .... 14.260, 14.310 Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573 ..................................... 7.590 United Dominions Corporation Ltd v Brian (1984) 157 CLR 1 ............................. 19.570, 21.360 Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366 ............................ 7.570

Table of Cases

University of London Press Ltd v University Tutorial Press [1916] 2 Ch 601 ........... 17.90, 17.100 University of New South Wales v Moorhouse (1975) 133 CLR 1 ............................. 17.440, 17.450 University of Western Australia v Gray (2009) 179 FCR 346 ................................ 17.2170, 17.2180 Upfill v Wright [1911] 1 KB 506 ........................... 8.210

V Vairy v Wyong Shire Council (2005) 223 CLR 422 ................................................................ 14.240 Van Den Esschert v Chappell [1960] WAR 114 ................................................................... 9.100 Van der Lely NV v Bamfords Ltd [1963] RPC 61 ................................................................ 17.1900 Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 ..................... 10.70 Vawdrey Australia Pty Ltd v Kreuger Transport Equipment Pty Ltd (2009) 261 ALR 269 ........................................................ 17.360 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 ...................... 12.130 Victoria University of Technology v Wilson (2004) 60 IPR 392 ....................................... 17.2170 Videon v Barry Burroughs Pty Ltd (1981) 37 ALR 365 ........................................................ 15.600 Vimig Pty Ltd v Contract Tooling Pty Ltd (1986) 9 NSWLR 731 ...................................... 7.480 Vita Pacific Ltd v Heather (2001) 10 Tas R 334 .................................................................. 9.660 Vivo International Corpn Pty Ltd v TiVo Inc (2012) 294 ALR 661 .................................... 17.2420 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 .................................... 9.710 Voli v Inglewood Shire Council (1963) CLR 74 .................................................................. 14.450 Vopak Terminal Darwin Pty Ltd v Natural Fuels Darwin Pty Ltd [2009] FCA 742 ........... 16.450

W Wakefield Trucks Pty Ltd v Lach Transport Pty Ltd (2001) 79 SASR 517 ........................ 15.1030 Wakim, Re; Ex parte McNally (1999) 198 CLR 511 ............................................... 1.700, 20.40 Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 ............................. 18.400 Walker v Sydney West Area Health Service [2007] NSWSC 526 ....................................... 14.580 Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259 .......................................................... 1.500 Walker v European Electronics Pty Ltd (1990) 23 NSWLR 1 ................................................. 19.900 Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388 .... 15.1420 Wallis, Son & Wells v Pratt & Haynes [1911] AC 394 ............................................................ 9.490 Walplan Pty Ltd v Wallace (1985) 8 FCR 27 ....... 15.750

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 .................. 5.350, 5.360, 5.380 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 .................................... 15.1090 Warman International v Envirotech Australia Pty Ltd (1986) 11 FCR 478 .......................... 17.2790 Warner Bros Pictures Inc v Ingolia [1965] NSWR 988 .................................................... 12.470 Warner Bros Pictures Inc v Nelson [1937] 1 KB 209 ........................................................... 12.470 Watson v Delaney (1991) 22 NSWLR 358 ............ 5.500 Watt v Hertfordshire CC [1954] 1 WLR 835 ..... 14.540, 14.570 Waugh v HB Clifford & Sons Ltd [1982] 1 Ch 374 ........................................................... 18.310 Waverley Borough Council v Fletcher [1996] QB 334 ............................................. 16.660, 16.670 Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 ........................................................ 20.330 Weigall & Co v Runciman & Co (1916) 85 LJKB 1187 ..................................................... 18.600 Weld-Blundell v Stephens [1920] AC 956 ............ 18.460 Wellsmore v Ratford (1973) 23 FLR 295 ........... 16.120; 16.380 Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129 .................................................................. 8.170 Westpac Banking Corp v Spice [1990] ATPR 41-024 ........................................................... 14.390 Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 ........................................ 7.550 White v Bluett (1853) 23 LJ Ex 36 .......................... 5.90 Whittle v Parnell Mogas Pty Ltd (2006) 94 SASR 421 ....................................................... 11.230 Wigan v Edwards (1973) 47 ALJR 586 ................. 5.170 Wik Peoples v State of Queensland (1996) 187 CLR 1 ......................................................... 1.90 Wilkinson v Osborne (1915) 21 CLR 89 .............. 8.310 Williams v Barton [1927] 2 Ch 9 ........................ 21.240 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 All ER 512 ............. 5.270 Windsurfing International Inc v Petit (1983) 3 IPR 449 ......................................... 17.1900, 17.1920 Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028 .............................................................. 14.710 Winner v Ammar Holdings Pty Ltd (1993) 41 FCR 205 ...................................................... 17.1910 With v O’Flanagan [1936] Ch 575 ....................... 7.340 Witheyman v Simpson [2011] 1 Qd R 170 ............ 1.320 Woods v Multi-Sport Holding Pty Ltd (2002) 208 CLR 460 ................................................. 14.550 Wolley v Attorney-General (Vic) (1877) 2 App Cas 163 .......................................................... 16.110 Woolley v Dunford (1972) 3 SASR 43 ................ 10.120 World of Technologies (Aust) Pty Ltd v Tempo (Aust) Pty Ltd (2007) 71 IPR 307 ..... 17.1610 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 .............................................................. 17.2840 Wright v Gibbons (1949) 78 CLR 313 ................ 16.200

xxiii

xxiv

Introduction to Business Law in Australia

Wynbergen v Hoyts Corporation Pty Ltd (1997) 149 ALR 25 ........................................ 14.680 Wyong Shire Council v Shirt (1980) 146 CLR 40 .................................................................. 14.470

Young v Odeon Music House Pty Ltd (1976) 10 ALR 153 ................................................. 17.1070 Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 ........................ 21.230

Y

Z

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 .......... 8.30, 8.60, 8.70 Yonge v Toynbee [1910] 1 KB 215 ......... 18.600, 18.760 Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299; (1983) 46 ALR 319; (1985) 158 CLR 661 .................................. 15.290, 15.1060, 15.1070

Zhang v VP302 SPV (2009) 223 FLR 213 .......... 18.310 Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 ............... 10.120, 10.130

Table of Statutes COMMONWEALTH Acts Interpretation Act 1901: 1.300, 1.310 s 3A(2): 1.170 s 15AA: 1.310, 1.340, 1.360 s 15AB: 1.320 s 15AB(1): 1.320 s 15AB(2): 1.320 s 15AB(3): 1.320 Australia Act Statute of Westminster 1986: 1.440 Australian Consumer Bill: 15.20 Australian Consumer Law: 7.500, 7.730, 9.130, 9.670, 9.690, 13.10, 13.120, 13.180, 14.390, 15.10, 15.20, 15.30, 15.40, 15.50, 15.60, 15.100, 15.320, 15.340, 15.450, 15.490, 15.540, 15.580, 15.610, 15.670, 15.810, 15.880, 15.890, 15.900, 15.1000, 15.1010, 15.1060, 15.1100, 15.1110, 15.1130, 15.1160, 15.1170, 15.1210, 15.1240, 15.1290, 15.1420, 15.1430, 15.1450, 15.1460, 15.1480, 15.1560, 15.1570, 15.1590, 15.1600, 17.2720, 17.2780, 17.2890, 19.40, 19.70 s 2(1): 15.500, 15.1060, 15.1070, 15.1080, 15.1280, 15.1290, 15.1420, 15.1480, 15.1560 s 2(2)(a): 15.230, 15.240 s 2(2)(c): 15.240 s 3: 15.1430 s 3(1): 15.1290 s 3(2): 15.1290 s 3(3): 15.1290 s 4(1): 15.630, 15.650 s 7: 15.1260 s 7(1): 15.1490 s 9: 15.1590 s 9(1): 15.1470 s 9(2): 15.1470 s 9(3): 15.1470 s 9(4): 15.1470 s 10(1): 15.790 s 18: 8.110, 13.230, 14.390, 15.60, 15.90, 15.105, 15.110, 15.170, 15.190,

15.210, 15.220, 15.240, 15.270, 15.280, 15.290, 15.300, 15.310, 15.320, 15.560, 15.570, 15.890, 15.940, 15.950, 15.1050, 15.1070, 15.1080, 15.1210, 15.1220, 15.1230, , 17.2720, 17.2890, 18.610 s 18(1): 7.500, 15.70, 15.80, 15.110, 15.150, 15.160, 15.180 , 15.1140 ss 18 to 37: 15.1260 s 19: 15.320 s 19(2): 15.320 s 19(3): 15.320 s 20: 15.330, 15.340, 15.350, 15.360, 15.380, 15.390 ss 20-22: 15.330 s 20(1): 15.340 ss 20 to 22: 7.730, 15.890, 15.940 s 21: 7.580, 15.330, 15.380, 15.390, 15.400, 15.420, s 21(1): 15.390 s 21(3)(a): 15.390 s 21(3)(b): 15.390 s 21(4)(a): 15.390 s 21(4)(b): 15.390 s 21(4)(c): 15.390, 15.420 s 22: 15.330, 15.390, 15.420, 17.2890 s 22(1): 15.390, 15.420 s 22(2): 15.390 s 23(1): 15.450, s 23(1)(b): 15.480 s 23(2): 15.450 s 23(3): 15.450 ss 23 to 27: 15.890 s 24(1): 15.460 s 24(2): 15.460 s 24(3): 15.460 s 24(4): 15.460 s 25(1): 15.470 s 26(1): 15.480 s 27(2): 15.480 s 29: 15.210, s 29(1): 7.500, 13.230, 15.500, 15.950 s 29(1)(a): 15.105, 15.110, 15.120, 15.560 s 29(1)(a)(i): 15.220 s 29(1)(i): 15.510, 15.530

s 29(1)(k): 15.120, 15.560, 15.570, 15.920 s 29(1)(m): 15.220, 15.520, 15.540 s 30: 15.600 s 30(1): 7.500, 15.580 s 30(1)(f): 15.590 s 31: 15.680 s 32: 15.900 s 32(1): 15.690 s 33: 15.105, 15.110, 15.700, 15.970 s 34: 15.710 s 35: 15.740, 15.750 s 36: 15.770, 15.900 s 37: 15.620, 15.1230 s 37(1): 15.610 s 37(2): 15.610 s 39(1): 15.780 ss 40(1) to (2): 15.790 s 40(4): 15.790 s 41(1): 15.800 s 41(2): 15.800 s 41(3): 15.800 s 41(4): 15.800 s 42: 15.800 s 43(1): 15.810 s 43(4): 15.810 ss 44 to 46: 15.820 s 47(1): 15.830, 15.940 s 48: 15.90, 15.840 s 48(1): 15.830 s 48(4A): 15.830 s 49: 15.860 s 50: 7.580 s 50(1): 15.870 s 51: 15.1260, 15.1430 s 51(1): 15.1300 s 52: 15.60, 15.1260, 15.1300, 15.1430 s 53: 15.1260, 15.1430 s 53(1): 15.1300 s 53(2): 15.1300 s 53(3): 15.1300 s 54: 15.1260, 15.1320, 15.1330, 15.1560, 15.1570, 15.1590 s 54(1): 15.540, 15.1310 s 54(2): 15.1320 s 54(3): 15.1320 s 54(4): 15.1320 s 54(5): 15.1320 s 54(6): 15.1320 s 55: 15.1260, 15.1570, 15.1590

xxvi

Introduction to Business Law in Australia

Australian Consumer Law — cont s 55(1): 15.1340 s 55(2): 15.1360 s 55(3): 15.1360 s 56: 15.1260, 15.1560, 15.1570 s 56(1): 15.1370 s 56(2): 15.1370 s 56(3): 15.1370 s 57: 15.1260, 15.1370 s 57(1): 15.1380 s 58: 15.1260, 15.1560 s 58(1): 15.1390 s 58(2): 15.1390 s 59: 15.1560, 15.1590 s 59(1): 15.1260, 15.1400 s 59(2): 15.1230, 15.1260 s 60: 15.1270, 15.1420 ss 60 to 64: 15.1270 s 61: 15.1270 s 61(1): 15.1420 s 61(2): 15.1420 s 61(3): 15.1420 s 62: 15.1270, 15.1420 s 63: 15.1420 s 64: 15.1240, 15.1270 s 64(1): 9.490, 15.1430 s 64A: 15.1240 ss 64A(1) to (2): 15.1430 s 64A(3): 15.1430 s 64A(4): 15.1430 s 68: 15.1240 s 106(1): 15.1600 s 109(1): 15.1600 s 114(1): 15.1600 s 118(1): 15.1600 s 122(1): 15.1600 s 123(1): 15.1600 s 123(1)(c): 15.1600 s 127(1): 15.1600 s 127(2): 15.1600 s 127(3): 15.1600 s 129: 15.1600 s 131(1): 15.1600 s 134: 15.1600 s 136(1): 15.1600 s 138: 15.1450, 15.1600 s 138(1): 15.1460 s 138(2): 15.1460 ss 138 to 150: 15.1450 s 139: 15.1460 s 140: 15.1460, 15.1590 s 141: 15.1460, 15.1590 s 142: 15.1500 s 143: 15.1520 s 146: 15.1540 s 148: 15.1500 s 149: 15.1550 s 150(1): 15.1530 s 151(1): 15.550 s 151(1)(a): 15.560 s 151(1)(k): 15.560

ss 151 to 168: 15.880, 15.890 s 152(1): 15.600 s 153(1): 15.680 s 154(1): 15.690 s 155(1): 15.700 s 156(1): 15.730 ss 157(1) to (2): 15.760 s 158(1): 15.770 s 159(1): 15.660 s 161(1): 15.780 s 162(1): 15.790 s 162(2): 15.800 ss 163(1) to (2): 15.810 ss 164(1) to (2): 15.820 s 165(1): 15.850 s 166(1): 15.850 s 167(1): 15.860 s 168(1): 15.870 s 194(1): 15.1600 s 197(1): 15.1600 s 199(1): 15.1600 s 202(1): 15.1600 s 203(1): 15.1600 s 204(1): 15.1600 s 205(1): 15.1180 s 207: 15.930 s 207(1): 15.910, 15.920 s 207(2): 15.910 s 208: 15.930 s 208(1): 15.930 s 209: 15.930 s 210(1): 15.1600 s 212: 15.890 s 217: 15.890 s 218: 15.1170 s 219: 15.1180 s 223: 15.1190 s 224(1): 15.880, 15.940 s 224(1)(a)(i): 15.940 s 224(3): 15.940 s 225(1): 15.940 s 232: 15.50, 15.880, 15.990 s 232(2): 15.1000 s 233: 15.990 s 236: 15.50, 15.880, 15.1010, 15.1020, 15.1030, 15.1040, 15.1050, 15.1140 s 236(1): 15.1010, 15.1050, 15.1060 s 236(2): 15.1090 ss 236 to 238: 15.1020 s 237: 15.880, 15.1110, 15.1130, 15.1140 s 237(3): 15.1110, 15.1130 ss 237 to 238: 15.50 s 239: 15.1130 s 239(1): 15.1120 s 239(3): 15.1120 s 239(4): 15.1120 s 243: 8.110, 15.880, 15.1130, 15.1150

s 246(2): 15.1200 s 247: 15.1210 s 248(1): 15.1220 s 250(1): 15.480 s 251: 15.930 s 252: 15.1600 s 255(3): 15.560 ss 255 to 257: 15.560 ss 256 to 257: 15.560 s 259(1) to (2): 15.1440 s 259(3): 15.1440 s 259(4): 15.1440 s 259(5): 15.1440 s 260: 15.1440 s 262(1): 15.1440 s 262(2): 15.1440 ss 263(2) to (3): 15.1440 s 263(4): 15.1440 s 266: 15.1440 ss 267 to 268: 15.1440 s 271: 15.1450, 15.1560, 15.1590 s 271(1): 15.1560 ss 271(1) to 271(2): 15.1260 s 271(3): 15.1560 ss 271(3) to (4): 15.1260 s 271(5): 15.1260, 15.1560 s 271(6): 15.1260 s 272: 15.1560 s 273: 15.1560 s 274: 15.1450, 15.1570 s 274(2): 15.1570 s 276: 15.1580 s 276A(1): 15.1580 s 276A(2): 15.1580 s 276A(3): 15.1580 s 276A(4): 15.1580 Ch 1: 15.40 Ch 2: 15.40 Ch 3: 15.40 Ch 4: 15.40 Ch 5: 15.40 Pt 3-2: 15.1250 Pt 3-2, Div 1: 15.500 Pt 3-3: 15.1600 Pt 3-5: 15.1450 Pt XI: 15.30 Sch 2: 18.610 Australian Consumer Law and Fair Trading Act 2012 s 18: 19.890 Australian Securities and Investments Commission Act 2001: 20.30 s 19: 20.30 ss 28 to 29: 20.30 Australia–United States Free Trade Agreement 2004: 17.1280, 17.1420

Table of Statutes

Banking Act 1959: 8.70 Bankruptcy Act 1966: 6.190, 11.680, 19.1070 s 45(1): 19.1070 s 45(2): 19.1070 s 126: 6.190 s 269: 6.190 Bills of Exchange Act 1909 s 8: 5.420 s 89: 5.420 Broadcasting Services Act 1992: 17.910, 17.920, 17.1330 Business Names Registration Act 2011: 19.270 Cheques Act 1986 s 10: 5.420 Circuit Layouts Act 1989: 17.160 Commonwealth Electoral Act 1918: 13.60 Commonwealth of Australia Constitution: 1.100, 1.110 s 51: 1.100 s 51(xviii): 17.30 s 109: 1.100 Commonwealth of Australia Constitution 1901 s 109: 15.1420 Commonwealth of Australia Constitution Act 1900 s 127: 1.140 s 128: 1.140 Companies Act 1862 s 4: 19.300 Competition and Consumer Act 2010: 1.580, 1.590, 1.660, 2.30, 8.570, 8.580, 9.350, 13.180, 15.900, 15.1590, 17.2880, 18.610, 19.40 s 2: 1.230 s 6(3): 15.30 s 18: 17.2780 s 51(2)(b): 8.580 s 51(2)(d): 8.580 s 51(2)(e): 8.580 s 130: 15.900 s 131: 15.30 s 131(1): 15.30 s 137A: 15.1510 s 137H: 15.1010 ss 138 to 138B: 15.30 s 139A(1): 15.1430 s 139A(2): 15.1430 s 139A(3): 15.1430 s 139B(1): 15.900

s 139B(2): 15.900 ss 140 to 140K: 15.30 Pt IV: 8.580 Pt IVB: 17.2880 Sch 2: 7.500, 7.730, 9.130, 9.670, 14.390, 16.540, 17.2720, 17.2780, 17.2890 Competition and Consumer Legislation Amendment Act 2011: 15.330, 15.390, 15.420 Copyright Act 1968: 16.540, 17.30, 17.40, 17.50, 17.60, 17.110, 17.160, 17.170, 17.180, 17.280, 17.290, 17.310, 17.320, 17.460, 17.470, 17.530, 17.540, 17.600, 17.610, 17.660, 17.690, 17.700, 17.710, 17.720, 17.810, 17.840, 17.900, 17.910, 17.990, 17.1070, 17.1120, 17.1190, 17.1240, 17.1250, 17.1340, 17.1350, 17.1410, 17.1430, 17.1470, 17.1490, 17.1500, 17.1510, 17.1560, 17.1570, 17.1720, 17.1740, 17.1770 s 5: 17.1590 s 6(1): 17.1590 s 6(2): 17.1590 s 6(4): 17.1590 s 7: 17.1590 s 8: 5.100 s 10: 17.170, 17.190, 17.250, 17.420, 17.570, 17.770, 17.840, 17.910, 17.1070 s 10(1): 17.100, 17.160, 17.410, 17.540, 17.550, 17.1280, 17.1310 s 10(2): 17.660 s 10(2A): 17.660 s 10AA: 17.1010 s 13(1): 17.1620 s 14(1): 17.330, 17.940, 17.1620 s 15(2): 17.1610 s 16: 17.1610 s 19: 17.1610 s 19(4): 17.1610 s 21(1): 17.340 s 21(1A): 17.350 s 21(3): 17.360, 17.1720 s 22(3A): 17.1420 s 22(3B): 17.1420 s 22(4): 17.880 s 22(5): 17.960 s 22(6): 17.1270 s 27: 17.1610 s 27(1): 17.380 s 28: 17.700 s 29(1): 17.80, 17.990 s 29(1)(b): 17.860 s 29(1)(c): 17.780 s 30: 17.1050

s 31: 17.470 s 31(1)(a): 17.320 s 31(1)(a)(i): 17.330 s 31(1)(a)(ii): 17.370 s 31(1)(a)(iv): 17.410 s 31(1)(a)(vi): 17.420 s 31(1)(a)(iii): 17.380 s 31(1)(a)(vii): 17.420 s 31(1)(b): 17.320 s 31(1)(b)(i): 17.330 s 31(1)(b)(ii): 17.370 s 31(1)(b)(iii): 17.410 s 31(1)(c): 17.320, 17.430 s 31(1)(d): 17.320, 17.430 s 31(5): 17.430 s 32: 17.90 s 32(1): 17.70, 17.110 s 32(2): 17.80, 17.110 s 32(4): 17.70 s 33(2): 17.730, 17.740 s 33(3): 17.730 s 33(5): 17.740 s 35(2): 17.250 s 35(4): 17.280 s 35(5): 17.310 s 35(6): 17.270 s 35(7): 17.310 s 36(1): 17.320, 17.440 s 36(1A): 17.460 s 37: 17.470, 17.480, 17.510, 17.1000 s 38: 17.470, 17.510, 17.580, 17.1000 s 39B: 17.1270 s 40: 17.610 s 40(2): 17.660 s 40(3): 17.660 s 40(4): 17.660 s 40(5): 17.660 s 41: 17.610 s 41A: 17.610 s 42: 17.610 s 43(1): 17.710 s 43(2): 17.610 s 43C: 17.690 s 44A: 17.530 s 44C: 17.540, 17.550 s 44C(2): 17.540 s 44D: 17.1010 s 44E: 17.560 s 45: 17.700 s 46: 17.700 s 47J: 17.690 ss 54 to 64: 17.720 s 55: 17.720 ss 65 to 67: 17.700 s 74: 17.1740 s 74(2): 17.1770 ss 74 to 77: 17.1720 s 75: 17.1730, 17.1740 s 77: 17.1750, 17.1760, 17.1770

xxvii

xxviii

Introduction to Business Law in Australia

Copyright Act 1968 — cont s 77(1): 17.1750 s 77(2)(a): 17.1750 s 77(3): 17.1770 s 77(5): 17.1770 s 77A: 17.1770 s 80: 17.750 s 81: 17.750 s 84: 17.780 s 85: 17.430 s 85(1): 17.790 s 85(1)(c): 17.410 s 86(c): 17.410 s 87: 17.930 s 87(a): 17.940 s 87(c): 17.410, 17.940 s 88: 17.990 s 89: 17.780 s 90: 17.860 s 91: 17.920 s 92: 17.990 s 93: 17.830 s 94(1): 17.900 s 95(1): 17.980 s 96: 17.990 s 97(2): 17.800 s 97(3): 17.800 s 98(2): 17.880 s 98(3): 17.880 s 99: 17.960 s 100: 17.990 s 100A: 17.1020 s 101(1): 17.760 s 101(1A): 17.760 s 102: 17.1000, 17.1010 s 102(2): 17.1000 s 103: 17.1000, 17.1010 s 103A: 17.1020 s 103AA: 17.1020 s 103B: 17.1020 s 103C: 17.1020 s 104: 17.1030 s 108: 17.810 s 109: 17.810 s 109A: 17.690, 17.820 s 110AA: 17.690, 17.890 s 111: 17.970 s 111(1): 17.970 s 111(2): 17.970 s 111(3): 17.970 s 111(4): 17.970 s 112D: 17.1010 s 112E: 17.1270 s 113(1): 17.760 s 115: 17.1070, 17.1110, 17.1230 s 115(2): 17.1130, 17.1170 s 115(3): 17.1150, 17.1170 s 115(4): 17.1190 s 116: 17.1070, 17.1110 s 116(1): 17.1230, 17.1250

s 116(1A): 17.1230 s 116(1C) to (1E): 17.1230 s 116(2): 17.1240 s 116B: 17.1310 s 116C: 17.1310 s 116D: 17.1320 ss 116AA to 116AJ: 17.1270 ss 116AK to 116AQ: 17.1280 s 116AN: 17.1280, 17.1290 s 116AN(2): 17.1290 s 116AN(3): 17.1290 s 116AN(4): 17.1290 s 116AN(5): 17.1290 s 116AN(6): 17.1290 s 116AN(7): 17.1290 s 116AN(8): 17.1290 s 116AN(9): 17.1290 s 116AO: 17.1280 s 116AO(3): 17.1290 s 116AO(4): 17.1290 s 116AO(5): 17.1290 s 116AO(6): 17.1290 s 116AP: 17.1280 s 116AP(3): 17.1290 s 116AP(4): 17.1290 s 116AP(5): 17.1290 s 116AP(6): 17.1290 s 116AQ: 17.1300 s 116AAA: 17.1420 s 119: 17.1070 ss 120 to 125: 17.1070 s 130A: 17.1010 ss 132AA to 132AT: 17.1340 s 132AC: 17.1340 s 132AD: 17.1340 s 132AE: 17.1340 s 132AH: 17.1340 s 132AQ: 17.1340 ss 132AQ to 132AS: 17.1320 s 132APC: 17.1340 ss 132APC to 132APE: 17.1300 ss 135A to 135ZA: 17.670 s 135AL: 17.1330 ss 135AL to 135AU: 17.1330 ss 135ZB to 135ZZH: 17.680 s 135AOA: 17.1330 s 135AOB: 17.1330 s 135AOC: 17.1330 s 135AOD: 17.1330 s 135AOE: 17.1330 s 135AOF: 17.1330 ss 135ASA to 135AU: 17.1330 s 151: 17.810 s 152: 17.810 ss 184 to 188: 17.1560 s 189: 17.1440, 17.1450 ss 189 to 195AZO: 17.1430 s 192: 17.1440 s 193(2): 17.1460 s 194: 17.1460 s 194(2)(c): 17.1460

s 195(1): 17.1460 s 195AA: 17.1460 ss 195AC to 195AH: 17.1470 s 195AI: 17.1480 ss 195AJ to 195AL: 17.1480 s 195AM: 17.1540 s 195AN: 17.1540 s 195AO: 17.1460, 17.1530 s 195AP: 17.1470, 17.1530 s 195AQ: 17.1480 s 195AR: 17.1500 s 195AS: 17.1500 s 195AT: 17.1510 s 195AW: 17.1490 s 195AW(4): 17.1490 s 195BB: 17.1460 s 195ABA: 17.1420 s 195AHA: 17.1420 s 195AWA: 17.1490 s 195AWA(4): 17.1490 s 195AZA: 17.1520 ss 195AZM to 195AZO: 17.1540 s 196(1): 17.1040 s 196(2): 17.1050 s 196(3): 5.420, 16.740, 17.1050 s 196(4): 17.1060 s 197(1): 17.1100 s 215: 17.720 s 248A: 17.1360, 17.1390 ss 248A to 248V: 17.1350 s 248G: 17.1370 s 248J: 17.1380 s 248P: 17.1410 s 248Q: 17.1410 s 248CA: 17.1400, 17.1410 Pt IV: 17.50, 17.760, 17.1030, 17.1270, 17.1460 Pt III: 17.50, 17.760, 17.1460 Pt XIA: 17.1400 Copyright Amendment Act 2006: 17.690, 17.970, 17.1280, 17.1330 Copyright Amendment (Digital Agenda) Act 2000: 17.410, 17.1270, 17.1280 Copyright Amendment (Moral Rights) Act 2000: 17.1430 Copyright Amendment (Parallel Importation) Act 2003: 17.560, 17.570 Copyright (International Protection) Regulations 1969: 17.1560 reg 4: 17.1560 reg 4A: 17.1410 reg 4B: 17.1410 reg 6: 17.1560 reg 7: 17.1560

Table of Statutes

Copyright Regulations 1969: 17.720 reg 17(1): 17.1760 Copyright (World Trade Organization Amendments) Act 1994: 17.1410, 17.1570 Corporations Act 2001: 1.180, 1.230, 6.10, 6.160, 19.70, 19.170, 19.200, 19.400, 19.1080, 20.10, 20.30, 20.40, 20.90, 20.150, 20.190, 20.280, 20.350, 20.390, 20.410, 20.500, 20.640, 20.680, 20.690, 20.760, 20.780, 20.790, 20.820, 20.830, 20.850, 27.320 s 1: 1.210 s 2: 1.220 s 9: 1.250, 20.20, 20.410, 20.420, 20.500, 20.700, 20.870 s 9A: 1.250 s 9B: 1.250 s 9AA: 1.250 s 45A(2): 20.150 s 57: 1.250 s 79: 20.680 s 92: 20.430 s 95A: 20.840 s 103: 19.230 s 112(1): 20.140 s 112(2): 20.190 ss 112(2) to (3): 20.160 s 114: 20.150 s 115: 19.230 s 115(2): 20.180 s 117(1): 20.180 s 117(2): 20.160, 20.180 s 117(2)(m): 20.190 s 118(1): 20.180 s 119: 20.180 s 121: 20.490 s 123: 20.180 s 124: 6.160 s 124(1): 20.130, 20.200 s 124(2): 20.200 s 125: 6.160 s 125(1): 20.200 s 125(2): 20.200 s 126: 6.160 s 127: 6.160, 20.240 s 128: 6.160, 20.210 s 128(4): 20.210 s 129: 20.210 s 130: 20.200 s 131: 18.140 s 131(1): 20.165 s 131(2): 20.165 ss 131 to 133: 20.165 s 134: 20.130, 20.190 s 135(1): 20.190 s 136: 20.700

s 136(1): 20.190 s 136(2): 20.190 s 136(3): 20.190 s 140(1): 20.250, 20.280, 27.320, 20.340 s 140(2): 20.190, 20.290 s 141: 20.20, 20.190 ss 142 to 145: 20.490 s 144: 20.180 s 146: 20.490 s 148(2): 20.150 s 148(3): 20.150 s 150(1): 20.160 s 162: 20.140 s 163: 20.140 s 168: 20.180, 20.250 s 168(1)(a): 27.310 s 169(1): 27.310 s 169(5A): 27.310 s 169(7): 27.310 s 173: 20.350 s 175: 20.350 s 175(1): 20.250 s 177: 20.350 s 177(1): 27.310 s 180: 1.180 s 180(1): 1.250, 27.540 s 180(2): 1.250, 27.540 s 180(3): 1.250 ss 180 to 184: 27.540, 20.570 s 181: 20.560 s 181(2): 20.570 s 182: 20.560 s 182(2): 20.570 s 183: 20.560 s 183(2): 20.570 s 184(1): 20.600 s 184(2): 20.600 s 191(1): 20.620 s 191(2): 20.620 s 194: 20.620 s 195(1): 20.620 s 195(2): 20.620 s 198A: 20.500, 20.700 s 198D: 20.690 s 198E: 20.150 s 198E(1): 20.190 s 198E(2): 20.190 s 201A(1): 20.500 s 201A(2): 20.500 s 201B: 20.500 s 201F: 20.150, 20.190 s 201G: 20.500 s 202C: 20.150, 20.190 s 203C: 20.500 s 203D: 20.280, 20.500 s 204D: 20.180 s 206B: 20.500, 20.600 s 206B(3): 15.1220 s 206C: 20.680 ss 212 to 216: 20.630

s 228: 20.630 s 231: 20.250 s 232: 20.250, 20.290, 27.320, 20.340 s 233: 20.290 s 233(1): 27.320 s 236: 20.250, 27.320 s 237: 27.320 s 245C: 20.340 s 246B: 20.280 s 246B(2): 20.340 ss 246B to 246G: 20.290, 20.340 s 246D: 27.320 s 246D(1): 20.340 s 246F(1): 20.340 s 248A: 20.690 s 248C: 20.690 s 248G: 20.690 s 249C: 20.690 s 249D: 20.280, 27.320 s 249D(1): 20.690 s 249H: 20.700 s 249J: 20.280 s 249R: 20.690 s 249T: 20.690 s 249X: 20.190, 20.700 s 249HA: 20.700 s 250E: 20.700 s 250L(1): 20.700 s 250N: 20.180 s 250N(2): 20.690 s 250N(4): 20.690 s 250S: 20.600, 20.690 s 250SA: 20.690 s 251A: 20.180 s 251A(1): 20.710 s 252: 20.180 s 254A(1)(b): 20.340 s 254A(1)(c): 20.340 s 254A(2): 20.340 s 254B: 20.335 s 254D: 20.190 s 254G(2): 20.340 s 254M: 20.340 s 254T: 20.360 s 254U: 20.360 s 254V: 20.280 s 254W(2): 20.190, 20.360 s 254X: 20.340 ss 256A to 258F: 20.380 s 256B: 20.360 s 256D: 20.360 s 257A: 20.380, 20.390 s 257B(1): 20.390 s 258D: 20.380 s 259A: 20.380 s 259B(1): 20.380 s 259B(2): 20.380 s 259B(3): 20.380 s 260A: 20.390, 20.400 s 260B: 20.390

xxix

xxx

Introduction to Business Law in Australia

Corporations Act 2001 — cont s 260C: 20.390 s 260D(2): 20.390, 20.400 s 260E: 20.390 ss 260FA to 260FC: 20.410 s 260GB: 20.410 ss 260GC to 260GF: 20.410 s 283AC(1): 20.410 s 283DA: 20.410 s 283DB: 20.410 s 286: 20.180, 20.710 s 292(1): 20.710 s 293: 20.710 s 293(3)(c): 20.710 s 294: 20.710 s 300A: 20.600 s 313(6): 20.710 s 314: 20.280 ss 324CA to 324CD: 20.150 ss 324DA to 324DA: 20.40 s 327: 20.710 s 327(1): 20.180 s 348: 20.710 s 349: 20.710 ss 411 to 412: 20.800 ss 413 to 414: 20.800 s 418(1)(d): 20.730 s 418A: 20.790 s 419(1): 20.780 s 420(1): 20.750 s 420(2): 20.750 s 420A: 20.760 s 420B: 20.750 s 420C: 20.770 s 421: 20.760 s 421A: 20.760 s 422: 20.760 s 423: 20.760 s 425: 20.760 s 428: 20.740 s 429(2): 20.760 s 433: 20.760 s 434A: 20.760, 20.790 s 434B: 20.790 ss 435A to 451D: 20.810 s 435C(1): 20.810 s 436A(1): 20.810 s 436A(2): 20.810 s 436B: 20.810 s 436C: 20.810 s 436E: 20.810 s 436E(1): 20.810 s 437A: 20.810 s 437B: 20.810 ss 438B to 438C: 20.810 s 439C: 20.810 s 439C(a): 20.810 s 439C(b): 20.810 s 439C(c): 20.810 s 443A(1): 20.810 s 443B: 20.810

s 443D: 20.810 s 444A(3): 20.820 s 444A(4): 20.820 ss 444D to 444H: 20.820 s 445C: 20.820 s 445D: 20.820 s 445E: 20.820 s 445G: 20.820 s 446A: 20.820 s 447A: 20.820 ss 448A to 448C: 20.810 s 459A: 20.840 s 459P: 20.840 s 461: 27.320 s 461(1): 20.840 s 471: 20.840 s 471B: 20.840 s 472: 20.830 s 477: 20.860 s 482: 20.840 s 491: 20.850 s 494: 20.850 s 494(1): 20.850 s 495: 20.830, 20.850 s 496: 20.850 s 496(1): 20.850 ss 497 to 500: 20.850 s 500: 20.850 s 506: 20.860 s 513A: 20.840 ss 515 to 518: 20.10 s 532: 20.830 s 553: 20.870 s 555: 20.870 ss 556 to 564: 20.870 s 588G: 20.90, 20.390, 20.610, 20.650, 20.810 s 588H(2): 20.650 s 588H(3): 20.650 s 588H(4): 20.650 s 588H(5): 20.650 s 588J: 20.650 s 588K: 20.650 s 588M: 20.650 ss 588FB to 588FF: 20.90 s 588FE: 20.870 s 588FF: 20.870 s 588FG: 20.870 ss 596A to 596AC: 20.610 s 601AA: 20.870 s 601AB(2): 20.870 s 601AC: 20.870 s 601AD: 20.850 s 601AD(1): 20.180 s 601AH: 20.870 s 601DA: 20.180 s 601ED: 20.420 s 601FA: 20.420 s 601FC: 20.420 s 601GA: 20.420 s 602: 20.720

ss 602 to 673: 20.720 s 608(1): 20.720 ss 626 to 630: 20.720 s 700: 20.430 s 708: 20.420, 20.430 s 709(2): 20.460 s 710: 20.440 s 711: 20.440 s 712: 20.450 s 714: 20.460 s 715: 20.460, 20.470 s 715(2): 20.470 s 715A: 20.430 s 717: 20.430 s 727: 20.430 s 728: 20.480 s 729: 20.480 s 731(1): 20.480 s 731(2): 20.480 s 732: 20.480 s 733: 20.480 s 739(1): 20.480 s 761A: 20.430 s 1041H: 27.310 ss 1042A to 1042H: 20.600 s 1043A: 20.600 s 1070A: 20.340 s 1071B: 20.350 s 1071E: 20.350 s 1071F: 20.350 s 1085(1): 20.340 s 1091: 20.350 s 1091D: 20.350 s 1282: 20.830 s 1317E: 20.570, 20.680 s 1317G: 20.680 s 1317H: 20.680 s 1317HA: 20.680 s 1318: 20.680 s 1323: 20.730 s 1324: 20.280, 20.340 s 1427: 20.335 Ch 6: 20.720 Ch 6D: 20.150, 20.430 Pt 2M.4: 20.710 Pt 5.2: 20.730 Pt 5.3A: 20.810 Pt 5.6: 20.830 Pt 5.8A: 20.90 Pt 6.10, Div 2: 20.720 Pt 9.4B: 20.580 Corporations Amendment (Improving Accountability on Termination Payments) Act 2009: 20.40 Corporations Amendment (Phoenixing and Other Measures) Act 2012: 20.40 Corporations Amendment (Short Selling) Act 2008: 20.40

Table of Statutes

Corporations Regulations 2001 reg 2A.1.01: 19.230

Designs (Consequential Amendments) Act 2003: 17.1720

Criminal Code Act 1995: 13.360, 20.130 s 477.1: 13.360 s 477.2: 13.380 s 477.3: 13.380 s 478.1: 13.380 s 478.2: 13.380 ss 478.3 to 478.4: 13.380 Pt 10.6: 13.380 Divs 477 to 478: 13.360

Designs Regulations 2004: 17.1770

Cybercrime Legislation Amendment Act 2012: 13.380 Damage by Aircraft Act 1999: 16.330 Designs Act 1906: 17.1580, 17.1750 Designs Act 2003: 16.540, 17.1580, 17.1590, 17.1620, 17.1630, 17.1690, 17.1700, 17.1710, 17.1720, 17.1730, 17.1740, 17.1750, 17.1770, 17.1780 s 10: 17.1700 s 10(1): 17.1650 s 10(2): 17.1650 s 15(1): 17.1610 s 16(3): 17.1640 s 19: 17.1670 s 21: 17.1600 s 22: 17.1600 s 27(1): 17.1640 s 35: 17.1710 ss 39 to 40: 17.1630 s 45: 17.1630 s 46: 17.1690 s 47: 17.1690 s 63: 17.1630 s 65: 17.1630 s 66: 17.1630 s 67: 17.1630 s 68: 17.1630 s 71(1): 17.1660, 17.1670 s 71(1)(a): 17.1660, 17.1670 s 71(1)(b) to (e): 17.1660 s 71(2): 17.1670 s 71(3): 17.1670 s 72(1): 17.1700 s 72(2): 17.1700 s 72(3): 17.1700 s 72(5): 17.1700 s 73: 17.1660 s 73(3): 17.1630 s 75(1): 17.1680 s 75(2): 17.1680 s 75(3): 17.1680 s 75(4): 17.1680 s 93: 17.1670

Do Not Call Register Act 2006: 13.410 Electronic Transactions Act 1999: 3.600, 13.10, 13.30 s 5: 3.600 s 8: 13.30 s 9: 13.30 s 10: 13.200 s 10(1)(a): 13.30, 13.60 s 10(1)(b): 13.60 s 10(1)(b)(i): 13.30 s 10(1)(b)(ii): 13.30 s 11: 13.30 s 12: 13.30 s 12(4)(c): 13.30 s 14: 3.600 s 14(1): 13.30 s 14(2): 13.30 s 14(3): 13.40 s 14A: 3.600 s 14A(1)(a): 13.30 s 14A(1)(b): 13.30 s 14B: 3.600 ss 14 to 14A: 3.600 s 15: 13.30 s 15(1): 3.600 s 15A: 13.90 s 15B: 13.110 s 15C: 13.90 s 15D: 13.90, 13.100 Pt 2A: 13.90 Sch 1: 13.30 Electronic Transactions Amendment Act 2011: 13.430 Electronic Transactions Bill 2000: 13.30 Electronic Transactions Regulations 2000: 13.30, 13.80 Evidence Act 1995: 13.80 Federal Court of Australia Act 1976: 1.580 s 33: 1.570 First Corporate Law Simplification Act 1995: 20.40 Immigration Restriction Act 1901 s 3: 1.290 Insurance Act 1973: 13.80 Insurance Contracts Act 1984: 2.30, 3.600, 10.100 s 48: 10.80 s 48(1): 10.100

Intellectual Property Laws Amendment (Raising the Bar) Act 2012: 17.1790, 17.1910, 17.1920, 17.1930, 17.1970, 17.1980, 17.1990, 17.2000, 17.2130, 17.2520 Sch 6, item 113: 17.2260 Intellectual Property Legislation Amendment (Raising the Bar) Regulation 2013: 17.1790 Interactive Gambling Act 2001: 13.430 s 9B: 13.430 s 15A: 13.430 Judiciary Act 1903 ss 35-35A: 1.570 s 39: 1.700 Jurisdiction of Courts (Cross-Vesting) Act 1987: 1.700 Legislative Instruments Act 2003 s 38: 1.390 s 42: 1.390 Life Insurance Act 1995 s 200(2)(a): 5.420 Local Government Act s 14: 1.370 Marine Insurance Act 1909 s 28: 5.420 National Consumer Credit Protection Act 2009: 18.850 Sch 1: 7.740 National Credit Code: 7.740, 13.120 s 7(8): 7.740 s 76(1): 7.740 Native Title Act 1993: 1.90 Native Title Amendment Act 1998: 1.90 Patent Regulations 1991: 17.1950 reg 19.1: 17.2160 Patents Act 1952: 17.1830, 17.1910 Patents Act 1990: 16.540, 17.1790, 17.1880, 17.1900, 17.1910, 17.1930, 17.1940, 17.1970, 17.2000, 17.2010, 17.2020, 17.2040, 17.2050, 17.2110, 17.2130, 17.2150, 17.2160, 17.2170 s 7(1): 17.1900 s 7(2): 17.1910 s 7(3): 17.1910 s 7(4): 17.2090

xxxi

xxxii

Introduction to Business Law in Australia

Patents Act 1990 — cont s 7A: 17.1920 s 9: 17.1930 s 13(1): 17.2110 s 13(2): 17.2110 s 14: 17.2110 s 15: 17.1940 s 15(1): 17.2170 s 15(1)(b): 17.2170 s 18: 17.2150 s 18(1): 17.1810, 17.1830 s 18(1)(a): 17.2010, 17.2020, 17.2040 s 18(1)(b): 17.2010, 17.2040 s 18(1)(b)(i): 17.1880 s 18(1)(b)(ii): 17.2090 s 18(1)(c): 17.2010, 17.2020, 17.2040 s 18(1A)(a): 17.2090 s 18(1A)(b): 17.2090 s 18(1A)(b)(ii): 17.2090 s 18(1A)(c): 17.2090 s 18(2): 17.1850 s 18(3): 17.2090 s 18(4): 17.2090 s 20(1): 17.2150 s 23: 17.2000 s 24(1): 17.1900 s 29(1): 17.1950 s 29(2): 17.1950 s 29(3): 17.1950, 17.1970 s 29(4): 17.1950, 17.1980 s 38: 17.1970 s 40(1): 17.1970 s 40(2): 17.1980, 17.2030, 17.2040, 17.2080, 17.2150 s 40(2)(c): 17.2090 s 40(3): 17.1990, 17.2030, 17.2040, 17.2080, 17.2150 s 40(4): 17.1990, 17.2080 s 43(2)(b): 17.2000 s 44(1): 17.2010 s 44(2): 17.2010 s 45: 17.2010 s 49(1): 17.2020 s 49(5): 17.2020 s 49(6)(b): 17.2020 s 52: 17.2070 s 54(1): 17.2020 s 54(3): 17.2020 s 57: 17.2140 s 59: 17.2030 s 60: 17.2030 s 60(3A): 17.2030 s 60(4): 17.2030 s 65: 17.1800, 17.2050 s 67: 17.1800, 17.2050 s 68: 17.1800, 17.2100 ss 70 to 79: 17.2050 s 75(1): 17.2050 s 75(4): 17.2050

s 97(1): 17.2040 s 97(2): 17.2040 s 97(3): 17.2040 s 97(3A): 17.2040 s 98: 17.2040 s 100A(1): 17.2040 s 101(1): 17.2040 s 101A: 17.2080 s 101B: 17.2080 s 101E: 17.2080 s 101F: 17.2080 s 101G: 17.2080 s 101J: 17.2080 s 104: 17.2010 s 117: 17.2110 s 119A: 17.2130 s 119B: 17.2130 s 119C(1): 17.2130 s 119C(2): 17.2130 s 120: 17.2140 s 120(1A): 17.2080 s 121: 17.2150 s 122(1): 17.2140 s 123: 17.2140 ss 133 to 136: 17.2110 s 138: 17.2150 s 142(1): 17.1970 s 142(2): 17.2010 ss 186 to 187: 17.2160 s 188: 17.2160 s 190: 17.2160 Sch 1: 17.1890, 17.2110 Patents Amendment (Innovation Patents) Act 2000: 17.2060 Patents Regulations 1991: 17.1790, 17.2030 reg 1.6: 17.1930 regs 2.2 to 2.2D: 17.1900 reg 3.10: 17.1970 reg 3.15: 17.2010 reg 3.16: 17.2010 reg 4.2(2): 17.2020 reg 4.2(3): 17.2020 reg 5.4(1): 17.2030 regs 5.5 to 5.26: 17.2030 reg 6.2: 17.2050 Payment Systems (Regulations) Act 1998: 13.220 Payment Systems and Netting Act 1998: 13.220 Personal Property Securities Act 2009: 16.820, 20.410 s 10: 20.410 s 51A: 20.410 Personal Property Securities (Corporations and Other Amendments) Act 2011: 20.410

Plant Breeder’s Rights Act 1994: 17.1870 s 22: 17.1870 Privacy Act 1988: 13.350, 13.430 Privacy Amendment (Enhancing Privacy Protection) Act 2012: 13.350 Protection of Birds Act 1954 s 6: 3.90 Resale Royalty Right for Visual Artists Act 2009: 17.1550 Spam Act 2003: 13.390, 13.400 s 16: 13.390 s 17: 13.390 s 18: 13.390 s 20: 13.390 Sch 1, cl 2: 13.390 Sch 1, cl 3: 13.390 Sch 1, cl 4: 13.390 Statute of Westminster Adoption Act 1942: 1.440 s 2: 1.440 Telecommunications Act 1997: 13.300 Trade Mark Regulations 1995 reg 5.1: 17.2310 Trade Marks Act 1955: 17.2210 Trade Marks Act 1995: 17.2200, 17.2210, 17.2220, 17.2240, 17.2290, 17.2320, 17.2440, 17.2480, 17.2560, 17.2590, 17.2610, 17.2620, 17.2630, 17.2780, 19.110 s 8: 17.2550 s 10: 17.2470 s 17: 17.2440 s 19: 17.2230 s 19(2): 17.2230 s 20: 17.2220 s 21: 17.2220 s 26(1): 17.2550 s 26(2): 17.2550 s 27(1): 17.2230 s 27(5): 17.2230 s 31: 17.2230 s 33: 17.2230 s 34: 17.2230 s 35: 17.2230 s 39: 17.2300 s 40: 17.2250 s 41: 17.2260, 17.2270 s 41(1): 17.2260 s 41(2): 17.2260 s 41(3): 17.2260 s 41(4): 17.2260

Table of Statutes

Trade Marks Act 1995 — cont s 42: 17.2300 s 43: 17.2280 s 44(1): 17.2290 s 44(2): 17.2290 s 44(3): 17.2290 s 44(4): 17.2290 s 52: 17.2310 s 54: 17.2310 s 55: 17.2310 s 56: 17.2310 s 58: 17.2320, 17.2330 s 59: 17.2340 s 60: 17.2350, 17.2360 s 61: 17.2370 s 62: 17.2380 s 62A: 17.2390 s 71: 17.2400 s 72(3): 17.2400 s 73: 17.2400 s 77: 17.2400 s 85: 17.2410 s 88(1): 17.2410 s 88(2): 17.2410 s 89: 17.2430 s 92: 17.2440 s 92(4): 17.2540 s 92(4)(a): 17.2440 s 92(4)(b): 17.2440 s 93(2): 17.2440 s 94: 17.2440 s 96: 17.2440 s 106: 17.2600 s 109: 17.2600 s 113: 17.2610 s 117: 17.2610 s 120: 13.270 s 120(1): 17.2450 s 120(2): 17.2470 s 122: 17.2480 s 123: 17.2480, 17.2490, 17.2500 s 124: 17.2510 s 126: 17.2520 s 126(1): 17.2520 s 126(2): 17.2520 s 127: 17.2540 ss 131 to 143: 17.2620 s 132: 17.2550 s 145: 17.2630 s 146: 17.2630 s 148: 17.2630 s 149: 17.2630 s 162: 17.2570 s 164: 17.2570 s 166: 17.2570 s 167: 17.2570 s 169: 17.2580 s 173: 17.2580 s 174: 17.2580 s 175: 17.2580

s 180: 17.2580 s 185: 17.2590

Sch 1: 15.450 Sch 2: 15.450

Trade Marks Regulations 1995 reg 4.15: 17.2300 Sch 1: 17.2230

Trade Practices (Industry Codes – Franchising) Regulations 1998 Schedule Schedule: 17.2880

Trade Practices Act 1974: 1.660, 7.500, 7.730, 8.570, 9.130, 9.670, 14.390, 15.30, 15.1240, 15.1310, 15.1590, 17.2720, 17.2780, 17.2880, 17.2890, 18.610 s 4M: 8.570, 8.580 s 51A: 15.650 s 51AA: 15.350 s 51AB: 15.400 s 52: 8.110, 13.240, 13.250, 13.260, 14.390, 15.60, 15.70, 15.90, 15.190, 15.280, 15.1050, 15.1070, 15.1230, 17.2720, 17.2890, 18.610 s 52(1): 15.150, 15.160, 15.170, 15.180 , 15.1140 s 53: 15.90 s 53(c): 13.260 s 53(d): 13.260, 13.280 s 53(e): 15.510 s 53(g): 15.520 s 53A: 15.600 s 53A(1)(b): 15.590 s 53(eb): 15.920 s 56(1): 15.750 s 56(2): 15.750 s 59: 15.1230 s 59(2): 15.620 s 68: 15.1240 s 71: 15.1330 s 74B: 15.1590 s 74D: 15.1590 s 74G: 15.1590 s 74AF: 15.1590 s 74AG: 15.1590 s 75B: 15.1070 s 75B(a): 15.1060 s 75AZC(1)(g): 15.530 s 82: 15.1020, 15.1030, 15.1040, 15.1050, 15.1140 s 82(1): 15.1050 s 85(1)(b): 15.920 s 87: 8.110, 15.1020, 15.1140 Pt IV: 8.580 Pt VI: 17.2880

US Free Trade Agreement Implementation Act 2004: 17.1270, 17.1420

Trade Practices Amendment (Australian Consumer Law) Act (No 1) 2010 Sch 1, Pt 1: 15.450 Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010

Venture Capital Act 2002: 19.1100 Volunteers Protection Act 2003: 14.60

AUSTRALIAN CAPITAL TERRITORY ACT Civil and Administrative Tribunal Act 2008: 1.690 s 18: 1.680 Age of Majority Act 1974 s 5: 6.30 Agents Act 2003: 18.850 s 22: 18.850 Associations Incorporation Act 1991: 19.70 Australian Consumer Law and Fair Trading Act 2012 s 16: 19.930 Civil Law (Property) Act 2006 s 204: 5.450 s 205: 10.180 s 219: 5.300 s 507: 5.440, 5.460 Sch 3: 5.440, 5.460 Civil Law (Wrongs) Act 2002: 14.60 s 3: 14.690 s 40: 14.60 s 41: 14.60 s 43(1): 14.470 s 43(2): 14.470 s 44: 14.560 s 45(1)(a): 14.585 s 45(1)(b): 14.630 ss 95 to 96: 14.680 s 96: 14.690 s 98: 14.60 s 99: 14.60 s 102: 12.290, 14.680 s 110: 14.250 s 113: 14.250 s 221(2)(a): 8.280 Ch 8: 14.60, 14.250 Pt 2.2: 14.60 Pt 2.2A: 14.60 Civil Procedure Rules 2006: 19.670

xxxiii

xxxiv

Introduction to Business Law in Australia

Electronic Transactions Act 2001: 3.600, 13.30 Fair Trading (Australian Consumer Law) Act 1992 s 7(1): 15.30 Imperial Acts (Substituted Provisions) Act 1986 s 3(1): 5.440, 5.460 Justice and Community Safety Legislation Amendment Act 2014 Sch 1 Pt 1.1 Item 1.3: 18.850 Land Titles Act 1925: 16.270 Law Reform (Miscellaneous Provisions) Act 1955 s 15: 14.680 Law Reform (Miscellaneous Provisions) Act 1999 Sch 3: 5.440, 5.460 Legislation Act 2001: 1.300 s 73(1): 1.170 s 142: 1.320 Magistrates Court Act 1930 s 257: 1.630 Married Persons’ Property Act 1986 s 5: 18.190, 18.850 Partnership Act 1963: 19.210 s 4: 19.280 s 5: 19.210 s 6: 19.280 s 7: 19.160, 19.410 s 8: 19.270 s 9: 19.680 s 11: 19.700 s 12: 19.700 s 15: 19.940 s 17: 19.960 s 18: 19.880 s 21: 19.830, 19.840 s 22: 19.600 s 24: 19.620 s 29: 19.530 s 30: 19.530 s 31: 19.590 s 32: 19.610 s 33: 19.550 ss 33 to 35: 19.550 s 34: 19.550 s 36: 19.550 s 39: 19.980 s 40: 19.1000 s 41: 19.840 s 42: 19.860 s 44: 19.1010 s 45: 19.1030 s 48: 19.1040

s 50: 19.1060 Pt 6: 19.210, 19.1100 Partnership Act 1997 s 9: 19.730, 19.820 s 14: 19.890 s 16: 19.890 Powers of Attorney Act 1956: 18.750 Sale of Goods Act 1954 s 7: 6.50, 6.170 s 11: 7.70 s 62(1A): 7.490 Unlawful Gambling Act 2009 s 47: 8.170

NEW SOUTH WALES Animals Act 1977: 1.410 Associations Incorporation Act 2009: 19.70 Australian Consumer Law and Fair Trading Act 2012 s 12: 19.930 Builders Licensing Act 1971: 12.500 s 45: 12.500 Civil Liability Act 2002: 14.60, 14.250, 14.680 s 3B: 14.60 s 5: 14.60 s 5A(1): 14.60 s 5B: 14.470 s 5B(1): 14.470 s 5B(1)(a): 14.710 s 5B(2): 14.470 s 5C: 14.560 s 5D(1): 14.710 s 5D(1)(a): 14.585 s 5D(1)(b): 14.630 s 5D(2): 14.600 s 5G: 14.690 s 5O: 14.60, 14.520, 14.580 s 5P: 14.60, 14.580 s 5R: 14.680 s 5S: 14.680 s 12: 14.60 s 16: 14.60 s 21: 14.60 s 42: 14.250 s 45: 14.250 s 58(1)(b): 14.710 s 59: 14.520 s 72: 16.330 Pt 1A, Div 5: 14.60 Pt 5: 14.60, 14.250 Pt 6: 14.680 Sch 2, Item 2: 8.280

Coal Acquisition Act 1981 s 5: 16.110 Commercial Agents and Private Inquiry Agents Act 2004: 18.850 Commercial Arbitration Act 2010: 1.550 Consumer Claims Act 1998 s 14: 1.680 Consumer Claims Regulation 2007 reg 5: 1.680 Conveyancing Act 1919 s 12: 10.180 s 26: 16.240 s 38(1): 5.300 s 53(1): 16.260 s 54A: 5.450 s 163: 18.100 Pt 23: 16.260 Crown Lands Act 1989 s 171: 16.110 District Court Act 1973 s 4: 1.620 s 44: 1.620 Electronic Transactions Act 2000: 3.600, 13.30, 13.70 Electronic Transactions Regulation 2012 reg 4: 13.70 Factors (Mercantile Agents) Act 1923: 18.800 Fair Trading Act 1987: 13.240 s 28(1): 15.30 Imperial Acts Application Act 1969 s 8(1): 5.440, 5.460 Interpretation Act 1987: 1.300 s 23(1): 1.170 s 34: 1.320 Law Reform (Miscellaneous Provisions) Act 1965 s 10: 14.680 Law Reform (Miscellaneous Provisions) Amendment Act 1965 s 9: 12.290, 14.680 Legal Profession Act 1987: 14.60 Local Court Act 2007 s 29: 1.630, 1.680 Married Persons (Equality of Status) Act 1996 s 4: 6.180 s 7: 18.190, 18.850

Table of Statutes

Minors (Property and Contracts) Act 1970: 6.50, 19.260 s 6(1): 6.30 s 48: 6.150

Travel Agents Act 1986: 18.850

Partnership Act 1892: 19.210 s 1: 19.280 s 2: 19.160, 19.410 s 4: 19.270 s 5: 19.680 s 7: 19.700 s 8: 19.700 s 11: 19.940 s 13: 19.960 s 14: 19.880 s 17: 19.830, 19.840 s 18: 19.600 s 20: 19.620 s 23: 19.670 s 24: 19.530 s 25: 19.530 s 26: 19.590 s 27: 19.610 s 28: 19.550 ss 28 to 30: 19.550 s 29: 19.550 s 30: 19.550 s 34: 19.980 s 35: 19.1000 s 36: 19.840 s 37: 19.860 s 38: 19.1010 s 39: 19.1030 s 42: 19.1040 s 44: 19.1060 s 45: 19.280 s 46: 19.210 Pt 3: 19.210, 19.1080, 19.1100

Trustee Act 1925 s 14: 21.270

Partnership Act 1997 s 5: 19.730 s 9: 19.820 s 10: 19.890 s 12: 19.890 Perpetuities Act 1984: 21.200 Petroleum (Onshore) Act 1991 s 6: 16.110 Real Property Act 1900: 16.270 s 88: 18.100 s 100: 16.240 Real Property (Amendment) Act 1970 s 13: 18.100 Restraints of Trade Act 1976: 8.680 s 4(1): 8.680 Sale of Goods Act 1923: 11.360 s 4(5): 11.360 s 7: 6.170 s 11: 7.70

Travel Agents Appeal Act 2014: 18.850

Unlawful Gambling Act 1998 s 56: 8.170 s 56(2): 8.170 Water Management Act 2000: 16.370

NORTHERN TERRITORY Age of Majority Act s 4: 6.30 Agents Licensing Act 1979: 18.850 Associations Act: 19.70 Auctioneers Act 1935: 18.850 Australian Consumer Law s 18: 7.300 Australian Consumer Law and Fair Trading Act 2012 s 16: 19.930 Commercial and Private Agents Licensing Act 1979: 18.850 Consumer Affairs and Fair Trading Act 1990 s 27(1): 15.30 Pt 11: 18.850 Consumer Affairs and Fair Trading Amendment Act 2014 s 6: 18.850 Electronic Transactions (Northern Territory) Act: 13.30 Interpretation Act 1978: 1.300 s 6: 1.170 s 62B: 1.320 Land Title Act 2000: 16.270 Pt 2, Div 1: 16.260 Law Reform (Miscellaneous Provisions) Act 1956 s 16: 12.290, 14.680 Law of Property Act 2000 s 49(3): 5.300 s 56(6): 10.30 s 58: 5.460 s 62: 5.450 s 182: 10.180 s 221: 5.440 Sch 4: 5.440 Local Court Act 1989

s 3: 1.630 s 14: 1.630 Married Persons (Equality of Status) Act 1989 s 3: 6.180 s 5: 18.190, 18.850 Partnership Act 1997: 19.210 s 3: 19.280 s 4: 19.210 s 5: 19.280 s 6: 19.160, 19.410 s 8: 19.270 s 9: 19.680, 19.730, 19.820 s 11: 19.700 s 12: 19.700 s 14: 19.890 s 15: 19.940 s 16: 19.890 s 17: 19.960 s 18: 19.880 s 21: 19.830, 19.840 s 22: 19.600 s 24: 19.620 s 27: 19.670 s 28: 19.530 s 29: 19.530 s 30: 19.590 s 31: 19.610 s 32: 19.550 ss 32 to 34: 19.550 s 33: 19.550 s 34: 19.550 s 38: 19.980 s 39: 19.1000 s 40: 19.840 s 41: 19.860 s 42: 19.1010 s 43: 19.1030 s 46: 19.1040 s 48: 19.1060 Pt 3: 19.210, 19.1100 Personal Injuries (Civil Claims) Act 2003: 14.60 Personal Injuries (Liabilities and Damages) Act 2003: 14.60 s 3: 14.60 s 4: 14.60 ss 14 to 15: 14.680 s 20: 14.60 ss 24 to 28: 14.60 Racing and Betting Act s 135: 8.170 s 135(1): 8.170 Sale of Goods Act 1972 s 7: 6.50, 6.170 s 11: 7.70 Small Claims Act 1974

xxxv

xxxvi

Introduction to Business Law in Australia

Small Claims Act 1974 — cont s 5: 1.680

QUEENSLAND Acts Interpretation Act 1954: 1.300 s 14B: 1.320 s 15A: 1.170 Associations Incorporation Act 1981: 19.70 Australian Consumer Law and Fair Trading Act 2012 s 15: 19.930 Civil Liability Act 2003: 14.60 s 2: 14.60 s 4(1): 14.60 s 5: 14.60 s 9(1): 14.470 s 9(2): 14.470 s 10: 14.560 s 11(1)(a): 14.585 s 11(1)(b): 14.630 s 14: 14.690 s 22: 14.60, 14.580 s 23: 14.680 s 24: 14.680 s 35: 14.250 s 37: 14.250 s 48: 14.690 s 52: 14.60 s 54: 14.60 s 62: 14.60 Pt 1, Div 4: 14.60 Pt 3: 14.60, 14.250 Pt 3, Div 2: 14.60 Pt 4, Div 2: 14.680 Construction and Tourism (Red Tape Reduction) and Other Legislation Amendment Act 2014 s 52: 18.850 District Court of Queensland Act 1967 s 68(2): 1.620 Electronic Transactions (Queensland) Act 2001: 13.30 Factors Act 1892: 18.800 Fair Trading Act 1989 s 16(1): 15.30 Land Title Act 1994: 16.270 s 42(1): 16.270 s 56: 16.240 ss 132 to 135: 18.100 Law Reform Act 1995 s 10: 12.290, 14.680 s 17: 6.30

s 18: 6.180 Local Government Act 1993 s 25: 1.390 Magistrates Courts Act 1921 s 2: 1.630 s 4: 1.630 Mineral Resources Act 1989 s 8: 16.110 Partnership Act 1891: 19.210 s 3: 19.270, 19.280 s 5: 19.280 s 6: 19.160, 19.410 s 8: 19.680 s 10: 19.700 s 11: 19.700 s 14: 19.940 s 16: 19.960 s 17: 19.880 s 20: 19.830, 19.840 s 21: 19.600 s 23: 19.620 s 26: 19.670 s 27: 19.530 s 28: 19.530 s 29: 19.590 s 30: 19.610 s 31: 19.550 ss 31 to 33: 19.550 s 32: 19.550 s 33: 19.550 s 37: 19.980 s 38: 19.1000 s 39: 19.840 s 40: 19.860 s 41: 19.1010 s 42: 19.1030 s 45: 19.1040 s 47: 19.1060 s 48: 19.210 Ch 3: 19.1080 Ch 4: 19.210, 19.1100 Ch Ch: 19.210 Partnership Act 1997 s 8: 19.730 s 13: 19.890 s 15: 19.890 Personal Injuries Proceedings Act 2002: 14.60 Petroleum Act 1923 s 9: 16.110 s 10: 16.110 Property Agents and Motor Dealers Act 2000 s 45: 18.850 s 117: 18.850 s 140: 18.850 s 217: 18.850

s 288: 18.850 s 346: 18.850 Property Law Act 1974 s 35: 16.240 s 45: 5.300 s 47(3): 5.300 s 55: 10.30 s 56: 5.460 s 59: 5.450 s 199: 10.180 s 237(1): 16.260 ss 241 to 249: 16.260 Queensland Civil and Administrative Tribunal Act 2009: 1.690 s 11: 1.680 Sch 3: 1.680 Racing Act 2002 s 341: 8.170 s 342: 8.170 Sale of Goods Act 1896 s 5: 6.50, 6.170 s 9: 7.70 Statute of Frauds 1972 s 3(1): 5.440 Travel Agents Act 1988: 18.850 Trusts Act 1973 s 57: 21.270

SOUTH AUSTRALIA Acts Interpretation Act 1915: 1.300 s 7: 1.170 Age of Majority (Reduction) Act 1971 s 3(1): 6.30 Associations Incorporation Act 1985: 19.70 Australian Consumer Law and Fair Trading Act 2012 s 12: 19.930 Civil Liability Act 1936: 14.60 s 3: 14.60 s 4: 14.60 s 4(4): 14.60 s 32(1): 14.470 s 32(2): 14.470 s 34(1)(a): 14.585 s 34(1)(b): 14.630 s 37: 14.690 s 41: 14.60, 14.580 s 42: 14.250 s 44: 14.680 s 46: 14.680 s 47: 14.690 s 52: 14.60

Table of Statutes

Civil Liability Act 1936 — cont s 54: 14.60 Pt 9, Div 11A: 14.60 Community Welfare Act 1972: 14.130 s 95(5): 14.130 District Court Act 1991 s 8: 1.620 Electronic Transactions Act 2000: 3.600, 13.30 Employment Agents Registration Act 1993 s 6: 18.850 Fair Trading Act 1987 s 14(1): 15.30 Land Agents Act 1994 s 6(2): 18.850 Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001: 12.290, 14.680 s 7: 14.680 Law of Property Act 1936 s 15: 10.180 s 26: 5.450 s 41: 5.300 ss 92 to 111: 6.180 s 104: 18.190, 18.850 Lottery and Gaming Act 1936 s 50: 8.170 s 50A: 8.170 Magistrates Court Act 1991 s 3: 1.680 s 8: 1.630 s 38: 1.680 Mercantile Law Act 1936: 18.800 Mining Act 1971 s 16: 16.110 Minors Contracts (Miscellaneous Provisions) Act 1979: 19.260 Partnership Act 1891: 19.210 s 1: 19.280 s 2: 19.160, 19.410 s 4: 19.270 s 5: 19.680 s 7: 19.700 s 8: 19.700 s 11: 19.940 s 13: 19.960 s 14: 19.880 s 17: 19.830, 19.840 s 18: 19.600 s 20: 19.620

s 23: 19.670 s 24: 19.530 s 25: 19.530 s 26: 19.590 s 27: 19.610 s 28: 19.550 ss 28 to 30: 19.550 s 29: 19.550 s 30: 19.550 s 34: 19.980 s 35: 19.1000 s 36: 19.840 s 37: 19.860 s 38: 19.1010 s 39: 19.1030 s 42: 19.1040 s 44: 19.1060 s 45: 19.280 s 46: 19.210 Pt 3: 19.210, 19.1080 Pt 6: 19.210, 19.1100 Partnership Act 1997 s 5: 19.730, 19.820 s 10: 19.890 s 12: 19.890 Petroleum Act 2000 s 5: 16.110 Powers of Attorney and Agency Act 1984 s 12: 18.750 Real Property Act 1886: 16.270 s 74: 16.240 s 156: 18.100 Recreational Services (Limitation of Liability) Act 2002: 14.60 Registration of Deeds Act 1935: 16.260 s 35: 18.100 Sale of Goods Act 1895 s 2: 6.50, 6.170 s 6: 7.70 Security and Investigation Agents Act 1995: 18.850 Statutes Amendment (Enforcement of Contracts) Act 1982 s 3: 5.440, 5.460 Travel Agents Act 1986: 18.850 Travel Agents Repeal Act 2014 : 18.850 Volunteers Protection Act 2001: 14.60

TASMANIA Acts Interpretation Act 1931 s 8B: 1.320 Acts Interpretation Act 1983: 1.300 s 9: 1.170 Age of Majority Act 1973 s 3(1): 6.30 Associations Incorporation Act 1964: 19.70 Australian Consumer Law (Tasmania) Act 2010 s 6(1): 15.30 Australian Consumer Law and Fair Trading Act 2012 s 17: 19.930 Civil Liability Act 2002: 14.60 s 3: 14.60 s 3B: 14.60 s 4: 14.60 s 11(1): 14.470 s 11(2): 14.470 s 12: 14.560 s 13(1)(a): 14.585 s 13(1)(b): 14.630 s 16: 14.690 s 22: 14.60, 14.580 s 23: 14.680 s 26: 14.60 ss 27 to 28: 14.60 s 38: 14.250 s 42: 14.250 Pt 2: 14.680 Pt 6, Div 5: 14.60 Pt 8B: 14.60 Pt 9: 14.60, 14.250 Pt 10: 14.60 Conveyancing and Law of Property Act 1884 s 35: 16.260 s 36: 5.450 s 63: 5.300 s 86: 10.180 Crown Lands Act 1976 s 16: 16.110 s 54: 16.110 Electronic Transactions Act 2000: 3.600, 13.30 Factors Act 1891: 18.800 Land Titles Act 1980: 16.270 s 44: 16.240 Magistrates Court (Civil Division) Act 1992 s 3: 1.630, 1.680

xxxvii

Introduction to Business Law in Australia

xxxviii

Magistrates Court (Civil Division) Act 1992 — cont s 7: 1.630 s 7(2): 1.680 Married Women’s Property Act 1935 s 3: 6.180 s 7: 6.180 s 11: 6.180 Mercantile Law Act 1935 s 6: 5.440, 5.450, 5.460, 19.220 Mineral Resources Development Act 1995 s 6: 16.110 Partnership Act 1891: 19.210 s 4: 19.280 s 5: 19.210 s 6: 19.280 s 7: 19.160, 19.410 s 9: 19.270 s 10: 19.680 s 12: 19.700 s 13: 19.700 s 16: 19.940 s 18: 19.960 s 19: 19.880 s 22: 19.830, 19.840 s 23: 19.600 s 25: 19.620 s 28: 19.670 s 29: 19.530 s 30: 19.530 s 31: 19.590 s 32: 19.610 s 33: 19.550 ss 33 to 35: 19.550 s 34: 19.550 s 35: 19.550 s 39: 19.980 s 40: 19.1000 s 41: 19.840 s 42: 19.860 s 43: 19.1010 s 44: 19.1030 s 47: 19.1040 s 49: 19.1060 Pt 3: 19.210, 19.1080, 19.1100 Partnership Act 1997 s 10: 19.730, 19.820 s 15: 19.890 s 17: 19.890 Powers of Attorney Act 2000: 18.100 s 52: 18.750 Property Agents and Land Transactions Act 2005 s 18: 18.850

Racing Regulation Act 2004 s 103: 8.170 s 103(2): 8.170 Registration of Deeds Act 1935: 16.260 Sale of Goods Act 1896 s 7: 6.50, 6.170 s 9: 5.460 s 11: 7.70 Security and Investigations Agents Act 2002: 18.850 Travel Agents Act 1987: 18.850

s 2.4.1: 8.170 s 2.4.2: 8.170 Goods Act 1958: 11.660 s 7: 6.50, 6.170 s 11: 7.70 ss 65 to 72: 18.800 Instruments Act 1958 s 126: 5.440, 5.450 Pt XI: 18.100 Interpretation of Legislation Act 1984: 1.300 s 11: 1.170 s 35: 1.320

Wrongs Act 1954 s 4: 12.290, 14.680 s 44: 14.680

Local Government (Decentralised Industries) Act 1963: 9.650

VICTORIA

Magistrates’ Court Act 1989 s 3(1): 1.630 s 100: 1.630

Age of Majority Act 1977 s 3(1): 6.30 Associations Incorporation Act 1981: 19.190 Associations Incorporation Reform Act 2012: 19.70, 19.190 Auction Sales Act 1958: 18.850 Auction Sales (Repeal) Act 2001 s 3: 18.850 Australian Consumer Law and Fair Trading Act 2012: 11.650, 11.660 s 11(1): 15.30 s 16: 19.930 s 35(1)(c): 11.660 s 36(1): 11.660 s 36(3): 11.660 s 37: 11.660 s 38(1)-(2): 11.660 s 38(3): 11.660 s 40: 11.660 s 41: 11.660 ss 182 to 192: 1.680 Commercial Arbitration Act 1984: 1.550 County Court Act 1958 s 37: 1.620 Credit Act 1984: 2.30 Electronic Transactions (Victoria) Act 2000: 13.30 Estate Agents Act 1980 s 49A: 18.850 s 50: 18.850 Gambling Regulation Act 2003

Marriage Act 1958 ss 156 to 161: 6.180 Mineral Resources (Sustainable Development) Act 2006 s 9: 16.110 Partnership Act 1958: 19.210 s 3: 19.280 s 4: 19.210 s 5: 19.280 s 6: 19.160, 19.410 s 8: 19.270 s 9: 19.680 s 11: 19.700 s 12: 19.700 s 15: 19.940 s 17: 19.960 s 21: 19.830, 19.840 s 22: 19.600 s 24: 19.620 s 27: 19.670 s 28: 19.530 s 28(1): 19.530 s 29: 19.530 s 30: 19.590 s 31: 19.610 s 32: 19.550 ss 32 to 34: 19.550 s 33: 19.550 s 34: 19.550 s 38: 19.980 s 39: 19.1000 s 40: 19.840, 19.850 s 41: 19.860 s 42: 19.1010 s 43: 19.1030 s 46: 19.1040 s 48: 19.1060 Pt 3: 19.210, 19.1080 Pt 5: 19.210, 19.1100

Table of Statutes

Partnership Act 1963 s 18: 19.880 Partnership Act 1997 s 9: 19.730 s 13: 19.820 s 14: 19.890 s 16: 19.890 Petroleum Act 1998 s 13: 16.110 Property Law Act 1958 s 44(1): 16.260 s 73: 5.300 s 134: 10.180 Pt 1: 16.260 Residential Tenancies Act 1997: 2.30 Sale of Goods (Vienna Convention) Act 1987 s 8: 5.440 Supreme Court Act 1986 s 49: 6.130, 6.140 s 51: 6.140 Transfer of Land Act 1958: 16.270 s 30(2): 16.240 s 94: 18.100 Transport Act 1983: 14.250 Transport (Highway Rule) Act 2002: 14.250 Travel Agents Act 1986: 18.850 Travel Agents Appeal Act 2014: 18.850 Victorian Civil and Administrative Tribunal Act 1998: 1.690 Wrongs Act 1958: 14.60 s 14G: 14.680 s 26: 12.290, 14.680 s 28F: 14.60 s 28G: 14.60 s 28H: 14.60 s 32(2): 8.280 ss 34 to 37: 14.60 s 43: 14.60 s 44: 14.60 s 45: 14.60 s 48(1): 14.470 s 48(2): 14.470 s 49: 14.560 s 51(1)(a): 14.585 s 51(1)(b): 14.630 s 54: 14.690 s 59: 14.60, 14.580 s 60: 14.60, 14.580 s 62: 14.680 s 63: 14.680 s 83: 14.250

Pt XXII: 14.60, 14.250 Pt VBA: 14.60

WESTERN AUSTRALIA Age of Majority Act 1972 s 5(1): 6.30 Associations Incorporation Act 1987: 19.70 Auction Sales Act 1973: 18.850 Australian Consumer Law and Fair Trading Act 2012 s 19: 19.930 Betting Control Act 1954: 8.170 Civil Liability Act 2002: 14.60 s 3: 14.60 s 5B(1): 14.470 s 5B(2): 14.470 s 5C(1)(a): 14.585 s 5C(1)(b): 14.630 s 5K: 14.680 s 5L: 14.680 s 5N: 14.690 s 5W: 14.250 s 5Z: 14.250 s 5PB(1): 14.560 s 6: 14.60 ss 9 to 10A: 14.60 s 11: 14.60 Pt 1A, Div 4: 14.60 Pt 1C: 14.60, 14.250 Civil Judgments Enforcement Act 2004 s 14(4): 19.670 Debt Collectors Licensing Act 1964: 18.850 District Court of Western Australia Act 1969 s 6(1): 1.620 s 50: 1.620 Electronic Transactions Act 2003: 13.30 Electronic Transactions Act 2011: 3.600 Employment Agents Act 1976 s 12: 18.850 Factors’ Acts Amendment Act 1878: 18.800 Fair Trading Act 2010 s 19(2): 15.30 Gaming and Betting (Contracts and Securities) Act 1985 s 4: 8.170

s 5: 8.170 Imperial Act 5 & 6 Vict, c 39: 18.800 Interpretation Act 1984: 1.300 s 19: 1.320 s 20: 1.170 Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 s 4: 14.680 Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Amendment Act 1947 s 4: 12.290 Law Reform (Miscellaneous Provisions) Act 1941 ss 2 to 3: 6.180 Law Reform (Statute of Frauds) Act 1962 s 2: 5.440, 5.450 Limited Partnerships Act 1909: 19.210, 19.1080 Magistrates Court (Civil Proceedings) Act 2004 s 3: 1.680 s 4: 1.630 s 6(1): 1.630 s 26: 1.680 Mining Act 1978 s 9: 16.110 Partnership Act 1895: 19.210 s 3: 19.280 s 6: 19.210 s 7: 19.280 s 8: 19.160, 19.410 s 10: 19.270 s 14: 19.700 s 15: 19.700 s 18: 19.940 s 20: 19.960 s 21: 19.880 s 24: 19.830, 19.840 s 25: 19.600 s 26: 19.680 s 30: 19.620 s 34: 19.530 s 35: 19.530 s 36: 19.530 s 37: 19.590 s 38: 19.610 s 39: 19.550 ss 39 to 41: 19.550 s 40: 19.550 s 41: 19.550

xxxix

xl

Introduction to Business Law in Australia

Partnership Act 1895 — cont s 45: 19.980 s 46: 19.1000 s 47: 19.840 s 48: 19.860 s 49: 19.1010 s 50: 19.1030 s 55: 19.1040 s 57: 19.1060 Partnership Act 1997 s 17: 19.890 s 19: 19.890 s 26: 19.730, 19.820

Transfer of Land Act 1893: 16.270 s 60: 16.240 s 143: 18.100 s 144: 18.100 Travel Agents Act 1985: 18.850 Trustee Act 1962 s 55: 21.270 Volunteers (Protection from Liability) Act 2002: 14.60

IMPERIAL

UNITED KINGDOM Bills of Exchange Act 1882: 1.160 Commonwealth of Australia Constitution Act 1900: 1.100 Exchange Control Act 1947: 8.640 Judicature Act 1873: 1.430 Pharmacy Poisons Act 1933: 3.80 Sale of Goods Act 1893: 1.160

Australian Courts Act 1828: 1.60, 1.440

TREATIES AND CONVENTIONS

Commonwealth of Australia Constitution Act 1900 s 57: 1.170 s 73: 1.570 s 75: 1.570 s 76: 1.570

Council of Europe Convention on Cybercrime: 13.380

Commonwealth of Australia Constution Act 1900: 1.90

Model Law on Electronic Commerce 1996: 13.430

Statute of Frauds 1677: 5.430, 5.440, 5.460, 5.480, 19.220 s 4: 5.440, 5.450

Patent Co-operation Treaty 1970: 17.2190

Registration of Deeds Act 1856: 16.260

Statute of Monopolies 1624: 17.1810 s 6: 17.1810

Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks: 17.2640

Sale of Goods Act 1895 s 2: 6.50, 6.170 s 4: 5.460

Statute of Westminster 1931: 1.440 s 4: 1.60, 1.440

Petroleum and Geothermal Energy Resources Act 1967 s 9: 16.110 Property Law Act 1969 s 9: 5.300 s 11(2): 10.30 s 11(3): 10.30 s 20: 10.180 s 34(1): 5.450 s 85: 18.100 s 85(2): 18.750 Real Estate and Business Agents Act 1978 s 60: 18.850

Sale of Land Act 1970 s 22: 16.260

Statute of Westminster Adoption Act 1942 s 2: 1.60

International Convention for the Protection of Industrial Property: 17.2190

United Nations Convention on the Use of Electronic Communications in International Contracts 2005: 13.430

AN INTRODUCTION TO STUDYING LAW UNITS HOW TO APPROACH THE STUDY OF LAW Students not studying for a law degree, often find units such as Business or Commercial Law difficult. The language, the unusual concepts, the odd cases, the legal reasoning, the lack of a “right answer”, the value judgments – all are potential obstacles for students studying a law unit for the first time. Then, of course, there is the assessment and, in particular, the hypothetical legal problem that is central to most assignment and examination questions. The truth is that the study of law is not easy. However there is a case to be made that the study of law is much more than a “necessary evil” to be endured in order to satisfy course requirements. The knowledge and skills gained from studying a law unit equips students with the ability to analyse, reason, negotiate and communicate. It encourages students to consider both sides of complex problems and find workable solutions. This unit will be useful to students immediately and, of course, in the next stage of life as they begin their careers. Each of the topics has been selected because of its commercial relevance. The need to have an awareness of contract law is self-evident. The same can be said for the law of torts (especially the law of negligence), consumer protection law (the rights and responsibilities of retailers and manufacturers and importers), agency law (particularly the concept of fiduciary responsibilities) and the range of issues in relation to business organisations (particularly with respect to partners’ and directors’ responsibilities). In short, the primary objective of a unit such as business law is to introduce students to the law and to the legal environment within which individual and organisations operate. At the same time, the study of law should be valued simply because the law has such a profound impact on the whole range of human activity. Indeed, where the law works well and efficiently, where there is respect for the rule of law, where there is an independent judiciary and respect for basic human rights such as the right to a fair trial, we are closer to living in a civilised society.

APPROACHING ASSESSMENT TASKS 1. Approaching the hypothetical legal problem

(a) Introduction One of the most common forms of assessment of law units is the hypothetical legal problem. This is the way it works. Students are given a story to read. The story always ends badly for one or more of the parties who invariably seek your legal advice. Your task is (usually) to provide that advice. Your advice, which must be careful and objective, is based on your understanding of the law. It is not based on your gut instinct nor is not coloured by the fact that you would like your client to succeed. The story that ends badly contains the material (legally relevant) facts. These facts raise one or more legal questions (“issues”). These legal issues need to be discussed and analysed according to the relevant law (“rules”). Having identified the relevant law, these need to be applied to the facts (“application”) and a conclusion reached on the legal position of the parties (“conclusion”). 1 Students are asked to answer such hypotheticals as part of their assessment in two main situations: final examinations and written assignments. In a traditional examination students are given a limited 1

There is a popular method for answering hypothetical problems (the IRAC method) that may assist students navigate the waters of the hypothetical problem. The letters stand for Issue, Rule, Application, Conclusion. Using a formula like this has attractions but it also inhibit and stifle. Our recommendation is to approach IRAC carefully: it may be useful as a crutch initially but it is better to find your own voice once you are clear about your objective in tackling a hypothetical legal problem. And, simply put, your objective is (usually) to provide sound legal advice (that is supported by legal authority) to one or more of the parties to a legal dispute.

xlii

Introduction to Business Law in Australia

time to answer a number of hypotheticals. It is common for these examinations to be “open book” (students can take in notes, texts and any other materials) because the objective is to test the students’ ability to find and analyse legal issues and advise clients. In an assignment task students may be given one or more hypothetical problem (and, often, a separate or complementary research or policy-oriented task).

(b) Writing tips 1.

It is useful to be aware of some legal writing conventions when answering hypotheticals. Very often, after the story has been told, your final instruction is to “Advise X”. There are several things to say about this: first, you are really being asked to inform the reader (most immediately, the examiner) of X’s legal position; you are not expected to make recommendations about the consequences of your advice (ie, X should consider settling this matter because the costs of litigation would be prohibitive etc). Secondly, even though the instructions are to “Advise X” you should not do so! Rather the convention is to write for your readership (ie the examiner) and use the third person singular (“he” or “she”) rather than the second person singular (“you”). For example it is better to say “There are several issues that affect X … she is likely to have breached the contract when she failed to turn up for work on the appointed day”.

2.

Plan your answer. Many students’ answers to legal problems suffer from poor planning and a loose structure – if your answer lacks planning and structure it is likely to contain parts that are repetitive, irrelevant and illogical. A well-planned, well-structured answer will always do better than one that is all over the place (even if the substantive answer contains similar material). Begin with an introduction in which you set out your thesis or theme – what you are intending to prove or explore.

3.

It is critical that you structure your answer well. The key to this is that you use paragraphs effectively. Good paragraphs make for good answers. As you probably remember from your English classes, a paragraph is a group of sentences organized around a single central idea usually expressed in the first sentence of the paragraph (called the topic sentence). Every sentence in the paragraph needs to expound on the topic sentence and the topic sentence should relate back to the main theme of the answer. See point 2 above.

4.

Canvas all the relevant issues, not simply the first major one. If you don’t, you sacrifice marks because marks are allocated for each issue. At the same time you need to think carefully about staying relevant.

5.

Don’t repeat or rewrite the question. This is a waste of time for which no marks are given. Instead, a brief introduction setting the scene is a useful device – it gets you off to a good start and indicates to the examiner where you are heading. It need only be brief. For example, “I am asked to advise P whether he has any rights against the partnership. In order to do this it is necessary to (a) decide when the partnership began (b) identify the partnership property (c) decide when the partnership came to an end and (d) decide whether appropriate notice of dissolution was given”.

6.

Stay relevant. Students may not answer the question because they select the wrong issues (not much to be said about this) or select the correct issues but do not accurately explain the law or get the issues and law correct but do not apply the rules to the facts in a way that complies with the instructions in the question.

An Introduction to Studying Law Units

7.

Explain yourself. Too often students become very propositional at the application stage. For example, “this action is a breach of contract” or “there is a breach of the duty of care”. To think “why” or insert the conjunction “because…” is a useful strategy which ensures you explain yourself if you have made a bold assertion.

8.

Don’t include too much information. In particular, when discussing relevant precedents do not include a summary of the facts of the cases. If there is a critical fact or two, state it concisely and move on to the argument or analysis. There is never a need for a case summary.

9.

In most hypothetical problem questions you are asked to “advise” a person or an organisation. This should be done “objectively” and “dispassionately”: you are not usually being asked to be an advocate. Provide an answer that considers both sides and comes to a reasoned conclusion, even if it is not what your client would like to hear!

10.

As it is an open book exam you will never be expected to “transcribe” slabs of material from your notes or from texts or from primary sources. Your material is there as an aide-mémoire only.

11.

Finally but importantly, write good English – clear and concise is the motto. Do not overwrite and do not use words just because you think they sound “lawyerly”. Good lawyers write and speak in plain English: they do not use words like “aforementioned” and only the Marx Bros said “the party of the first part and the party of the second part”! Grammar and spelling are important so do the very best you can.

(c) A method for answering hypotheticals Read the question and identify the legal issues. First, read the story carefully. Consider the individuals or business entities in the story and be clear about what has happened between them and what each might be seeking (the remedy). You are looking for the material facts (ie the facts that matter, in a legal sense). For example, where the facts are that a financial adviser has provided advice to X – the duty of care question may be the issue; where a director of a company has used information gained in his position as a director to purchase shares in another company, the issue concerns directors’ duties; where a person responds to an offer on the back of a breakfast cereal box it is likely the legal issue will concern unilateral contracts. One aide to effective “issue spotting” is being familiar with the facts of key cases because they often inspire the hypothetical problems that are used. For this reason, the more familiar you are with the facts of the cases you have studied the easier it will be to recognise similarities and differences. It is also true that the very different stories may raise the same legal issue (eg the duty of care question in negligence is triggered by snails in ginger beer bottles, car doors that come off unexpectedly and teachers who allow students to leave class early). So you will have to be alert! Discuss the relevant law in the context of the story and apply to the facts. Having identified the issue(s), the next step is to explain the relevant law. To reiterate, exams are usually “open book” (as, obviously, are assignments) so it would make no sense for you to be asked to write all you know on a specific area of law that you have identified as relevant – you could open up to the right page and write to your heart’s content. Rather what we expect students to do is to analyse or explain the legal issues that you have identified as relevant and then apply that legal analysis to the facts. Using the examples in the previous section, you would need to explain, citing your legal authorities, the circumstances in which a financial adviser owes a duty of care and then apply those principles to the particular facts – thus explaining why or why not a duty of care might be owed in this particular circumstance; or explain the relevant directors’ duties and say whether or not this director

xliii

xliv

Introduction to Business Law in Australia

has breached the law; and, in the third example, explain the law in relation to formation of unilateral contracts and say whether or not a contract has been formed. You must be discriminating at this stage, honing in on the law that matters in the scenario you have been presented with. Thus, in the examples above, you would not discuss all aspects of the duty of care in negligence or all the duties a director has or all the law in relation to agreement. You analyse and apply the law that is relevant to the facts you have in front of you. As this is one area of life where your own particular opinion is not valued, please cite the authority (cases and statutes) that you rely on for your statements of law. Furthermore do not simply assert a legal rule: cite the relevant case or statute that is the source of the rule. For example, to say “infatuation can be a special disadvantage in relation to unconscionable conduct” is not as good as saying that “… in Louth v Diprose the High Court of Australia, when discussing the criteria in Amadio’s case, extended the concept of ‘special disadvantage’ to include infatuation with another person who, being aware of the other’s infatuation, took advantage of it to extract an advantage”. This is the part that separates out the good from the ordinary (or worse) because this is the moment when you apply the law to the facts. For obvious reasons, it will usually be the case that there is no perfect match between the new facts and the existing legal principles. So usually you have the opportunity to demonstrate you can argue a case, to show that you understand that a good answer is an argument, not a statement. You are expected to draw the strands together in a way that clearly demonstrates that you have understood the law and, even better, could argue the extent to which it applied to this particular set of facts. Conclusion Your conclusion should be brief and should simply summarise your advice. For example, if you were asked to “Advise Adam about his liability in contract to Barak”, you might conclude by saying that “Adam has breached the contract with Barak and will be liable to pay him damages. Those damages will include his loss of earnings for the period June and July 2014. However it is uncertain whether he is liable to compensate him for his physical injuries because there is insufficient evidence that the breach caused the injury”.

(e) Worked examples In the following question we go through the process of identifying the issues. Question 1. Norman Peeters Pty Ltd, a vendor of electronic equipment, dropped brochures in mail boxes advertising in bold print NEVER TO BE REPEATED OFFERS ON FAMOUS HUGE PLASMA TELEVISIONS WITH SURROUND SOUND SYSTEM. BUY NOW FOR $3500. On Wednesday, Ben, a famous footballer, saw one of the brochures and decided he would purchase one of the plasma televisions. He immediately went down to the store and told Mary, the sales manager, that he accepted the store’s offer and would bring his car around the back to pick it up. However, Mary told him to slow down. “Unfortunately, we are out of stock”, she said. She then said, “The only plasma left is the demonstration model, and you [can have that for $2,000”. “Not a bad price as they usually sell for around $3000”. Ben was annoyed believing that he had already made a contract. Nevertheless, he said that he would think about her offer to sell the demonstration model. Then Mary said, “Look, you’re my son’s favourite footballer…if you autograph my arm, I’ll hold it for you for two days. Here’s my business card – just email me your decision before Friday at noon.” Ben agreed, autographed her arm and left the shop. The next day (Thursday) Jessie walked into the store and, when told the set it was “on hold”, offered to buy it for $3,000. Mary decided that it was better (for her) to get a certain sale and sold it to Jessie.

An Introduction to Studying Law Units

On Friday morning well before noon, Ben emailed Mary advising her that he would buy the demonstration set. “I’ll pay for it and pick it up after training” he wrote. Mary immediately rang him and told him the set had been sold. He was furious but she said that since he had not paid a deposit he had no reason to complain. Ben seeks your advice as to whether he had a contract with Norman Peeters Pty Ltd either on the Wednesday when he first visited the store or on the Friday. Please advise him. Include in your advice any remedies that may be available, including whether he is entitled to extra damages designed to punish the store for its deliberate breach.

Issues 1. Is the advertisement an offer or was the advertisement an invitation to treat? Define each and discuss the difference: refer to Carlill, Boots. Conclude that it is an invitation to treat. Ben’s “acceptance” is therefore an offer to purchase. Counter-offer by store when she offers to sell him a demo model for $2000. Discuss effect of counter-offer: refer to Harvey v Facey. 2. Has Ben got an option or is Mary’s promise to hold the item for two days simply a gratuitous promise? Discuss characteristics of option: refer Goldsborough Mort when discussing effect of an option is (ie, gives the option holder a right to purchase provided the conditions in the option are met). Discuss key requirement of an option contract – consideration. Define consideration: must be something of “value” (sufficient but need not be adequate): Currie. Is Ben providing valuable consideration when he signs the arm? Signature on the arm is “valuable” and therefore Ben has an option contract – giving him two days to decide. 3. Has Ben accepted? On Friday morning, did Ben accept? Acceptance is effective when communicated. In this case acceptance is effective when email received. No need to deal with ETA as there is no doubt Mary has received the email. 4. Revocation or not? Revocation occurs when the offeror withdraws the offer. The offeror may do this at any time before acceptance (or when there is a valid option). Byrne v Van Tienhoven. 5. Is Ben entitled to a remedy? There has been a breach of contract by Mary (both the option and the main contract). Ben is entitled to damages. Measure of damages – he should be restored to the position he would have been in if the contract had been performed: Robinson v Harman. In order to claim the loss must show the breach is caused by the loss (no problem) and that it is a reasonably foreseeable loss: Hadley v Baxendale. In this case the reasonably foreseeable loss is the difference between market price of a similar plasma (perhaps $3000) and the contract price ($2000). Also note that contractual damages are compensatory not punitive (Addis Gramophone) so not Ben is not entitled to extra damages. In the next question we set out an answer showing how good paragraphs assist. Question 2 Abdul runs the Incredible Edibles Organic Restaurant. He grew disenchanted with the quality of vegetables supplied by his supplier so contacted George. George gave him his standard contract that contained a term that promised that the fruit and vegetables supplied would be “fresh”. It says nothing about it being “organic” (grown without chemical fertilisers or pesticides). Abdul questions George about this and stresses that the vegetables must be organic or his business will suffer. When George assures him that his vegetables will be sourced from organic suppliers, Abdul signs the contract but the contract does not include the statement about the vegetables being organic. George begins well enough but then three deliveries include vegetables that are not organically grown. As a consequence Abdul loses $7000 per week because those customers who only eat organic food go elsewhere.

xlv

xlvi

Introduction to Business Law in Australia

(a) Advise Abdul of the remedies, if any, he may have for breach of contract. Do not refer to the Australian Consumer Law. [10 marks] (b) Would it make a difference to your advice if George’s failure to deliver organic vegetables was because of the severe flooding that had ruined the organic vegetable crops of George’s suppliers making it more difficult (though not impossible) for him to supply Abdul? [5 marks] A suggested answer: (a) Introduction: I have been asked to advise Abdul of any remedies he may have under the law of contract. For him to have a remedy in contract he must prove on the balance of probabilities that the oral statement by George (that his “vegetables will be sourced from organic suppliers”) was a contractual term. It is possible that the oral statement could be a term of the contract or it may be a collateral contract. Topic sentence: First, we need to determine the status of the oral statement – is it a term of the contract? A term is a contractual promise, a breach of which allows an innocent party to terminate the contract and/or seek damages: Associated Newspapers v Banks. A term may be oral or written. However, where there is a written agreement there is a rule – the parol evidence rule – that says that where the written agreement appears to be the whole agreement between the parties, no other (parol) evidence can be admitted into court that would add to, vary or contradict the written agreement: Mercantile Bank of Sydney v Taylor. In other words, if the written agreement between Abdul and George looks to be the whole agreement – there are no references to other terms, oral or written, elsewhere – the parol evidence rule would prevent Abdul from being able to rely on the oral statement concerning the organic nature of the food. It would not be a part of the contract and therefore no contractual remedy would be available for its breach. Topic sentence: The second possibility we should explore is that the statement is a collateral contract. In order for a statement to be characterized as a collateral contract three criteria must be met. First, it must be promissory; second, it must not be inconsistent with a term in the main contract; and third, the promisee must have given consideration for the collateral promise. There is no question that the first two criteria have been met – there is no inconsistency between the collateral statement and the main contract and, in entering into the main contract, Abdul has provided consideration for the collateral statement made by George. Topic sentence: The important criteria that we must examine is the requirement that the statement was intended to be promissory (that is, it was intended to have contractual effect): JJ Savage v Blakeney. An objective test is used to test whether the statement was promissory – what would a reasonable person in the position of the parties say about George’s statement? Would a reasonable person say it was promissory and intended to have contractual effect? There is no doubt Abdul made it clear how important it was to him that the vegetables be organic. After all, he said he would lose business if the vegetables weren’t organic. In these circumstances it is arguable that George’s oral statement is a collateral warranty. Conclusion: It is therefore possible for Abdul could sue for a breach of the collateral contract. As the breach would be of a warranty (a term that does not go to the heart of the contract) Abdul is entitled to damages only: see Tramways Advertising. However he would be compensated for the lost business he suffered ($7000) under the first limb of Hadley v Baxendale (losses which naturally arise from the breach (Koufos)) as long as he could show there is a causal connection between the breach and the loss: Alexander v Cambridge Credit). (The modern position is that the statement could constitute misleading or deceptive conduct under s 18 of the Australian Consumer Law. Students were not, however, asked to discuss any rights under the ACL.) (b) Introduction: This part of the question raises the issue of the place of the doctrine of frustration in the law of contract.

An Introduction to Studying Law Units

Topic sentence: The common law has always been reluctant to allow a party to plead that a change in circumstances should allow a party to plead that the contract is frustrated, thus excusing what otherwise would be a breach of contract: Davis Contractors. A broad doctrine of frustration would only increase contractual uncertainty and both the courts and business people are wary of this. Topic sentence: So we need to examine the circumstances in which it is possible to plead frustration? The courts have said that merely because the contract is less profitable or more difficult to perform will not excuse the party who fails to perform: Tsakiroglou v Noblee Thurl. However, where an events occurs that is unforeseen and is not the fault of either party and which make the contract radically different from the one the parties entered, the contract may be frustrated: Codelfa Constructions v SRA. For instance, where the subject matter of the contract has been completely destroyed the contract was frustrated: Taylor v Caldwell. Here the severe flooding has not made it impossible for George to acquire the organic goods but it has made it more expensive and more inconvenient for him to do so. Conclusion: In these circumstances I believe that a court would decide that the contract is not frustrated. George is therefore in breach of contract (it is, in effect, a repudiation of the contract). Abdul could terminate the agreement and sue for his losses: Associated News v Bancks.

2. Approaching the research question

(a) Introduction As with any other piece of writing, a research paper must be logically structured and present a coherent answer to the question. The answer must not be a simple summary of the material you have assembled – you must demonstrate an understanding of the material and answer the question in a confident and individual way. To do this you must follow the following steps:  Carefully consider and interpret the question – what is it I am expected to do?  Research the topic and assemble relevant materials (some of which will be used but much of which will not).  Write a coherent and well-structured paper that shows to the reader/examiner that you have understood the question and conducted your research thoroughly.

(b) Consider and interpret the question It is obviously a vital part of any essay to answer the question you have been set. You need to be rigorous here – assess precisely what the question is about and answer it. Don’t simply identify the general area of law (eg, negligence) and summarise the relevant material. Sometimes it helps to clarify the topic if you re-form the question in your own words under the heading “what the question asks me to do”, noting:  Any statements or propositions in the question.  Any implicit approach or angle that is express or implied in the question itself (eg, there has been a suggestion that s 18 of the Australian Consumer Law has gone too far ...).  What the question asks you to do (eg, examine, explain, analyse, interpret ...). These instructional words will assist you in defining your task.  Any restrictions on where you should go (eg, “in Australian case law...”).

(c) Research Once you have a clear idea of what the question mean, your research begins. This is not an invitation to collect everything on a topic – in this time of internet searches of law databases (and even general databases like Google Scholar) the need for relevance is even more acute. You need to:

xlvii

xlviii

Introduction to Business Law in Australia

 Find material that is on the general topic (eg from table of contents or internet search of key words).  Skim read to see if it relevant to the key issues – in particular whether it takes your argument further.  Filter in and out – taking brief notes only if it the material is relevant.

(d) Writing Planning: Planning is critical – it will save you time because you will have a structure and direction from the start. The plan itself should break your essay into parts, usually under headings and sub-headings. Once you have a “map” of your essay in front of you, you can push and pull it into shape. Writing: Good writing of any kind is not easy. There are many general books on the subject and they have one thing in common: writing is best when it is direct, active, concrete and verb filled. If you wish to do well in your legal research paper please follow that advice! Of course, structure is important. As with any other essay, you need a short introduction, telling the examiner what the question is about and how you are going to answer it. Then follows the main body of the essay that sets out your arguments in a logical and coherent way (using headings or paragraphs). Remember your assertions or propositions should be supported by authority (eg, case authority, legislation, scholarly writing). Many students have trouble with this – but you must try not to make statements that are unsupported by either primary or secondary authority. Of course, your conclusion is your own but must be a logical conclusion – one that is consistent with the arguments in the body of the essay. Referencing is crucial: familiarise yourself with the style that is expected and follow it precisely.

(e) Reviewing The review stage is a critical part of the writing task – it is the time when you edit, eliminating errors of style (how you have written – grammar, spelling, structure and flow) and substance (what you have written – weaknesses in the arguments, the analysis etc). It is worth spending some time on this because it makes a substantial and tangible difference to your essay (and therefore your marks).

3. Approaching Multiple-Choice Questions

(a) Introduction A multiple-choice exam is quite different from either an assignment (research or problem-based) or a problem-based exam. In a multiple choice exam a student is typically asked to recognize a correct (or incorrect) answer among a set of options that include 3 or 4 wrong answers (called distractors), rather than analysing a hypothetical problem or producing an argumentative essay. Students often consider that multiple-choice exams are easier than the problem-based exams or research essay because the right answer is before their very eyes (somewhere) and, if the worst comes to the worst, the student can, as the joke goes, turn it into a multiple-guess exam. Furthermore, the nature of the multiple-choice exam militates against analytical questions so that many multiple-choice questions consist of basic definitions or simple comprehension questions. Finally students may prefer this form of question because the stakes on each question are lower – each question will be worth a single mark so there is always the chance of redemption with the very next question. The truth, however, is that multiple-choice exams are difficult. With so many questions, the student must be familiar the entire course; there is a need to be familiar with case and statutory details and,

An Introduction to Studying Law Units

because the multiple-choice exam is a closed book exam, there is nothing to prompt the student. And, because multiple choice questions involve a degree of hair-splitting, there is the real risk that the exam will contain one or more questions that contain an ‘ambiguity’ (ie they are not very good questions).

(b) Tips Here are some tips for preparing for a multiple-choice exam:  Thorough preparation on a weekly basis for lectures and tutorials is the best preparation for a multiple-choice exam (and for everything else). Focus on the broad themes of the week’s work and follow up with a careful attention to the details.  In your tutorials, as you go about your problem-solving, make sure you are clear on the meaning of particular terms and concepts because it is these facts that are often picked up in multiple-choice exams.  Get into the habit of noting definitions (eg which of the following is the correct definition of a condition...), comparisons (eg the difference between a term and a representation is…) and factors or criteria (eg which of the following is necessary in order for a contractual term to be unfair under the Australian Consumer Law…) because these, too, are favourite fodder for multiple-choice exams. Keeping a running list of such matters may be handy.  Studying in a group may be helpful provided each member of the group prepares several questions  Finally, doing some sample questions is always beneficial.

(c) A sample multiple-choice exam 1. Which of the following is the best definition of “ratio decidendi”? A. It refers to the final decision of the court that is binding on both parties B.

It refers to that part of the judgment which was not strictly necessary in order to reach a decision

C.

It refers to that part of the judgment that cannot be appealed to a higher court

D.

It refers to that part of the judgment that is binding on all courts lower in the same hierarchy when the facts are similar

2. Consider the following facts:  1 April: X telephones Y and offers to sell his piano. They swap postal addresses and e-mail addresses for further communication  3 April: Y sends a letter of acceptance  5 April: X sends an e-mail revoking his offer. Y is away and doesn’t have access to his computer for two days  6 April: X receives Y’s letter of acceptance  7 April: Y returns and reads X’s e-mail Which of the following statements is most correct? A. A contract is made on 3 April B.

A contract is made on 6 April

C.

No contract is made because the revocation is effective on 5 April

xlix

l

Introduction to Business Law in Australia

D.

No contract is made because the revocation is effective on 7 April

According to the rule in Hadley v Baxendale (1854) for which types of loss can a plaintiff seek compensation in an action for damages? A. All losses arising from and caused by the breach of contract B.

Losses arising from special circumstances where such circumstances were made known to the other party at the time the contract was formed

C.

All losses arising from the breach of contract that could be considered to be in the usual or normal course of things

D.

Those losses that were provided for in the contract provided they are not in the nature of a penalty 1.

A

2.

C

3.

B and C

4.

B and D

4. Which of the following is the best description of apparent or ostensible authority? A. A has authority to do anything which is incidental to or necessary for the carrying out of acts within A’s actual authority B.

Authority is conferred by P on A in writing

C.

Authority is conferred by P on A under seal

D.

P creates the appearance of authority by words or conduct but, in fact, that authority does not exist

5. Considering the High Court decision in Esanda v Peat Marwick Hungerfords (PMH) which of the following is NOT correct? A. Auditors, like PMH, have statutory and contractual duties to act with due care and skill to the company audited B.

PMH owed Esanda a duty of care because it was reasonable to forsee that parties other than Excel might rely on the accounts when deciding whether to provide finance to Excel

C.

There is a significant difference between establishing a duty of care owed to a third party and a duty of care owed to a person who requests information

D.

The High Court held that a duty was not owed by PMH to Esanda because Esanda was an unknown and unintended user and mere forseeability that someone like Esanda might rely on the information was not enough

6. Considering Thornton v Shoe Lane Parking Co Ltd [1971] 2 QB 163 which one of the following is NOT true? A. The court decided that Shoe Lane could not rely on the exclusion clause on the ticket/signs inside the car park because it had not done what was reasonably necessary to bring the exclusion clause to the attention of the plaintiff B.

The exclusion clause on the post outside the carpark entrance was incorporated into the contract but was not broad enough to protect the defendant in relation to the personal injury suffered by Thornton

An Introduction to Studying Law Units

C.

In injuring Thornton so carelessly, Shoe Lane had committed a fundamental breach of the contract and no exclusion can protect against a fundamental breach

D.

The contract was formed when Thornton “accepted” Shoe Lane’s “offer” by taking the ticket from the machine and thereafter it was too late to bring the exclusion to Thornton’s notice

7. Felicity and Julie run a chain of women’s fashion clothing stores in partnership. Their agreement prohibits either partner spending more than $10,000 of business funds without the consent of the other. The business has been experiencing financial difficulties, and so Julie decided to buy a new line of exclusive cocktail dresses from Swish Manufacturing (in the hope of improving sales). Without Felicity’s knowledge, she ordered $200,000 of dresses. The strategy was unsuccessful and the business is now unable to pay the debt. Who is liable for the $200,000 debt to Swish Manufacturing? (Swish was unaware of the cap on spending contained in the partnership agreement between Felicity and Julie). A. Julie is solely liable for the debt B.

Felicity is solely liable for the debt

C.

Julie and Felicity are jointly liable for the debt

D.

Julie and Felicity are jointly and severally liable for the debt

8. In Leaf v International Galleries [1950] 2 KB 86: A. As the painting was a forgery of a John Constable painting, the contract was voidable at Leaf’s option B.

The mistake that was made was a mutual mistake and therefore the parties were at cross-purposes so there could be no binding contract

C.

As the misrepresentation concerned one of the most important aspects of the painting – that the artist was John Constable – the contract could be rescinded by Leaf

D.

Leaf was unable to rescind the contract because rescission for a common mistake is not available for a mistake about the quality of the subject matter)

9. Henny decides to sell his restaurant, El Bambino. It is licensed to seat 84 people at 26 tables. However H, in breach of the licence, has always placed 120 chairs at 39 tables. The restaurant was sold to Colin, whose solicitor also did not enquire about the terms of the licence. During the negotiations and during the four-week trial period, Colin did not enquire about the licence and Henny did not disclose any information about it. After the settlement Colin was notified by the Licensing Court that El Bambino was only licensed to seat 84 patrons. He sued Henny for misleading or deceptive conduct under s 18 of the Australian Consumer Law. Which of the following is correct? A. Henny is under no duty to disclose information unless asked by the prospective buyer B.

Henny is only under a duty to disclose information if he is an expert in the area and would be expected by a reasonable person to disclose any relevant information

C.

For conduct to be misleading or deceptive there must be some action or representation on the part of the defendant: mere silence is not “conduct” under s 18

D.

Silence or failure to disclose can be misleading or deceptive if, in all the circumstances, there is a reasonable expectation that disclosure would be made

10. Which of the following statements about the rights of partners in a partnership (subject to agreement to the contrary) is NOT true? A. A majority of the partners can expel a partner

li

lii

Introduction to Business Law in Australia

B.

The consent of all existing partners is needed to introduce new partners

C.

Partners may be both jointly and severally liable for the acts of a partner

D.

Any partner may access the partnership books in order to inspect and copy them

11. In Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225, where the plaintiff property developers made inquiries of their local council, which one is correct: A. The plaintiffs were not owed a duty of care by the Council as the Council did not profess to possess skill or competence in that area B.

The court found no distinction between the giving of advice and merely providing information

C.

As the loss was pure economic loss, it was not recoverable by the plaintiffs without evidence of the loss being reasonably forseeable

D.

The Council could not have known that the plaintiffs intended to rely on the information or advice it provided

12. In Donoghue v Stevenson [1932] AC 562 the House of Lords in England decided that a manufacturer of goods that contained a hidden defect owes a duty of care to the consumer. A year later there was a similar case in Australia: Grant v Australian Knitting Mills (1933) 50 CLR 387. Dr Grant sued the manufacturer when he almost died from dermatitis caused by harmful chemicals left in the woollen materials used to make his underwear. The case ended up in the High Court of Australia. Assume that Grant v Australian Knitting Mills came before the High Court of Australian in 2014, which of the following is NOT correct: A. The High Court could ignore the decision of the House of Lords B.

The High Court could regard the decision of the House of Lords as persuasive

C.

The House of Lords decision is binding but only as far as it relates to manufacturers

D.

Whatever the High Court decides all other courts in Australia, both State and Federal, are bound by its decision

13. The legislative powers listed in Section 51 of the Australian Constitution: A. may only be relied upon by the federal parliament B.

may be relied upon by the states but are subject to appeal in the High Court

C.

are concurrent powers able to be used by the states and federal parliaments

D.

may be relied upon by the federal parliament as long as there is no conflict with the states

14. A breach of a warranty entitles: A. The innocent party to sue for all damages that were caused by the breach B.

The innocent party to terminate where the damage is serious

C.

The party in breach to remedy the breach and pay damages for any loss suffered

D.

The innocent party to sue for damages for losses that were caused by the breach and were reasonably foreseeable

15. Which of the following is NOT true? In Taylor v Johnson the High Court said: A. A contract affected by a unilateral mistake is void B.

A contract affected by a unilateral mistake is voidable only

C.

There must be an element of unconscionable conduct before a court would declare a contract voidable because of a unilateral mistake

An Introduction to Studying Law Units

D.

The purchaser had behaved unconscionably in endeavouring to ensure the vendor remained unaware of the mistake

16. To succeed in a claim for damages under s 18 of the ACL which of the following is NOT true: A. The misleading conduct must have caused the damage B.

There must be reliance on the misleading conduct

C.

The damage must be pure economic loss

D.

The plaintiff need not show that the defendant intended to mislead

17. Alex the business broker fraudulently misrepresents that a business is worth $20,000. In fact it is worth $10,000. Bob pays $12,000 for it. If he were successful in a claim under s 18 of the ACL, he would be entitled to receive: A. $6000 B.

$14,000

C.

$8,000

D.

$20,000

18. Which of the following is NOT true? Where there is a “major failure” of a consumer guarantee under the ACL: A. The consumer cannot get a refund but must accept a replacement of the goods from the supplier B.

Where the failure can be fixed the consumer can request that the supplier remedy the failure within a reasonable time

C.

It must be shown that a reasonable consumer, fully acquainted with the facts, would not have bought the goods

D.

The goods need not be valued at under $40,000

19. An agent’s authority can be: A. Nominal B.

Express actual

C.

Implied actual

D.

Apparent

20. Which of the following is NOT true? To be guilty of insolvent trading under s 588 of the Corporations Act it must be proven that: A. The defendant was a director at the time when it incurs a debt B.

The company is insolvent at that time or becomes insolvent by incurring the debt

C.

The director must have known that the company was insolvent or would become so when it took on the debt

D.

A reasonable person would have been aware that the company was insolvent

21. Which of the following is the least likely to be regarded as an invitation to treat? A. An auctioneer’s call for bids at a house auction B.

Goods on a supermarket shelf

C.

Goods advertised in a catalogue

liii

liv

Introduction to Business Law in Australia

D.

Apple Air laptops that are advertised as being “for sale for $19.00 to the first sixty people through the doors at the Apple shop on Boxing Day 2014”.

22. Which of the following is NOT correct in relation to an action in negligence? A. In Wagon Mound No 1 the loss was foreseeable because a reasonable person would have expected the wharf to be damaged in the particular circumstances B.

If damages are too remote they will not be recoverable

C.

The remoteness test will be more easily satisfied where the damage is of the same type or kind as the damage that has occurred in the case at hand

D.

Damages that are reasonably foreseeable are not too remote

23. In which case did the High Court of Australia decide that contract damages are recoverable for disappointment or distress provided the object of the contract itself was to provide pleasure and enjoyment: A. Hadley v Baxendale (1854) B.

Waltons Stores v Maher (1983)

C.

Baltic Shipping v Dillon (1993)

D.

Jarvis v Swans Tours (1973)

24. Which of the following would NOT overcome a defect in an agent’s actual authority: A. Implied actual authority B.

Apparent authority

C.

A properly executed deed

D.

Ratification

25. Bob the builder signs a construction contract with the City of Manningham to build a library. A clause in the contract states: “In the event that Bob does not complete on the due date, he will pay a sum of $50,000 to the City”. Bob fails to complete on time. Which of the following would give him the best chance to avoid paying the $50,000. A. The $50,000 are unliquidated damages B.

The $50,000 are liquidated damages

C.

The $50,000 is a penalty clause

D.

The $50,000 is an unconscionable amount considering the relative bargaining power of the parties

26. In Mabo v State of Queensland the High Court: A. Recognised a form of native title to land based on a concept of continuous possession B.

Recognised a form of native title that depended on an overriding concept of fairness and justice

C.

Recognised a form of native title based on a concept of prior rights

D.

Recognised a form of native title that was limited to the Miriam Islands

27. Which of the following is NOT true? A. A company can sue and be sued in its own name B.

Directors, but not members/shareholders, are personally liable for the debts of the company

An Introduction to Studying Law Units

C.

Directors may be personally liable for a breach of the insolvent trading provisions of the Corporations Act

D.

Section 184 applies where the director has committed the ss 181–183 offences recklessly or dishonestly

28. Which of the following is NOT a requirement of a partnership: A. The partners aim to make a profit B.

There is a mutuality of obligations

C.

They carry on a business

D.

They each contribute equally to partnership property

29. Which of the following statements about the consumer guarantees provisions in the ACL is NOT true: A. The guarantees are non-excludable B.

The guarantee provisions only apply to “consumers” as defined in s 3

C.

The definition of “consumers” in s 3 is limited to purchases of goods or services under $40,000

D.

The remedies available for breach of the guarantee as to acceptable quality depend on whether the breach constitutes a major failure

30. Which of the following statements is NOT true? A. Unless the partnership agreement provides otherwise, each partner has a right to participate in management B.

The maximum number of partners in a partnership is usually 20

C.

Unless the partnership agreement says otherwise, a partnership of between 3 and 20 would continue on the death of a partner

D.

Partners are both agents and principals of one another

lv

chapter 1

The Australian Legal System [1.10] Principles ....................................................................................................................................................................... 3 [1.20] Terminology.................................................................................................................................................................. 4 [1.30] The Australian constitutional system............................................................................................................ 6 [1.150] Sources of law....................................................................................................................................................... 14 [1.160] Statute Law............................................................................................................................................................ 15 [1.400] Judge-made law ................................................................................................................................................... 26 [1.540] The doctrine of precedent and the hierarchy of Australian courts........................................... 36 [1.720] Classification of law and legal proceedings .......................................................................................... 47

2

Introduction to Business Law in Australia

chapter 1 The Australian Legal System

Aim Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 1. By the end of this chapter you will be able to:  identify the concept of law and its purpose;  explain the federal constitutional system in Australia;  explain when federal or State/Territory parliaments have the power to make laws;  define what is meant by “law”, “common law” and “legislation”;  identify the main approaches to statutory interpretation;  identify the courts in the Australian legal system and describe their hierarchy;  explain the doctrine of precedent and how it operates in the court system;  classify areas of law and legal proceedings; and  explain the court process and alternative ways of resolving disputes.

Principles The nature of law [1.10] This chapter introduces the reader to the legal framework under which commercial law operates. In order to understand how these legal principles operate, it is first necessary to have an understanding of the following:  the nature of law;  the application of law through the doctrines of separation of powers and rule of law;  the Australian constitutional system;  the sources of Australian law;  the classification of law; and  legal proceedings. Law can be described as a complex system of social control that is necessary for society as a whole to function. Law is a regulatory tool. It tells people not only what they cannot do (eg, commit a crime), but what they can do (eg, own property) and what they must do (eg, pay taxes). Law then consists of rules that regulate the conduct of individuals, businesses and other organisations within society. Without laws that the population agrees to abide by there would be disorder, and society as we know it would be unrecognisable. Law is basically a set of principles, rules and standards which citizens living, working and interacting in the community are expected to uphold. These standards may change from time to time, thus prompting a need to change the law. Law as it applies to commerce is subject to such change, according to the needs of the business community. The law provides a dispute resolution procedure which guides, resolves problems between and ultimately may punish, a party or parties. The law provides predictability and guidance. A good law system should create law which has foreseeable outcomes, is accessible, is understandable and applies equally to all citizens. How does business and the law work together? Why should people understand this part of the legal system? What is commercial law, or business law as it is also known? Commercial law comprises the laws

3

4

Introduction to Business Law in Australia

that determine the rights, duties and obligations of people involved in business. People are involved in commercial transactions on a daily basis, although they seldom think about the legal consequences of their acts at the time they are taking place. For example, when taking a train, who thinks about contract law when paying for a ticket (or the criminal law consequences if they don’t)? How many people consider the Acts of Parliament that have to be complied with to get them to their destination, the standard of behaviour that they must show when catching a train, and what remedies they may have if they are injured while on the way to their destination? Commercial law applies to myriad transactions such as those carried out in insurance, banking, employment and investment. The law serves a number of purposes such as:  keeping the peace (making some activities affecting people or property a crime);  establishing moral standards (discouraging drug and alcohol abuse);  regulating relationships between members of society such as marriage, and between members of society and government, as in the public service;  providing a basis for impartial settlement of disputes through courts and tribunals; and  facilitating planning, eg, creating premises that comply with health and safety measures. The legal system is based on a number of features including  certainty (stability and predictability);  flexibility (responsiveness to technological, economic, cultural and social change);  the capability of being known (law is published);  fairness (being seen as reasonable and just); and  equal applicability to all. Some critics argue that complex laws may not necessarily be certain, accessible or even fair — particularly if it is unclear how they might be applied. Business law is designed to balance the competing interests of sellers and buyers. While the “law” is a set of rules, it should not be assumed that all rules are “law”. There are numerous rules that govern daily behaviour that are not, and will not become, laws, eg, sporting rules. Certain standards apply for decorum, politeness and social interaction but are not enforceable within a court; commercial law concerns those rules which are enforceable in a court of law.

Terminology [1.20] This chapter introduces the reader to the legal framework within which commercial law operates. In order to understand how these legal principles operate, it is first necessary to have an understanding of the following:  Act: an enactment, a statute, a law made by parliament.  adversarial: refers to a competitive system of law, as used in Australia, where legal representatives take a combative approach to presenting and resolving disputes in court before a judge.  appellant: the party bringing an action on appeal from a decision of a lower court.  appellate court: a court which, under its enabling legislation (ie, the legislation which created the court), has the power to hear a matter on appeal from a lower court.  civil law: an action between persons (both real or legal, eg, a company) regarding the enforcement of rights and the carrying out of obligations, with the intention of compensating the injured party.

chapter 1 The Australian Legal System

 civil law system: a reference to a major legal system derived from Roman law, such as that found in continental Europe.  common law: has at least four possible meanings — the law common to the whole of England; unenacted law (the decisions of judges); both case law from the common law courts and statute law as distinct from equity that have developed over time; or the law which originally developed in England and was inherited by the British colonies. Common law describes a competitive or adversarial type of system.  court of first instance: a court which, under its enabling legislation, has the power to hear a matter when it first comes into the court system. The more serious the matter, the higher the court that will hear it at first instance.  criminal law: the rules of common law and statute that make certain actions by persons (real or legal, ie, companies) punishable by the state.  defendant: the party defending a civil or criminal law action.  enacted law: the law made by parliament and known as statute law, legislation, Acts of parliament or delegated legislation.  equity: the body of rules concerned with fairness and justice, originally formulated and administered by the Courts of Chancery to supplement the common law but which are now fused and applied together with the common law.  law report: cases decided by intermediate and superior courts are recorded in law reports and are available to those researching law.  natural justice: inherent rules of fairness in law such as the right to representation, right of notice of hearing etc.  obiter dicta: matters stated by the judge/s, considerations and statements leading up to the ratio decidendi.  plaintiff: the party bringing a civil law action and on whom the onus of proof lies (to prove their case on the balance of probabilities).  precedent: a case (containing a principle of law) decided in a court which will be applied in other courts.  private law: that body of legal rules that deals with situations involving relationships between persons or organisations (eg, contract law, tort law).  procedural law: the rules of court and judicial procedure and evidence.  public law: law concerned with the relationship that exists between governments and the people (eg, criminal law).  ratio decidendi: the reason for the decision given by the court/judge which may then form the basis of a precedent.  respondent: the party defending an appeal.  rule of law: law is applied equally and consistently in a predictable way to every person, irrespective of their position in society.  separation of powers: the powers of government — executive, legislative and judicial — are operated separately to ensure checks and balances, eg, law-makers cannot judge the law.  statute law: laws made by parliament. Also known as enacted law or legislation and includes Acts of parliament and delegated legislation.  substantive law: actual rights and duties under the law.

5

6

Introduction to Business Law in Australia

 superior court: the High Court and the Supreme Court are superior courts since they set law for intermediate and inferior courts.  unenacted law: judgments, also known as case law or common law.

The Australian constitutional system Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1.

Pre-European history [1.30] Aboriginal and Torres Strait Islander peoples inhabited most areas of the Australian continent for between 40,000 and 60,000 years. They spoke one or more of hundreds of separate languages and dialects, and their lives and cultural traditions differed from region to region. They each occupied and hunted a recognized tract of land where sacred sites were protected, and boundaries, designed in the Dreamtime, were crossed only by invitation. Their complex social systems and highly developed traditions reflected a deep connection with the land. They had their own laws – a customary law system with laws passed down orally from one generation to the next.

European colonisation [1.40] The first recorded European contact with Australia was in March 1606, when a Dutch explorer, Willem Janszoon, charted the west coast of Cape York Peninsula in Queensland. Later that year, a Spaniard sailed through the strait separating Australia and Papua New Guinea. Over the next 200 years, European explorers and traders continued to explore and chart the coastline of “New Holland”. In 1688, William Dampier became the first British explorer to land on the Australian coast but it was not until 1770 that another Englishman, Captain James Cook, aboard the Endeavour, extended a scientific voyage to the South Pacific in order to further chart the east coast of Australia and claim it for King George III of England. James Cook made three voyages to the South Pacific between 1768 and 1779 and on each occasion carried “Secret Instructions” from the British Admiralty. On the first voyage, his Secret Instructions provided that, in the event that he found the Continent, he should chart its coasts, obtain information about its people, cultivate their friendship and alliance, and annex any convenient trading posts in the King’s name. Cook reached the southern coast of New South Wales on 20 April 1770. He sailed north, landing at Botany Bay one week later, before continuing to chart the Australian coast all the way north to the tip of Queensland. There, on Possession Island, just before sunset on Wednesday 22 August 1770, he declared the entire eastern half of New Holland a British possession. Cook had recorded signs that the coast was inhabited during the voyage north, and here he noted as he returned to the ship the great number of fires on all the land and islands about them, “a certain sign they are Inhabited”. British exploration and colonisation has obscured the significant role of the French in the discovery and mapping of the land mass known as New Holland. Indeed, give or take a few days, Australia could easily have been a French colony. While Australia had always been intended as the final stop of Jean-François de Galaup, Comte de La Pérouse’s itinerary, Louis XVI was made anxious by news of the departure from England of Arthur Phillip with the first prisoners destined to establish a colony at Botany Bay. La Pérouse was directed to proceed there in all haste. He sailed into Botany Bay on 26 January 1788, only days after

chapter 1 The Australian Legal System

Arthur Phillip and the First Fleet had arrived. After spending six weeks in Botany Bay, La Pérouse set sail to New Caledonia, and he and his ships were never seen again. 1 By 1786, Britain had begun to devise a use for its far-flung colony. At home, it was on the brink of an uprising by the working classes. With its own prisons, hulks and poor houses full, Britain was desperate to find a new dumping ground for its convicts. It decided to use its new colony as a penal colony and by January of the following year the First Fleet of 11 ships under the command of Arthur Philip, set sail, carrying about 1,500 people – half of them convicts. The fleet arrived in Botany Bay between 18th and 20th of January 1788. However, this area was deemed to be unsuitable for settlement so they moved north arriving at Port Jackson on the Australian East coast on 26 January 1788. About 160,000 men and women were brought to Australia as convicts from 1788 until penal transportation ended in 1868. From the mid-18th century, labour shortages, the vast expanses and new wealth based on farming and goldmining made Australia an attractive land for immigrants seeking a better life. Australia began as a major economic and sociological experiment. Historians have noted that for Britain there was always more to it than the simple act of creating a penal colony. There was evidence that the Great Southland might be a new India – able to grow tea and coffee, silk and spices – and, in producing and exporting these products, a society of peasant proprietors would be created. In this sense it was also an experiment in reformation. As Knightley asks: “Could the repressed and criminalized working class and the disaffected and deprived peasants … if sent to an empty land at the other end of the world, remake themselves and create a respectable outpost of British civilization?” 2 The fact is, of course, that the land was far from empty. David Malouf makes the same point: “What seems astonishing when we look about at the world we live in here, this clean and orderly place with its high level of affluence and ease, its concern for rights and every sort of freedom, these cities in which a high level of civility is simply taken for granted … is that it should have emerged from a world that was at the beginning so un-free, so brutal and disorderly. It did so because these rejects of society, of whom so little might have been expected, made it happen. Out of their insistence that they were not to be so easily written off. When we think of our beginning we are inclined to emphasise what is sensational in it, the many horrors, and this is understandable … what is harder to think our way into is ordinariness, the day-to-day routine of lives that, however brutal they may have been by our standards, were unremarkable except in the astonishing capacity of those who lived them…to endure, but even more, to change; to take hold of their lives and remake themselves in terms of the opportunities offered by a second chance in a new place.” 3 Mary Gilmore has summed up this view of the significance of ordinary (Anglo-Celtic) people in Australia’s European origins in her classic poem “Old Botany Bay”, of which the following stanzas contain the gist of her meaning: 1

2 3

As David Malouf, one of our finest writers of ‘historical fiction’, has said of our ‘boring’ history: “When Australians occasionally play the game of alternative beginnings, of imagining an Australia that might have been French, for example, or Spanish, it is worth reminding them of something. That in failing to be French we missed out on four bloody revolutions, as well as French cuisine and Gallic stylishness and wit, and in failing to be Spanish spared ourselves an almost continuous history of coups by army factions and the rule of a series of brutal juntas. Stability may be dull, and our society may lack passion … but it does allow people breathing space – and if what this results in is a history without ‘interest’, it also produces fewer graves” (1998 Boyer Lectures later published in A Spirit of Play (ABC Books, 1998) 27–28). P Knightley, Australia – A Biography of a Nation (Jonathon Cape, 2000) 33-4. Malouf, above n 3, 14.

7

8

Introduction to Business Law in Australia

“I’m old Botany Bay; Stiff in the joints, Little to say. I am he Who paved the way, That you might walk At your ease to-day; I was the conscript Sent to hell To make in the desert The living well; I bore the heat, I blazed the track Furrowed and bloody Upon my back. I split the rock; I felled the tree: The nation was Because of me!” 4 As a reminder that indigenous people had a different perspective on the European settlement, Gladys and Jill Milroy wrote the following ‘rebuttal’: “I saved the rock; I saved the tree; The country is because of me!” 5

Settled or conquered? The terra nullius issue [1.50] When the British colonized the land they brought with them all relevant British law and used that law to dispossess the indigenous peoples. Eighteenth century international law stated that states could acquire sovereignty over foreign land by conquest (using military force), cession (by treaty or agreement) or occupation (of unoccupied land). The British opted for ‘occupation’ because it allowed for the automatic “reception” (application) of British law to the colony without the need to negotiate a treaty (as happened in the US and New Zealand and Canada). The treatment of the indigenous inhabitants by the British was not simply a matter of the strong prevailing over the weak: it also reflected international law. Under international law, the rights of the coloniser depended on whether it was “occupying” or “conquering” the colony. When a country was “occupied” the conquering country could impose its laws only with the consent of the conquered peoples. On the other hand, if the land was “unoccupied”, the colony could be peacefully “settled” – no conquering required – and all the laws of the settling nation were regarded as coming into force insofar as they were relevant to the new circumstances. Despite the fact that it was clearly not “unoccupied”, the English version of international law at the time was that the colony had been ‘discovered’ by Cook in 1770 and, when Arthur Philip arrived in 1788, it was ‘unoccupied’ land, land belonging to no-one – “terra nullius”. 4 5

For the complete poem see http://www.poemhunter.com/i/ebooks/pdf/dame_mary_gilmore_2012_3.pdf. G and J Milroy, “Different Ways of Knowing: Trees are our families too” in S Morgan, Tjalaminu Mia and B Kwaymullina (eds), Heartsick for Country (Fremantle Press, 2008).

chapter 1 The Australian Legal System

Why was it “unoccupied land” when clearly there were aboriginal people seen by Cook and there to meet Philip at Botany Bay? The answer turns on the (English) definition of “occupy”. The land could be said to be “unoccupied” or “uninhabited” because the indigenous peoples did not “use” (ie “cultivate”) the land. Locke’s view was widely accepted: “As much land as a man tills, plants, improves, cultivates and can use the product of, so much is his property”. The nomadic life – even when there was evidence of continual return to the same place – was not recognized as “cultivation”. William Blackstone, the pre-eminent British scholar of the 18th century, argued that to be an “owner” one “had to be present and to manifest a will to possess the land as one’s own”. The indigenous people had transient possession only, so when they left the land, any other person could take it and therefore become permanent owners. 6 In summary, the new colony had been peacefully settled, as it was “inhabited by no-one”. The legal consequence of that decision was that neither the sovereignty nor the land rights of indigenous inhabitants were recognized.

The reception of law into Australia [1.60] A legal system, based on the British system and (within the framework of the considerable discretionary powers given to the governor), the rule of law was established from the earliest days of the new colony. The Court of Judicature, established in 1787, heard its first criminal cases on 11 February 1788. 7 A Court of Civil Jurisdiction was established at the same time and heard its first case (the Kable case) in 1788. 8 By 1823 NSW had a Supreme Court with full powers to hear all cases. An Imperial Act, the Australian Courts Act 1828 (IMP), provided that all laws and statutes in force within the realm of England on 25 July1828 should be applied in the administration of justice in the courts of New South Wales and Tasmania so far as they could be applied within those colonies. Accordingly, 25 July 1828 is the point of time at which the laws (both common law and statutory law) then existing in England apply in Australia. After 1828, changes in the laws of England did not apply to Australia unless they were specifically passed for the colonies. Australian statute law thus had a solid foundation in English law but was able to adapt to local circumstances. However, until 1942, the Commonwealth Parliament could not legislate contrary to the provisions of Imperial Acts applying to the Commonwealth. The Imperial Parliament enacted the Statute of Westminster 1931 IMP, which was adopted by the Commonwealth Parliament in the Statute of Westminster Adoption Act 1942 (Cth). Under the Imperial Act the Imperial Parliament relinquished the power to legislate for the Commonwealth of Australia, except in the case where the Commonwealth Parliament expressly requested and consented to such enactment: Statute of Westminster 1931(IMP), s 4. The Commonwealth was also given power to legislate contrary to Imperial Acts: Statute of Westminster Adoption Act 1942 (Cth), s 2. Since the Australia Act 1986 (Cth), the states can now legislate contrary to Imperial Acts. In other words, the Australia Act 1986 (Cth) did for the state parliaments what the Statute of Westminster had earlier done for the Commonwealth Parliament.

6 7

8

For extensive discussion of this argument see Henry Reynolds, The Law of the Land, Penguin Books (1992), 25. All were convicts. The first was convicted of assault and given 150 lashes. The second stole bread and was exiled to a small island in Sydney Harbour and the third was convicted of stealing wood and given 50 lashes (but was pardoned by the governor). Henry and Susannah Kable were convicts who sued the Captain of the ship Alexander (one of the First Fleet) when the £20 they entrusted to him went missing. They won.

9

10

Introduction to Business Law in Australia

Mabo: the end of terra nullius and the limited recognition of aboriginal customary law [1.70] In the following landmark case the High Court of Australia declared terra nullius to be a fiction. Although its effect has subsequently been modified by statute, it remains a pivotal case in Australia’s development.

Mabo v State of Queensland (No 2) [1.80] Mabo v State of Queensland (No 2) (1992) 175 CLR 1 (Mabo). In May 1982, Eddie Mabo and four other Murray Islanders, who were members of the Meriam people, instituted legal proceedings in the original jurisdiction of the High Court, claiming rights to their traditional lands (the Murray Islands) in the Torres Strait off the North Queensland coast. The Murray Islanders commenced proceedings in the High Court in 1982, in response to the Queensland Amendment Act of that year which established a system of land grants on trust for Aboriginals and Torres Strait Islanders, grants which the Murray Islanders refused to accept. The action was brought as a test case to determine the legal rights of the Meriam people to their traditional islands which Queensland took over in 1879. Prior to European settlement, the Meriam people had lived on the islands in a subsistence economy. Land on the islands was not the subject of public or general community ownership, but was regarded as belonging to individuals or groups. The plaintiffs sought declarations that the Meriam people were entitled to the islands “as owners; as possessors; as occupiers; or as persons entitled to use and enjoy the said islands”. The Queensland Government argued that when the territory of a settled colony became part of the Crown’s dominions, the law of England became the law of the colony and, by that law, the Crown acquired the “absolute beneficial ownership” of all land in the territory. In 1992, 10 years after the case began and, sadly, just a few months after Eddie Mabo died, the High Court held in a 6–1 decision that the common law of Australia recognized a form of native title, namely, the rights of the indigenous inhabitants to their traditional land in accordance with their laws and customs. Native title in Australia is sourced in the “traditional laws and customs” of the Aboriginal peoples. Brennan J (at 58) stated that: “Native title has its origin in and is given its content by the traditional laws acknowledged by and the traditional customs observed by the indigenous inhabitants of a territory.” In their joint judgment, Deane and Gaudron JJ said (at 82): “The acts and events by which that dispossession in legal theory was carried into practical effect constitute the darkest aspect of the history of this nation. The nation as a whole must remain diminished unless and until there is an acknowledgement of, and retreat from, those past injustices.” The decision meant that the Meriam people were entitled to the occupation, use and enjoyment of the lands of the Murray Islands (except for the operation of Crown leases and some land set aside for administrative purposes). The title of the Meriam people was stated to be subject to the Queensland Government’s rights to validly extinguish that title so that a grant of a fee simple (that is, freehold title) would extinguish any native title and would do so without creating any right to compensation.

chapter 1 The Australian Legal System

The “darkest aspects” sentiment of Gaudron and Deane JJ was reflected shortly after in then Prime Minister Keating’s Redfern speech. 9 “[reconciliation] begins, I think, with the act of recognition. Recognition that it was we who did the dispossessing. We took the traditional lands and smashed the traditional way of life. We brought the disasters. The alcohol. We committed the murders. We took the children from their mothers. We practised discrimination and exclusion. It was our ignorance and our prejudice. And our failure to imagine these things being done to us. With some noble exceptions, we failed to make the most basic human response and enter into their hearts and minds. We failed to ask – how would I feel if this were done to me? … The Mabo judgement should be seen as one of these. By doing away with the bizarre conceit that this continent had no owners prior to the settlement of Europeans, Mabo establishes a fundamental truth and lays the basis for justice. It will be much easier to work from that basis than has ever been the case in the past… Mabo is a historic decision – we can make it an historic turning point, the basis of a new relationship between indigenous and non-Aboriginal Australians … It seems to me that if we can imagine the injustice then we can imagine its opposite. And we can have justice.”

Native title legislation [1.90] The Commonwealth Government’s legislative response to the High Court’s decision in Mabo v State of Queensland (No 2) (1992) 175 CLR 1 was to enact the Native Title Act 1993 (Cth). 10 This legislation gave statutory effect to much of the decision in the Mabo Case while also introducing new elements in relation to native title and providing a framework in which native title could operate. One of the most significant common law cases since the Mabo Case was the decision of the High Court in Wik Peoples v State of Queensland (1996) 187 CLR 1. The High Court held by a majority that native title was not necessarily extinguished by certain pastoral leases. The response of the Howard Government to the High Court’s decision in the Wik case in 1996 was to formulate the “10 Point Plan” and in 1998 to substantially amend the original Native Title Act 1993. One of the most important changes was to permanently extinguish native title rights if they interfere with the rights of the agricultural or pastoral leaseholder. Activities other than farming and grazing would be allowed on pastoral leases, even if Native Title exists, provided the dominant purpose of the lease remains primary production. Not surprisingly indigenous leaders called for the negotiation of co-existing rights and rejected the upgrading of pastoral leases. They also rejected the upgrading of pastoral leases and the compensation for loss of native title rights because such compensation did not take account the fact that as a result of the policy changes pastoral leases would become virtually freehold land. These amendments also incorporated overdue amendments in relation to the Commonwealth of Australia Constution Act 1900 and functions of the National Native Title Tribunal. The Native Title Amendment Act 1998 (Cth) came into operation on 30 September 1998. 9 10

10 December 1992 at Redfern Park, Sydney. View at http://www.antar.org.au/issues_and_campaigns/self-determination/paul_keating_redfern_speech. The Native Title Act 1993 (Cth) came into operation on 1 January 1994. For more detailed discussion of the legislation, see MA Stephenson (ed), Mabo: The Native Title Legislation (University of Queensland Press, Brisbane, 1995).

11

12

Introduction to Business Law in Australia

Commonwealth, States and Territories Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 1. [1.100] Australia is a federation created under the Commonwealth of Australia Constitution Act 1900 (UK), a statute passed by the UK parliament. This means that the federal government has specified powers under the Commonwealth Constitution to make laws applying across Australia, while the governments of the States and Territories also have powers under their own constitutions to make laws which will only apply within their own borders. When taking into account the law-making powers of local government, which are delegated to it by State government, there are three layers of law-making bodies in Australia. The Commonwealth (or federal) parliament has exclusive legislative (law-making) power in only a few areas given to it under the Commonwealth Constitution — eg, defence, customs and excise — with the bulk of its powers being held concurrently with the States in a wide range of areas, such as external and interstate trade, post and telecommunications, listed in s 51 of the Commonwealth Constitution. If nothing at all is stated in the Commonwealth Constitution as to a Commonwealth power, it is assumed that authority to legislate in that area rests solely with the States and is said to be a residual power. A State can give a residual power to the Commonwealth if it wishes to, eg, Victoria gave the Commonwealth its industrial relations power. Territory parliaments only have the powers the Commonwealth parliament has granted them and the Commonwealth parliament can override any laws a Territory has made. Where there is any inconsistency between a law made under the concurrent powers of the Commonwealth Constitution by the Commonwealth and any State law, s 109 of the Constitution provides that the State law, to the extent of the inconsistency, is invalid. Under their constitutions, State parliaments only have the power to legislate for the “peace, order and good government” of the State. Although this appears to be much wider than the specifically listed federal powers, court interpretation has gradually broadened the federal powers at the expense of State powers. Cases providing examples of this include:  Strickland v Rocla Concrete Pipes Pty Ltd (1971) 124 CLR 468, extending the federal corporations power to cover restrictive trade practices; and  Commonwealth v Tasmania (1983) 158 CLR 1, extending the federal external affairs power to legislate based on an international agreement, which had the effect of stopping a State from building a dam. While constitutional law is primarily contained within the Commonwealth Constitution itself there is a lot of case law which explains constitutional law, and there are a number of conventions or customs, eg, the Prime Minister is elected by the majority party, yet there is nothing in the Constitution about this. The High Court of Australia is stipulated in the Constitution as the only court which can decide the meaning of the Constitution (and disputes between States or between a State and the Commonwealth). The High Court has also determined that the Constitution has a number of implied powers, eg, freedom of speech on political matters: Australian Capital Television Pty Ltd v Commonwealth (1992) 177 CLR 106. The High Court still hears interesting cases, eg, in Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392, the casino was found not to have any duty of care to a problem gambler.

Separation of powers [1.110] As a constitutional democracy, Australia applies the doctrine of “separation of powers” at both federal and State or Territory levels. Separation of powers is enshrined in the Commonwealth Constitution (but interestingly not in State constitutions) and the powers are that of:

chapter 1 The Australian Legal System

1.

The executive This is what we normally call “the government”, comprising the Prime Minister, or State Premier, and Ministers. Technically, the Queen through the Governor-General (at Commonwealth level) and State Governors are part of the executive, though they usually only act on the advice of Ministers. The executive has powers to administer through government departments. The executive formulates policy and its administration is supervised by the Ministers in Cabinet.

2.

The legislature These are the federal, State and Territory parliaments. In the Australian system, the executive is drawn from the party which holds the majority within parliament. The function of the legislature is the enactment or making of statutory or enacted law.

3.

The judiciary These are the courts and, in some cases, the tribunals who interpret, apply and enforce the law through the court systems of the Commonwealth and the States and Territories.

The rule of law [1.120] The separation of powers is part of what is sometimes called the “rule of law”, which prescribes that the application of law cannot be arbitrary (made up on the spot), but must be applied consistently according to set standards and applied equally to all citizens irrespective of their position in society. The separation of powers doctrine is designed to act as a counterbalance, so, eg, those who enforce the law should not make the law, nor judge it — the police enforce the law made by legislators, and only courts should judge the law. The judiciary should be independent from law-makers and enforcers, and only the judiciary should determine the meaning and interpretation of the law. In practical terms there is some overlap between different powers, eg, judges do make law by their decisions (called “precedent”) and legislators are sometimes part of the executive, eg, Ministers of the government. Under “administrative law” the decision of any authority can be reviewed if an official has exceeded their authority, eg, in the failure to issue a licence or permit. There is a hierarchy of judicial bodies to do this including the Administrative Appeals Board. The principle of natural justice also applies whereby there are certain presumptions about how decisions must be made, eg, that persons appearing before a judge or decision-maker have the opportunity of representation, notice of a hearing, and an unbiased, unprejudiced, hearing before an independent party. There are a number of further safeguards that an aggrieved party might turn to as a means of appeal over a decision, eg, the Ombudsman (State and federal) who investigates and reviews executive decisions. There are opportunities for executive judicial review whereby a body may review an administrative decision, eg, the Administrative Appeals Tribunal, the Federal Courts and various other forums may review administrative/executive decisions. Freedom of Information (FOI) also allows persons to seek information regarding the process of a decision.

The sources of law [1.130] The two basic sources of law in Australia are statute law (Acts of parliament) and judge-made law (decisions of judges).

Amending the Constitution Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1. [1.140] It is difficult to amend the Constitution of the 44 referenda put to the people since 1901 only eight have passed. The electorate is reluctant to change and the process for change is itself a deterrent. Section

13

14

Introduction to Business Law in Australia

128 of the the Constitution provides the mechanism for amending the Constitution. It is a complex process that involves the parliament and the electorate. Once both Houses of the Parliament have passed the proposed amendment to the Constitution, there is a referendum of all eligible voters who are asked to vote “yes” or “no”. If the proposal is approved of by a majority of voters in a majority of states, the Constitution is amended. The most significant amendment occurred in 1967 when s 51(xxvi) was amended to extend the power of the Commonwealth Government to legislate for Aborigines, and s 127, which excluded aboriginal people from the national census, was repealed.

Sources of law Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1. Figure 1.1 – Sources of Law

[1.150] There are two sources of law – primary and secondary. A primary source of law is a document that contains the law itself – for our purposes, a case or a statute. A secondary source of law is a resource that explains or analyses the primary source or is prepared for law reform purposes. They include scholarly texts, articles in academic journals, law reform commission reports and other commentary, both national and international. Our focus is on the primary sources of law. The basic primary sources of law in Australia are: (a)

statute law (Acts of Parliament); and

(b)

judge-made law (legal principles enunciated in judicial decisions).

chapter 1 The Australian Legal System

Statute law Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1. [1.160] Until the assertion of democratic power by the parliament in Britain (a process which began with the Bloodless Revolution in 1688) judges were the principal law-makers. However, certainly over the past 200 years, it has been the parliament, the heart of representative democracy, that has become the dominant law-making institution. There has been a massive increase in the amount and scope of legislation considered by the Parliament: so much so that a relevant statute affects virtually every aspect of our lives. If you are renting a house, getting married or divorced, buying or selling a car, taking out insurance, working part-time or studying at a university, migrating to Australia or seeking protection as a refugee – you are affected by a statute. If you are assaulted, defamed, injured at work, discriminated against because of your race or religion or sexual preference, misled by false advertising or injured by a faulty product – a statute will be relevant to any claim for compensation. In the federal arena alone there are now over 1,400 statutes and 600 regulations. Each year the number of Acts passed by the Federal Parliament is around 180. In the middle of the 20th century the figure was around 60 per year. 11 In addition State legislators are active law-makers. Parliament passes Bills which, on receipt of the royal assent, are called “statutes”, or Acts of Parliament. These statutes become part of the body of law known as “statute law”. Statutes may: (a)

bring new laws into existence;

(b)

repeal old laws created either by earlier statutes, or by decisions of the courts, which have ceased to be appropriate to present social needs; or

(c)

codify the law, that is, include not only previous statutory provisions but also common law principles derived from decisions of the courts.

Two of the best known examples of codifying statutes are the United Kingdom Sale of Goods Act 1893 and the Bills of Exchange Act 1882 (UK) (both Acts being later adopted in Australia). These Acts gathered together in statutory form principles based originally on the customs of merchants as developed by numerous decisions of the common law courts. Mention should also be made of what is known as a “consolidating statute”, the object of which is to assemble and re-enact a number of previous statutory provisions. For example, the legislation on a particular subject may have been subject to numerous amendments and it becomes desirable to bring them together into one statute, or a “consolidating Act”.

11

http://www.aph.gov.au/Parliamentary_Business/Statistics.

15

16

Introduction to Business Law in Australia

The making of statutes Figure 1.2: The Making of Statutes

[1.170] Where it is intended to make a new law on a particular matter or amend an existing law, a Bill will be drafted, usually by parliamentary counsel. Bills may be introduced in either House but will normally be introduced into the particular House of Parliament in which the Minister in charge of the Bill sits. Most Bills tend to be introduced in the Lower House, that is, the House of Representatives of the Commonwealth Parliament, or the Legislative Assembly in the case of the State Parliaments. After introduction of a Bill to the House, it will have to pass what are called three readings. The first reading is generally a formality involving stating the name of the Bill and moving that it be read a first time. If this is agreed to, the Bill will be printed and distributed to members of the House. The second reading of the Bill involves the Minister moving that the Bill be read a second time and the members will then debate the broad principles of the Bill. On the passing of the motion for a second reading, the Bill then moves on to the next stage, known as the committee stage. The committee may be a select or standing committee of the House, or the whole House sitting as a committee. At this point each clause of the Bill may be debated and amendments made; in practice only the controversial parts of the Bill will be objected to and debated. Once all the clauses of the Bill have been considered the Bill, if approved, is reported to the House as having passed the committee stage. A motion is then proposed that the Bill be read a third time. The third reading simply involves the House voting on the Bill as it stands after the committee stage. Once passed, the Bill is then sent to the other House, usually the Upper House (that is, the Senate of the Commonwealth Parliament or the Legislative Council in the states other than Queensland), and the same process is repeated. If the Bill is passed by the Upper House unamended, it is sent to the Governor-General of the Commonwealth, or the Governor of the State, for assent. After assent the Bill becomes an Act of Parliament. An Act which is to be proclaimed to come into operation has no legal effect until such date has been proclaimed and has arrived. The Act will commence from the date specified, or it may provide that it is to

chapter 1 The Australian Legal System

operate from a date to be proclaimed by the Governor-General or Governor and published in the Government Gazette. Where a Commonwealth Act is silent as to its commencement, it commences 28 days after the Governor-General’s assent was given. 12 Where a atate or territory Act does not make provision for its commencement, the various statutory interpretation laws make varying provision for the commencement date. It is the date of assent in Queensland, South Australia and the Northern Territory; 14 days after assent in Tasmania; and 28 days after assent in New South Wales, Victoria and Western Australia, and one year after assent in Victoria. 13 In the Australian Capital Territory, legislation commences on the day after its notification day, that is, the day the Act is notified in the Government Gazette or the electronic register of legislation. However, if the Act provides for a different commencement date, the law commences on that date. 14 Problems may arise where an Upper House refuses to pass a Bill that has been passed by a Lower House. With respect to the Commonwealth Parliament, this situation is provided for in s 57 of the Constitution, which sets down the following procedure for resolving such “deadlock”: (a)

If the Senate rejects a Bill, fails to pass it or passes it with amendments unacceptable to the House of Representatives, then after three months the Bill can be reintroduced in the House of Representatives.

(b)

If the House of Representatives again passes the Bill but the Senate still rejects it, etc, then the Governor-General may dissolve both Houses (known as a “double dissolution”) and call an election.

(c)

If, after the election, the House of Representatives passes the Bill and the Senate still rejects it, etc, the Governor-General may convene a joint sitting of both Houses and if there is a majority vote in favour of the Bill then it goes to the Governor-General for assent.

Parts of a statute Example: The Corporations Act 2001 [1.180] The various parts of a statute are illustrated here with reference to the Corporations Act 2001 (Cth) (Corps Act). We discuss the Corps Act and the duties and liabilities of the directors and officers of a company in Chapter 18. We have used s 180 of the Corps Act as an example. Section 180 imposes a duty on directors and officers of companies to take reasonable care and act with reasonable diligence. We will also discuss similar concepts of reasonable care when considering the tort of negligence in Chapter 14. The following examples are drawn from the Corporations Act 2001 (Cth).

Act number [1.190] “Act No 50 of 2001” Each statute enacted in a year is assigned an Act Number. This Act was the 50th statute enacted by the Commonwealth Parliament in the year 2001. 12 13

14

Acts Interpretation Act 1901 (Cth), s 3A(2). Interpretation Act 1987 (NSW), s 23(1); Interpretation of Legislation Act 1984 (Vic), s 11; Acts Interpretation Act 1954 (Qld), s 15A; Acts Interpretation Act 1915 (SA), s 7; Interpretation Act 1984 (WA), s 20; Acts Interpretation Act 1983 (Tas), s 9; Interpretation Act 1978 (NT), s 6. Legislation Act 2001 (ACT), s 73(1).

17

18

Introduction to Business Law in Australia

Long title [1.200] “An Act to make provision in relation to corporations and financial products and services, and for other purposes.” The long title is a broad statement of the subject matter of the Act.

Short title [1.210] s 1. “This Act may be cited as the Corporations Act 2001.” The short title provides a more concise statement of the subject of the Act than is provided by the long title. Acts are customarily cited by their short title.

Commencement date [1.220] s 2. “This Act commences on a day to be fixed by Proclamation.” This provision states the date on which the Act enters into force. In this example, that date is to be fixed by Proclamation of the Governor-General, that is, on the advice of the executive government.

Object or purpose [1.230] The Corporations Act 2001 does not contain an objects clause. However, many modern statutes contain a statement of the objects which the Act seeks to achieve. For example, s 2 of the Competition and Consumer Act 2010 (Cth) states: “The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection”.

Definitions [1.240] 9 Dictionary Unless the contrary intention appears: “AASB” means the Australian Accounting Standards Board. “accounting standard means:” (a) an instrument in force under section 334; or (b) a provision of such an instrument as it so has effect. “officer of a corporation means:” (a) a director or secretary of the corporation; or (b)

a person: (i)

who makes, or participates in making, the decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii)

who has the capacity to affect significantly the corporation’s financial standing; or

(iii)

in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or

(c)

a receiver, or receiver and manager, of the property of the corporation; or

(d)

an administrator of the corporation; or

chapter 1 The Australian Legal System

(e)

an administrator of a deed of company arrangement executed by the corporation; or

(f)

a liquidator of the corporation; or

(g)

a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

The meaning of many words in a statute are not self-evident. Most statutes contain a provision defining certain words the meaning of which may be ambiguous or which will have a specialist or technical meaning when used in the Act. This provision may be entitled “definitions”, “interpretation” or “dictionary”. Sometimes a statute may have a number of definition sections, with particular definition provisions applying only to specific parts of the Act. In some statutes, definitions are included in a separate schedule to the Act.

Sections [1.250] 180 Care and diligence — civil obligation only (1) Care and diligence — directors and other officers A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation’s circumstances; and (b)

occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Note: This subsection is a civil penalty provision (see section 1317E). (2) Business judgment rule A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a)

make the judgment in good faith for a proper purpose; and

(b)

do not have a material personal interest in the subject matter of the judgment; and

(c)

inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation. The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) – it does not operate in relation to duties under any other provision of this Act or under any other laws. 180(3) “business judgment” In this section: “business judgment” means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. Each statute is divided into consecutively numbered sections. A section number is abbreviated by the letter “s” (eg s 180), multiple section numbers are abbreviated by the letters “ss” (eg ss 180 – 184). When new sections are inserted into an Act by an amending Act, the new sections are often placed between existing sections. The new sections are assigned section numbers that include one or more letters. Where many new

19

20

Introduction to Business Law in Australia

sections have been inserted into an Act, the numbering of the Act can become complicated. For example, the example from the Dictionary section of the Corporations Act 2001 above is s 9. Additional definitions were later added to the Act and these were added in new sections. Section 9A was added in 2007 to define when the issue of secutities would amount to a “rights issue” under the Act. Section 9AA was added in 2008 to define when certain relationships would be “family” relationships under the Act. Section 9B was added in 2011 to define “remuneration recommendations” under the Act. Individual sections of an Act are often further subdivided into subsections. In s 180 above, the section number is s 180. This section is subdivided into three subsections, abbreviated as s 180(1), s 180(2) and s 180(3). Within the section these subsections are identified by the numbers “(1)”, “(2)” and “(3)”.

Marginal notes [1.260] 52 Doing acts A reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done. The marginal notes are often, but not necessarily, placed in the margin of a statute. In the example given here the marginal note appears in bold type immediately before the text of the section: “Doing acts”. Marginal notes describe in general terms the particular subject dealt with by each section.

Chapters, Parts or Divisions [1.270] Chapter 2J – Transactions affecting share capital Part 2J.1 – Share capital reductions and share buy-backs Division 1 – Reductions in share capital not otherwise authorised by law Division 2 – Share buy-backs Division 3 – Other share capital reductions Part 2J.2 – Self-acquisition and control of shares Part 2J.3 – Financial assistance Part 2J.4 – Interaction with general directors’ duties An Act with a large number of provisions is generally divided into Chapters, Parts and Divisions, each composed of a number of individual provisions. As can be seen in the example above, each Chapter, Part and Division has an individual heading which describes its subject matter. The division of the Act into Chapters, Parts or Divisions assists comprehension of the scheme of the Act.

Schedules [1.280] “Schedule 3 – Penalties” “Schedule 4 – Transfer of financial institutions and friendly societies” Matters of detail are often incorporated into one or more Schedules which appear at the end of the Act.

Interpretation of statutes [1.290] All statutes consist of words, which, as we all know, may mean different things to different people. There are frequently conflicting views as to the precise meaning of a particular clause or section of an Act that may ultimately have to be resolved by the courts. The decisions that the courts make in relation to the meaning will, consistent with the doctrine of precedent, bind or guide courts in the future.

chapter 1 The Australian Legal System

Example Section 3 of the Immigration Restriction Act 1901 – one of the first pieces of legislation passed by the first Federal Parliament was an Act that established the racist White Australia Policy. It provided: The immigration into the Commonwealth of (certain) persons is prohibited: (a) any person who fails to pass the dictation test: that is to say, who when an officer dictates to him not less than fifty words in any prescribed language, fails to write them out in the presence of the officer. In Potter v Minahan (1908) 7 CLR 277 the respondent had entered into Australia from China. His mother was British, his father was Chinese. He had lived in Victoria until he was five when his father left Australia with him and returned to China. Many years later, after his father died, he decided to return to Australia. When given the dictation test he could not do it. The Immigration Department then prevented him from entering Australia. The issue to be decided by the court was whether he was an “immigrant”. Minahan argued he was not an ‘immigrant’ within the meaning of s 3. He argued that an immigrant is one who is leaving an old home to settle in a new one. He argued he was “returning home” after a considerable stay in China. He argued his “domicile” was always Victoria, never China. The High Court agreed and, in so deciding, interpreted the word “immigrant” in a way that did not include people of British parentage who had physically left Australia but had continued to call Australia “home”. There are a number of aids to assist a court when it is called upon to interpret a statute. The principal ones are the Commonwealth and State Acts Interpretation Acts, and certain rules and maxims of statutory interpretation developed by the courts.

The Acts Interpretation Acts [1.300] The Commonwealth, State and Territory Parliaments have passed Acts Interpretation Acts 15 that set down some basic rules or presumptions of interpretation, define some common terms, and deal with a number of other matters relating to form, content and operation of statutes. For example, most of the Acts have provisions stating that the male gender includes the female gender, singular includes plural and vice versa, and defining commonly occurring terms such as “document”, “person”, “Minister”, “service by post” and so on.

A “purposive” construction [1.310] The Commonwealth Acts Interpretation Act 1901 contains a provision which, in effect, directs a court to have regard to the objects and purposes of an Act in interpreting its provisions. Thus, s 15AA provides: “In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other construction.” A purposive construction requires that a court gives a meaning to the words that is consistent with the overall purpose or objective, rather than a strict or literalist approach. In applying a “purposive” construction: “[T]he grammatical meaning of a provision is not to be taken to represent Parliament’s intention as to its meaning when the context or the purpose of the provision raises a real doubt about the 15

Acts Interpretation Act 1901 (Cth); Interpretation Act 1987 (NSW); Interpretation of Legislation Act 1984 (Vic); Acts Interpretation Act 1954 (Qld); Acts Interpretation Act 1915 (SA); Interpretation Act 1984 (WA); Acts Interpretation Act 1983 (Tas); Legislation Act 2001 (ACT); Interpretation Act 1978 (NT).

21

22

Introduction to Business Law in Australia

applicability of the grammatical meaning. If purpose or context does raise a real doubt as to whether Parliament intended the grammatical meaning to apply, a court is entitled to depart from that meaning. Moreover, if the grammatical meaning gives rise to injustice or anomaly, it may strengthen the conclusion that the Parliament did not intend the grammatical or literal meaning to apply”: Bermingham v Corrective Services Commission of New South Wales (1988) 15 NSWLR 292 at 302 per McHugh JA. To give effect to the purpose of the legislation, a court may read words into a legislative provision provided the following three conditions are fulfilled: “First, the court must know the mischief with which the Act was dealing. Secondly, the court must be satisfied that by inadvertence Parliament has overlooked an eventuality which must be dealt with if the purpose of the Act is to be achieved. Thirdly, the court must be able to state with certainty what words Parliament would have used to overcome the omission if its attention had been drawn to the defect”: Bermingham v Corrective Services Commission of New South Wales (1988) 15 NSWLR 292 at 302 per McHugh JA. However, where the parliament has failed to make provision for something because it has not considered the matter, the deficiency in the statute goes beyond reading in “some necessary words”. To remedy that deficiency will be impermissible as it crosses the boundary between interpreting the legislation and legislating: Sevmere Pty Ltd v Cairns Regional Council [2010] 2 Qd R 276. The High Court has indicated the broad limits of this approach “The question whether the court is justified in reading a statutory provision as if it contained additional words or omitted words involves a judgment of matters of degree. That judgment is readily answered in favour of addition or omission in the case of simple, grammatical, drafting errors which if uncorrected would defeat the object of the provision. It is answered against a construction that fills ‘gaps disclosed in legislation’ or makes an insertion which is ‘too big, or too much at variance with the language in fact used by the legislature’”: Taylor v The Owners – Strata Plan No 11564 (2014) 88 ALJR 473 at [38] Where the words of a statute are clear, effect must be given to them notwithstanding that parliament appeared to have legislated “in an exceedingly odd manner”, since: “When statutory words are clear, even if the purpose informing them is not immediately apparent, the courts are not at liberty to mangle them to the point where they no longer mean what they say”: Turner v Morlend Finance Corp (Vic) Pty Ltd [1990] ASC 56-006. The method of purposive construction does not permit a court to redraft legislation to give effect to a presumed legislative intent: Comcare v Thompson (2000) 100 FCR 375 at [40].

Extrinsic materials [1.320] The Commonwealth Acts Interpretation Act 1901 (Cth) (s 15AB) now allows the court to take into consideration certain extrinsic material in interpreting, for example, an ambiguous or obscure provision in an Act. Section 15AB(1) provides, in part, that: [I]n the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material: (a)

to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or

(b)

to determine the meaning of the provision when – (i)

the provision is ambiguous or obscure; or

chapter 1 The Australian Legal System

(ii)

the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.

This provision allows “but does not require” a court to refer to extrinsic materials in interpreting a statute: Screen Australia v EME Productions No 1 Pty Ltd (2012) 200 FCR 282 at [48]. The material which may be referred to includes: relevant Law Reform Commission reports; relevant parliamentary committee reports; the explanatory memorandum for the Bill; the second reading speech of the Minister on the Bill; and relevant material in parliamentary debates: Acts Interpretation Act 1901 (Cth), s 15AB(2). Section 15AB(3) contains a proviso to the effect that in determining whether consideration should be given to such extrinsic material, or in considering the weight to be given to it, regard is to be had, inter alia, to: (a)

the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; and

(b)

the need to avoid prolonging legal or other proceedings without compensating advantage.

The section is essentially an aid to interpretation of a statutory provision and the court will not give effect to the intention evinced in, for example, a Minister’s second reading speech on a Bill where it is satisfied that there is good reason not to do so. In Re Bolton; Ex parte Beane (1987) 162 CLR 514 at 518 Mason CJ, Wilson and Dawson JJ stated that “[t]he words of a Minister must not be substituted for the text of the law”. The court has regard to the second reading speech in order to ascertain the purpose of the legislation. It is the words of the statute rather than the extrinsic materials that have primary importance for statutory interpretation: Nominal Defendant v GLG Australia Pty Ltd (2006) 228 CLR 529 at [22], [82]. Thus the words of the explanatory memorandum cannot replace the words of the statute, and where there is a clash between them, the words of the statute naturally take priority: Director of Public Prosecutions v Le (2007) 15 VR 352 at [59]-[60]. Similar provisions permitting recourse to extrinsic materials are included in most State and Territory interpretation statutes. 16 The Queensland Court of Appeal has held that the language of the statute may not be ignored in order to accord with statements in the Minister’s Second Reading speech: Witheyman v Simpson [2011] 1 Qd R 170 at [52], [82], [89]. There is no such provision in South Australia. In that State the common law applies, so the courts may have regard to extrinsic materials in determining the mischief to which a statute was directed: K-Generation Pty Ltd v Liquor Licensing Court (2009) 237 CLR 501 at [50]–[51].

Common law rules of statutory interpretation [1.330] Over the years, the courts developed a number of rules to be applied in the interpretation of statutes. While described as “rules”, they are essentially guidelines for statutory interpretation. The more important of these rules are:

The literal rule [1.340] The courts are to interpret the words used in an Act of Parliament literally as far as they can, that is, they must give the words their natural, ordinary and grammatical meaning. This is based on the 16

Interpretation Act 1987 (NSW), s 34; Interpretation of Legislation Act 1984 (Vic), s 35; Acts Interpretation Act 1954 (Qld), s 14B; Interpretation Act 1984 (WA), s 19; Acts Interpretation Act 1931 (Tas), s 8B; Legislation Act 2001 (ACT), s 142; Interpretation Act 1978 (NT), s 62B.

23

24

Introduction to Business Law in Australia

assumption that parliament’s intention is expressed in the actual words used. Accordingly, if the words are clear, it is not necessary to look further for their meaning. However, the inconvenience of the result of a literal interpretation may assist the court in concluding that an alternative construction which is reasonably open is to be preferred to the literal meaning because the alternative construction more closely conforms to the legislative intent discernible from other provisions in the statute: Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297 at 320 per Mason and Wilson JJ. In that case, Gibbs CJ explained the general position as follows: “[I]f the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust. To say this is not to insist on too literal an interpretation, or to deny that the court should seek the real intention of the legislature. The danger that lies in departing from the ordinary meaning of unambiguous provisions is that … it may lead judges to put their own ideas of justice or social policy in place of the words of the statute. On the other hand, if two constructions are open, the courts will obviously prefer that which will avoid what it considers to be inconvenience or injustice. Since language, read in its context, very often proves to be ambiguous, this last mentioned rule is one that not infrequently falls to be applied”: Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297 at 305. Arguably, the Acts Interpretation Act 1901 (Cth) (s 15AA) may now require a more “purposive” approach to statutory interpretation than the common law literal rule that was indicated in the Cooper Brookes case, although the views expressed in that case are still referred to with approval in decisions on the amended provisions: see, for example, Mills v Meeking (1990) 169 CLR 214. McHugh J stated that today “[t]he literal meaning of the legislative text is the beginning, not the end, of the search for the intention of the legislature”: Kelly v The Queen (2004) 218 CLR 216 at [98].

The golden rule [1.350] Where a literal reading would give rise to an absurdity, the judge may have resort to what is known as the “golden rule”. It has been said in the High Court that the propriety of departing from a literal interpretation is not confined to situations where the operation of the statute on a literal interpretation would be “absurd”, “capricious” or “irrational” but “extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions”: Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297 at 321 per Mason and Wilson JJ. For example in Keene v Muncaster (1980) RTR 377 the legislation said that in order to park a car in a certain way, permission had to be received from “a policeman in uniform”; the defendant was a policeman in uniform. The court held that while on a literal interpretation of the words used, the defendant had received permission from a policeman in uniform (himself), this would be an absurd result. However, as Professor Zander has noted: “the golden rule is little more than a safety-valve to permit the courts to escape from some of the more unpalatable effects of the literal rule. It cannot be regarded as a sound basis for judicial decision-making”.

The mischief rule [1.360] This brings us to the “mischief rule”. By this rule, where a literal interpretation is not possible because, for example, the words are ambiguous, logically defective, inconsistent with each other or

chapter 1 The Australian Legal System

incomplete, then the court may have regard to the “mischief” which Parliament passed the Act to remedy. In such circumstances, the court is to interpret the statute according to the original purpose or policy underlying its enactment. For example in Corkery v Carpenter (1951) 1 KB 102 the defendant was in charge of a bicycle whilst drunk. It was an offence to be drunk in charge of a “carriage”. The court held that a bicycle was a “carriage”: the “mischief” was drunks on the highway being in charge of transport. The mischief rule required an ambiguity or inconsistency before a court could have regard to the purpose or object of a statute. The “purposive” provision of the Acts Interpretation Act 1901 (Cth) (s 15AA) and the corresponding provisions in the State legislation is not so confined: Mills v Meeking (1990) 169 CLR 214 at 235: see [1.360]. Furthermore, the range of extrinsic materials to which one may have regard is more extensive under the amended provisions: see [1.370]. Accordingly, much of the scope for the operation of the common law mischief rule would now appear to have been superseded by the statutory provisions.

Maxims of interpretation [1.370] The courts apply a number of principles or “maxims” of statutory interpretation. However, these principles are aids to construction, rather than inflexible rules. “Ejusdem generis”: Where particular words are followed by a general word, the general word may be interpreted as restricted to the same class as the particular words. For example, in the absence of some contrary intention, in the phrase “dogs, cats, guinea pigs and other animals”, the general words “other animals” would be construed as restricted to domestic animals, and would not be interpreted as including elephants or whales. Ejusdem generis is merely a “guide to interpretation” rather than a rule, and it “must be used cautiously”: Chief Executive Officer of Customs v Biocontrol Ltd (2006) 150 FCR 64 at [46]; see also Pepper v Attorney-General [2008] 2 Qd R 353 at [1], [23], [34]. This rule does not apply where the particular words do not constitute a class. In that case, the general word will not be subject to that restrictive interpretation: Cody v Nelson (1947) 74 CLR 629; R v Regos (1947) 74 CLR 613. “Expressio unius est exclusio alterius”: The phrase indicates that items not on a list are assumed not to be covered by the statute. When something is mentioned expressly in a statute it leads to the presumption that the things not mentioned are excluded. The maxim will not apply unless the provision concerned is intended as an exhaustive statement of some matter. For example, under to s 14 of the Local Government Act the following animals are regarded as domestic animals for the purposes of Council permits: dogs, cats, chickens, ducks and rabbits. The expressio rule would indicate that pigeons are not included. “Generalia specialbus non derogant”: Where there is a conflict between a specific provision and a general provision in a statute, the specific provision will usually be applied in preference to the general provision.

Presumptions [1.380] The courts also make certain presumptions when interpreting in construing legislation. “Rules of natural justice will be complied with”: There is a presumption that the legislature would not intend to deny a person natural justice, such as the right to a fair trial which includes a right to be heard by an impartial court or tribunal within a reasonable time. There may be situations in which this does occur (particularly in an era where “national security” is so often invoked) but the legislature needs to make its intention to do so very clear. “Rules of natural justice will be complied with”: There is a presumption that the legislature would not intend to deny a person natural justice, such as the right to a fair trial which includes a right to be heard by

25

26

Introduction to Business Law in Australia

an impartial court or tribunal within a reasonable time. There may be situations in which this does occur (particularly in an era where “national security” is so often invoked) but the legislature needs to make its intention to do so very clear. Common law rights should be taken to have been cut down by statute only where there is a clear legislative expression of an unmistakable and unambiguous intention to do so. “Laws do operate retrospectively”: There is a presumption that legislation is intended to operate after it has become the law of the land. If the intention is that a statute is to have retrospective effect, the Parliament must make its intention clear. “Penal statutes are interpreted strictly”: Any ambiguity will be interpreted in favour of an accused.

Delegated legislation [1.390] Delegated legislation is legislation made under the authority of an Act of Parliament. It is also known as subordinate legislation. It is not uncommon for an Act of Parliament to set out the law on a particular matter in general terms and go on to delegate or empower some person or body to make the detailed rules or regulations necessary to give effect to the legislation. Examples of the persons and bodies to whom such power is commonly given include the Governor-General or Governor in Council, government Ministers and local authorities. The reasons for conferring power on others to make delegated legislation are that: (a)

Parliament does not have the time to deal in detail with the many matters that claim its attention; and

(b)

much of the legislation that is passed is of a highly technical, specialised or essentially local nature so that the details are better left to experts or local bodies.

The power given by the particular Act may be quite specific as to the regulations which may be made under it, or it may confer a broad power to make delegated legislation. An example of the latter is the power given to local governments by the Queensland Local Government Act 1993 (Qld), s 25: “Each local government has jurisdiction … to make local laws for, and otherwise ensure, the good rule and government of its territorial unit.” Parliament maintains some control over delegated legislation by provisions requiring that regulations be tabled or laid before the Parliament 17 and provisions for the disallowance of such regulations within specified periods after their tabling. 18 In both the Commonwealth and State Parliaments, committees have been set up to examine delegated legislation tabled before the Parliament with a view to maintaining some general supervisory control over its content. It is important to bear in mind that delegated legislation is only valid if it comes within the power conferred by the Act of Parliament under which it is made. Accordingly, if in making the regulation the person or body has exceeded the power given by the particular Act, the regulation may be held to be ultra vires (beyond power) by the court and hence invalid.

Judge-made law Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1. 17 18

Legislative Instruments Act 2003 (Cth), s 38. See Legislative Instruments Act 2003 (Cth), s 42.

chapter 1 The Australian Legal System

[1.400] Another important source of law is judge-made law which comprises the principles of law propounded by judges in deciding particular cases. The term “common law” is in fact used in a number of different ways. It may refer to: (a)

the law as declared by judges as distinct from statutory law (the laws made by Parliament);

(b)

common law as distinct from equity; and

(c)

common law as distinct from civil law (to distinguish between a common law system of law as practised in the UK and those countries which inherited that system (for example, Australia), from a civil law system as practised in most European and Asian countries).

The term “common law” in the present work will generally be used to refer to the principles of law arising from the decisions of judges in deciding particular cases, as distinct from statutory law. Thus, the term “common law” will generally refer to the principles of both the common law and equity. However, in some cases it will be necessary to distinguish between common law and equity. An Act of Parliament may abrogate or modify the rules of the common law and equity. The judicial law-making function is thus subordinate to the legislative power of Parliament. To appreciate the essential nature of judge-made law, and particularly to understand the reasons for the distinction between common law and equitable principles, it is useful to have some familiarity with the historical development of judge-made law. In this context we distinguish between common law and equity.

Common law Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 1. Common law is distinguished from “civil law” systems which operate in continental Europe and many Asian countries. While there are a number of legal systems in the world, the English-speaking world generally uses a common law system, while many other countries have a civil law system which is based on the old Roman law. Civil law operates as a code system, whereby all laws have been codified to cover every possible application, making little use of judge-made (case or precedent) law. The judges in a civil law (or inquisitorial) system control a court and ask questions regarding each party’s case, whereas in common law systems there is more of an adversarial or competitive character to the courts. Australian laws, procedures and institutions have their basis in English law which was imposed with the colonisation of Australia in 1788. Progressive changes in law have given Australians the independence to make their own laws and replace the original law, though some very ancient English laws may still remain (or may have been replaced). For example, in State Government Insurance Commission (SA) v Trigwell (1979) 142 CLR 617 a farmer’s sheep caused a road accident, but he escaped liability under an ancient English law that excused an owner for injury caused by their straying animals. The State government then passed legislation to remove the ancient law: Animals Act 1977 (NSW). Sometimes you will see common law contrasted with “equity”. In this sense “common law” means the fairly formal rules developed by English royal courts such as the King’s Bench and the Court of Common Pleas, as opposed to the less formal rules emphasising notions of fairness and justice of “equity” developed by the Court of Chancery. While Australian courts now apply both common law and equity, the distinction is still important because equitable remedies are discretionary and must be applied for promptly or they may be lost. Unlike common law rights, equitable rights are only valid against those persons specified by the court. In business law there are equitable rules regarding unfair or unconscionable contracts, or to grant certain remedies, eg, specific performance for a breach of an agreement. The common law system works because:

27

28

Introduction to Business Law in Australia

 courts and tribunals have been arranged in a hierarchy, which provides a system of appeals for dissatisfied litigants to appeal from a decision of a lower court to a higher court, to have the matter reconsidered, to correct errors and to allow different forms of hearing according to the seriousness of the case (see Figure 1.6 at the end of this Chapter);  significant court decisions are recorded and published in a systematic way through law reports, creating a precedent base for future reference;  the doctrine of precedent means that courts lower in the hierarchy are bound to follow previous decisions of courts directly higher in the hierarchy, and this promotes consistency, coherence, certainty, efficiency and justice in the legal system. In a court hierarchy, only superior courts of record (ie, those courts which record in writing their judgments) can create binding precedent. The Australian court hierarchy has superior courts, intermediate courts and inferior courts. Thus:  only the reasoning of the higher court in the same court system in actually making its decision (ratio decidendi) is binding (ie, the ratio of the Victorian Court of Appeal is only binding on Victorian courts and not on courts in any other jurisdiction);  other steps of reasoning and commentary made by a judge is called obiter dicta and is not binding, but may form a persuasive precedent;  decisions by courts not directly higher in the hierarchy, or in a different hierarchy, are also not binding, but may be persuasive. Two points should be noted from this statement. First, just as the laws of a State or Territory only apply within its territorial boundaries (ie, Victorian laws do not apply outside Victoria), decisions of Victorian courts are of persuasive value only in other jurisdictions. Secondly, decisions of the Supreme Court are also of persuasive value in the Court of Appeal (see Figure 1.4 at the end of this Chapter). This occurs because the Supreme Court is lower in the hierarchy than the Court of Appeal. Decisions can be appealed through the court hierarchy, and in an appeal a superior court may:  affirm the decision (leaving the precedent as binding);  distinguish a precedent, which means the court makes a different decision but decides the binding precedent does not apply to the current situation;  disapprove, leaving the precedent as it is but stating that it is not good law;  overrule, which means the precedent is no longer valid or binding; or  reverse the decision substituting a different decision because the law was wrongly interpreted.

Development of the common law Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1. [1.420] In medieval England, the development of the Royal or Common Law Courts saw the gradual decline of local courts governed by archaic procedures. It was in these central courts that a law common to all of England gradually evolved. All actions in the Royal Courts had to be commenced by obtaining the appropriate writ from Chancery, the department responsible for issuing writs. By the 14th century, the Royal Courts had become firmly established. However, the legal system during this period suffered from a number of serious deficiencies. Only certain types of writ were available and if the wrong complained of could not be framed so as to fit within one of the existing writs, then the complainant had no cause of action and hence no remedy. Furthermore, the procedure involved in proving

chapter 1 The Australian Legal System

a case became increasingly complex and very strict. A case could be lost for non-compliance with the merest technicality. These deficiencies in the common law led to the rise of equity as a source of law.

The growth of equity [1.430] Equity developed as an amelioration of the harsh consequences of common law rules. Where persons were unable to obtain a remedy for their grievances in the Common Law Courts because of the deficiencies in the common law, they would petition the King for relief. The increase in the number of these petitions asking the King as a matter of conscience or justice to redress the petitioners’ grievances led to them being dealt with by the Chancellor, one of the King’s principal advisers. Eventually, aggrieved petitioners would send their petitions directly to the Chancellor. The Chancellor was also the head of the Chancery, the body responsible for issuing writs to those seeking a remedy in one of the Common Law Courts. The hearing of petitions by the Chancellor led to the emergence during the 15th century of the separate jurisdiction of the Chancery as a court of equity, later known as the Court of Chancery. The system of law administered by the court, which came to be known as equity, was not seen as a rival system to the common law but as supplementing the common law by providing remedies that the common law could not supply and by acknowledging rights not recognised by the Common Law Courts. For example, the recognition and enforcement of trusts was exclusively a development of equity since the common law made no provision for the legal owner of property holding it on behalf of another. Further, the remedy of the Common Law Courts was to award monetary compensation called “damages” to a person who had suffered injury, whereas the Court of Chancery could grant specific performance (that is, compel a person to do what he or she had promised) or an injunction (that is, order a person to abstain from doing something). Equitable remedies were (and remain today) discretionary. There gradually evolved two systems of law – common law and equity – but all the Australian States have followed the United Kingdom Judicature Act 1873 model, so that both common law and equitable principles are applied in the one proceeding.

Reception of English law in Australia [1.440] The law in force in Australia today is largely based on the law of England. To appreciate the nature of that inheritance, it is necessary to have some understanding of the reception of English law in Australia. An Imperial Act, the Australian Courts Act 1828 (IMP), provided that all laws and statutes in force within the realm of England on 25 July 1828 should be applied in the administration of justice in the courts of New South Wales and Tasmania “so far as they could be applied within those colonies”. Accordingly, 25 July 1828 is the point of time at which the laws (both common law and statutory law) then existing in England apply in Australia. After 1828, changes in the laws of England did not generally apply to Australia. However, until 1942 the Commonwealth Parliament could not legislate contrary to the provisions of Imperial Acts applying to the Commonwealth. The Imperial Parliament enacted the Statute of Westminster 1931 (IMP), which was adopted by the Commonwealth Parliament in the Statute of Westminster Adoption Act 1942 (Cth). Under the Imperial Act the Imperial Parliament relinquished the power to legislate for the Commonwealth of Australia, except in the case where the Commonwealth Parliament expressly requested and consented to such enactment: Statute of Westminster 1931 (IMP), s 4. The Commonwealth was also given power to legislate contrary to Imperial Acts: Statute of Westminster Adoption Act 1942 (Cth), s 2. Since the Australia Act Statute of Westminster 1986 (Cth), the States can now legislate contrary to Imperial

29

30

Introduction to Business Law in Australia

Acts. In other words, the Australia Act Statute of Westminster 1986 (Cth) did for the State Parliaments what the Statute of Westminster had earlier done for the Commonwealth Parliament.

Law reports [1.450] The common law comprises the decisions of judges in deciding particular cases. Those decisions are published in law reports. For the High Court the authorised law reports are the Commonwealth Law Reports (published since 1903) and for the Federal Court, the Federal Court Reports (since 1984). In the States and Territories the authorised law reports are the New South Wales Law Reports, Victorian Reports, Queensland Reports, South Australian State Reports, Western Australian Reports, Tasmanian Reports, Australian Capital Territory Law Reports and the Northern Territory Law Reports. The Australian Law Reports contain decisions of the High Court, Federal Court, Territory courts and other courts exercising federal jurisdiction and decisions of the Territory courts. The Federal Law Reports contain decisions of Commonwealth and State courts on matters of federal law. In addition, there are many specialist series of reports containing decisions on particular aspects of the law such as intellectual property, trade practices, torts, insurance, consumer credit, industrial law, trusts and so on.

Form of a law report [1.460] Modern law reports present cases in a similar way. On turning to the report of a case, at the top of the page will usually be found the names of the parties followed by the name of the court (although in some reports this order is reversed). This will be followed by the name of the judge/s and the dates on which the case was heard. Immediately below are a number of words which very briefly indicate the subject matter of the case and relevant legislation: these words are called “catchwords”. Then will follow a fuller summary of the facts, the decision in the case and reference to cases that were applied, overruled, distinguished, discussed or referred to in the judgment: this part is called the “headnote”. The catchwords and the headnote do not form part of the judgment. Their object is to provide readers with a short summary of the case to decide whether it is relevant for their purposes. After the headnote there will be words indicating how the case came before the court, for example by statement of claim, summons, appeal, etc. This will be followed by the names of the legal representatives of the respective parties (usually barristers). In some law reports there will then be a brief summary of the arguments put to the court by counsel. Where the court does not give judgment immediately after hearing argument but gives it later, it is called a reserved judgment: this is indicated in the law report by the words “cur adv vult” (the short form of the Latin expression curia advisari vult – “the court wishes to be advised”). The law report will then set out, usually in full, the judgment/s given in the case. Judgments tend to follow a similar basic pattern, namely a statement of the material facts; identification of the issues involved; discussion of the relevant law and its application to the particular facts; the decision reached and a statement of the orders flowing from the decision. At the end of the report appear the names of the firms of solicitors representing the respective parties and the initials or name of the reporter who wrote the catchwords and headnote. The following example of a case reported in the Commonwealth Law Reports illustrates the various features of a law report:

chapter 1 The Australian Legal System

Figure 1.3: Example of a Law Report

31

32

Introduction to Business Law in Australia

chapter 1 The Australian Legal System

Citation of cases [1.470] A case in support of a legal principle is cited by quoting the names of the parties and giving a reference to the law report where the case can be found. For example:

33

34

Introduction to Business Law in Australia

Norwich Winterthur Insurance (Australia) Ltd v Con-stan Industries of Australia Pty Ltd [1981] 2 NSWLR 879 This means that the case of Norwich Winterthur Insurance (Australia) Ltd (the plaintiff) against Con-stan Industries of Australia Pty Ltd (the defendant), decided in the Supreme Court of New South Wales, is reported in the New South Wales Law Reports of 1981, volume two of that year, at page 879. In that case, the judge at first instance decided in favour of the defendant, Con-stan Industries of Australia Pty Ltd. Accordingly, the plaintiff in the original action, Norwich Winterthur Insurance (Australia) Ltd, appealed to the New South Wales Court of Appeal. The Court of Appeal reversed the decision of the trial judge and held in favour of Norwich Winterthur Insurance (Australia) Ltd (now called “the appellant”) and against Con-stan Industries of Australia Pty Ltd (now called “the respondent”). The report of the decision of the New South Wales Court of Appeal is cited as follows: Norwich Winterthur Insurance (Australia) Ltd v Con-stan Industries of Australia Pty Ltd [1983] 1 NSWLR 461 As in the example above, this means that the report of the decision of the New South Wales Court of Appeal in the case can be found in the New South Wales Law Reports for the year 1983, in volume one of that year, at page 461. Subsequently, Con-stan Industries of Australia Pty Ltd, the unsuccessful respondent in the New South Wales Court of Appeal, appealed against that court’s decision to the High Court. The decision of the High Court is cited as follows: Con-stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 The case citation given means that the decision of the High Court in the appeal of Con-stan Industries of Australia Pty Ltd (now called the appellant) against Norwich Winterthur Insurance (Australia) Ltd (now called the respondent) is reported in the Commonwealth Law Reports, volume 160, at page 226, the judgment being delivered in the year 1986. The following points may be noted from the above explanation: 1.

In connection with the case at first instance (that is, at the original trial of the action), Norwich Winterthur Insurance (Australia) Ltd was the party who brought the action and is therefore called the plaintiff. The plaintiff’s name appears first in the citation of the case. The party against whom the action is brought, here Con-stan Industries of Australia Pty Ltd, is called the defendant. Although the reference to the case is written Norwich etc v Con-stan Industries etc, it is referred to verbally as Norwich and Con-stan Industries. The reason for this is that the full title of the action is “between N, plaintiff and C, defendant”.

2.

In the appeal to the New South Wales Court of Appeal, Norwich was the party who appealed and is therefore called the appellant. Con-stan Industries, who responded to the appeal, is called the respondent.

3.

In the appeal to the High Court, Con-stan Industries was the party who appealed and who now, therefore, is called the appellant. Norwich this time is the respondent, and in the citation the appellant’s name appears first. Accordingly, in this instance, the names of the parties are in reverse order in the citation of the appeal to the High Court to that in which they appeared in the citation to the report of the original action, and also in the report of the appeal to the New South Wales Court of Appeal.

chapter 1 The Australian Legal System

[1.480] Sometimes the parties are referred to by other names, for example applicant, petitioner, etc, depending on the particular court in which the case is to be heard and the nature of the proceedings. In criminal proceedings, the citation of a case dealing with the prosecution of a person for an indictable offence usually takes the following form: R v Dillon [1982] VR 434 The citation indicates that the case is reported in the Victorian Reports for the year 1982, at page 434. Here, R is an abbreviation for Regina or Reg (the Queen), or Rex (the King). Sometimes the words “the Queen” (or “the King”) are used instead of the abbreviation R. In the above citation the Crown is taking action against Dillon and the citation is expressed verbally as “the Queen against Dillon”. It will be observed that in the citations to the New South Wales Reports and the Victorian Reports above, the year is contained in square brackets. This indicates that the year was an integral part of the reference to the particular series of reports at that time. On the other hand, the Commonwealth Law Reports, the other series of law reports cited in the examples above, is cited by volume number (in the example given, volume 160) and the year in which the case was decided is not a necessary part of the citation. However, it is common practice to include in the citation in round brackets the year in which the case was decided. More recent volumes of the New South Wales Law Reports and Victorian Reports are now also cited by volume number. [1.490] With the ready availability of judgments in electronic form on the Internet, often long before their publication in the printed law reports, “medium-neutral” citations have now been adopted for the citation of judgments. Each case is given a citation that identifies the year the case was decided and the court which decided the case, together with a unique number for that case. For example, the following medium-neutral citation is that of the 16th High Court decision handed down in 2011: Insight Vacations Pty Ltd v Young [2011] HCA 169. Each judgment is divided into numbered paragraphs. These individual paragraphs are cited as follows: Insight Vacations Pty Ltd v Young [2011] HCA 16 at [20]. It is thus possible to cite to a particular point in an electronic version of a judgment with the same precision as a page number in a printed law report. Many decisions available in electronic format will be subsequently reported in the law reports. After the publication of a case in the law reports, it is customary to cite the case by its citation in the law reports rather than by its medium-neutral citation. Hence, the decision referred to above will now be cited as Insight Vacations Pty Ltd v Young (2011) 243 CLR 149. The main abbreviations for federal courts used in medium-neutral citations are HCA (High Court of Australia); FCAFC (Full Court of the Federal Court of Australia, from 2002); and FCA (single judge decision of the Federal Court). The abbreviations for state courts are generally a combination of the abbreviation for the state and the letters SC (Supreme Court) or CA (Court of Appeal). For example, the New South Wales Supreme Court is abbreviated NSWSC, while the New South Wales Court of Appeal is abbreviated NSWCA.

35

36

Introduction to Business Law in Australia

The doctrine of precedent and the hierarchy of Australian courts Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1.

The doctrine of precedent [1.500] The principles of the common law are to be found in the decisions of the various courts. Justice requires that like cases should be decided alike (stare decisis) or, to put it another way, that the legal principles applied in similar situations should be consistent. The common law gives effect to this notion by what is called the doctrine of binding precedent. In simple terms, the doctrine requires that the decision of a court in a decided case binds judges lower in the same court hierarchy in deciding cases of a similar nature. For example, a decision of the High Court of Australia on a particular issue is binding on State Supreme Courts and the Federal Court should they have to decide the same issue in a later case. The rationale for the doctrine was explained in the High Court in this way: “If an intermediate appellate court were free to disregard a fundamental doctrine settled by the final appellate court, an endemic uncertainty would infect the administration of justice … Courts are bound to apply the principles laid down by courts higher in the appellate hierarchy and observance of that rule avoids the futility of delivering judgments which will be reversed on appeal”: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 129-130 per Brennan J. Cases decided in one hierarchy are not strictly binding on the courts in another but will be of persuasive authority only. For example, decisions of the Supreme Court, the highest appellate body for the United Kingdom since 2009, will not be binding on Australian courts although they will generally be followed unless there is good reason not to do so. 19 The precedential value of the decisions of the appellate courts of other states is very strong. A unanimous bench of the High Court has stated: “Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. Since there is a common law of Australia rather than of each Australian jurisdiction, the same principle applies in relation to non-statutory law”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [135]. There will be a conflict of authority where the court of another jurisdiction holds that a prior decision interpreting a uniform law was wrongly decided. The New South Wales Court of Criminal Appeal followed its own earlier decision on the interpretation of uniform legislation in preference to a subsequent Victorian Court of Appeal decision that had held that the prior New South Wales decision was plainly wrong. The New South Wales court determined for itself which of the conflicting decisions was correct: R v XY (2013) 84 NSWLR 363. The situation is different where a court interprets state or territory legislation that is not part of a uniform national scheme. In such a case the court need not “slavishly follow judicial decisions of the courts of another jurisdiction in respect of similar or even identical legislation”: Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259 at [31]. 19

The House of Lords was the predecessor of the Supreme Court as the highest court of the United Kingdom. For an example of a case where the High Court refused to follow a previous decision of the House of Lords, see Australian Consolidated Press v Uren (1966) 117 CLR 185; [1969] 1 AC 591; see also Parker v The Queen (1963) 111 CLR 610.

chapter 1 The Australian Legal System

A further question that arises is whether an appellate court in a particular hierarchy is bound by a previous decision of the same court. The High Court “has never regarded itself as bound by its own previous decisions, which is all the more appropriate now that it is a court of last resort for all purposes”: Nguyen v Nguyen (1990) 169 CLR 245 at 269. 20 In practice, the High Court will normally follow its own earlier decisions and will only depart from them where there is a strong reason for so doing. In this context the High Court has commented that: “The power to overrule a previous decision should be exercised with great caution. Continuity and coherence in the law demand that in this court the principle of stare decisis should ordinarily be applied”: Jones v Commonwealth (1987) 71 ALR 497 at 498. In a recent case in which the High Court did not follow its own previous decision, it was said that when a court of final appeal considers judge-made law: “[w]hile stare decisis is a sound policy because it promotes predictability of judicial decision and facilitates the giving of advice, it should not always trump the need for desirable change in the law especially, we would add, if the change is necessary to maintain a better connection with more fundamental doctrines and principles”: Imbree v McNeilly (2008) 236 CLR 510 at [45] However, a state or territory court of appeal will normally follow its own previous decisions and the circumstances in which it determines not to do so will be comparatively rare. The Victorian Court of Appeal will only depart from its own previous decision where it is convinced that the decision is “clearly, or plainly, wrong”: RJE v Secretary to the Department of Justice (2008) 21 VR 526 at [48]. The New South Wales Court of Appeal has adopted a similar test, but with the added qualification that this is “a necessary, but not sufficient condition”: Gett v Tabet (2009) 254 ALR 504 at [296]. Other considerations relevant to the decision whether to overrule include whether the decision was part of a line of authority, inconvenience caused by the decision, reliance upon the decision and whether the decision can be confined to its precise issue: at [297]–[299]. A single judge of a lower court is not bound by an earlier decision of another judge of the same court, for example a single judge of a Supreme Court is not bound by an earlier decision of another single judge of the same Supreme Court. However, in practice, a judge of first instance will usually follow the decision of another judge of first instance unless convinced that the earlier judgment was wrong: La Macchia v Minister for Primary Industries and Energy (1992) 110 ALR 201. The following case study illustrates how the law develops:

Commercial Bank v Amadio [1.510] Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. Mr and Mrs Amadio were an elderly Italian couple who had poor English skills and were not experienced in business. Their son, Vicenzo, operated his own business that was in serious financial trouble. The parents did not know this but the bank did. Vicenzo persuaded his parents to sign a guarantee secured by a mortgage over property they owned as security for a loan he was getting from the bank. He told them that the loan was for six months and for a maximum of $50,000. This was untrue – the loan was for $240,000 and was for more than six months. The manager brought the papers to the Amadios’ home and they signed without any explanation from him and without having obtained any independent legal or financial advice. Several months later the son’s business went into liquidation. The bank 20

See generally M Harding and I Malkin, “Overruling in the High Court of Australia in Common Law Cases” (2010) 34 Melbourne University Law Review 519.

37

38

Introduction to Business Law in Australia

sought to enforce its rights under the guarantee. The Amadios argued that the contract of guarantee should be set aside because the bank had engaged in unconscionable conduct. Held: The guarantee and mortgage should be set aside on the ground of unconscionable conduct. The bank took unfair advantage of its superior bargaining position when it entered into the guarantee. It may not have had full and actual knowledge of the parents’ situation, it knew that they were unaware of, or mistaken about, the details of the loan; it knew the Amadios were not aware that their son’s business was in trouble and that the parents were not commercially sophisticated people. In Mason J’s view: “It must have been obvious to [the manager] … that the transaction was improvident from the viewpoint of the [Amadios]. In these circumstances it is inconceivable that the possibility did not occur to [the manager] that [the Amadios’] entry into the transaction was due to their inability to make a judgement as to what was in their best interests”: at 466–467. Under traditional common law principles Mr and Mrs Amadio, in the absence of fraud or mistake etc, would have been bound by the terms of the guarantee they signed. Certainty of contract demanded nothing less. The following case has been chosen because it is an excellent example of how the courts can expand (or narrow) a principle or ratio decidendi (see below). In the following case, the High Court expanded the notion of what constitutes a “special disability”.

Louth v Diprose [1.520] Louth v Diprose (1992) 175 CLR 621. Diprose, a solicitor, was “utterly infatuated” with a woman who did not share the same feelings for him. In the view of the court, she unconscientiously played on his infatuation by pretending to be suicidal and on the edge of homelessness to persuade him to make a gift of $60,000 to allow her to buy a cottage in her own name. Held: The High Court set the gift aside. The court accepted that strong, emotional dependence or attachment could be a “special disability” and, in this case, Diprose’s emotional dependence prevented him from making an informed decision. In this way, the high court in Louth (1992) 175 CLR 621, has “made” law by extending the concept of unconscionable conduct to include “emotional dependence” as a (possible) form of the “special disability” criterion spelt out in Amadio (1983) 151 CLR 447.

The ratio decidendi of a case [1.530] Not all of the judgment of a higher court is necessarily binding on a lower court. Only the reason/s given for deciding the earlier case, called the “ratio decidendi” (often shortened to ratio), creates a binding precedent. In the High Court decision in O’Toole v Charles David Pty Ltd (1991) 171 CLR 232 at 267, Brennan J said: “the law is changed by judicial decision, especially by decision of the higher appellate courts. Thereafter, the law is taken to be and to have been in accordance with the principle which informs the new decision: the ratio decidendi. The ratio, which is expressed in or necessarily implied by reasons for judgment to which a majority of the participating judges assent, is the law. It is not merely a judicial opinion as to what the law is; it is a source of law.”

chapter 1 The Australian Legal System

A statement of principle made in the earlier case that was not strictly necessary for the decision is not binding: such a statement is called an “obiter dictum” (singular) or “obiter dicta” (plural). However, the High Court has modified this traditional rule by stating that lower courts are bound by its “seriously considered dicta”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [134], [158]. 21 A lower court must determine precisely what was the ratio of the higher court which is binding, a task which is often more complex than might at first appear. Furthermore, it might be found that there is some differentiating feature between the fact situations in the two cases so that the earlier case can be distinguished from the later, in other words, held not to apply because of the differing circumstances of the later case.

Classifications of law Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 1. [1.540] Law can be analysed in different ways, but common classifications include public and private law, substantive and procedural law, and civil and criminal law.  Public law and private law: – public law concerns the organisation of government (or the state) and its relationship with the people. Public law covers areas such as constitutional, administrative and criminal law. – private law concerns the relationships between private persons or organisations. Private law covers areas such as contract, torts, property, corporations, trusts and family law.  Substantive law and procedural law: – substantive law deals with actual legal rights and obligations; – procedural law deals with how people take steps to enforce the law (ie, the rules of procedure and evidence).  Civil law and criminal law: – civil law encompasses the rights and obligations which people can enforce privately, often for compensation and where the onus is on the plaintiff to prove their case on the balance of probabilities, which means the plaintiff must prove they probably have the better case; – criminal law covers offences against the state, which the state will normally prosecute. For criminal prosecutions, the prosecution must prove their case beyond reasonable doubt; if there is doubt then there should be no conviction. Criminal proceedings are divided into summary offences — less serious offences, tried by a magistrate; and indictable offences — serious offences tried before a judge and jury, usually after a committal hearing by a magistrate who decides whether there is sufficient evidence for a trial.

Court proceedings [1.550] The nature and seriousness of a matter to be heard by a court will determine which courts will hear the matter, and further, what steps and proceedings must be undertaken by the parties involved, including the types of documents and notices that must be filed with the court. Less serious civil or criminal matters will be heard in the lowest level of the court hierarchy. Serious civil or criminal matters will be decided in the intermediate courts or the superior courts (Supreme Court); similarly, appeals may go further up the court hierarchy. At the lower level of the hierarchy there are some specialist courts which will not 21

See M Harding and I Malkin, The High Court of Australia’s Obiter Dicta and Decision-Making in the Lower Courts (2012) 34 Sydney Law Review 239.

39

40

Introduction to Business Law in Australia

necessarily be as formal as some other courts, eg, in Victoria there is the Drug Court which may hear offences related to drug use, and also the Koori Court which was established to find alternative ways of dealing with wrongful behaviour by indigenous Australians. Civil proceedings in all Australian jurisdictions follow this pattern:  The plaintiff files in the court an application, statement of claim, writ or summons to commence the action and serves a copy on the defendant.  The defendant files a defence, usually after filing an “appearance” which indicates an intention to defend.  A party may use other pre-trial procedures such as interrogatories (a list of questions) or discovery (details of and the right to inspect documents) to find out more evidence from the other parties. The exchange of documents is designed to narrow down the issues to be decided by the court, and the flow of documentation is called the “pleadings”.  If the parties are unable to reach a settlement, the matter will then come up for trial. The plaintiff’s counsel will present their case first and then the defendant’s counsel will present their case. In civil proceedings the plaintiff has the onus of proof and they must establish that their case is the more believable on the balance of probabilities.  At the end of the trial, but more often later, the court delivers judgment, giving reasons and orders, including which party (or parties) is to pay for the legal costs.  A successful party may then need to follow further court procedures to enforce the court’s judgment. Criminal proceedings are commenced summarily (by summons) in a Magistrates Court (or equivalent summary court), while more serious offences (indictable offences) require the executive to demonstrate that there is a serious matter to be heard before a judge and jury. Lawyers normally practise as either barristers or solicitors. Barristers normally present cases in court, but also often advise on a specialised branch of law. Solicitors deal directly with the public and do most of the non-court legal work, though some jurisdictions have abolished the difference between barristers and solicitors. There are a number of alternative methods to court proceedings that can be used to resolve disputes.  Commercial arbitration The States and Territories have enacted essentially uniform Commercial Arbitration Acts (eg the Commercial Arbitration Act 2010 (NSW) and Commercial Arbitration Act 1984 (Vic)) for the settling of commercial disputes. It involves the hearing of a dispute by an independent third party (an arbitrator), who is an expert in the relevant field. The arbitrator will make an award at the end of the hearing, usually in writing, and this will be final and binding on the parties. Often there will be a restriction on the right of a legal practitioner to be present. The decision may be reviewed by a court if there has been an error in law, misconduct or undue influence by the arbitrator.  Alternative dispute resolution (ADR) ADR takes a variety of forms including facilitative means (which includes negotiation, mediation and facilitation), advisory procedures (which include conciliation, appraisal mediation and independent expert appraisal), and determinative forms (which include arbitration and private hearings).  Negotiation Negotiation is a discussion between the parties, with or without the assistance of a third party, with a view to seeking a mutually acceptable outcome.  Mediation Mediation is a voluntary negotiation process that is used if the parties are unable to negotiate a

chapter 1 The Australian Legal System

settlement. The parties may seek a mediator to try and resolve the dispute. In Australia there has been an increase in mediation centres and statutes that encourage this and other alternatives to the court system. In various industries there are specialists who offer their mediation and arbitration services to, eg, contractors within the building industry (an industry notorious for disputes over contractual matters), and further, many industries have an ombudsman who settles disputes between service providers and customers. Many building contracts stipulate that disputes be first determined before mediation or arbitration.  Conciliation Conciliation is similar to mediation, but the independent third party may have greater power over the outcome than in mediation.  Independent expert appraisal An independent expert is appointed by the parties to provide a determination on some disputed issue of fact or law. Whether the expert’s determination is to be final and binding will depend upon agreement between the parties.

Hierarchy of the Australian courts Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1. In regards to the hierarchy of Australian courts, please see table on the following page.

41

42

Introduction to Business Law in Australia

Figure 1.4: Hierarchy of the Australian Courts

Federal courts [1.560] There are presently four federal courts: the High Court, Federal Court, Family Court and the Federal Circuit Court. The jurisdiction of the Family Court is outside the scope of a general work on commercial law. However, each of the other courts will be examined in turn.

High Court of Australia [1.570] The High Court of Australia is the highest court in Australia. The court has both an original and an appellate jurisdiction. Under s 75 of the Constitution the court has original jurisdiction in matters: (i) arising under any treaty; (ii) affecting consuls or other representatives of other countries; (iii) in which the Commonwealth, or a person suing or being sued on behalf of the Commonwealth, is a party; (iv) between states, or between residents of different states, or between a state and a resident of another state. The Parliament may make laws conferring original jurisdiction on the High Court in a range of matters (i) arising under this Constitution, or involving its interpretation; (ii) arising under any laws made by the Parliament: s 76 of the Constitution. One justice can hear cases before the court in its original jurisdiction. The High Court is the final appeal court in Australia. Its appellate jurisdiction stems from s 73 of the Constitution which provides that the court can hear and determine appeals from: (a)

any justice/s exercising the original jurisdiction of the court;

chapter 1 The Australian Legal System

(b)

any federal court or court exercising federal jurisdiction; and

(c)

the Supreme Court of any state.

Litigants generally need to obtain special leave to appeal to the High Court: Judiciary Act 1903 (Cth), ss 35–35A; Federal Court of Australia Act 1976 (Cth), s 33. What this means is that the High Court will hear an application to appeal and decide whether or not to hear the appeal. Special leave to appeal will normally only be granted where the case involves some important question of law, or in a criminal case, a serious miscarriage of justice.

Federal Court of Australia [1.580] The Federal Court was established under the Federal Court of Australia Act 1976 (Cth). It comprises a Chief Judge and over 40 other judges. The court has both an original and appellate jurisdiction. The court enforces federal legislation such as the Competition and Consumer Act 2010 (Cth). It has concurrent jurisdiction over bankruptcy and intellectual property matters. In its appellate jurisdiction, where the court sits as a Full Court comprised of three judges, the Federal Court hears appeals from: (a)

a single judge of the court; and

(b)

a single judge of a State Supreme Court which is exercising federal jurisdiction in regard to intellectual property matters (that is, patents, trade marks, copyright and designs).

Application for special leave to appeal may be made to the High Court from a decision of the Full Court of the Federal Court.

Federal Circuit Court [1.590] A new federal court was established by the Federal Circuit Court of Australia Act 1999 (Cth). Prior to 2012 the court was called the Federal Magistrates Court. It has a concurrent jurisdiction over minor cases concerning consumer protection under the Competition and Consumer Act 2010 (Cth) and bankruptcy. This court has reduced the workload of the Federal Court.

State courts [1.600] Each of the Australian states and territories has its own separate hierarchy of courts. The basic structure in most of the states comprises: (a)

Supreme Court;

(b)

District or County Courts; and

(c)

Local or Magistrates Courts.

Supreme Court [1.610] The highest court in each state and territory is the Supreme Court which exercises both civil and criminal jurisdiction. The Supreme Court has unlimited civil jurisdiction in all matters not expressly excluded by statute and vested in, for example, the Federal Court or the High Court. The original jurisdiction of the Supreme Court is exercised by a single judge. A decision of a single judge may be appealed to the Court of Appeal (in New South Wales, Victoria, Queensland and Western Australia, Australian Capital Territory and Northern Territory) or Full Court of the State (in South Australia and Tasmania). In New South Wales, appeals from single judges of the Supreme Court in civil matters are heard by a separate division of the court called the Court of Appeal in which sit specially appointed Judges of Appeal. Appeals in criminal cases in that state are heard by the Court of Criminal Appeal.

43

44

Introduction to Business Law in Australia

In Victoria, the Court of Appeal comprises a President and a number of Judges of Appeal. The Chief Justice is also a member of the court. The Victorian Court of Appeal functions both as a civil and criminal court of appeal. In Queensland, the Supreme Court comprises two Divisions: the Court of Appeal (comprising the President and a number of Judges of Appeal) and the Trial Division. Proceedings in the Trial Division are heard by a single judge from whose decision an appeal lies to the Court of Appeal, which will normally comprise three Judges of Appeal. In Western Australia, the Supreme Court consists of a General Division and the Court of Appeal. The Court of Appeal comprises the Chief Justice, President and the other Judges of Appeal. In South Australia and Tasmania, there is a right of appeal from a single judge to a Full Court of the Supreme Court comprising a number of judges of the court (usually three) sitting together. Appeals from single judges of a Supreme Court exercising federal jurisdiction in certain matters lie to the Full Federal Court (see above). Special leave to appeal to the High Court may be sought from a decision of the Full Court or the Court of Appeal. In New South Wales, the Supreme Court has a somewhat more complex administrative structure than in the other states. In addition to the Chief Justice, the highest judicial position common to all the States, there is also a President of the Court of Appeal, a Chief Judge of the Common Law Division and a Chief Judge of the Equity Division of the court.

District or County Courts [1.620] Most States have established intermediate courts called District Courts (in New South Wales, Queensland, South Australia, and Western Australia) or County Courts (in Victoria) which have a statutory jurisdiction. This jurisdiction is limited with respect to subject matter and value of money or property in dispute. The maximum monetary limitations on the civil jurisdiction of these courts are: New South Wales ($750,000; and unlimited jurisdiction in respect of motor accident claims and work injury damages claims); Victoria (unlimited jurisdiction); Queensland ($750,000); and Western Australia ($750,000; and unlimited jurisdiction in personal injury cases). 22 Where higher amounts are involved proceedings must be taken in the Supreme Court. In South Australia there is no specified maximum monetary limitation and the District Court has the same jurisdiction as the Supreme Court in civil cases with the exception of probate and admiralty. 23 The majority of civil cases heard in the District or County Courts are common law disputes such as actions to recover money under a contract, personal actions in tort (that is, personal injury cases) and some actions for the possession of land. Tasmania, the Australian Capital Territory and the Northern Territory do not have the equivalent of these intermediate courts in the other States since their population is not considered sufficient to justify their establishment.

Local or Magistrates Courts [1.630] The lowest courts in the hierarchy of State courts are those presided over by magistrates. These courts are variously known as Local Courts (in New South Wales; and also in South Australia, when exercising civil jurisdiction); Magistrates Courts (in Victoria, Queensland, Western Australia and Tasmania); Courts of Petty Sessions (when exercising criminal jurisdiction in Tasmania); and Courts of Summary Jurisdiction (when exercising criminal jurisdiction in South Australia). 22 23

District Court Act 1973 (NSW), ss 4, 44; County Court Act 1958 (Vic), s 37; District Court of Queensland Act 1967 (Qld), s 68(2); District Court of Western Australia Act 1969 (WA), ss 6(1), 50. District Court Act 1991 (SA), s 8.

chapter 1 The Australian Legal System

In civil cases the jurisdiction of the courts is generally limited to claims up to a certain monetary value. The maximum monetary limitations on the civil jurisdiction of these courts are: (a)

New South Wales ($100,000);

(b)

Victoria ($100,000);

(c)

Queensland ($150,000);

(d)

South Australia ($100,000);

(e)

Western Australia ($75,000);

(f)

Tasmania ($50,000);

(g)

the Australian Capital Territory ($250,000); and

(h)

the Northern Territory ($100,000). 24

The Local Courts and Magistrates Courts in their civil jurisdiction deal primarily with debt claims, contractual disputes and minor accident claims.

Other courts and tribunals [1.640] In addition to the principal courts discussed above, there are a number of other courts and tribunals in Australia both at federal and state level.

Federal tribunals and commissions [1.650] A number of quasi-judicial bodies, tribunals and commissions have been established under federal legislation, the most significant of which for our purposes are: the Australian Competition and Consumer Commission and the Australian Competition Tribunal.

Australian Competition and Consumer Commission and Australian Competition Tribunal [1.660] The Australian Competition and Consumer Commission (ACCC) has general responsibility for initiating proceedings for contravention of the Commonwealth Competition and Consumer Act 2010 (Cth) (formerly, the Trade Practices Act 1974 (Cth)) in restrictive trade practices cases and for instituting prosecutions for offences against the consumer protection provisions of the Act. The ACCC has the power to authorise on public benefit grounds some types of conduct in restrictive trade practices matters that might otherwise be prohibited. Decisions of the ACCC on authorisation and certain other matters are subject to review by the Australian Competition Tribunal. The Tribunal consists of a President and a number of Deputy Presidents (who must be judges of a Federal Court) and other Members appointed on the basis of knowledge of, or experience in: industry, commerce, economics, law or public administration.

Specialist state courts and tribunals [1.670] There are a considerable number of specialist state courts and tribunals. Some of the more important of these are outlined below.

24

Local Court Act 2007 (NSW), s 29; Magistrates’ Court Act 1989 (Vic), ss 3(1), 100; Magistrates Courts Act 1921 (Qld), ss 2, 4; Magistrates Court Act 1991 (SA), s 8; Magistrates Court (Civil Proceedings) Act 2004 (WA), ss 4, 6(1); Magistrates Court (Civil Division) Act 1992 (Tas), ss 3, 7; Magistrates Court Act 1930 (ACT), s 257; Local Court Act 1989 (NT), ss 3, 14.

45

46

Introduction to Business Law in Australia

Small Claims Tribunals [1.680] All states and territories have instituted Small Claims Tribunals or procedures to provide a cheaper, speedier and more informal method of resolving disputes, particularly between consumers and traders, involving comparatively small sums of money. 25 The parties normally present their own case (without lawyers) and the dispute is heard before a referee, invariably a legal practitioner in New South Wales, Victoria, and Western Australia, and in Queensland, a stipendiary magistrate. South Australia, Tasmania, the Australian Capital Territory and the Northern Territory have provided for simplified small claims proceedings within their existing court structures. Jurisdiction is limited to hearing disputes where the claim does not exceed a prescribed amount. The monetary limits are: New South Wales $10,000 in small claims and $30,000 in consumer claims; Victoria $10,000; Queensland $26,000; Australian Capital Territory $10,000; Northern Territory $10,000; Western Australia $10,000; South Australia $6,000 and Tasmania $5,000.

Other specialist courts and tribunals [1.690] Most state jurisdictions have a Civil and Administrative Tribunal which hears disputes relating to executive actions of government (administrative actions) and civil matters. Administrative matters include such issues as discrimination claims and the appointment of a guardian to make decisions for a person with a disability. 26 Civil disputes include those between residents and managers of retirement homes, fencing disputes between neighbours, residential tenancy disputes and small consumer claims. The Commonwealth Administrative Appeals Tribunal only hears administrative matters under the Administrative Appeals Tribunal Act 1975 (Cth)).

Federal and State court jurisdiction [1.700] The general position is that federal courts may only exercise the jurisdiction that is conferred upon them by the Constitution or by Acts of the Commonwealth Parliament and do not have power to deal with matters falling within State jurisdiction. Similarly, State courts cannot exercise federal jurisdiction unless empowered to do so by a federal Act. State courts have been invested with federal jurisdiction from time to time (for example, under the Judiciary Act 1903 (Cth), s 39), although such jurisdiction has usually been limited to particular areas of Commonwealth legislation such as bankruptcy, taxation and intellectual property. The consequence has been that sometimes litigants have commenced an action in a particular court only to find that the court did not have jurisdiction to hear the matter. To remedy this situation, consultations took place between the Commonwealth and State governments that led to the passing of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth). The Act provides for the vesting of State and Territory Supreme Courts with federal civil jurisdiction except in certain industrial and trade practices matters. By corresponding legislation passed by all the State Parliaments, the Federal Court was vested with the jurisdiction of the State Supreme Courts. The basic purpose of the legislation was to prevent actions failing in the respective court systems for lack of jurisdiction with the resultant inconvenience and expense to 25

26

Local Court Act 2007 (NSW), s 29 (in Local Court); Consumer Claims Act 1998 (NSW), s 14 and Consumer Claims Regulation 2007 (NSW), reg 5 (in Consumer, Trader and Tenancy Tribunal); Australian Consumer Law and Fair Trading Act 2012 (Vic), ss 182-192; Queensland Civil and Administrative Tribunal Act 2009 (Qld), s 11, Sch 3; Magistrates Court Act 1991 (SA), ss 3, 38; Magistrates Court (Civil Proceedings) Act 2004 (WA), ss 3, 26; Magistrates Court (Civil Division) Act 1992 (Tas), ss 3, 7(2); ACT Civil and Administrative Tribunal Act 2008 (ACT), s 18; Small Claims Act 1974 (NT), s 5. For example, Victorian Civil and Administrative Tribunal Act 1998 (Vic); Queensland Civil and Administrative Tribunal Act 2009 (Qld); ACT Civil and Administrative Tribunal Act 2008 (ACT).

chapter 1 The Australian Legal System

litigants. However, in Re Wakim; Ex parte McNally (1999) 198 CLR 511 the High Court held that the purported vesting of State jurisdiction in the Federal Court under the cross-vesting scheme was constitutionally invalid; it was held that no amount of co-operation between the Commonwealth and the State could supply a power that did not exist. The consequences of the High Court’s decision were immediately apparent: it was possible that every decision made by a federal court exercising state jurisdiction was invalid. However, the States and the Commonwealth moved quickly to pass legislation that allowed for the affirmation of federal decisions by the state Supreme Courts.

Classification of law and legal proceedings Extract from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 1.

Public law and private law [1.710] Law can be classified as either public law or private law. Public law is concerned with the organisation of government and with the relationship between the government and the people. It includes constitutional law, administrative law and criminal law. Constitutional law defines the structure of government and the rights of individuals under that government. Administrative law regulates the exercise of powers and duties by government administrative officers and authorities. Criminal law defines offences against the State and provides punishment for their commission. Whereas public law is concerned with matters affecting the State and its relationship with individuals, private law deals with the relationships between private persons or organisations. There are many branches of private law, some of the more important of which include the following: 1.

The law of contract which is concerned with the rights and duties arising out of those agreements between individuals the law regards as legally binding.

2.

The law of tort which requires a person who has committed a civil wrong, other than a breach of contract, to compensate the person against whom or whose property the wrong was committed.

3.

The law of property which deals with the ownership, possession, use, and disposition of both real property (for example, land) and personal property (for example, goods).

4.

Corporations law which regulates the incorporation, administration, winding up and dissolution of companies, and the responsibilities of directors and other officers of the company.

5.

The law of trusts which determines the circumstances in which and the conditions on which a person (called “the trustee”) holds property on behalf of another person (that is, “the beneficiary”).

Sometimes an area of law may have both private and public law aspects, so many areas of law cannot be regarded as exclusively one or the other.

47

48

Introduction to Business Law in Australia

Figure 1.5: Public Law and Private Law

Substantive law and procedural law [1.720] A distinction is made between substantive law and procedural law. Substantive law refers to actual rights and duties under the law. Procedural law refers to the formal steps to be followed in the enforcement of those rights and duties, in particular, the rules of procedure and evidence.

Civil law and criminal law [1.730] The civil law is that law under which a person (the plaintiff) may sue another (the defendant) to obtain redress for a wrong committed by the defendant. The usual purpose of a civil action is to obtain monetary compensation or damages for the loss suffered by the plaintiff as a result of the defendant’s wrongful act, for example, for a breach of contract or the commission of a tort. In some cases damages are an inadequate remedy and the plaintiff might seek specific performance of a contract or an injunction to restrain some unlawful act or threatened act. The criminal law defines offences against the State and provides punishment for their commission. Crimes are defined by statute, delegated legislation or the common law and are prosecuted in the name of the Crown on behalf of the State. Where a wrongful act is both a crime and a tort, the State may prosecute the offender who committed the crime, and the victim may bring a civil action against such person for the harm or loss suffered. The

chapter 1 The Australian Legal System

distinction between civil law and criminal law is important because different procedures, different standards of proof and significantly different consequences or remedies apply.

Criminal proceedings [1.740] Criminal offences are of two types, namely summary offences and indictable offences. Summary offences are criminal offences triable summarily, that is, offences which are heard and determined by a magistrate without a jury; they usually comprise minor offences. Indictable offences are criminal offences triable before a judge and jury; they are generally the more serious offences. In the case of indictable offences there is a preliminary or committal hearing before a magistrate who conducts an inquiry to see if there is sufficient evidence to put the defendant on trial. The magistrate must determine whether a prima facie case has been made out and, if he or she so decides, the defendant is committed for trial before a judge and jury. In criminal law the prosecution must prove their case beyond reasonable doubt. This is essentially another way of saying that a person is innocent until proven guilty.

Civil proceedings [1.750] Civil proceedings is the term used to describe all other proceedings that are not criminal proceedings. A person will commence civil proceedings in order to enforce some legal right which they believe they have against another, for example for breach of contract, or for the commission of a tort. The party commencing the action is called the plaintiff and the party against whom the action is brought, the defendant. The procedural steps for bringing a civil action vary according to the particular court. In the Supreme Courts a civil action is generally commenced by the issue of a document called a writ or, in New South Wales, a statement of claim. This is a formal document issued by an officer of the superior court and it contains a brief statement, prepared by the plaintiff or the plaintiff’s legal advisers, of the cause of action. The plaintiff has to cause the writ to be served on the defendant. The defendant then has a limited period within which to file a document with the court, known as a notice of “appearance”, indicating their intention to defend the action. A copy of the appearance is required to be served on the plaintiff’s solicitor. If the defendant fails to file an appearance, the plaintiff may bring the matter before the court for judgment in the absence of the defendant. The writ sets out briefly the nature of the plaintiff’s cause of action but a more detailed statement of facts is required before the matter can proceed to trial. Such statement is set out in a document called a statement of claim which may be delivered with the writ, or after the defendant has entered an appearance. The defendant, if he or she intends to defend the action, is required to respond to the plaintiff’s statement of claim by filing with the court, and serving on the plaintiff, a document known as a “defence”. The defendant must admit or deny in their defence each of the allegations in the plaintiff’s statement of claim. If the defendant relies on facts which do not appear in the statement of claim, these must be set out in their defence and the plaintiff will respond to these in a further document known as a reply. The aggregate of these documents are known as “pleadings” and it is by this system of pleading that the parties determine the matters of dispute between them.

Interrogatories [1.760] In pre-trial civil proceedings interrogatories may be delivered by one party to the other. Interrogatories are a set of questions about the facts of the case that the other party is obliged to answer on

49

50

Introduction to Business Law in Australia

oath. These answers can be used as part of the evidence at the hearing of the case. Interrogatories are designed to obtain admissions of fact and narrow the issues in dispute.

Discovery [1.770] A further useful procedure available in civil proceedings is that of discovery. A party who is asked to give discovery must make a statement on oath as to all the relevant documents in their possession or control and can be required to allow the other party to inspect and take copies of these documents. In this way the parties can find out details of the other side’s case. Certain documents are excepted from the process of discovery, for example, the instructions given by a party to their legal adviser.

The trial [1.780] If the parties are unable to reach a settlement, the dispute will eventually come on for trial before the court. Counsel for the plaintiff will open her or his case with an address setting out in broad terms what the case is about and outlining the evidence to be presented. The plaintiff’s witnesses are then called and examined in turn by the plaintiff’s counsel. This is known as evidence-in-chief. Each witness on completing their evidence may be cross-examined by counsel for the defendant. After cross-examination has been completed, the plaintiff’s counsel has the right to re-examine a witness in respect of matters arising out of the cross-examination. It is then for the defendant’s counsel to open their case and to call witnesses in support of the defence. The defendant’s witnesses are examined by the defendant’s counsel and may be cross-examined by the plaintiff’s counsel. If necessary, they may be re-examined by the defendant’s counsel. On the close of the defendant’s case, the plaintiff’s counsel may adduce evidence in reply to matters raised in the defence. On completion of the evidence on both sides, first the plaintiff’s counsel and then the defendant’s counsel will give their closing address. If it is a jury trial the judge will sum up, that is, identify the facts, survey the evidence and explain the relevant legal rules. When a decision is reached by the jury a verdict is entered. If the case is heard by a judge and jury, the decision on the facts is made by the jury and the decision on the law is made by the judge. Where the case is heard by a judge sitting alone, which is the more usual situation in civil cases, the judge will determine both questions of fact and law. After a decision has been reached, the court will make appropriate orders, for example, order the defendant to pay the damages assessed for the breach of contract or tort and make an order for costs. An appeal to a higher court will normally be available.

Standard of proof [1.790] In civil proceedings the plaintiff has a lesser standard of proof than in criminal proceedings and in order to succeed must prove their case on the balance of probabilities.

The legal profession [1.800] The legal profession is basically composed of solicitors and barristers.

Solicitors [1.810] A solicitor is a general practitioner of the law. Where a member of the public has a dispute which has legal implications, requires legal documents to be drawn up in respect of a particular transaction or matter, or needs advice on some aspect of the law then they will generally consult a solicitor. The work of a solicitor includes, for example, drawing up contracts regarding commercial dealings, following through the

chapter 1 The Australian Legal System

legal technicalities of forming a company and advising on taxation matters. In relation to litigation, that is, cases to be heard before the court, the solicitor’s function is to ascertain the facts and procure the necessary documents and other evidence required by the barrister who has been briefed to conduct the case.

Barristers [1.820] Barristers are generally responsible for actually conducting cases in court. They also provide solicitors with legal opinions on difficult points of law. Barristers tend to specialise in a particular branch of the law. Whereas a person can see a solicitor for the first time simply by going to the solicitor’s office, or phoning up to make an appointment, a barrister cannot usually deal directly with a client in this way but must first have been instructed in the matter by a solicitor. That is to say, the client will have gone to a solicitor with their problem and if the problem involves litigation the solicitor will usually “brief” or instruct a barrister in the matter. Alternatively, the issue in question may be one of some legal complexity requiring specialist advice and the solicitor may well seek an opinion from a barrister who is an expert in that particular area of law. Leading barristers in each State may apply to “take silk”, that is, be appointed a Senior Counsel (or SC), with the exception of Queensland where the appointment is to Queen’s Counsel (or QC). In practice, a solicitor will only brief a Senior Counsel or Queen’s Counsel if the case is of sufficient importance and difficulty to warrant the additional cost involved.

Guide to Problem Solving Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 1. [1.830] This chapter is mostly background information to assist you to understand the balance of the book. Questions based on this chapter will typically ask about:  The common law system: What are the unique features of the common law system?  Jurisdiction: Which governments have power to make laws to regulate particular activities?  Statutory interpretation: How do you interpret or construe the meaning of words in legislation?  Case law: How do the hierarchy of the courts and the doctrine of precedent work?  Dispute resolution: What legal and/or other options can be used to resolve a dispute?

51

52

Introduction to Business Law in Australia

Figures Figure 1.6: Federal and State powers

chapter 1 The Australian Legal System

Figure 1.7: Deciding which parliament has power to legislate

53

54

Introduction to Business Law in Australia

Figure 1.8: Statutory interpretation — Acts Interpretation Acts (AIAs)

chapter 1 The Australian Legal System

Figure 1.9: Australian court hierarchy — simplified

(The jurisdiction of the courts is determined by the legislation that created them but in the case of civil courts, the court used will be determined by the amount of money claimed, eg, large claims will go to the Supreme Court.)

55

56

Introduction to Business Law in Australia

Figure 1.10: Civil legal proceedings and alternative methods of dispute resolution

chapter 2

Introduction to the Law of Contract [2.10] Terminology .............................................................................................................................................................. 59 [2.20] Introduction ............................................................................................................................................................... 61 [2.30] The evolution of the law of contract ............................................................................................................. 62 [2.40] Definition of a contract ........................................................................................................................................ 62 [2.60] Essential elements of a contract ................................................................................................................... 63 [2.70] Classification of contracts ................................................................................................................................. 64 [2.130] Illustration of an express written contract ............................................................................................ 66

58

Introduction to Business Law in Australia

chapter 2 Introduction to the Law of Contract

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 2.

Aim By the end of this chapter you will be able to:  define a contract;  outline the essential elements of a valid contract;  understand key terminology peculiar to contract law; and  explain when certain formalities are required by law to validate particular contracts.

Terminology [2.10] Here is a list of some key terms that are encountered in contract law:  agreement: mutual assent to the terms of the contract. An agreement comes into existence when one party accepts the offer of the other to deal on certain terms.  breach of contract: a contract is breached when one party fails to comply with an express or implied term of the contract.  condition: a very important term of the contract (to be contrasted with a warranty which only allows the injured party to recover damages) and, if breached, allows the innocent party to terminate the contract and/or sue for damages.  condition subsequent: a term of a contract providing that the agreement is discharged (ended) on the happening of a certain event.  consideration: must be present in every simple contract. It is present when each party has provided something of value (money, property or a promise) to the other and may be a promise for a promise.  damages: a common law remedy and is the monetary sum a party will receive to compensate for the loss flowing from a breach of contract.  deed: a deed is a formal contract which has been “signed, sealed and delivered” (ie, it has satisfied certain legal requirements). Consideration does not have to be present.  deed poll: a deed within which one or more persons express an intention by which they intend to be bound (eg, it is used by one person to change their name). A deed poll is distinguished from a contract which involves a promise passing from one party to another.  defendant: the party against whom the contract is being legally enforced.  escrow: a deed delivered subject to a condition and which does not come into effect until that condition is fulfilled.  estoppel: a legal doctrine allowing the courts to prevent a party from breaking a promise, or asserting that a contract does not exist, if that assertion would be unconscionable.  exclusion clause; exemption clause: a term in a contract that prevents or limits the liability of a party for breach of certain terms of the contract.  express terms: the terms of a contract that are written in a contract, or verbally agreed to by the parties.

59

60

Introduction to Business Law in Australia

 frustrating event: an occurrence not contemplated or foreseen by the parties to the contract, which has such a fundamental impact on the operation of the contract such that the courts will declare the contract discharged.  illegality of object: contracts formed for an illegal purpose will make the contract either void or voidable depending on the circumstances.  implied term: a term or clause that has not been expressly agreed upon between the parties, but is deemed part of the contract either by the courts or pursuant to legislation.  indenture: a deed to which there is more than one party.  injunction: a discretionary court order issued by a court in its equitable jurisdiction restraining a party from engaging in certain conduct (such as conduct in breach of contract).  Instruments Acts: legislation in each State outlining which contracts must be in writing to be valid.  intention to contract: intention to contract means that the parties must have intended that legal consequences attach to their agreement, as distinct from informal or social arrangements where the parties do not usually intend legal consequences to flow from their actions.  lack of capacity: certain persons do not have the capacity to enter contracts (eg, persons under the age of 18 years, people of unsound mind, people who are drunk). Such agreements may be rendered either void or voidable, depending upon the circumstances.  lack of genuine consent: the law provides that where one party to a contract has not genuinely consented to the agreement, the contract will be rendered either void or voidable (eg, a party may not genuinely consent to an agreement when their consent has been given as a result of mistake, a misrepresentation, or as a result of the unfair conduct of the other party to the contract).  liquidated damages clause: a clause that specifies the amount of damages payable by a party in the event of a breach of a term of the contract.  misrepresentation: a false statement of fact, which may be made fraudulently, innocently or negligently and for which different remedies exist according to the type of misrepresentation.  non-compliance with formalities: some contracts must be wholly evidenced in writing to be enforceable, and if they aren’t there is said to be non-compliance with formalities, and the contract is rendered unenforceable.  option to terminate: a term of a contract giving a party the right to end the agreement in certain circumstances.  part performance: a legal doctrine allowing the courts to enforce an agreement notwithstanding technical non-compliance with formalities.  plaintiff: the party bringing the action or the party seeking to legally enforce the contract.  repudiation: a contract is said to be repudiated when one of the parties has shown an intention to abandon or renounce the agreement.  restitution: a legal doctrine allowing the courts in their equitable jurisdiction to prevent the unjust enrichment of one party at the expense of another.  specific performance: a discretionary court order issued by a court in its equitable jurisdiction compelling a party to perform their obligations under a contract.  Statute of Frauds 1677 (UK): old English law adopted into early Australian law which requires certain contracts to be in writing.

chapter 2 Introduction to the Law of Contract

 term/s: the provision/s of a contract setting out the content of the agreement (ie, what the parties have agreed to). They are generally referred to as “clauses” and may be further classified as “conditions” or “warranties”.  void or unenforceable: a contract that is rendered void or unenforceable cannot be sued upon by any party to the agreement.  voidable: a voidable contract may be set aside, or enforced, by the injured party to the agreement (eg, where the other party has misrepresented an important fact during negotiations).  warranty: a less important term of the contract (to be contrasted with a condition which is an important term of a contract) which, if breached, only allows the innocent party to sue for damages. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 2.

Introduction [2.20] Contracts are the hub of all commercial life. People and organisations enter into contracts virtually every day: when they purchase the daily necessities of life or larger consumer items, buy or lease property, purchase shares, borrow money, buy insurance, hire lawyers or accountants, see a doctor, advertise in the newspapers or buy goods on eBay. Despite all of the changes to the law of contract that have occurred over the past half century, the basic function of the law of contract remains the same: it is to ensure that agreements freely entered into are honoured, or, if not honoured that compensation for the losses caused by the breach are paid. If parties to an agreement could break their promises without legal consequences, the commercial world would be dysfunctional: contracts provide a level of certainty and stability, allowing the parties to the contractual agreement to plan their activities in the knowledge that the agreement must be kept or, if not, the innocent party will be compensated. Some contracts are more complex than others (for example, a contract for the sale of iron ore to China or Japan is a different order of magnitude to a contract for the purchase of a car); some contracts are made and executed in an instant (for example, buying a daily newspaper) whereas others are for a longer term (for example, the LNG (liquid natural gas) contract with China is a 50 year contract); some are for domestic purposes (for example, buying a television) whereas others are commercial (for example, large construction contracts in the CBD); some involve international trade (for example, contracts to purchase tractors from Germany); some contracts are controlled or subject to statutes (for example, residential tenancy agreements) whereas others are a mix of common law and statute (for example, a contract for supply of consumer goods or services); some have no requirements as to the form in which they must be expressed (for example, most sales of goods may be oral or written) whereas others have strict requirements as to form of the contract (for example, a contract for the sale of land which must be evidenced in writing or a transfer of shares which must be in writing). The original source of the principles that make up the law of contract was the English common law courts. Even today, many of the early English cases are still cited as authority for one principle or another. Of course we now have a substantial body of Australian case law and in addition, over the past 50 years or so, both state and federal parliaments have passed statutes that affect a wide spectrum of commercial agreements.

61

62

Introduction to Business Law in Australia

The evolution of the law of contract [2.30] In the 19th century, as industrial capitalism and the market economy came to dominate the economic and political landscape, the emerging law of contract became the main tool that facilitated and concluded market transactions. George Jessel MR, in Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 at 465 captured the prevailing political and economic mood in England in the mid-19th century when he said: “If there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty in contracting and their contracts, when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts … therefore you have this paramount public policy to consider in that you are not lightly to interfere with this freedom of contract.” The law of contract that emerged in the 19th century reflected the individualistic, self-reliant ethic of the times. The courts stressed the virtues of freedom and sanctity of contract: parties had the freedom to negotiate and consent to the terms of their contract and, once this was done the courts ensured the sanctity of the contract by strictly enforcing the terms of the contract (except where there was no genuine consent (such as where the agreement was affected by vitiating elements such as mistake, fraud, duress or misrepresentation). The mass production of goods in the 20th century signalled a growing gap between those with bargaining power, and those without such power. The complex nature of many consumer goods produced inevitably means that there is an information gap between sellers and buyers which affects a buyer’s ability to meaningfully assess the quality of the goods. Responding to the demands for protection of the vulnerable, the courts and legislatures have made laws designed to protect individuals (eg employees, tenants, consumers, borrowers) and small businesses from conduct that is, for example, unfair, misleading or unconscionable. The Competition and Consumer Act 2010 (Cth) is an excellent example. There are other examples of statutes that affect specific kinds of contracts: Insurance Contracts Act 1984 (Cth), Credit Act 1984 (Vic) and Residential Tenancies Act 1997 (Vic).

Definition of a contract [2.40] The terms “contract” and “agreement” are frequently used interchangeably. Every contract involves an element of agreement; however, not every agreement is a contract. For this reason it is necessary to define what constitutes a “contract”. [2.50] A contract is an agreement between two or more parties under which legal rights and obligations are created which will be enforced in the courts. More succinctly, a contract is a promise or a set of promises that the law will enforce. It is the possibility of enforcement that distinguishes a contract from other kinds of agreements. The law of contract is concerned with the principles applicable to the formation, performance, interpretation and breach of contracts.

chapter 2 Introduction to the Law of Contract

Essential elements of a contract Figure 2.1 – Elements of a valid contract

[2.60] For there to be a contract, certain 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. The essential elements of a contract are: (a)

an offer by one party and its acceptance by the other indicating the parties have reached agreement;

(b)

the intention of the parties to create legal relations;

(c)

valuable consideration (unless the promise is made by deed);

(d)

legal capacity of the parties to act;

(e)

a genuine consent by the parties; and

(f)

legality of the objects of the agreement.

The requirement (see (a) above) that there be an offer by one party which is accepted by the other together form the agreement between the parties. The nucleus of all contracts is the notion of agreement or consensus. Where there is a dispute as to whether an agreement has occurred, the courts generally apply the offer and acceptance analysis – that is, they ask whether there has there been a clear indication from one party of a willingness to enter into a contract with another without further negotiation (“the offer”) and, in response, an unqualified statement or act that indicates that the other party accepts the terms of the offer (“the acceptance”).

63

64

Introduction to Business Law in Australia

In the event of a dispute as to whether a contract has come into existence, the court considers whether a reasonable person looking objectively at what the parties have said and looking at their conduct would say that there was an agreement. As the High Court has recently said: “Regardless of the subjective intentions of the parties, the question of whether the parties had made contracts of the kinds described was to be determined by taking an objective view of the agreements”: Forrest v ASIC [2012] HCA 39 at [34]. However, not all agreements are enforceable at law. For example, a social agreement (say, where A agrees with B to play cards at B’s house on a certain night) does not give rise to contractual rights since the parties do not intend their agreement to be legally binding. Hence, the requirement (in (b) above) that for a contract to come into existence, the parties must intend their agreement to create legal relations. A further essential element in the formation of a contract is that some value must have been given in exchange for the other party’s promise. That is, in a simple contract the agreement must be supported by valuable consideration: see (c) above. This requirement means that the law will not enforce a gratuitous promise. For example, a promise by A to give something to B is not legally enforceable. An exception is where the promise is made under seal, that is, contained in a formal deed, in which case valuable consideration is not necessary for the promise to be enforceable. The parties to a contract must be legally capable of reaching a binding agreement, that is, have the legal capacity to enter into a contract: (see (d) above). To be enforceable, the agreement must have been the product of a genuine consent by each of the parties. Factors affecting genuine consent such as mistake, misrepresentation, duress and undue influence may affect the enforceability of the agreement: (see (e) above). The subject matter of the agreement must be legal: (see (f) above). Each of these essential elements of a contract are discussed in further detail in the following chapters. If one of these essential elements is lacking, then the courts will not enforce the agreement between the parties. Assuming that the court is satisfied that there is a valid contract, its next task in the event of dispute is to determine the nature and extent of what the parties have agreed by interpreting the terms of the contract. The court is then in a position to determine whether a party is in breach of their obligations under the contract and, if so, decide the appropriate remedy available to the other party.

Classification of contracts [2.70] Some of the common types of contract and their basic characteristics are outlined below.

Simple contracts [2.80] All contracts (other than contracts under seal) are termed “simple contracts”. In general, a simple contract may be oral, wholly or partly in writing, or may even be implied by the conduct of the parties. However, some simple contracts are required by statutory provision to be in writing, and others are required to be evidenced in writing. Every simple contract, irrespective of how it is formed, must be supported by consideration: see Chapter 5.

Contracts under seal [2.90] A contract under seal (or formal contract) is referred to as a deed. It derives its validity from its particular form. A contract under seal must be in writing and signed, sealed and delivered. The basic distinction between a simple contract and a contract under seal is that the latter does not require consideration: see Chapter 5.

chapter 2 Introduction to the Law of Contract

Express and implied contracts [2.100] Where the intentions of the parties are stated in explicit terms, either orally or in writing, they constitute an express contract. This is the usual type of contract. For example, an agreement is signed to buy a car and the price is to be paid by instalments over the next 12 months. All the terms of the contract are agreed upon and expressed in the written contract. An implied contract is one in which the terms of the contract are inferred from the conduct of the parties and the surrounding circumstances. An example of this type of contract is where you hail and enter a taxi. By this act the law implies that you promise to pay the fare to your destination and the taxi driver impliedly agrees to transport you.

Bilateral and unilateral contracts [2.110] Most contracts consist of the exchange of mutual promises, the actual performance of which is to occur at some future time. For example, where a steel manufacturer enters into a contract with a coal supplier in February for the delivery of coal during August at a specified price, each party has made a promise to the other to do something at a future date. Such a contract, consisting of a “promise for a promise”, is a bilateral contract. A unilateral contract is one in which an offer is made inviting acceptance by actual performance rather than by a promise. For example, the offer of a reward for the return of a lost dog is accepted by the return of the dog. A unilateral contract “comes into existence when one party promises to do something in return for acts performed by the other party, with the intention of being contractually bound if those acts are performed, and the other party accepts that promise by performing his or her side of the bargain”: Gippsreal Ltd v Registrar of Titles (2007) 20 VR 127 at [42].

Valid, voidable, void and unenforceable contracts [2.120] A valid contract is one in which all the essential elements are present. As a result it is enforceable against both parties. The usual remedy for breach of the contract is a judgment for damages. Sometimes an equitable remedy such as specific performance may be available. A voidable contract is one which a party may avoid, that is, get out of, if that party wishes to do so. For example, a person who was induced to enter into a contract by the other party’s fraud may avoid the contract. A void contract is one which, as far as the law is concerned, never existed at all. It is of no legal effect between the parties and thus does not create legal rights or obligations. For example, where the purpose of the contract is totally illegal, such as a contract to commit a crime, the contract would be void. An unenforceable contract is one which is prima facie a valid contract but which by reason of some technical defect is not capable of being enforced by action by one or both of the parties, for example, a contract made verbally which is required by statute to be evidenced in writing and which has not been so evidenced.

65

66

Introduction to Business Law in Australia

Illustration of an express written contract [2.130] JOIN ONLINE — MEMBERSHIP PORTAL FOR CLAYTON SPORTS WORLD STRENGTHEN YOUR BODY = STRENGTHEN YOUR BRAIN! What’s so good about CSW? Join for free No long term contracts Free health and fitness assessment Free individualized training program BETTER MUSCLES

CLAYTON SPORTS WORLD – Terms and Conditions Before agreeing to become a member please ensure that you read and understand the terms and conditions. You indicate your agreement by clicking on the “I accept” button and providing your credit card details for payment. 1.

2.

3.

General Conditions and Member Responsibilities 1.1

You must complete a CSW membership application form including personal/contact information and contact details.

1.2

All new members must complete a Pre Exercise Health Screen form and complete a Pre-Exercise Health Screening session.

1.3

It is a condition of membership that all members strictly obey all CSW directions at all times.

1.4

The terms of this agreement constitute the entire agreement between the parties. Any representations made by a CSW employee (whether at a CSW facility or over the telephone) cannot be relied upon unless put in writing and included in this contract.

1.5

You agree that at any time CSW may vary the terms of this agreement and the varied terms will apply from the date the term is posted on the website.

Payment of Membership Fees and other Fees 2.1

You agree to pay membership fees by credit card or cash

2.2.

You agree that the minimum membership period is 3 months.

2.3

You agree CSW may increase membership fees at any time after the completion of the minimum term of your membership, by giving you notice in writing and that the increase will become effective immediately.

2.4

In the event that you pay your monthly fee late, you agree to pay $125 to CSW for its administrative costs

Cooling Off period 3.1

You may change your mind within 3 clear calendar days hours from the time you accept this offer. However, if you do change your mind during the cooling off period you agree to pay $100 to CSW for its administrative expenses.

chapter 2 Introduction to the Law of Contract

4.

5.

6.

7.

8.

9.

Operating Hours 4.1

CSW will provide you with access to the CSW facility during the usual operating hours as notified from time to time.

4.2

CSW may at its discretion close the facility for repairs, maintenance or cleaning. No refunds/fee offsets apply to such closures.

CSW and Disclaimer Clauses 5.1

You agree that there are significant risks involved with fitness training and you agree that you are willing to accept those risks.

5.2

CSW is not liable for any loss or damage to your property.

5.3

CSW excludes its liability for your death or injury in relation to its services insofar as it is legal for it to do so under the Australian Consumer Law.

CSW Obligations 6.1

CSW will use its best endeavours to maintain the premises to a reasonable professional standard.

6.2

CSW will use its best endeavours to ensure its staff and instructors are qualified to a reasonable professional standard.

6.3

CSW has no liability whatsoever In the event there is a breach of clauses 9.1 or 9.2.

Cancellation of Membership 7.1

You cannot transfer your membership to another person.

7.2

There are no refunds of membership fees for any reason.

7.3

You may cancel your membership prior to its annual expiry after the minimum term of 3 months provided that you give CSW 1 month’s notice in writing of your intention to do so.

7.4

You must pay all membership fees until the date the cancellation of membership takes effect.

7.5

CSW may cancel or suspend your membership, without giving reasons, if you breach this agreement in any way.

Membership Fees 8.1

Membership fees must be paid in advance monthly.

8.2

Membership fees must be paid by an authority to debit your credit card.

8.3

Membership fees are as notified from time to time on the CSW website or as set out in writing signed by CSW.

Dispute Resolution 9.1

If any dispute arises then you agree to mediate this dispute by meeting with a senior executive of CSW.

9.2

If any dispute is not successfully resolved then you agree that a mediation will be conducted by a senior member of the industry representative body, currently Fitness Victoria, or its successors from time to time. Under no circumstances are you permitted to seek resolution in a court of law.

By clicking on the “I accept” button you agree that you have read and understood and agreed to these terms and conditions. I accept

67

68

Introduction to Business Law in Australia

Further reading [2.130] JW Carter, Carter’s Guide to Australian Contract Law (2nd ed, LexisNexis Butterworths, Sydney, 2011). JW Carter, Contract Law in Australia (6th ed, LexisNexis Butterworths, Sydney, 2013). JW Carter, Cases and Materials on Contract Law in Australia (6th ed, LexisNexis Butterworths, Sydney, 2012). MP Ellinghaus, Australian Cases on Contract (Code Press, Melbourne, 2009). J Gooley, P Radan and I Vickovich, Principles of Australian Contract Law (3rd ed, LexisNexis Butterworths, Sydney, 2014). S Graw, An Introduction to the Law of Contract (7th ed, Thomson Reuters, Sydney, 2012). D Khoury and YS Yamouni, Understanding Contract Law (8th ed, LexisNexis Butterworths, Sydney, 2010). J Paterson, R Robertson and A Duke, Principles of Contract Law (4th ed, Thomson Reuters, Sydney, 2012). J Paterson, R Robertson and A Duke, Contract: Cases and Materials (12th ed, Thomson Reuters, Sydney, 2012). NC Seddon, RA Bigwood and MP Ellinghaus, Cheshire and Fifoot Law of Contract (10th Aust ed, LexisNexis Butterworths, Sydney, 2012).

Journal Journal of Contract Law

Tutorial activities 2.1

Consider the online webpage and contract terms for the gymnasium membership that appears in the text above. What rights and obligations of both parties are created by this online contract?

2.2

Is this a simple contract or a formal contract? Why?

2.3

Is this a unilateral or a bilateral contract? Why?

2.4

Is this an express or an implied contract? Why?

2.5

Assuming (a) that the gymnasium, CSW, misrepresented the expertise of their trainers by saying they were all highly trained experts when in fact the trainers had no expertise, knowledge or training at all. What remedy do you think you, the member, would be legally entitled to? What remedy do you think the member should be entitled to? Is there a difference?

2.6

Assuming you, the member, dishonoured your credit card payment for your monthly membership fees one month. Review the contract terms and see what remedy, if any, you think CSW would be able to claim from you under the contract. What remedy, if any, do you think CSW should have?

IN WRITING

EVIDENCED IN WRITING

In most States these provisions have been replaced by local enactment which varies from State to State

Sale or other disposition of land Promise by executor, etc Guarantee Agreement in consideration of marriage Agreement not to be performed in one year

CONTRACTS NOT ASSIGNABLE: A contract with a person having special qualifications is of a personal nature, and not assignable

OF RIGHTS: 1. At Common Law (a) Negotiable instruments (b) Novation 2. In Equity 3. Statute 4. Operation of Law (a) Death (b) Bankruptcy

ORAL

Any contract not required to be in other form may be made by word of mouth.

UNENFORCEABLE: A unenforceable contract is one which is prima facie valid but by reason of some technical defect is not capable of being enforced by action by one or both of the parties

VOIDABLE: A voidable contract is one which is capable of being disclaimed at the option of one of the parties

VOID: A void contract is one which is of no legal effect between the parties and thus does not create legal rights or obligations

THE ABSENCE OF ONE OF THE SIX ESSENTIALS may render the contract

Essential contents: 1. Names of parties 2. Subject matter must be stated 3. Consideration must be apparent 4. Must be signed by party to be charged or by some person authorised by her/him

MEMORANDUM REQUIRED

Sale of goods of value of $20 and upwards, unless: (a) Buyer accepts goods and receives same, or (b) Buyer gives something in earnest or part payment (Now only applies in WA and Tasmania)

BY SALE OF GOODS ACT

1. 2. 3. 4. 5.

BY STATUTE OF FRAUDS

OF LIABILITIES: A person liable under a contract may not transfer her or his liability under a contract to another person without the consent of the other party to the contract

ASSIGNMENT

(Note:The list of contracts required to be in writing is not exhaustive.)

Bills of exchange Assignments of Copyright Marine Insurance Acknowledgment of Statute Barred Debt 5. Transfer of Shares

1. 2. 3. 4.

SIMPLE

LEGALITY OF OBJECTS

GENUINE CONSENT

LEGAL CAPACITY

FORM OR VALUABLE CONSIDERATION

INTENTION TO CREATE LEGAL RELATIONSHIPS

BY STATUTE 1. Competition and Consumer Act 2010 (Cth) (with exceptions) (formerly, Trade Practices Act 1974 (Cth)) 2. Gaming and Betting Contracts (to a limited extent)

Contracts Illegal AT COMMON LAW 1. Agreements to commit a crime or tort 2. Agreements hindering the administration of justice 3. Agreements contrary to good morals 4. Agreements to restrain or discourage marriage 5. Agreements involving conflict between private interest and duty 6. Agreements in restraint of trade (there are exceptions)

Consideration 1. Essential in every simple contract 2. Must have some value but court not concerned as to its adequacy 3. Must not be illegal or unlawful 4. Must be definite 5. Should be present or future but not past 6. Must be possible of performance 7. Must move from promisee 8. Must amount to something more than party already obliged to do 9. May consist in refraining from suing

Lapse of Offer 1. If not accepted within time stated 2. If no time stated, if not accepted within reasonable time 3. If counter offer made 4. On death of either party before acceptance 5. If not accepted in terms of conditional offer

Rules as to Offer 1. May be made to one or a number of persons 2. Must be communicated to offeree 3. All terms must be brought to notice of offeree 4. May specify condition to be followed 5. May be revoked or may lapse

OFFER AND ACCEPTANCE

and requires SIX ESSENTIALS

IT IS EITHER

Genuineness of Consent Affected by: Mistake of Fact: Renders contract void if (a) Mistake as to nature of the contract (b) Mistake as to identity of other party (c) Mistake as to existence of fact at root of contract (d) Mutual mistake as to identity of subject matter (e) Mistake of intention of one party known to other NB A unilateral mistake as to terms of written contract renders contract voidable only unless set aside in equity eg, for fraud, misrepresentation or unconscionable dealing. FRAUDULENT MISREPRESENTATION: Renders contract voidable at option of party defrauded who is entitled to damages INNOCENT MISREPRESENTATION: Entitles innocent party to rescind the contract NEGLIGENT MISREPRESENTATION: Requires a special relationship giving rise to a duty of care Representee entitled to damages DURESS: Actual or threatened violence to, or deprivation of liberty of, the party or her or his parent, spouse or child Renders contract voidable at option of injured party Economic duress UNDUE INFLUENCE: Improper use of ascendancy acquired by one person over another for the benefit of the ascendant person or someone else so that the acts of the person influenced are not, in the fullest sense of the word, her or his free voluntary acts UNCONSCIONABLE CONTRACTS: Relief obtainable: (a) In equity where one party is at a special disadvantage and has been abuse of superior bargaining position by other party (b) Australian Consumer Law (Sch 2, Competition and Consumer Act 2010 (Cth), formerly Trade Practices Act 1974 (Cth)), ss 20, 21 and 22. (c) NSW Contracts Review Act (d) National Credit Code (Cth), s 76

Minors Corporations Mentally incapacitated and intoxicated persons Married women Bankrupts

Rules as to Acceptance 1. Must be communicated to offeror or offeror must have dispensed with notification thereof 2. Must be unconditional 3. Must be made in the method prescribed 4. Can only be made by party or parties to whom offer was made 5. Cannot be revoked without consent of offeror 6. Must be made within time prescribed or if no time prescribed within a reasonable time

CONTRACTS BY POST

A contract is an agreement made between two or more parties whereby legal obligations are created which the law will enforce.

THE LAW OF CONTRACT

Attempted (Tender)

1. Bankruptcy 2. Material alteration 3. Merger

OPERATION OF LAW

1. Cancellation by (a) Mutual Discharge (b) Release 2. Substituted Agreement (a) Novation (b) Accord and satisfaction 3. Provision for discharge by (a) Condition Subsequent (b) Condition Precedent

AGREEMENT

Actual

PERFORMANCE

1. Judgments 2. Recognisances

CONTRACTS OF RECORD

1. Gratuitous promise 2. Power of Attorney 3. Lease of land exceeding three years

CONTRACTS REQUIRED TO BE UNDER SEAL

Essentials: 1. Must be expressed to be a deed or be under seal 2. Signed by the parties 3. Attested by at least one witness who is not a party to the deed 4. Written 5. Delivered

CONTRACTS UNDER SEAL

The contract may be impossible of performance due to 1. Subsequent change of law 2. Vital thing to contract subsequently ceasing to exist 3. Death, serious disability or illness of party in contract of personal service 4. Failure of an event occurring on which the contract relies 5. Frustration of the adventure

FRUSTRATION

Partial Remedies

By Statute of Limitations Simple Contracts Contracts under Seal NSW, Qld, Tas, ACT, NT Vic, SA WA

12 yrs 15 yrs 20 yrs

6 yrs

1. If breach of condition remedies same as for total breach 2. If breach of warranty, sue for damages

LAPSE OF TIME

Refuse performance Damages Sue on Quantum Meruit Sue for specific performance 5. Obtain injunction

1. 2. 3. 4.

Total Remedies

BREACH

A CONTRACT MAY BE DISCHARGED By

FORMAL

chapter 3

Offer and Acceptance [3.10] Terminology .............................................................................................................................................................. 70 [3.20] Introduction ............................................................................................................................................................... 70 [3.30] The offer ...................................................................................................................................................................... 71 [3.360] Acceptance............................................................................................................................................................. 82 [3.600] Statutory reform.................................................................................................................................................. 89

70

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 3.

Terminology [3.10] You will encounter the following terminology in this chapter.  acceptance: a final assent to all of the details of what has actually been offered.  auction: an arrangement whereby potential buyers are invited to make a bid (offer) which may or may not be accepted.  battle of the forms: a situation where both parties exchange a contractual form, so that it is difficult to determine whether there is an offer and acceptance, and consequently which form encapsulates the agreement.  counter-offer: an offer made in response to an offer (and therefore implicitly rejecting that offer).  electronic communications: using the internet to make a contract requires communication of the acceptance.  invitation to treat: a statement or indication by a potential offeree indicating a willingness to consider offers. Put another way, a statement inviting offers, or even a display of goods.  offer: An invitation to a person or persons to deal on certain terms. An offer must set out the terms that will govern the relationship between the parties should the offer be accepted.  offeree: the recipient of an offer. The offeree may accept or reject that offer (either outright, or by way of a counter-offer).  offeror: the person who makes an offer.  postal acceptance rule: if a contract is made through the postal service, the offeree’s posting a letter accepting the offer signifies acceptance.  prima facie: what is believed to be the situation in the first instance.  reject: refuse to accept an offer.  revocation: to revoke or withdraw an offer.  tender: an invitation, such as an advertisement, for offers which may or may not be accepted.

Introduction Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 3. [3.20] In this and the next three chapters we discuss the essential elements that must exist in order to establish a legally binding contract. The first is that there must be an agreement. For an agreement, in this context, to arise it must be shown that one person has made an offer and there has been an acceptance of that offer by the person to whom the offer was directed. This methodology works well enough in many straightforward contractual negotiations (for example, the purchase of a car or a television or where a retailer orders goods from a regular supplier) but in many cases – complex, protracted or disjointed commercial negotiations as well as common occurrences such as purchasing an air ticket or buying goods on eBay – it becomes a rather artificial exercise. However, whether there are simple or complex negotiations, there can be no agreement unless it is clear that negotiations have

chapter 3 Offer and Acceptance

finished and the parties are prepared to enter into a contract on these particular terms. The courts may be prepared to fill in gaps in the agreement provided the parties have agreed on all major terms. According to the traditional analysis a legally binding agreement requires three elements: 1.

two parties at least;

2.

an offer; and

3.

an acceptance of that offer.

The offer Figure 3.1: Rules as to offer

[3.30] An offer is a proposal by one party to enter into a legally binding contract with another. The offer may be made in writing, orally or implied by conduct. An offer can only exist if the terms are clear. The person making the offer must intend that it can be converted into a binding obligation by acceptance. When the courts are required to determine whether a statement amounts to an offer, for the purposes of determining whether the parties have ultimately concluded a legally enforceable contract, we will see that the courts distinguish offers from other commonly occurring categories of statements. Commonly occurring categories of statements are puffs, invitations to treat and.statements supplying information. Puffs can be easily dismissed as they are statements that no reasonable person would take seriously. Many advertisements contain puffery.

71

72

Introduction to Business Law in Australia

Offers distinguished from invitations to treat or statements supplying information [3.40] It is important to distinguish an offer which will give rise to binding obligations on acceptance from an “invitation to treat”. An invitation to treat is essentially an indication that a person is prepared to negotiate. For example, if A said: “I want to sell my car but I will not let it go for less than $5,000”, that is an invitation to treat. Even if you desired to purchase A’s car for $5,000 he cannot be compelled to sell it to you for he has made no offer which you can accept. However, if A had said, “I will sell you my car for $5,000”, that would be an offer. In the following two cases the plaintiffs failed because they wrongly interpreted the communication of the defendant to be an offer when, in fact, it was an invitation to treat.

Gibson v Manchester City Council [3.50] In Gibson v Manchester City Council [1979] 1 All ER 972 Manchester City Council adopted a policy that allowed its housing tenants to purchase their flats. Gibson, one of the tenants, was sent a letter in which the council said it “may be prepared to sell” him the flat for a particular price and outlining other terms and conditions. It went on, “If you would like to make a formal application to buy your Council house please complete the enclosed application form and return it”. Gibson completed an application form but before formal contracts were signed, the Council policy changed and it only proceeded with those contracts that had already been executed. Gibson argued that the Council’s letter was an offer and his response was an acceptance of that offer. On the other hand, Council argued that its letter was an invitation to treat, that Gibson’s response was an offer that had not been accepted by Council. Held: The House of Lords decided that there was no enforceable agreement. The Council’s letter was an invitation to treat, not an offer. Lord Diplock said, “the words (of the letter) … make it quite impossible to construe this letter as a contractual offer capable of being converted into a legally enforceable open contract for the sale of land by Mr Gibson’s written acceptance of it. The words ‘may be prepared to sell’ are fatal to this; so is the invitation … ‘to make formal application to buy’ on the enclosed application. It is … a letter setting out the financial terms on which it may be the council would be prepared to consider a sale … in due course”: at [974] A statement that provides information but does so without indicating that the person intended to make an offer is not an offer.

Harvey v Facey [3.60] In Harvey v Facey [1893] AC 552 Harvey sent a telegram enquiring, “Will you sell us Bumper Hall Pen? Telegraph lowest cash price”. (Bumper Hall Pen was a property.) Facey replied, “Lowest price for Bumper Hall Pen £900” to which Harvey replied, “We agree to buy Bumper Hall Pen for the sum of £900 asked by you”. When Facey refused to sell, Harvey sued for breach of contract. Harvey argued that Facey’s telegraphed reply was an offer to contract and that an agreement to contract was made when Harvey sent his second telegram “agreeing to buy” Bumper Hall Pen.

chapter 3 Offer and Acceptance

Held: No contract existed. The third telegram (Harvey’s “acceptance” of Facey’s “offer”) was, in fact, an offer to buy at the price stated. The second telegram was simply a precise answer to a precise question – the lowest price that Facey would accept if he were to sell. A contract would be made only if Facey accepted the offer from Harvey to buy Bumper Hall Pen at £900. This he did not do. The decision may have been different if Facey had replied by saying, “I am interested in selling. My price is £900”. This communication is more likely to be regarded as an offer because it indicates a willingness by Facey to enter into a contract.

Shop displays, catalogues and advertisements [3.70] The display of an article in a shop window, even with a card indicating its price, is not generally an offer but merely an invitation for someone to make an offer of purchase. A prospective purchaser makes the offer to purchase that the shopkeeper may either accept or reject. Window displays, catalogues, price lists and advertisements are usually invitations to deal and not firm offers by the seller. It has been held that a bookseller who sends out a catalogue of books with prices indicated against them is not making an “offer” but merely issuing an invitation to transact business: Grainger v Gough [1896] AC 325.

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [3.80] In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795; affirmed Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 (CA) Boots Cash Chemists opened the first large self-service pharmacy in England. Pharmaceutical supplies, including medicines and pharmaceutical drugs, were displayed on the shelves for customers to select and take to the cash register where a qualified pharmacist was always in attendance near the cash registers. The Pharmaceutical Society objected to this new method of retailing pharmaceuticals and attempted to close down the self-service part of the business by having Boots prosecuted under the Pharmacy Poisons Act 1933 (UK). The Act required prescribed drugs to be “sold” under the supervision of a pharmacist. The Society argued that an offer was made when the chemist placed the drugs on the shelves and the offer was accepted and a contract was made when the customer placed the drugs in the basket. If the sale was effected in this way it breached the Act as the sale was “unsupervised”. Boots argued that its placing of the goods on the shelf was an invitation to treat and the customer made the “offer” by taking it to the cashier who “accepted” the offer under the watchful gaze of a registered pharmacist. The court accepted Boots’ argument. In the words of the Lord Chief Justice, cited by Birkett LJ: “the mere fact that a customer picks up a bottle of medicine from the shelves … does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy and there is no sale effected until the buyer’s offer to buy is accepted … the sale takes place under the supervision of the pharmacist…it would be wrong to say that the shopkeeper is making an offer to sell every article in the shop to any person who might come in and that that person can insist on buying any article by saying ‘I accept your offer’. I agree with the illustration put forward during the case of a person who might go into a shop where books are displayed … There is no contract by the shopkeeper to sell until the customer has taken the book to the shopkeeper … and said ‘I want to buy this book’ and the shopkeeper says ‘Yes’. That would

73

74

Introduction to Business Law in Australia

not prevent the shopkeeper, seeing the book picked up, saying: ‘I am sorry I cannot let you have that book: it is the only copy I have got and I have already promised it to another customer’”: at [802].

Partridge v Crittenden [3.90] In Partridge v Crittenden (1968) 2 All ER 421 the defendant placed an advertisement in a classified section of a magazine offering some bramble finches for sale for 25/- each. Section 6 of the Protection of Birds Act 1954 made it an offence to “offer” such birds for sale. He was prosecuted by the RSPCA and convicted of the offence. He appealed. The issue was whether the advertisement was an “offer” (in the technical legal sense – capable of being accepted) or was it an invitation to treat (a negotiating position). Held: The advertisement constituted an invitation to treat and not an offer. People responding to the advertisement might, if they wished, make an offer that could in turn be accepted by Partridge. In many cases advertisements, brochures and circulars will be regarded as invitations to treat. However, in each case the question is whether there was an intention, objectively speaking, to enter into a contract if the response from the person receiving the communication is positive: see, for example, Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.

Auction sales [3.100] In the case of a typical auction sale, the auctioneer’s call for bids is an invitation to treat. Where a bid is made, it is an offer from the bidder to buy at the price offered. The auctioneer may then either accept or reject the offer on behalf of the principal.

Harris v Nickerson [3.110] In Harris v Nickerson (1872–73) LR 8 QB 286 the defendant advertised that an auction of certain goods would take place at a stated time and place. The plaintiff travelled to the auction only to find that items that he was interested in had been withdrawn. He claimed compensation for breach of contract, arguing that the advertisement constituted an offer, and his travelling to the auction, an acceptance by conduct. The court held that the advertisement was not an offer: it was merely a declaration of intention or an invitation to treat.

[3.120] The position is Australia is unclear where the auction is advertised as one “without reserve” or where the reserve has been withdrawn. However it is likely that in either of these circumstances the auction is still regarded as an invitation to treat and not as a collateral warranty to sell to the highest bidder. Thus there is no sale until the property is knocked down to a bidder and, conversely, the auctioneer may withdraw the goods or property from the auction at any before a bid is accepted. See AGC v McWhirter (1977) 1 BPR 9595.

chapter 3 Offer and Acceptance

Online auctions [3.130] Auctions conducted online, such as on eBay, raise interesting questions about the process of contract formation:

Smythe v Thomas [3.140] Smythe v Thomas [2007] NSWSC 844. The seller listed a Wirraway aircraft on the eBay online auction site with an effective disclosed reserve of $150,000. In doing so the court decided that the seller had made an offer to sell the Wirraway to any bidder who: (a)

bid within the specified time;

(b)

made a bid of at least $150,000;

(c)

was the highest bidder of those who made bids in accordance with (a) and (b); and

(d)

did not qualify or seek to impose a qualification on their bid to which the seller had not previously indicated his willingness to consent to.

The buyer satisfied these criteria but the seller refused to sell. The seller argued that as a result of the registration and bidding process that eBay prescribes, at the time when bidding ceased, there was no contract between him and the buyer, only contracts between eBay and the buyer, and eBay and the seller. The court decided that the eBay terms and conditions created a framework for the auction in which the buyer and the seller were willing participants. A binding contract was formed between the buyer and seller that the court would specifically enforce.

Tenders [3.150] A statement that goods are to be sold by tender is usually regarded as an invitation to treat. A party submitting a tender makes the offer and there is no contract until the person who called for tenders accepts the tender. Further, unless it says so in the original document calling for tenders, the person calling for tenders is not obliged to accept the lowest (or any) tender: Spencer v Harding (1870) LR 5 CP 561 at 564.

Harvela Investments Ltd v Royal Trust Co of Canada Ltd [3.160] Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1986] AC 207. The House of Lords indicated that those inviting tenders had an obligation to abide by the undertakings given in the tender document. The Royal Trust Co owned shares in a company, and invited bids for them from two parties. The letter of invitation said, “… we confirm that if any offer made by you is the higher offer … we will bind ourselves to accept [it]”. Harvela bid $2,175,000 and its competitor bid “$2,100,000 or $101,000 in excess of any other offer … expressed as a fixed monetary amount, whichever is higher.” The Royal Trust accepted the competitor’s bid as being $2,276,000. Harvela sued for breach of contract, saying a referential bid (not a fixed bid, but one that refers to and increases a competitor’s bid) was invalid. The House of Lords agreed. It held that Harvela’s bid should have been accepted. The parties had been invited to put in a tender, they had invested time and effort in preparing the tender and it was reasonable for the tender selection process to be carried out in the way Royal Trust had impliedly

75

76

Introduction to Business Law in Australia

promised – that is, it would accept the higher of the two “fixed” bids. It therefore could not accept a referential bid.

Persons to whom an offer may be made [3.170] An offer can be made to a specific person or persons, to a particular class of persons, or to the world at large. The person or persons for whom it was intended are the only ones who can accept it. However, if the offer is made to the world at large, for example by way of a general advertisement, then it may be accepted by anyone who reads the advertisement.

Carlill v Carbolic Smoke Ball Co [3.180] Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. The flu epidemic of 1891 was responsible for many deaths in Britain and no shortage of medical quackery followed in its wake. One famous example, concerning a carbolic smoke ball, has made its way into contract law folk history. In an advertisement published in an English newspaper (see below) the Carbolic Smoke Ball Company, manufacturers of the “carbolic smoke ball”, claimed it would prevent the onset of influenza and other maladies and offered to pay £100 to any customer who, despite using the ball as directed, caught influenza. The company deposited £1,000 with its bankers, “showing our sincerity in the matter”. Mrs Carlill saw the advertisement, bought a smoke ball and used it as directed. She nevertheless contracted influenza. When she requested that the company pay her the £100 it refused and she sued the company for breach of contract. The company denied liability. The case involved a number of issues – the first was whether the advertisement was an offer or a “mere puff” which no reasonable person would regard as a binding contractual promise. The court held that the advertisement was more than a “mere puff”. The Carbolic Smoke Ball Co made a serious offer to the whole world that could be accepted by anyone coming forward and satisfying the conditions. The court relied on the statement in the advertisement, “£1,000 is deposited with the Alliance Bank showing our sincerity in the matter” as evidence that it was not engaging in mere puffery. Lindley LJ said: “Now for what was that money deposited or that statement made except to negative the suggestion that this was a mere puff and meant nothing at all? The deposit is called in aid by the advertiser as proof of his sincerity in the matter – that is the sincerity of his promise to pay this £100 in the event which he has specified. I say this for the purpose of giving point to the observation that we are not inferring a promise; there is the promise, as plain as words can make it. Then it is contended that it is not binding. In the first place, it is said that it is not made with anybody in particular. Now that point is common to the words of this advertisement and to the words of all other advertisements offering rewards. They are offers to anybody who performs the conditions named in the advertisement and anybody who does perform the condition accepts the offer. In point of law this advertisement is an offer to pay £100 to anybody who will perform these conditions, and the performance of these conditions is the acceptance of the offer”: at 261–262.

chapter 3 Offer and Acceptance

Figure 3.2: Carbolic Smoke Ball Advertisement

[3.190] In contrast, in the following more recent example from the US, the plaintiff could not establish that a reasonable person would have thought that the manufacturers of Pepsi were offering a Harrier Jet to a person who accumulated sufficient points.

Leonard v PepsiCo [3.200] Leonard v PepsiCo 88 F Supp 2d 116 (1999). PepsiCo ran an advertising campaign in which consumers were encouraged to collect “Pepsi Points” from specially marked packages of Pepsi. A television commercial for “Pepsi Stuff” showed a series of products with the Pepsi logo and the number of Pepsi Points that were required to purchase them. (It was possible to purchase additional Points for 10 cents each, if a person wanted an item for which he or she had insufficient points.) In the final scene from the advertisement, a young boy is seen flying a Harrier jet fighter to school. After he parked the jet on the school playground he emerged with a Pepsi in hand, and the words “HARRIER FIGHTER 7,000,000 PEPSI POINTS” appeared on the screen. After seeing the commercial, Leonard (and his syndicate) decided to purchase a jet fighter by “buying” the 7,000,000 points. He submitted an order form (though the jet was not included in the catalogue) with a cheque for $700,008.50. When PepsiCo rejected his order and returned his cheque Leonard sought specific performance of the unilateral contract that he alleged had been formed when he performed his obligations. The court decided that the advertisement was not “clear, definite and explicit” enough to constitute an offer. Because of the comical nature of the commercial, a reasonable person could not conclude that PepsiCo was offering a Harrier Jet to anyone who collected 7,000,000 points. It was a mere puff.

77

78

Introduction to Business Law in Australia

Communication of offer [3.210] The offer must be communicated, that is, brought to the notice of the person to whom it is made. Unless an offer is communicated there can be no acceptance and therefore no contract. The reason for the rule that an offer must be communicated is that the whole basis of the law of contract is that there has been an agreement between the parties. The word “agreement” presupposes that the parties were aware of the fact that what they were doing would lead to an agreement.

Revocation of offer [3.220] An offer is revoked when the offeror formally withdraws the offer. On revocation the offer comes to an end and cannot subsequently be accepted. The offeror can give notice of the revocation of the offer at any time before acceptance.

Options [3.230] A promise to keep an offer open for a period of time is not enforceable unless the offeree provides consideration. The consideration is usually a relatively small amount of money. Without the consideration the promise to keep the offer open is unenforceable. If consideration is provided, an enforceable option contract is made. Thus, for example, if A promises B that, if he pays her $100, she will keep her offer to sell her house to B open for seven days, A’s promise is enforceable (assuming B accepts). If B exercises the option, and agrees to buy A’s house, unless the parties agree otherwise, the price of the option is neither refundable nor is it included in the sale price.

Goldsbrough, Mort & Co Ltd v Quinn [3.240] Goldsbrough, Mort & Co Ltd v Quinn (1910) 10 CLR 674. The defendant offered to the plaintiff that the plaintiff would have the right to purchase certain property within one week at a stated price. (That is, the plaintiff promised to keep the offer open for the defendant for one week.) The plaintiff paid the defendant the sum of 5 shillings in consideration for this option. Before the week agreed for the plaintiff to accept the offer to purchase the property, the defendant repudiated the offer. The plaintiff company accepted the offer within the week and brought a suit for specific performance of the agreement. It was held that the option having been given for value was not revocable, and that the acceptance of the offer by the company constituted a binding contract which was enforceable by specific performance. [3.250] To be effective the revocation of an offer, like the offer itself, must be communicated to the offeree. Until the time the offeree becomes aware of the revocation, he or she can accept the offer and create a valid and binding contract.

chapter 3 Offer and Acceptance

Byrne & Co v Leon Van Tienhoven & Co [3.260] Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344. Van Tienhoven wrote on 1 October from Cardiff offering to sell 1000 boxes of tinplates to Byrne in New York. Byrne received the offer on 11 October and accepted it by telegram on the same day, and by letter on 15 October . Meanwhile, on 8 October, Van Tienhoven had posted a letter withdrawing the offer (because the price of tinplates had risen by 25%). The letter did not reach Byrne until 20 October. The withdrawal of the offer was ineffective. While an offer could be revoked at any time before its acceptance, a revocation of the offer was not effective until it had been communicated to the offeree. A contract binding both parties had been entered into on 11 October when Byrne accepted by telegram the offer of 1 October. Lord Lindley said: “There is no doubt an offer can be withdrawn before it is accepted, and it is immaterial whether the offer is expressed to be open for acceptance for a given time or not…It may be taken as now settled that where an offer is made and accepted by letters sent through the post, the contract is completed the moment the letter accepting the offer is posted although it never reaches its destination. When, however, those authorities are looked at, it will be seen that they are based upon the principle that the writer of the offer has expressly or impliedly assented to treat an answer to him by a letter duly posted as a sufficient acceptance and notification to himself, or, in other words, he has made the post office his agent to receive the acceptance and notification of it. But this principle appears to me to be inapplicable to the case of the withdrawal of an offer. In this particular case I find no authority in fact given by the plaintiffs to the defendants to notify a withdrawal of their offer by merely posting a letter, and there is no legal principle or decision which compels me to hold, contrary to the fact, that the letter of the 8th of October is to be treated as communicated to the plaintiff on that day or on any day before the 20th, when the letter reached him.”

[3.270] The law does not stipulate any particular way in which the revocation is communicated to the offeree. It simply requires the offeree to be made aware that the offer has been withdrawn. Accordingly, any method of communication is sufficient provided the fact of revocation actually comes to the offeree’s notice. Although as a general rule an offer may be revoked before acceptance, the general rule does not work so well in relation to unilateral contracts. In the now famous Brooklyn Bridge hypothetical Professor Wormser said: “Suppose A says to B, ‘I will give you $100 if you walk across the Brooklyn Bridge’. Let us suppose that B starts to walk across the Brooklyn Bridge and has gone about one-half of the way across. At that moment A overtakes B and says to him, ‘I withdraw my offer’. Has B then any rights against A? It is elementary that an offeror may withdraw his offer until it has been accepted. It follows logically that A is perfectly within his rights in withdrawing his offer before B has accepted it by walking across the bridge – the act contemplated by the offeror and the offeree as the acceptance of the offer. Until this act is done, therefore, A is not bound, since no contract arises until the completion of the act called for”. 1 If this analysis is correct, it would mean that, in Carlill, for instance, the company could have revoked after Mrs Carlill had commenced using the smokeball but before she had completed the prescribed two week course of treatment. Unfortunately there is no clear case authority on this point. However, in the following

1

Wormser, “The True Conception of Unilateral Contracts” (1916) 26 Yale LJ 136, 137.

79

80

Introduction to Business Law in Australia

case, the Full Federal Court held that, on the facts, Mobil could revoke an offer to its franchisees, even though some had begun to perform the acts required in the offer.

Mobil Oil Australia Ltd v Wellcome International Pty Ltd [3.280] Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475. The Mobil franchisees were invited to attend a convention where the general manager of retail marketing made a number of statements suggesting that any franchisee who performed at a set “standard of customer service excellence” level for six years would be given an extension of their franchise at no cost. Mobil followed up with a report of the convention and video containing the manager’s statements. Relying on the manager’s representations some of the franchisees undertook to enter the customer service program believing that their participation would qualify them for the extension of the franchise agreements. Mobil subsequently discontinued the scheme and a number of dealers alleged breach of contract. The Full Federal Court held that Mobil had made no unilateral offer. The statements were exploratory – the precise terms of the offer had not been finalised. On the point concerning revocation of unilateral offers the Full Court said there was “no universal proposition” that an offeror cannot revoke the offer once the offeree begins to perform the act that has been requested by the offeror.

Lapse of offer [3.290] An offer will lapse: (a)

if not accepted within the time stated;

(b)

if not accepted within a reasonable time, where no time for acceptance has been stated;

(c)

if a counter-offer is made, for example if a person offered to sell their car for $5,000 and the person to whom the offer was made replied that they would pay $3,500 for the car, this reply would constitute a counter-offer to buy and the original offer would lapse. The buyer could not then purport to contract by accepting the original offer of $5,000. The essential characteristic of a counter-offer is that it changes one or more of the material terms of the offer (such as price or quantity or quality). There is a difference between a counter-offer and a request for information or clarification of the terms of the offer. The following case illustrates this point:

Hyde v Wrench [3.300] Hyde v Wrench (1840) 49 ER 132. Wrench offered to sell land to Hyde for £1,200. Hyde rejected the offer. He then offered to sell for £1,000. Hyde responded by offering to purchase the land for £950. The defendant refused to sell at this price. The plaintiff then said that he would accept the earlier offer to sell at £1,000. When Wrench refused to sell, Hyde brought an action for specific performance (that is, Hyde asked the court to find that a contract existed and order Wrench to perform it and hand over title to the property). Held: The court refused. It held there was no agreement – the earlier offer to sell at £1000 was terminated by Hyde’s counter-offer of £950 and it could not subsequently be revived. In effect, Hyde, in purporting to accept Wrench’s offer was, in fact, making an offer to buy it at that price. Of course, Wrench was free to reject the offer.

chapter 3 Offer and Acceptance

A request for information is not a counter-offer [3.310] It is not unusual for the offeree to want to clarify or seek more information about the terms of the offer. He or she may want to know if the offeror is prepared to modify one or more terms. Such a response is not a counter-offer so the offer does not lapse. It is a question of fact in each case whether the offeree’s response is a counter-offer or whether it is an attempt to clarify or seek additional information about the offer. In the above example, if B had enquired whether A would accept a cheque or credit card as payment for the television, this would be regarded as an enquiry or a request for further information and not a counter-offer because B is not seeking to impose a different term to the offer.

Stevenson Jaques & Co v McLean [3.320] Stevenson Jaques & Co v McLean [1880] 5 QBD 346. The parties were operating in a volatile iron ore market where price fluctuated quickly. McLean, an iron merchant, offered to sell iron to Stevenson Jaques, a buyer, for “40 shillings net cash”. Stevenson Jaques responded by asking whether McLean would accept 40 shillings “for delivery over two months or if not the longest limit you would give”. McLean, without answering, sold to another buyer. When it did not get a response, Stevenson Jaques, purported to “accept” the offer but then discovered that McLean had sold the iron elsewhere. Stevenson Jaques sued for breach of a contract that it argued came into effect when it accepted the offer. It argued its initial response was not a counter-offer but a request for information. If the latter, McLean’s offer was still able to be accepted as its revocation had not been communicated. If it was construed as a counter-offer, Stevenson Jaques could no longer accept (as a counter-offer kills the offer). The court decided that McLean was liable for breach of contract. The response from Stevenson was merely seeking to clarify the terms of the offer, not impose new or different terms. Lush J said: “The form of the telegram is one of inquiry. It is not ‘I offer 40 shillings for delivery over two months’ which would have likened the case to Hyde v Wrench. Here there is no counter proposal … 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”: at 349–350.

[3.330] An offer will lapse: (d)

on the death of either party before acceptance. The death of either party before acceptance generally causes the offer to lapse. There are, however, circumstances in which the death of the offeror does not cause the offer to lapse. For instance, in relation to option contracts for the sale of property, the grantee of the option could exercise his rights under the option against the grantor’s executor. Again, where the offeree accepts the offer, unaware of the death of the offeror, and the offer does not involve the personal skill or expertise of the offeror, it is likely that acceptance would be effective and the agreement would be enforceable against the executor. The death of the offeree normally causes the offer to lapse. However where the offer is made to the offereee or his or her heirs and successors or where an option contract has been signed and has yet to expire, the offer may be accepted by the deceased offeree’s estate. The following case illustrates this point:

81

82

Introduction to Business Law in Australia

Carter v Hyde [3.340] In Carter v Hyde (1923) 33 CLR 115, Carter had leased Hyde’s hotel for a five year period. He offered to assign the lease back to him, and, for $1, granted him an option for three months. Before the option had expired, Hyde died. His executors sought to exercise the option but Carter argued the option had lapsed on Hyde’s death. The High Court decided that Hyde’s estate could exercise the option. It made an order for specific performance. Isaacs J said: “There was nothing of a purely personal nature in the bargain … and consequently it was … a right in the nature of property to endure for the expressed period of three months, and passed as part of his estate to his executors”: at [125].

[3.350] An offer will lapse: (e)

by loss of contractual capacity by either party, for example by insanity. 2

Acceptance Figure 3.3 Rules as to acceptance

2

See also D McLauchlan and R Bigwood, “Lapse of Offers Due to Changed Circumstances: A Contract Conversation” (2011) 27 Journal of Contract Law 222.

chapter 3 Offer and Acceptance

[3.360] An agreement is concluded when the offeree communicates an unconditional acceptance of the offer to the offeror. The form of the acceptance will vary according to whether it is a unilateral offer (performance of the act is acceptance) or bilateral (a verbal or written response communicated to the offeror or by conduct, such as commencing to build the house). The requirement that acceptance of the offer is clear, absolute and unconditional is consistent with the mutual assent theory of contract - only when the parties have, objectively speaking, given their mutual consent will law lend its weight to enforcing the agreement if a dispute arises. However, it must be understood at the outset that the courts have a long history of trying to make bargains work, if that is possible. They will make an effort to find their way through some uncertainty, ambiguity or lack of completeness in order that the apparent agreement be enforceable (see below at [3.610]).

Rules as to acceptance [3.370] The following points illustrate the primary basis for the rules as to acceptance. 1.

The general principle is that acceptance of an offer must be communicated to the offeror for there to be a binding contract between the parties. Acceptance can be communicated by express words or in writing, by conduct or by performance of an act requested by the offeror.

2.

Acceptance can be implied from the conduct of the parties

Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd [3.380] Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523. A property developer, Empirnall, hired architects, Machon Paull, to act as a project manager, to draw plans and to obtain permits for a property development. Machon Paull forwarded a contract for signature and a progress payment claim to Empirnall, which paid on the claim and asked Machon Paull to submit progress claims. However, Empirnall did not sign the contract because its director “does not sign contracts”. Later, when Machon Paull sent another progress claim, it forwarded a contract for signature. Again the contract was not signed. Some two weeks later they wrote saying: “we are proceeding on the understanding that the conditions of the contract are accepted by you and works are being conducted in accordance with those terms and conditions”. It was important for Machon Paull that the court infer acceptance of the written contract (and not simply infer an agreement) because the written contract contained a clause that gave Machon Paull some security over the land in question. A dispute subsequently arose and Empirnall denied that the written contract had ever been accepted. The issue was whether a reasonable bystander would regard the conduct of the offeree as signalling that Empirnall had accepted the offer. The court decided that although Empirnall did not expressly accept the offer, it had impliedly accepted the offer by its conduct. McHugh J said: “… where an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms”: at [535].

[3.390] 3. Acceptance cannot be inferred from the silence or inaction of the offeree.

83

84

Introduction to Business Law in Australia

Felthouse v Bindley [3.400] Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037. Felthouse offered to buy a particular horse from his nephew and stated in a written offer that “if I hear no more about him, I consider the horse mine at £30 15s”. His nephew did not reply but instructed the auctioneer, Bindley, not to sell the horse. Unfortunately Bindley forgot to withdraw the horse from sale and sold it to another buyer. Felthouse sued the auctioneer in the tort of conversion (selling property belonging to the plaintiff). To succeed in an action for conversion Felthouse needed to demonstrate that he, Felthouse, was the owner of the horse at the time of the sale – as he would be if there were a valid contract between himself and his nephew. The Court held that Felthouse could not impose on his nephew a duty to respond if he did not wish to sell on those terms. There was no communication of acceptance before the sale; consequently the nephew was not bound to sell the horse to his uncle on the day of the auction and could sell the horse at auction. As the horse did not belong to the uncle, no tort of conversion had been committed. [3.410] 4. There can be no acceptance if the offeree is unaware of the offer. It may happen that a person carries out certain acts in ignorance of the fact that an offer exists. In such a case, where the person carrying out those acts does not do so on the faith of the offer, there is not an acceptance capable of resulting in a binding contract.

R v Clarke [3.420] R v Clarke (1927) 40 CLR 227. A proclamation offered a reward of £1,000 for information that would lead to the arrest and conviction of the person who had murdered two policemen. A and B were arrested and charged with the murder of one of the policemen. B gave evidence that led to the conviction of A and C for the murder of that policeman. B was subsequently released from custody and claimed the reward of £1,000. It was revealed in evidence that B volunteered the information in order to clear himself of a false charge of murder. The High Court held that because B did not act in reliance upon the offer, there was no acceptance of the offer and therefore there was no contract between the parties. Clarke was unable to claim the reward.

[3.430] 5. In a unilateral contract the offeror has waived its right to communication of acceptance. An example is Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (see [3.180]). The Smoke Ball Co could not argue that Mrs Carlill had not communicated her acceptance of the unilateral offer. The company had waived its rights in this respect. Mrs Carlill accepted by performing the acts requested by the company. That is, she bought the smoke ball and used it as directed. [3.440] 6. Acceptance must be unconditional. A qualified acceptance would amount to a counter-offer. Where the acceptance is made “subject to contract” or “subject to a formal contract to be drawn up by our solicitors”, as often happens in negotiations for the purchase of land, then in the absence of cogent evidence of a contrary intention, there

chapter 3 Offer and Acceptance

will be no binding agreement between the parties until a formal document has been drafted and signed. In the following case, the High Court considered the alternative outcomes when the contract is expressed to be “subject to” an event:

Masters v Cameron [3.450] Masters v Cameron (1954) 91 CLR 353. Masters signed an agreement to purchase Cameron’s rural property. The agreement included the following clause: “This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions”. Masters also paid the agent £1,750 when he signed the agreement. When Masters refused to proceed with the purchase, both parties claimed the deposit moneys. Masters argued there was no binding agreement and he was entitled to a refund. Cameron argued that there was a binding agreement and the moneys, being a deposit, were forfeited when the purchaser refused to proceed. The High Court decided that no binding agreement had been made. On the evidence, the court said that the parties had not intended that a legally binding agreement would exist until or unless a formal contract acceptable to Master’s solicitors had been signed. Therefore the £1,750 had to be returned to Masters. In the course of the judgment, the High Court noted that where parties reach agreement on the terms of a contract but also agree that the agreement shall be expressed in a more formal way, one of three alternatives is possible:  the parties intend to be immediately bound by the agreement but agree that the agreement should be restated in a more precise way. Thus a contract exists and the parties are bound to perform it whether the formal document is signed or not;  the parties have agreed on all the terms but have made performance conditional on the execution of a formal document. Again, as in the first alternative, a contract exists but here the parties have agreed that a formal document must be executed before they perform the agreement; and  the intention of the parties is not to conclude an agreement at all unless or until a formal contract is executed. The High Court then said: “… in each of the first two cases there is a binding contract: in the first, a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second, a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own … there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape”: at [360]–[363].

[3.460] 7. Acceptance must follow the conditions, if any, stated in the offer.

85

86

Introduction to Business Law in Australia

Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd [3.470] In Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122, a lease contained an option to renew subject to the giving of three months’ previous notice in writing, the punctual payment of rent and the due performance of covenants by the tenant. During the currency of the lease the rent was, without objection by the landlord, paid at irregular intervals and rarely on the due date. The tenant sought to renew the lease but the landlord claimed that the option was not validly exercised. It was held that the punctual payment of rent was a condition that had to be fulfilled before the tenant could validly exercise the option. [3.480] 8. Acceptance can be made only by the party to whom the offer was made. As we have seen an offer may be made to one or more people or to the world at large: Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. [3.490] 9. Acceptance can be revoked at any time prior to acceptance being communicated. [3.500] 10. Acceptance must be made within the time prescribed or, if no time has been prescribed, within a reasonable time: Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex 109. [3.510] 11. Communication of acceptance must be made in a regular and authorised manner.

Powell v Lee [3.520] Powell v Lee (1908) 99 LT 284. Powell applied for the position of headmaster of a school. The school board passed a resolution appointing him. The resolution was not communicated to Powell officially. One of the board members privately informed him of it. Subsequently the resolution was rescinded. It was held that Powell’s offer had not been accepted as the resolution was never communicated to him in an authorised manner.

[3.530] 12. The postal acceptance rule. The general principle is that an acceptance must be communicated to the offeror. However, there is an important exception to this principle: the postal acceptance rule. 3 According to this rule, where acceptance by post is contemplated by the parties, acceptance is complete as soon as the letter of acceptance is properly posted: Henthorn v Fraser [1892] 2 Ch 27. The acceptance is not affected by delay or loss of the letter in the course of post, provided that the parties contemplated the post as a means of entering into contractual obligations: Household Fire & Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216, 219, 223, 227. An offeror can stipulate the required method of acceptance of their offer. Accordingly, the postal acceptance rule is excluded where the offeror requires actual communication of the acceptance. This may arise, for example, where there is an express stipulation in the offer requiring receipt by the offeror of the offeree’s acceptance for it to be effective. In such a case, the mere posting of the acceptance would not

3

See generally D McLauchlan, “The Uncertain Basis of the Postal Acceptance Rule?” (2013) 30 Journal of Contract Law 33.

chapter 3 Offer and Acceptance

create a binding contract: Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74. Further, the postal acceptance rule may be impliedly excluded where it is apparent that an uncommunicated acceptance was not intended.

Adams v Lindsell [3.540] In Adams v Lindsell (1818) 106 ER 250, Adams were manufacturers of wool products and Lindsell were wool brokers. Lindsell posted a letter to Adams on 2 September offering to sell them a quantity of wool, requiring a reply “in the course of post”. This letter was misdirected and was not received until 5 September. Adams posted an acceptance on the same day. This letter reached the offeror on 9 September. On September 8, unaware that the offer letter had been misdirected and in the belief that the manufacturers were not replying, Lindsell sold the goods to a third party. Adams sued for breach of contract. Held: The defendant brokers were liable. The postal rule applied because, on the facts, the parties expected that the post would be used as a method of acceptance. Therefore the contract had been made on 5 September when Adams posted the letter of acceptance. As Lindsell was not able to supply the wool, it was in breach of contract.

Holwell Securities Ltd v Hughes [3.550] In Holwell Securities Ltd v Hughes [1974] 1 All ER 161, the court came to a different conclusion on the applicability of the postal acceptance rule: On 19 October, Hughes granted Holwell a six-month option to purchase property. The option could be taken up “by notice in writing to the intending vendor at any time” within the option period. On 14 April 1972, Holwell’s solicitors wrote to Hughes advising that their client wished to take up the option. The letter was never received. The issue was whether the words “by notice in writing to” had the effect of negating the postal acceptance rule. Held: Although the parties clearly contemplated that the post would be used, the use of the words “by notice in writing to the intending vendor” indicated that their intention was that actual communication was required. Therefore, as the option had not been properly exercised, Hughes was not required to enter into a contract of sale.

Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd [3.560] In Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995) 63 SASR 235, Corralyn sent a letter by ordinary post to Elizabeth City Centre (ECC) giving notice within the specified time that it wished to exercise an option to renew its sub-lease. ECC claimed that it never received the letter. A clause in the sub-lease provided that a notice mailed by registered or certified letter was deemed to be served on ECC on the third business day following that on which it was posted. The court held the postal acceptance rule could not be relied upon as its operation was impliedly excluded by the clause regarding notification by certified mail. In the circumstances, the ordinary rule requiring communication of acceptance applied. Since Corralyn’s notice had not been actually communicated to ECC, Coralyn had not effectively exercised its option to renew.

87

88

Introduction to Business Law in Australia

[3.570] Where the postal acceptance rule applies, a person who makes an offer cannot revoke the offer once the offeree has posted a letter of acceptance. This is because the letter of acceptance creates a binding contract at the time of its posting. Thus a revocation must be communicated to the offeree before the latter posts the acceptance letter. Where the postal acceptance rule does not apply, the normal rule applies: an offer can be revoked provided it is communicated to the offeree before the acceptance is communicated. [3.580] 13. Electronic or instantaneous communications Where instantaneous or electronic communication is used as a method of acceptance, the usual rule applies – acceptance is effective only when it is communicated to the offeror. In the following case the critical question was where the contract had been made and the answer turned on whether the acceptance had to be communicated to the offeror.

Brinkibon Ltd v Stahag Stahl und Stahlwarenhandels-gesellschaft mbH [3.590] In Brinkibon Ltd v Stahag Stahl und Stahlwarenhandels-gesellschaft mbH [1983] 2 AC 34, Brinkibon was a London company that sold steel from Stahag, a seller based in Vienna, Austria. Brinkibon sent their acceptance to a Stahag offer by telex, a now almost obsolete form of electronic communication to Vienna. Brinkibon later wanted to issue a writ against Stahag but because of the rules of civil procedure would only be able to do so if the contract had been formed in England. Thus the issue was where the contract had been formed. The general principle is that a contract is formed where the acceptance is communicated and the court decided that, in this particular case, where a form of electronic communication (a telex) had been used, the usual rule applied: the contract was formed in Vienna where communication of the acceptance occurred. However, somewhat presciently, Lord Wilberforce did not see the rule as applying in all circumstances: “Since 1955 the use of telex communication has been greatly expanded … The senders and recipients may not be the principals to the contemplated contract … The message may not reach, or be intended to reach, the designated recipient immediately: messages may be sent out of office hours, or at night, with the intention, or on the assumption that they will be read at a later time. There may be some error or default at the recipient’s end which prevents receipt at the time contemplated and believed in by the sender. The message may have been sent and/or received through machines operated by third persons. And many other variants may occur. No universal rule can cover all such cases; they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgement where the risks should lie”: at [296].

chapter 3 Offer and Acceptance

Statutory reform [3.600] The Electronic Transactions Act 1999 (Cth) contains rules that aim to “facilitate the use of electronic transactions” (e-commerce). An electronic communication will commonly be email however the definition under the Act is much broader as the definition includes any information in the form of data, text, images, or speech (provided the speech is processed at the destination by automated voice recognition processes) that is by means of electromagnetic energy, see s 5 of the Act. Reflecting the fact that digital commerce has rapidly evolved and its uses expanded, the Act has been amended since its introduction. Reflecting also the global aspect of digital commerce, a number of amendments were for the purpose of making the Australian law on electronic transactions consistent with laws in many other countries and the United Nations Convention on the Use of Electronic Communications in International Contracts 2005 was used as the basis for a number of amendments. In ss 14 – 14A the Act provides for determining the time of dispatch and time of receipt of an electronic communication and in s 14B provides for determining the place of dispatch and time of receipt of an electronic communication. It must be noted that, as with the postal rule, the parties can agree to modify or exclude these rules sand agree some other the time and place of dispatch and receipt. Section 14 says an electronic communication is dispatched when it leaves an information system under the control of the originator (or of the party who sent it on behalf of the originator). Section 14A says an electronic communication is received by an addressee when it enters the information system designated by the addressee for the purpose of that electronic communication (which would often be the email address the person provides). If the electronic communication is sent to a person at an address other than the address the person designated communications to be sent to, then it will be taken to be received when the communication enters the information system and the person becomes aware of the communication. In practical terms, a person is deemed to have received an email or other electronic communication when it enters their electronic or email system (whether or not they have seen it or read it) provided that the communication was sent to the email address specified by the person. If an email is sent to some other address, then they will only be deemed to have read it when it is in their email system and they are aware of it. There is no requirement in the Act that the receiver actually read the email to be in receipt of the email. Under s 14B, and unless otherwise agreed, the place of dispatch and the place of receipt shall be where the originator and the addressee, respectively, have their place of business. If no such system is designated, the electronic communication is taken to have been received when it comes to the attention of the addressee. It remains unclear whether the words “comes to the attention of” mean the addressee has read the communication or has merely received a message such as “you have mail”. A person is not bound by an electronic communication unless the communication was sent by, or with the authority of, that person: s 15(1). The Electronic Transactions Act 1999 (Cth) may not apply, or may apply in modified ways to contracts regarding specific subject matter. For example, the Insurance Contracts Act 1984 (Cth) sets out specific rules about information an insurer must provide to an insured, and how that information must be provided. Because of Constitutional limits, the Electronic Transactions Act 1999 (Cth) sets out model laws that each state and territory applies 4. 4

See Electronic Transactions Act 2000 (SA); Electronic Transactions Act 2000 (NSW); Electronic Transactions Act 2011 (WA); Electronic Transactions Act 2000 (Tas); Electronic Transactions Act 2001 (ACT).

89

90

Introduction to Business Law in Australia

Section 5 Definitions “information system” means a system for generating, sending, receiving, storing or otherwise processing electronic communications. “electronic communication” means: (a)

a communication of information in the form of data, text or images by means of

guided and/or unguided electromagnetic energy; or (b)

a communication of information in the form of speech by means of guided and/or unguided electromagnetic energy, where the speech is processed at its destination by an automated voice recognition system.

Section 14 Time of dispatch (1)

For the purposes of a law of the Commonwealth, unless otherwise agreed between the originator and the addressee of an electronic communication, the time of dispatch of the electronic communication is: (a)

the time when the electronic communication leaves an information system under the control of the originator or of the party who sent it on behalf of the originator; or

(b)

if the electronic communication has not left an information system under the control of the originator or of the party who sent it on behalf of the originator–the time when the electronic communication is received by the addressee.

Note: Paragraph (b) would apply to a case where the parties exchange electronic communications through the same information system.

(2)

Subsection (1) applies even though the place where the information system supporting an electronic address is located may be different from the place where the electronic communication is taken to have been dispatched under section 14B.

Section 14A Time of receipt (1)

For the purposes of a law of the Commonwealth, unless otherwise agreed between the originator and the addressee of an electronic communication: (a)

the time of receipt of the electronic communication is the time when the electronic communication becomes capable of being retrieved by the addressee at an electronic address designated by the addressee; or

(b)

the time of receipt of the electronic communication at another electronic address of the addressee is the time when both: (i)

the electronic communication has become capable of being retrieved by the addressee at that address; and

(ii)

the addressee has become aware that the electronic communication has been sent to that address.

(2)

For the purposes of subsection (1), unless otherwise agreed between the originator and the addressee of the electronic communication, it is to be assumed that the electronic communication is capable of being retrieved by the addressee when it reaches the addressee’s electronic address.

(3)

Subsection (1) applies even though the place where the information system supporting an electronic address is located may be different from the place where the electronic communication is taken to have been received under section 14B.

chapter 3 Offer and Acceptance

Section 14B Place of dispatch and place of receipt (1)

(2)

(3)

(4)

For the purposes of a law of the Commonwealth, unless otherwise agreed between the originator and the addressee of an electronic communication: (a)

the electronic communication is taken to have been dispatched at the place where the originator has its place of business; and

(b)

the electronic communication is taken to have been received at the place where the addressee has its place of business.

For the purposes of the application of subsection (1) to an electronic communication: (a)

a party’s place of business is assumed to be the location indicated by that party, unless another party demonstrates that the party making the indication does not have a place of business at that location; and

(b)

if a party has not indicated a place of business and has only one place of business, it is to be assumed that that place is the party’s place of business; and

(c)

if a party has not indicated a place of business and has more than one place of business, the place of business is that which has the closest relationship to the underlying transaction, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the transaction; and

(d)

if a party has not indicated a place of business and has more than one place of business, but paragraph (c) does not apply – it is to be assumed that the party’s principal place of business is the party’s only place of business; and

(e)

if a party is a natural person and does not have a place of business – it is to be assumed that the party’s place of business is the place of the party’s habitual residence.

A location is not a place of business merely because that is: (a)

where equipment and technology supporting an information system used by a party are located; or

(b)

where the information system may be accessed by other parties.

The sole fact that a party makes use of a domain name or email address connected to a specific country does not create a presumption that its place of business is located in that country.

The question of certainty [3.610] The general rule is that for any agreement to be binding there must be sufficient certainty about the essential terms. If there is (a) a vagueness or ambiguity about the meaning of one or more of the essential terms or (b) the contract is incomplete because one or more of the essential terms has not been agreed to or (c) there is simply an “agreement to agree” in the future, there is no enforceable agreement. It must be noted that Australian courts are reluctant to find an agreement void for uncertainty. They strive to be the “upholder of bargains, not their destroyer” so they will try to find meaning and certainty if it is possible. On the question of completeness, it is not essential that an agreement be worked out in great detail and it is possible (and not uncommon) for parties to nominate one of the parties to the contract or, more commonly, a third party to determine certain matters (such as the value of assets to be sold) provided the parties themselves do not need to reach further agreement.

91

92

Introduction to Business Law in Australia

Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd [3.620] Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429. The Council signed a contract to supply Australian Chilling & Freezing with electricity. Clause 5 of the contract stated “if the Supplier’s costs shall vary in other respects than has been herein before provided the Supplier shall have the right to vary the maximum demand charge and energy charge …”. Council sought to increase its charges, but Australian Chilling & Freezing said the contract was unenforceable because of the lack of certainty about the term “supplier’s costs”. The parties had made no attempt to define what those costs might be. The High Court said the contract was not uncertain. The Court said that a contract is not automatically void for uncertainty just because it may be construed in more than one way: “As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it.” He observed that a “narrow or pedantic approach” to interpretation should not be taken - it is clear that In this case there was no uncertainty even though there may be scope for disagreement about what constituted suppliers costs in individual cases.

Godecke v Kirwan [3.630] Godecke v Kirwan (1973) 129 CLR 629. Godecke (buyer) and Kirwan (vendor) entered into a written agreement for the sale of land for $110,000 which included a clause that said if Kirwan required it, Godecke would execute a further agreement containing the terms of that agreement and any other as determined by Kirwan’s solicitors (within reason). Kirwan subsequently refused to proceed with the sale. The trial court decided that the agreement was not binding. On appeal, the decision was reversed. A binding agreement may be made leaving some important matter to be settled by a third party or even, in most cases, by one of the parties. The parties had set out all the principal terms governing the sale of land, including “an obligation to execute a formal contract” and a promise by the seller to “execute, if required …, a further agreement”. The court said that although the clause gave the vendor the choice of inserting additional terms to those already agreed upon, he could not insert terms that were inconsistent with those in the document and any such additional conditions needed to be “reasonable”. This was not an “agreement to agree” or a “conditional acceptance” but an agreement by Godecke to accept additional provisions if reasonably required. A binding agreement had been made.

ANZ Banking Group v Frost [3.640] In ANZ Banking Group v Frost [1989] VR 695, Frost submitted a proposal to the ANZ that the Bank accepted “in principle” but there was absence of agreement “concerning the style, size, quality and price of the proposed calendar”. ANZ subsequently advised Frost it did not wish to proceed. Frost sued for breach of contract.

chapter 3 Offer and Acceptance

The Supreme Court of Victoria held that there was no agreement on essential terms. Where a “relevant or critical term” requires future agreement it is not an enforceable contract.

Further reading See contract texts listed at the end of Chapter 2.

Tutorial activities 3.1

Why must an acceptance be unconditional? What, in effect, is a conditional acceptance?

3.2

What is an option contract? How is it different from a deposit?

3.3

Assume that B has accepted an offer from A. When and where is the contract made if the acceptance is communicated by (a) telephone (b) post (c) email? In your answer to (c) refer to relevant legislation.

3.4

Review the example webpage and contractual documents at the end of Chapter 2 regarding Clayton Sports World and answer the following questions.

3.5

(a)

Who is the offeror?

(b)

Who is the offeree?

(c)

Has the offeror required a specific form of acceptance? If yes, what is required?

(d)

Identify the communications between the parties that are anticipated under the webpage and contractual documents. Would the Electronic Transactions Act 1999 (Cth) apply to any of the communications between the parties in these circumstances? Explain why by reference to the legislation.

Hardly Normal Pty Ltd, a vendor of electronic equipment, advertised: “NEVER TO BE REPEATED OFFER. 50in PANASONIC PLASMA 3D TELEVISIONS @ $7500” Ben saw the advertisement and the next day (Thursday) went to the store and said to Mary, the sales manager: “I accept the offer on the plasma 3D TV – here is my card – please deliver it as soon as possible.” Mary told him to slow down. “Unfortunately, there has been a rush and we’ve sold out”, she said. “Look” said Ben, “I know my business law – we’ve got a contract”. Mary told him he was a young fool but went on to say: “The only 3D plasma left is the demonstration model, and you can have that for $6,000. Not a bad price as they usually sell for around $7,500. That should make you happy.” Ben was not sure and said that he would think about it and let her know by noon the next day (Friday). Mary said she would definitely keep it for him until then. However, at 9.00 am on Friday Jin Tao walked into the store, saw the demonstration model, and offered Mary $6,500 for it. Mary sold it to her. At 10.00 am Friday Ben rang Mary and told her that he would buy the demonstration set at the price she offered. Mary then told him the bad news – the set had been

93

94

Introduction to Business Law in Australia

sold. Ben comes to your law offices and seeks your advice as to whether he and Hardly Normal Pty Ltd had a contract on either Thursday or Friday. Advise him. 3.6

David wanted to purchase a car. He searched through the local papers, the Trading Post and The Herald Sun classifieds. Eventually, he found a 1988 Volvo station-wagon. After remembering his grandmother’s old car, he decided that it would be perfect. David rang the number in the advertisement and spoke to Sarah, the Volvo’s owner. Consider the following separate and unrelated scenarios: (a)

After some negotiations, Sarah offers to sell David the car for $4,500. In response, David says “I need some time to think about it. I’ll call you back soon”. Five minutes later, David receives a call from his sister, Diana. Their mother has been rushed to hospital in Geelong. David and Diana immediately head to Geelong to look after their mother. Six months later, after returning to Melbourne, David wants to accept Sarah’s offer. Is he able to?

(b)

After some negotiations, Sarah offers to sell David the car for $4,500 and says she will keep her offer open for the next 30 minutes. Five minutes later, while David was considering the offer, Sarah receives a call from Angelo who offers $5,500 for the car. She immediately accepts. David calls a few minutes later (within the 30-minute limit) and communicates his acceptance of her offer. Does David have a contract with Sarah? If he does, consider what remedy he might have.

(c)

After some negotiations, Sarah offers to sell David the car for $4,500. In response, David says “I need some time to think about it. I’ll call you back soon.” David calls back and offers Sarah $4,000 for the car. Sarah says it is not enough. David then says “I accept your earlier offer, and will pay you the $4,500.” Sarah refuses. Advise David whether he has a contract with Sarah.

3.7

Reginald decided he no longer wanted to keep the holiday house he owns at Lorne on Victoria’s south-west coast. He agrees to sell it to his brother, Tom. They agree on a purchase price of $280,000 and sign a document dated 10 June by which Tom agreed to buy and Reginald agreed to sell “subject to a proper contract being prepared on these same terms by the purchaser’s solicitors”. The settlement date was named as 10 September, on which date the purchase money was to be paid and possession given to Tom. A contract of sale, prepared by Tom’s solicitors, was sent to Reginald for signature on 20 June. However, Reginald refused to sign, saying he had changed his mind. Advise Tom of any rights he may have. Please cite relevant case authorities

3.8

Peter who lived in Adelaide saw an advertisement posted by Daniel on the Harley Davidson website that said “Wanted: a ’62 Harley Davidson Roadster”. Peter telephoned Daniel, an academic at Monash University, on 3 November and after some discussions about the bike and its condition, Peter offered to sell his 1962 Roadster (the kind made famous in the film Easy Rider) to Daniel for $30,000. Photos of the bike were on the classified advertisements page. Daniel was thrilled (only a few genuine originals are to be found in Australia) but said he needed time to arrange the finances. Peter said that he understood and promised to keep the offer open for a week. They exchanged phone numbers and home addresses. “Just let me know by 5.00pm November 10”, were Peter’s final words. Daniel arranged a loan on November 5 and decided to accept Peter’s offer. He rang him repeatedly throughout the day but could not reach him. The following day he tried and failed again. He therefore sent a letter of acceptance on the same day, in which he included a cheque for $3000 “as deposit with the balance payable on delivery”. In the letter he enquired whether Peter would arrange delivery – (“could you arrange for it to be sent by rail (I’ll pay!) or are you ready to ride it to

chapter 3 Offer and Acceptance

Melb?”). In fact, Daniel could not reach Peter by telephone on November 5 because Peter had left on a five day business trip to Los Angeles. After visiting a “movie museum” in LA that contained the original bike from Easy Rider he grew nostalgic about his own bike and decided not to sell it. He looked up Daniel on Monash’s internet site and found his email address. He sent him an e-mail on November 9 withdrawing the offer. Daniel opened up his email late on November 9 and read Peter’s e-mail. Peter returned home from Los Angeles and read Daniel’s letter on the morning of November 10. He still did not want to sell and returned the cheque. Daniel seeks your advice as to whether he has a legally binding contract with Peter. Support the analysis in your advice with relevant cases.

95

chapter 4

Intention to Create Legal Relations [4.10] Introduction ............................................................................................................................................................... 98 [4.20] Intention and social and domestic agreements..................................................................................... 98 [4.140] Intention and commercial agreements................................................................................................ 102

98

Introduction to Business Law in Australia

Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 4.

Introduction For the parties to an agreement to be able to sue and be sued they must intend to create legal relations – that is, they must intend that the agreement be enforceable in the courts, if necessary, in the event of a breach. In the event that they have to determine whether such an intention exists the courts have traditionally applied an objective test: [T]he court does not try to discover the intention by looking into the minds of the parties. It looks at the situation in which they were placed and asks itself: Would reasonable people regard the agreement as intended to be binding?: Merritt v Merritt [1970] 1 WLR 1211 at 1213 per Lord Denning MR. Two presumptions have evolved to assist the court in the determining whether an intention exists. Parties who make social or domestic agreements are generally presumed not to intend that the agreement will be legally binding. On the other hand, where the agreements are commercial in nature, the parties are presumed to intend to make a legally enforcement agreement. There are obviously situations that are not clear. In these situations the party seeking to rebut the normal presumption bears the onus of proving that the presumption should not apply. Notwithstanding the High Court’s warning in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 (see [4.130]) that “it would be both difficult and wrong to use strict rules in relation to ‘presumptions’ to determine whether or not intention exists in any particular case” we will nevertheless consider the question of whether there is an intention to create legal relations by looking at the presumptions that arise in relation to: (a)

social and domestic agreements; and

(b)

commercial agreements.

Intention and social and domestic agreements [4.20] There is a presumption of fact that social and domestic agreements are not intended to give rise to legal relations. However, this presumption may be readily rebutted if the evidence discloses a contrary intention.

Agreements between a husband and wife [4.30] In normal circumstances the courts will regard domestic arrangements between a husband and wife as not intended to give rise to legally enforceable obligations. An example is provided by the following case:

Balfour v Balfour [4.40] Balfour v Balfour [1919] 2 KB 571. The defendant was a civil engineer employed by the Government of Sri Lanka (or Ceylon as it was then called) as Director of Irrigation. He and his wife lived in Sri Lanka together until they returned to England for his leave. When he returned to Sri Lanka she was unable to accompany him because of her ill health. At this point, he promised to pay her £30 a month as maintenance during the time that they were forced to live apart. When the relationship

chapter 4 Intention to Create Legal Relations

deteriorated she commenced divorce proceedings. She claimed she was entitled to the amount she and her husband had agreed upon. Her action failed. The Court held that the agreement was an ordinary domestic arrangement which was not intended to give rise to a legally binding contract. As Atkin LJ said: “The common law does not regulate the form of agreements between spouses. Their promises are not sealed with seals and sealing wax. The consideration that really obtains for them is that natural love and affection which counts for so little in these cold courts ... the plaintiff has not established any contract.”: at 579-580.

[4.50] The same principle applies to continuing de facto relationships. The principle does not apply to agreements made after the de facto relationship has ended: Shortall v White [2007] NSWCA 372 at [18]. However, where the agreement between a husband and wife falls outside normal domestic arrangements and concerns some essentially commercial matter, such as their relationship under a business partnership, then it will be enforceable: Milliner v Milliner (1908) 8 SR (NSW) 471. Similarly, agreements as to the disposition of property where the marital relationship has broken down will be enforceable.

Merritt v Merritt [4.60] Merritt v Merritt [1970] 1 WLR 1211. A husband left his wife to live with another woman. It was arranged that the husband would pay the wife a monthly allowance out of which she was to pay the outstanding balance on the mortgage of the matrimonial home which was in their joint names. The husband signed a document stating that, in consideration of her paying all charges in connection with the home until the mortgage repayments had been completed, he agreed to transfer the house into her sole ownership. The wife paid off the remainder of the mortgage but the husband refused to transfer the house to her. It was held that since the parties had separated, the agreement regarding the ownership of the matrimonial home was one which was intended to create legal relations and was binding on them.

Other family or social agreements [4.70] Similarly, while other kinds of family arrangements are not generally regarded as intended to give rise to enforceable rights and obligations, the circumstances may indicate that the parties intended to be legally bound. The court is more inclined to find an intention to create legal relations where one of the parties has significantly changed their position in reliance on the agreement.

Todd v Nicol [4.75] Todd v Nicol [1957] SASR 72. Mrs Nicol was living in South Australia by herself after her husband died. She wrote to her sister-in-law, Margaret Todd, and Margaret’s daughter, Gracie, who lived in Scotland, and invited them to come and live with her on the understanding that they would live rent-free and that she would leave her house to them when she died. As she said:

99

100

Introduction to Business Law in Australia

“I must have company at my age – it is not good to live alone... The house is big enough, I will do all I can to make it comfortable for you, and we could change it around when you arrive ... I will help with emigration and jobs ... You would share my home ... and no rent at all.” The Todds replied, accepting her invitation. They terminated the lease on their home and sold their furniture and surplus belongings. Margaret resigned from her job, and they bought tickets to travel by sea to Australia. After hearing this, Mrs Nicol wrote to say that she had varied her will so that if anything were to happen to her, “when I sign it the house is yours for life Margaret without expense, also you Gracie (unless you marry)”. In a following letter she said that she was “doing her darndest to think things out for their protection – just in case.” Shortly after they arrived in Australia the parties argued and Mrs Nicol sought to remove the plaintiffs from her house. The plaintiffs sued, claiming a contract had been formed, giving them the right to live in the house rent-free for life (or in Gracie’s case, until she married). The court decided that although there was a presumption that in a family arrangement of this kind there would be no intention to create a legal relationship, it was rebutted by evidence of the cost and inconvenience to the plaintiffs. Certainly, where there are significant commercial consequences that flow from a social or domestic agreement the presumption may be rebutted. Note: although the plaintiffs succeeded in establishing that there was a contract, Mayo J held there was an implied term in the agreement that obliged the Todds to behave in a reasonable manner. In behaving badly towards Mrs Nicol they had breached this implied term and the court refused to order Mrs Nicol to allow them to live in her home. In similar circumstances the presumption was also rebutted in the following case but, in this instance, the plaintiff son succeeded in an action against his mother.

Riches v Hogben [4.80] Riches v Hogben [1986] 1 Qd R 315. An 88-year-old widow persuaded her 64-year-old son and his family to migrate to Australia with her from the UK on the promise of buying a house here in the son’s name if they would take care of her during her lifetime. The son and his family gave up their rent-free council house in the UK and sold their possessions at a considerable loss. On arrival in Australia, the widow bought a house in her own name and ordered her son and his family to leave the house after only seven days following an argument. The Court held that the agreement between the parties went beyond a mere family arrangement and was intended to have legal effect. It was further held that in the circumstances the widow was trustee of the house for the benefit of her son and was ordered to transfer it to him subject to her right to live in a “granny flat” attached to the house during her lifetime. [4.90] While most social arrangements are regarded as too insubstantial to be intended to give rise to legal rights and obligations, agreements to participate in a competition or lottery have been held to be enforceable.

chapter 4 Intention to Create Legal Relations

Trevey v Grubb [4.100] Trevey v Grubb (1982) 44 ALR 20. Where a Tattslotto entry coupon lodged by one person on behalf of a three-member syndicate won a first prize of $218,000, the High Court held that in the circumstances – there was a lot of money at stake, systematic behaviour over time, and statements such as “more chance to win with more people” – there was an enforceable contract to share the winnings in the same proportion as the proportion of costs of the winning entry paid by each party. Hence, as the appellant had contributed 50 cents of the $2 winning entry, she was entitled to receive 25 per cent of the total prize-money.

Voluntary work [4.110] Participation in the activities of a charitable or other voluntary organisation will not normally give rise to contractual rights and obligations.

Teen Ranch Pty Ltd v Brown [4.120] Teen Ranch Pty Ltd v Brown (1995) 87 IR 308. The respondent was injured while working as a volunteer at a camp for teenagers run by a non-profit Christian organisation. It was held that no contract of service existed between the respondent and the organisation since there was no indication that legal relations were contemplated by the parties. Accordingly, the respondent was not entitled to workers’ compensation.

Religious or spiritual work [4.25] The High Court warned in the following case (concerning an action by a religious leader to recover his accumulated leave and other entitlements) that the concept of “presumptions” should not distract us from the more important task which is to consider all the circumstances of a particular case and ask whether a reasonable person would say that there was an intention to make a legally binding agreement.

Ermogenous v Greek Orthodox Community of SA Inc [4.130] Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95. When he resigned after more than 20 years employment with the Greek Orthodox Church Archbishop Ermogenous made a claim for payments for annual and long service leave. The Church refused, arguing that his employment with the Church was not “contractual”. The Archbishop eventually took his case to the High Court and succeeded. The High Court said it would be both difficult and wrong to use strict rules in relation to “presumptions” to determine whether or not intention exists in any particular case. The majority of the Court said it was wrong to make a presumption that there was no intention to create legal relations simply because it was a matter concerning the engagement of a minister of religion. Kirby J said (at 76):

101

102

Introduction to Business Law in Australia

“… It would be contrary to basic principle to suggest that his spiritual calling somehow placed him outside the rights and duties of the law ... a proved agreement with a body such as the respondent to provide for the necessities of life of a minister of religion ... is not one which Australian law will refuse to enforce because the law presumes a lack of intention to enter legal relations.”

Intention and commercial agreements [4.140] Where an agreement is reached in the course of business dealings there is a presumption that the parties intended to create legal relations. Accordingly, the courts will enforce such agreements unless it is apparent that the parties did not intend that their agreement should be legally binding. It has been said that: “The whole thrust of the law today is to attempt to give proper effect to commercial transactions. … If the statements are appropriately promissory in character, courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable”: Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 at 523. On the other hand: “A loosely formed shared idea, based wholly or partly on common expectations, mutual optimism and misplaced enthusiasm, to which greed and the hope of financial gain may be added in varying degrees, is not a contract”: Conway v Critchley [2012] NSWSC 1405 at [6].

Malago Pty Ltd v AW Ellis Engineering Pty Ltd [4.150] Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] NSWCA 227. Following a mediation the parties entered into Heads of Agreement. The Agreement provided that: “[w]ithout affecting the binding nature of these Heads of Agreement the parties within 7 days [are] to execute a formal document or documents as agreed between their respective solicitors to carry out and express in more formal terms and additional terms as these Heads of Agreement”: at [10]. The New South Wales Court of Appeal held that the Agreement was binding. The words “without affecting the binding nature” of the Agreement were “decisive” in establishing the intention to be bound: at [23]. [4.160] Ordinarily, where a business or land is sold, a contract will not be created until a formal contract has been signed. However, in such a situation a contract can arise even without the signing of a formal contract if the parties intended to be immediately bound.

chapter 4 Intention to Create Legal Relations

Souter v Shyamba Pty Ltd [4.170] Souter v Shyamba Pty Ltd (2002) 11 BPR 20,369. Following several months of negotiations, the parties signed a document regarding the sale of a hotel. This document set out the price, the contracting parties and the property to be sold. The vendor asked its solicitors to draft a formal contract. After another buyer made a better offer, the vendor argued that it was not bound by the document. It was held that the document constituted a binding contract. The document was expressed in formal and legalistic language and was not expressed to be subject to contract. The parties had intended that the document would conclude the negotiations between them. The document included all essential terms, including “the parties, the property, the price and the promises”: at [26].

Express exclusion of intention [4.180] Where the agreement includes an express stipulation that it is not intended to give rise to legally enforceable obligations, the courts will give effect to such provision. Accordingly, such an agreement will not be enforceable at law.

Rose & Frank Co v JR Crompton & Bros Ltd [4.190] Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445. An agreement contained a clause which stated: “This arrangement is not entered into … as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts …, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves, with the fullest confidence – based on past business with each other – that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation”. It was held that the agreement was not a legally binding contract. It was clear from the clause that the agreement was intended to be binding in honour only and not intended to create legal obligations. The use of words in the agreement such as “not ... a formal agreement” and “honourably pledge” indicated that the parties did not have the intention to create a legally binding agreement. As Atkin LJ said: “In this document, construed as a whole ... the clause in question expresses in clear terms the mutual intention of the parties not to enter into legal obligations ... I see nothing necessarily absurd in businessmen seeking to regulate their business relations by mutual promises which fall short of legal obligations, and rest on obligations of either honour or self-interest ....”: at 293.

[4.200] It is common to insert in competition, lottery and pools forms a stipulation to the effect that entry into the competition is not intended to give rise to legally enforceable obligations. A provision of this kind was considered in the following case:

103

104

Introduction to Business Law in Australia

Jones v Vernon's Pools Ltd [4.210] Jones v Vernon’s Pools Ltd [1938] 2 All ER 626. The plaintiff alleged that he had sent in a completed football coupon to the defendant pools company. It would have been a winning coupon but could not be traced by the defendant. When sued by the plaintiff, the defendant relied on the following clause included on its coupons: “It is a basic condition of the sending in and acceptance of this coupon that it is intended and agreed that the conduct of the pools and everything done in connection therewith … shall not be attended by or give rise to any legal relationship, rights, duties or consequences whatsoever or be legally enforceable or the subject of litigation, but all such arrangements, agreements and transactions are binding in honour only.” It was held that in view of the clause the agreement was not intended to give rise to a legally binding contract. Accordingly, the plaintiff had no enforceable claim against the defendant pools company.

Letters of comfort [4.220] A letter of comfort is usually written by a parent company to a lender giving “comfort” to the lender about a loan to be made by the lender to a subsidiary of the parent company. 1 Such a letter may be given in circumstances where, for example, the parent company is unwilling to accept the legal commitments of a guarantor to the lender for the loan to its subsidiary, or there may be other reasons why the parent company does not want to enter a formal contract of guarantee in respect of its subsidiary’s loan, for example, to avoid accounting requirements that would require the parent to include a contingent liability in respect of the guarantee on the parent company’s balance sheet. Where the parent company is a substantial company of good reputation, a letter of comfort that it issues in respect of its subsidiary may be regarded by the lender as a sufficient alternative to a guarantee or other form of security for the loan. The courts will determine whether the parties intend a letter of comfort to be legally binding by looking objectively at the words used in the letter and the surrounding circumstances A letter of comfort tends to be phrased in general terms and will typically include: (a)

an acknowledgment that the parent company is aware of the proposed loan and approves of it;

(b)

a commitment to maintain its shareholding in the borrowing company so long as the loan is outstanding; and

(c)

some statement of support to the lender, couched in terms such as: “It is our policy to ensure that the business of [the borrowing company] is at all times in a position to meet its liabilities to you”.

Letters of comfort tend to be construed by the courts as merely statements of commercial intent and not legally enforceable contracts of security: Australian European Finance Corp Ltd v Sheahan (1993) 60 SASR 187; ATCO Controls Pty Ltd (In liq) v Newtronics Pty Ltd (In liq) (2009) 25 VR 411 at [54]; contrast the following case:

1

See generally M Seddon, “Letters of Comfort” (1998) 26 Australian Business Law Review 309; L Thai, “Comfort Letters – A Fresh Look?” (2006) 17 Journal of Banking and Finance Law and Practice 15.

chapter 4 Intention to Create Legal Relations

Banque Brussels Lambert SA v Australian National Industries Ltd [4.222] Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502. When Banque Brussels was negotiating a loan of $5 million to Smedley Securities, ANI (which had a controlling interest in Smedley’s parent company) provided a letter of comfort to the bank in which ANI agreed to inform the bank if it decided to dispose of its holding in Smedley’s parent company. The letter also said: “We take this opportunity to confirm that it is our practice to ensure that Smedley Securities Ltd will at all times be in a position to meet its financial obligations ... (including) repayment of all loans made by your bank.” ANI disposed of its holding without giving notice and Smedley went into liquidation. When the bank could not recover its loan it sued ANI, arguing that the letter of comfort contained a contractual promise that it would in effect guarantee the loan made to Smedley. ANI argued that the letter was not intended to create a legal relationship between it and the bank. The court began with the presumption that parties to commercial arrangements intend their agreements to have legal effect and found that ANI had not adduced enough evidence to rebut the presumption. Rogers CJ said: “There should be no room in the proper flow of commerce for some purgatory where statements made by businessmen, after hard bargaining and made to induce another business person to enter into a business transaction would, without any express statement to that effect, reside in a twilight zone of merely honourable engagement. The whole thrust of the law today is to attempt to give proper effect to commercial transactions. If the statements are appropriately promissory in character, courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable”: at 532.

In Norman v FEA Plantation Ltd (2011) 195 FCR 97, FEA wrote a “letter of commitment” which stated that it would provide FEAP with sufficient cash to meet its ongoing obligations: at [6]. As a holder of a financial services licence FEAP was subject to a “cash needs requirement”: at [14]. The Full Federal Court held that the letter bound FEA in view of its terms and the circumstances in which it was given: at [91]. The word “commitment” connoted obligation, especially when read in the regulatory context of the cash needs requirement: at [98].

Government policy proposals [4.225] The courts have traditionally kept out of political fights, in much the same way, as we saw earlier, that they have been reluctant to decide family disputes. Where promises made by government are in the nature of policy commitments (for example, the promise to build a national broadband network or a school hall or subsidise solar panels), the courts have been reluctant to say that these promises create contractual obligations between the government and some of the citizenry. Broken policy commitments may have political consequences; they do not generally have legal ones. However, where the government enters into normal commercial agreements to buy or sell goods or services (for example, it signs a contract with Toyota to purchase a fleet of cars or signs a contract with a builder to construct a school hall or signs a contract to build an $8 billion tunnel) it is bound by the normal

105

106

Introduction to Business Law in Australia

law of contract. In other words, there is a presumption that the parties to such a contract intended to make a binding contract and it is enforceable by and against the government.

Australian Woollen Mills Pty Ltd v Commonwealth of Australia [4.227] Australian Woollen Mills Pty Ltd v Commonwealth of Australia (1954) 92 CLR 424: After World War II the Commonwealth Government announced that it would pay a subsidy for wool that was bought by manufacturers for the purpose of manufacturing within Australia. Acting on the policy, Australian Woollen Mills (AWM) bought wool and received a subsidy for one year. However when AWM purchased wool the next year and then applied for the subsidy they were refused, as the government announced the scheme would be terminated. The question arose as to whether the Commonwealth had intended to enter into a contract to continue the subsidy. The High Court found that there were a number of factors that indicated that this was more in the nature of an administrative scheme rather than a contractual obligation to pay a subsidy. For instance, the Commonwealth expressly reserved the right to vary the amount of the subsidy and there was no formal agreement between the government and the manufacturers. The court decided that these factors, combined with the courts’ general reluctance to regard policy commitments as contractual obligations, meant that there was no binding contract to subsidise wool purchases.

Further reading See contract texts listed at the end of Chapter 2.

Tutorial activities 4.1 4.2

What are the presumptions that operate in this area of law and how can they be rebutted? Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following questions: (a)

What presumption would operate in respect of this agreement if a member of the public enters into an agreement with CSW?

(b)

Do the circumstances support or rebut that presumption?

4.3

George and Michael are best friends who work for the same company. They are rewarded for their excellent work with a ticket to the corporate boxes at the 2010 Melbourne Cup. They agree to place bets on unfancied horses in every race and decide to take it in turns to walk from the box to the betting ring to place bets. They agree that each will place a bet of $100 per race. On the third race of the day George places a bet of $100 for a win and a place on a long-shot called Trust and Loyalty and wins $24,500. He then refuses to share the proceeds with Michael, saying it was just the luck of the draw and Michael would have done the same. Advise Michael if he has contractual rights against his (ex-) best friend.

4.4

Mac Investments Pty Ltd (MI) received a call from Como Bank Ltd (Como). It was concerned about lending a substantial sum of money to Bankers Trust Pty Ltd (BT), a subsidiary company of MI. In the wake of the 2009 Global Financial Crisis, the parent company was aware that BT needed to borrow funds to continue trading in the securities and futures market and wrote a letter to Como in the following terms:

chapter 4 Intention to Create Legal Relations

MI supports the loan to BT and undertakes to ensure that it remains in a position to repay the loan. BT subsequently defaults on the loan and Como looks to MI to compensate it for its losses. Advise Como of its rights in this matter and explain how it might better protect itself in the future. 4.5

Promises made by governments that are of a political nature (for example, the promise to pay a subsidy to woolgrowers or to build a National Broadband Network or to rebuild infrastructure after floods or bushfires) are not legally enforceable. Can you justify this position?

4.6

In 2001 Jimmy and four of his high school friends decided to form a band and have some fun. They called themselves Cold Spanner. After a few years of playing the pubs and clubs they made a successful CD and were becoming well known. One the band, Jaz, was writing songs for Cold Spanner and other artists and one of his songs was picked up by Freddy and the Dreamers. At this point, the group had a meeting about future directions. It was attended by the band’s accountant/lawyer. At this meeting, when asked about the proceeds and royalties from his song writing, Jaz said he would share his income from his song writing with the group. This happened for several years but after Cold Spanner broke up in 2008 Jaz stopped sharing the proceeds. Jimmy and the rest of the band said this was a breach of the contract. Jaz said he never intended to make a contract in the first place. Advise Jaz.

107

chapter 5

Consideration, Promissory Estoppel and Formalities [5.10] Terminology ........................................................................................................................................................... 110 [5.20] Introduction ............................................................................................................................................................ 110 [5.30] Consideration ........................................................................................................................................................ 111 [5.310] Promissory or equitable estoppels ........................................................................................................ 120 [5.410] Formalities........................................................................................................................................................... 125

110

Introduction to Business Law in Australia

[5.10] Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 5.

Terminology [5.10] Here is a list of some of the key terms that are useful to an understanding of consideration:  consideration: the giving of something of value in exchange for a promise. This may comprise “… some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”: Currie v Misa (1875) LR 10 Ex 153.  deed: an instrument (a document) which derives its validity from its form (ie, it is in writing; sometimes the format is prescribed by law; it is signed, sealed and delivered; it passes an interest, right or property to another; and it does not require consideration).  executory consideration: consideration is yet to be performed, consideration cannot be past as this will not bind the promisor.  estoppel: a principle of law which stops a person from denying the truth of some statement they formerly made or of some action they took.  forbearance: to give up something, to give up a right or opportunity, a promise not to do something.  future (or executory) consideration: arises when the parties exchange promises, the consideration to be performed in the future.  past consideration: arises where the promise is made after the act.  present (or executory) consideration: arises where an act is done in return for a promise.  promisee: the person to whom a promise is made (ie, the recipient of the promise).  promisor: the person making or giving the promise.  promissory estoppel: (sometimes referred to as equitable estoppel) occurs when representations or promises made by one party (the promisor) not to enforce contractual rights are acted on by the other party (the promisee) in such a way that if the promisor was allowed to go back on the promise the promisee would suffer some detriment.  simple contracts: contracts not made under seal (ie, they require intention, agreement and consideration).  unconscionable: against good conscience, so unfair that a court will not enforce an agreement. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 5.

Introduction [5.20] This chapter discusses three issues. First, we consider the third essential element in the formation of a contract – consideration. Second, we consider the equitable doctrine of promissory estoppel which offers some relief from the strict common law rule that a promise is not enforceable unless some consideration has been given. Thirdly, some contracts will only be enforceable if certain formalities are complied with.

chapter 5 Consideration, Promissory Estoppel and Formalities

Consideration The requirement of consideration [5.30] In all simple contracts, consideration – something of value – must be present for the agreement to be valid. The vast majority of contracts are simple contracts, that is, they are not made under seal: see ([5.180]). Such contracts may be oral, written or may be implied from the conduct of the parties. Broadly speaking, the requirement of consideration means that a promise can only be legally enforced by the promisee (the person to whom the promise is made) if the promisee can show that they have given or promised to give something of value in return for the promise. Accordingly, a bare or gratuitous promise, for example a promise by A to give B $100, is not enforceable (when, for example, A changes her mind) because nothing of value has been given or promised in return by B, the promisee. A promise that is not supported by consideration is referred to as a “bare” promise, or a “gratuitous” promise.

The basic differences between simple contracts and contracts under seal [5.40] These are the basic differences between a contract under seal (or a deed) and a simple contract: 1.

A gratuitous promise is binding if under seal but is not binding in the case of a simple contract.

2.

A party to a contract under seal is “estopped” (prevented from denying) the facts expressed in it.

3.

The period during which a right of action arising out of a contract under seal can be enforced is 20 years in Western Australia; 15 years in Victoria and South Australia; and 12 years in New South Wales, Queensland, Tasmania and the Northern Territory. In the case of a simple contract the period is, in general, six years.

4.

The terms of a simple contract will merge in a deed, that is, if a simple contract is entered into and a deed is executed in substitution for it, then the simple contract comes to an end; however, this is so only where the parties are the same and the deed is in respect of the same matters as the simple contract.

The definition of consideration [5.50] In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, Lord Dunedin adopted the following definition of consideration: “An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable”: at 855. Consideration was described in the New South Wales Court of Appeal as follows: “Without consideration, a promise is unenforceable at law. The modern theory of consideration has arisen from the notion that a contract is a bargain struck between the parties by an exchange. By that modern theory, consideration must be satisfied in the form of a price in return for the promisor’s promise. The price can be in the form of an act, forbearance or promise”: Beaton v McDevitt (1987) 13 NSWLR 162, 168 per Kirby P. In essence then, consideration is the bargain element of a contract; it is the price paid, the thing given or promised, the detriment suffered by one party in exchange for the other party’s promise. For example, in an ordinary consumer contract (A purchasing a couch from B) the exchange of promises is consideration. To reiterate, a promise is valuable consideration when given in exchange for a promise from the other party. In this example, A promises to B that A will pay the agreed price of the couch. In exchange for A’s promise, B

111

112

Introduction to Business Law in Australia

promises that she will give A the couch. Conversely, C’s promise to pay D $500 is, on the face of it, a bare promise (ie it is a promise of a gift) and therefore unenforceable by D. That same promise is enforceable if it is made in exchange for D’s promise to sell her his smart phone.

Essential rules regarding consideration Figure 5.1: Rules of consideration

chapter 5 Consideration, Promissory Estoppel and Formalities

[5.60] 1. Consideration must be sufficient but need not be adequate. The consideration provided by the promisee must have some recognised legal “value” but it need not be a “fair” exchange. The courts are disinclined to assess whether the deal was a good one for both parties. Thus a promise to lease premises in exchange for a promise to pay a “peppercorn rental” (say $1 per annum) is of sufficient value to make an enforceable contract. If the promise is too vague or uncertain or does not oblige the promisor to do anything, it will have no legal value and cannot be consideration for the promise that the promisee is seeking to enforce.

Thomas v Thomas [5.70] Thomas v Thomas (1842) 2 QB 851: Just before he died, John Thomas orally expressed a desire for his wife to have their house. After his death the executors of his estate entered into an agreement with his wife “in consideration of John’s desires” pursuant to which she would stay in the house and, in return, pay one pound per year. After a certain time she would be entitled to have the title conveyed to her. She lived in the house for some time but the executor refused to complete the conveyance claiming the agreement was unenforceable because no valuable consideration had been provided. The court decided in favour of the wife. It said that the court will not look into the adequacy of consideration or the motivation for entering the agreement (honouring Thomas’ dying wish) provided that there is a real bargain between the parties. Motive is irrelevant; consideration is not. In this case there is sufficient consideration (the token rental) coming from Thomas’ wife, and for this reason alone (and quite independent of the moral feeling that motivated the executors to enter into the agreement) the agreement is enforceable. [5.80] 2. Consideration must not be illusory. This occurs when there is no objective way of evaluating the promise

White v Bluett [5.90] In White v Bluett (1853) 23 LJ Ex 36. Bluett had loaned his son some money. After Bluett died, the executor, White, sued the son when he refused to repay the loan money. In his defense, the son argued that his father had said the son need not repay if the son would stop complaining about how his father would distribute his property in his will (he was anxious about his siblings getting more than him). White succeeded. The Court held there was no consideration provided by the son to his father for any discharge of the obligation to repay. The son had “no right to complain” anyway. Not complaining was therefore an entirely intangible (and not valuable) benefit and so did not amount to consideration.

Chappell & Co Ltd v Nestle Co Ltd [5.100] Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87. Nestle were the manufacturers of chocolate products. To promote sales of its chocolate bars, Nestle entered into a contract with Chappell that allowed it to sell copies of the song “Rockin’ Shoes” (Chappell owned the copyright)

113

114

Introduction to Business Law in Australia

for 1s 6d plus three chocolate bar wrappers. The Copyright Act 1968 (Cth) s 8 said a 6.25% royalty needed to be paid on the “ordinary retail selling price” to the owners of copyright. Nestle said 1s 6d was the “ordinary retail selling price”, but Chappell argued that the consideration should include the value of the wrappers. The House of Lords held that the wrappers formed part of the consideration. Lord Somervell said: “I think they are part of the consideration. They are so described in the offer. ‘They..will help you to get smash hit recordings.’ They are so described in the record itself – ‘all you have to do to get such new record is to send three wrappers from Nestlé’s 6d. milk chocolate bars, together with postal order for 1s. 6d.’…It is said that when received the wrappers are of no value to Nestlé’s. This I would have thought irrelevant. A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee not like pepper and will throw away the corn. As the whole object of selling the record was to increase the sales of chocolate, it seems to me wrong not to treat the stipulated evidence of such sales as part of the consideration”: at 114.

[5.110] 3. Consideration may be executed or executory but cannot be past consideration. (Certain exceptions exist to the rule that past consideration will not support a simple contract: see [5.130]). Consideration is executed where one party performs an act in exchange for the other party’s promise. For example, A offers a $100 reward for the return of his lost wallet. B, on finding and returning the wallet, has performed her part of the bargain. It remains for A to fulfil his obligation by paying the reward. Consideration is executory where one party has given a promise to do, or refrain from doing, something in exchange for the other party’s promise. For example, A agrees to sell B one tonne of coal on the basis that B is to pay for it on delivery. In this case both promises are not yet performed and each provides consideration for the other. If a person performs an act (B drives A from Melbourne to Adelaide) and then after the act is performed the other person makes a promise (A promises B $200) the promise is unenforceable because the act was not done in exchange for the promise. This is called past consideration. Since “consideration” is defined as the price paid in exchange for a promise, acts that are done prior to the promise can never in law amount to consideration sufficient to support a subsequent promise. In the following case the promise to increase Anderson’s wage in the future is enforceable (it is an example of executory consideration – a promise to pay exchanged for a promise to work). However, it is a different story for the promise to pay him for work already done:

Anderson v Glass [5.120] Anderson v Glass (1868) 5 WW & AB (L) 152. Glass promised to give his overseer increased wages, not only for the future, but for a past period during which his wages had been at a previously agreed lower rate. It was held that the contract was unenforceable as to the past period for want of consideration. The promise to pay increased wages for past services was based on a past consideration.

chapter 5 Consideration, Promissory Estoppel and Formalities

[5.130] 4. Exception to the “past consideration” rule. Where the consideration amounts to some past act or forbearance that was done at the request of the person making the present promise.

Pao On v Lau Yiu Long [5.140] Pao On v Lau Yiu Long [1980] AC 614. In 1973, Pao agreed to sell to Fu Chip Investment Co Ltd (a company controlled by Lau Yiu Long and family), the issued capital of Shing On Estate Co Ltd (a company controlled by Pau On and family) for $10.5 million to be met by allotment of 4.2 million shares of Fu Chip, each share being valued at $2.50. At the request of Fu Chip, Pao On agreed not to sell 60% of the shares until April 1974 (so as to stabilise the value of the shares). Also, in case the share price dropped in that year, Lau agreed to buy 60% of the shares back from Pao at $2.50. But then Pao realised, if the share price rose over $2.50 in the year, the price would stay fixed and he would not receive the gains. So he demanded that instead of that, Lau would merely indemnify Pao if the share price fell below $2.50. Pao made clear that unless he got this “guarantee agreement”, he would not complete the main contract. It was signed on 4 May 1973. But as it turned out the shares did slump in value. Pao tried to enforce the guarantee agreement. Lau argued the guarantee agreement was not valid because there was no consideration. The House of Lords held that the consideration was not “past” so the guarantee could be enforced. Lord Scarman said: “An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisor’s request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.”

[5.150] For instance, if Jane, a law faculty administrative officer, is asked to assist at a law conference to be held at the weekend. The conference is very successful and, on the following Monday, the Dean promises her a bonus of $1000. Later, after they argue about an unrelated matter, he informs her that he has changed his mind and will not give her the bonus. She sues him. In this case the consideration may appear to be “past” because the promise to pay came after the act (working at the weekend) but the three criteria mentioned in Pao On v Lau Yiu Long have been met:  Jane worked at the promisor’s (the Dean’s) request;  there would have been an understanding that she would not work for nothing (why would an administrative officer work on the weekend for no reward?); and  the promise would have been enforceable if it had been made before the act in question. [5.160] 5. Consideration may consist of a promise to refrain from taking legal action, provided that the person threatening such action has a bona fide belief in the claim and their prospects of success, and that the claim itself is reasonable, not vexatious or frivolous.

115

116

Introduction to Business Law in Australia

Wigan v Edwards [5.170] Wigan v Edwards (1973) 47 ALJR 586. Mr and Mrs Edwards agreed to buy a house from Wigan for $15,000. Before settlement, the plaintiffs said they had found defects and were not going to proceed. In return for their promise to proceed with the purchase, Wigan promised to remedy minor defects within one week of finance being approved and to correct any major defects occurring within five years. Wigan subsequently did not honour his promise. The Edwards sued him and sought to recover the cost of the work. The main issue was whether the Edwards had provided consideration for Wigan’s promise. The general rule is that a promise to perform an existing duty is no consideration. Here the Edwards were already obliged to complete the contract so a promise to do so in exchange for the promise to fix the defects is not consideration. An important qualification to this general principle is that a promise to do what the promisor is already bound to do is sufficient consideration when it is a bona fide compromise of a disputed claim. What is meant by bona fide? It is not required that the promisor’s (the Edwards’) claim would have succeeded had it been litigated. It must just be a reasonable one. Here the Edwards honestly believed that they did not have to complete the contract and although they may have been wrong regarding this, their claim cannot be described as frivolous or vexatious. [5.180] 6. Performing an existing obligation (at law or under contract) is not good consideration.

Collins v Godefroy [5.190] Collins v Godefroy (1831) 1 B & Ad 950; 109 ER 1040. A attended on subpoena to give evidence on B’s behalf in a case in which B was a litigant. A sued B to recover moneys which he alleged B had agreed to pay him in consideration of his giving evidence. It was held that as A was under a legal duty to give evidence because he had been subpoenaed, the giving of evidence was not consideration.

Glasbrook v Glamorgan County Council [5.200] Glasbrook v Glamorgan County Council [1925] AC 270: In this case the Court held that the police had done more than their public duty required. A miners’ strike at a coal mine resulted in the police being called. In discussions as to how best to protect the mine, the company asked for police to be stationed permanently at the coal mine. However the police felt that a mobile patrol would be sufficient. The mine company then offered to pay £2200 for the police to have a presence on the premises and the police accepted. The mine company later refused to pay arguing that the police had not provided consideration for the promise – they were doing no more than their public duty. The House of Lords decided that valuable consideration had been provided by the police. The police were under a public duty to provide protection for the mine but they had formed the view that a mobile patrol was adequate and a promise to provide more protection was consideration for the promise by the company to pay for these services.

chapter 5 Consideration, Promissory Estoppel and Formalities

Foakes v Beer [5.210] Foakes v Beer (1884) 9 App Cas 605. An example of the second class of case arose in Foakes v Beer. The plaintiff had recovered a judgment against the defendant and the defendant asked for time to pay. It was then agreed that if the defendant would pay a certain sum at once and the balance by instalments the plaintiff would not take any proceedings on the judgment. The defendant ultimately paid the whole amount of the judgment debt but the plaintiff sought to issue execution for the interest that a statute provided should accrue on the debt. It was held that the agreement to pay by installments did not relieve the defendant from the obligation of paying interest. [5.220] Where, however, the promisor agrees to do something more, albeit only a little more, or something different from what they are already obliged to do and the promisee agrees to accept that in discharge of the existing obligation, then there is sufficient consideration even though the substituted performance may not be as valuable as the original obligation.

Stilk v Myrick [5.230] Stilk v Myrick (1809) 2 Camp 317: The plaintiff contracted to work as one of 11 seamen on a return voyage from London to the Baltic at the rate of £5 per month. During that voyage two seamen deserted and the captain promised the remaining seamen they could divide the deserters’ wages between them if they continued to sail the ship. The plaintiff sued for his share when the captain returned to London and refused to honour his promise. The court decided that Stilk was already under a contractual duty to provide his services, including the duty to cover for others in an emergency. As he had done nothing more than what he was obligated to do under the existing contract, the court held that he had not provided valuable consideration for the captain’s promise. There may have been public policy reasons for the court’s insistence on a strict adherence to the original contract (not the least of which would be that the law did not want to encourage mutiny on the high seas). [5.240] Compare Stilk v Myrick (1809) 2 Camp 317 with the following case.

Hartley v Ponsonby [5.250] Hartley v Ponsonby (1857) 7 E & B 872. Hartley signed on as a crew member of the sailing ship The Mobile. When the ship reached Port Philip (in Victoria) 17 of the 36 crew deserted, leaving only 19 to sail back to India. Of those 19 only five were qualified mariners. To encourage the remainder to continue, the captain, Ponsonby, promised them additional wages. Hartley sued Ponsonby when he refused to honour his promise. The court concluded that Hartley had done more than his existing contractual duty (and therefore had provided value). In the wake of the desertion of so many men, the ship had become unseaworthy, thus allowing Hartley to terminate the contract, if he elected to do so. In agreeing to sail on, Hartley had provided valuable consideration for the modified contract.

117

118

Introduction to Business Law in Australia

A modern approach: the practical benefit test [5.260] In recent times, some courts have adopted a different, perhaps more commercially realistic, but controversial approach to disputes of this kind. They have broadened the concept of valuable consideration to include the so-called “practical benefit” test.

Williams v Roffey Bros & Nicholls (Contractors) Ltd [5.270] Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 All ER 512: The unfairness of the rule in Stilk v Myrick (1809) 2 Camp 317, if strictly applied, has led to a more generous interpretation of the idea of what can be considered to be valuable consideration. Roffey Bros and Nicholls Ltd (Roffey), a construction company, had contracted with a housing association to renovate a block of flats. There was a penalty clause in the main contract compelling Roffey to pay significant damages to the purchaser of the flats if it finished late. Some of the carpentry work was subcontracted to Williams for £20,000. Williams performed some of the work and received £16,200. However, it then became clear that he had under-quoted for the job and would not be able to fulfil his obligations on time. When Roffey became aware of this, he promised to pay Williams an extra £10,300. Only £1,500 was paid to Williams before a dispute arose and Roffey refused to pay any more money. The court decided that Williams could enforce the contractual variation. Although he had not done more than he was obliged to do under the original contract, the court decided that the promise to pay the extra money was enforceable. The court said that the traditional common law rule (Stilk v Myrick) does not apply when:  A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B;  at some stage before A has completely performed his obligations under the contract, B has reason to doubt whether A will be able to complete his side of the bargain;  B promises A an additional payment in return for A’s promise to perform his contractual obligations on time;  as a result of A giving his promise, B obtains in practice a benefit, or obviates a disbenefit;  B’s promise is not given as a result of economic duress or fraud on the part of A; and  the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding. The first three criteria had been met. But what “practical benefit” had Roffey received as a result of the variation? Williams continued on the project, relieving Roffey of the need to find another subcontractor; second, Roffey avoided having to pay penalty damages under the head contract for failing to complete on time; and third, he did not have to sue Williams for breach of contract (litigation is expensive, lengthy and uncertain). Furthermore, there was no suggestion that Williams had applied any duress to Roffey. Had Williams sensed that he had Roffey “over a barrel” and could refuse to work until assured of extra payment, the variation would not have been enforced (as it would encourage opportunistic or bullying behaviour by a party in a stronger position).

chapter 5 Consideration, Promissory Estoppel and Formalities

[5.280] The major problem with the reasoning in Williams v Roffey Bros is that the law has always required that consideration be something that is bargained for – it has never been sufficient for the promisor to have benefited in some incidental way. Although the reasoning in Williams was accepted (and extended) in the following New South Wales case, it remains to be seen whether appellate courts in Australia, particularly the High Court, accept it.

Musumeci v Winadell Pty Ltd [5.290] Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723. Musumeci leased a shop in a shopping mall owned by Winadell. He sold fruit and vegetables. Winadell subsequently leased another shop in the centre to another fruit and vegetable business. Musumeci asked for a 30% rent reduction to compensate for this and, rather than lose a tenant, Winadell agreed. When a dispute later arose Winadell changed his mind about having Musumeci as a tenant. He terminated the lease, arguing the new one (with the reduced rental) was not binding because Musumeci had not provided sufficient consideration for the promise to reduce the rental. The NSW Supreme Court held that the promise to reduce the rent was properly supported by consideration and therefore legally binding. Santow J said that the “practical benefit” exception as explained by Glidwell LJ in Roffey Bros should be accepted in Australia. His Honour then indicated that he would add an element to Glidewell LJ’s criteria in Roffey Bros. The fourth element should make it a requirement that as a result of giving this promise, A (the promisee) puts himself in a worse position than if he were to breach the contract by non-performance and, on the flip-side, B, the promisor, obtains a practical benefit. Either way – whether it be the benefit to B or the detriment to A – there is sufficient consideration to make the promise of additional payment by B binding.

Contracts under seal [5.300] A contract under seal must be in writing and signed, sealed and delivered. Contracts under seal obtain their binding force from their form alone. Every deed must now be signed 1 and attested by at least one witness who is not a party to the deed. The deed may be signed by an agent on behalf of party to the deed, though the agent’s authority to do so must derive from a deed: Lift Capital Partners Pty Ltd v Merrill Lynch International (2009) 73 NSWLR 482 at [37], [70]. It is not always essential that a seal be actually affixed, it being sufficient if the contract is expressed to be a deed: First National Securities Ltd v Jones [1978] 1 Ch 109. In Queensland and the Northern Territory delivery is defined as “the intention to be legally bound either immediately or subject to the fulfilment of a condition”. 2 Where an instrument was executed in the form of a deed, but the parties intended that it would not take effect until all parties were bound, there was no intention to be bound immediately so the instrument had not been delivered: 400 George Street (Qld) Pty 1

2

Conveyancing Act 1919 (NSW), s 38(1); Property Law Act 1958 (Vic), s 73; Property Law Act 1974 (Qld), s 45; Property Law Act 1969 (WA), s 9; Conveyancing and Law of Property Act 1884 (Tas), s 63; Law of Property Act 1936 (SA), s 41; Civil Law (Property) Act 2006 (ACT), s 219. In 1972, the latter section was amended to further provide that where it appears in any proceedings: (a) that a deed has not been duly executed by, or on behalf of, a party to the deed; or (b) that the signature or mark of a party to a deed, or a person acting on his behalf, has not been duly attested, but that the party to the deed, or person acting on his behalf, purported or intended to execute the deed and has taken a benefit under it, then the deed is deemed to have been duly executed by, or on behalf of, that party and the execution deemed to have been duly attested. Property Law Act 1974 (Qld), s 47(3); Law of Property Act 2000 (NT), s 49(3).

119

120

Introduction to Business Law in Australia

Ltd v BG International Ltd [2012] 2 Qd R 302 at [57], [68]–[69]. 3 The fact that a deed is undated does not affect its validity: Juric-Kacunic v Vaupotic [2013] NSWSC 41 [49]-[51]. At common law a deed could only be discharged by another deed. However, a release by simple contract is enforceable in equity if it is supported by consideration: Energy Brix Australia Corporation Pty Ltd v National Logistics Coordinators (Morwell) Pty Ltd (2002) 5 VR 353 at [33].

Promissory or equitable estoppel The general nature of promissory estoppel Figure 5.2 Criteria for promissory estoppel

[5.310] As we saw in Chapter 1, the courts of equity developed to soften the harsh consequences that flowed from a rigid application of common law rules. One example has been the development of the equitable doctrine of promissory estoppel, designed to ameliorate the rule that a promisor is not bound to honour a promise for which consideration has not been paid, even though the promisor intended the promisee to rely on it and he or she did rely on it. For example, we have seen that if Abe owes Bert $1000 and Bert promises to accept $750 in full satisfaction of the debt he may later claim the balance of $250. The effect of this rule was “commercially inconvenient” (to use the phrase from Foakes v Beer) because it failed to respect the view of the parties at the time the promise was made that $750 was sufficient value. The doctrine of promissory estoppel operates to ameliorate the effect of this rule. The modern doctrine of promissory estoppel began with the following English decision.

Central London Property Trust Ltd v High Trees House Ltd [5.320] Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. The plaintiff/landlord promised to reduce the rent paid by the defendant for a block of flats because wartime conditions in London at the time were such that only a few of them were occupied. However, towards the end of the war, when conditions had improved and people began to return to London, the plaintiff gave notice to the defendant that it wished to return to the rental to which the parties originally agreed. 3

See R Allen, “Deed I do … If Signed and Delivered: 400 George Street (Qld) Pty Limited v BG International Limited” (2013) 25 Bond Law Review 144.

chapter 5 Consideration, Promissory Estoppel and Formalities

Held: The plaintiff was entitled to give notice that it wished to return to the original rental. However, Denning LJ indicated that if the landlord had gone further and claimed the arrears of rent back to 1940 it would have been “estopped” from doing so. Denning LJ said that, although the parties have not formally varied the lease, and notwithstanding that the promise by Central London was not supported by any consideration from High Trees, it would have been unconscionable for Central London to be allowed to break its promise once High Trees could show it had relied on the promise and would suffer detriment if the promise was broken. [5.330] It will be seen from the above decision that the doctrine of “promissory estoppel” does not necessarily prevent the promisor from reverting back to the strict legal position. Thus, where the contract is of a continuing nature, the promisor, by giving reasonable notice, can resume the right which they have suspended and revert, for the future, to the original contract: Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761.

Je Maintiendrai Pty Ltd v Quaglia [5.340] Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101. The defendant tenant leased a shop in the plaintiff landlord’s shopping centre. On the expiry of the first three-year lease for the shop in 1976 the tenant signed a new lease at a substantially increased rental. Some months later, the landlord orally agreed to a reduction of rent for an indefinite period. The tenant continued to pay the reduced rental for the next 18 months. The landlord then found that the tenant was about to vacate the premises and demanded the accumulated “arrears” of rent, that is, the difference between the rental stipulated in the lease and the amount the tenant had actually been paying in consequence of the landlord’s oral agreement to a rent reduction. The landlord brought an action to recover the alleged “arrears” of rent. It was held by a majority of the court that the tenant had so altered his position, that is, had suffered a detriment, by continuing in possession at the reduced rental on the basis that the landlord’s promise would not be resiled from, that it would be inequitable to allow the landlord to go back on his promise. Accordingly, the landlord was estopped in the circumstances from claiming the alleged “arrears” of rent.

121

122

Introduction to Business Law in Australia

The High Court's decision in Waltons Stores Waltons Stores (Interstate) Ltd v Maher [5.350] Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. Waltons Stores negotiated with Maher for the lease of commercial premises. Under the proposal, Maher was to demolish an existing structure on the site and erect a new building to be leased by Waltons. After discussions between the parties’ solicitors, the contracts documents were drawn up. Maher’s solicitors proposed certain amendments. Walton’s solicitors said they believed approval for the amendments would be forthcoming from their client, adding: “We shall let you know tomorrow if any amendments are not agreed to”. A few days later, Maher’s solicitors, having heard nothing about the amendments, submitted, “by way of exchange”, documents executed by their client for signature by Waltons. Receipt of these documents was not acknowledged for nearly two months because Waltons was privately reconsidering their position in view of impending policy changes to their future trading operations. Meanwhile, Maher sought finance for redevelopment of the site, and proceeded to demolish the existing building which Waltons became aware of shortly afterwards. Erection of the new building was begun to ensure completion by the required date. When the building was 40 per cent completed, Maher was advised that Waltons did not intend to proceed with the transaction. No binding contract to lease the premises had been concluded between the parties as there had been no exchange of documents. The High Court held that Maher had assumed that exchange of contracts would take place as a mere formality. The inaction of Waltons in retaining the executed documents and doing nothing constituted clear encouragement or inducement to Maher to continue to act on the assumption that the lease was proceeding. It was unconscionable for Waltons, knowing that Maher was exposing himself to detriment by acting on the basis of a false assumption, to adopt such a course of inaction that had encouraged Maher to proceed. “To express the point in the language of promissory estoppel, [Waltons] is estopped in all the circumstances from retreating from its implied promise to complete the contract”: Mason CJ and Wilson J. Brennan J summarised the criteria that must be met before a promisor will be estopped (the relevant conduct in Walton Stores in parentheses):  The promisee assumed that a legal relationship existed or would exist (the parties had been in negotiations for a long time and clear indications from Waltons were that a lease would be signed).  The promisor induced that assumption or expectation (Waltons’ solicitor’s statement that “we shall let you know tomorrow if any amendments are not agreed to” induced the Maher’s assumption).  The promisee acted, or refrained from acting, in reliance on that assumption or expectation (Maher sent the executed lease and began the demolition in reliance on the assumption).  The promisor knew that the promisee intended to act in that way (Waltons was aware of Maher’s actions. They had encouraged Maher to act by stressing that time was short).  The promisee will suffer a detriment (material loss) if the assumption is not fulfilled. (Maher’s detriment was the reliance loss, the wasted expenditure on the demolition and reconstruction of the building).

chapter 5 Consideration, Promissory Estoppel and Formalities

 The promisor acted unconscionably in failing to prevent the damage to the promisee. Merely proving that the promisee had acted on an assumption is not sufficient. (When Waltons, knowing that Maher was acting on the assumption that a lease had been (or would be) executed, decided not to inform him of their change of heart, it was acting unconscionably).

Figure 5.3 Six requirements for promissory estoppel

[5.360] Following Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, the basis for the application of promissory estoppel would appear to be the prevention of unconscionable (that is, unfair or unjust) conduct on the part of the person making the promise so as to avoid the loss or detriment that would otherwise be suffered by the person to whom the promise is made. The trigger for estoppel is detrimental reliance – not merely unconscionable conduct. In the following case the High Court explained the notion of detrimental reliance.

Sidhu v Van Dyke [5.370] Sidhu v Van Dyke (2014) 88 ALJR 640. Ms Van Dyke had rented the Oaks Cottage from Mr Sidhu and his wife, who lived 100 metres away, in the main homestead on Burra Station. Sidhu and his wife jointly owned the property. Van Dyke and Sidhu commenced a sexual relationship that led to the breakdown of Van Dyke’s marriage. Sidhu told Van Dyke not to worry about getting a property settlement in the divorce, as he would subdivide the land belonging to him and his wife, and give the cottage to Van Dyke. However, when his relationship with Van Dyke ended some eight years later, Sidhu reneged on his promises (and his wife refused to consent to a subdivision). The Court concluded that Van Dyke had made out detrimental reliance – essentially because she had improved Oaks Cottage and worked on Burra Station in reliance on the promise by Sidhu – and found that Sidhu was estopped from denying his promise to Van Dyke. The High Court explained the

123

124

Introduction to Business Law in Australia

rationale for estoppel: “It is not the breach of promise, but the promisor’s responsibility for the detrimental reliance by the promisee, which makes it unconscionable for the promisor to resile from his or her promise”: at [58]. The Court then posed a hypothetical scenario to demonstrate the unfairness of Sidhu’s argument that there was no detrimental reliance by Van Dyke: “The extent to which it is unconscionable of the appellant to seek to resile from the position expressed in his assurances to the respondent may be gauged by reflecting on the likely response of the respondent if the appellant had told her in January 1998: ‘I am happy for you to remain at Oaks Cottage, but only for so long as it suits me and my wife to have you here; and, while you remain on the property, you must care for it as if you were the owner of the property and do unpaid work on parts of Burra Station other than the property. Until I make the property over to you, you must pay rent … Should you choose to leave, you will leave with nothing in return for the value of your work here’”: at [77]. Note: As the cottage had burned down and the subdivision had never taken place, Van Dyke was awarded equitable compensation reflecting the value of what she had lost.

Austotel Pty Ltd v Franklins Selfserve Pty Ltd [5.380] Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582. Austotel (a property developer) negotiated with Franklins (a supermarket chain) for the lease of a supermarket in one of its shopping complexes. During the negotiations Franklins agreed to lease an area larger than in its earlier written agreement. Austotel built the supermarket to Franklins’ specifications, Franklins ordered equipment and Austotel used Franklins’ intended presence as a means of getting the extra finance it needed. No lease was executed and exchanged. When Franklins learnt that Austotel was negotiating with another supermarket, it sought an order for specific performance of the lease, arguing on the basis of Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 that Austotel should be estopped from resiling from its position, even though no contract had been signed. The Court refused to grant the order. Although the parties had equal bargaining power and had engaged in some tough commercial negotiating, it was no more than that: Austotel had not behaved unconscionably. [5.390] The following case provides an example of the remedies that may be granted when a promisor is estopped. Also see Sidhu v Van Dyke (2014) 88 ALJR 640 (at [5.370] above).

Giumelli v Giumelli [5.400] Giumelli v Giumelli (1999) 196 CLR 101. The Giumellis were orchardists in Western Australia who operated as a partnership. Robert, one of the sons (and a partner), worked on one of the orchards for no wages but received living expenses. His parents promised him that he would receive an interest in their property in lieu of his wages if he worked to improve the property. They also promised him that if he built a house on the property, the house would belong to him. So he built a house. After he married, they promised him that if he stayed and worked the land (instead of taking

chapter 5 Consideration, Promissory Estoppel and Formalities

up an offer to work for his new father-in-law) they would sub-divide the land and give him a section that contained the house and an orchard. So he stayed. However, when his marriage broke up and he began a relationship with a woman that his parents disliked, they told him to choose between the woman and the land. He chose the woman. His brother subsequently occupied the house. Robert sued his parents arguing that they held the property on trust for him and were obliged to honour their promises. Held: In these circumstances the court said an estoppel arose. The criteria outlined in Waltons Stores had been met. The next question concerned the remedy. Was Robert entitled to the house? The High Court said that the correct approach is to start with the proposition that having found an estoppel, the right of the plaintiff is to have their expectations fulfilled. However, the court must examine whether that approach will bring an inequitable or unfair result. Here, an order conveying title to the property would have resulted in injustice to third parties who had already acquired title and was not necessary to relieve the detriment caused by the defendants’ unconscionable departure from the assumption that they had raised in their son. The Court ordered the defendants to pay monetary compensation to the son.

Formalities [5.410] Many contracts, particularly those of a minor nature, are made by word of mouth and do not need to be in writing. Where the contract is of importance it is generally considered prudent to reduce its terms to writing. This provides valuable evidence of the terms of the agreement in the event of dispute. Accordingly, in practice many oral contracts are confirmed in writing as soon as possible after they are made. The common law does not require a simple contract to be in writing nor that written evidence of the details of the contract exist in order for the contract to be enforceable. However, in some cases various statutes require that in order for a contract to be enforceable it must be in writing. In other cases, there are statutory provisions to the effect that in order for a contract to be enforceable some written evidence of it must exist, that is, it must be evidenced in writing.

Contracts required to be in writing [5.420] Certain kinds of simple contracts are required by various statutes to be entirely in writing, otherwise they will be void or unenforceable. Examples are as follows: 1.

Bills of exchange and promissory notes: Bills of Exchange Act 1909 (Cth)), ss 8, 89.

2.

Cheques: Cheques Act 1986 (Cth), s 10.

3.

Assignments of copyright: Copyright Act 1968 (Cth), s 196(3).

4.

Contracts of marine insurance: Marine Insurance Act 1909 (Cth), s 28.

5.

Assignments and mortgages of life insurance policies: Life Insurance Act 1995 (Cth), s 200(2)(a).

6.

An acknowledgment of a debt barred by the State Limitation Acts.

7.

Most forms of consumer credit contract.

125

126

Introduction to Business Law in Australia

Contracts to be evidenced in writing [5.430] The principal legislative provisions requiring contracts to be evidenced in writing are contained in the Statute of Frauds 1677 (IMP) or the local re-enactment of some of its provisions.

The Statute of Frauds 1677 [5.440] The Statute of Frauds 1677 (IMP), a United Kingdom statute, was received in Australia on settlement. Section 4 of the Statute provides that no action shall be brought in certain cases unless the agreement or some memorandum of it is in writing signed by the party to be charged or by some person authorised by that party to contract on their behalf. The Statute has been repealed in its application to most Australian States and Territories but a number of its provisions have been re-enacted by State legislation in similar terms. 4 The main types of contract required to be evidenced by a written memorandum by s 4 of the Statute or local re-enactment of its provisions are: (a) contracts dealing with an interest in land; and (b) contracts of guarantee.

(a) Contracts dealing with an interest in land [5.450] A contract for the sale or other disposition of land or any interest in land is required to be evidenced in writing. This part of s 4 of the Statute of Frauds 1677 (IMP) has been replaced in most States and Territories by local enactments in substantially similar terms. 5 Agreements to buy, sell or lease land fall within the provision, and a contract to assign a lease has been held to be an interest in land and therefore required to be evidenced in writing. Case law provides examples of what constitutes a sale or other disposition of land or any interest in land. The New South Wales Court of Appeal held that a contract for the declaration of a trust over land was a disposition of an interest in land: Khoury v Khouri (2006) 66 NSWLR 241 at [3], [15], [47]. An option for the sale of land also falls within the provision: Todrell Pty Ltd v Finch (No 1) [2008] 1 Qd R 540 at [86]. A profit à prendre gives a right to remove something from the land of another person. In Duff v Blinco (No 2) [2007] 1 Qd R 407, the profit à prendre gave a right to take timber from the plaintiff’s land. The Queensland Court of Appeal held that a profit à prendre was not a contract for the sale or other disposition of land, so it did not fall under the writing requirement of this section of the Statute. 4

5

The Statute no longer applies in the following States and Territories: Imperial Acts Application Act 1969 (NSW), s 8(1); Statute of Frauds 1972 (Qld), s 3(1); Statutes Amendment (Enforcement of Contracts) Act 1982 (SA), s 3; Imperial Acts (Substituted Provisions) Act 1986 (ACT), s 3(1), relocated by Law Reform (Miscellaneous Provisions) Act 1999 (ACT), Sch 3 and relocation repealed by Civil Law (Property) Act 2006 (ACT), s 507 and Sch 3; Law of Property Act 2000 (NT), s 221 & Sch 4. In Victoria the Statute of Frauds 1677 (IMP), s 4 was replaced by local enactment in the same terms by the Instruments Act 1958 (Vic), s 126, but the latter section only applies, in effect, to guarantees and contracts for the sale of land since the commencement of the Sale of Goods (Vienna Convention) Act 1987 (Vic), s 8. In Tasmania, the Statute of Frauds 1677 (IMP), s 4 has been replaced by a local enactment in the same terms: Mercantile Law Act 1935 (Tas), s 6. The Statute of Frauds 1677 (IMP), s 4 still applies in Western Australia but is limited, in effect, to guarantees and contracts for the sale of land: Law Reform (Statute of Frauds) Act 1962 (WA), s 2. Conveyancing Act 1919 (NSW), s 54A; Instruments Act 1958 (Vic), s 126; Property Law Act 1974 (Qld), s 59; Law of Property Act 1936 (SA), s 26; Mercantile Law Act 1935 (Tas), s 6 and Conveyancing and Law of Property Act 1884 (Tas), s 36; Law of Property Act 2000 (NT), s 62; Civil Law (Property) Act 2006 (ACT), s 204. The Statute of Frauds 1677 (IMP), s 4 still applies in Western Australia but is limited, in effect, to guarantees and contracts for the sale of land (Law Reform (Statute of Frauds) Act 1962 (WA), s 2) and the Property Law Act 1969 (WA), s 34(1) also contains a provision to similar effect.

chapter 5 Consideration, Promissory Estoppel and Formalities

(b) Contracts of guarantee [5.460] A further important category of contract covered by the Statute of Frauds 1677 (IMP) was a “promise to answer for the debt, default or miscarriage of another person”. This expression has been held to cover a contract of guarantee or suretyship: Tipperary Developments Pty Ltd v Western Australia (2009) 38 WAR 488 at [61]–[63]. It does not apply to a contract of indemnity. The provision does not apply in New South Wales, South Australia, or the Australian Capital Territory. 6 It is important to notice the difference between a guarantee and an indemnity. A guarantee may be defined as a promise made by one person (the guarantor or surety) to another (the creditor) that should a third person (the principal debtor) fail to carry out an engagement made with the creditor, the guarantor will be answerable for the carrying out of such engagement. An indemnity is a contract for the purpose of insuring the party indemnified against loss. A guarantee must be evidenced in writing, whereas an indemnity need not. 7

The memorandum required [5.470] Attention must be paid to the following matters that must be covered by the memorandum: 1.

The names of the parties must be specified.

2.

The subject matter must be stated.

3.

The consideration must be apparent (except in guarantees).

4.

The memorandum must be signed by the party to be charged or by some person authorised by them to contract on their behalf.

The memorandum is not the agreement; it is merely evidence of the agreement. To be efficacious the memorandum must contain all the express terms of the agreement.

Effect of non-compliance: the doctrine of part performance [5.480] A contract that is not evidenced in writing as required by the Statute of Frauds 1677 (IMP) is unenforceable at common law. However, equity will enforce such a contract provided that the claimant for relief has partly performed the contract. The basis of the equitable doctrine is that it would be unconscionable to allow a defendant to set up the Statute to deny relief to a claimant who has performed either the whole or part of her or his obligations in reliance on the contract. The application of the doctrine of part performance has, in practice, generally been confined to contracts for the sale or other disposition of an interest in land.

6

7

The Statute no longer applies in the following States and Territories: Imperial Acts Application Act 1969 (NSW), s 8(1); Statutes Amendment (Enforcement of Contracts) Act 1982 (SA), s 3; Imperial Acts (Substituted Provisions) Act 1986 (ACT), s 3(1), relocated by Law Reform (Miscellaneous Provisions) Act 1999 (ACT), Sch 3 and relocation repealed by Civil Law (Property) Act 2006 (ACT), s 507 and Sch 3. In Queensland and the Northern Territory guarantees must be evidenced in writing: Property Law Act 1974 (Qld), s 56; Law of Property Act 2000 (NT), s 58. The Statute of Frauds 1677 (IMP) also applied to: agreements made in consideration of marriage; agreements not to be performed within one year from their making; and agreements involving a special promise by an executor or administrator to satisfy the liability of a deceased person out of their own money. However, such categories of contract are now only affected in Tasmania (Mercantile Law Act 1935 (Tas), s 6). The Statute also applied to contracts for the sale of goods over a certain price: this now only affects contracts in Western Australia (Sale of Goods Act 1895 (WA), s 4 and Tasmania (Sale of Goods Act 1896 (Tas), s 9).

127

128

Introduction to Business Law in Australia

Riley v Osborne [5.490] Riley v Osborne [1986] VR 193: The deceased had orally agreed with the defendant that he would build a house for her and her family if she would take care of him as part of her family for the rest of his life. After the house was built the defendant and her family moved in with the deceased who was looked after by the defendant for some 23 years before he died. The deceased’s administrator brought an action to recover possession of the house from the defendant for the benefit of the deceased’s estate. It was held that the contract indicated by the defendant’s acts of performance was one in which, in consideration of her making her home with the deceased and caring for him for the remainder of his life, the deceased had agreed to transfer the title of the property to her. Accordingly, the court granted a decree of specific performance of the agreement and a declaration that the defendant was the beneficial owner of the property. See similarly, Butler v Craine [1986] VR 274.

Watson v Delaney [5.500] Watson v Delaney (1991) 22 NSWLR 358: In a further example, the plaintiffs went into possession of a dwelling-house paying rent and effecting substantial repairs to the house on the oral promise (corroborated by the owner’s will) that they could live in the house for the rest of their lives. An oral grant of a tenancy for life could not take effect at common law because of the absence of writing. However, it was held that the promise should be construed in equity as an agreement for a lease and there were sufficient acts of part performance unequivocally referable to that agreement. Accordingly, the court ordered specific performance of the agreement for the lease of the house for the joint lives of the plaintiffs.

[5.510] A claimant must establish that the acts of part performance relied on are referable to the contract in the sense that the parties’ conduct must be inexplicable except on the assumption that some such contract as that alleged has been made: Regent v Millett (1976) 133 CLR 679. In that case Gibbs J said: “It is clear that if a vendor permits a purchaser to take possession to which a contract of sale entitles him, the giving and taking of that possession will amount to part performance notwithstanding that under the contract the purchaser was entitled rather than bound to take possession”: at 684. The payment of money on its own will not usually be regarded as a sufficiently unequivocal act since it may also be consistent with either no, or some other kind of, agreement between the parties.

Further reading See contract texts listed at the end of Chapter 2.

Tutorial activities 5.1

Review the example webpage and contractual documents at the end of Chapter 2 regarding Clayton Sports World and answer the following questions:

chapter 5 Consideration, Promissory Estoppel and Formalities

5.2

5.3

5.4

5.5

(a)

Assume you sign a contract with CSW. What consideration will CSW provide under the contract? What consideration will you provide under the contract?

(b)

Is the consideration executed or executory?

(c)

Would such consideration be considered good consideration by a court? Explain your answer.

(d)

Would this agreement require compliance with any formalities?

The following things happen to Alex the Harley Davidson rider in December 2012: (a)

He agrees to buy a new Harley Davidson motorbike from Bob’s Bikes for $13,000. After the contract is signed he asks Jeff, the sales manager, if they will provide the first service free of charge. Advise Alex whether he can enforce the promise.

(b)

He promises his neighbour, Bruno, that if he discontinues legal proceedings that arose when Alex accidentally drove the Harley into Bruno’s fence he will pay him $5,000. Bruno accepts. Later Alex learns that he may not have been liable (there was a design fault in the bike) and refuses to pay. Advise Alex whether he must pay the $5,000.

(c)

Alex agrees in writing to provide free bike rides at his child’s school fair. However, he later changes his mind because he has to work on that day. The school is furious and threatens to sue him. Advise Alex whether the school could sue him.

(d)

On 1 December 2010, Alex’s boss promises Alex a bonus of $15,000 after a successful year. Advise Alex what he should do to ensure the promise is legally binding.

(e)

Alex agrees to sell and Barry agrees to buy his old Harley for $7000. Barry agrees to pay on delivery. Is there a valid contract?

(f)

Alex agrees to give his Harley to Freddy. Freddy agrees. Is there a valid contract? Would your answer be different if he agreed to “sell” it to him for $1. Explain.

Peter, an accountant, lives in an apartment that he leases from Sally for $2,000 per month. In August 2008 Peter invested most of his money in the booming share market only to see his investment halve in the space of four weeks. By December 2008, with his income slashed, Peter was unable to pay his rent and so went to see Sally. She agreed to accept half the rent until December 2010. However, in September 2009 Peter was promoted and the market had improved. Sally wrote and told him he would have to resume paying $2,000 per month in October 2009. His reaction was so negative that she also claimed the rental she had foregone from December 2008 to October 2009. (a)

Please advise Peter whether he has to resume paying the original rental immediately.

(b)

Advise Sally whether she could claim the rent foregone (that is, $10,000).

Harriet owns land in Kinglake, north of Melbourne, upon which she intends to build a house made primarily of Australian hardwood from the Kinglake area. She enters into a contract with Freddy the Builder to build the house for $275,000. Unfortunately, the price of the hardwood specified increases significantly after the 2009 bushfires so Freddy requests an extra $7,451 to offset the extra expense. Harriet agrees and Freddy finishes her house. Harriet refuses to pay the extra $7,451. (a)

Does Harriet have a contractual duty to pay the extra $7,451?

(b)

Would your answer be different if Freddy had demanded the money by saying: “It’s too bloody cold here anyway – if you don’t pay the extra, I’ll be on a beach in Queensland by tomorrow morning.”

Revisit Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. What consideration did Mrs Carlill give the company in exchange for its promise to pay £100?

129

130

Introduction to Business Law in Australia

6.

What was the detriment suffered by the promisee in Sidhu v Van Dyke (see [5.370]) and Giumelli v Giumelli (see [5.400]). What remedy did the court provide to each promisee?

chapter 6

Contractual Capacity [6.10] Terminology ........................................................................................................................................................... 132 [6.20] Introduction ............................................................................................................................................................ 132 [6.30] Minors ....................................................................................................................................................................... 133 [6.160] Corporations ....................................................................................................................................................... 136 [6.170] Mentally incapacitated and intoxicated persons............................................................................ 136 [6.180] Married women ................................................................................................................................................ 137 [6.190] Bankrupts ............................................................................................................................................................ 137

132

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 7.

Terminology [6.10] You will encounter the following terms in this chapter:  corporation: an artificial body created by law: Corporations Act 2001 (Cth). A corporation is considered a legal person, as distinct from a “natural” person.  Crown: a government body which is recognised as a legal person for contractual purposes.  minor: (an infant or a child) a person of either sex who has not attained the age of 18 years.  property: that which is capable of ownership and is divided into two categories: real property (land) and personal property (eg, goods).  ratification/ratify: affirmation of an agreement. Confirmation that there is a valid agreement in place. A person may ratify an agreement expressly or by conduct.  repudiation/repudiate: an indication by a party to a contract that he or she is unwilling or unable to perform his or her obligations under the agreement. A contract may be repudiated (disclaimed) by express words or the repudiation may be implied from the conduct of the party (unless legislation provides otherwise).  rescission/rescind: putting an end to a contract in a way that treats it as if it never existed. An agreement can only be rescinded at common law where the parties can be returned to their pre-contractual position. Equity allows rescission on wider grounds.  station in life: your position in society, your upbringing, employment and education and your expectations of a particular mode of life determines what is a luxury and what is a necessity.  tort: a civil wrong other than a claim for breach of contract and for which the remedy is generally damages.  void: a contract that is “void” is one on which neither party can sue or be sued.  void ab initio: a contract that is void from the beginning (ie, from the date at which the agreement commenced). A contract that is voidable may only be rendered void ab initio if the agreement may be rescinded.  voidable: a contract that may be avoided (set aside) either at the will of a party (by repudiating or rescinding the agreement), or by a court order. A voidable contract is legally valid (effective) unless and until set aside. Therefore either party can enforce the agreement unless and until it is avoided. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 6

Introduction [6.20] Not all persons can enter into a valid contract. Certain classes of persons are regarded by law as incapable, either wholly or partly, of entering into contractual obligations. The capacity of the following persons to enter into valid contracts will be discussed: 1.

Minors.

2.

Corporations.

3.

Mentally incapacitated and intoxicated persons.

chapter 6 Contractual Capacity

4.

Married women.

5.

Bankrupts.

Minors [6.30] Formerly, a minor 1 was a person who had not reached the age of 21 years. However, in all States and Territories the age of majority has been reduced to 18 years. 2 In New South Wales and South Australia the legal position of minors differs markedly from that in the other States. The position in these States will be considered separately at the end of this section. With the exception of New South Wales and South Australia, contracts with minors may be considered under three headings depending on their legal effect. Such contracts may be: (a)

valid;

(b)

voidable; or

(c)

void.

Valid contracts [6.40] Two classes of contracts with minors are binding, namely: (a)

a contract for the supply of “necessaries”; and

(b)

a beneficial contract of service, such as a contract of apprenticeship.

A minor is liable under a contract for “necessaries” [6.50] The word “necessaries” is not confined to articles necessary 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 which he or she enjoys. So far as goods are concerned, necessaries have been defined as “goods suitable to the condition in life of such minor and … to his actual requirements at the time of the sale and delivery”. 3 In any given case there are two questions involved: (a)

are the goods or services within the classes of goods which can be classed as “necessaries” for a person in the circumstances of the minor in question?; and

(b)

were the goods or services in fact necessary to the minor at the time?

It follows that no hard and fast rules can be laid down as to what a minor will be made liable to pay for, as the position must vary in every case. Thus, in Scarborough v Sturzaker (1905) 1 Tas LR 117, it was held that a minor who was accustomed to cycle a distance of some 12 miles to his daily employment was liable to pay for a new bicycle: at 117–118. By contrast, in Bojczuk v Gregorcewicz [1961] SASR 128, a minor who lived in Poland and had a permanent job there, but who wished to emigrate to Australia, was held not to be liable to repay to a relative, who had paid for her passage to Australia, the cost of the passage. 1 2

3

The earlier cases and legislation used the expression “infant” when referring to a person below the age of majority. However, the modern legislative trend is to use the more appropriate term “minor”. Minors (Property and Contracts) Act 1970 (NSW), s 6(1); Age of Majority Act 1977 (Vic), s 3(1); Law Reform Act 1995 (Qld), s 17; Age of Majority (Reduction) Act 1971 (SA), s 3(1); Age of Majority Act 1972 (WA), s 5(1); Age of Majority Act 1973 (Tas), s 3(1); Age of Majority Act 1974 (ACT), s 5; Age of Majority Act (NT), s 4. Goods Act 1958 (Vic), s 7; Sale of Goods Act 1896 (Qld), s 5; Sale of Goods Act 1895 (SA), s 2; Sale of Goods Act 1895 (WA), s 2; Sale of Goods Act 1896 (Tas), s 7; Sale of Goods Act 1954 (ACT), s 7; Sale of Goods Act 1972 (NT), s 7. In New South Wales the position is now governed by the Minors (Property and Contracts) Act 1970 (NSW).

133

134

Introduction to Business Law in Australia

If the court finds that the goods or services are not within the classes of necessaries, or were not in fact necessary, then the minor is not liable to pay nor, unless he or she obtained them by fraud, to return the goods. Even where the goods are found to be necessaries, the minor is not bound to pay the contract price but only a reasonable price.

A minor is liable under a beneficial contract of service [6.60] This particularly applies to agreements relating to services to provide the minor with a means of livelihood, apprenticeship contracts or contracts relating to education. In deciding whether the contract is for the minor’s benefit, the agreement must be taken as a whole and any restrictions placed on the minor at the present time and in the future closely considered.

Hamilton v Lethbridge [6.70] Hamilton v Lethbridge (1912) 14 CLR 236. While still a minor, the defendant had entered into articles of clerkship with the plaintiff. The articles contained a covenant by the defendant that he would not practise as a solicitor within 50 miles of Toowoomba where the plaintiff carried on his practice. Within a year of qualifying, the defendant started to practise in Toowoomba. The plaintiff sued for an injunction to restrain the defendant from so practising. The defendant pleaded his infancy at the time of entering into the articles as a defence. The High Court unanimously held that the covenant was enforceable against the defendant. Although the contract contained clauses that were prejudicial to him, the contract as a whole was beneficial and therefore enforceable. [6.80] In contrast, if the contract is substantially detrimental to the interests of the minor, it will not be enforced against her or him.

De Francesco v Barnum [6.90] De Francesco v Barnum (1890) 45 Ch D 430. A girl aged 14 years entered into a seven-year apprenticeship with the plaintiff to be taught stage dancing. She agreed that she would not marry during the apprenticeship and would not accept professional engagements without the plaintiff’s permission. The plaintiff did not bind himself to provide her with engagements nor was he obliged to maintain her while she was not working. The pay he agreed to give in the event of her employment was less than generous. The plaintiff was entitled at his own discretion to terminate the contract if, after a fair trial, he decided that she was unfit for stage dancing. It was held that the terms of the apprenticeship deed were unreasonable and unenforceable.

[6.100] The question of whether the contract is beneficial to the minor is the crucial issue in determining the validity of this type of contract. On the other hand, this does not mean that any contract which benefits the minor will be enforced against her or him. Thus, it is well-established that a trading contract is not binding on a minor, notwithstanding that it may be financially beneficial. For example, a minor who carried on business as a haulage contractor agreed to purchase a lorry under a hire-purchase agreement.

chapter 6 Contractual Capacity

When he was sued for arrears under the agreement, it was held that the contract was a trading contract by which the minor could not be bound: Mercantile Union Guarantee Corp Ltd v Ball [1937] 2 KB 498; see similarly, Cowern v Nield [1912] 2 KB 419.

Voidable contracts [6.110] The contracts voidable by a minor are either: (a)

Those binding unless repudiated by the minor during their minority or within a reasonable time after attaining their majority

(b)

Those not binding unless ratified within a reasonable time after attaining the age of majority:

Those binding unless repudiated by the minor during their minority or within a reasonable time after attaining their majority [6.120] This applies to contracts which are of a permanent nature – those which involve a continuing obligation, for example: (a)

shares in a company;

(b)

leases;

(c)

partnerships; or

(d)

marriage settlements.

A minor is bound by such contracts unless he or she takes steps to repudiate them within a reasonable time after attaining majority. If the minor has received no benefit under the contract he or she may repudiate it and also secure a return of any money paid on the contract. If, however, the minor had the benefit or the use of goods, he or she, while able to renounce the contract, cannot obtain a refund of the money paid for them: Pearce v Brain [1929] 2 KB 310. In other words, rescission avoids future liability only.

Those not binding unless ratified within a reasonable time after attaining the age of majority [6.130] These are contracts which are not of a continuing nature, for example the purchase of goods which are not necessaries. These contracts require the express ratification of the minor after coming of age to make them binding. In Victoria these contracts, that is those not binding unless ratified within a reasonable time after attaining the age of majority, are not effective, as in that State legislation makes such contracts absolutely void and incapable of ratification by the minor after attaining majority. 4

Void contracts [6.140] In Victoria all contracts whether simple or made under a deed are void: (a)

for the repayment of money lent or to be lent;

(b)

for the payment of goods supplied or to be supplied (other than contracts for necessaries); or

(c)

all accounts stated (that is, an account acknowledged by the parties to be correct): Supreme Court Act 1986 (Vic), s 49.

In all states a minor is not liable on a bill of exchange (or cheque) even if given for the price of necessaries: Re Soltykoff; Ex parte Margrett [1891] 1 QB 413. A minor cannot give a valid security to repay advances even if made to enable her or him to purchase necessaries: Martin v Gale (1876) 4 Ch D 428. 4

Supreme Court Act 1986 (Vic), s 49.

135

136

Introduction to Business Law in Australia

In Victoria a contract made by a minor, after he or she comes of age, to repay a loan contracted during minority is void. 5

Misrepresentation by minors [6.150] Minors are not liable for a tort 6 directly connected with any contract upon which no action will lie against them. It is impossible indirectly to enforce such a contract by changing the form of action to one in tort. Thus an action of deceit does not lie against minors who, by falsely representing themselves to be of full age, have fraudulently induced another to contract with them, since to enable a plaintiff to convert a breach of contract into a tort would destroy the protection that the law affords to minors: Leslie v Sheill [1914] 3 KB 607. 7

Corporations [6.160] Corporations are created by the Corporations Act 2001 (Cth) and are referred to as “bodies corporate”. Many businesses are conducted through corporations. However, it is to be noted that the Corporations Act 2001 gives corporations all of the legal capacity of a natural person: s 124. This legal capacity allows a corporation to enter contracts, own assets, and sue and be sued (for example, for negligence or breach of contract). In some respects, a company has greater capacity than a natural person as it also has the capacity to issue shares in itself: s 124. A corporation is able to enter a contract either directly (by using the company seal, or by the directors signing) or by using an agent: ss 126 and 127. Most people would be familiar with corporations through the transactions they engage in with businesses in daily life, for example, banking, purchasing food in a supermarket, education services. In most of these routine, everyday interactions, the corporation often acts through an agent (usually an employee) rather than acting directly itself. Although the Corporations Act 2001 gives corporations full legal capacity, a corporation may specify in its company constitution that its legal capacity is restricted in certain ways. For example, a corporation may state in its constitution that it will not borrow money, or, that it will not sell off its main business venture, or, that contracts must be signed by all of the members of the board. Such statements in the constitution will not affect the corporation’s capacity to contract with third parties and the corporation will be bound (providing the contract is valid in other respects): s 125. Under the revisions to the Corporations Act 2001, such restrictions in the corporation’s constitution will be binding internally on the members and directors and officers of the corporation. The constitutional restrictions will not be binding on third parties dealing with the corporation – unless the third party is aware of the restriction: s 128.

Mentally incapacitated and intoxicated persons [6.170] Mentally incapacitated and intoxicated persons may be made liable under contracts for the provision of necessaries. However, all other contracts entered into by them will be voidable provided: (a)

they were incapable of understanding the nature of what they were agreeing to at the time they contracted; and

(b)

the other party was aware, or should have been aware, of their incapacity.

5 6 7

Supreme Court Act 1986 (Vic), s 51. A tort is a civil wrong, committed by one person against another, consisting in the infringement of a right created independent of contract, giving the injured party a right to claim damages or compensation. This is no longer the position in New South Wales: see Minors (Property and Contracts) Act 1970 (NSW), s 48.

chapter 6 Contractual Capacity

Accordingly, a person of unsound mind will not be able to avoid a contract where the other party was unaware of their mental incapacity: Hart v O’Connor [1985] AC 1000. The onus of proving the existence of both incapacity and the knowledge of the other party of that incapacity rests with the mentally incapacitated or intoxicated person. The effect of mental incapacity or intoxication is to make the contract voidable at the option of the person suffering the disability and does not entitle the other party to set aside the contract: Gibbons v Wright (1954) 91 CLR 423. A voidable contract can be ratified on the intoxicated person regaining sobriety, or the mentally incapacitated person recovering their sanity, and the ratified contract will then become binding: McLaughlin v City Bank of Sydney (1912) 14 CLR 684. Both mentally incapacitated and intoxicated persons are bound to pay a reasonable price for necessaries obtained while incapable of knowing what they were doing. 8

Married women [6.180] Formerly, married women lacked legal capacity. Women were regarded as losing their legal capacity on marriage when the “very being or legal existence of the women is suspended during the marriage and … consolidated into that of the husband”. 9 This concept was known as “coverture” and theoretically provided the woman, upon marriage, with the protection of her husband. The position of married women is now much the same as that of a single woman or a man and this is enshrined in legislation throughout Australia. 10

Bankrupts [6.190] A bankrupt is not deprived of their general capacity to contract. However, there are certain provisions of the Bankruptcy Act 1966 (Cth) which relate to dealings by bankrupts. If an undischarged bankrupt, or a debtor who is party to a debt agreement, obtains credit or enters into a contract for goods and services involving an obligation to pay $3,000 or more (indexed in accordance with the Consumer Price Index) without disclosing they are an undischarged bankrupt, they are liable to imprisonment for up to three years: s 269. An undischarged bankrupt is liable to the same penalty if they carry on business under an assumed or firm name without disclosing the bankrupt’s true identity and the fact that they are an undischarged bankrupt. Certain transactions by a bankrupt in relation to property acquired after the date of the sequestration order are valid against their trustee provided they are completed before any intervention by the trustee: s 126.

Further reading See contract texts listed at the end of Chapter 2. 8

9 10

Sale of Goods Act 1923 (NSW), s 7; Goods Act 1958 (Vic), s 7; Sale of Goods Act 1896 (Qld), s 5; Sale of Goods Act 1895 (SA), s 2; Sale of Goods Act 1895 (WA), s 2; Sale of Goods Act 1896 (Tas), s 7; Sale of Goods Act 1954 (ACT), s 7; Sale of Goods Act 1972 (NT), s 7. Sir William Blackstone, Commentaries on Laws of England (Chapter 15), (1765-1769), Co Lit 112. Married Persons (Equality of Status) Act 1996 (NSW), s 4; Marriage Act 1958 (Vic), ss 156 – 161; Law Reform Act 1995 (Qld), s 18; Law of Property Act 1936 (SA), ss 92 – 111; Law Reform (Miscellaneous Provisions) Act 1941 (WA), ss 2 – 3; Married Women’s Property Act 1935 (Tas), ss 3, 7, 11; Married Persons (Equality of Status) Act 1989 (NT), s 3.

137

138

Introduction to Business Law in Australia

Tutorial activities 6.1

Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following question: CSW does a promotion to VCE students at a local high school who are all under the age of 18. Explain the circumstances under which the students who sign contracts with CSW will be bound.

6.2

Joshua, a 15-year-old boy, signed a contract for a mobile phone service. The contract obliges him to pay $29.95 a month for a year. After the first month he refuses to pay. His parents also refuse to take over the contract on his behalf. Please advise the mobile phone company whether it can sue Joshua (or his parents).

6.3

James Marsden, who owned $280,000 worth of shares in a mining company, was an alcoholic. His fondness for alcohol was well known. On one occasion, when he was under the influence, the local bank manager got Marsden to transfer the shares to the bank as security for an unsecured loan it had given to Marsden three months earlier. When he sobered up and learned what had happened he wanted to have the agreement declared void. Advise him.

chapter 7

Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts [7.10] Terminology ........................................................................................................................................................... 140 [7.20] Introduction ............................................................................................................................................................ 140 [7.30] Mistake..................................................................................................................................................................... 141 [7.300] Misrepresentation........................................................................................................................................... 149 [7.420] Innocent misrepresentation ...................................................................................................................... 155 [7.510] Negligent misrepresentation .................................................................................................................... 158 [7.520] Duress ................................................................................................................................................................... 158 [7.590] Undue influence................................................................................................................................................ 160 [7.650] Unconscionable contracts .......................................................................................................................... 163

140

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2014), Chapter 7.

Terminology [7.10] Some of the key terms that are used in this chapter include:  common mistake: where both parties to an agreement have the same mistaken view of the facts.  condition precedent: a condition which delays the formation, existence, performance or even the enforceability of a contract until that condition occurs.  condition subsequent: a condition, being a future event which the parties agree will bring the contract to an end if it occurs. Contrast with a condition precedent.  duress: the use of threats or violence against a person, their goods or economic interests, to force them to enter into a contract against their will.  misrepresentation: a representation which conveys a false or wrong impression and thus makes a contract voidable.  mutual mistake: where the parties to a contract have made different mistakes as to the facts of the contract.  puffery: statements and conduct not designed to be taken seriously during the negotiation period for a contract.  rectification: an equitable remedy ordering the correction of a contract to accord with the intention of the parties where the parties have agreed on the terms of their contract but written them down incorrectly.  unconscionable: where a party when making an agreement has acted against good conscience, or in a manner not acceptable to society, then a court may refuse to enforce such an agreement.  undue influence: improper use of a position of influence or power possessed by one person over another to induce the latter to act for the former’s benefit.  unilateral mistake: a mistake made by only one person to an agreement. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 7.

Introduction [7.20] Agreement or consent remains the cornerstone of the law of contract. As we have seen, the law of contract, both in principle and in practice, is about allowing parties to enter arrangements on terms they choose (“freedom of contract”) which the courts will then enforce (“sanctity of contract”). However, the consent must be genuine. If the consent of one of the parties has been affected by a mistake or induced by a misrepresentation or extracted under duress or by the use of undue influence or unconscionable conduct, the agreement may not be enforceable. It must be noted at the outset that much of the common law in relation to mistake and misrepresentation has been overtaken by the “misleading and deceptive conduct” (s 18) and “unfair practices” (ss 29 – 34) provisions of the Australian Consumer Law (ACL). In addition, unconscionable conduct, a creation of equity, has been subsumed by (ss 20 – 22) of the ACL and the common law action for duress is now, at least in part, covered by (s 50) of the ACL. The statute is broader in scope and has better and more varied

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

remedies than the common law was able to provide. Nevertheless, the common law and equitable principles provide background and context and may still need to be relied upon where a victim is not able to use the ACL.

Mistake Figure 7.1: Mistake

[7.30] It is not unusual for a party to say that he or she made a mistake during the pre-contractual negotiations and would not have entered into the contract if the true facts were known. For instance, the purchaser of a unit in a booming inner city precinct mistakenly believes the council will continue its ban on new high-rise developments. It does not. A purchaser of a café in a rural community mistakenly believes McDonalds will not open next door. It does. An investor purchases shares in a wind farm company believing they will rise in value. The shares plunge when the government drops its support for renewables. Is it relevant to the law of contract and, if so, what is the remedy? Generally speaking, the courts are reluctant to allow a person to avoid a contract simply because one or both of the parties has entered into the contract on the basis of a mistake (particularly a mistaken assumption or a mistake about the qualities of the subject-matter of the contract). The view of the courts has traditionally been that to widen the scope of operative mistake so that contracts could more easily avoid contracts would undermine confidence in the sanctity, certainty and reliability of contracts. The following discussion concerns the situations in which a mistake of fact is said to be operative and may vitiate the apparent consent between the parties.

141

142

Introduction to Business Law in Australia

Mistakes of fact [7.40] The general position is that a legally operative mistake of fact renders the contract void, that is, there is no contract. However, the High Court has held that a unilateral mistake as to the terms of a written contract renders the contract voidable rather than void: see [7.190]. It is difficult to appreciate the nature of the legal principles without distinguishing between the various types of mistake:

Common mistake [7.50] A common mistake occurs when the parties have made the same mistake about one or more of the terms. Only some types of common mistake invalidate a contract; such cases are usually involve mistakes about a fundamental term of the contract or are about property which neither party is aware no longer exists. Common mistakes about such matters as the law or regulation that applies to a particular property or the licensing arrangements in respect of an export or import venture or about the qualities of the subject-matter of the contract are irrelevant. One example of an operative common mistake is where, unknown to both parties, the subject matter of the contract has ceased to exist before the date of the contract.

Scott v Coulson [7.60] Scott v Coulson [1903] 2 Ch 249. A contract for the assignment of a life insurance policy was made upon the basis of a belief common to both parties that the assured was alive. In fact, he had died before the contract of assignment was made. It was held that there was a common mistake, and therefore the contract was one that could not be enforced. In this type of case the parties have both believed wrongly that the subject matter of the contract was in existence. That belief was wrong and consequently the basic assumption on which the contract was made has never been fulfilled. [7.70] The principle is given statutory confirmation in the provision of the Sale of Goods Acts 1 that “where there is a contract for the sale of specific goods, and the goods, without the knowledge of the seller, have perished at the time when the contract was made, the contract is void”. This principle of avoidance on the ground of common mistake is, however, very limited. It does not apply to the case of a mistake made by both parties merely as to qualities or attributes possessed by the subject matter. This point is illustrated by the following case.

Leaf v International Galleries [7.80] Leaf v International Galleries [1950] 2 KB 86. The plaintiff purchased a painting of Salisbury Cathedral from the defendant gallery. Both parties mistakenly believed the famous John Constable was the artist. When the plaintiff attempted to resell the painting, he discovered that it was not a 1

Sale of Goods Act 1923 (NSW), s 11; Goods Act 1958 (Vic), s 11; Sale of Goods Act 1896 (Qld), s 9; Sale of Goods Act 1895 (SA), s 6; Sale of Goods Act 1895 (WA), s 6; Sale of Goods Act 1896 (Tas), s 11; Sale of Goods Act 1954 (ACT), s 11; Sale of Goods Act 1972 (NT), s 11.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

Constable. The plaintiff argued the contract was affected by a common mistake which would render the contract void. (NB. As Leaf would not have been able to rescind the agreement for the (obvious) innocent misrepresentation made by the Gallery – too much time had elapsed for rescission to be possible – he had to argue the contract was affected by common mistake) The court decided that there was no operative mistake. Leaf had wanted the painting that was hanging in the gallery called “Salisbury Cathedral” and that is what he got. Everything else, including whether it was a genuine Constable, concerned the quality, the nature or the value of the goods and, as such, was not operative. Denning LJ stated: “There was a mistake about the quality of the subject-matter, because both parties believed the picture to be a Constable; and that mistake was in one sense essential or fundamental. But such a mistake does not avoid the contract: there was no mistake at all about the subject-matter of the sale. It was a specific picture, “Salisbury Cathedral”. The parties were agreed in the same terms on the same subject-matter, and that is sufficient to make a contract.”

[7.90] The normal position then is that there is an operative common mistake if, unknown to both parties, the subject matter of the contract no longer exists at the time of contracting. However, if the owner or seller, in effect, warrants that the goods do exist, the owner or seller is liable for breach of contract if they do not. This was the position in the following case.

McRae v Commonwealth Disposals Commission [7.100] McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. The Commonwealth Disposals Commission (CDC) advertised for tenders for the purchase of a wrecked tanker on a reef near Indonesia. The plaintiff was the successful tenderer. However, despite spending considerable time and effort it was unable to locate the wreck (or the reef). In reality, there never was a wreck on the reef specified. McRae sued the CDC claiming it was entitled to compensation for the wasted expenses as damages in addition to the price it paid for the (non-existent) tanker. The CDC argued the contract was void for a common mistake and therefore no contractual remedy was available. The High Court held that there was a valid contract. The CDC was liable for its breach because the CDC had promised that the tanker existed. The court said that in such a case the common law had always regarded the fundamental question as being: “What did the promisor really promise?” Where such a question arises, it must be determined in the light of the words used by the parties and the surrounding circumstances. In this instance, the Court decided the CDC had promised that the tanker existed.

Mutual mistake [7.110] That is, where the parties are both mistaken but their mistakes are not the same. They are at cross-purposes. This type of mistake does not necessarily invalidate a contract.

143

144

Introduction to Business Law in Australia

Example A makes a clear offer to sell china to B. B makes an unqualified acceptance of the offer. B thinks that A is offering Dresden china. A thinks that B is merely concluding a contract to buy china. Here both parties make different kinds of mistake as to the contractual intention of the other. The contract is valid.

However, this type of mistake may invalidate the contract in certain circumstances: see [7.130].

Raffles v Wichelhaus [7.120] Raffles v Wichelhaus [1864] 159 ER 375. The plaintiff sold the defendant 125 bales of cotton, the cotton to arrive in Liverpool, England on the boat Peerless sailing from Bombay. It so happened that there were two ships named Peerless arriving in Liverpool from Bombay, one departing in October and another departing in December. The defendant thought the contract was for cotton on the October ship while the claimant thought the contract was for the cotton on the December ship. When the December Peerless arrived, the claimant tried to deliver it to the defendant who refused to accept it arguing that the contract was for the cotton on the October Peerless. The claimant sued for breach of contract, arguing that the date of the ship was not relevant. The court decided that the defendant only bought that cotton which was to arrive by a particular ship (the one departing in October). To enforce the agreement would be “imposing on the defendant a contract different from that which he entered into”: Martin B. Therefore, as there was no agreement on such a fundamental term, the court held that the contract was void.

Unilateral mistake [7.130] That is, where one party is mistaken as to the terms of the contract or the identity of the other party and that mistake is known to the other party. In the example in [7.110] above, if A knows that B erroneously thinks that he is being offered Dresden china the error is B’s alone. The contract is void (or possibly voidable – see [7.210]). The effect of each of the above categories of mistake will now be considered in more detail.

Common mistake as to the existence of a fundamental fact [7.140] Here the parties have made the contract on the basis of a common assumption of fact which both intend to be a condition precedent to the existence of a binding contract. If the fact does not exist, then the condition precedent for the existence of a binding contract has not been fulfilled. The most common instance is where the subject matter of the contract has ceased to exist before the date of the contract.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

Mutual mistake [7.150] In mutual mistake, although there is to all outward appearances an existing contract, nonetheless because the parties are at cross-purposes there is in fact no correspondence of offer and acceptance. In such cases the court seeks to determine whether a “reasonable person” would infer a contract. If it decides in the affirmative, then the parties are bound by the contract a reasonable person would infer; if it decides in the negative then there is no contract. Example A agrees to buy B’s shipment of ginseng. A assumes he is buying high quality ginseng from Xinjiang Province in China whereas B believes he is selling the lower quality Korean ginseng. If either party seeks to avoid the contract because of the mistake, the court applies an objective test and asks whether a reasonable person would say the parties were ad idem (of like mind) as to the subject matter of the contract and, if so, on whose terms the contract was made. If a reasonable person would say that the parties were at cross purposes, the purported contract is void and of no effect.

Unilateral mistake [7.160] Unilateral mistake occurs when one party to the contract is mistaken about a fundamental term of the contract or the identity of the other party to the contract and the other party is aware (or should have been aware) of the mistake and takes advantage of it. If one party is mistaken and the other party does not know, nor should have known, of the other’s mistake the contract is valid and enforceable. Example A purchases a Persian carpet from B for $40,000 in the mistaken belief that it is made of a rare silk from the Bohkara region of Iran. Assuming B did not misrepresent the origins of the carpet, the contract is enforceable unless B knew of A’s mistaken assumption and acted in an unconscionable or unfair manner (perhaps to ensure he did not discover his mistake).

[7.170] Unilateral mistake occurs in three areas:  those involving a mistake as to the identify of one of the parties;  those involving a mistake as to the terms of the contract; and,  those involving a mistake as to the nature of the document signed.

Unilateral mistake as to identity [7.180] A mistake as to identity occurs when A makes a contract with B thinking that B is C. Usually this mistake occurs because B has claimed to be C. The following case is a good example.

Lewis v Averay [7.190] Lewis v Averay [1972] 1 QB 198. Lewis advertised his car for sale. A rogue responded, took the car for a drive and said he would like to buy it. He identified himself as Richard Greene, a well-known actor, wrote a cheque, signing it “RA Greene”. Lewis wanted proof of identity and the rogue produced a Hollywood film studio’s pass in the name, “Richard A Greene”, alongside a photo of himself. Lewis was satisfied and accepted the cheque. The rogue drove off. Shortly after, he sold the

145

146

Introduction to Business Law in Australia

car to Averay who bought in good faith (unaware that he was buying from a rogue). When the cheque was dishonoured, Lewis traced the car to Averay and sued him in conversion (the tort of using goods that belong to another). The issue was whether Lewis entered into the contract with the rogue as a result of a mistake (as to the identity of the other party) or as a result of a misrepresentation. If it was a mistake, the contract would be void. Title cannot pass under a void contract (because it never existed) and therefore the rogue could not, in turn, pass title to Averay. If, on the other hand, it was affected by a misrepresentation, the contract would be voidable, that is, valid until rescinded by Lewis and, because Averay bought the car before the contract was rescinded, he would get a valid title. Held: Lewis was a victim of a misrepresentation, not an operative mistake. Therefore, as Averay received a good title from the rogue before Lewis rescinded the contract, he could retain the car. Of course, Lewis could sue the rogue but, even if the rogue could be located, he may not be able to pay any damages that are awarded. [7.200] In such a case, there is a strong presumption that the mistaken party intended to make the contract with the person in front of him or her. There have been exceptions: in cases such as Ingram v Little [1961] 1 QB 31, contracts of sale have been held to be void where it was established that the identity of the other party was a matter of vital importance to the mistaken party.

Unilateral mistake as to a fundamental term [7.210] In the past, where the unilateral mistake involved a fundamental term of the contract (such as the price) the contract may be declared void. However, since the decision of the High Court in Taylor v Johnson (1983) 151 CLR 422, the position is that a unilateral mistake as to a fundamental term will not render a contract void at common law. Instead, it will make it voidable in equity if the unmistaken party has acted unconscionably.

Taylor v Johnson [7.220] Taylor v Johnson (1983) 151 CLR 422. The vendor granted to a purchaser an option to purchase two adjoining blocks of land. The option was exercised and the parties entered into a written contract of sale for the land. In both the option and the sale agreements the purchase price stipulated was $15,000. The vendor later refused to complete the purchase on the ground that she had mistakenly believed that the option and sale agreements provided for a price of $15,000 per acre which would have amounted to a total purchase price of $150,000, the two blocks comprising 10 acres. The High Court considered that the evidence led to the inference that the purchaser believed that the vendor was acting under a serious mistake or misapprehension about either the terms (the price) or the subject matter (its value) of the transaction and deliberately set out to ensure that she was not disabused of the mistake or misapprehension. The avoidance of mention of the purchase price after the initial enquiry and the circumstances in which Mr Taylor procured the execution of the option, including his wrong statement that he did not have a copy of the option which he could make available to Mrs Johnson, and the contrived sense of urgency when the option was signed, lead to the inference that he deliberately set out to ensure that Mrs Johnson did not become aware that she was being induced to grant the option and, subsequently, to enter into the contract by some material mistake or misapprehension as to its terms or subject matter.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

It was held that the contract of sale should be set aside. The High Court said that the particular proposition of law applicable to the case could be narrowly stated as follows: “It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension”: at 432.

[7.230] The High Court made it clear in Taylor v Johnson (1983) 151 CLR 422 that where the unilateral mistake relates to the actual terms of a written contract, the mistaken party cannot rely on their own mistake to say that the contract is void. The contract in such circumstances is voidable only, that is, binding on the parties unless and until it is set aside in accordance with equitable principles, for example for fraud, misrepresentation or, as in that case, unconscionable dealing.

Mistake as to the nature of the document signed: non est factum [7.240] If a person signs a written document which he or she mistakenly believes to relate to a transaction entirely different in character from that to which in fact it does relate he or she will not be bound. To an action on the contract such person has a defence that is called non est factum (“it is not his deed”). The policy dilemma facing a court when a person pleads non est factum was addressed by the High Court in Petelin v Cullen (1975) 132 CLR 355. In upholding the plea (thus preventing a person from enforcing a signed document) the Court said: “The problem is that the principle (of non est factum) must accommodate two policy considerations which pull in opposite directions: first, the injustice of holding a person to a bargain to which he has not brought a consenting mind; and, secondly, the necessity of holding a person who signs a document to that document, more particularly so as to protect innocent persons who rely on that signature when there is no reason to doubt its validity”: at 359. Thus the plea of non est factum will only succeed where a person can establish that the document they signed was of a fundamentally different or type character from that which they thought it to be. Furthermore, if in the circumstances the signer was careless in failing to take reasonable precautions before signing the document, he or she will not be able to avoid liability on the document against an innocent third party. In particular, where a person of full age and understanding fails to read a document which they sign, either because they are too busy or too lazy, that person will not be entitled to raise the plea of non est factum.

Petelin v Cullen [7.250] Petelin v Cullen (1975) 132 CLR 355. Petelin owned land that Cullen wished to buy and develop. Through his agent Clements, Cullen obtained a six-month option to purchase the land from Petelin in consideration of $50. Shortly after the expiry of the option a letter was written to Petelin in which was enclosed a further cheque for $50. Subsequently Cullen saw Petelin and asked him whether he had received the cheque for $50. On Petelin replying in the affirmative, Clements then

147

148

Introduction to Business Law in Australia

asked him: “Have you got a paper like that?” and showed Petelin a form of document proposing an extension of the option. Petelin replied that he had and Clements said: “Sign it that you have received $50”. Petelin signed the document but did not read it. Petelin could not read English. He had signed the document in the belief that it was a receipt, when in fact it was an extension of the option. The reason for Petelin accepting the second cheque for $50 was that Clements had said when the original cheque was handed over: “Here’s the $50 and after six months you will receive another $50”. Cullen exercised the option within the period of the second six months but Petelin refused to sell the land. When Cullen brought an action for specific performance of the option, Petelin relied on the defence of non est factum. The High Court said: “To make out the defence a defendant must show that he signed the document in the belief that it was radically different from what it was in fact and that, at least as against innocent persons, his failure to read and understand it was not due to carelessness on his part”: at 360. The court added that what was meant by carelessness in this context was a “failure to take reasonable precautions in ascertaining the character of a document before signing it”: at 360. The need to take such precautions is of fundamental importance when the defence is asserted against an innocent person who has relied on the document and the signature it bears and who is unaware of the circumstances in which it was executed. On the facts the question of carelessness was not relevant since Petelin’s belief that the document was a receipt had been caused by Clements, for whose actions Cullen was responsible. Consequently as against Petelin, Clements was not to be considered an innocent person without reason to doubt the validity of Petelin’s signature. In any event the facts disclosed that there had been no carelessness on Petelin’s part. The High Court went on to hold that Petelin had discharged the onus on him of showing that there was a radical difference between what he signed (that is, an extension of the option) and what he thought he was signing (that is, a receipt) and had therefore made out the defence of non est factum. [7.260] This doctrine was applied in the case below.

Ford v Perpetual Trustees Victoria Ltd [7.270] Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42. Ford borrowed $200,000 using his house as security. He had an intellectual disability and was illiterate. The loan was entered into at the behest of his son to finance the son’s business. Ford had no understanding of the loan. He was manipulated by his son. The business failed and Ford defaulted on the loan. He derived no benefit from the loan other than a sum of $24,000 deposited into his bank account. The Court held that where a signer had no understanding at all of the transaction, “the mind does not go with the pen”. On the facts Ford did not know what he was signing, beyond knowing that it was a piece of paper: at [84]–[85]. The defence of non est factum was available. The loan and mortgage were void.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

Remedy of rectification [7.280] Where the parties are agreed and there has been no mistake as to what they have agreed upon, but the contract has been reduced to writing and by a common mistake such writing erroneously records the effect of what has been already agreed, equity will order the written contract to be rectified to accord with the parties’ intention. This is the remedy of rectification: Slee v Warke (1949) 86 CLR 271. 2 The contract is actually rewritten to accord with the intention of the parties: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [30], [42], [446]. [7.290] The power to rectify a contract is limited to what is necessary to express the common intention of the parties and may not change the contract beyond that extent: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [30], [42], [448]. In appropriate circumstances, the power to rectify a document extends to rectification by the substitution of one name for another: Elders Lensworth Finance Ltd v Australian Central Pacific Ltd [1986] 2 Qd R 364.

Misrepresentation Figure 7.2: Misrepresentation/Misconduct

[7.300] At common law, a misrepresentation is a false statement of fact, made during pre-contractual negotiations, that induces a party to enter a contract. The remedies will vary according to whether the misrepresentation is innocent, fraudulent, or negligent. As mentioned above (see [7.20]), these cases are 2

See generally D Mossop, “Rectification for Unilateral Mistake” (1996) 10 Journal of Contract Law 259; JW Carter, “The Remedy of Rectification” (June-August 2013) 27, 2 Commercial Law Quarterly 10.

149

150

Introduction to Business Law in Australia

now usually brought under s 18 of the Australian Consumer Law (see below at [7.500]). The representation made be oral, in writing or by conduct. Not all statements made by the parties during contractual negotiations become terms of the contract. If the party making a statement promises the truth of that statement in the sense of making it part of the contractual bargain, then it is a term of the contract, and non-fulfilment entitles the other party to take action for breach of contract. Those statements that are not “promissory” are referred to as representations – while not contractual, they induce or persuade the person to whom they are made to enter into the contract. Therefore it is understandable that if the representation proves to be untrue, the innocent party (who was, at least in part, persuaded to enter into the contract because of the representation) would be entitled to a remedy. There is another class of statements called “mere puffs”, often simply exaggerated sales talk, that has no legal effect because a reasonable person would not be persuaded to enter into a contract on the strength of such statements. Figure 7.3: Pre-contractual statements

Distinguishing terms and representations [7.310] As the above example demonstrates, there is an important distinction to be made between statements that are terms and those that are representations. This issue is explored more thoroughly at [9.130] but, at this point, it is important to understand the basic approach. The courts asking the question, “would a reasonable person, in the position of the parties and aware of the surrounding circumstances, believe that the statement was intended to be promissory, and therefore contractual?” If so, the statement is contractual; if not it is a representation only. The courts have used some guidelines to assist in determining whether the statements are contractual terms or not: first, where the statement is, objectively speaking, important to the parties and sounds

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

promissory it is more likely to be a term; second where the statement is made close to the time when the deal was made, or is made by someone with expertise it is more likely to regarded as a term and finally, where an oral statement is followed by a written agreement that does not include the oral statement, it is less likely to be regarded as a term. Further it is important to appreciate that certain statements will not be regarded as representations:  mere puffs;  statements of opinion or of future intention (these are not “facts”) unless the opinion or statement of future intention was not genuinely held (in which case it may be a fraudulent representation) or there were no reasonable grounds for holding the opinion (in which case it may be a negligent representation);  silence (there is no duty of disclosure unless the silence itself is misleading or constitutes a misrepresentation). This issue is explored in greater detail when we examine misleading or deceptive conduct at [15.230].

An example to illustrate the difference between representations and terms [7.320] Assume that in June 2011, James decided to move onto a small farm in southern Australia where he could develop a commercial fish farm. He went to Bert, a real estate agent in Korumburra, who took him to a property that seemed suitable – it had a cottage, a river and a dam. The agent took him around the property telling him that the cottage was “an absolute gem, one of the best I’ve ever had the privilege of selling. They simply do not come better than this”. He went on, “There is a current permit for fish farming issued by the Department of Wildlife and Fisheries. It is renewed automatically each year on payment of a fee. The river flows all year, filling the dam with trout – I think your venture will succeed”. James was impressed by these statements and signed the contract the next day. The contract contained the usual terms – names of the purchaser and vendor, the price, a description of the land, settlement date and a number of other standard conditions. No mention was made in the contract of any of the matters mentioned by Bert. Settlement occurred on April 1, 2012. James discovered the house was full of termites soon after moving in. By January 2013 the river had dried up (as it did most years, according to neighbours), he had not seen one fish and the Council did not renew the permit automatically on payment of a fee – it demanded certain commitments concerning the maintenance of the dam and waterways. James is very upset and wishes to know if he has any rights. Before advising James, it is necessary to examine each of the statements made by Bert, the real estate agent. They could fall into one or more of the following categories: 1.

Mere puffs – these are exaggerated statements that a reasonable person would not take seriously. Advertisements provide endless examples of “puffery” – such statements are not part of the contract, nor would they induce a reasonable person to enter into a contract. In our above example, Bert’s statement that the cottage is “an absolute gem…” is an example of a “mere puff”. Because no reasonable person would take them seriously, no legal consequences flow if James took it seriously.

2.

Representations – As we have seen in the above paragraph, a representation is a statement of fact made during pre-contractual negotiations with the intention to induce the other party to enter into the contract. It is not a part of the contract (ie a term). Bert’s statements about river flows, fish in the dam and permits automatically issued by the Department are likely to be regarded as representations. The statement that “I think the venture will succeed” is a statement of opinion and, unless Bert did not actually hold that opinion, it is unlikely to be a misrepresentation. If the representations prove to be untrue, certain remedies may be available. (These statements may also constitute misleading or deceptive conduct that is discussed in Chapter 13.)

151

152

Introduction to Business Law in Australia

3.

Terms – Terms are the legally binding obligations or promises made by each party that become part of the contract. They may be express or implied – express terms may be either oral or written or a mixture of both and terms may be implied into contracts by either the common law or by statute. Where a term in a contract has not been performed or not performed as promised, the innocent party will have remedies for the breach. In the above example, the names of the parties to the contract, the price, the settlement date, the standard conditions and the promise regarding the permit may all be regarded as express terms. Note that one or more of the oral statements made by the Agent may be terms of the contract (we will discuss this issue in Chapter 9).

Each of the categories of representations – fraudulent, innocent, and negligent – will now be considered.

Fraudulent misrepresentation [7.330] Fraud exists “when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”: Derry v Peek (1889) 14 App Cas 337 at 374. Fraud may also exist where there is a partial statement of fact in such a manner that the withholding of what is not stated “makes that which is stated absolutely false”: Peek v Gurney (1873) LR 6 HL 377 at 403. For an action for fraud to succeed, or for the other party to have the remedies given to a person induced to enter into a contract by means of fraudulent misrepresentation, the following six elements must be established: 1.

The representation must be one of fact.

2.

The representation must be false.

3.

The party who makes such representation must know that what they are stating is false, or they must have no belief in its truth, or be reckless about whether it is true or false.

4.

The party who makes the representation must intend the other party to the contract to act upon such representation.

5.

The representation must, in fact, have been acted upon by the other party.

6.

The person claiming must have suffered damage.

The presence of each element is necessary in order to constitute the grounds for an action for fraud, or to afford those remedies to the other party to the contract.

1. Statement of fact [7.340] To be a misrepresentation, a person must make a representation of a past or present fact. For example, “we have a contract with Chinese investors to build a railway and a port”. That is a statement of fact that is either true or false when made. A statement of opinion or intention or a prediction about the future cannot be true or false at the time the statement is made. However, they may be misrepresentations if the representor does not, in fact, hold that opinion or have that intention or does not have reasonable grounds for making the prediction. Although a misrepresentation will generally consist of a statement or some overt conduct, silence (or inaction) may also constitute a misrepresentation. Robert Louis Stevenson summed up the view of the courts when he wrote in Virginibus Puerisque “[t]he cruellest lies are often told in silence”. In Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 the Federal Court summed up the position in relation to silence or non-disclosure:

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

“[T]here is no such thing as ‘mere silence’ because the significance of silence always falls to be considered in the context which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed”: at 32. Thus, although there is in general no duty to disclose information or facts known by one side but not known to the other, there are two recognised situations where there is a positive duty to disclose: (1)

Where the statement may be literally true but, left alone, creates a false impression. For example, a statement that “the shopping centre is fully let” may be true but if, in fact, one-third of the tenants have given notices of intention to terminate their leases because of a dispute with the landlord, the statement may be a misrepresentation. (However, if the matter had not arisen during the negotiations, the landlord would not have had a duty to disclose.)

(2)

Where the statement is true at the time it is made but circumstances change so that it becomes untrue. For example, in With v O’Flanagan [1936] Ch 575, a doctor made a true statement about the number of patients he had but, before the contract was signed, there was a significant decline in the numbers. Similarly, where the representor believes the statement to be true at the time it is made but subsequently discovers it is false, he or she may be guilty of fraudulent misrepresentation unless the true facts are disclosed.

2. Falsity [7.350] This is obviously a necessary ingredient of liability. It is a question of fact in each case whether the representation is false or not. If the representation is true when made but becomes false to the knowledge of the representor before the contract is concluded, and the representor concludes the contract without disclosing the falsity of the representation, they are just as liable as if the representation had been false to their knowledge when originally made: Jones v Dumbrell [1981] VR 199.

3. Known to be false, or without belief in its truth, or recklessly careless whether it be true or false [7.360] This is a further element of fraud. The representor need not actually know that what they are representing is in fact untrue. The representor is liable if they make the false statement when they have no knowledge whether it is true or false, and also when they do not trouble to verify the truth of what is said. If, on the other hand, the person making the representation genuinely believed the statement to be true, there is no fraud even though their belief was formed negligently. The High Court has stated that: “In order to succeed in fraud, a representee must prove, inter alia, that the representor had no honest belief in the truth of the representation in the sense in which the representor intended it to be understood”: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 578.

4. Intended to be relied upon [7.370] This means, for example, intending that the other party enter into a contract or do any other act in reliance on the statement.

5. In fact relied upon [7.380] The misrepresentation must have induced the other party to enter into the contract. Accordingly, if the party to whom the representation is made is fully aware of the falsity of the statement, they will be unable to show that it induced them to enter into the contract. However, even where the person to whom the representation was made did not believe the representation to be entirely true, they will still have a remedy for fraudulent misrepresentation so long as they were not aware at the relevant time of the extent of the fraud: Gipps v Gipps [1978] 1 NSWLR 454.

153

154

Introduction to Business Law in Australia

In the following case the purchaser of the legal practice relied on the misrepresentation. The vendor argued that as the purchaser could have discovered the correct earnings figure he should not be able to say he relied on the misrepresentation.

Redgrave v Hurd [7.390] Redgrave v Hurd (1881) 20 Ch D 1. Hurd entered into a contract to purchase a legal practice after Redgrave had exaggerated the earnings. Subsequently, Hurd had an opportunity to examine the books but declined to do so. When he did discover the truth he refused to proceed with the contract. Redgrave sought an order for specific performance on the basis that Hurd could not rely upon the misrepresentation as he had not taken the opportunity to discover the truth. Held: The fact that Hurd had an opportunity to investigate whether a representation was true or false was insufficient to prevent reliance upon that misrepresentation.

6. Resulting in damage [7.400] If no damage is suffered from the false representation, no action lies.

Remedies for fraudulent misrepresentation [7.410] A person who has been induced to enter into a contract by reason of fraudulent misrepresentation is in the following position: 1.

They may refuse to be bound by the contract and bring an action for its rescission where such a course is necessary, for example in the case of contracts under which the defrauded party has given some benefit before the fraud was discovered.

2.

They may take advantage of the contract to the extent of retaining what benefits they may have received and sue for fraud, claiming such damages or loss as they have sustained.

3.

They may successfully defend any attempts to enforce the contract against them.

In cases 1. and 3. the representee is treating the contract as at an end. In case 2. the representee is affirming the contract, that is allowing the contract to stand, but is claiming damages for the loss they have suffered through the misrepresentation. Where the latter approach is adopted, the general principle in assessing damages is that the plaintiff is to be put, so far as possible, in the position they would have been in if they had not acted on the fraudulent inducement. For example, where a person complains that they have been induced by fraud to buy something and pay more for it than it was worth, the measure of damages which that person is entitled to recover is, prima facie, the amount by which the price paid exceeds the value of the thing purchased at the time of sale. Consequential loss is also recoverable in an appropriate case: Gould v Vaggelas (1984) 157 CLR 215. Where fraud is present the contract is not void but merely voidable. However, where the fraudulent misrepresentation has been of such a nature that it has resulted in no true agreement between the parties, then the contract may be void on the grounds of mistake.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

Innocent misrepresentation [7.420] An innocent misrepresentation occurs when a person makes an untrue statement of fact which was intended to, and did in fact, induce the other party to enter into the contract but without any fault on the part of the speaker. There are many instances of innocent misrepresentations in commercial life. The following is a classic example:

Oscar Chess Ltd v Williams [7.430] Oscar Chess Ltd v Williams [1957] 1 WLR 370. Mr Williams bought a new Hillman Minx from Oscar Chess, a car trader. He traded in a used Morris as part payment. It was described as a 1948 Morris and was therefore valued at £290. In fact it was a 1939 model worth £175. Mr Williams honestly believed it was a 1948 model, relying on the car’s registration papers. The papers, unknown to him, were a forgery. The error was discovered when the chassis and engine numbers were sent to Morris Motors Ltd. As no damages could be awarded for an innocent misrepresentation and rescission was not available (see [7.480]), Oscar Chess had no remedy. Its argument that Mr Williams’ statement was a term of the contract failed (see Chapter 9 for a further discussion of this point).

Example of innocent misrepresentation [7.440] The following is an example of innocent misrepresentation:

Redgrave v Hurd [7.450] Redgrave v Hurd (1881) 20 Ch D 1. The defendant was induced to enter into a contract to purchase from the plaintiff a house and together with it the latter’s practice as a solicitor, on the faith of a misstatement as to the value of the returns from the business. The court held that there was no statement made which was false to the knowledge of the plaintiff; hence damages were refused to the defendant but the plaintiff was refused specific performance and the contract was rescinded.

Remedies for innocent misrepresentation [7.460] The common law provided no remedy for an innocent misrepresentation (where the representation was not made a term of the contract); it neither awarded damages nor regarded the contract as void or liable to be rescinded. [7.470] Subject to very limited exceptions, only the courts of equity provided a remedy for the victim of innocent misrepresentation. A person who was induced to enter a contract by an innocent misrepresentation has the right: (a)

to rescind the contract whereupon they can obtain an “indemnity” against expenses incurred because of the obligations in the contract;

(b)

to resist successfully an action for specific performance of the contract.

155

156

Introduction to Business Law in Australia

The main difference between the remedies for fraud and the remedies for innocent misrepresentation is that damages are not obtainable as a result of innocent misrepresentation unless, as has been pointed out, the representation becomes a term of the contract. Several legislative modifications of these principles are discussed separately later in this chapter (see below at [7.500]).

The remedy of rescission [7.480] This equitable remedy is available in the case of both fraudulent and innocent misrepresentation. It amounts to setting the contract aside and restoring the parties to the position they occupied before the contract was made. 3 The following points are relevant to this remedy: 1.

The right is lost if the party entitled to rescind affirms the contract after becoming aware of the falsity of the representation. A contract is affirmed if the representee, after full knowledge of the facts, declares their intention to proceed with the contract, or does some act from which such an intention may be inferred: Clough v London and North Western Railway Co (1871) LR 7 Exch 26. A representee will not generally be taken to have affirmed a contract unless they were also aware of their right to rescind: Coastal Estates Pty Ltd v Melevende [1965] VR 433. Where the contract is affirmed, the representee retains a right to sue for damages only if the representation was fraudulent.

2.

The right is lost if third parties acting in good faith acquire rights in the subject matter of the contract before the right to rescind is exercised. This occurred in Lewis v Averay [1972] 1 QB 198 (see above at [7.165]).

3.

The right to rescind is lost if by reason of the changes that have occurred to the subject matter it is no longer possible to restore the parties to their former position. In this context the court will go to considerable lengths in ordering payments and adjustments to be made, particularly in a case of fraudulent misrepresentation: Alati v Kruger (1955) 94 CLR 216 (see below at [7.640].

4.

In the case of innocent misrepresentation, the court will not order rescission if the contract has been completed: Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326. This limitation seems at least to apply to contracts dealing with interests in land where a conveyance, transfer, or lease has been executed: Svanosio v Macnamara (1956) 96 CLR 186. An executed contract for the sale of a business cannot be rescinded for innocent misrepresentation: Vimig Pty Ltd v Contract Tooling Pty Ltd (1986) 9 NSWLR 731.

5.

It was held in South Australian Railways Commissioner v Egan (1973) 130 CLR 506 and in New South Wales that a contract for the sale of goods can be rescinded for innocent misrepresentation.

Alati v Kruger [7.490] Alati v Kruger (1955) 94 CLR 216. Kruger purchased a fruit business from Alati for £700. Kruger alleged that he had been induced to enter into the contract of purchase by fraudulent misrepresentations as to the takings of the business made respectively by A and others. He also alleged that Alati had warranted in clause 21 of the contract that the average takings of the business were approximately £100 per week. The takings proved immediately to be much less than £100 per week. In fact, during the two weeks he was in possession of the business, the takings were less than half of the warranted amount. 3

See generally NY Nahan, “Rescission: A Case for Rejecting the Classical Model?” (1997) 27 University of Western Australia Law Review 66.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

The Court noted Kruger had three options: first he could sue for an innocent damages for breach of the warranty contained in clause 21, but he could not do this and rescind the contract for misrepresentation: Sale of Goods Act 1954 (ACT), s 62(1A). Second, he might sue to recover as damages for fraud the difference between the price he had paid and the fair value of the property at the time of the contract but that again would involve affirming the purchase. Or, third, provided that he was in a position to restore to A substantially that which he had received under the contract, he might avoid the purchase and sue to recover his purchase money back from A, with interest and also with damages for any loss which he may have suffered through carrying on the business in the meantime. This is what he did. It is important to note that after Kruger issued the writ he vacated the shop. Alati knew this but did nothing about preserving the business or its goodwill. As a result the business deteriorated in value. If the case had to be decided according to the principles of the common law, it might have been argued that Kruger was not entitled to rescind the purchase, because he was not then in a position to return to Alati precisely what he had received under the contract. But equity has always been more flexible and has ordered rescission where the court can do what is practically just between the parties, and by so doing restore them substantially to their pre-contractual positions. The High Court affirmed the decision to rescind the contract, order the return of the purchase money and award damages for losses Kruger suffered.

Misrepresentation under the Australian Consumer Law [7.500] The Australian Consumer Law 4 provides civil remedies where misrepresentations by a person constitute misleading or deceptive conduct. Section 18(1) provides that: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The Act also provides civil remedies, as well as penal sanctions, where misrepresentations are made in connection with the supply of goods or services. 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 make a false or misleading representation:

4

(a)

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)

that services are of a particular standard, quality, value or grade;

(c)

that goods are new;

(d)

that a particular person has agreed to acquire goods or services;

(e)

that purports to be a testimonial by any person relating to goods or services;

(f)

concerning: (i)

a testimonial by any person; or

(ii)

a representation that purports to be such a testimonial; relating to goods or services;

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 13.

157

158

Introduction to Business Law in Australia

(g)

that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits;

(h)

that the person making the representation has a sponsorship, approval or affiliation;

(i)

with respect to the price of goods or services;

(j)

concerning the availability of facilities for the repair of goods or of spare parts for goods;

(k)

concerning the place of origin of goods;

(l)

concerning the need for any goods or services;

(m)

concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy;

(n)

concerning a requirement to pay for a contractual right that: (i)

is wholly or partly equivalent to any condition, warranty, guarantee, right or remedy; and

(ii)

a person has under a law of the Commonwealth, a State or a Territory (other than an unwritten law).

The Australian Consumer Law also prohibits misrepresentations made in relation to the sale or grant of an interest in land. In this context s 30(1) provides: A person must not, in trade or commerce, in connection with the sale or grant, or the possible sale or grant, of an interest in land or in connection with the promotion by any means of the sale or grant of an interest in land make a false or misleading representation: (a)

that the person making the representation has a sponsorship, approval or affiliation;

(b)

concerning the nature of the interest in the land;

(c)

concerning the price payable for the land;

(d)

concerning the location of the land;

(e)

concerning the characteristics of the land;

(f)

concerning the use to which the land is capable of being put or may lawfully be put; or

(g)

concerning the existence or availability of facilities associated with the land.

Negligent misrepresentation [7.510] So far we have been considering the remedies available where a person has been induced to enter into a contract with another as a result of an innocent or fraudulent misrepresentation made by the latter. However, a person may enter into a contract as a result of negligent advice or information given to them by a third party. We will examine this area of law in Chapter 14 under the law of torts.

Duress [7.520] Duress is actual or threatened violence to, or the deprivation of liberty of, a person or their immediate family or near relatives to pressure or coerce such person into entering into a contract. A person who has been coerced into entering into a contract under duress has been deprived of their free will to act and thus there is no true consent to the agreement. A contract made under duress is voidable at the option of the party coerced, that is, he or she can elect not to be bound by the contract.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

It has been held that the duress need not be the sole reason for the party subjected to the duress to enter into the contract. It is sufficient if it was one of the reasons for doing so.

Barton v Armstrong [7.530] Barton v Armstrong [1976] AC 104. The plaintiff claimed that he had executed a deed for the purchase of the defendant’s shares in a company because of the defendant’s threats against his life. At trial it was held that the plaintiff had also been motivated to execute the deed for business reasons. The Privy Council, held that: “[T]hough it may be that [the plaintiff] would have executed the documents even if [the defendant] had made no threats and exerted no unlawful pressure to induce him to do so the threats and unlawful pressure in fact contributed to his decision to sign the documents”: at 120.

Scolio Pty Ltd v Cote [7.540] Scolio Pty Ltd v Cote (1992) 6 WAR 475. The Western Australia Full Supreme Court held that a contract entered into by an employee for the repayment of moneys misappropriated from her or his employer was not voidable on the ground of duress where the employer had threatened police intervention. The court held that the threat of prosecution in such a case was not enough to set aside the contract for duress where: (a)

the amount was in fact owing; and

(b)

the employee received consideration for entering into the contract by being given time to pay the debt.

Economic duress [7.550] The courts have also recognised a category of duress known as “economic duress”. 5 That expression refers to a situation where one party is induced to enter into a contract because of threats to that party’s economic interests. It has been said that in determining whether there has been economic duress the proper approach is to ask: (a)

whether any applied pressure induced the party to enter into the contract; and

(b)

whether that pressure went beyond what the law is prepared to countenance as legitimate, for example unlawful threats or unconscionable conduct: Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 at 46; see, similarly, Westpac Banking Corporation v Cockerill (1998) 152 ALR 267.

Where economic duress is established the contract will be voidable at the option of the person threatened.

5

See generally MP Sindone, “The Doctrine of Economic Duress” (1996) 14 Australian Bar Review 34 (Part 1), 114 (Part 2); N Tamblyn, “Causation and Bad Faith in Economic Duress” (2011) 27 Journal of Contract Law 140.

159

160

Introduction to Business Law in Australia

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [7.560] North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705. A shipbuilding company threatened to terminate a contract for the building of a tanker unless the shipowner paid increased payments following a currency devaluation (payments which were not required under the contract). The shipowner agreed because it required the vessel for a lucrative charter it was negotiating. Some time after delivery of the vessel the shipowners sought to recover the increased payments they had been compelled to make. It was held that the shipbuilder’s threat to break the contract without any legal justification unless the owners agreed to the increased payments amounted to economic duress. The contract for the increased payments was therefore voidable and the moneys prima facie recoverable. However, it was held that because of their delay in seeking recovery of the excess payments, the owners had affirmed the contract and could not recover the payments. [7.570] A further example of economic duress was a situation where a shipowner whose tanker was blacklisted by a union agreed to the payment of moneys to get the bans lifted for fear of the catastrophic economic consequences which would ensue if the demands were refused: Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366; see also, Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298.

Alternative actions under the Australian Consumer Law [7.580] It is more likely that allegations of duress, particularly economic duress, will be dealt with under s 21 (which prohibits unconscionable conduct in relation to goods and services) or s 50 of the Australian Consumer Law (which prohibits the use of physical force, or undue harassment or coercion in connection with the supply of or payment for goods, services or land). The ACCC has indicated a preference for using s 21 when businesses allege unfair pressure/duress by large corporations in relation to the buying and selling of goods and services.

Undue influence [7.590] Undue influence is the improper use of the ascendancy acquired by one person over another for the benefit of the ascendant person themselves or someone else, so that the acts of the person influenced are not, in the fullest sense of the word, their free voluntary acts. 6 Undue influence usually arises in transfers of property for no or inadequate consideration. The granting of relief on account of undue influence is founded on the principle of correcting abuses of confidence and is applied where two persons are so situated that one may obtain considerable influence over the other. Where the following special relationships exist undue influence is presumed in dealings and the onus of proving that it was not exercised is on the party denying it: (a)

6

parent and child; until the child has withdrawn from the influence of the parent (Lancashire Loans Ltd v Black [1934] 1 KB 380); See F Burns, “Undue Influence Inter Vivos and the Elderly” (2002) 26 Melbourne University Law Review 499; F Burns, “Elders and Testamentary Undue Influence in Australia” (2005) 28 University of New South Wales Law Journal 145.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

(b)

guardian and ward;

(c)

trustee and (beneficiary);

(d)

solicitor and client (Lloyd v Coote [1915] 1 KB 142);

(e)

religious adviser and devotee (Allcard v Skinner (1887) 36 Ch D 145) 7; or

(f)

doctor and patient.

However, the list of relationships which may give rise to a presumption of undue influence is not closed. Thus, it is open to a person to establish that a special relationship of trust and confidence has arisen such as to give rise to a presumption of undue influence against the person in the dominant position. In Johnson v Buttress (1936) 56 CLR 113 an illiterate man, a widower, was able to set aside a conveyance of his only asset to a relative upon whom he relied for advice. On the other hand, it has been held that there is no presumption of undue influence in the relationship of accountant/financial adviser and client: Cowen v Piggott [1989] 1 Qd R 41. Where a special relationship of confidence exists between the parties to a contract such as to raise a presumption of undue influence, the onus is on the person in whom the confidence is reposed to establish that the transaction in question was the “pure voluntary and well-understood” act of the person reposing the confidence, that is, that the latter’s mind or intention was not subject to any undue influence: Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573. The relationship of husband and wife does not give rise to a presumption of undue influence. However, in an appropriate case a special relationship of control and dominance may be established giving rise to such presumption:

Johnson v Buttress [7.600] Johnson v Buttress (1936) 56 CLR 113. Johnson, three years before he died, gave his land and cottage to Buttress, a woman whom he had known for 20 years, who had been very good to his wife and who had helped him out in various ways. After his death, the administrator of his estate challenged the gift on the basis that the relationship was one of trust and confidence. In the view of the administrator, Johnson was illiterate, ignorant of commercial matters and did not understand the irrevocable nature of what he had done. The finding of the trial judge was more colourful – the deceased was “highly excitable, very stupid and mentally unstable”. Held: The High Court agreed with the administrator. Having established that a relationship of trust existed, the onus then shifted on to Buttress to prove that she had not exercised undue influence on Johnson. In the words of Latham CJ: The learned judge found that a relation of trust and confidence obtained between the deceased and the defendant of such a character that he relied upon her for advice on any matter of business ... This being so, I agree with the learned judge that, in order to maintain the transaction, it was necessary for the defendant to show affirmatively that the deceased knew what he was doing when he made the transfer, in the sense that he understood its effect and significance in relation to himself, and further to show that the transfer was the result of his own will ... (T)hough it has not been affirmatively proved against the defendant that she

7

See P Ridge, “The Equitable Doctrine of Undue Influence Considered in the Context of Spiritual Influence and Religious Faith: Allcard v Skinner Revisited in Australia” (2003) 26 University of New South Wales Law Journal 66.

161

162

Introduction to Business Law in Australia

exercised undue influence, yet she has not displaced the presumption of undue influence which arises in the circumstances of this case ... (at 122-3).

[7.610] In the absence of establishing a special relationship giving rise to a presumption of undue influence, the onus is on the person seeking to avoid a transaction to prove that it was the result of undue influence exerted on her or him by another.

Examples of undue influence Spong v Spong [7.620] Spong v Spong (1914) 18 CLR 544. X brought an action against Y, who was his son, for rescission of a voluntary transfer of land by X to Y on the ground that X, when he executed the transfer was, as Y knew, incapable of knowing or understanding the contents or effect of the transfer, and of undue influence. The trial judge found that X was to Y’s knowledge feeble-minded, weak and incapable of transacting business and therefore gave judgment for X. Y appealed against this judgment but the High Court dismissed the appeal, holding that the evidence established the existence of a fiduciary relationship between X and Y and that in the absence of independent advice to X the transfer should be set aside.

Lloyd's Bank Ltd v Bundy [7.630] Lloyd’s Bank Ltd v Bundy [1975] QB 326. The defendant, an elderly farmer, and his only son had been customers of the plaintiff bank for many years. The son formed a company which banked at the same branch of the bank as the defendant. The defendant guaranteed the company’s overdraft and charged the whole of his farm, his sole remaining asset, to secure the amount under the guarantee. It was held that there was such a relationship of confidentiality between the bank and the defendant that the court could intervene to prevent the relationship being abused. Since the effect of the guarantee and charge could have resulted in the defendant being left penniless in old age and the defendant had had no independent advice as to the wisdom of what he was doing, there was a breach by the bank of its fiduciary duty of care and the guarantee and charge should be set aside for undue influence.

Effect of undue influence [7.640] Undue influence renders a contract voidable at the option of the “weaker” party. If an unreasonable length of time is allowed to elapse after the entire cessation of the influence, the right of a person to have a transaction set aside on the ground of undue influence may be lost: Allcard v Skinner (1887) 36 Ch D 145.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

Unconscionable contracts At common law [7.650] The general rule is that the court will not grant relief to a party merely because the contract they have entered into operates harshly or oppressively against them. For example, the High Court gave effect to an agreement notwithstanding that in the opinion of one of the judges it was: “… perhaps the most wordy, obscure and oppressive contract that I have come across … I am sure that not one oppressive provision which could be found was omitted. The contract is so outrageous that it is surprising that any contractor would undertake work for the Railways Commissioner upon its terms”: South Australian Railways Commissioner v Egan (1973) 130 CLR 506 at 512.

The High Court's decision in Amadio's case [7.660] In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, the High Court had the opportunity of clarifying the principles to be applied in determining whether a contract should be set aside on the ground that it was unconscionable. It was held that a court in exercising its equitable jurisdiction could set aside a transaction as unconscionable whenever one party by reason of some condition or circumstance is placed at a special disadvantage as against another and unfair or unconscientious advantage is then taken of the opportunity thereby created.

Commercial Bank of Australia Ltd v Amadio [7.670] In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, the plaintiffs, Mr and Mrs Amadio, were an elderly Italian couple of little formal education and limited knowledge of the English language. They signed a mortgage to the defendant bank over a block of shops as security for payment of its debts by one of their son’s building companies: the mortgage included a guarantee under which the plaintiffs became liable for the total present and future indebtedness of the company. At the time of signing the mortgage/guarantee, the plaintiffs believed the company to be prosperous: it was in fact in serious financial difficulty. Earlier on the day of their signing the mortgage/guarantee, the plaintiffs’ son, who had never read its terms, had led them to believe that their liability was limited to $50,000 and was to run for no longer than six months. Later on the same day, the manager of the son’s bank called on the plaintiffs at their home with the mortgage/guarantee contract. There was little discussion. The plaintiffs did not try to read the document, nor did the manager purport to explain its meaning or effect, except to correct Mr Amadio’s apparent misunderstanding that the mortgage/guarantee was only for six months. Having obtained the plaintiffs’ signatures, the manager left without leaving them a copy of the agreement. The son’s company ultimately went into liquidation and the bank claimed nearly $240,000 from the plaintiffs under the terms of the mortgage/guarantee. The plaintiffs sought to have the contract set aside. It was held by a majority of the High Court that the mortgage/guarantee should be set aside on the ground of unconscionable dealing. The plaintiffs were in a position of special disadvantage in that they were mistaken as to the extent of their liability under the agreement and as to the financial circumstances of their son’s company, which far from being prosperous as they believed, was insolvent and being propped up by the bank which had inadequate security to cover its indebtedness. In consequence, the plaintiffs were ill-informed as to the seriousness of their position in signing the mortgage/guarantee which spelt financial ruin for them but ameliorated the position of the bank.

163

164

Introduction to Business Law in Australia

Their age and background and reliance on their son’s misleading advice contributed to their position of special disadvantage. Although the bank may not have had full and actual knowledge of the plaintiffs’ disability, it knew enough to be put on inquiry as to whether Mr and Mrs Amadio appreciated the nature of the contract they were being asked to sign and the bank’s failure to make further inquiry as to whether the transaction had been properly explained to them amounted to wilful ignorance. Thus, in Mason J’s view: “It must have been obvious to [the bank manager] … that the transaction was improvident from the viewpoint of the [plaintiffs]. In these circumstances it is inconceivable that the possibility did not occur to [the bank manager] that the [plaintiffs’] entry into the transaction was due to their inability to make a judgment as to what was in their best interests, owing to their reliance on their son, whose interests would inevitably incline him to urge them to sign the instrument put forward by the bank”.

[7.680] The general principle to be applied in such cases is, this: “[I]f A, having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interests, takes unfair advantage of his (A’s) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same”: per Mason J, 466-7. The High Court in Amadio’s case recognised that it was impossible to definitively describe all circumstances which would give rise to a situation of special disadvantage which if unfairly taken advantage of may lead to relief being granted by the court on the ground of unconscionable dealing. The following case is a further example of relief being granted for unconscionable conduct:

Louth v Diprose [7.690] Louth v Diprose (1992) 175 CLR 621. Louis Diprose became friends with Carol Louth, initially in Tasmania. Diprose was “utterly infatuated” with Louth. Louth, on the other hand, appeared somewhat indifferent to Diprose. Louth moved to Adelaide in 1982 and Diprose followed shortly after. He was infatuated but she was not and never changed. He composed love poems for her and regularly provided her with gifts, including paying household bills from time to time including her children’s school fees from time to time. In 1984 Louth was in financial difficulties and was living in a house owned by her sister’s husband, Volkhardt. Louth told Diprose she was going to be asked to leave the house and that if this happened she would commit suicide. This was untrue. She was under no immediate pressure from Volkhardt to vacate the house, although he had suggested she should consider putting her name on a housing list. In this atmosphere of crisis in May 1985 Diprose agreed to buy the house for Louth for $58,000 and, at her insistence, put it in her name. For the next three years Diprose’s ardour seems to have continued unabated; and Louth’s generally offhand approach to him does not seem to have altered. For various reasons Diprose moved in to the home he had bought. Louth resented his presence. They argued. After this time their relationship deteriorated and Diprose told Louth he wanted the house transferred to him. She refused and Diprose sued to recover the gift.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

The trial judge, the Court of Appeal and the High Court agreed that Louth had engaged in unconscionable conduct. Deane J said that the: “adverse circumstances which may constitute a special disability for the purposes of the principle relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible of being comprehensively catalogued but the common characteristic of such adverse circumstances “seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other”: at 12. His Honour then said that: “the relationship between the respondent and the appellant at the time of the impugned gift was plainly such that the respondent was under a special disability in dealing with the appellant. That special disability arose not merely from the respondent’s infatuation. It extended to the extraordinary vulnerability of the respondent in the false “atmosphere of crisis” in which he believed that the woman with whom he was “completely in love” and upon whom he was emotionally dependent was facing eviction from her home and suicide unless he provided the money for the purchase of the house. The appellant was aware of that special disability. Indeed, to a significant extent, she had deliberately created it. She manipulated it to her advantage to influence the respondent to make the gift of the money to purchase the house. When asked for restitution she refused. From the respondent’s point of view, the whole transaction was plainly a most improvident one….the appellant deliberately used that love or infatuation and her own deceit to create a situation in which she could unconscientiously manipulate the respondent to part with a large proportion of his property. The intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness. It is to prevent his victimisation ...” at [13]–[14] (emphasis added). See Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392 (below at [7.720]) for a case in which the High Court refused the appellant’s victimisation claim against a casino.

Mackintosh v Johnson [7.700] Mackintosh v Johnson (2013) 37 VR 301. A 73 year old man and a 45 year old woman were in an intimate relationship. During the relationship he bought a house in her name and paid large amounts to support her business. After the relationship broke down he sought a transfer of title to the house and repayment of the money. The Victorian Court of Appeal held that the facts did not establish unconscionable conduct. The man’s infatuation and lavish spending did not constitute a special disadvantage making him unable to make decisions in his own best interests The Court distinguished Louth v Diprose. In Louth the recipient had created a false atmosphere of crisis. There was no similar circumstance in this case. In Louth the solicitor had given away most of his assets though he had three dependent children. In this case the plaintiff was wealthy and could easily afford to make these gifts.

165

166

Introduction to Business Law in Australia

Garcia v National Australia Bank [7.710] Garcia v National Australia Bank (1998) 194 CLR 395. Fabio Garcia was a foreign exchange dealer. His wife, Jean Garcia, was a physiotherapist. They executed a mortgage over their home in favour of the National Australia Bank. The mortgage secured all monies loaned under the mortgage as well as all money loaned under any future guarantees. Over a two-year period Jean Garcia signed four guarantees in favour of the bank for loans to a company that was controlled by her husband but in which she was a director and shareholder. The Garcias subsequently separated and the company was wound up. Jean sought a declaration that the mortgage and the guarantees she had given were voidable on the grounds of undue influence and unconscionable conduct. Held: The High Court set aside the guarantee because (a) Mrs Garcia did not understand the nature and effect of the guarantee, particularly its unlimited nature and (b) the bank had not taken proper steps to inform her. The decision was not based on the vulnerability of women but rather because the creditor (the bank) can be assumed to know that a wife may repose “trust and confidence” in her husband in matters of business and therefore to have understood that the husband may not explain the purport and effect of the transaction to her; and despite this, not take steps to explain the transaction to his wife or ensure that an independent person had done so. Note: to demonstrate the Court has a modern view of relationships, the Court indicated that the principle should be applied to “long-term and publicly declared relationships short of marriage between members of the same or opposite sex” and where a husband acted as a guarantor for his wife.

Kakavas v Crown Melbourne Ltd [7.720] Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392. Kakavas lost over $20 million while gambling at a Victorian casino over a 14 month period. He had a compulsion to gamble, though he was able to control that compulsion. The High Court rejected his unconscionability claim against the casino. Gambling is a rare commercial activity in which each party inherently seeks to cause financial damage to the other party. Equity did not characterise as victimisation the ordinary operation of a lawful commercial activity. If a casino encouraged a pensioner to cash their pension cheque for gambling purposes, that would constitute victimisation. If a gambler was drunk or under an incapacity, that could also constitute victimisation. By contrast, Kakavas was a wealthy “high roller”. He did not suffer a constant compulsion that would have prevented him from staying away from the casino. He was able to stay away from the casino when he so wished. He had gone to great lengths to persuade the casino that his previous gambling problems were now past. Equitable intervention required “proof of a predatory state of mind”, which had not been established here. Indifference to the welfare of the other party to an arm’s length commercial transaction was not enough. Victimisation or exploitation was required.

chapter 7 Consent of Parties: Mistake, Misrepresentation and Unconscionable Contracts

Under the Australian Consumer Law [7.730] The Australian Consumer Law 8 contains important provisions prohibiting persons from engaging in “unconscionable conduct” (ss 20 – 22). These provisions are discussed in Chapter 13.

Under the National Credit Code [7.740] The National Credit Code (set out in Sch 1 of the National Consumer Credit Protection Act 2009 (Cth)) provides for the reopening of a credit transaction where the court is satisfied that in the circumstances relating to the credit contract, mortgage or guarantee at the time it was entered into, it was unjust: National Credit Code, s 76(1). “Unjust” includes “unconscionable, harsh or oppressive”: National Credit Code, s 7(8). The provisions apply to all personal (that is, non-business credit).

Further reading See contract texts listed at the end of Chapter 2.

Tutorial activities 7.1

Why are courts reluctant to say that a contract is affected by an operative mistake?

7.2

Why are statements of opinion or statements of future intention unlikely to be “misrepresentations” (assuming the opinion turns out to be wrong or the statement of future intention does not eventuate). In what circumstances might such a statement amount to a misrepresentation?

7.3

Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following question: assume that you enter a contract to join the CSW sports facility. Prior to joining and completing the joining process you review the current membership fees on the CSW website as per the fee clause in the contract. You misread the fees on the website and think they are $150.00 per annum but in fact the website says the fees are $150.00 per week. After 4 weeks you realize your mistake and wish to avoid the contract. Can you?

7.4

Imogen sells her unit to Clare. It overlooks a beautiful park. In their conversations about the unit and the environment Clare is obviously very attracted by the park and by the fact that she could walk her three dogs there. She does not ask whether any changes to the park were planned. Therefore Imogen does not mention the fact that the Council has approved a 12 storey multi-unit dwelling that includes a car park and skate-boarding rink that will reduce the size of the park by half and alter the ambience dramatically. Shortly after Clare moves in, so do the bulldozers. She is very upset and seeks your advice as to whether she can rescind the contract for misrepresentation.

7.5

Eddie purchases a Persian carpet from Khali the Rug Dealer in High St, Prahran. On the back of the rug is an authentication certificate that says the rug is from Baluchistan in Iran, a region noted for its fine carpets. Khali assures Eddie that this is true, and Khali believes it to be so. On the basis of Khali’s assurances Eddie pays $25,000 for the carpet. Three years later when Eddie tries to sell the carpet, a prospective buyer brings Ali Khan, a famous valuer, to inspect it. Ali says it is not a Baluchistan carpet — “the knots are tight but the silk is not of the finest quality. This one is from a small village near Herat in Afghanistan — it’s nice but worth only $4,000.” Eddie packs it up and

8

The Australian Consumer Law is Sch 2 to the Commonwealth Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 13.

167

168

Introduction to Business Law in Australia

heads off to see Khali. Please advise Eddie of any rights he may have under the common law of misrepresentation. 7.6

Mr and Mrs Sarnath migrated to Australia from Sri Lanka in 2005. They are dependent on their only son, Jayantha, for advice and support. They have limited education, no business acumen, poor language skills and their only income is the aged pension. They own their own home which is valued at around $400,000. Jayantha is a charming but feckless businessman, who is always on the verge of something great. In June 2012 he needs $150,000 to pursue a dot com opportunity that will make him rich. He is able to borrow money from the West Bank but only after he persuades his parent to act as guarantors. He misleads his parents as to the extent and purpose of the loan. The bank is unaware of this. After investigating their financial position, the bank manager meets with Mr and Mrs Sarnath and goes over the guarantee contract. He asks whether they have any questions and, when they do not, they sign the documents as required. Jayantha uses the money to invest in an internet company. The company is worthless and Jayantha loses his entire investment. When he is unable to repay the loan West Bank looks to the parents to honour their obligations as guarantors. Advise Mr and Mrs Sarnath.

7.7

Jack gifted his land and cottage to Bonny, a woman he had known for many years and for whom he had a strong affection. Jack had had a very limited education – he could not read or write, had limited exposure to the commercial world and, in relation to the gift to Bonny, did not realise that it would be “forever”. Bonny had handled his affairs since his wife died and was aware of Jack’s deficiencies. She did not, however, encourage Jack to make the gift. After Jack died, his son, Bob, who was the executor of his father’s estate, sought to have the gift rescinded for undue influence. Please advise Bob of his rights, if any. What could Bonny have done to ensure the gift from Jack could not be undone?

chapter 8

Legality of Object [8.10] Terminology ........................................................................................................................................................... 170 [8.20] Introduction ............................................................................................................................................................ 170 [8.30] Illegality under statute law ............................................................................................................................ 171 [8.180] Illegality at common law .............................................................................................................................. 174 [8.590] Consequences of illegal contracts and void contracts................................................................. 186

170

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 8.

Terminology [8.10] The following terminology will be used in this chapter:  champerty: the maintaining of a legal action on the understanding that the party supporting the suit will receive some share of the benefits as a result of the proceedings.  goodwill: the benefit a business has in its connection with its customers. It is an asset and is based on the idea that customers of a business will continue to deal with the business after it is sold.  in pari delicto: both parties are equally to blame in the civil action, therefore the law will not uphold either party’s claim.  restraint of trade: contractual restrictions on an individual’s ability to exercise their business, trade or profession with other persons who are not parties to the contract.  severance: to distinguish, or “read down” a particular clause so that those parts of the contract that are legal can still be enforced.  vendor: the person selling a business.  void: of no legal effect and cannot be enforced or relied upon.  voidable: the contract has a legal defect whereby it is enforceable only by one party.  void ab initio: void from the beginning, there was never a valid agreement. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 8.

Introduction [8.20] A further essential element for a valid contract is the legality of its objective, that is, it must concern the doing of something which is not prohibited by law. Conversely, if the “contract” does involve doing something prohibited by law, then it is generally referred to as an “illegal” contract and, as such, is invalid and unenforceable. The illegality of a contract may arise from: (a) statute or (b) the common law. Contracts that are broadly referred to as “illegal” are generally recognised as falling into two categories: (a) those which are so serious as to be regarded as illegal in the strict or narrow sense (for example, a contract to commit a crime); and (b) those which are less reprehensible and are regarded as void (for example, a contract in restraint of trade). Whether a contract is categorised as illegal in the strict sense, or simply void, it is unenforceable. The topic of illegality and contracts is considered under the following headings: 1.

Illegality under statute law.

2.

Illegality at common law.

3.

Consequences of illegal contracts and void contracts.

chapter 8 Legality of Object

Illegality under statute law Contracts illegal by statute [8.30] Many business activities are regulated by statutory provision requiring, for example, a licence to be obtained before engaging in a particular activity. Often, non-compliance with such provisions is made an offence under the particular statute. The question which may then arise is the effect of such non-compliance on a contract entered into with another party, that is, is such contract prohibited by the statute in question? If it is, then “the court will not enforce a contract which is expressly or impliedly prohibited by statute”: St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267 at 283. In Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413, Gibbs ACJ outlined four different ways in which a statute may render a contract illegal: “(1) The contract may be to do something which the statute forbids; (2) The contract may be one which the statute expressly or impliedly prohibits; (3) The contract, although lawful on its face may be made in order to effect a purpose which the statute renders unlawful; or (4) The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits”. See also Burmic Pty Ltd v Goldview Pty Ltd [2003] 2 Qd R 477 at [17].

Express prohibition [8.40] If a contract is expressly prohibited by statute then it is illegal and unenforceable.

Re Mahmoud & Ispahani [8.50] Re Mahmoud & Ispahani [1921] 2 KB 716. A statutory order provided that a person was not to buy or sell or otherwise deal in linseed oil without a licence issued by a government official. The defendant told the plaintiff, untruthfully, that he had the necessary licence and contracted to purchase a quantity of linseed oil from the plaintiff. The defendant later refused to take delivery and the plaintiff sued him for damages for breach of contract. It was held that the plaintiff’s action failed. The order clearly prohibited the sale of linseed oil to an unlicensed purchaser and therefore expressly prohibited the contract in question. Accordingly, the contract was illegal and unenforceable: “The contract was absolutely prohibited; and in my view, if an act is prohibited by statute for the public benefit, the Court must enforce the prohibition, even though the person breaking the law relies upon his own illegality”: at 729 per Scrutton LJ; see also Chitts v Allaine [1982] Qd R 319

Implied prohibition [8.60] It is common for a statute to require or proscribe certain conduct and provide a penalty for non-compliance. The problem is then to determine whether non-compliance was also intended to affect a contract involving such conduct: if so, then the contract may be regarded as being impliedly prohibited by the statute and therefore illegal and unenforceable.

171

172

Introduction to Business Law in Australia

On the other hand, the statute may be construed as limiting the sanction for non-compliance to the penalty or fine specified in the statute but otherwise leaving the validity of a contract involving the conduct unimpaired. The issue arose for consideration by the High Court in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410:

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd [8.70] Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410. The respondent company lent the first appellant $132,600, repayment of which was secured by a mortgage which incorporated a guarantee given by the other appellants. Default having been made in repayment of the loan, the respondent sued the appellants on the personal covenants in the mortgage. The appellants contended that the mortgage (including the guarantee) was illegal and void on the ground that the respondent had been carrying on the business of banking without authorisation under the Banking Act 1959 (Cth). The Act provided that a corporation was not to carry on a banking business unless it was authorised to do so and provided a penalty of $10,000 per day for contravention of this provision. It was agreed between the parties that the lender was carrying on the business of banking in contravention of the Act. The question to be determined was whether such offence rendered the contract between the parties illegal and unenforceable. The High Court held that having regard to the scope and object of the provision prohibiting the carrying on of any banking business without authority, and in particular to the heavy penalty provided for its contravention, the provision did not upon its proper construction either expressly or impliedly prohibit such a loan on mortgage. Accordingly, the respondent lender was entitled to enforce the mortgage. [8.80] The validity of the contract is determined by statutory interpretation: Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 at [11]. In determining the effect on a contract of conduct proscribed by statute, the courts have regard to the intention of the legislation, that is, what it was intended to achieve. This is particularly so where it is apparent that the statute was aimed at protecting the public, or furthering some public policy objective.

Buckland v Massey [8.90] Buckland v Massey [1985] 1 Qd R 502. A Queensland statute provided that it was an offence to sell a second-hand motor vehicle without a certificate of roadworthiness. It was agreed between the seller of a second-hand vehicle and the buyer that the seller need not obtain the requisite certificate but that the buyer would do so. The seller sought to recover the balance of the purchase price. The court said that the whole of the statute was concerned to ensure that motor vehicles for use on the road are roadworthy. The clear implication of the Act was to prohibit contracts for the sale of second-hand vehicles where a roadworthiness certificate had not been obtained. Accordingly, it was held that the contract was impliedly prohibited by the Act and therefore unenforceable.

chapter 8 Legality of Object

Gaffney v Ryan [8.100] Gaffney v Ryan [1995] 1 Qd R 19. Another statute provided that it was an offence for a registered builder to perform general building construction when not registered as a general builder and a monetary penalty was prescribed for non-compliance. A registered builder performed work in breach of this provision. It was held that non-compliance with the statutory provision by the builder did not render void and unenforceable his contractual liability for the loss caused by his defective workmanship. The builder was liable for damages for his faulty workmanship. To have decided otherwise would not have been consistent with the statutory purpose of protecting those for whom building work is performed. [8.110] It was held that representations which constituted misleading or deceptive conduct in contravention of s 52 of the former Trade Practices Act 1974 (Cth) did not render a contract entered into as a result of such conduct illegal and unenforceable. The reason was that the Act itself provided a wide range of remedies for contravention of s 52, particularly s 87 which empowered the court to declare a contract which had come into existence as a result of such conduct to be void: Bank of America Australia Ltd v Ceda Jon International Pty Ltd (1988) 17 NSWLR 290. It is likely that the court will give a similar construction to the corresponding provisions in the Australian Consumer Law, ss 18 and 243 respectively.

Contracts illegal as formed or performed [8.120] A statutory prohibition may make a contract: (a)

illegal as formed; or

(b)

illegal as performed.

Contracts illegal as formed [8.130] A contract will be illegal as formed where it was prohibited, either expressly or impliedly, from its inception. An example of a contract illegal as formed is Re Mahmoud & Ispahani [1921] 2 KB 716: see [8.50].

Contracts illegal as performed [8.140] A contract may be legal at the time it was formed, that is, when it was made but become illegal because of the way in which it is performed. Thus, a contract will be illegal as performed where one or both of the parties intend to perform it in an illegal manner or for an illegal purpose.

Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [8.150] Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828. The plaintiff manufacturers contracted with the defendant hauliers for the transportation of a large piece of engineering equipment. Subsequently, the lorry on which the equipment was being carried toppled over and the equipment was damaged. The plaintiffs sued the defendants for their loss.

173

174

Introduction to Business Law in Australia

The relevant motor vehicle legislation provided that it was unlawful to use on the road a motor vehicle weighing more than 30 tons when loaded. Both the plaintiffs and the defendants were aware that the load exceeded the legal limit. It was held that the plaintiffs could not recover. Although the contract for the carriage of the equipment may have been lawful when it was made, it was illegal as performed and therefore unenforceable by either party. [8.160] If the illegal conduct is only incidental to the way in which the contract is performed, it will not have the effect of making the contract unenforceable: Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215; St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267 at 291.

Contracts void by statute [8.170] A contract which is illegal as a result of an express or implied statutory prohibition is void and unenforceable. However, a statute may not make a particular contract illegal but simply declare it void. Legislation in most Australian States provides that contracts or agreements by way of gaming or wagering are void and such contracts cannot be enforced in the courts. 1 Exception is made in respect of lawful forms of gambling such as a bet or wager made on a licensed racecourse with a bookmaker. 2 A contract will be void if it undermines a statutory purpose under which statutory rights are conferred in the public interest. The High Court has thus indicated that: “contractual arrangements will not be enforced where they operate to defeat or circumvent a statutory purpose or policy according to which statutory rights are conferred in the public interest, rather than for the benefit of an individual alone. The courts will treat such arrangements as ineffective or void, even in the absence of a breach of a norm of conduct or other requirement expressed or necessarily implicit in the statutory text”: Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129 at [46] per French CJ, Crennan, Kiefel and Bell J.

Illegality at common law [8.180] The courts refuse to enforce agreements that are “contrary to public policy”. These contracts fall into two basic categories: 1.

contracts described as illegal because of their more reprehensible character; and

2.

those simply described as void, rather than illegal, because of their less serious nature.

A contract which is illegal will also be void and unenforceable in the courts. The rationale for the distinction between contracts which are illegal, and those which are simply void, on grounds of public policy is said to be justified because of the more severe consequences which may ensue where the contract is illegal. 1

2

Unlawful Gambling Act 1998 (NSW), s 56 (“has no effect”); Gambling Regulation Act 2003 (Vic), s 2.4.1; Racing Act 2002 (Qld), s 341; Lottery and Gaming Act 1936 (SA), ss 50 and 50A; Racing Regulation Act 2004 (Tas), s 103; Unlawful Gambling Act 2009 (ACT), s 47; Racing and Betting Act (NT), s 135; Gaming and Betting (Contracts and Securities) Act 1985 (WA), s 4. Unlawful Gambling Act 1998 (NSW), s 56(2); Gambling Regulation Act 2003 (Vic), s 2.4.2; Racing Act 2002 (Qld), s 342; Lottery and Gaming Act 1936 (SA), s 50; Racing Regulation Act 2004 (Tas), s 103(2); Unlawful Gambling Act 2009 (ACT), s 47; Racing and Betting Act (NT), s 135(1); Gaming and Betting (Contracts and Securities) Act 1985 (WA), s 5; Betting Control Act 1954 (WA).

chapter 8 Legality of Object

Contracts illegal at common law [8.190] Contracts that are illegal at common law on grounds of public policy are: (a)

contracts to commit a crime, a tort or a fraud on a third party;

(b)

contracts promoting sexual immorality;

(c)

contracts prejudicial to the administration of justice;

(d)

contracts tending to promote corruption in public life;

(e)

contracts prejudicial to the public safety; and

(f)

contracts to defraud the revenue.

Contracts to commit a crime, a tort or a fraud on a third party [8.200] A contract involving the commission of a crime, a tort or a fraud on third parties is illegal at common law and will not be enforced.

Contracts promoting sexual immorality [8.210] A contract which promotes, either directly or indirectly, the promotion of sexual immorality is illegal and unenforceable. This includes agreements for the letting of premises or the hire of vehicles for an immoral purpose: Upfill v Wright [1911] 1 KB 506. On the other hand, the contract of employment of a receptionist at a brothel was not void for illegality and she was entitled to recover workers’ compensation for a broken arm sustained on her way to work: Barac (t/as Exotic Studios) v Farnell (1994) 53 FCR 193. Community standards of “immorality” are susceptible to change: Andrews v Parker [1973] Qd R 93.

Seidler v Schallhofer [8.220] Seidler v Schallhofer [1982] 2 NSWLR 80. In that case an agreement provided for the continuation of a de facto relationship for six months and for marriage or separation thereafter. In the event of separation, the plaintiff was to get a refund of her payments towards the purchase of a house in return for the transfer to the defendant of her half share as joint tenant in the property. It was held that the agreement was not void as being contrary to public policy.

Contracts prejudicial to the administration of justice [8.230] Agreements which are regarded as hindering the administration of justice are illegal at common law on grounds of public policy. This includes agreements to conceal offences, compromise prosecutions or to prevent or impede the justice system. Two categories of agreement require further consideration in this context: 1.

agreements to stifle a prosecution; and

2.

agreements for the maintenance of a suit and champerty.

Agreements to stifle a prosecution [8.240] An example of such an agreement is the following:

175

176

Introduction to Business Law in Australia

Public Service Employees Credit Union Co-operative Ltd v Campion [8.250] Public Service Employees Credit Union Co-operative Ltd v Campion (1984) 56 ACTR 39. The defendant guaranteed repayment of a loan advanced by the plaintiff credit union to his son on the understanding that the credit union would not report his son to police for misappropriation of moneys from the credit union. It was held that the guarantee was void for illegality as an agreement to stifle prosecution for an indictable public offence. [8.260] To be contrasted with that case is the decision of the Supreme Court of Western Australia in Scolio Pty Ltd v Cote (1992) 6 WAR 475:

Scolio Pty Ltd v Cote [8.270] Scolio Pty Ltd v Cote (1992) 6 WAR 475. An auditor’s report disclosed evidence of misappropriation of moneys by the respondent, a manager of the appellant company. The manager signed a deed to repay the moneys by instalments, being given to understand that if he did not do so the auditor’s report would be referred to the police. The court held that it was not established that the manager had signed the deed under duress and there was no evidence of an implicit agreement to stifle a prosecution. Accordingly, judgment was entered against the respondent manager for the amount of the deed.

Agreements for the maintenance of a suit and champerty [8.280] Maintenance is the act of a third party in encouraging litigation by rendering officious assistance, by money or otherwise, to another person in a suit in which that third person has no legal interest. All the aspects of a particular transaction have to be taken into consideration to determine whether: “[T]here is wanton and officious intermeddling with the disputes of others in which the meddler has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse”: Giles v Thompson [1994] 1 AC 142 at 164 per Lord Mustill. Champerty is the maintaining of a suit on the understanding that the person maintaining will receive some share of the benefits accruing to a party to such suit, and is thus really a sharing of the results of litigation. In several jurisdictions legislation provides that the abolition of the torts of maintenance and champerty does not affect the rules concerning the illegality of contracts that are tainted by maintenance or champerty. 3

Contracts tending to promote corruption in public life [8.290] A contract with a person to use their official position to obtain a benefit for another is illegal. For example, a contract to procure a title of honour for reward is illegal.

3

Civil Liability Act 2002 (NSW), Sch 2 Item 2; Wrongs Act 1958 (Vic), s 32(2); Civil Law (Wrongs) Act 2002 (ACT), s 221(2)(a).

chapter 8 Legality of Object

Parkinson v College of Ambulance Ltd [8.300] Parkinson v College of Ambulance Ltd [1925] 2 KB 1. The secretary of a charity made an arrangement with the plaintiff that if he would make a donation to its funds it would take steps on his behalf and procure him at least a knighthood. He paid £3,000 and undertook to pay more when the knighthood was forthcoming. However, he did not receive a knighthood and sued for the return of the money. It was held that he was unable to recover because the contract was illegal as being contrary to public policy.

Wilkinson v Osborne [8.310] Wilkinson v Osborne (1915) 21 CLR 89. In a further example, A, the agent for the owners of land, who was negotiating on their behalf for its sale to the Crown, entered into an agreement with B and C, who were members of the State Parliament and carried on business in partnership as land agents. Under the agreement, B and C for pecuniary consideration undertook to put pressure upon the government, of which they were supporters, to agree to purchase the land. The completion of the purchase and the earning of the reward were contingent upon the approval of the House of which they were members, so that the completion was or might be dependent upon their votes. It was held that the agreement was illegal as being contrary to public policy.

Contracts prejudicial to the public safety [8.320] Agreements in this category are of two types. First, trading agreements between a national and an enemy alien in wartime. Secondly, agreements which might rupture the existing friendly relationships between one country and another: Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. Such agreements are illegal and unenforceable.

Contracts to defraud the revenue [8.330] A contract which is designed to defraud the revenue whether national or local is illegal as being contrary to public policy: Alexander v Rayson [1936] 1 KB 169.

Contracts void at common law [8.340] There are three categories of contract usually regarded as being void (rather than illegal) at common law as being contrary to public policy. These are: 1.

contracts to oust the jurisdiction of the courts;

2.

contracts prejudicial to the status of marriage; and

3.

contracts in restraint of trade.

Contracts to oust the jurisdiction of the courts [8.350] A provision in a contract which purports to prevent recourse to the courts in the event of dispute between the parties is void as being contrary to public policy. It has been stated in the High Court that: “No contractual provision which attempts to disable a party from resorting to the Courts of law was ever recognized as valid. It is not possible for a contract to create rights and at the same time to

177

178

Introduction to Business Law in Australia

deny to the other party in whom they vest the right to invoke the jurisdiction of the Courts to enforce them”: Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 at 652.

Contracts prejudicial to the status of marriage [8.360] A contract or a term of a contract which prejudices the status of marriage will be void as contrary to public policy, for example, a pre-marriage agreement not to live together after marriage: Scott v Scott (1904) 25 ALT 174. One type of contract invalidated is that known as “marriage brokerage”, that is, an agreement to procure a marriage for a consideration: Hermann v Charlesworth [1905] 2 KB 123, discussed at [8.710].

Contracts in restraint of trade [8.370] A contract in restraint of trade is one which restricts a person from freely exercising their trade, business or profession. 4 The most widely accepted definition of “restraint of trade” is that enunciated in Petrofina (Great Britain) Ltd v Martin [1966] 1 Ch 146 at 180: “A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in future to carry on trade with other persons not parties to the contract in such manner as he chooses”. A contract which is in restraint of trade is prima facie void as being contrary to public policy but will be binding on the parties if the court is satisfied that it is reasonable in the circumstances. The main points in considering whether at common law a contract in restraint of trade is void or binding are: (a)

the restraint must be reasonable as between the parties, that is, must be no wider than is reasonably necessary to protect the person for whose benefit it is imposed; and

(b)

the restraint must be reasonable in the interest of the public, that is, it must be in no way injurious to the public.

In applying these tests the duration and extent of the area of the restraint are of particular importance. Contracts in restraint of trade at common law can conveniently be divided for the purposes of discussion into the following categories: (a)

those made when a business is sold to protect the purchaser’s goodwill in the business against undue competition by the vendor;

(b)

those made with an employee to restrain the employee after the termination of their employment from exercising their occupation in a certain area or for a certain time; and

(c)

other restrictive trading agreements, such as price maintenance agreements.

Each of these types of contractual restraint is considered separately below.

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [8.380] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535. The vendor of a business is frequently restrained from competing with the purchaser for a specified period and, usually, within a defined area. Such a restraint is enforceable if it is reasonable in the circumstances for the protection of the purchaser’s goodwill in the business.

4

See generally C Arup et al, “Restraints of Trade: The Legal Practice” (2013) 36 University of New South Wales Law Journal 1.

chapter 8 Legality of Object

Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd [8.390] Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505. Where a contract for the sale of a shipbuilding business, specialising in the construction of luxury motor vessels, contained a restraint of trade clause restraining the vendors from engaging in “the business of shipbuilding of any description or any other business of a similar nature”, it was held that the clause constituted an unreasonable restraint of trade as not being reasonably necessary to protect the interests of the purchaser.

Positive Endeavour Pty Ltd v Madigan [8.400] Positive Endeavour Pty Ltd v Madigan (2009) 105 SASR 109. A contract for the sale of a finance broking business provided that the vendor must not “solicit, canvass or secure the custom of a person who is at completion, or was within twelve months before completion, a customer”: at [74]. The Court held that this clause went beyond what was reasonably necessary to protect the value of the purchased business. The clause applied in perpetuity to any loan for any purpose to any existing customer. Sufficient protection would have been given by a clause with a suitable time limitation or which applied to a limited class of customers or type of loan.

Contracts of employment [8.410] Contracts of employment sometimes contain covenants restraining the employee from exercising their profession or trade in a certain area or for a certain time after the termination of their employment. Covenants in restraint of trade contained in contracts of employment will only be enforced so far as is necessary to prevent the employee using the knowledge, trade secrets or connections of their past employer in competition with that employer, and not to prevent the employee from using their own skill and knowledge in their trade or profession, even if acquired in the previous employer’s service: Attwood v Lamont [1920] 3 KB 571. The law does not readily allow a person to contract out of their means of livelihood: Lindner v Murdock’s Garage (1950) 83 CLR 628. A certain number of restraints rest on the employee, however, quite independently of any express covenant. For example, a person can be restrained from disclosing a secret process belonging to their employer which they have memorised: Amber Size Chemical Co v Menzel [1913] 2 Ch 239. A person can be prevented from using a list of their employer’s customers for the purpose of soliciting business for themselves: Robb v Green [1895] 2 QB 315. A person acquiring special skills with access to their employer’s secrets can be restrained from working for a competitor in their spare time: Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169. Such covenants will be construed more strictly in the case of an employer ((vis a vis an employee) than in the case of a vendor (vis a vis a purchaser of a business): Geraghty v Minter (1979) 142 CLR 177 at 185; EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [10]. These points can be demonstrated by the leading case of Herbert Morris Ltd v Saxelby [1916] 1 AC 688:

179

180

Introduction to Business Law in Australia

Herbert Morris Ltd v Saxelby [8.420] Herbert Morris Ltd v Saxelby [1916] 1 AC 688. Saxelby had been employed by the appellant company for 12 years. He had made a covenant with the company that he would not, for seven years after the termination of his employment with the company, either in the United Kingdom or Ireland, carry on or engage in by himself or with others any business of a like nature to that of the appellant company: at 690. He left the company and joined the staff of competitors of the company. The House of Lords held that the covenant was void as a person should not be restrained from using their own skill in any particular trade. A person has a right to engage in competition with others engaged in that trade and the law will not enforce a covenant in restraint of employment if it is imposed on the former employee only to protect the employer against competition per se. [8.430] A restraint which is imposed simply for the purpose of preventing an ex-employee from using their own skill and knowledge in competition with their former employer will not be enforceable. However reasonable restraint designed to protect trade connections, confidential information, or trade secrets acquired by the employee in the course of their employment will be enforceable: Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472.

Jardin v Metcash Ltd [8.440] Jardin v Metcash Ltd (2011) 285 ALR 677. Jardin was the CEO of a subsidiary of Metcash, IGA Distribution, which distributed groceries to independent retailers at [42]–[43]. Jardin’s contract of employment provided that he must not accept any other employment without the company’s permission, compete with the company, or hold investments of more than 5% of the issued investments of any class of another company: at [44]. Metcash decided to terminate his employment: at [2]. Jardin sought to take a majority shareholding in a competitor of Metcash: at [50]–[52]. The New South Wales Court of Appeal held that these contractual restraints were valid: at [107]. Metcash was entitled to protect itself from the risk that Jardin would use his connections with its customers to seek to entice them away to a competitor: at [97]. The evidence showed that over the 10 years of his employment Jardin had acquired knowledge and influence over customers that was sufficient to justify a restraint: at [98]. Confidential information about the terms of trade between IGA Distribution and its customers could be used to compete against IGA: at [102]. The 5% investment limit was justified because of the risk that Jardin would use his knowledge as CEO for the advantage of a competitor of IGA: at [104]. The deed releasing Jardin from his employment included a restraint for 12 months while he continued to be employed by Metcash. This restraint was also reasonable: at [106].

Seven Network (Operations) Ltd v Warburton [8.450] Seven Network (Operations) Ltd v Warburton [2011] NSWSC 386. James Warburton was the Chief Sales and Digital Officer at Network Seven and was seen as its next Chief Executive Officer. However, on March 2, 2011, he defected to Network 10 taking up a position as its CEO, commencing on July 14, 2011. After Warburton informed Seven, they asked him to take leave

chapter 8 Legality of Object

immediately and sought to enforce a restraint of trade clause in his contract. Under the clause, he could not work for Network 10 for a period of 12 months from the date he left Seven. The Court first decided that the restraint, if valid, would start from March 2. The Court then held that the restraint was necessary for the reasonable protection of the employer’s legitimate interests including the need to reduce the risk of devaluation of the business caused by the departure of any executives to competitors and to reduce the risk of the misuse of confidential information by competitors. The Court decided that 12 months was not an unreasonable restraint period because it was tied to the advertising contract cycle – beyond that period Warburton’s knowledge of the advertising rates etc would be past its use-by date. However the judge, underscoring the principle that a restraint will only be enforced to the extent necessary to protect the employer’s legitimate interests, then decided that the restraint would expire on January 1, 2012 because by December 31, 2011, Seven would have finalised its major advertising contracts.

Pearson v HRX Holdings Pty Ltd [8.460] Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187. Pearson was employed in a senior role in a human resources firm, marketing the firm to possible clients: at [12]. His contract provided that he could not be employed by a business “similar to or competitive with” the firm for two years after ceasing employment with the firm. The contract also contained confidentiality and nonsolicitation obligations: at [18]–[20]. The Full Federal Court upheld the restraint. The firm’s customer connections were a legitimate interest which could validly be protected by a restraint: at [46]. Pearson’s role had been to market the firm to potential customers: at [50]. The confidentiality and non-solicitation provisions were not sufficient to protect the firm’s customer connections: at [51]. The firm also had a legitimate interest in securing the full benefit of its bargain with Pearson during his employment through preservation of the goodwill and expansion of the business he generated: at [57]–[59]. The restraint was reasonably necessary to protect these interests: at [62]. This reasonableness was demonstrated by the allocation of shares in the company and the payment of his salary for 21 months of the two-year restraint period: at [63].

Birdanco Nominees Pty Ltd v Money [8.470] Birdanco Nominees Pty Ltd v Money (2012) 36 VR 341. Money was employed by a firm of accountants. His employment contract provided that for a period of three years after leaving employment with the firm he may not provide accounting services to any client of the firm for whom he had worked within the three years before leaving the firm’s employment: at [21]. The contract further provided that if this restraint was breached, the ex-employee was liable to pay damages set at three quarters of the fees payable by the client in the year before he ceased employment with the firm. The Victorian Court of Appeal upheld the restraint. The firm had a legitimate interest in guarding the goodwill of clients in relation to the ex-employee’s previous services to those clients: at [40]. The ex-employee’s knowledge of the client’s affairs encouraged the continued patronage of the firm: at [42]. The firm introduced the ex-employee to the client and it was through the firm’s facilities and supervision that the ex-employee had been able to create goodwill with the client. That goodwill was

181

182

Introduction to Business Law in Australia

the property of the firm: at [76]. The duration of the restraint was reasonable: at [9]–[10], [84]. The damages clause was a genuine pre-estimate of loss and did not constitute a penalty.

NE Perry Pty Ltd v Judge [8.480] NE Perry Pty Ltd v Judge (2002) 84 SASR 86. A chiropractor was appointed to work at a chiropractic practice. The chiropractor agreed that for two years after the termination of a contract, he would not practice within the town, or induce any client of the practice to become his own client: at [11]. This was not a contract of employment: at [20]. It was held that the covenant not to practice within the town for two years was unenforceable. To be reasonable the time period would have to be that reasonably required to break the connection between the chiropractor and the patients of the clinic. On the facts a two-year period was unreasonable: at [31]–[32], [63]. A one-year restraint upon practice would have been reasonable: at [38], [115]. One judge stated that “the longer the gaps between [chiropractic] treatments, the longer the justifiable period of restraint” at [64]. The covenant not to induce clients of the practice to become his own clients was upheld. A lengthier period was reasonable in the case of inducement than in the case of setting up as a competitor, since inducement “strike[s] more directly” at the clinic’s goodwill. [8.490] The principles governing the operation of the restraint of trade doctrine have also been applied to provisions which seek to unduly limit the circumstances in which an employee may be relieved from the employment contract as the following case demonstrates:

Buckley v Tutty [8.500] Buckley v Tutty (1971) 125 CLR 353. T, a professional footballer, contracted to play with the Balmain Rugby League Club. Under his contract, T could not transfer to any other club except with the consent of the Balmain Club which had refused to give its consent. Further, even if the Balmain Club agreed to put T on a transfer list, the amount of transfer fee which it could fix was within its own discretion. The High Court held that the rules relating to the retention and transfer of players were in restraint of trade and that appropriate orders could be granted to prevent the club from continuing to observe them. The Court stated: “[T]he rules … go beyond what is reasonable in two main respects. In the first place, they enable a club to prevent any professional who has played in one of its teams from playing with another club, notwithstanding that he has ceased to play for the club which retains him and no longer receives any remuneration from that club. There is no time limited for the exercise of this power … A second objection to the rules … is in relation to the question of transfer fees. Although a club does not wish to retain a player, and is prepared to see him go to another club, it may fix a transfer fee, most of which goes to the club itself, although it may be quite unrelated to any benefit which the player has received from his membership of … the club … The transfer fee may not only prevent a player from reaping the financial rewards of his own skill but it may impede him in obtaining new employment”: at 378.

chapter 8 Legality of Object

[8.510] In determining whether a restraint is reasonable, the court may also have regard to the relative bargaining positions of the parties. That is to say, where there is an inequality of bargaining power, the court will have regard to the fairness of the bargain in determining whether the restraint in question is reasonable in the circumstances.

A Schroeder Music Publishing Co Ltd v Macaulay [8.520] A Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308. A young songwriter entered into an agreement with a music publishing company on one of the company’s standard forms. Under the contract the company engaged his exclusive services as a songwriter for a period of five years, with provision for automatic extension for another five years if royalties exceeded £5,000. Copyright in all compositions created by the songwriter during the term of the contract was to be assigned to the company. The songwriter received no payment (apart from an initial £50) unless his work was published but the company was under no obligation to publish or promote his work. If the company did not publish, the songwriter had no right to terminate the agreement or to have copyright in his compositions reassigned to him. The company could terminate the agreement by giving one month’s notice but there was no corresponding provision for the benefit of the songwriter. The company also had complete power to assign its rights under the contract but the songwriter could not do so without the publisher’s written consent. The House of Lords held that the contract was in unreasonable restraint of trade and void as being contrary to public policy. In determining whether the court would relieve the songwriter of his legal duty to fulfil his obligations it was necessary to “assess the relative bargaining power of the publisher and the songwriter at the time the contract was made and to decide whether the publisher had used his superior bargaining power to extract from the songwriter promises that were unfairly onerous to him”. The relevant question to be answered is: “‘Was the bargain fair?’ The test of fairness, is … whether the restrictions are both reasonably necessary for the protection of the legitimate interests of the promisee and commensurate with the benefits secured to the promisor under the contract.” On the facts, the contract did not satisfy this “test of fairness”. [8.530] The validity of a restraint is determined as at the time of entry into the contract: NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at [98]. The covenantor’s subsequent unlawful conduct does not confer validity upon an invalid clause. Such a clause remains of no effect: Cedar Hill Flowers & Foliage Pty Ltd v Spierenburg [2003] 1 Qd R 482 at [2], [25], [50].

Other restrictive trading agreements Several cases concern restraint of trade clauses that applied after the end of a franchise agreement. A franchise agreement shares some characteristics with both contracts for the sale of a business and contracts of employment. Determining which category most closely fits a particular franchise agreement requires a consideration of the specific agreement: BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [61].

183

184

Introduction to Business Law in Australia

BB Australia Pty Ltd v Karioi Pty Ltd [8.550] BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105. Karioi operated two video rental stores under a Blockbuster franchise: at [3]. The franchise agreement provided that for two years after the end of the agreement Karioi would not operate a video rental store within 30 km of Karioi’s premises: at [43]-[44]. In its decision the New South Wales Court of Appeal considered both the sale of a business and employment lines of cases. In relation to the sale of a business cases, Blockbuster sought to justify the restraint as necessary to protect various interests subsumed under the concept of “goodwill”: at [50]. The Court held that Blockbuster was not entitled to protect the goodwill related to its wider business from competition by Karioi: at [66]. The protection of Blockbuster’s intellectual property and confidential information was sufficiently protected by other clauses of the agreement: at [68]–[69]. The location of the stores did not justify the restraint as Blockbuster had not exercised its right to acquire the leases of the premises. Karioi retained the right to occupy the premises under its leases: at [70]. Blockbuster did not have a legitimate interest in the patronage of the stores as there was no evidence that customers chose their video store based on customer service at a branch rather than the location or branding of the store: at [73]-[76]. In relation to the contract of employment cases, the Court observed that while Karioi was not employed by Blockbuster, in a general way it acted on behalf of Blockbuster: at [78]. There was no evidence that customers were likely to follow Karioi at the end of the franchise: at [82]. Blockbuster did not have a legitimate interest in relation to the patronage of the stores: at [85]. There was no justification for giving a new Blockbuster franchisee in the area time to become established as there was no evidence that customers would prefer Karioi’s store rather than a new Blockbuster store, except in relation to location: at [87]. There was no evidence that Karioi would have a competitive advantage over a new franchisee by reason of having previously been a Blockbuster franchisee: at [91]. The franchise agreement adequately protected confidential information related to Blockbuster’s operations, which would in any case quickly become outdated: at [94]-[95]. The restraint was not justified by the protection of confidential information: at [96].

EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [8.560] EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517. A clause in a franchise agreement provided that for six months after the end of the agreement an EzyDVD franchisee would not operate a competing business within 5 km of the store at [2]. When the agreement expired the franchisee destroyed or returned the intellectual property of EzyDVD. The franchisee began to operate a DVD store in the same location under a new name: at [8]. EzyDVD sought to justify the restraint as necessary for the protection of its intellectual property. The Queensland Court of Appeal held that the franchise agreement provided extensive protection for the intellectual property of EzyDVD: at [35]. It was unlikely that the franchisee would be able to remember the extremely detailed information contained in the EzyDVD product database: at [40]. The information in the database constantly changed so it became quickly outdated: at [41]. EzyDVD had not proven that the protection of its intellectual property necessitated the restraint: at [45].

chapter 8 Legality of Object

[8.570] Many kinds of anti-competitive agreements are now proscribed by the Commonwealth Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)). However, it is still important to be aware of the common law restraint of trade doctrine since agreements not falling within the ambit of the Competition and Consumer Act 2010 (Cth) may be held unenforceable at common law as being in unreasonable restraint of trade. The Act provides that it “does not affect the operation of … the law relating to restraint of trade insofar as that law is capable of operating concurrently with this Act”: s 4M. [8.580] In some cases, the first question to be determined is whether the clause is a restraint of trade clause – does the clause restrain trade? Only if the clause is a restraint of trade does the question of whether the restraint is reasonably necessary in the circumstances arise. The House of Lords in the case of Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] 2 AC 269 discussed 3 alternative tests to determine whether a clause was a restraint of trade: the “pre-existing freedom” test; the “sterilisation” test; and the ‘trading society’ test. The pre-existing freedom test essentially asks whether a party has given up freedoms that they had prior to the agreement. If not, then there is no restraint. The sterilisation test essentially asks whether the clause sterilises (stops) the person’s ability to work or trade, or, is it directing the person’s work or trade to the activities covered by the contract. Lord Reid asked whether “prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties’ services and not their sterilisation”: at 328. In Australian Capital Territory v Munday (2000) 99 FCR 72, the Full Federal Court held that the “structure of trading society” test is the best criterion for determining which types of transactions are excluded from the common law restraint of trade doctrine. (and hence will not be invalid): at [105], developed by Lord Wilberforce in the case of Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] 2 AC 269. Determining whether a clause is in restraint of trade requires the courts to consider both public policy and commercial and competition issues. The “structure of a trading society” test recognizes that some issues occur commonly in the course of business activities, that these issues have thus been subject to much negotiation amongst many parties and through this process, over time, some “standard” or usual contract clauses have developed. The development of such clauses tends to show that the clauses “have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society”: at 335. Accordingly, such clauses will not be in restraint of trade and thus invalid. The High Court also pointed out that the approach of the common law has been to strike down a restraint unless justification for the restraint is shown. Citing s 4M of the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)), as permitting the independent development of the common law of restraint of trade, the Court indicated that a restraint which does not contravene Pt IV of the Trade Practices Act 1974 (Cth) (now Pt IV of the Competition and Consumer Act 2010 (Cth)) may nonetheless constitute an invalid restraint at common law: Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 at [32]. The Commonwealth Competition and Consumer Act 2010 (Cth) does not apply to the kinds of agreements discussed above under the headings “Contracts for the sale of a business” and “Contracts of employment” which are accordingly governed by the common law restraint of trade doctrine: s 51(2)(b), (d), (e).

185

186

Introduction to Business Law in Australia

Consequences of illegal contracts and void contracts [8.590] A distinction has been drawn between those contracts which are categorised as illegal in the strict or narrow sense and those which are regarded as simply void (rather than illegal). This distinction is maintained in the following discussion which considers the consequences of illegal and void contracts.

Consequences of illegal contracts [8.600] The consequences of illegality under either statute law or common law are basically the same. The general position is as follows:

The contract is totally void [8.610] The general effect of illegality in the formation of a contract is that the contract is void and neither party can sue on it.

Money paid cannot generally be recovered [8.620] Money paid or property transferred under an illegal contract is not generally recoverable. Should one of the parties seek to recover money paid under the contract, the defendant is in the stronger position where there is equal culpability. This means that a party cannot recover moneys paid under the illegal contract to the other if they are equally blameworthy. For example, in Parkinson v College of Ambulance Ltd [1925] 2 KB 1 (discussed at [8.290]) the plaintiff was unable to recover the £3,000 donation he had paid to a charity for a knighthood which did not eventuate.

Exceptions [8.630] A party can recover money paid or property transferred if that party was not “in pari delicto”, that is, not equally to blame. This will apply where, under a contract prohibited by statute, money is paid by the person whom the statute was designed to protect: Kiriri Cotton Co Ltd v Dewani [1960] AC 192. The parties are not “in pari delicto”, and accordingly recovery is allowed, where a person is induced to enter into the illegal contract by the exercise of fraudulent misrepresentation, duress or oppression.

Shelley v Paddock [8.640] Shelley v Paddock [1980] QB 348. The plaintiff, an English resident, agreed to purchase a house in Spain from the defendants who were English nationals resident in Spain. The defendants said that they were selling the house as agents for the owner. In fact they had no authority to sell the house. The plaintiff paid the defendants the purchase price. On discovering the true situation, the plaintiff sued the defendants. However, the defendants contended that the moneys paid by the plaintiff were irrecoverable on the ground that the transaction was illegal since it contravened the Exchange Control Act 1947 (UK). It was held the plaintiff could recover since the parties were not in pari delicto. Tthe defendants “were guilty of a swindle. It is only fair and just that they should not be allowed to keep the benefit of their fraud”: at 357. [8.650] It has also been held that where a fiduciary relationship exists between the contracting parties, as in the case of a solicitor or articled clerk entering into a contract with a client, the solicitor or articled clerk

chapter 8 Legality of Object

cannot raise the defence of illegality in an action by the client on the contract since the parties in such a case are not in pari delicto: Abdurahman v Field (1987) 8 NSWLR 158. A further exception is where a party who has paid money under an illegal contract repents of the illegal purpose before there has been any substantial performance of the contract; in such a case he or she can recover the money paid.

Related transactions void [8.660] The effect of an illegal contract may spread beyond the contract itself and affect related or collateral transactions which in turn become illegal. For example, a contract for the loan of money is illegal if it is made to enable the borrower to perform an illegal contract, or to pay a debt contracted under an illegal contract: Spector v Ageda [1973] Ch 30.

Severance and void contracts Extent of invalidity [8.670] Where a contract is void (but not illegal) the position is similar whether it is void under statute or at common law. The contract will be unenforceable only to the extent that its terms contravene the statutory or common law constraint. Accordingly, if the void part of the contract can be severed (separated from the rest), the remainder of the contract can still be enforced. Void words or parts of a clause may also be severed from the remainder of the clause: Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 253 ALR 364 at [11], [13], [101]–[104], [110]; Positive Endeavour Pty Ltd v Madigan (2009) 105 SASR 109 at [43], [155]. [8.680] However, the court will not sever promises or terms of a contract if to do so would alter the whole nature of the contract: MacKinlay v Derry Dew Pty Ltd [2014] WASCA 24 at [152], [171]. Where severance is not possible, then the whole contract will be void: SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at [51]. The general test for determining whether terms that are void are severable was stated by Jordan CJ in McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345: “When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature. … If the elimination of the invalid promises changes the extent only but not the kind of contract, the valid promises are severable”: at 345. A common situation in which the question of severance has arisen is in relation to restraint of trade clauses. This led to the inclusion of clauses imposing harsh restraints but also providing that if that restraint was unenforceable some lesser restraint should be adopted. The object was to ensure that if the court struck down the more onerous clause, they could be severed from the contract and the remaining restraints enforced. In New South Wales, the Restraints of Trade Act 1976 (NSW) was enacted to combat this development. The Act provides that a restraint of trade is valid to the extent to which it is not against public policy whether or not it is in severable terms: s 4(1). The general effect of the Act is to validate a restraint of trade

187

188

Introduction to Business Law in Australia

to the extent that it imposes a reasonable restraint, that is, reasonable between the parties and reasonable in the interests of the public: see Fleming Bros (Monaro Agencies) Pty Ltd v Smith [1983] ATPR 40-389; IRAF Pty Ltd v Graham [1982] 1 NSWLR 419. 5

Severance and illegal contracts [8.690] The courts have held that severance also applies to contracts which are illegal in the strict sense: Carney v Herbert [1985] 1 AC 301 at 317. In practice, the scope of severance in the case of illegal contracts tends to be limited, since the usual effect of failure to comply with a statutory prohibition is to make the whole contract illegal and void: Humphries v Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597; Day Ford Pty Ltd v Sciacca [1990] 2 Qd R 209 at 236.

Money paid recoverable [8.700] Money paid under a contract which is merely void (rather than illegal) is generally recoverable. It appears that this is so whether or not the party who has paid it can prove a total failure of consideration. This is illustrated by the case of a marriage brokerage contract:

Hermann v Charlesworth [8.710] Hermann v Charlesworth [1905] 2 KB 123. The defendant agreed that he would introduce certain gentlemen to the plaintiff (an unmarried woman) with a view to matrimony for an initial fee of £52 and a later payment of £250 should a marriage take place. He introduced certain gentlemen to her but no marriage resulted. It was held that the plaintiff was entitled to the return of her £52 since the payment had been made under a void contract and was recoverable.

Further reading See contract texts listed at the end of Chapter 2.

Tutorial activities 8.1

Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following questions. (a)

Assume that you enter a contract to join the CSW sports facility. Assume also that the federal government introduces legislation that says: “all providers of fitness services must be licensed by the Commonwealth Government Department of Human Services. Providing fitness services without a licence will render the provider liable to a fine of $100.00 per day”. Fitness service providers are defined in the legislation to include CSW. You find out that CSW does not have the required licence.

5

See generally A Moses, “Restraint of Trade in New South Wales” (2004) 1 University of New England Law Journal 199.

chapter 8 Legality of Object

(a)

Will you be successful if you ask a court to declare your contract with CSW void for illegality?

(b)

What type of illegality would you allege?

(c)

Would you be entitled to recover all the fees you have paid since the legislation came in? Why?

8.2

Andrew is a currency trader with Grabbit and Partners. He has a friend, Jessica, who is on the Board of the Reserve Bank. Andrew hands Jessica $40,000 for information about Reserve Bank decisions on interest rates when it meets on the first Tuesday of November. She agrees to provide the information. This is, of course, illegal under the Reserve Bank charter. Jessica takes the money but never provides information. Andrew has a number of legal issues to address but he would be pleased to receive your advice as to whether he can recover the money from Jessica.

8.3

Padmapalasaki and Chandrakantha purchase an Indian restaurant from Priya. It is located in Glen Waverly, south east of Melbourne. In order to ensure he does not establish a similar restaurant in the same vicinity they include a term in the contract that prohibits Priya “owning or managing” a restaurant within a 20 km radius of the restaurant for five years. Advise them whether this term would be an illegal restraint.

8.4

Explain the competing policy considerations that underpin your answer to question 2 above.

8.5

Elders Ltd lent Tongo Ltd $2 million, repayment of which was secured by a mortgage and personal covenants. Tongo defaulted so Elders sued on the personal covenants in the mortgage. Tongo contended that the mortgage (including the guarantee) was illegal and void on the ground that Elders had been carrying on the business of banking without authorisation under the Banking Act 1959 (Cth) which provides that “a corporation is not to carry on a banking business unless it is authorised to do so” and provided a penalty of $10,000 per day for contravention of this provision. It was clear that the lender had in fact been carrying on the business of banking in contravention of the Act. Elders seeks your advice as to whether the contract between the parties is illegal and unenforceable.

8.6

A Victorian statute provides that “a person was not to buy or sell or otherwise deal in genetically modified canola oil without a licence”. George Mahout informs GM Oils that he has the necessary licence and contracts to purchase a quantity of canola oil from GM. He does not in fact have the necessary licence. George later refuses to take delivery and GM Oils sues him for damages for breach of contract. Advise GM Oils of its position in relation to the contract.

189

chapter 9

Contents and Interpretation of the Contract [9.10] Terminology ........................................................................................................................................................... 192 [9.20] Introduction and overview.............................................................................................................................. 192 [9.30] Express terms....................................................................................................................................................... 193 [9.300] Exclusion clauses............................................................................................................................................. 203 [9.330] The Incorporation Issue ............................................................................................................................... 204 [9.480] The Interpretation Issue .............................................................................................................................. 211 [9.590] Online contracting ........................................................................................................................................... 214 [9.600] Implied terms..................................................................................................................................................... 215 [9.720] A duty to be honest......................................................................................................................................... 221

192

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 9.

Terminology [9.10] Below are some of the key terms that are used in this chapter:  business efficacy: implied terms which go without saying for parties creating a commercial contract, eg, that food will be wrapped.  collateral contract: a preliminary contract on which the main contract is based.  condition: a term of the contract that is of basic importance, the breach of which gives rise to a right by the innocent party to either treat the contract as at an end and/or to sue for damages.  contra proferentum: an exclusion clause will be interpreted against the party (proferens) seeking to exclude liability.  exemption clause (also known as an exclusion or exception clause): a term of a contract which attempts to limit, or exclude, the liability of the party inserting it.  extrinsic evidence: evidence as to terms existing outside the written contract.  four corners rule: the terms of the contract are assumed to exist within the four corners of the contract, there is no need to look outside that documents for terms.  parol evidence rule: an assumption that if a contract is in writing it contains all the terms of the contract.  puff: statements not meant to be true, but to attract attention.  representations: in contract law, statements made by the parties in the course of negotiating a contract which are intended to induce the ultimate agreement but not intended to form part of the contract as terms.  term: is a clause or provision in a contract which is promissory in nature and which is intended to form part of the agreement. It may be further classified as a condition, warranty or intermediate term, depending on the intention of the parties.  warranty: a term of the contract which is subsidiary (of lesser importance) to the main purpose of the contract and which confers on the innocent party only a right to sue for damages.

Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 9.

Introduction and overview [9.20] The rights and obligations of parties to a contract are determined by the terms of that contract. These terms may be express (specifically agreed to by the parties either in writing or orally) or they may be implied (by the courts (as a result of conduct of the parties, necessity or normal commercial practice)) or by statute (parliament has prescribed that certain terms must be implied into contracts generally or implied into a contract of this kind (for example, a consumer or credit contract or a residential lease)). Not all of the terms are equally important. There are terms that are of vital importance (conditions) and terms that are of lesser significance (warranties) and ones that could be one or the other but it is not clear which it is until the consequences of the breach is known (intermediate terms). The significance of the

chapter 9 Contents and Interpretation of the Contract

difference is that the remedies in the event of breach depend on the label that is attached to the breached term. If the term that is breached is characterized as a warranty, only damages are available; for a breach of condition, the innocent party may also terminate the contract. We will see how the courts go about deciding whether a particular term is a warranty or a condition. Finally whenever any dispute arises as to the meaning of a term in the contract, it becomes necessary to construe (interpret) the terms of the contract in order to ascertain the intention of the parties. In this chapter we now focus on the terms of the contract (both express and implied) and look closely at a particular kind of express term – the exclusion clause.

Express terms Figure 9.1: Terms

[9.30] Express terms are obviously ones that have been expressed in some form in the agreement or negotiation phase. During this phase, the parties may make many statements. Once agreement is reached, some of these statements are terms of the contract (for example, in a consumer contract, the terms would include statements about the price of the goods, the delivery method, the date of delivery, an exclusion clause and so on). In addition the parties may make statements during the negotiations that are not promises but representations (which, if false, might give rise to non-contractual remedies). Statements about the condition or history of the goods or statements of opinion or forecasts may be examples of statements that may not be promissory but which influence or induce the other party to agree to enter into the contract. If we reconsider the example of James and Bert in Chapter 7 at [7.320]), we see the distinction that is made between a term and a representation and the reason for the distinction being made – if a contractual promise is breached, the innocent party may sue for damages or possibly terminate the contract. If the statement is a misrepresentation, no contractual remedy is available (although remedies maybe available under common law or, more importantly, under statute).

193

194

Introduction to Business Law in Australia

In the event of a dispute about what each party promised, it might be necessary to determine whether the particular statement was a term (the breach of which would give rise to contractual remedies); or a representation (which, if false, might give rise to non-contractual remedies (assuming the representation did not become a term); or a mere puff (a statement with no legal significance). Thus we can see that express pre-contractual statements may be: (a) a term (of the main contract or a collateral contract); or (b) a representation or (c) a mere puff. Figure 9.2: Express terms

Parol evidence in relation to written documents [9.40] Where the parties have expressed their agreement in writing, the “parol evidence rule” will apply. 1 According to this rule, 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 the agreement contained in that written document. The rule has been stated as follows: “[W]here 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 oral agreement which would have the effect of adding to or varying it in any way:” Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252, 262 per Innes J. 1

See generally T Cole, “The Parol Evidence Rule: A Comparative Analysis and Proposal” (2003) 26 University of New South Wales Law Journal 680; K Lindgren, “The Ambiguity of “Ambiguity” in the Construction of Contracts” (2014) 38 Australian Bar Review 153.

chapter 9 Contents and Interpretation of the Contract

Modern decisions have taken the view that the rule “does not operate until the terms which constitute the contract are determined”: Nicolazzo v Harb (2009) 22 VR 220. The rule prevents the admission of parol evidence only where the contract is entirely in writing: Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382. [9.50] The parol evidence rule is subject to the following exceptions: 1.

Parol evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language of the written contract “is ambiguous or susceptible of more than one meaning”: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. On the other hand: “[E]vidence of surrounding circumstances may not be used, as part of an exercise in construction of a contract, to contradict unambiguous contractual stipulations”: GMA Garnet Pty Ltd v Barton International Inc (2010) 183 FCR 269.

2.

Evidence may be given of the subject matter of the contract or of the identity of the parties to it: Abram v AV Jennings Ltd (2002) 84 SASR 363 at [44]. Such evidence is admissible in explanation of the terms used in the contract but must not alter those terms.

Giliberto v Kenny [9.70] Giliberto v Kenny (1983) 48 ALR 620. In a contract for the sale of land the purchaser was described in different parts of the document as “Mrs Kenny” and as “Mr Kenny”. The document was signed by “Mrs Kenny”. The High Court held that: “Extrinsic evidence was admissible to show, as it did, that Mrs Kenny, in agreeing to buy, was acting as agent for her husband as well as herself”: at 623. An order for specific performance of the contract by the vendor was granted. [9.80] 3.

Parol evidence may always be given to explain a trade custom or local usage applicable to the contract. Similarly, evidence of usage to explain the meaning of terms of art or technical words in a document is admissible.

[9.90] 4.

A collateral oral agreement relating to the same subject matter and not inconsistent with the writing may be proved.

Van Den Esschert v Chappell [9.100] Van Den Esschert v Chappell [1960] WAR 114; see also [9.100]. A purchaser, before signing a contract for the purchase of a house, asked the vendor whether there were any termites in the house. On receiving an assurance that there were not, the purchaser signed the contract that contained no reference to termites. Some months after taking possession, the purchaser discovered termites in the house and had the premises treated to eradicate them. It was held that the purchaser could recover the cost of treatment and necessary repairs for breach of the vendor’s collateral agreement. The court held that there were two parts to the agreement – a written contract and a collateral one that consisted of one term – a promise that the house was free of termites. The three criteria for a collateral contract were present: the statement was promissory; it was not inconsistent with the main contract; and there was consideration provided by the purchaser in exchange for the collateral

195

196

Introduction to Business Law in Australia

promise (in this case, as it so often is with collateral contract, the consideration consists of the promise agreeing to conclude the main contract). [9.110] 5.

When the written document was not intended to embody all the terms of the transaction but was intended merely to be a note, receipt or the like, no inference can be drawn that the parties intended the document to be a complete record of their agreement and parol evidence may be given to show what the agreement was. Parol evidence is admissible “as to whether a document was intended to be operative as a contract”: Nicolazzo v Harb (2009) 22 VR 220 at [88].

[9.120] 6.

Parol evidence may always be given that the contract is not legally binding because of fraud, duress, undue influence and the like.

Distinction between representations and terms of the contract [9.130] As we have seen in the Introduction to this chapter and in Chapter 7, not all statements made by a party in the course of negotiating a contract will be regarded as terms of the contract. Therefore, it is important to distinguish between representations which induced the contract (for which the remedy of rescission for misrepresentation may be available) and statements that are regarded as terms of the contract itself, so that if they turn out to be untrue the appropriate remedies will be those available for breach of contract. The importance of the distinction is that damages cannot be awarded for a statement that merely constitutes an innocent (as opposed to a negligent or a fraudulent) misrepresentation inducing the contract, 2 whereas damages and termination may be awarded for breach of a contractual term. For a statement to constitute a term of the contract, the party making the statement must have undertaken or promised that the statement was true in the sense of making it part of the contractual bargain. The courts look objectively at the circumstances to determine whether or not an express pre-contractual statement was a promise (a contractual term) or a representation (non-contractual). There are, however, guidelines that may assist a court:  the time that has elapsed from the making of the statement to the formation of the contract may be a factor. The less time, the more likely it is to be a term of the contract; the longer gap, the harder it will be to argue that the statement was significant.  objectively, the more important the statement in the context of the contract, the more likely it is to be a term of the contract. Where the party arguing that the statement is a term has reasonably relied on the statement and has placed importance on the statement it is more likely to be a term.  if a statement is made during the negotiations and the agreement is subsequently reduced to writing, any statement not included in the written contract will be regarded as a representation. This is consistent with the parol evidence rule (see [9.40]). It may however constitute a collateral contract (see below [9.120]).  the relative knowledge and expertise of the parties. If the person making the statement was an expert or had more knowledge about the matter than the other party, the statement is more likely to be a term. 2

But note that where the representation is made in connection with the supply of goods, services, or land, an action for damages may lie for contravention of the false representation provisions of the . The is Sch 2 to the Commonwealth Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 13 ([13.10]).

chapter 9 Contents and Interpretation of the Contract

The cases discussed below illustrate these points.

Oscar Chess Ltd v Williams [9.140] Oscar Chess Ltd v Williams [1957] 1 WLR 370. The defendant traded in his old second-hand car to the plaintiff dealers in part payment for a new one. The defendant had described his old car as a 1948 Morris, this being the date of the first registration of the vehicle shown in its registration papers. On this basis the plaintiff allowed him £290 trade-in. However, eight months later the plaintiff discovered that the vehicle was a 1939 model and not a 1948 model, the appearance of the models having remained the same in the intervening years. A previous owner of the vehicle must have fraudulently altered the date in the logbook. The plaintiff dealers sought to recover £115 as damages, being the difference in value between a 1939 and a 1948 model, on the ground that the defendant’s representation constituted a term of the contract. However, the Court of Appeal held that the plaintiff’s claim failed. Williams did not promise that the car was a 1948 model; it was an innocent misrepresentation for which damages could not be awarded. Denning LJ said that much depends on the precise words used: “If the seller says, ‘I believe it is a 1948 Morris. Here is the registration book to prove it’, it is a statement of belief, not a contractual promise. But if the seller says ‘I guarantee that it is a 1948 Morris …’ there is clearly a warranty (promise). The seller is making himself contractually responsible, even though the registration book is wrong … What is the proper inference from the known facts? It must have been obvious to both that the seller had himself no personal knowledge of the year when the car was made … It is unlikely that such a person would warrant the year of manufacture. The most he could do was state his belief”: at 375-376.

Compare the following cases:

Dick Bentley Productions Limited v Harold Smith (Motors) Ltd [9.150] Dick Bentley Productions Limited v Harold Smith (Motors) Ltd [1965] 1 WLR 623: The purchaser of a motor car was told by the vendor during negotiations that the car had travelled only 20,000 miles since being fitted with a replacement engine and gearbox. In fact it had done approximately 100,000 miles. If the statement were a term of the contract, the purchaser could get damages for breach of contract, whereas if it were a representation he could only rescind the agreement (and a right of rescission is easily lost). The Court held that the statement was a term of the contract. The court was influenced by the fact that the vendor was a car dealer who was possessed of superior knowledge and expertise.

Ross v Allis-Chalmers Australia Pty Ltd [9.160] Ross v Allis-Chalmers Australia Pty Ltd (1980) 32 ALR 561. Ross was negotiating to buy a harvester for commercial use. To be successful he needed to be able to harvest around 120 to 130 acres per day. He was looking at a harvester and asked the salesman what its capacity was. The

197

198

Introduction to Business Law in Australia

salesman, who was experienced in this kind of work, said, “In my experience the best this one could do is 90 acres per day.” Ross bought the machine but found it could not even do this. He sued for breach of contract, arguing the salesman’s statement was a term of the contract. The court held that the salesman’s statement was not a term of the contract. It was merely a statement of opinion, based on experience, and was not intended to be promissory.

Collateral contracts [9.170] A further possibility is that a statement, although not an actual term of the contract, may be treated by the court as a collateral contract, that is, collateral to the main contract, and damages may be recovered for breach of that collateral contract. The term “collateral warranty” is sometimes used interchangeably with “collateral contract”. This device has been used particularly where the main contract has been reduced to writing. In such a case it may not be possible for an oral statement to take effect as an actual term of the contract because of the parol evidence rule. However, where it can be shown that the statement was intended to have contractual effect, the courts will treat it as a collateral contract. The oral statement constitutes a collateral contract, the consideration for which is the entering into the main written contract between the parties. [9.180] However, the collateral contract must not be inconsistent with the terms of the main contract.

Hoyt's Pty Ltd v Spencer [9.190] Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133. The defendant sub-leased certain premises to the plaintiff. The written sub-lease contained a proviso entitling the defendant to terminate it on giving four weeks’ notice in writing. The defendant subsequently terminated the sub-lease. The plaintiff claimed damages for breach of a verbal promise, given by the defendant prior to the sub-lease being signed, that he would not terminate it unless required to do so by the head lessors. It was held that the defendant’s verbal agreement not to terminate the sub-lease and the proviso in the written sub-lease giving him an unqualified right to terminate it were inconsistent; therefore, the verbal agreement was unenforceable: see also Adicho v Dankeith Homes Pty Ltd [2012] NSWCA 316 at [26]–[27]. [9.200] It needs to be emphasised that a court will only treat a statement or representation as a collateral contract where it is satisfied that the statement was intended to have contractual effect. This is clearly demonstrated by the following decision of the High Court.

JJ Savage & Sons Pty Ltd v Blakney [9.210] JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435. B was contemplating purchasing a motor boat from S who built and sold boats. During the negotiations B sought the written advice of S as to various engines which might be used to power the boat. In his letter of reply, S commented on three types of engines and recommended one in particular, stating it to have an “estimated speed [of] 15 mph”. Relying on this statement B contracted to buy the boat with the engine recommended by S.

chapter 9 Contents and Interpretation of the Contract

The contract contained no reference to the capacity of the boat to achieve any particular speed. When the boat’s maximum speed proved to be only 12 mph, B sued S for damages for breach of an alleged collateral warranty in respect of the statement concerning the estimated speed. The High Court held that: “B’s claim failed since S’s statement, although inducing B to enter into the contract, constituted a representation only and not a collateral warranty. Thus, the question was whether there was ‘a promise by [S] that the boat would in fact attain the stated speed if powered by the stipulated engine, the entry into the contract to purchase the boat providing the consideration to make the promise effective’. In the court’s view it was not sufficient simply to show that one party would not have entered into the contract but for the statement made by the other since: ‘Such a fact is but a step in some circumstances towards the only conclusion which will support a collateral warranty, namely, that the statement so relied on was promissory and not merely representational’.”

[9.220] The High Court added that when B received S’s letter recommending the particular engine, the negotiations for the construction of the boat were still incomplete. Accordingly, B could have adopted one of three courses, namely: (a)

he could have required the attainment of the speed of the boat to be inserted as a term of the contract; or

(b)

he could have sought a promise from S – “however expressed, whether as an assurance, guarantee, promise or otherwise” – that the boat would attain the speed as a prerequisite to his ordering the boat; or

(c)

he could have formed his own judgment as to the most suitable engine, relying on the opinion of S whose reputation and experience in the field he held in high regard: JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442–443.

The Court said: “Only the second course would give rise to a collateral warranty”: at 443. The Court said there was nothing in the evidence to support (a) or (b). The only conclusion open was that B had taken course (c), that is, he had accepted S’s estimate of speed to form his own judgment as to which engine should be ordered for the boat: at 443. [9.230] A merger or “entire agreement” clause is a very common clause in a commercial contract. It provides that the written agreement constitutes the entire agreement between the parties. 3 The aim is to prevent any further contractual obligations arising outside the terms of the document. Whilst such a clause leaves “no room for a submission that the terms of the contract were not fully embraced within its four walls” 4 such a term cannot be conclusive, because the contract is the agreement not the document. The agreement is determined from the entirety of the parties’ words and conduct. If the evidence put forward by the parties as to what comprises the contract is inconsistent with the entire agreement clause (for example, there is clear evidence of a separate contractual promise), the court will weigh the evidence to determine the contractual terms. Nonetheless, although an entire agreement clause may not be conclusive, it would usually be very difficult to persuade a court that the document containing the clause was intended to be only a partial record of the parties’ agreement. 3 4

See E Peden and J W Carter, “Entire Agreement – and Similar – Clauses” (2006) 22 Journal of Contract Law 1. Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd [2012] VSCA 134.

199

200

Introduction to Business Law in Australia

Although it is possible for an entire agreement clause to exclude or limit liability for misrepresentations under the general law, there are some qualifications:  if a misrepresentation was fraudulent (but perhaps not if it is an innocent misrepresentation 5) an entire agreement clause is ineffective; and  it is not possible to contract out of the misleading or deceptive conduct provisions of the Australian Consumer Law. However, an appropriate clause may assist with the argument that no misleading or deceptive occurred: the defendant is, in effect arguing that the clause should have put the plaintiff on notice not to rely on anything other than what is in the contract;  It is also possible that a collateral contract may still be proven, unless the entire agreement clause is clearly worded to exclude the existence of a collateral agreement: McMahon v National Foods Milk Ltd (2009) 25 VR 251 at [37]–[38].

Conditions, warranties and innominate terms [9.240] A distinction is made between conditions (terms that are of fundamental importance to the contract) and warranties (terms that are of lesser importance). The reason for distinguishing between the significance of terms is that breach of a condition entitles the innocent party to terminate the contract and/or claim damages, whereas a breach of warranty only entitles the innocent party to damages for the loss they have suffered; there is no right to terminate for a breach of warranty. A condition is a term which “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) 1 QBD 183, 188. It is sometimes described as a term without which the party for whom the term was included would not have entered the agreement without an assurance of compliance.

Associated Newspapers Ltd v Bancks [9.250] Associated Newspapers Ltd v Bancks (1951) 83 CLR 322. Bancks contracted to prepare a weekly drawing relating to a cartoon character, “Ginger Meggs”, for the plaintiff newspaper company which in turn undertook to present the drawing each week as a full page feature on the front page of the comic section of its Sunday newspaper. As a result of problems arising from a newsprint shortage, Bancks’ “Ginger Meggs” cartoon appeared on page three of the comic section of the newspaper instead of on page one as provided by the contract between the parties. This occurred on three consecutive Sundays, whereupon Bancks wrote to the plaintiff to the effect that he no longer regarded himself as bound by the contract because of the plaintiff’s breach. In an action by the plaintiff company, the High Court held that its undertaking to publish Bancks’ cartoon on the front page of the comic section constituted a condition of the contract, breach of which entitled him to treat the contract as at an end. The High Court held that the term was a condition. In a unanimous decision the Court said: “He was employed as a comic artist and his true work was to produce this weekly drawing … It was what he was really engaged to do … Obviously it was of prime importance to the defendant that there should be continuity of publication so that his work should be kept continuously before the public … and that it should be published on the most conspicuous page … (T)he undertaking … formed a condition a substantial failure in the performance of 5

Byers v Dorotea Pty Ltd (1986) 69 ALR 715.

chapter 9 Contents and Interpretation of the Contract

which would enable the defendant to treat the contract as at an end … [S]uch a failure to perform the condition went to the root of the contract and gave the defendant … the right immediately to treat the contract as at an end”: at 337–338.

[9.260] A warranty is regarded as of lesser significance or importance than a condition.

Bettini v Gye [9.270] Bettini v Gye (1876) 1 QBD 183. Gye, the director of an opera company, contracted for the exclusive services of B as a singer in opera and concerts for a period of three months. The contract contained a provision that B would be in London at least six days before the commencement of his engagement for rehearsals. B, through illness, only arrived two days earlier, whereupon G refused to accept his services and treated the contract as at an end. It was held that in the circumstances the term was not a condition but a warranty and, accordingly, although G was entitled to damages for loss (if any) he had suffered for B’s breach of contract, he had not been entitled to treat the contract as terminated. The court said that clause 7 did not go to the root of the contract. Blackburn J said: “… the failure to attend at rehearsals during the six days immediately before 30 March could only affect the theatrical performances and, perhaps, the singing in duets or concert pieces during the first week or fortnight of this engagement, which is to sing in theatres, halls, and drawing rooms for fifteen weeks”: at 189.

[9.280] Recently, the High Court of Australia has approved of a third category – the innominate term. After some uncertainty about the status of this third category, the innominate term was declared part of Australian law in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115. Whether a term of a contract is a condition or warranty depends on determining the intention of the parties to the contract. Ascertaining that intention, and thus deciding whether the term is to be treated as a condition or warranty, is often no easy matter as the above cases demonstrate. In some cases it may be more appropriate to look at the nature and effect of the breach in deciding what remedy should be available to the innocent party, rather than determining the remedy by simply asking whether it is a condition or warranty of the contract that has been breached. However, that issue is better considered in the context of the termination of a contract by breach: see Chapter 11 ([11.160]). The innominate term began life in the following case.

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [9.290] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1952] 2 QB 26. The plaintiffs chartered a ship for a period of two years. A term of the contract required the shipowners to provide a seaworthy ship that was “in every way fitted for ordinary service”. They also promised to “maintain her in a thoroughly efficient state in hull and machinery during service”. There was a 57–day delay in delivering the ship in seaworthy condition because of the incompetence of the engine

201

202

Introduction to Business Law in Australia

room personnel. A further 91 days were likely to be lost because of the need to repair the vessel’s engines. In all, it would be 20 weeks before the charterers could sail the ship. They terminated the contract, arguing that this was a breach of the “seaworthiness” condition. The plaintiffs argued that the defendants’ actions were a repudiation of the contract (that is, a wrongful termination) and sued for damages. The court decided that not all contractual undertakings were easy to classify. The breach of some undertakings would always deprive the innocent party of substantially the whole benefit of the contract, enabling the innocent party to terminate. The breach of others would never deprive the innocent party of substantially the whole benefit of the contract, allowing the innocent party to sue for damages only. However, in the words of Diplock LJ: “There are … many contractual undertakings … which cannot be categorised as being ‘conditions’ or ‘warranties’ (at the start) … all that can be predicted is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit (of the contract) … (the undertaking to deliver a seaworthy ship) is one of that large class of contractual undertakings (that could be either a condition or a warranty)”: at 69–70. The court decided that, although the plaintiffs were obviously in breach of their promise to provide a seaworthy ship, this was not a condition because the delays caused by the breach, in the context of a two-year charter, were not so great as to deprive the defendant charterers of the substantial part of the benefit of the contract.

chapter 9 Contents and Interpretation of the Contract

Exclusion clauses Figure 9.3: Exclusion clauses in contracts

[9.300] In this section we are examining one very important and very common type of express term – the exclusion clause (sometimes referred to as an exemption or limitation of liability clause but, for the sake of clarity, we will refer to them as exclusion clauses). However, although our attention is focused on this particular type of express term, it must be remembered that the same or similar considerations apply whenever there is a dispute about any express term (whether it is a price variation clause, a dispute resolution clause, a choice of law clause, a force majeure clause or any of the express terms that are negotiated by the parties). That is, a court may have to (a) determine whether the particular term has been properly incorporated into the contract and/or (b) interpret or give meaning to the term.

Function of exclusion clauses [9.310] The function of exclusion clauses is to exclude (or limit) liability of one or both parties under the contract. Such clauses have traditionally been regarded in a negative light because parties who rely on them are often in a dominant position and abuse that dominance by incorporating unreasonably wide clauses into standard form contracts, aware that the other party cannot realistically read or object to the clause or, if he or she does, will face the same exclusion clause elsewhere.Therefore the courts and the parliament have developed rules to regulate how exclusion clauses may be used in contracts, and their attitude depends on whether the contract is a commercial or a consumer contract. The use of exclusion clauses in consumer

203

204

Introduction to Business Law in Australia

contracts is restricted or prohibited by the Parliament and the courts have used various strategies to restrict their impact on consumers. However, where the parties have negotiated an arms-length commercial contract, exclusion or limitation clauses are regarded as a conscious attempt to allocate risk. Thus in Photo Production Ltd v Securicor Transport Pty Ltd [1980] AC 827 Lord Diplock said: “In commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance) it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only”: at 851. [9.320] In order to determine whether an exclusion clause is effective, the courts may consider whether the exclusion clause is, in fact, a part of the contract (the “incorporation issue”). If the clause is incorporated in the contract, the courts may need to consider the meaning of the clause – the extent to which it protects the party seeking to rely on it (the “interpretation issue”).

The Incorporation Issue [9.330] The person seeking to rely on an exclusion clause must show first that it has in fact become part of the contract.This may be achieved in one of the following ways:

1. By signature [9.340] An exclusion clause, like any other term, will be incorporated into a contract if it is contained in a signed document.

L'Estrange v F Graucob Ltd [9.350] L’Estrange v F Graucob Ltd [1934] 2 KB 394. L’Estrange bought a cigarette vending machine from Graucob and signed a document headed “Sales Agreement”. The agreement, which L’Estrange did not read, contained a number of clauses, including an exclusion clause that said: “This agreement contains all the terms and conditions under which I agree to purchase the machine specified above and any express or implied condition, statement or warranty, statutory or otherwise not stated herein is excluded.” The machine failed to work properly. L’Estrange sued for breach of the implied term that goods should be fit for their purpose. The issue was whether she was bound by a term of which she was unaware. Held: The exclusion clause was effective because L’Estrange had signed the contract. The fact that she had not read the contract was irrelevant. In the words of Scrutton LJ: “When a document containing contractual terms is signed, then, in the absence of fraud, or, I might add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not … (T)he plaintiff has signed a document headed ‘Sales Agreement’, which she admits had to do with the intended purchase, and which contained a clause excluding all conditions and warranties. That being so, the plaintiff, having put her signature to the document and not having been induced to do so by any fraud or misrepresentation, cannot be heard to say that she is not bound by the terms of the document because she has not read them”: at 402.

chapter 9 Contents and Interpretation of the Contract

Note that under the Competition and Consumer Act 2010 (Cth) an exclusion clause such as this in a “consumer contract” would be void.

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [9.360] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52: Richard Thomson Pty Ltd, (apparently) acting as the agent of Alphapharm Pty Ltd, entered into a freight and storage agreement with Finemores (later taken over by Toll), a transport company with fleet of refrigerated vans. Alphapharm had purchased a large quantity of flu vaccine from Ebos in the UK and planned to sell and distribute it throughout Australia. The vaccine was perishable unless stored between 2-8 degrees. The transport and storage agreement between Finemores and Thomson was formed by a series of written communications. On 20 January 1999, Thomson sent a letter to Finemores by fax requesting refrigerated transport for the vaccine as well as details of its insurance arrangements. Finemores replied by fax on 12 February 1999, attaching a quotation of its freight rates. The fax relevantly stated: Following acceptance to our quotation, it would be very much appreciated if you would complete the Credit Application and sign the Freight Rate Schedule accepting our Rates and Conditions and fax back to our office at your earliest convenience. An employee of Thomson, signed the Schedule and later signed the “Application for Credit” referred to in Finemores’ fax above. Above the space for signature were the words: “Please read ‘Conditions of Contract’ (Overleaf) prior to signing.” On the reverse side of the Application for Credit were a number of “Conditions of Contract”. Clause 6 excluded Finemores’ liability for “any loss, injury or damage suffered by the Customer in respect of any goods being carried or stored on its behalf”. Thomson’s employee did not read the Conditions of Contract before signing the Application for Credit. Upon Alphapharm’s instructions, Thomson directed Finemores to deliver shipments of the vaccine to Brisbane and to Sydney. Finemores did not maintain the consignments within the specified temperature range during transport. As a result the laboratories rejected them. Alphapharm submitted that in order for those terms and conditions to be made part of the contract, Finemores had to establish that it had done what was reasonably sufficient to give Thomson notice of the terms and conditions (and it had not, in fact, done so). In effect, it argued (and the lower courts accepted) that the rule in L’Estrange does not apply when exclusion clauses, or at least harsh or onerous ones, are in issue. The High Court rejected this approach. It held that the ordinary rule in L’Estrange applied and the employee’s signature was binding. The High Court said: “… to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, … whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it (at [45]) … There may be cases where the circumstances in which a document is presented for signature, or the presence in it of unusual terms, could involve a misrepresentation. No such problem exists in the present case. There could also be circumstances in which one party would not reasonably understand another party’s signature to a document as a manifestation of intent to enter into legal relations, or of assent to its terms. Again, that is not this case. It was reasonable of Finemores

205

206

Introduction to Business Law in Australia

to treat (the employee’s) signature as a manifestation of assent to the conditions he had been invited to read before signing”: at [63] [emphasis added].

Le Mans Grand Prix Circuits Pty Ltd v Illiadis [9.370] Le Mans Grand Prix Circuits Pty Ltd v Illiadis [1998] VSC 331:. The Court of Appeal in Victoria unanimously decided that no contract had been made and therefore the exclusion clause was of no effect. The following extract from the judgment contains the facts and the court’s reasoning: “The appellant carried on the business of providing for hire to the public ’go-karts and a go-kart racing track’. The respondent, George Iliadis, attended with his friend, Victoria Bianchi, at the appellant’s racing track at about 7 pm on Monday, 26 April 1993. A local radio station, 3MP, had booked the appellant’s racing track for a corporate promotion night for staff members, their families and friends. She and the respondent were members of the group attending the promotion night. The respondent said that when he and Miss Bianchi arrived at the track he was told “… to sign a particular form so you can register your name to be able to do a lap of the go-kart race and once I did that I was qualified to drive the faster vehicle”. He signed the form but was not given enough time to read the form. “I was being rushed by the group of people and by operators and people to get these forms signed, give it across to the right people there so we can get out on the track and start proceedings because there was a large group of people there …They were saying that I had to hurry up and sign the document to get out there.” He said also that he treated the form as “a marketing or registration type of form… (1) to get my details for obviously issuing me with a licence as a registration form and (2) as a marketing purpose for sending out pamphlets, things to keep to go back with other people, other groups and things like that”. In that connexion it may be mentioned that the four opening lines at the top of the form, in prominent, bold capitals, beginning “TO HELP WITH OUR ADVERTISING …” were printed in red, the rest being in black. (The form contained a broad and onerous exclusion clause.) GI qualified to race and in the course of a race his vehicle overturned, and he fractured his arm. The appellant contends that, because the document which was signed by the respondent was of a kind that every driver was required to sign before driving, and was clearly contractual on its face, we should conclude that the respondent bound himself by it. Counsel for the appellant was disposed to concede in his reply that contractual documents containing an onerous exemptive provision must be brought to the notice of the party against whom they are to be enforced, and contended that in this case the provision in question was so brought. Assuming, without deciding, that the term on which the appellant seeks to rely is onerous in the relevant sense, and that the concession was well made (as to which see, for example, the judgment of Bramwell, LJ in Parker v South Eastern Railway Co and Interfoto Library Ltd v Stiletto Visual Programs Ltd). I see no reason why the proved facts of the case require a conclusion that there was a contract of hire between the appellant and the respondent constituted by the document that the respondent signed … The following considerations tend, in my opinion, to render any such conclusion at best speculative. There was no evidence that anyone, whether on behalf of the appellant or 3MP,

chapter 9 Contents and Interpretation of the Contract

had told or suggested to the respondent, or any other participant in the promotion night, that participation required or concerned on the part of a participant any kind of agreement with the appellant save for a licence to drive. Nor is there evidence that, before participants were asked to sign the form, they were given any notice or other indication that any contractual or other arrangement was to exist between them and the appellant, save for a licence to drive. In the circumstances it is unnecessary to attempt to construe the term of the form on which the appellant seeks to rely. I would dismiss the appeal”.

2. By giving reasonable notice [9.380] The party seeking to rely on the clause must show that, in the absence of a signed document, the exclusion clause was brought to the notice of the other party before or at the time the contract was made. Often there is no signed document to refer to but an exclusion clause may be contained either in a notice on the premises where the contract is made, or in a document which is simply handed over, for example in a ticket, voucher or receipt. The basic principle in these situations is that the exclusion clause will form part of the contract if the party seeking to rely on it can show that they had taken steps that were reasonably sufficient in the circumstances to give notice of the exclusion clause to the other contracting party.

3. Notice must be given before contract made [9.390] The exclusion clause must be brought to the notice of the contracting party before or at the time the contract is made. If notice of the exclusion clause is given after the contract has been made, it will have no effect.

Olley v Marlborough Court Ltd [9.400] Olley v Marlborough Court Ltd [1949] 1 KB 532. The plaintiff and her husband booked into the defendant’s hotel. They went up to their room where on one of the walls a notice was displayed stating that: “The proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody”. The plaintiff’s furs were stolen from the room as a result of negligence on the part of the hotel staff. It was held that the defendants were liable for the loss since the exclusion clause was not incorporated in the contract. Thus, the contract had already been made before the plaintiff and her husband went up to their room and so the notice could not thereafter affect her rights.

Baltic Shipping Co v Dillon [9.410] Baltic Shipping Co v Dillon (1991) 22 NSWLR 1. The plaintiff booked for a cruise on the defendants’ cruise ship. It was stipulated on the “Booking Form” that the “Contract of carriage for travel … will be made only at the time of the issuing of tickets and will be subject to the conditions and regulations printed on the tickets. These conditions and regulations are available to all passengers

207

208

Introduction to Business Law in Australia

at any CTC Cruises offices …” [emphasis added]. The ticket subsequently issued to the plaintiff, some six weeks after full payment for the cruise and two weeks before departure, contained conditions limiting the defendants’ liability for loss of baggage or personal injury. The plaintiff lost her belongings and suffered personal injury when the cruise ship sank owing to negligent navigation of the vessel. The defendants relied on the conditions in the ticket limiting the amount recoverable from them. It was held by a majority of the New South Wales Court of Appeal (and affirmed by the High Court) that the defendants could not rely on the conditions on the ticket since they had not been sufficiently brought to the plaintiff’s attention and therefore did not form part of the contract. Kirby P said: “(t)he contract of carriage here came into force at the time … notified in the booking form. Yet at that time the respondent had not had a reasonable opportunity to see and agree to the terms and conditions which the appellant sought subsequently to impose upon her by the delivery of the passenger ticket. Once the contract was made, it was not open, without fresh agreement, for further terms and conditions to be imposed … She was entitled … to take the view that she would be issued with a ticket which would contain no unusual provisions.”

Thornton v Shoe Lane Parking Ltd [9.420] Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163. Thornton was attending an engagement at the BBC. He drove to the defendants’ new automatic car park. He had not gone before. At the entrance was a notice that read “All Cars Parked at Owner’s Risk”. He drove in, was stopped by a red traffic light and took the ticket issued by the machine. When he took the ticket, the light turned green allowing him to proceed into the garage where his car was parked by mechanical means. The ticket contained in small print on the bottom left hand corner the words “issued subject to conditions … displayed on the premises”. A set of printed conditions displayed in a panel on a pillar opposite the machine included a provision exempting the defendants from liability for injury to a customer. Thornton was run down and severely injured when he returned to collect his car. In an action for damages, the defendants sought to rely on the exclusion clause. It was held that the clause did not exempt the defendants from liability since they had not done what was reasonably sufficient to bring the clause to Thornton’s notice. Denning LJ said: “… the acceptance of the car park’s offer occurs when the customer puts his money into the slot. The terms of the offer are contained in the notice placed on or near the machine stating what is offered for the money. The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late. The contract has already been made … The ticket is no more than a voucher or receipt for the money that has been paid … on terms which have been offered and accepted before the ticket is issued.” In the present case the offer was contained in the notice at the entrance giving the charges for garaging and saying “at owner’s risk”, that is risk of the owner so far as damage to the car was concerned. The offer was accepted when Mr Thornton drove up to the entrance, and, by the movement of his car, turned the light from red to green and the ticket was thrust at him. The contract was then concluded, and it could not be altered so as to exempt the company from liability for personal injury due to their negligence … this customer is (only)

chapter 9 Contents and Interpretation of the Contract

bound by the exempting condition if he knows that the ticket is issued subject to it; or if the company did what was reasonably sufficient to give him notice of it”: at 169–170.

4. What is “reasonable” when the exclusion clause term is harsh, onerous or unusual? Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [9.430] Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [1989] 2 QB 433. Interfoto ran a library of photographic transparencies. They delivered, upon request, some 47 transparencies to Stiletto who had not dealt with Interfoto before. The delivery note in the bag had conditions on it which said that if the transparencies were held for longer than 14 days, a fee would be paid. The conditions were supposed to be the conditions of bailment - if Stiletto wished to use the transparencies, a fresh contract had to be agreed. Stiletto retained them for an extra 2 weeks and was asked to pay £3,783. They refused. The issue was whether the penalty clause (clause 2) was sufficiently brought to Stiletto’s attention. Dillon LJ and Bingham LJ both noted the clause was a very onerous clause and that Stiletto neither knew or could have known that such an exorbitant rate would be imposed for a late return. Dillon LJ said: “At the time of the ticket cases in the last century it was notorious that people hardly ever troubled to read printed conditions on a ticket or delivery note or similar document. That remains the case now. In the intervening years the printed conditions have tended to become more and more complicated and more and more one-sided in favour of the party who is imposing them, but the other parties, if they notice that there are printed conditions at all, generally still tend to assume that such conditions are only concerned with ancillary matters of form and are not of importance. In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties’ attention to the printed conditions or they would not be part of the contract … (I)t should be held (now) … that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.” Bingham LJ agreed. The issue was, he said, “whether it would in all the circumstances be fair (or reasonable) to hold a party bound by any conditions … of an unusual and stringent nature … The defendants are not to be relieved of that liability because they did not read the condition, although doubtless they did not; but in my judgment they are to be relieved because the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention.” Note: Bingham LJ added that condition 2, even though onerous, would be enforceable if fully and fairly brought to the defendants’ attention.

209

210

Introduction to Business Law in Australia

5. Is the document “contractual” in nature? [9.440] If the document containing the clause is one which a reasonable person would not expect to contain contractual terms, that is, would regard it merely as a receipt or voucher, then an exclusion clause contained in it cannot be relied upon to exclude liability.

Causer v Browne [9.450] Causer v Browne [1952] VLR 1. Causer (C) took a dress for dry cleaning to Browne (B) and received at the time of deposit a docket on the face of which appeared printed conditions purporting to exempt the firm from liability for loss or injury. When the frock was returned to C, it was found to be damaged. The court, in deciding that B was liable for damages and had not discharged the onus of proving that the printed conditions modified the contract, took into account:  the docket was one which might reasonably be understood to be only a voucher for the customer to produce when collecting the frock, and not as containing conditions exempting the firm from their common law liability for negligence: at 6;  the onus was on the firm of proving that the person receiving the docket was aware, or ought to be treated as aware, that it was delivered not merely as a voucher or receipt, but was intended to convey to him the knowledge of the special conditions upon it and that the person delivering it intended to modify the effect of the contract.

6. If the scope of an exclusion clause is misrepresented, its effect will be limited Curtis v Chemical Cleaning & Dyeing Co Ltd [9.460] Curtis v Chemical Cleaning & Dyeing Co Ltd [1951] 1 KB 805. B took a dress to A to be cleaned and was asked to sign a receipt which contained, among other terms, a clause that the article “is accepted on condition that the company is not liable for any damage howsoever arising”. B asked why she had to sign and was told that A would not accept liability for damage to beads or sequins. B then signed. The dress was returned stained. It was held that A could not rely on the clause because B’s signature was obtained by misrepresentation as to the effect of the document.

Henry Kendall & Sons v William Lillico & Sons Ltd [9.470] Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 41. Feed stuff was sold by SAPPA (animal feed merchants) to Hardwick Game Farm. The feed had a latent defect. SAPPA joined its suppliers, Lillico and Grimsdale who, in turn, joined their suppliers. The particular contract of sale of the contaminated ingredients consisted of three oral contracts. However there had been frequent prior transactions (three to four per month for several years). For each transaction Grimsdale would send a contract note to SAPPA after the oral contract. The back of the contract note contained terms

chapter 9 Contents and Interpretation of the Contract

or conditions, including an exclusion clause that said the buyer took responsibility for any latent defects. The clause would, if incorporated into the contract of sale, protect the supplier. SAPPA was aware of the clause although they had not read them. The House of Lords decided that the exclusion clause was incorporated into the contract. Lord Morris said “Over the course of a long period prior to the three oral contracts which are now in question SAPPA knew that when Grimsdale sold they did so on the terms that they had continuously made known to SAPPA. In these circumstances it is reasonable to hold that when SAPPA placed an order to buy they did so on the basis and with the knowledge that an acceptance of the order by Grimsdale and their agreement to sell would be on the terms and conditions set out on their contract notes.”

However, it would seem that the implication of an exclusion clause in a later contract by virtue of a previous course of dealing between the parties may be narrowly confined and require proof that the party against whom the exclusion clause is invoked had actual knowledge of it: Eggleston v Marley Engineers Pty Ltd (1979) 21 SASR 51. Where an invoice containing an exclusion clause was sent after each previous contract was performed, the clauses on the invoice were not incorporated into a subsequent contract between the parties. The invoice was a claim for payment rather than a contractual document: La Rosa v Nudrill Pty Ltd [2013] WASCA 18.

The Interpretation Issue [9.480] The High Court in Electricity Generation Corp t/a “Verve” v Woodside Energy [2014] HCA 7; (2014) 88 ALJR 447 has taken the opportunity to re-affirm that the following principles that are to be adopted in determining the rights and obligations of the parties to a commercial contract:  the meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean.  it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.  appreciation of the commercial purpose or objects is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating.  a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption that the parties intended to produce a commercial result.

An exclusion clause will be construed strictly and any ambiguity resolved against the person seeking to rely on it [9.490] If the clause is properly incorporated into the contract, the second stage is for the court to interpret or construe the clause in an effort to ascertain whether its scope is sufficient to protect the person seeking to rely on it from the loss or injury suffered by the plaintiff as a result of the breach. Reflecting their longstanding antipathy to the use of exclusion clauses (particularly in consumer contracts) the courts interpret such clauses “contra proferentum” (against the party relying on it). For example, exclusion of liability for breach of warranty will not exclude liability for breach of condition: Wallis, Son & Wells v Pratt & Haynes [1911] AC 394. Furthermore, exclusion from liability for breach of implied conditions and warranties will not protect a party from breach of an express term of the contract:

211

212

Introduction to Business Law in Australia

Andrews Bros (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17. Thus a party drafting an exclusion clause should be careful to ensure that it is carefully and precisely drafted - and, of course, complies with various consumer protection statutes that prevent or limit the use of exclusion clauses. 6

Insight Vacations Pty Limited v Young [9.500] Insight Vacations Pty Limited v Young (2011) 243 CLR 149. Stephanie Young was on a tour bus in Europe, travelling from Prague to Budapest. When she got out of her seat to get something from her bag the coach driver braked suddenly causing the plaintiff to fall backwards and suffer injury. The bus company attempted to rely on the following exclusion clause: “Where the passenger occupies a motorcoach seat fitted with a safety belt, neither the Operators nor their agents or co-operating organisations will be liable for any injury, illness or death or for any damages or claims whatsoever arising from any accident or incident, if the safety belt is not being worn at the time of such accident or incident.” The High Court decided that as a matter of interpretation the clause did not protect the defendant. Relying on the ordinary meaning of the words in the clause, the clause only applied “where the passenger occupies a motor coach seat fitted with a safety belt”. In the unanimous opinion of the High Court the purported exclusion clause should therefore be read as referring only to times when the passenger was seated, and not to times when the passenger stands up to move around the coach or to retrieve some item from an overhead shelf as occurred on this occasion.

Elder Smith Goldsbrough Mort Ltd v McBride [9.510] Elder Smith Goldsbrough Mort Ltd v McBride [1976] 2 NSWLR 631. The conditions of sale at an auction provided that “as all lots are available for inspection previous to the commencement of sale, the same are sold with all faults, if any”. It was held that the operation to be given to the words “with all faults” was restricted by the earlier words, so that the “faults” referred to were only faults which would be revealed by an inspection and did not extend to exclude liability for latent, that is, hidden, defects in the goods purchased.

An appropriately worded exclusion clause can exclude a party from liability for negligence [9.520] Exclusion clauses may limit or exempt liability for negligence: Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642. A properly worded exclusion clause need not expressly mention liability in negligence in order to exclude such liability. For example, a clause that excluded liability for “all claims and demands whatsoever in respect of the contract” was held to be exclude liability for negligence: MWH Australia Pty Ltd v Wynton Stone Australia Pty Ltd (in liq) (2010) 31 VR 575.

6

For example, see the Australian Consumer Law s 64(1) that declares void any clause that seeks to exclude or limit the effect of the consumer guarantees if included in consumer contracts (see Chapter 13 [13.1150]).

chapter 9 Contents and Interpretation of the Contract

Exclusion clauses will not normally be construed as limiting or excluding liability for acts done outside the terms or scope of the contract [9.530] In Council of the City of Sydney v West (1965) 114 CLR 481, the High Court said that it is a question of interpretation of the contract as a whole whether or not a particular exclusion clause is wide enough to exclude liability for the alleged breach of contract.

Council of the City of Sydney v West [9.540] Council of the City of Sydney v West (1965) 114 CLR 481:. The plaintiff parked his car at a parking station and received a ticket which contained the following clause: “The council does not accept any responsibility for the loss or damage to any vehicle … however such loss, damage … may arise or be caused” together with a statement that the “ticket must be presented before taking delivery of the vehicle”. He put it in his pocket without reading it and parked the car where directed. What happened next is very unusual. A person who during the day had entered the parking station and claimed to have lost his parking ticket stole West’s vehicle. He did it in this way. He gave his name to an attendant as “Paul Robinson”, said that he had parked his car in the station and having given what proved to be a fictitious address obtained the issue of a duplicate parking ticket for a vehicle (that was not West’s). Having armed himself with the duplicate ticket-which, on its face, related to another car, Robinson got into West’s vehicle and proceeded to drive it to one of the exits of the parking station where he was permitted to drive it away without any further inquiry. It was held that the clause did not protect the Council as the release of the car was not merely a negligent act but was a delivery not authorised by the contract. The Court said: “the act of the attendant in permitting ‘Robinson’ to proceed after handing over the duplicate ticket which he had obtained constituted an unauthorized delivery of possession by him to ‘Robinson’ and not a mere act of negligence in relation to some act authorized by the contract of bailment. The fact that the attendant at the exit through which the car was driven was negligent is of no consequence in the case; the act of delivery was one which was neither authorized nor permitted by the contract and in our view the appellant was not entitled to be exonerated by the exempting clause.”

[9.550] The House of Lords applied these principles in Photo Production Ltd v Securicor Transport Pty Ltd [1980] AC 827.

Photo Production Ltd v Securicor Transport Pty Ltd [9.560] Photo Production Ltd v Securicor Transport Pty Ltd [1980] AC 827. Securicor contracted to provide a night patrol service to the plaintiff’s factory. While one of Securicor’s employees was on patrol at the factory one night, he deliberately started a small fire by throwing a match onto some cartons. The fire got out of control and ultimately destroyed a large part of the factory. The plaintiff

213

214

Introduction to Business Law in Australia

sued Securicor for damages on the ground that they were liable for the act of their employee. Securicor relied on an exclusion clause in the contract which provided that “under no circumstances” were they to be: “responsible for any injurious act … by any employee of the company unless such act … could have been foreseen and avoided by the exercise of due diligence … nor … any loss suffered by the customer through … fire … except … as … solely attributable to the negligence of the company’s employees acting within the course of their employment.” The House of Lords held that the question whether an exclusion clause applied when there was a “fundamental breach” or any other breach turned on the construction of the whole contract including any exclusion clause. Although Securicor was in breach of their implied obligation to operate their service with due and proper regard to the safety and security of the plaintiff’s factory, the exclusion clause was clear and unambiguous and protected Securicor from liability. [9.570] The Australian High Court reaffirmed the approach it had taken in Council of the City of Sydney v West (1965) 114 CLR 481 (above) in its decision in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500:

Darlington Futures Ltd v Delco Australia Pty Ltd [9.580] Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500. A contract between a broker and his client in respect of dealings on the futures commodities market contained a clause excluding liability by the broker to the client. The clause provided: “[T]he 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”. The contract further contained a clause limiting the liability of the broker, in the cases where liability had not been totally excluded, to damages that “shall not in any event (and whether or not such liability results from or involves negligence) exceed one hundred dollars”. The broker was proved to have exceeded his authority under the contract to act for the client in respect of certain dealings. The High Court held (1) that the clause excluding liability when properly construed did not protect the broker since it related only to transactions undertaken with the client’s authority, but (2) the limitation clause was effective to limit the extent of the broker’s liability for the substantial losses suffered by the client as a result of the broker’s unauthorised dealings.

Online contracting [9.590] The use of online contracting has increased massively in recent years but there have been relatively few disputes that have come before the Australian courts about the formation of the contract or testing the way in which terms are incorporated into the online agreement. As with any “normal” contract the terms on which the parties are contracting must be agreed to by both parties and incorporated into the contract before or at the time of contracting. In order to consider agreement and incorporation in the context of online agreements it is helpful to consider the two broad categories of online agreements, “clickwrap” and “browsewrap”.

chapter 9 Contents and Interpretation of the Contract

Clickwrap agreements generally present the terms of contract that are offered (almost always by the website provider, a supplier of goods, services or information) and ask the website user to indicate that they acknowledge and agree to the website provider’s terms by clicking an online “button”, usually with words such as “I agree” on the button. Browsewrap agreements are similar save for the fact that the terms of contract are not on the page where the website user indicates their agreement – the terms of contract are on another webpage or website and the website user is able to access those terms through visiting, or linking, to that other page or site. The general principles of contract will apply to online contracts and specifically the issues of agreement and incorporation. In the case of Peter Smythe v Vincent Thomas (2007) NSWSC 844 the court held that the online agreements between the parties using eBay were legally binding, after applying ordinary principles of the law of contract. When dealing with customers of a website the seller must ensure that the ordering process requires the customers to agree to the seller’s terms. Certainly, merely placing the terms on a website would not be sufficient to show the website user has agreed to the terms and thus incorporate them into the contract. In a clickwrap agreement the website user clicks on the acceptance button immediately following the terms and this would usually indicate that the website user has seen the terms, or at least has clear notice of them, and has accepted those terms. There is no reason why the principle in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 and L’Estrange v F Graucob Ltd [1934] 2 KB 394 should not apply. Broadly speaking, clicking on the acceptance button operates similarly to a signature and indicates that the person accepts the terms, whether they have read the terms or not. Another analysis is that the website user indicates their acceptance of the terms offered by doing the act of clicking on the acceptance button. Under either view, the website user accepts the risk of not reading the terms, provided that no other vitiating factors such as misrepresentation of the terms applies on the facts. The browsewrap type online agreements tend to raise more questions about whether or not on the facts the website user has agreed to the terms and the terms are incorporated into the contract. In contrast to clickwrap agreements, in browsewrap agreements there is often no evidence that the website user is aware of the terms as the terms are located on another webpage or site. In these circumstances, the question revolves around whether reasonable notice was given of the terms such that the website user can be said to have agreed to the terms. There is no reason why the principle in Olley v Marlborough Court Ltd [1949] 1 KB 532 should not apply, requiring the court to consider whether the website provider has taken adequate steps to draw the terms to the notice of the website user. This will require the court to review the facts as to how and when the notice of the terms located on another webpage or site was drawn to the web user’s attention. It will come as no surprise that in the case of eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450 the terms relating to on-selling and “scalping” tickets to the Big Day Out concerts that were not made available on the websites where the tickets were sold (the Big Day Out website and the Ticketmaster website) but were made available to purchasers when they received their tickets were held by the Court not to be incorporated. The terms in dispute were clearly not known (and could not be known) to purchasers at the time of contract. Although a mere reference to terms and conditions applying, as in eBay International AG v Creative Festival Entertainment Pty Ltd, will not be sufficient notice, it remains to be seen what steps a website provider must take to give the website user adequate notice of terms in a browsewrap type agreement.

Implied terms [9.600] In addition to the express terms agreed upon by the parties, other terms may be implied in the contract. In appropriate circumstances terms may be implied by:

215

216

Introduction to Business Law in Australia

(a)

the court;

(b)

custom or trade usage; or

(c)

statute.

Terms implied by the court [9.610] Terms which may be implied by the court can be subdivided into two categories: (a) those implied to give “business efficacy” to the contract, and (b) those implied in specific kinds of contract.

Terms implied to give “business efficacy” to the contract [9.620] The courts will “readily imply” a term that the parties must cooperate to “ensure the performance of their bargain”: Famestock Pty Ltd v Body Corporate for No 9 Port Douglas Road Community Title Scheme 24368 [2013] QCA 354 [13]. Occasionally the parties, through inadvertence or poor drafting, may have failed to incorporate terms to cover a situation which had they thought about it, they would certainly have provided for. In such a case the court may imply appropriate terms so as to give “business efficacy” to the contract in accordance with the presumed intention of the parties. This principle was recognised in the case of The Moorcock (1889) 14 PD 64.

The Moorcock [9.630] The Moorcock (1889) 14 PD 64. The defendant wharfingers contracted to allow the plaintiff to use their jetty to unload his ship. The ship was damaged at low tide by settling on a ridge of hard ground which lay beneath the river mud. It was held that the defendants were liable for the damage since the parties must have intended to contract on the basis that the berth would be safe for the plaintiff’s ship at low tide. The defendants were thus in breach of an implied term that they would take reasonable care to see that the berth was safe for the vessel. In the words of Bowen LJ: “[I]n business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are businessmen”: at 68. [9.640] The most frequently cited test for determining whether a term should be implied in a contract is as follows: “Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common, ‘Oh, of course’: Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 per MacKinnon LJ.” The power to imply terms in a contract is used sparingly by the courts. In BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1978) 180 CLR 266, the Privy Council said that the term implied must be: (a)

reasonable and equitable;

(b)

necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(c)

so obvious that “it goes without saying”;

(d)

capable of clear expression; and

chapter 9 Contents and Interpretation of the Contract

(e)

must not contradict any express term of the contract: at 283.

BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [9.650] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1978) 180 CLR 266. A wholly owned subsidiary of BP Australia Ltd had entered into an agreement with the State of Victoria to build and maintain an oil refinery on a site within the municipal district of the respondent council. The appellant was empowered under the agreement to dispose of its rights under the agreement to a company in which BP Australia Ltd held at least 30 per cent of the issued capital. The appellant company was granted preferential rate concessions by the respondent council under the provisions of the Local Government (Decentralised Industries) Act 1963 (Vic). The preferential rating agreement was expressed to cover a period of 40 years but contained no express provision enabling the appellant to assign the benefit of the agreement to any other company. Some five years later, following a decision to reorganise the corporate structure of BP Australia Ltd, the appellant company went into a members’ voluntary liquidation. The appellant’s liquidator transferred the refinery site and plant to BP Australia Ltd. The respondent council contended that the preferential rating agreement with the appellant lapsed on such reorganisation and assessed normal rates on the site on the basis that the preferential rating agreement did not apply to BP Australia Ltd. The liquidator of the appellant company subsequently obtained a court order for the winding up of the appellant to be stayed. BP Australia Ltd then leased the refinery to the appellant for three years at no rent, the appellant agreeing as lessee to carry out such refinery processes on the site as would be directed by BP Australia Ltd as lessor. The appellant company then claimed the benefit of the preferential rate agreement with the council which refused the claim and levied rates at the normal level. The appellant brought an action claiming it was entitled to the preferential rate concessions in accordance with the original agreement with the respondent council. The Privy Council held that no term could be implied in the rating agreement that it was to remain in force only so long as the refinery site remained in the appellant’s occupation. On the contrary, the Privy Council held that a term should be implied making the rating agreement accord with the refinery agreement and thus provide that the rights of the appellant company under the rating agreement could be assigned or otherwise disposed of to a company in which BP Australia Ltd held 30 per cent or more of the issued capital. Such an implied term would be: “both reasonable and equitable. It is capable of clear expression. It does not contradict any express term of a contract, but adds to it; and it gives business efficacy to the contract. In the light of the provisions of the refinery agreement it was something so obvious that it went without saying, and if an officious bystander had asked whether that was the common intention of the parties the answer would have been ‘Of course’”: at 286.

217

218

Introduction to Business Law in Australia

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [9.660] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. By way of contrast, Codelfa Constructions contracted with the State Rail Authority to build tunnels for a new railway. Under the agreement, Codelfa had to complete the contract in 130 weeks. The parties contracted on the common assumption that the company would be able to work three eight-hour shifts per day, six days a week. This in fact occurred until an injunction was obtained by a resident restraining the company from working from 10pm to 6am (with no work to occur at all on Sundays). As a result, Codelfa asked the court to imply a term in the agreement granting a reasonable extension of time. Held: The High Court declined to imply such a term. Codelfa had to prove that the term was necessary to make the contract work (and not just rescue Codelfa from a difficult position) and was “so obvious that it goes without saying” (that is, if the parties had known what was to happen when making the contract, they would have agreed to the term now sought to be implied). Codelfa could not establish this. Mason J said: “… there remains an insurmountable problem in saying that ‘it goes without saying’ that had the parties contemplated the possibility that their legal advice was incorrect and that an injunction might be granted to restrain noise or other nuisance, they would have settled upon the term implied by the Court of Appeal … This is not a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances, negotiation about that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution”: at 355-6. However, the High Court found that the changed circumstances were such as to frustrate the contract: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337: on the latter point see Chapter 11 ([11.430]). The High Court later reaffirmed the view that where it is contended that a term should be implied to give business efficacy to a contract, it must be shown that “the term sought to be implied must be necessary to make the contract work and must be so obvious that it goes without saying”: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 241; see also Vita Pacific Ltd v Heather (2001) 10 Tas R 334 at [14], [59].

Terms implied in specific kinds of contract [9.670] Certain terms are implied in various types of contract at common law. For example, in a contract for the hire of goods there is an implied condition that the goods will be reasonably fit for the purpose for which they are hired: Derbyshire Building Co Pty Ltd v Becker (1962) 107 CLR 633. Similarly, in a contract for skill and labour and the supply of materials, as in the case of a contractor who carries out repairs, there are implied terms that reasonable care and skill will be exercised in the performance of the work and that the materials used will be reasonably fit for the purpose intended: Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1.

chapter 9 Contents and Interpretation of the Contract 7

The Australian Consumer Law implies similar terms in such contracts. In cases not falling within the scope of the latter legislation, the terms implied at common law remain important. The terms implied in a contract at common law can be excluded by the parties.

Terms implied by custom or trade usage [9.680] Where parties have contracted in a particular trade, the customs or usages of that trade may be implied into the contract. However, in order for this to occur, the custom or usage must be notorious, certain and reasonable and not contrary to the express terms of the contract. The relevant principles have been stated by the High Court as follows: 1.

The existence of a custom or usage that will justify the implication of a term is a question of fact.

2.

There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract: Nelson v Dahl (1879) 12 Ch D 568 at 575; Thornley v Tilley (1925) 36 CLR 1 at 8.

3.

A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement.

4.

A person may be bound by a custom notwithstanding the fact that they had no knowledge of it: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 236-237.

Terms implied by statute [9.690] In certain classes of contract, terms are implied by statutory provision. For example, the Australian Consumer Law provides for statutory guarantees in contracts for the supply of goods and services to consumers. These include guarantees as to title, correspondence with description, acceptable quality and fitness for purpose. Conditions as to title, quality and fitness of the goods are implied into contracts for the sale of goods by the State and Territory Sale of Goods Acts. These will be considered in Chapter 13.

Implied term to act in good faith/use best endeavours [9.700] Imagine that in negotiating a lease, the landlord was required to tell a prospective tenant that it had received no offers in the last six months and that the last one it did receive offered rent of $10 per square foot while the landlord was asking $30 per square foot. Such a proposition goes against all conceptual notions of negotiation, where hard bargaining rules and each party seeks to get the best deal for themselves. While it has long been recognised that there is an obligation to perform the obligations of a contract in good faith, absent special circumstances such as employer/employee and franchisor/franchisee relationships, no court has suggested that there is a general duty to negotiate in good faith. Although there is no High Court authority, there is considerable case law that establishes that a duty of good faith will, in certain limited circumstances, be implied into commercial contracts. Although it generally affects the circumstances in which one party can exercise its rights to terminate a contract, it may be a more general obligation.

7

The is Sch 2 to the Commonwealth Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 13 at [13.10].

219

220

Introduction to Business Law in Australia

Renard Constructions (ME) Pty Ltd v Minister for Public Works [9.710] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234: The idea that a duty to act in good faith may be implied into a commercial contract took root in Australia in this case. A clause in a building contract empowered the principal to take over the work or cancel the contract upon the contractor’s default, if the contractor failed to show cause as to why the contract should not be terminated. When the contractor defaulted the principal purported to terminate the contract and take over the construction even though the contractor indicated that it was willing and able to complete the contract within a reasonable time. The contractor sued, arguing that the Minister’s decision to terminate was unreasonable and lacking in good faith. The NSW Court of Appeal agreed. It concluded that the contract included an implied term that the principal would give reasonable consideration to the question of whether the contractor had failed to show cause and, if it had failed, to the question of whether its power to terminate should be exercised. The power to terminate was not absolute: it implied a duty to act reasonably. In the event that it did not, the principal’s decision was “an invalid exercise of the power (to terminate)”. There have been other decisions that clearly point to the existence of a duty of good faith. However, as the following cases indicate, the contract itself is paramount. If the existence of a duty of good faith would be inconsistent with terms in the contract itself, no duty of good faith will be implied. In Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165 the Western Australia Court of Appeal examined whether a right to terminate a franchise agreement must be exercised in good faith. By way of obiter, the Court acknowledged that the law in Australia recognises the potential to imply a duty of good faith in commercial contracts. However, the express terms trump any implied duty of good faith and, in this case, the Court said it would be inconsistent with the express terms – which, inter alia, allowed either party to terminate the agreement for any reason and without regard to the interests of the other party – to imply a duty of good faith. There was a similar outcome in the following two cases. In Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 the contract provided that Vodafone had the “sole discretion” to determine the number of new subscribers it would provide to Mobile Innovations to manage. In determining that there was no implied duty to act in good faith or reasonably, the Court was influenced by the fact that Vodafone had “sole discretion” and could exercise this power in accordance with its own interests rather than those of Mobile Innovations. Finally, in Solution 1 Pty Limited v Optus Networks Pty Ltd [2010] NSWSC 1060, a contract gave Optus the right to terminate for any reason and at any time in its absolute discretion by giving 120 days’ notice. To imply a duty to act in good faith in these circumstances would be inconsistent with this “absolute discretion” and with a clause in the contract that expressly excluded any implied terms. Where a duty of good faith/use best endeavours term is implied into the contract the consequences could be significant. A breach of such a term could transform what would otherwise have been a valid exercise of a right to terminate the contract (for breach of a term or failure of a conditional subsequent) into repudiatory conduct that would give the other party a right to terminate and sue for damages.

chapter 9 Contents and Interpretation of the Contract

A duty to be honest [9.720] In a very recent landmark decision (Bhasin v Hrynew (2014) SCC 71) the Supreme Court of Canada has held that it was time for the common law to recognize a duty of honest contractual performance. This requires that parties be honest with each other in relation to the performance of their contractual obligations. Parties to a contract must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. The Court was careful to note that this does not impose a duty of loyalty or of disclosure or even require a party to forgo advantages flowing from the contract. Rather, in the words of the Court, “it is a simple requirement not to lie or mislead the other party about one’s contractual performance”. It is important to note that the Court said that the duty of honest contractual performance should not be considered an implied term of the contract; it was a general doctrine of contract law, like unconscionability, that imposes a contractual duty, regardless of the parties’ intentions. It remains to be seen whether Australian courts follow the precedent set by the highest court in Canada.

Further reading SA Christenson and WD Duncan, Commercial Contracts – Principles and Construction (Federation Press, Sydney, 2014). K Lewison and D Hughes The Interpretation of Contracts in Australia (Thomson Reuters, Sydney, 2012). J Thomson, K Martin and L Warnick, Commercial Contract Clauses: Principles and Interpretation (Thomson Reuters, Sydney, 2012). See also contract texts listed at the end of Chapter 2.

Tutorial activities 9.1

9.2

State the tests that the courts will use to determine the following issues and give case authority: (a)

Whether or not a pre-contractual statement is incorporated into the contract;

(b)

Whether or not a term of the contract is a condition or a warranty. Explain why this difference is important.

Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following questions. (a)

What documents and terms would form part of any agreement with CSW?

(b)

Would you advise CSW to change any aspect of the format or layout of their website in order to maximize the chances that all documents and terms would be held to be incorporated into the contract? What changes, if any, would you advise?

(c)

Identify the exclusion or limitation of liability clause? Is it likely to be effective in protecting CSW when a treadmill inexplicably and without warning speeds up to 20 kph causing an elderly man, who was walking on the treadmill at 4 kph, to be thrown off the machine breaking a leg and causing him mental trauma.

221

222

Introduction to Business Law in Australia

9.3

Jill is off to the opera at the State Theatre. She drives her Mercedes to the underground car park owned and operated by Bilsons Ltd. Outside the car park is a large sign that says “Take ticket from machine. Ticket contains terms. Pay when leaving. No liability accepted”. Jill does not read the sign. As she approaches the boom gate an automatic ticket machine issues her with a ticket with these words printed on it: CONDITIONS OF PARKING It is a condition of the issue of this ticket that vehicles are parked on these premises at the car owner’s risk. The car park proprietors accept no responsibility for loss or damage to vehicles in the parking area whether caused by negligence or in any way whatsoever. When she returns to get her car, it is missing. An hour later it is found in the Yarra River. The police confirm that an employee of the car park broke into the car, somehow managed to start the engine and drove off. When he had had enough he abandoned it in the river. Not only is the car beyond repair but Jill’s laptop, valued at $5,000, is also destroyed. Jill seeks your advice as to whether the exclusion clause will prevent her from claiming damages from Bilsons Ltd.

9.4

Tennis Oz owns a tennis shop that sells tennis equipment, including tennis racquets. It has a half-court at the back where, for $2 an hour, customers can try out the racquets and choose one that suits them. Leyton goes with a friend to choose a racquet. He chooses a couple of racquets, pays his $2 and he and his friend head out through a back door to the court. They have been playing for a few minutes when Leyton slips over on patch of wet Astroturf and tears a ligament in his knee. When they complain about the condition of the surface, the manager of the shop points them to a notice on the door out to the court (that Leyton had seen but not read). It said: “Customers using the half-court do so at their own risk. Oz Tennis will not be responsible for any damage, injury or loss to any customer no matter how the injury or damage is caused”. Advise Leyton whether he can sue Oz Tennis. Would it have made a difference if Leyton’s friend were the one who had suffered the injury?

9.5

Daniel and his wife Hannah want to buy a house in the country. They receive a brochure from a property developer, Dolphin Estates Pty Ltd, advertising a housing development called “Lake View Retreat” at Red Hills. The brochure contains a number of statements, including the following:  “a little piece of paradise – you’ll think you’ve died and woken up in heaven”;  “all the appliances throughout the house, in the lounge, kitchen and laundry, will be European brands”; and  “every house will have a view of the lake”. The brochure also has a number of photos featuring a prominent lake at the centre of the development, but no statements about its size or location. Purchasers are often keen to buy “off the plan” (that is, to sign a contract to purchase before the house is built) because of the significant savings on stamp duty. Daniel and Hannah negotiate with Max, the managing director of Dolphin Estates Pty Ltd. During the negotiations Max confirms the statements about the appliances and the lake. Daniel and Hannah are thrilled and immediately sign a contract of sale. The contract contains no reference to the European appliances nor does it mention the lake. The house is completed in January 2013 and Daniel and Hannah conduct the final inspection before moving in. They are disappointed to discover the appliances are cheap imports and, as

chapter 9 Contents and Interpretation of the Contract

they gaze out of their lounge room window, expecting a view of the lake, they realise the lake “concept” has been downsized and is actually more like a muddy pond. Suddenly Daniel and Hannah realize that this is not “a little piece of paradise” after all. They seek your advice as to whether they have any contractual rights in respect of each of the statements referred to in the brochure. (Do not refer to any claims that may be made under the Australian Consumer Law). 9.6

Why is it necessary to imply terms into contracts?

9.7

A court will not imply a term into a contract unless business efficacy demands it. Explain the concept using The Moorcock to illustrate your answer.

223

chapter 10

Operation of the Contract [10.10] Terminology........................................................................................................................................................ 226 [10.20] Introduction......................................................................................................................................................... 226 [10.30] Privity of contract ............................................................................................................................................ 226 [10.120] Liability for inducing a breach of contract........................................................................................ 229 [10.140] Assignment of contracts.......................................................................................................................... 230

226

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2014), Chapter 10.

Terminology [10.10] Below are some of the key terms that are used in this chapter:  assignee: is the person to whom an assignment is made.  assignment: in contract law means the transfer by a party to a contract of their rights and liabilities under that agreement to another party.  assignor: is the person who assigns or transfers to another.  chose in action: is a legal right as opposed to a right to a physical object and may only be enforced by the bringing of a legal action. It may take the form of a legal chose in action, which is a right of action that can be enforced in a court of law, or an equitable chose in action, which is a right of action that can only be enforced in a court of equity.  novation: refers to ending an existing contract and creating a new contract, usually on the same terms, but with one of the parties being different.  privity of contract: means, as a general rule, that only the parties to a contract can acquire rights or incur liabilities under it. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2014), Chapter 10.

Introduction [10.20] We pass next to a consideration of the operation of a contract, that is, the rights and liabilities under a contract. In particular, the following topics are considered: 1.

Privity of contract.

2.

Liability for inducing a breach of contract.

3.

Assignment of contracts.

Privity of contract General principle [10.30] The doctrine of privity of contract means that a contract cannot confer rights or impose obligations on any person except the parties to the contract. In other words, the general rule is that only the parties to a contract: (a)

acquire rights under it; and

(b)

incur liabilities under it.

In certain circumstances rights and liabilities may pass to persons other than the original parties either by their own act (that is, by assignment) or by operation of law: see [10.140].

chapter 10 Operation of the Contract

The basic principle, then, is that “a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations”: Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478. Thus, if A agrees with B to do something for the benefit of X, X cannot sue A if A fails to fulfil his promise. 1

Tweddle v Atkinson [10.40] Tweddle v Atkinson (1861) 1 B & S 393. The plaintiff was engaged to the daughter of William Guy. Guy promised the plaintiff’s father that he, Guy, would pay the plaintiff a sum of money upon the marriage. Guy did not do so and when he died Tweddle sued the executor. Held: Tweddle failed because of the doctrine of privity: he was not entitled to enforce a promise which had not been made to him. Wrightman J said: … it is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit..

[10.50] However, although a third person, X, cannot sue A on her or his promise to B, B may have a remedy against A for breach of contract. The application of these principles can be seen in the leading case of Beswick v Beswick [1968] AC 58.

Beswick v Beswick [10.60] Beswick v Beswick [1968] AC 58. B transferred his coal merchant business to his nephew who promised in return to pay B an annuity during B’s lifetime and after B’s death to pay a slightly smaller annuity to B’s widow. Following B’s death, the nephew failed to make the promised payments to B’s widow. The widow brought an action against the nephew both in her personal capacity and as administratrix of B’s estate. The House of Lords held that the widow could not succeed in her personal capacity as she was not a party to the contract between B and his nephew. However, it was further held that she could succeed in her capacity as B’s administratrix, that is, as the legal representative of B who would have been entitled to sue the nephew for breach of contract. Accordingly, in her capacity as administratrix of B’s estate, B’s widow obtained an order for specific performance of the nephew’s promise to B to pay her the annuity.

The agency and trust “exceptions” to the doctrine of privity [10.70] There is an exception to the doctrine of privity of contract where it can be established that a contracting party entered into the contract as an agent of a third party principal. Once the contract is made, the agent acting within his or her authority drops out and the contract is in fact between the principal and the third party with the agent having no rights or obligation under the contract. This is not a true exception to the privity doctrine because the agent has, at all times, when acting within his or authority, been acting 1

This is no longer the position in Queensland where by virtue of the Property Law Act 1974 (Qld), s 55 a promise by A to B for valuable consideration, to do something for the benefit of a third party beneficiary X is, on acceptance by X, enforceable by X against A. There is a similar provision in Western Australia (Property Law Act 1969 (WA), s 11(2), (3)) and the Northern Territory (Law of Property Act 2000 (NT), s 56(6)).

227

228

Introduction to Business Law in Australia

for the third party principal: Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1980) 144 CLR 300 at 304–305 (Privy Council Appeals). A further exception is where a contracting party is a trustee for a third party beneficiary of the rights given by the contract: Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 (PC) at 79 (AC).

The insurance exception to the doctrine of privity: the Trident case [10.80] In the absence of an agency or trust relationship, the doctrine of privity of contract is capable of working hardship by preventing a third party from enforcing a benefit to which they appear to be entitled under the contract. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, a majority of the High Court held that the doctrine of privity of contract does not apply to contracts of insurance. 2 However, the real importance of the case lies in its potential application to other kinds of contract. The facts were as follows:

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [10.90] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. T Ltd entered into an insurance contract with B Ltd, to provide cover against liability in respect of alterations being carried out at the latter’s limestone crushing plant. The public liability policy was expressed as extending not only to B Ltd and all its related companies but also to all contractors, subcontractors and suppliers. M Ltd, the principal contractor at the plant, was held liable for injuries sustained by a crane driver employed by one of its subcontractors. M Ltd sought an indemnity under the insurance policy between T Ltd and B Ltd. T Ltd refused the claim on the ground that M Ltd was not a party to the contract and had given no consideration. It was held by a majority of the High Court, affirming the decision of the New South Wales Court of Appeal, that T Ltd was bound to indemnify M Ltd under the insurance policy with B Ltd.

[10.100] The majority of the court was critical of the general operation of the doctrine of privity of contract, as well as its particular application to insurance contracts. Mason CJ and Wilson J commented that: “There is much substance in the criticisms directed at the traditional common law rules as questions debated in the cases reveal”: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 118. Toohey J recognised that it would be “unreal” to think that the decision “would not have implications for privity of contract in other situations”: at 163. Gaudron J went further than the other members of the court in saying that in her view: “[A] promisor who has accepted an agreed consideration for a promise to benefit a third party comes under an obligation to the third party to fulfil that promise and the third party acquires a right to bring an action to secure the benefit of that promise”: at 173. On the other hand, the dissenting minority were firmly of the view that the “settled and fundamental” doctrine of privity was too entrenched to be overturned by the court. The exception to the privity doctrine in relation to insurance has been incorporated into the Insurance Contracts Act 1984 (Cth). Section 48(1) provides: 2

The Insurance Contracts Act 1984 (Cth), s 48 effectively abrogated the common law doctrine of privity of contract in its application to insurance contracts to which the Act applies. However, the facts of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 occurred before the coming into operation of the Act, and hence the Act did not apply to the facts of the case.

chapter 10 Operation of the Contract

Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of his loss from the insurer in accordance with the contract notwithstanding that he is not a party to the contract.

Property law exception to the doctrine of privity: land covenants [10.110] Another exception to the doctrine of privity exists in the law of property. Benefits and liabilities attached to the land by way of restrictive covenants “run with the land” and may benefit or bind successors in title to that land. Thus A may sell land to B who covenants not to develop a high rise building on the land. Provided the covenant is properly registered, anyone who subsequently purchases the land will be bound by the covenant, even though he or she was not a party to the original contract.

Liability for inducing a breach of contract [10.120] Although no right of action in contract generally exists against a person who is not a party to a contract, the law, on principles of tort liability, will make such third person liable to an action if, without sufficient justification, they induce a party to a contract to commit a breach of existing obligations. 3 Inducing a party to lawfully terminate a contract does not constitute inducing a breach of contract: Sanders v Snell (1998) 196 CLR 329 at [23]. Intentionally, and without justification, inducing a person to break a contract with another is a tort. It must be proved that the breach was knowingly and intentionally procured: Woolley v Dunford (1972) 3 SASR 43; Australian Development Corporation Pty Ltd v White (2001) 189 ALR 266. “Wilful blindness” or “reckless indifference” will satisfy the knowledge requirement: LED Technologies Pty Ltd v Roadvision Pty Ltd (2012) 199 FCR 204 at [1], [47]–[54], [96]. Interference with contractual rights may be justified where there is just cause for the interference. However, it is generally difficult to establish such justification. An illustration of a case where justification was held not to exist is Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530.

Zhu v Treasurer of the State of New South Wales [10.130] Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530. Z had entered into an agency agreement with TOC. Under the agreement, Z was required to sell memberships in an “Olympic Club”. The Organising Committee for the Sydney Olympics (SOCOG) induced TOC to terminate its contract with Z. SOCOG sought to justify its inducement of the termination on the ground that it was required by contract to protect intellectual property rights relating to the Olympics. Z had used that intellectual property without authorisation. The High Court held that to justify inducement of a breach of contract the defendant must show that they were protecting a “superior legal right”. That superior right must be of a proprietary nature

3

See P Edmundson, Sidestepping Limited Liability in Corporate Groups Using the Tort of Interference with Contract (2006) 30 Melbourne University Law Review 62; JJW Pembroke-Birss, “The Defence of Justification to the Tort of Inducing Breach of Contract: An Australian Perspective” (December 2010-February 2011) 24, 4 Commercial Law Quarterly 3; C Bailey, “Facilitation or Manipulation: What Conduct gives rise to Liability for Inducing or Procuring a Breach of Contract?” (2014) 22 Tort Law Review 22.

229

230

Introduction to Business Law in Australia

(such as real or personal property) or be conferred by statute. A right to contractual performance is not a superior legal right but is merely an equal right. An equal right will not provide justification. An inducement is only justified where the defendant’s actions go no further than is reasonably necessary to protect its rights. On the facts, SOCOG’s actions in inducing the breach went further than would have been reasonably necessary, since less drastic alternative courses of action had been available.

Assignment of contracts [10.140] In order to enforce rights or to incur liabilities under a contract, a person must be one of the parties to such contract. However, in certain circumstances, the original contracting parties may assign their rights and liabilities to assignees who may then enforce, or be bound by, the terms of the agreement. 4

Relevant definitions [10.150] The relevant definitions are:  Assignor: An assignor is the one who assigns or transfers to another.  Assignee: An assignee is the one to whom an assignment is made.  Assignment: An assignment of a contract is the act by which one party to a contract substitutes another person for themselves as a party to that contract either for some or all the purposes of the contract.

Assignment of liabilities [10.160] A person liable under a contract may not transfer their liability to another person without the consent of the other party to the contract and the consent of the “transferee”. Other than this manner of assignment of liabilities, there exists the method of “novation”, whereby obligations under a contract may be assigned by a party to the contract to another person not a party, so that “a new contract takes the place of the old”: ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338 at [12]: “Novation is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made; it involves the extinguishment of one obligation and the creation of a substituted obligation in its place…intention is crucial to show a novation, although intention may be express or implied from the circumstances”: Goodridge v Macquarie Bank Ltd (2010) 265 ALR 170 at [112] per Rares J. 5

Assignment of rights [10.170] Although at one time at common law debts and other choses in action were not assignable in the true legal sense (unless they were represented by negotiable instruments) they are now made assignable by virtue of special statutory provisions in force in each State. A cause of action may be assigned where the 4

5

See generally GJ Tolhurst, The Efficacy of Contractual Provisions Prohibiting Assignment (2004) 26 Sydney Law Review 161; GJ Tolhurst, “Assignment of Contractual rights: The Apparent Reformulation of the Personal Rights Rule” (2007) 29 Australian Bar Review 4; GJ Tolhurst and JW Carter, “Prohibitions on Assignment: A Choice to be Made” (2014) 73 Cambridge Law Journal 405. See J Bailey, “Novation” (1999) 14 Journal of Contract Law 189.

chapter 10 Operation of the Contract

assignee has a genuine commercial interest in the enforcing the assignor’s claim: Insight SRC IP Holdings Pty Ltd v Australian Council for Educational Research Ltd (2013) 101 IPR 484 at [27].

Assignments by statute [10.180] These provisions 6 allow an assignee of a debt or other legal chose in action to take action against the debtor in the assignee’s own name provided that: (a)

the assignment is absolute and not merely by way of charge;

(b)

the assignment is in writing; or

(c)

express notice of the assignment is given in writing to the debtor.

In order for notice of an assignment to be effective, it is necessary that the debtor actually receive such notice. Accordingly, where notice of an assignment of a margin loan was sent by post by a bank but not received by the debtor, there was no effective notice of the assignment. Further, a generalised message on the bank’s website that the majority of its margin loans were transferred was not effective notice to the debtor of assignment of his loan to a third party: Goodridge v Macquarie Bank Ltd (2010) 265 ALR 170 at [148]–[149]. The assignee takes their rights “subject to equities” and cannot obtain a better title than that of the transferor. Provision is also made whereby a person liable can, if there is a dispute between the assignor and assignee, pay the money into court.

Assignments in equity [10.190] Courts of equity apply different rules from those of the common law relating to assignment and, accordingly, assignments of choses in action are recognised and enforced by them. This applies not only to equitable but also to legal choses in action.

Legal chose in action A legal chose in action is a right of action that can be enforced in a court of law, for example action on a bill of exchange or to recover a debt due under a contract.

Equitable chose in action An equitable chose in action is a right of action that can only be enforced in a court of equity, for example an interest in a trust fund or legacy. An equitable assignment of a chose in action (which may be itself either a legal chose or an equitable chose) may be effected without writing, no particular form of words being necessary, so long as the intention is shown that the chose in action is to be transferred or appropriated to the use of the assignee. The following points concerning an equitable assignment should be noted: 1.

6

Notice is not necessary to complete the assignee’s equitable right as against the original creditor or the latter’s representatives, including assignees in bankruptcy, but the claims of competing assignees rank as between themselves not according to the order in date of the assignments, but according to the dates at which they have respectively given notice to the debtor: Dearle v Hall (1828) 3 Russ 1; Conveyancing Act 1919 (NSW), s 12; Property Law Act 1958 (Vic), s 134; Property Law Act 1974 (Qld), s 199; Law of Property Act 1936 (SA), s 15; Property Law Act 1969 (WA), s 20; Conveyancing and Law of Property Act 1884 (Tas), s 86; Civil Law (Property) Act 2006 (ACT), s 205; Law of Property Act 2000 (NT), s 182.

231

232

Introduction to Business Law in Australia

38 ER 475. This rule applies to give priority over the assignee in bankruptcy of the assignor even though the bankruptcy of the assignor occurred before the date of the assignment: Australian Mutual Provident Society v Gregory (1908) 5 CLR 615 at 626–627, 635. It applies even though an assignee knew of the earlier assignment when he or she gave notice but not if he or she knew of the earlier assignment when he took his assignment. Verbal notice is sufficient but it is advisable for it to be in writing. 2.

The assignee takes “subject to equities”, that is, subject to such defences that the debtor might have raised against the assignor. In other words, the assignee can only receive such title as the assignor is able to give and cannot be in a better position.

Assignment by operation of law [10.220] Another form of assignment occurs in the transfer of the rights under a contract by operation of law. The most common examples are:

Death [10.230] The estate of a deceased person passes to their executor or administrator on a grant of probate or letters of administration and with it rights under contracts. The liabilities of a deceased person under contracts made by her or him also devolve on the executors or administrators but the extent of the liability is limited to the assets that come into their hands as such executors or administrators. There is an exception to the rule that the rights and liabilities of a person under contract devolve on their personal representative in the case of contracts requiring the personal skill or services of the deceased. On the death of one of the persons by whom a joint promise has been made, the liability devolves on the survivors, the representatives of the deceased being under no liability. In the case of a promise by partners, equity construes the promise as joint and several. On the death of one of the several joint promisees the right of action on the promise vests in the survivors.

Bankruptcy [10.240] The estate of a bankrupt passes to the Official Trustee in Bankruptcy, unless and until a registered trustee is appointed in which event the bankrupt’s estate will vest in the registered trustee.

Contracts for personal services not assignable [10.250] A contract with a person having special qualification is of a personal nature and probably would not be able to be performed by another person to the satisfaction of the other original party and for this reason it is not assignable; for example a contract between publisher and author is not assignable.

Further reading A Guest, Guest on the Law of Assignment (Sweet & Maxwell, London, 2012). M Smith and N Leslie, The Law of Assignment (2nd ed, Oxford University Press, Oxford, 2013). G Tolhurst, The Assignment of Contractual Rights (Hart, Oxford, 2006). See also contract texts listed at the end of Chapter 2.

chapter 10 Operation of the Contract

Tutorial activities 10.1 Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following question. Assume you have joined CSW and paid your membership fees one year I advance. Assume also that you have finished your degree and have obtained employment in the city. Given the distance, and your long hours, it is no longer possible for you to travel to CSW. Can you transfer your membership to your friend, so as not to waste the fees paid in advance? 10.2

A Ltd, an insurance company, and B Ltd, an insured, agree that the insurance policy taken out by B Ltd will cover B’s employees/agents/contractors. C, a contractor of B, is injured and makes a claim under the policy. Advise C whether the doctrine of privity will prevent him or her from making a claim under the policy.

10.3

Explain the connection between the need for consideration and the doctrine of privity.

10.4

Harry assigns to Kerry his right to receive $1,000 from Bruce. For this to be a valid assignment, is it necessary for him to notify Bruce What if Kerry has not provided consideration?

233

chapter 11

Termination of a Contract [11.10] Terminology........................................................................................................................................................ 236 [11.20] Introduction......................................................................................................................................................... 236 [11.30] Termination by performance..................................................................................................................... 237 [11.130] Termination by agreement ..................................................................................................................... 241 [11.260] Termination by breach............................................................................................................................... 244 [11.380] Termination by frustration ...................................................................................................................... 249 [11.670] Termination by operation of law........................................................................................................... 257

236

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 11.

Terminology [11.10] Below are some of the key terms that are used in this chapter:  breach: where one party to the contract does not perform their obligations in accordance with the terms of the contract.  condition: a term of the contract that is of fundamental importance, breach of which gives rise to a right by the innocent party to either treat the contract as at an end, and/or to sue for damages.  condition precedent: a term requiring something to be done before another party completes their part of the bargain.  condition subsequent: a term in the contract which automatically terminates the contract (or that part of the contract to which the term applies) on the happening of a certain event after the contract has been made.  frustration: an unforeseen event that was not contemplated by the parties at the time of entering into the contract, which when the frustrating event occurs discharges the parties from any future obligations under the contract.  intermediate or innominate term: a term in a contract that is somewhere between a condition and a warranty and which may operate as either a condition or warranty, depending on the gravity of the breach.  rescind: where one party ends the contract because of a breach by another party to the agreement.  supervening event: an unexpected or unforeseen event which affects the ability of the parties to complete their agreement.  warranty: a term of the contract of lesser importance in breach of which only allows the innocent party to sue for damages, rather than rescinding the contract. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 7.

Introduction [11.20] In this and the following chapter, we examine the contractual end-game. Having established in earlier chapters the requirements for contractual agreement; the various factors that may affect that agreement; the various kinds of terms, both express and implied and their significance, in this chapter we consider how a contract may be terminated or discharged and, in the next chapter, conclude by examining the remedies that may be available for a failure to perform the contract as promised. A contract may be terminated in the following ways: by performance of the parties’ obligations under the contract; by an agreement between the parties that they no longer wish to continue with the contract and release each other from their obligations; by breach of a condition or a repudiatory breach of the contract that gives the innocent party the right to terminate; by frustration because an unforeseen event has made performance of the contract radically different from what it was before the event; and by operation of law

chapter 11 Termination of a Contract

where the contract is terminated independently of the wishes of the parties by operation of law.

Termination by performance Figure 11.1: A contract may be terminated

[11.30] The most obvious and natural form of termination is when the parties perform fully and exactly their obligations to one another. In the event that one party has not performed exactly as promised, that party is not discharged from his or her obligations under the contract and may be sued for breach of contract. The corollary of this rule is that exact performance is a condition precedent to recovery of the contract price (that is, the full price agreed to in the contract). Figure 11.2: Termination by performance

237

238

Introduction to Business Law in Australia

Cutter v Powell [11.40] Cutter v Powell (1795) 101 ER 573. Cutter agreed to work for wages on a merchant ship on a voyage from Jamaica to Liverpool. It was agreed that he would be paid 30 guineas “provided he proceeds, continues and does his duty as a second mate in the said ship from hence to the Port of Liverpool”. The ship left on July 31, 1793 and Cutter carried out his duties until his death on September 20. The ship arrived in Liverpool on October 9. Cutter’s widow claimed wages on a pro rata basis on a quantum meruit for work and labour done by her husband. Powell refused to pay for that part of the journey that Cutter had performed. Held: Cutter was only entitled to claim once his entire obligations were fulfilled. The court took into account that merchant seamen who were paid on a monthly basis (or pro rata) were paid half the amount promised to Cutter. Thus the court said the risk of non-completion was allocated to Cutter – if he did complete the journey he would receive a handsome wage; if not, he would receive nothing.

Entire and divisible contracts [11.50] Under an “entire” contract (such as in Cutter v Powell), exact performance of the whole contract is required before the other party’s obligations are triggered. For example, if Y is contracted to paint X’s house for $5000 and is being paid a lump sum at the end of the job, it is an “entire contract”. Y would not be entitled to sue for the contract price ($5000) until he had completed the job exactly as required. Similarly, a contract for the supply of goods that provides for a lump sum payment at the completion of the contract would be an entire contract and no payment could be demanded until all goods are delivered. A “divisible” contract, on the other hand, is one that provides, either expressly or impliedly, that performance by one party (eg, payment of the price) is due after the other has performed particular stages of the contract. Most construction contracts are structured in this way. For example, if A’s obligation is to build B’s house, the contract may be divided up into stages – footings, frame, lock-up and completion – with progress payments being made at the completion of each stage. Similarly, a contract for the sale of 10,000 tonnes of uranium to Russia over 10 years would be a divisible contract. In both instances, if there is a breach, the builder or supplier would have a right to be paid for each stage or instalment that has been exactly performed. As a general rule, the courts regard contracts as not divisible. As was said in Re Hall & Barker [1878] 9 Ch D 538, “if a shoemaker agrees to make a pair of shoes, he cannot offer you one shoe and ask you to pay one half the price” (at 545). However, it is a question of fact in each case.

The “substantial performance” rule [11.60] . The exact performance rule is subject to considerable qualification nowadays. In fact, unless exact performance is a condition of the contract, contracting parties who “substantially perform” their obligations will be able to claim the contract price, subject to the right of the innocent party to deduct the amount required for exact performance against the full contract price. The question of what may be regarded as “substantial performance” is one of fact, depending upon all the circumstances, including the nature of the contract, the nature of the defects and the relative cost involved in rectifying or completing the contract.

chapter 11 Termination of a Contract

Hoenig v Isaacs [11.70] Hoenig v Isaacs [1952] 2 All ER 176. The plaintiff, an interior decorator, agreed to decorate and furnish the defendant’s flat for £750. The terms of payment were “net cash as the work proceeds, and balance on completion”. Hoenig made two payments of ₤150. Some time later Isaacs advised that the work had been completed and claimed the balance of ₤450. Hoenig paid ₤100 but refused to pay the balance alleging faulty design and workmanship. He argued this was an entire contract that had not been exactly or substantially performed and therefore Isaacs was not entitled to recover any money. It would have cost £55 to bring the work up to the exact performance level. Held: The Court accepted this was an entire contract but, as there had been substantial performance, Isaacs was entitled to recover the contract price less the amount required to finish it exactly. Romer LJ said: ... [W]hen a man fully performs his contract in the sense that he supplies all that he agreed to supply but what he supplies is subject to defects of so minor a character that he can be said to have substantially performed his promise, it is, in my judgment, far more equitable to apply the … principle (that he is entitled to the contract price, less the amount it would take to complete the contract): at 182. Had Isaacs not substantially performed his promises, the corresponding obligation to pay anything at all would not have arisen. Compare the outcome in the following case.

Bolton v Mahadeva [11.80] Bolton v Mahadeva [1972] 2 All ER 1322. The plaintiff agreed to install central heating and to perform certain other work in the defendant’s house. The contract price for the installation and work was a lump sum of £560. The central heating was installed but there were defects and the cost of remedying the defects was £174. Held: The Court of Appeal held that the plaintiff was not entitled to recover anything. The Court said that the main question was whether the defects in workmanship were of such a character and amount that the plaintiff could not be said to have substantially performed his contract. In other words, the governing considerations were the nature of the defects and the proportion between the cost of rectifying them and the contract price. Cairns LJ said: “I find it impossible to say that the judge was right in reaching the conclusion that ... the contract had been substantially performed. The contract was a contract to install a central heating system. If a central heating system when installed is such that it does not heat the house adequately and ... further, that fumes are given out, so as to make living rooms uncomfortable, and if the putting right of those defects is not something which can be done by some slight amendment of the system, then I think that the contract is not substantially performed.”

239

240

Introduction to Business Law in Australia

Steele v Tardiani [11.90] Steele v Tardiani (1946) 72 CLR 386 provides an example of how the courts may find there has been substantial performance of one stage in a divisible contract, in an effort to avoid the other party being unjustly enriched. The plaintiffs agreed to split 1500 tons of wood at agreed lengths at 6/per ton. However much of the timber was not cut to the correct length. The Tardianis sued for the contract price but Steele refused to pay anything, arguing the contract was an entire contract that had not been exactly or substantially performed. The High Court said the contract was “infinitely divisible” meaning that Steele was obliged to pay for any part of the divisible contract that was substantially performed. In fact this did not assist the plaintiffs very much because much of the timber that they had cut did not meet the substantial performance test. As Dixon J explained it: “... each divisible application of the contract is entire and is only satisfied by performance, not partial, but substantially complete”: at 401.

Acceptance of partial performance [11.100] It may happen that the innocent party voluntarily accepts the partial performance of the other party. If this happens, the parties have effectively abandoned the original contract and substituted a new one under which the innocent party agrees to accept partial performance on agreed terms. A person who voluntarily accepts a benefit under contract (eg, where, in a contract for the sale of goods the innocent party accepts some of the goods) must pay on a quantum meruit basis, that is, a reasonable amount for the work done. The basis of the rule is that otherwise the innocent party is unjustly enriched. For instance, in Steele v Tardiani (above) if Steele had accepted the timber cut by the Tardiani brothers he would have had to pay on a quantum meruit even though the contract (or part of it) had not been substantially performed. To refer back to the example concerning the pair of shoes, if, for whatever reason, the buyer accepted the one shoe that the shoemaker had made, the buyer would have to pay a reasonable price for it. The following case shows that the innocent party must have a choice about whether to retain the benefit before they will have to pay on a quantum meruit.

Sumpter v Hedges [11.110] Sumpter v Hedges [1898] 1 QB 673. Sumpter agreed to build two houses for Hedges for a lump sum of £565. It was an entire contract (though some progress payments had been made for work completed). However, when Sumpter ran out of money he abandoned the contract leaving Hedges to finish the project. Hedges used materials left by Sumpter. Sumpter claimed payment on a quantum meruit (that is, he did not claim the contract price but wanted compensation for the value of the work he had carried out and materials used). Held: Sumpter was not entitled to a quantum meruit payment because he had abandoned the project. Nor was he entitled to further payment on the basis of his part performance – this was an entire contract that had been abandoned and there was no evidence that the parties had entered into a fresh contract to pay for the work done. Hedges therefore retained the benefit of the work done (though, as noted above, he had made some progress payments). Collins J said: “Where, as in the case of work done on land, the circumstances are such as to give the defendant no option whether he will take the benefit of the work or not, then one must look

chapter 11 Termination of a Contract

to other facts than the mere taking of the benefit of the work in order to ground the inference of a new contract … the mere fact that a defendant is in possession of what he cannot help keeping, or even has done work upon it, affords no ground for such an inference. He is not bound to keep unfinished a building which is in an incomplete state which would be a nuisance on his land”: at 676.

[11.120] Time for performance: As a general rule performance should take place within the time specified in the contract (eg, “within 60 days from the contract date” or “on January 1, 2013”) or, if none is specified, within a reasonable time, taking into account the particular circumstances. If the parties have stipulated a time for performance, the rule is that if the time clause is not precisely kept, damages will be the usual remedy (not termination for breach of condition) unless it is expressly or impliedly agreed by the parties that time should be “of the essence” or notice is given by the innocent party that time is “of the essence”.

Termination by agreement Termination under the original contract Express power to terminate [11.130] A contract may be terminated through the happening of an event as provided for in the original agreement itself. For example, a contract of loan with a bank may provide that the bank can terminate its contractual arrangements with the borrower in the “Event of Default” by the borrower and declare that the moneys lent are immediately due and payable: Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 at [35]–[36]. A further common illustration is a stipulation in the contract that it will terminate at the expiration of a specified period, for example a contract for a lease for a specified number of years. At the end of the time stipulated the lease will automatically come to an end.

Implied right to terminate [11.140] Where a contract does not contain a provision as to its duration, the court may imply a right to terminate on giving reasonable notice to the other party. For example, where a distributorship agreement was silent as to its duration, the New South Wales Court of Appeal held that a period of six months’ notice prior to terminating the contract was appropriate. The contract would otherwise have been of indefinite duration: Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438.

Termination by subsequent agreement [11.150] A contract is the result of agreement and by means of a further agreement the contract may be terminated. A subsequent agreement must be valid in order to modify a prior contract. A void agreement cannot rescind or vary a valid earlier contract: Coghlan v Pyoanee Pty Ltd [2003] 2 Qd R 636 at [9], [32]. A subsequent agreement may be: (a)

to cancel the original contract; or

(b)

to vary the terms of the original contract through substitution.

241

242

Introduction to Business Law in Australia

Cancellation of original contract Mutual termination [11.160] This occurs where both parties agree to cancel the original contract. However, such an agreement can only operate as a termination of the original contract where there is still something to be done by each party under the original contract. In such a case the promise by one party to abandon their rights under the original contract would be given in consideration of the other party’s promise to do likewise.

Release [11.170] If one party has completed their undertaking and the other has not, then the only method of cancelling the contract is by agreement under seal to release the defaulting party or by the giving of some further consideration for the release by the party still under an obligation. This consideration must not be something that the party is already legally bound to do.

Accord and satisfaction [11.180] In the case of cancellation of the contract by agreement to release, where the release involves the giving of some further consideration, the principle is often referred to as that of accord and satisfaction. This principle applies where there is an agreement (accord) between two parties that the debtor shall do or pay something in satisfaction of the cause of action and that the claimant will accept the same. When the payment or performance is completed and satisfaction obtained, then such discharge of the original right of action has been effected by accord and satisfaction.

By substituted agreement [11.190] A new agreement may be made providing for an alteration in the terms of the original contract so that a new contract is substituted for the old one. The simplest example of a contract being terminated by the formation of a new contract is novation: see Chapter 10 at [10.160]. If a new contract is made with a view to discharging an existing one the rule is that the new contract need not necessarily be in the same form as the original one. A simple contract may be terminated by word of mouth even if the original contract was required by law to be in writing providing the intention to rescind, as distinct from an intention to vary, is clear: Morris v Baron & Co [1918] AC 1.

Contingent conditions [11.200] The parties to a contract may make the performance of their contract conditional upon the occurrence of a specified event. They may also make performance of their contract conditional upon an event not occurring. Such contingent conditions may take the form of a condition precedent or a condition subsequent.

Conditions precedent [11.210] A distinction must be made between: (a)

a condition precedent to the formation or existence of a contract; and

(b)

a condition precedent to the performance of a party’s obligations under a contract.

As explained by Mason J in Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 551: “There is an obvious difference between the condition which is precedent to the formation or existence of a contract and the condition which is precedent to the obligation of a party to perform

chapter 11 Termination of a Contract

his part of the contract and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment. In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled. In the second category there is a binding contract which creates rights capable of enforcement, though the obligation of a party, or perhaps of both parties, to perform depends on fulfilment of the condition and non-fulfilment entitles him to terminate”: at 551. By way of example:

Sandra Investments Pty Ltd v Booth [11.220] Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153. A contract for the sale of land contained the following clause: “This contract is subject to and conditional upon the approval of the [local council] to a plan of subdivision … within six calendar months from the date hereof. In the event that such approval is not obtained then the purchaser may at their option cancel this contract.” Approval was not obtained and the purchaser waived this condition but the vendor refused to complete. The High Court held that the approval referred to was expressed in the form of a condition precedent to the obligation to complete the contract and not as a condition precedent to the formation of the contract. The plain implication of the condition was that if the purchaser did not choose to cancel the contract the vendor had no right to treat it as being at an end. Accordingly, the purchaser had the option to choose to allow the contract to remain on foot when the condition was not satisfied, and because he had elected to waive the condition, he was entitled to specific performance of the contract.

Whittle v Parnell Mogas Pty Ltd [11.230] Whittle v Parnell Mogas Pty Ltd (2006) 94 SASR 421. Another case involved negotiations for the lease of a service station. The respondent’s offer stated that the appellant was to “provide an environmental site assessment prior to the execution of the proposed lease”. This was not done. The South Australian Full Court held that there was no binding contract between the parties. The respondent was not prepared to enter into a lease until the assessment was provided. Provision of the assessment was a condition precedent to the formation of a contract. This condition was never satisfied and therefore there was no contract.

[11.240] Generally, the court will tend to favour a construction leading to the conclusion that a particular stipulation is a condition precedent to the performance of the contract since: “In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract that makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion”: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552 per Mason J.

243

244

Introduction to Business Law in Australia

Condition subsequent [11.250] A condition subsequent is a condition contained in a contract upon the happening of which at a subsequent time the contract will be terminated. In such a case the parties’ obligation to perform the contract is immediately binding but will come to an end should the event specified in the condition occur. For example, in a charterparty an owner agrees to make the voyage on certain terms, “act of God, dangers of the seas, etc” excepted. If one of the excepted risks occurs, the owner is relieved from performing the contract: Geipel v Smith (1872) LR 7 QB 404.

Termination by breach Figure 11.3: Termination by breach

[11.260] A breach of contract can occur in various ways, not all of which will give the innocent party the right to terminate the contract. There are two basic situations to consider: (a)

where one party repudiates the whole contract by act or deed; and

(b)

where one party breaks a term of the contract.

Repudiation of the contract [11.270] An innocent party has the right to terminate the contract where the other party repudiates their obligations under the contract, that is, demonstrates an absence of willingness or ability to perform their obligations under the contract.

chapter 11 Termination of a Contract

Repudiation before the contract is due for performance: anticipatory breach of contract [11.280] Where a contract is entirely unperformed on both sides, for example, where the time for performance has not yet arrived and one party repudiates the contract, the other can treat the contract as terminated and sue immediately for damages for such breach. This is known as anticipatory breach of contract. It should be noted that the contract must be entirely repudiated. For example, on August 1, 2012, Jack signs a contract of employment with IT Pty Ltd and is due to begin on January 1, 2013. If he were to inform them on November 1, 2012 that he no longer intends to work for them, this is an anticipatory breach (because the breach anticipates the time for commencement of the contract). The innocent party may either elect to accept the breach and terminate the contract or elect to keep the contract “on foot”. If the innocent party elects to terminate, he or she is able to sue for damages immediately (rather than wait for the date of performance to fall due). If the anticipatory breach is not accepted by the innocent party, it may, in time, become an actual breach. In the example above, IT may accept the repudiation by Jack and immediately sue for any losses it can show were caused by his breach. On the other hand, it can wait for the contract date and, when Jack fails to perform, sue for actual losses sustained.

Foran v Wight [11.290] Foran v Wight [1989] HCA 51; (1989) 168 CLR 385. The Forans had a contract to purchase land from the Wights. Under a term of the contract, the vendors were required to register a right of way prior to settlement. Settlement date was June 22, 1983 and time was “of the essence”. Two days before settlement, the vendors notified the purchasers that they had not been able to register the right of way and they would not be able to settle on the due date. The purchasers did not terminate at that time (for the anticipatory breach) but, as a result of the vendors’ notice, they did not pursue their application for finance and did not tender the balance of the purchase monies at settlement. On June 24 they purported to terminate the contract (for the actual breach) and sought a refund of the deposit. The vendors refused arguing that the termination notice was not valid because the purchasers had not put themselves in a position where they were ready and willing to settle on the due date. Held: The High Court decided that the vendors’ statement that they would not be able to perform a condition precedent (registering the right of way) entitled the purchasers to terminate (for an anticipatory breach or for the actual breach) and released them from their dependent obligation to be ready and willing to settle on the due date.

Conduct amounting to repudiation [11.300] The most obvious case of repudiation is for non-performance, where a party to a contract expressly states that they are unwilling or unable to perform the contract. In the absence of an express statement, a party’s words or conduct may indicate that they are repudiating the contract. Furthermore, a party may repudiate a contract by putting it out of their power to perform the contract, for example where the seller of an antique car sells the car to a third person. In such a case, the original buyer can treat the seller as having repudiated the contract for the sale of the vehicle.

245

246

Introduction to Business Law in Australia

Renunciation may not be express but has to be implied from fragmentary acts and omissions. In Shevill v Builders Licensing Board (1982) 149 CLR 620 Gibbs CJ stated that: “[A] contract may be repudiated if one party renounces his liabilities under it – if he evinces an intention no longer to be bound by the contract … or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way … In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and sue for damages”: at 625. Repudiation is determined by an objective test. It is concerned with the conduct of the repudiating party not their subjective state of mind.

Laurinda Pty Ltd Capalaba Park Shopping Centre Pty Ltd [11.310] Laurinda Pty Ltd Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623. In October 1985 Capalaba agreed to lease a shop in a shopping mall to Laurinda for six years. Under the contract, Capalaba agreed to do what was necessary to put the lease into registrable form and then register it (or forward to Laurinda for registration) by the time Laurinda went into possession “or so soon thereafter as is practicable”. Laurinda went into possession in December 1985. In March and again in August of 1986, Laurinda sought the lease but did not receive it. Finally in September, Laurinda terminated the lease, arguing that the inordinate delay in registration amounted to a repudiation of the lease. Held: The High Court agreed that Capalaba’s conduct was repudiatory because it showed an intention to perform the contract in a manner that was substantially inconsistent with its obligations. Laurinda therefore had the right to terminate.

Progressive Mailing House Pty Ltd v Tabali Pty Ltd [11.320] Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17. The High Court considered whether a lessee’s conduct amounted to a repudiation of the lease. The lessee had committed a number of breaches of the lease including the failure to pay rent. The Court held that although the failure to pay the rent would not, on its own, “evince an intention not to be bound by the contract”, the cumulative effect of the breaches amounted to a repudiation of the lease, thus allowing the lessor to terminate. It is irrelevant that the party repudiating the contract believed that their action was justified under the contract: Sopov v Kane Constructions Pty Ltd (2007) 20 VR 127.

Effect of repudiation [11.330] Repudiation gives to the other party to the contract an option either to ignore the breach and to insist upon performance when due, or to accept the repudiation and treat themselves as discharged from any further obligation under the contract. If the innocent party elects to treat themselves as discharged, he or she can immediately sue the defaulting party for damages whether or not the time for performance is due. On the other hand, if the innocent party does not elect to treat themselves as discharged, then the contract remains and continues for

chapter 11 Termination of a Contract

the benefit of both parties. The innocent party remains subject to all their own obligations and liabilities under the contract. The defaulting party has an opportunity not only to complete the contract but also, notwithstanding their previous repudiation of it, to take advantage of any intervening circumstance which would entitle her or him to decline to complete it: Avery v Bowden (1855) 5 E & B 714.

Breach in fulfilling terms of contract Breach of an essential term: conditions, warranties and innominate terms [11.340] Not all breaches in the performance of a contract give the innocent party the right to terminate the contract. It is only a breach of a term that is of fundamental importance to the contract (a condition) that termination may result. A breach of a lesser term (a warranty) only allows the innocent party to sue for damages. [11.350] A condition is a term of a contract that is of such basic importance that breach of it gives rise to a right to treat the contract as at an end. A warranty is subsidiary to the main purpose of the contract so that its breach confers merely a right to sue for damages. If there is a breach of condition and the other party does not treat the contract as terminated, the condition sinks to the level of a warranty only. In some cases statute declares that certain conditions and warranties are implied in a contract, for example in the case of a sale of goods. Here there is no difficulty. In other cases the parties may expressly declare that a term of the contract is a condition or essential to the contract, for example by a stipulation that it is the basis or of the essence of the contract. However, the mere fact that the parties have used the word “condition” in their contract does not necessarily mean that they have used it in the strict technical sense that a breach of the term can be treated as a repudiation of the contract. The court may find that the parties have used the word “condition” in a non-technical sense as simply meaning a term of the contract and did not intend that breach of the term should have the effect of entitling one party to treat the contract as at an end: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235. In other cases the contract, without expressly saying so, may indicate that the parties attached sufficient importance to the stipulation to make it a condition of its validity. Where these guides to the intention of the parties are absent, the courts still look at the matter in terms of the distinction between condition and warranty but decide it on the nature of the whole contract and the relative importance of the term broken. For further discussion of conditions and warranties, see Chapter 9 at [9.240].

Innominate terms [11.360] In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, it was said that not all contractual undertakings fell into one of the two categories of “condition” and “warranty”. The more basic test was whether the breach had given rise to a situation where the party not in default had been deprived of substantially the whole benefit which they were entitled to expect from the contract. The Australian High Court adopted this approach in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549: “… a term in a contract may stand somewhere between a condition and a warranty. Such an intermediate or innominate term, it has been held, is capable of operating, according to the gravity of the breach, as either a condition or a warranty. In Hongkong Fir the obligation of seaworthiness was readily classified as innominate because a breach of the obligation might be trivial, making damages an adequate remedy, or grave, in which event it should have effect as a breach of condition. … nothing less than a serious breach of an innominate term entitles the innocent party to treat the contract as at an end”: at 561–562.

247

248

Introduction to Business Law in Australia

In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, the majority of the High Court described the Hongkong Fir Shipping doctrine as being part of the “mainstream law of contract” in Australia: at [50].

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [11.370] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115. Koompahtoo Local Aboriginal Land Council (Koompahtoo) and Sanpine entered into a joint venture agreement for the commercial development of land. Koompahtoo contributed the land and Sanpine was the manager of the development. Clause 16.1 provided for the establishment of a joint venture bank account into which funds concerning the development were to be deposited under cl 16.3. Funds advanced by third parties were also to be deposited in the joint venture account, unless the Management Committee approved otherwise. Clause 16.4 provided that payments were only to be made from the joint venture account in accordance with the approved development plan and approved budget and payment guidelines previously approved by the Management Committee. Clause 16.5(a) provided that Sanpine would ensure that proper Books were kept so as to permit the affairs of the joint venture to be duly assessed. Financial records comprised in the Books had to be kept in accordance with generally accepted accounting principles and in such a manner as to enable the venturers to extract from the Books any information in relation to the affairs of the joint venture. In 2003 an Administrator was appointed. In December 2003, on behalf of Koompahtoo, he terminated the Agreement. Sanpine sought a declaration that the termination was invalid. The trial judge dismissed the application finding “gross and repeated” departures by Sanpine from its contractual obligations under the Agreement. In particular, Campbell J found that (a) substantial joint venture payments went through an account in Sanpine’s name in what amounted to a systematic breach of cl 16; (b) over $183,000 that had been raised on the security of the joint venture had been misapplied; and (c) requests by the Administrator for financial information relating to the joint venture had not been met. In Campbell J’s view, these were intermediate terms, the breaches of which were sufficient to amount to a repudiation. Koompahtoo argued that essential terms (conditions) had been breached and thus termination was justified regardless of the seriousness of the breaches. Sanpine successfully appealed to the Court of Appeal. The Court regarded the essential questions as being whether a reasonable person would have said that it was Sanpine’s intention to repudiate the agreement or whether the terms in question were conditions. They said no to both. Koompahtoo appealed to the High Court. The High Court upheld the appeal. The majority held that the breaches by Sanpine “went to the root of the contract” and “as a matter of construction of the contract … deprived Koompahtoo of a substantial part of the benefit for which it contracted”: at 71. The Court summarised the law as follows: “For present purposes, there are two relevant circumstances in which a breach of contract by one party may entitle the other to terminate. The first is where the obligation with which there has been failure to comply has been agreed by the contracting parties to be essential. Such an obligation is sometimes described as a condition ….The second relevant circumstance is where there has been a sufficiently serious breach of a non-essential term …. we rest our decision in the appeal not upon the ground of breach of an essential obligation, but upon application of the doctrine respecting intermediate terms” [emphasis added].

chapter 11 Termination of a Contract

In New South Wales, a similar approach has been adopted in respect of contracts for the sale of goods by the Sale of Goods Act 1923 (NSW). Section 4(5) of the Act provides: “Nothing in this Act shall be construed as excluding a right to treat a contract of sale as repudiated for a sufficiently serious breach of a stipulation that is neither a condition nor a warranty but is an intermediate stipulation.”

Termination by frustration Figure 11.4: Termination by frustration

[11.380] The doctrine of frustration provides a lawful excuse for breach of contract. The parties may trigger the doctrine only where some unforeseen event occurs which results in a fundamentally different situation from that contemplated at the time of entering into the contract. For the unforeseen event to have this effect, it must have been of such a serious nature as to make further performance of the contract illegal, impossible, or radically different. The courts have traditionally been reluctant to conclude that a contract is frustrated and it remains the case that performance of a contract is not excused merely because it involves more hardship, inconvenience or material loss. The difference between a frustrating event and a mistake (such as that in Commonwealth Disposals Commission v McRae (1951) 84 CLR 377) is essentially one of timing. For an event to be frustrating it must occur after the contract is made; for mistakes to be operative, the mistake must have occurred prior to

249

250

Introduction to Business Law in Australia

the contract being formed. Thus, in Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 (see [11.450] below) if the hall in Surry had burned down before the contract was made, it would have been an example of a common mistake.

Davis Contractors Ltd v Fareham Urban District Council [11.390] Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696. Davis Contractors tendered for a contract with the council to build 78 houses within a period of eight months. The tender was accompanied by a letter, which stated that the tender was “subject to adequate supplies of material and labour being available as and when required to carry out the work within the time specified”. The contract was to build the houses at a fixed price subject to certain adjustments. For various reasons, mainly the lack of skilled labour, the work took 22 months (instead of the agreed eight months) to complete. The appellants contended that the contract price was not binding as the contract had been frustrated. Held: The lack of material and labour was not enough to frustrate the contract. The classic statement from Lord Radcliffe reflects the general disinclination of the courts to allow much scope to the operation of the doctrine of consideration: “... frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do ... it is not hardship or inconvenience or material loss itself which calls the principle into play. There must be as well such a change in the significance of the obligation that the thing undertaken would if performed be a thing different from that contracted for”: at 723-9.

[11.400] In essence, frustration will only occur where the following conditions are met:  there must be an event that occurs after the contract has been made  that causes a fundamental change to the nature of the contract and the obligations of the parties under the contract  the event was not the fault of either party  the event was not foreseeable by either party, so that  it would be unfair to enforce the contract under the changed circumstances.

Application of the doctrine [11.410] The following are examples of circumstances that have been held to frustrate a contract:

Supervening illegality [11.420] Where a subsequent change in the law renders further performance illegal the contract will be terminated: Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260.

Death or illness [11.430] Where the contract is one of personal service and the party to perform the service dies or suffers from some serious disability or illness making performance of the contract impossible the contract will be terminated: Robinson v Davison (1871) LR 6 Ex 269.

chapter 11 Termination of a Contract

Destruction of subject matter [11.440] Where performance of the contract is rendered impossible by the physical destruction of the subject matter before performance falls due, the contract is terminated. A contract for the hire of a building for a concert at a future date was held to be terminated by the building being burnt down: Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309.

Taylor v Caldwell [11.450] Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309. Caldwell agreed to hire Surrey Gardens and Music Hall to Taylor for five days for a series of concerts. However, six days before the first concert, fire destroyed the hall through no fault of either party. Taylor sued Caldwell for breach of contract because Caldwell had not done what he promised – provided a hall for the concerts. The issue was whether Caldwell’s breach was excused by frustration. Held: The contract was frustrated by the event that occurred through no fault of either party. In a classic statement, Blackburn J said: “There seems no doubt that where there is a positive contract to do a thing … the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible … But … where from the nature of the contract it appears that the parties must have known that it could not be fulfilled unless when the time for fulfilment of the contract arrived some particular specified thing continued to exist … the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor … The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance … We think, therefore, that the Music Hall having ceased to exist, without the fault of either party, both parties are excused.”

Common objective no longer attainable [11.460] When the happening of some particular event can be regarded as the real basis of the contract, then if that event fails to eventuate without the fault of either party the parties are discharged.

Krell v Henry [11.470] Krell v Henry [1903] 2 KB 740. Henry booked Krell’s apartment in London for two days on £25 deposit. Henry intended to use the apartment to watch the coronation of Edward VII. That was the sole reason for Henry booking the room. Although this objective did not appear in the agreement itself both parties were aware that many other flats in the area had been rented for the same purpose. The coronation had originally been scheduled for 26 June, but two days before on 24 June, the future King Edward was diagnosed with appendicitis. Surgeons performed a then-radical operation of draining the infected abscess through a small incision. The next day, Edward was sitting up in bed, smoking a cigar. Two weeks later, it was announced that the King was out of danger and he was crowned at Westminster Abbey on 9 August 1902. Krell sued for £50, the balance of the rent.

251

252

Introduction to Business Law in Australia

Held: Performance will be excused when (a) the purpose of a contract is frustrated by an unforeseeable supervening event and (b) the purpose was within the contemplation of both parties when the contract was made. A contract’s purpose may be inferred from surrounding circumstances. Where a contract indicates that the parties knew that it could not be fulfilled unless some particular specified thing continued to exist, the parties must have contemplated the continued existence of that thing as the foundation of the performance. The parties understood that the sole purpose of the contract was to allow Henry to view the coronation. When it was cancelled, the contract, although possible to perform, became futile and, as a consequence, was frustrated. Contrast with the latter case the following decision by the same court:

Herne Bay Steamboat Co v Hutton [11.480] Herne Bay Steamboat Co v Hutton [1903] 2 KB 683. The HB Company agreed to hire a boat to H to view the naval review at the coronation and to cruise around the fleet. Owing to the King’s illness the naval review was cancelled but the fleet was assembled and the boat might have been used for the intended cruise. It was held that H was not discharged from performance as the naval review was not the sole basis of the contract. It was held that the contract was not frustrated (so Hutton was not discharged from performance) because the naval review was not the sole reason for him entering into the contract.

Governmental intervention [11.490] Where government interference is such that it would make the subsequent carrying out of the remainder of the contract radically different from that envisaged by the parties, then they are absolved from further performance:

Metropolitan Water Board v Dick, Kerr & Co Ltd [11.500] Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119. D contracted with the Metropolitan Water Board to construct a dam within six years, subject to a proviso that if the contractors should be delayed or impeded in the completion of the contract it would be lawful for the engineer to grant an extension of time. The Ministry of Munitions, exercising wartime powers, appropriated the machinery of the company and work on the dam ceased. It was held that the interruption suffered was of such duration and character as to alter the contract on resumption, and therefore the contract had ceased to be operative.

chapter 11 Termination of a Contract

Other supervening circumstances resulting in radical difference in performance [11.510] The basis of the doctrine of frustration is that performance of the contract is, as a result of an unforeseen event that occurred after the contract was made, radically different from what the parties intended when they entered into the contract.:

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [11.520] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. Codelfa contracted to excavate tunnels and do concrete work in connection with a railway. Various stages of the work were to be completed by certain dates. The whole of the work was to be completed within 130 weeks of the date of notice to proceed. Time was made of the essence of the contract. The work generated considerable noise and vibration. A resident obtained an injunction to restrain Codelfa from performing construction work between 10 pm and 6 am. Codelfa contended that the changed working conditions necessitated by the injunction resulted in frustration of the contract: the contract was frustrated. Codelfa was released from further work on the project. As the contract was now terminated Codelfa was not able to recover any further payments under the contract. However Codelfa was entitled under equity to recover monies for work completed (on a quantum meruit basis – the amount earned).. The dispute was referred to arbitration under the terms of the contract. The arbitrator found that the work could not be carried out as agreed except on the basis of three shifts per day, and that neither party foresaw the possibility of the restrictions that were imposed on the hours of work as a result of the injunction. A majority of the High Court held that the situation produced by the grant of the injunction was such as to make it impossible lawfully to perform the contract in a manner that would have complied with its requirements. Accordingly, performance had become a thing radically or fundamentally different from that undertaken by the contract resulting in frustration of the contract.

Changes in circumstances not amounting to frustration [11.530] There have been many cases in which the courts have held that the change in circumstances did not give rise to frustration of the contract.

Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd [11.540] Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671. An environmentally concerned building union imposed a “work ban” (that is where a union prevents its members from working on a particular site) on land owned by the defendants. This meant that the purchaser of the land could not develop the land in the way envisaged as workers were banned from working on the site. The ban was placed on the site after it had been sold but before settlement. The purchaser claimed the contract was frustrated.

253

254

Introduction to Business Law in Australia

Held: The fact that the work bans had been placed on the site was not, without more, a frustrating event – at the time the contract was entered into, the court held that the risk of such bans being placed on the site had shifted to the purchaser.

Scanlon's New Neon Ltd v Tooheys Ltd [11.550] Scanlon’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169. The appellants entered into a number of contracts with the respondents for the installation of neon advertising signs on the respondent’s hotels and the respondent agreed to hire the signs for a period, and to pay the rentals whether or not the signs were used or operated. The signs were conspicuous even when not illuminated. During the currency of the contract and after the signs had been operated for a substantial period, the use of lighted signs outside any building was prohibited by State order because of the outbreak of war with Japan. The High Court held that the making of the State order did not frustrate the contracts and that the respondent remained liable for the rental payments. In the court’s view, there was no ground for concluding that the lighting of the signs was the basis on which the parties had contracted. The court also rejected the contention that a term should be implied providing for the termination of the contract in the events which had happened. [11.560] An interesting example of the occurrence of an event that in the particular circumstances was held not to frustrate the contract arose in consequence of the closing of the Suez Canal as a result of hostilities in 1956.

Tsakiroglou & Co Ltd v Noblee Thorl GmbH [11.570] Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93. On 4 October 1956, the appellants agreed to sell to the respondents Sudanese groundnuts for shipment from Port Sudan to Hamburg during November–December 1956. On 2 November the Suez Canal was closed. The alternative route via the Cape of Good Hope would have increased the length of the voyage by four weeks and also increased the appellant’s costs of shipment. No delivery date in Hamburg and no particular route had been specified in the contract, while extra expense does not in itself justify a finding of frustration. It was held by the House of Lords that although the route via the Cape would have involved a change in the method of performance of the contract than that originally contemplated by the parties, it was not such a fundamental change as to entitle the appellant sellers to say that the contract was frustrated.

chapter 11 Termination of a Contract

oOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd [11.580] oOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255. A licence agreement allowed the licensee to maintain a large advertising billboard on the roof of an office building. The construction of another office building subsequently impaired the visibility of the billboard. The licensee’s advertising revenue was drastically reduced. The Victorian Court of Appeal held that the contract was not frustrated. It was foreseeable at the time the agreement was concluded that the visibility of the billboard was at risk of being reduced by construction of a building: at [80]. Since this risk was foreseeable it was difficult for the licensee to claim that the continuation of the same level of visibility of the sign was the common assumption of the parties when making their agreement. The licensee could have insisted upon the inclusion of a clause providing for termination of the agreement in the event the visibility of the sign was reduced.

Limitations on the doctrine of frustration [11.590] 1.

The contract itself covers the event If the parties make specific provision for the event in the contract – by, for instance, agreeing that the obligation to perform is “absolute” or by inserting a force majeure clause that covers the event – this will prevent the contract being frustrated.

Claude Neon Ltd v Hardie [11.600] Claude Neon Ltd v Hardie [1970] Qd R 93. The parties signed a five-year contract that contained a clause that said that if Hardie’s leasehold interest in the property was “extinguished or transferred”, Neon would become immediately entitled to the remaining rent. Two years later the owner of the premises took possession of the premises and demolished them. Neon claimed the rent to which it was entitled under its contract with Hardie. Hardie argued that the owner’s action in going back into possession of the property had frustrated the contract. Held: The contract was not frustrated because the parties had foreseen the event (the owner re-taking possession) and had made provision for it in the contract.

[11.610] 2.

The frustrating event must not have been one that the parties could reasonably have foreseen A frustrating event must not have been foreseen or must not have been reasonably foreseeable by the parties. If it were foreseeable, the courts presume that the parties have allocated the risk of the event occurring in the contract. This limitation is not as easy as it may appear. For instance, it is not clear how foreseeable the event needs to be, nor is it clear how foreseeable the effects of the event need to be. It is not, for example, difficult to say that hurricanes are a foreseeable event in the Gulf of Mexico. It is another matter to say that the particular damage wrought on the north-east coast of the USA by Hurricane Sandy in 2012 was foreseeable.

255

256

Introduction to Business Law in Australia

3.

Fault or self-induced frustration The frustrating event (or its effect) must not have been caused by the acts or omissions of the party seeking to rely on the frustration. The reason for this limitation is that a party should not be able to plead frustration in respect of an event that he or she could have prevented. For example, a contract for the carriage of goods may not be frustrated by the sinking of the vessel if the sinking was caused by the negligence of the shipper of the goods: J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyds Rep 1. Again, the eruption of hostilities in and around a port may not allow the captain of a cruise liner to plead frustration if he or she deliberately allowed the vessel to sail into the port knowing that the likelihood of hostilities erupting was high.

Effect of frustration [11.630] At common law the effects of frustration were: 1.

When frustration of a contract occurs it automatically terminates the contract: Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154. Furthermore, the effect of frustration is to bring the whole contract to an end and not just some part of it: Aurel Forras Pty Ltd v Graham Karp Developments Pty Ltd [1975] VR 202.

2.

The future obligations of the parties are discharged, but rights and liabilities that have already accrued are not discharged: Renehan v Leeuwin Ocean Adventure Foundation Ltd (No 3) (2006) 17 NTLR 83 at [77]. The contract is brought to an end as a result of the frustrating event.

3.

This rule that the contract is not void ab initio (ie, from the beginning) is subject to the exception that money paid under a contract where the consideration wholly fails may be recovered. In other words, where one party to the contract has paid money (such as a deposit or instalment) under a contract and, when the frustrating event occurs, there is a total failure of consideration (ie, nothing exchanged by the other party for the money paid), the other party is under a duty to refund the whole of the money paid. This may cause hardship where a party to a contract has performed part of the work preparatory to performing their promise (eg, the party has built 50% of an engine but has not delivered anything when the frustrating event occurs).

Fibrosa Spolka Akcyjna v Fairbairn, Lawson, Combe, Barbour, Ltd [11.640] Fibrosa Spolka Akcyjna v Fairbairn, Lawson, Combe, Barbour, Ltd [1943] AC 32. Fairbairn contracted to sell textile machines to a Polish company to be delivered to Gydnia. The contract price was £4800 of which £1000 was paid in advance. The English company completed most of the work but before it was finished, Germany invaded Poland and occupied Gydnia. The law made it illegal to trade with the enemy. Fibrosa sued for repayment of the £1000 it had paid in advance. Held: The lower courts followed the so-called “rule” in Chandler v Webster principle – where a contract has been frustrated by a supervening event, “the loss lies where it falls”, with the result that sums paid or rights accrued before that event are not to be surrendered, but that all obligations falling due for performance after that event are discharged. Consequently, the lower courts rejected Fibrosa’s claim to recover the £1,000. The House of Lords reversed the decision. It found in favour of Fibrosa and restricted the Chandler decision to where there had not been a failure of consideration. In these circumstances, there was a total failure of the consideration as Fibrosa had not received any part of the machinery that was ordered in exchange for the payment. Consequently, Fibrosa was entitled to a refund.

chapter 11 Termination of a Contract

Viscount Simon LC in the House of Lords said: [The law] cannot be regarded as dealing fairly between the parties in all cases, and must sometimes have the result of leaving the recipient who has to return the money at a grave disadvantage. He may have incurred expenses in connection with the partial carrying out of the contract, which are equivalent, or more than equivalent, to the money which he prudently stipulated should be prepaid but which he now has to return for reasons which are no fault of his. He may have to repay the money, though he has executed almost the whole of the contractual work, which will be left on his hands. These results follow from the fact that the English common law does not undertake to apportion a prepaid sum in such circumstances: at 49.

[11.650] Legislation has been passed which provides for a fairer distribution of loss than that found under common law. The Victorian legislation (the Australian Consumer Law and Fair Trading Act 2012 (Vic)) is replicated in all jurisdictions. The key provisions are referred to below.

Victoria [11.660] The Victorian Australian Consumer Law and Fair Trading Act 2012 provides that all sums paid to any person before the time of the discharge through frustration are recoverable: s 36(1). This extends the effect of Fibrosa Spolka Akcyjna v Fairbairn, Lawson, Combe, Barbour, Ltd [1943] AC 32 in that a complete failure of consideration is not necessary. However, if the payee incurred expenses for the purposes of the contract before the time of discharge, the court hearing the case may allow the payee to retain the whole or part of the money paid, up to the amount of the expenses incurred: s 37. If one party to the contract has, by reason of anything done by the other party, obtained a valuable benefit (other than a payment of money) before the time of discharge, the other party may recover such sum as the court considers just (up to the value of the benefit): s 38(1)-(2). The court may have regard to the amount of expenses incurred before discharge by the benefited party in performance of the contract and the effect, in relation to such benefit, of the circumstances giving rise to frustration of the contract: s 38(3). If the contract contains a provision that is intended to continue to have effect in the event of frustration of the contract the court must give effect to that provision. The court may give effect to the frustrated contracts provisions of the Act only to the extent that is consistent with the provisions of the contract: s 41. These provisions do not apply to a charterparty, any other contract for the carriage of goods by sea or a contract of insurance (subject to certain exceptions): ss 36(3), 40. On the other hand, these provisions apply to the situation where under the Goods Act 1958 (Vic) a contract for the sale of goods is avoided by the goods perishing before the property passes to the buyer: Australian Consumer Law and Fair Trading Act 2012 (Vic), s 35(1)(c).

Termination by operation of law [11.670] A contract may be terminated independently of the wishes of the parties by operation of law.

Bankruptcy [11.680] If a party liable under a contract becomes bankrupt they are personally relieved of the contract and the other party may prove in the bankrupt’s estate. There are also other provisions in the Bankruptcy

257

258

Introduction to Business Law in Australia

Act 1966 (Cth) under which a trustee in bankruptcy may adopt or rescind certain contracts into which the bankrupt has entered. When the affairs of the bankrupt have been wound up, the bankrupt is given a certificate of discharge by the court, which releases the bankrupt from all debts provable in bankruptcy but the bankrupt is not released from liability in respect of certain types of debts, such as liability for fraud.

Merger [11.690] A deed may in certain cases displace a simple contract (which is then terminated) and the relations and rights of the parties are governed by the deed. When that happens the simple contract becomes merged in, and is extinguished by, the deed. The first agreement is terminated because the rights in the lesser contract merge by the operation of law into the greater. In order that merger of a simple contract in a deed may take place, the following conditions must be fulfilled: (a)

the parties to the two agreements must be the same;

(b)

the subject matter must be the same; and

(c)

the second security must be of a higher value than the first.

Another but different type of merger is that which takes place when a party recovers judgment upon a cause of action for breach of contract. Here the cause of action merges in the judgment.

Further reading See contract texts listed at the end of Chapter 2.

Tutorial activities 11.1 In each of the contracts mentioned below there has been a termination. Explain how this has occurred in each of the following separate and unrelated scenarios:

11.2

(a)

Becks agrees to play soccer for Melbourne Victors in 2013 but before the season commences he signs with Rovers.

(b)

Becks plays with Rovers in 2013 but Rovers refuses to pay him.

(c)

After race riots and terrorist attacks the 2013 season is abandoned in week 3.

(d)

Becks’ agreement specifies that in the event that Becks does not kick goals in six of the first eight games, the contract is terminated.

(e)

Mid-season, Becks and Rovers agree to abandon their contract in favour of another one that better reflects the current situation.

(f)

Becks informs Rovers he has grown tired of soccer and will not play any more games.

Review the example webpage and contractual documents in Chapter 2 regarding Clayton Sports World and answer the following questions: (a)

Is this contract entire or divisible?

(b)

When does this contract end? Is it a specified date? If not, how does the contract come to an end?

(c)

Assume new legislation is brought in that requires all staff working in fitness centres to undergo extensive testing and certification and police checks. As a result of this, there is a severe shortage of staff in the fitness industry and wages are five times what they were prior

chapter 11 Termination of a Contract

to the legislation. CSW are losing money paying these high wage rates. CSW decide it is better to close their doors until conditions in the industry improve. CSW has a substantial amount of money as membership fees paid in advance. Advise CSW whether it would be successful in claiming the contracts with members have been frustrated. Regardless of whether you conclude yes or no, also advise CSW as to whether it could keep the advance membership fees if the contract was held to be frustrated. 11.3

Jimmy contracted with Prix Advertising Pty Ltd (Prix) to advertise his limousine service on billboards attached to a new trailer. The contract stated that a driver employed by Prix would drive around busy shopping centres with the billboard trailer attached to a Ford stretch limo for 20 hours a week for four weeks at a cost of $200.00 per hour. After the first week of the contract Prix stopped using the stretch limo and attached the billboard trailer to a Ford diesel truck that was not in good condition. The truck with the attached billboard trailer was shown on a TV current affairs program as an example of “junkyard bombs that trash the environment”. As a result, Jimmy lost business and his profits dropped severely. At the end of the second week, he sent a notice saying he was terminating the contract. Prix refused to accept the termination and continued driving around the billboard trailer for the last two weeks of the contract. They are now seeking payment for these two weeks. Advise Jimmy whether he was entitled to terminate the contract and whether he can recover his lost profits.

11.4

Jerry opens a delicatessen specialising in selling sandwiches and rolls to health-conscious university students. He signs a one-year contract with Vogel Breads to supply him with bread. Clause 1 states that “it is a condition of the contract that Vogel deliver 100 loaves and 100 rolls (both made from 100% organic wheat) on Monday, Wednesday, Friday and Sunday by 7.00am sharp.” On Monday, 27 April 2010, Vogel fails to deliver the bread because of an outbreak of a virus that has contaminated much of the organic wheat crop. Supplies cannot resume for a week. Jerry tries to find another supplier but is unable to do so. As a result, Jerry has to close the business for the week, losing $25,000 in profit. He is also unable to fulfil a contract to supply healthy food at a national scout jamboree that coincidentally is scheduled for that week. Jerry loses $120,000 on that contract. Jerry wishes to terminate the contract with Vogel Breads and sue for damages. Advise him. George, a logger, and Andrew, a farmer, entered into a logging contract on January 1, 2013. Under the contract George would pay Andrew a fee of $10,000 on signing the contract for the sole rights to log a specified amount of Australian old-growth hardwood for a three year period. George paid the fee and commenced logging. In March of that year, the Government banned the logging of old-growth timber. (a)

Advise George whether the contract is frustrated.

(b)

Assuming that the contract is frustrated, advise of the consequences and, in particular, whether George is entitled to a refund of all or part of the fee.

(c)

Would it make a difference to your answer to (a) above if, instead of a ban, the Government placed a three month moratorium on logging until an enquiry reported to Government?

259

chapter 12

Remedies [12.10] Terminology........................................................................................................................................................ 262 [12.20] Introduction......................................................................................................................................................... 263 [12.30] Remedies depend on the nature of the breach................................................................................ 264 [12.50] The remedy of damages .............................................................................................................................. 265 [12.325] Penalties and liquidated damages...................................................................................................... 275 [12.410] Specific performance.................................................................................................................................. 278 [12.470] Injunction .......................................................................................................................................................... 279 [12.470] Restitution........................................................................................................................................................ 280 [12.490] The basis of restitution.............................................................................................................................. 280

262

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 12.

Terminology [12.10] Below are some of the key terms that are used in this chapter:  condition: an essential and fundamental term of the contract, the breach of which gives rise to a right by the innocent party to terminate if they should so choose.  damages: monetary compensation and the basic common law remedy for breach of contract.  exemplary damages: a dollar amount awarded by the court to punish the party in default. Exemplary damages are awarded only in exceptional cases.  injunction: a “stop order”, a discretionary equitable remedy which will only be granted where damages do not provide an adequate remedy. It is an order of the court restraining a person from doing something.  limitation of actions: a statutory time limit during which certain legal proceedings must be taken to enforce a right, after which no action is permitted unless under exceptional circumstances.  liquidated damages: a pre-determined amount or formula in the contract, to be paid by a defaulting party on a breach of contract.  mitigation: if a breach of contract occurs and results in expenses and losses to a party, the other side, in order to claim damages, must take steps to minimise their loss, otherwise a court may reduce the damages to be claimed.  nominal damages: a nominal or small amount awarded to recognise the infringement of a legal right, usually when there has been no real damage done to the plaintiff.  ordinary damages: the dollar amount P may recover as a result of the breach.  penalty: if the liquidated damages prescribed in a contract exceed actual losses, they may be disallowed as a penalty rather than appropriate compensation.  quantum (of damage): the amount of damages P may recover for the breach.  quantum meruit: “as much as he has earned” and means that a party prevented from fulfilling their obligations can be paid for the proportion of work they have done.  remoteness: in the context of contract law, the loss suffered by the injured party is only compensable if it was within the reasonable contemplation of the parties as a likely result of breach (ie, not too far removed from the wrongful act so as to be regarded by the courts as too remote).  restitution: based on unjust enrichment, and is imposed independently of contract, involving either the return of money or a claim of “reasonable remuneration” to P.  specific performance: a discretionary equitable remedy which will only be granted where damages do not provide an adequate remedy. It is an order of the court requiring a party to perform their obligations.  unliquidated damages: no amount is mentioned in the contract that a defaulting party will pay in the event of a breach, with the amount left to the courts to determine.

chapter 12 Remedies

Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 12.

Introduction [12.20] The contractual narrative ends with a discussion of the remedies that may be available where the contract is not performed in the way the parties expected. This chapter is divided into two main parts. The first part is concerned with the remedies available to an innocent party where there has been a breach of contract that does not permit the innocent party to terminate. In the previous chapter we considered the circumstances in which a breach – either by repudiation or breach of a term – allowed the innocent party to terminate the contract. We will briefly touch on this remedy but will not repeat that discussion in detail. In this chapter we focus on (a) the usual common law remedy for a breach of contract – an award of damages; and (b) the equitable remedies of specific performance and injunction. The second part of this chapter discusses restitution. An action in restitution is usually brought either because there is no express contract between the parties or such contract is void or unenforceable. Accordingly, an action in restitution may provide a remedy where otherwise there would be none. Before beginning a discussion on common law and equitable remedies for breach of contract, it is worth remembering that the statutory remedies contained in the Australian Consumer Law and the remedies for mistake and misrepresentation may also be relevant. Finally, it must be acknowledged that litigation is an expensive, time-consuming and uncertain business. Even victory may not be sweet – there are significant costs that are not met by the losing party and, perhaps more importantly, in a commercial dispute there is the risk that litigation may adversely affect the business (who wants to do business with someone who sues them?). Litigation also involves airing all the evidence relevant to the dispute (and much commercial information) in public, something that a business may not want to do. The fact is that the great majority of contractual disputes are settled out of court – the parties themselves find a solution or they seek the assistance of negotiators, conciliators or, more formally, arbitrators. However, even though the parties may not seek legal remedies, the fact that each party knows what remedies might be awarded is often enough to concentrate the minds of the parties (or at least one of them) and will provide the context for the settlement negotiations.

263

264

Introduction to Business Law in Australia

Remedies depend on the nature of the breach Remedies where the contract is terminated for breach Figure 12.1: Remedies for breach

[12.30] As we saw in the previous chapter, where a breach of a fundamental term has occurred (that is, a breach of a condition) or a party has repudiated the contract the innocent party may elect to terminate the contract. If the innocent party does elect to terminate the contract for the breach then the contract comes to an end and the parties are released from further performance of their obligations under the contract. In such a case, the innocent party can also seek damages for the losses that were caused by the breach. In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 the majority of the High Court accepted that a “sufficiently serious breach of a non-essential term” – the innominate term – can also justify termination of the contract where such a breach deprives the injured party of a substantial part of the benefit to which they are entitled under the contract. Thus the High Court recognised three situations that provided a right to terminate: 1.

repudiation - either anticipatory or when the contract is being performed

2.

breach, in performance, of a condition

3.

breach of an innominate or non-essential term that has the effect of denying the innocent party of a substantial part of the benefit of the contract.

chapter 12 Remedies

Remedies where the contract is not terminated for breach [12.40] There are two situations in which the contract remains valid and enforceable despite a breach having occurred. The first in where the breach is of a warranty or of an innominate term (that, unlike in Koompahtoo (see [12.30] above) does not deprive the other party of a substantial part of the benefit of the contract) and the second is where the breach was of a condition but the innocent party has opted not to terminate the contract. In both situations, whilst the contract remains on foot and the parties remain liable to perform their obligations under the contract, the innocent party is entitled to sue for damages for the breach of contract. In other words, at common law, any breach of an obligation under a contract by one party entitles the innocent party to seek compensation by way of an award of damages for the loss or damage caused by the breach.

The remedy of damages Figure 12.2: The principles of damages

[12.50] An award of damages, that is, monetary compensation, is the basic common law remedy for a breach of contract. The object of awarding damages for breach of contract is to compensate the innocent party for the loss caused by the breach.

Principles applying to the assessment of damages [12.60] Three broad questions arise in the assessment and award of substantial damages for breach of contract: 1.

What is the measure of damages?

2.

Was the loss caused by the breach and is the loss too remote from the breach?

3.

Is the loss one that the innocent party should have taken steps by way of mitigation?

The measure of damages [12.70] The general principle underlying an award of damages is that damages for breach of contract are awarded to place the innocent party, as far as money can do so, in the same position as they would be in if the contract had been performed: Robinson v Harman (1848) 154 ER 363 at 365. To put this another way

265

266

Introduction to Business Law in Australia

it is a fundamental expectation of the courts that contracts are performed, and if they are not, damages will as far as possible put the innocent party in as good a position as if it had been. The decisions of the High Court in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 established the following propositions: 1.

In most cases, the plaintiff is compensated for the loss of the benefits (usually the loss of profit) that it expected to receive in exchange for its own promise (described as “expectation damages”). The onus of proving such loss is on the plaintiff.

2.

Where it is not possible for a plaintiff to demonstrate whether, or to what extent, the performance of the contract would have resulted in a profit, the plaintiff can seek to recover the expenses (that is, the “wasted expenditure”) he or she reasonably incurred in reliance on the defendant’s promise to perform its obligations under the contract (such damages are referred to as “reliance damages” or “damages for wasted expenditure”). 1

3.

If a plaintiff’s expenditure would not have been fully recovered if the contract had been performed, the plaintiff is entitled to damages only for an amount equivalent to that which would have been earned if the contract had been performed. The onus of proving that the plaintiff’s expenditure would not have been recouped even if the contract had been performed lies on the defendant.

4.

In Tabcorp the Court decided that where a breach of contract has caused property damage, the proper measure of assessing of damages is the cost of reinstatement rather than the diminution in the value of the property. Reinstatement damages put the innocent party in the position it would have been in if the contract had been performed, but diminution in value damages do not.

Commonwealth v Amann Aviation Pty Ltd [12.80] Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64. Amann entered into a three year contract with the Commonwealth to conduct aerial coastal surveillance. To enable it to perform the contract, it spent a substantial amount of money acquiring and fitting out specially equipped aircraft. However, on the day performance was due to begin, only seven of the eleven planes were ready to fly. As a result of this (admitted and obvious) failure to have all eleven planes ready on time, the Commonwealth terminated the contract for what it considered to be a repudiatory breach. However, the Commonwealth did not terminate the contract according to the procedure set out in the agreement. Therefore, Amann argued that the Commonwealth’s wrongful termination was itself a repudiation by the Commonwealth, which then allowed it to terminate the contract and sue for damages.The trial judge agreed but awarded only $410,000 damages because the plaintiff’s expectation loss on the three year contract was low. The Federal Court agreed with the trial judge on the liability issue but awarded damages of approximately $6 million based on Amann’s reliance loss – in effect, its wasted expenditure. By the time the matter reached the High Court the only question was the measure of damages. The High Court affirmed the decision of the Full Federal Court. It agreed that Amann assumed it would either make a loss or just recover its expenditure on the first three year contract (given that its significant start up costs) and that its prospects of making a substantial profit rested on its prospect of securing a renewal of the contract. The prospect of this occurring was strong because it would be fully equipped with the cost of its aircraft written down. It would be very difficult for a competitor to 1

See G Ng, “The Onus of Proof in a Claim for Reliance Damages for Breach of Contract” (2006) 22 Journal of Contract Law 139.

chapter 12 Remedies

match this advantage. Thus the contract with the Commonwealth enabled Amann to recoup part, if not all, of its expenditure and placed it in a favourable position to secure a renewal and earn substantial profits under any renewed contract. For these reasons the High Court agreed that Amann was entitled to recover as damages an amount commensurate with what it had expended in reliance upon the Commonwealth’s promise to perform its contractual obligations and which was wasted because of the Commonwealth’s breach. The Court said: “In a case where a plaintiff has incurred expenditure either in procuring the contract or in its performance but it is impossible or difficult to establish the value of any benefits which the plaintiff would have derived from performance by the defendant, considerations of justice dictate that the plaintiff may rely on a presumption that the value of those benefits would have been at least equal to the total detriment which has been or would have been sustained by the plaintiff in doing whatever was reasonably necessary to procure and perform the contract”: [emphasis added] at [126]

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [12.90] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272. A tenant of an office building carried out substantial renovations to the foyer without the consent of the landlord as required under the lease. The High Court held that the landlord had a contractual right to the preservation of the leased building against alterations to which it had not given its consent. The issue was what damages the landlord was entitled to. The tenant argued that the landlord was only entitled to be compensated for the diminution in the value of the premises (assessed at approximately $33,000) not the amount that it would take to put the landlord in the position it would have been in had the lease been performed (reinstatement damages – $1.34 million). The High Court reaffirmed that contracts must be performed. It held that the landlord was entitled to the cost of restoring the foyer to the state it would have been in had the tenant performed its part of the deal.

Clark v Macourt [12.100] Clark v Macourt (2013) 304 ALR 220. Clark bought the assets of a fertility company controlled by Macourt for approximately $400,000. The sale included a stock of frozen donated sperm, which the vendor warranted was compliant with relevant regulations. Macourt guaranteed the vendor’s obligations, including the warranties, under the contract. Upon delivery, it was clear that the frozen sperm was not compliant as warranted and was unusable. Clark was subsequently required to buy replacement stock from the US at a cost of approximately $1 million. Judgment was entered against the vendor for the breach of warranty, and against Macourt as guarantor, with damages to be assessed. The primary judge awarded damages for breach of contract in the amount of $1.24 million, being the amount that it cost Clark to buy the replacement stock. This award was set

267

268

Introduction to Business Law in Australia

aside by the Court of Appeal which said that it could not be demonstrated that anything had in fact been paid for the stock and accordingly Clark had suffered no loss. The High Court reaffirmed the principle of Robinson v Harman that when a contract is breached the innocent party should be put in the position he would have been in had it been performed as expected. The measure of damages in this unusual set of facts was the value of what the purchaser would have received if the contract had been performed. In this case that was the “loss to the purchaser of the value of the stock”, which was to be assessed as at the date of the breach. It was irrelevant that the damages were thereby higher than the contract price.

The damage must have been caused by the breach and must not be too remote from the breach [12.110] Causation: The innocent party must establish that the damages it seeks were “caused” by the breach. The courts use the “but for” test: “but for” the breach would the loss have occurred. As the High Court has put it, the question is “whether a particular act or omission…can fairly and properly be considered a cause of the accident”: Fitzgerald v Penn (1945) 71 CLR 637 at 649. Where there are more than one causes of the loss, it is sufficient that the breach is “causally contributed” to the loss. Remoteness: The common law considered that it would be neither just nor practicable for the party in breach to be liable for every loss that might have been caused by the breach. Therefore a fundamental principle is that damages are not recoverable for losses that are too remote. That is, they are not reasonably foreseeable. What is a reasonably foreseeable loss? The classic test for remoteness has been well established since Hadley v Baxendale (1854) 9 Exch 341. Reasonably foreseeable losses are (a) those that arise naturally from the breach or (b) those that are in the reasonable contemplation of the parties at the time the contract is made as the probable result of the breach.

Hadley v Baxendale [12.120] Hadley v Baxendale (1854) 9 Exch 341. The plaintiffs were millers in Gloucester. They worked the mills with a steam-engine. The crankshaft of the engine broke, preventing the steam engine from working. They contracted with a firm called Joyce and Co to make a new shaft. Before they could make the new shaft, the firm required the broken one to be sent to them, to be used as a template. So the plaintiffs contracted with the defendants to deliver the broken shaft to Joyce. However the defendants took 7 days to deliver it instead of the expected 2 days which prevented the plaintiffs working their steam-mills for five days, which prevented them from running their milling business and thereby causing them to lose profits. The Court held that in this case the rule should be that the damages were those fairly and reasonably considered to have arisen naturally from the breach itself, or such as may be reasonably supposed to have been in the contemplation of both parties at the time the contract was made. The Court held the loss of profits did not arise naturally from the delay in delivering the shaft (first limb): “[F]or such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances …”. The Court said that the

chapter 12 Remedies

fact of sending a shaft for repair did not mean that the mill would probably not be able to operate until that shaft was returned (allowing for the possibility of spare parts). The Court held that if there were special circumstances and these circumstances were known to both parties at the time they entered into the contract, then any breach of the contract would result in damages that would naturally flow from those special circumstances (second limb). However in this case Baxendale did not know that the mill was shut down and would remain closed until the new shaft arrived. Unless Hadley communicated the special circumstances to Baxendale, the loss of profits could not fairly or reasonably have been contemplated by both parties if a breach such as this occurred. The court ruled that the jury should not have taken the loss of profits into consideration.

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [12.130] Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528. The plaintiff operated a laundry. It contracted to buy a boiler from Newman Industries which knew of the plaintiff’s desire to expand the business quickly and that it was “most anxious” to have the boiler installed on time. However, Newman Industries did not know that Victoria Laundry had negotiated lucrative dyeing contracts with the government. The boiler was damaged during manufacture and as a result was installed 20 weeks late. The issue was whether the launderers could recover their loss of “ordinary business” and, in addition, the loss of the “special lucrative dyeing contracts”. Held: The plaintiff was entitled to recover the profits that would have been made on the ordinary work but not on the special lucrative government dyeing contracts. Newman should have foreseen the likelihood that the ordinary business would be lost but it could not have foreseen the government dyeing contract as a serious possibility as this work was not normal work. Asquith LJ summarised the approach to the issue of remoteness as follows:  the governing purpose of damages is to put the innocent party in the same position as if his or her rights had not been violated;  it is too harsh to completely indemnify for all his or her losses;  the plaintiff is therefore only compensated if the loss is “reasonably foreseeable as liable to result” from the breach;  this depends on “the knowledge then possessed by the parties” or at least the defendant;  this knowledge is two types: imputed (because a reasonable person would understand that this particular loss would occur naturally in the usual course of things) and actual (because the defendant has been given notice of the particular loss that might be suffered in the event of a breach); and  there is no need to have actually considered the issue but if a reasonable person had considered the issue he or she would have thought it “liable to result” or “not unlikely”.

269

270

Introduction to Business Law in Australia

[12.140] The effect of these rules on the question of the remoteness of damage was explained by the House of Lords in Koufos v Czarnikow Ltd [1969] 1 AC 350. In that case it was held that damage in the reasonable contemplation of the parties must be “a serious possibility”, “a real danger”, “liable to result” or “not unlikely” to occur.

H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [12.150] H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1 QB 791: The plaintiffs ordered a bulk food storage hopper from the defendants for the purpose of storing pignuts for feeding their pig herd. When the defendants installed the hopper they failed to ensure that the ventilator at the top of the hopper was open. The result was that the pignuts became mouldy and caused the outbreak of an intestinal infection in the pigs and 254 of them died. The plaintiffs brought an action for substantial damages. The court held that the plaintiffs were entitled to recover their loss. The court said that damages for breach of contract were recoverable in respect of injury or loss where the parties, at the time of the contract, would have contemplated as a serious possibility the type of consequence (although not necessarily the specific consequence) that would ensue in the event of a breach of the contract. On the particular facts, it must have been within the contemplation of the parties that injury to the pigs was a serious possibility if, in breach of the contract, the hopper was unfit for storing nuts suitable to be fed to the plaintiffs’ pigs.

Day v O'Leary [12.160] Day v O’Leary (1992) 57 SASR 206. In an Australian example, the appellant flooring contractors were engaged by the respondents to resurface a parquetry floor in a house they were renovating. The appellants’ work was so defective that the floor had to be replaced. There had also been considerable delays in completion of the work. It was held that the respondents were entitled to damages for the cost of replacing the floor. However, the respondents’ claim for loss of rent was rejected since the appellants had never been informed of the respondents’ intention to let the house; such loss neither flowed naturally from the breach nor was one which should have been reasonably contemplated by the appellants.

The duty to mitigate the loss [12.170] The law imposes a duty upon a person claiming damages to take all reasonable steps to mitigate, that is minimise, the loss caused by the breach of contract. A person who fails to mitigate their loss cannot recover any part of the loss that is attributable to their failure to do so. The question whether a person claiming damages has failed to take reasonable steps to mitigate their loss is one of fact dependent upon the particular circumstances. The burden of proving that there has been a failure to mitigate the loss rests upon the person from whom the damages are claimed.

chapter 12 Remedies

Payzu Ltd v Saunders [12.180] Payzu Ltd v Saunders [1919] 2 KB 581. Under a contract to deliver goods by instalments, payment to be made within one month of each delivery, less 2.5 per cent discount, the buyers failed to make a punctual payment of the first instalment. The seller wrongly treated this as sufficient to repudiate the contract but offered to continue deliveries at the contract price if the buyers would pay cash at the time of each order. This offer was rejected. The price of the goods having risen, the buyers sued for breach of contract. It was held that the seller was liable for damages since the failure to make a punctual payment in respect of the first instalment did not amount to a breach on the part of the buyers sufficient to entitle the seller to treat the contract as repudiated. On the other hand, it was held that the buyers should have mitigated their loss by accepting the seller’s offer, and that the damages recoverable were not to be measured by the difference between the contract and market price but by the loss that would have been suffered had the offer been accepted. [12.190] A person suing for damages for breach of contract is only required to act reasonably in mitigating their loss and is not required to take undue steps, expose himself or herself to risk, or spend money which they cannot afford simply to reduce the amount of their loss. This is particularly so where the plaintiff’s financial difficulties were primarily the consequence of the defendant’s breach of contract: Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653.

Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 [12.200] Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648. A purchaser of land terminated the contract for breach of a contractual provision regarding time for completion. The vendor offered to complete the contract under judicial supervision. The New South Wales Court of Appeal held that the purchaser had failed to mitigate its loss by accepting the vendor’s offer: at [54]. An innocent party who was entitled to terminate may act unreasonably by not mitigating its loss by completing the contract.

271

272

Introduction to Business Law in Australia

Figure 12.3: Damages

Difficulty of quantifying damages no bar to recovery [12.210] In certain circumstances it may be difficult to quantify or assess the loss in monetary terms resulting from the breach of contract, particularly where the loss is of a speculative nature. However, mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can: Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257 at [38]. For instance, damages may be awarded for the loss of a chance or an opportunity to secure a benefit where there is a legal obligation to provide the chance or opportunity. In Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 the High Court took into account the likelihood (assessed by Deane J at 80%) that Amann would be offered a renewal of the contract.

Howe v Teefy [12.220] Howe v Teefy (1927) 27 SR (NSW) 301: The defendant leased a racehorse to the plaintiff trainer for three years. Three months later, in breach of the contract, the defendant retook possession of the horse. The plaintiff brought an action claiming damages for the loss of profits he would have made from his own bets on the horse and supplying information for reward to other persons. The jury awarded the plaintiff £250 damages. The defendant appealed on the grounds that the prospective winnings of the plaintiff from bets and stable commissions were too remote to be recovered as damages, and that there was no evidence on which the jury could have assessed such winnings. The Court dismissed the defendant’s appeal. In the court’s view, the plaintiff had been deprived of his right to make what profit he could from the use of the horse and that right was capable of assessment in monetary terms. Street CJ said: “[I]f a plaintiff has been deprived of something which has a monetary value, a jury is not relieved from assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty”: at 306.

chapter 12 Remedies

Damages not usually recoverable for disappointment or distress [12.230] The general rule is that damages are not recoverable for disappointment, distress, injured feelings or mere inconvenience arising from a breach of contract: Baltic Shipping Co v Dillon (1993) 176 CLR 344.

Falko v James McEwan & Co Ltd [12.240] Falko v James McEwan & Co Ltd [1977] VR 447. The defendant retail merchant contracted with the plaintiff, a householder, to supply and install an oil heater in the plaintiff’s home. The defendant installed the heater and engaged an electrician to connect it. The electrician informed the plaintiff that a new power point was necessary and that it would cost an extra $5. The plaintiff refused to pay and so the electrician did not complete the wiring. Some months later, the plaintiff ran a temporary lead from a power point in the kitchen to provide electricity to the heater. The plaintiff sued the defendant claiming damages for the cost of the electrical installation and for the inconvenience he had suffered. It was held that the contract was an ordinary commercial contract for breach of which the plaintiff was not entitled to recover damages for inconvenience and mental distress. The measure of damages was limited to the cost involved in remedying the breach by the defendant to fully install the heater (by then, $11). [12.250] An exception to the general rule is that damages are recoverable for distress or disappointment arising from breach of an express or implied term that the promisor will provide the promisee with pleasure, enjoyment or personal protection, or where the distress or disappointment is consequent upon the suffering of physical injury or physical inconvenience.

Jarvis v Swans Tours Ltd [12.260] Jarvis v Swans Tours Ltd [1973] 1 QB 233. Jarvis booked a holiday in Switzerland through the defendant, Swans Tours. The brochures were tantalising, leading Jarvis to believe he would be part of a large house party that would have excellent skiing and social activities. However, as Denning LJ said in his judgment: he found there were only 13 (guests) there in the first week. In the second week … he was the only person there … He was very disappointed, too, with the skiing. It was some distance away … There were only mini-skis … In the second week he did get longer skis for a couple of days, but then, because of the boots, his feet got rubbed and he could not continue even with the long skis. There were many other matters, too … He did not have the nice Swiss cakes, which he was hoping for. The only cakes for tea were potato crisps and little dry nut cakes. The yodeller evening consisted of one man from the locality who came in his working clothes for a little while, and sang four or five songs very quickly. The Court awarded damages, a part of which was calculated to compensate Jarvis for the disappointment he felt.

273

274

Introduction to Business Law in Australia

Baltic Shipping Co v Dillon [12.270] Baltic Shipping Co v Dillon (1993) 176 CLR 344. the respondent paid $2,205 in advance for a 14-day cruise in the South Pacific. The object of the contract was to provide an enjoyable and relaxing holiday experience and there was an implied term to this effect. However, after eight days the ship struck a rock and sank. In an action against the appellant owners and operators of the vessel, the respondent was awarded $5,000 for disappointment and distress in addition to compensatory damages for loss of belongings and personal injuries including the trauma she suffered in the shipwreck. The High Court affirmed the $5,000 damages awarded for the respondent’s disappointment and distress. The High Court further held that the respondent was not entitled to recover the whole of the cruise fare since there had not been a total failure of consideration, the respondent having enjoyed the benefits of the first eight days of the cruise. In the court’s opinion to award full restitution of the fare in addition to damages for breach of contract would have been to give the respondent excessive compensation.

Boncristiano v Lohmann [12.280] Boncristiano v Lohmann [1998] 4 VR 82. The parties were involved in a building dispute. After reviewing a number of cases the court concluded that it appears now to be accepted in England and Australia that awards of general damages can be made to building owners who have suffered physical inconvenience, anxiety and distress as a result of a builder’s breach of contract, “but only for the physical inconveniences and mental distress directly related to those inconveniences which have been caused by the breach of contract”.

Damages and contributory negligence [12.290] Under the apportionment legislation of the various States, the damages awarded to a successful plaintiff suing in tort are reduced by the extent of any contributory negligence on the part of the plaintiff. However, in Astley v Austrust Ltd (1999) 197 CLR 1 the High Court held that the apportionment legislation of South Australia required apportionment for contributory negligence only in a tort action, not in an action for breach of contract. The Court held that the South Australian apportionment legislation was directed only to claims in tort, and not to claims in contract. The apportionment legislation of the other States was in similar terms. Consequently, the case would have been of application throughout Australia. However, all jurisdictions have now amended their apportionment legislation to permit the apportionment of damages for breach of contractual duty of care in cases of contributory negligence. 2 2

See Law Reform (Miscellaneous Provisions) Amendment Act 1965 (NSW), s 9; Wrongs Act 1958 (Vic), s 26; Law Reform Act 1995 (Qld), s 10; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA); Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Amendment Act 1947 (WA), s 4; Wrongs Act 1954 (Tas), s 4; Civil Law (Wrongs) Act 2002 (ACT), s 102; Law Reform (Miscellaneous Provisions) Act (NT), s 16.

chapter 12 Remedies

Ordinary, nominal and exemplary damages Ordinary damages [12.300] The damages we have so far considered in this chapter are variously referred to as ordinary, actual or compensatory damages, that is, the damages flowing from the breach of contract to compensate the innocent party for the actual loss suffered. These are by far the most important kind of damages. To be distinguished from such damages are two other kinds of damages, namely, nominal damages and exemplary damages.

Nominal damages [12.310] Where there has been an infringement of a legal right, for example a breach of contract, but the plaintiff is unable to establish that they have suffered any actual loss, only nominal damages will be awarded, that is a token sum of, say, $1: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.

Exemplary damages [12.320] Exemplary damages are not only awarded as a means of compensation but to punish the party in default in view of the intentional or flagrant nature of the breach. They are only awarded in exceptional circumstances.

Penalties and liquidated damages [12.325] Normally in a breach of contract case, damages are “unliquidated”, that is, no amount is specified in the contract - the matter is left for the court to determine, according to accepted principles. It is possible, however, for the contracting parties to insert a clause in the contract that specifies the amount of damages that will be paid to the innocent party in the event of a breach. For example, in a house building contract, the parties may agree that in the event the builder does not finish the house on or before the date in the contract, the builder will pay the home owners $1000 per week. In such a case, damages are said to be “liquidated” provided that the amount fixed in the contract, to be paid in the event of a breach, is a genuine pre-estimate of the damages that the victim would suffer as a consequence of the breach.. If it is not a genuine pre-estimate, it will be construed as a penalty, that is to say a sum inserted in order to punish and/or deter the other party from a possible breach and which bears little or no relationship to the loss actually suffered by the plaintiff as a result of the breach by the defendant. If the amount stated is held to be a penalty, then only the actual loss sustained can be recovered. If the sum named is held to be liquidated damages, then that sum is recoverable, whether it exceeds or is less than the actual loss. [12.330] It is frequently difficult to determine whether an amount expressed in a contract to be payable on a breach is a penalty or liquidated damages. The issue arose for consideration before the High Court in O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359.

275

276

Introduction to Business Law in Australia

O'Dea v Allstates Leasing System (WA) Pty Ltd [12.340] O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359. The appellant lessees entered into a leasing contract with the respondent company for a prime mover. The agreement provided for a lease of the vehicle “for a period of 36 months at an entire rental of $39,550.32”, which sum was stated to be due on the signing of the lease with the proviso that if the lessees duly performed all the conditions of the lease and punctually paid the instalments, the lessor would not enforce payment of the entire rent other than by the stipulated monthly instalments of $1,098.62. The lease contained a further clause to the effect that if the lessee defaulted in the punctual payment of any monthly rental instalment, the lessor could immediately retake possession of the vehicle and on such event “all moneys due for unexpired terms shall become immediately due and payable”. The lease further provided that on the goods coming into the lessor’s possession either at the end of the lease, or on the lessor’s repossession of the goods, the lessees were to be liable for the difference between the best price obtainable by the lessor for the goods and the appraisal value (that is, the estimated residual value of the goods) stated in the lease. There was no provision requiring the lessor to account to the lessees for any amount received on a resale of the goods even in the event that the price obtained on the resale exceeded the stated appraisal or residual value of the goods. The lessees duly paid the monthly rental under the lease for seven or eight months when they defaulted in payment. The lessor retook possession of the vehicle and sold it for $20,000, the appraisal value stated in the schedule to the agreement being only $13,300. The lessor then brought an action against the lessees claiming, inter alia, the difference between the total rent payable under the agreement, that is, the total rent payable for 36 months less the amount of the instalments paid the sum claimed under this head being $31,436.04. No provision was made in the agreement for a rebate or discount on the balance of the instalments by reason of their having become immediately payable. The High Court said that the amount sought to be recovered by the lessor under the terms of the lease constituted a penalty and not a genuine pre-estimate of damage, and hence the terms of the lease providing for the recovery of such sum were unenforceable. Accordingly, the lessor was only entitled to recover the arrears of rental up to the time of repossession, certain other incidental costs, and damages for the actual loss they could establish resulting from the lessee’s breach of contract. [12.350] Before the High Court’s decision in the following case, the accepted position was that the penalties doctrine was limited to situations where the relevant liability for the payment was triggered by a breach of the contract. On this approach, the doctrine would not apply to a fee imposed by a bank that was triggered by an event (for instance an overdue payment on a credit card) that was not technically a breach of contract. Thus a party could avoid the application of the doctrine of penalties by ensuring that what the client did (eg not pay the monthly amount of the credit card on time) was not a breach of contract. Thus any credit payable would not be subject to the penalties doctrine. However, in the wake of the following case, it will be necessary to re-evaluate this approach.

Andrews v Australia and New Zealand Banking Group Ltd [12.360] Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205. The High Court considered the enforceability of various fees and charges imposed by the ANZ bank, including charges for exceeding overdrafts. The action is part of a broader class action brought by

chapter 12 Remedies

170,000 customers of eight banks. The customers contend that fees totalling AUD$223 million imposed by the banks were penalties and should be refunded. At first instance, the Federal Court found that these fees could not be treated as penalties, as ANZ’s customers were not under a contractual obligation to avoid overdrawing their accounts – as the fees were not triggered by a breach of contract they could not be characterised as penalties. The High Court reversed the Federal Court. It decided that relief against penalties is potentially available even if a fee is not payable on breach of contract. According to the Court, the proper approach in determining whether a fee is a penalty is to consider whether the substantive purpose of the fee is to secure performance of a contractual obligation. The matter was referred back to the Federal Court to determine whether, in fact, the fees charged by ANZ should be treated as penalties on this basis. 3

Paciocco v Australia and New Zealand Banking Group Ltd [12.370] In Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 the Federal Court held that the bank’s fees for late credit card payments constituted a penalty. The fee was payable upon a breach of contract by the customer. The fee was used in terrorem to deter a breach and was “extravagant and unconscionable” in amount in relation to the bank’s losses from the breach. Gordon J found that ANZ was likely to suffer a maximum loss of $0.50 to $5.00 in respect of each fee, whereas the actual fee levied was $20.00, regardless of whether the payment was one day later or longer. However, the bank’s honour, overlimit and dishonour fees did not constitute penalties. These fees were not dependent upon a breach of contract. The liability to pay these fees arose from something more than what was agreed to in the primary stipulation – i.e. fees for the provision of an additional service. The fees were the price customers were required to pay to obtain a further right or benefit, e.g. access to credit beyond their specified credit limit. The Full Court heard the case on appeal in August 2014. Judgement was reserved.

Ringrow Pty Ltd v BP Australia [12.380] In Ringrow Pty Ltd v BP Australia (2005) 224 CLR 656, the High Court held that mere disproportion to the likely damage was not sufficient to render a clause a penalty. The Court unanimously stated that, to be a penalty, the amount “must be judged ‘extravagant and unconscionable in amount’. It is not enough that it should be lacking in proportion. It must be ‘out of all proportion’”: at [32].

3

See A Gray, “Contractual Penalties in Australian Law After Andrews: An Opportunity Missed” (2013) 18 Deakin Law Review 1; R Manly, “Breach No Longer Necessary: The High Courts’s Reconsideration of the Penalty Doctrine” (2013) 41 Australian Business Law Review 314; S Harder, “The Relevance of Breach to the Applicability of the Rule Against Penalties” (2013) 30 Journal of Contract Law 52; P Easton, “Penalties Percolating Through the Construction Industry: Andrews v Australia and New Zealand Banking Group Ltd” (2013) 29 Building and Construction Law Journal 233.

277

278

Introduction to Business Law in Australia

Forfeiture of deposits [12.390] A contract may provide for the payment of a deposit as “an earnest of performance which, on default, may be retained and credited against the damage suffered”: NLS Pty Ltd v Hughes (1966) 120 CLR 583 at 589 per Barwick CJ.

Fiorelli Properties Pty Ltd v Professional Fencemakers Pty Ltd [12.400] Fiorelli Properties Pty Ltd v Professional Fencemakers Pty Ltd (2011) 34 VR 257. A property owner entered into a contract with a fencing manufacturer to install a fence and gates. The contract price was $47,300 with a deposit of $17,300. At the time they entered into the contract the parties had not discussed the details of the gates. The manufacturer was unable to manufacture gates of the width sought by the property owner, but was able to manufacture and install the fence. The property owner told the fencing manufacturer that its services were no longer required as he had contracted with a different company to manufacture and install the fence and gates. The fencing manufacturer did not refund the deposit: at [5]-[7]. The Victorian Supreme Court held that the deposit had been forfeited by the property owner’s unilateral repudiation of the contract and the retention of the deposit by the manufacturer was not unconscionable: at [69].

Specific performance [12.410] A decree of specific performance is an order of the court requiring a party to perform the obligations under the contract. It is a remedy directed towards enforcing the carrying out of the contract as originally agreed to by the parties. Specific performance is an equitable remedy and is entirely within the discretion of the court. An application for a decree of specific performance will only be granted in circumstances where damages do not provide an adequate remedy for breach of contract. It is mainly granted with respect to contracts for the sale of land and also in contracts where the goods are unique, for example, rare works of art. Specific performance will not be granted in the following cases:

(a) Where damages are an adequate remedy [12.420] It is for this reason that specific performance of a contract for the sale of goods will not normally be ordered. An award of damages is usually a sufficient remedy to compensate for the breach of contract, for example the buyer can go out into the market and buy equivalent goods. However, in exceptional circumstances, for example where the contract is for the sale of rare or unique items that cannot be readily purchased elsewhere, specific performance of the contract may be granted.

(b) Where the contract is for personal services [12.430] Specific performance will not be ordered to enforce a contract for personal services.

chapter 12 Remedies

(c) Where the contract would require constant supervision by the court [12.440] Specific performance will not be ordered where constant supervision by the court would be necessary to ensure compliance with the order: JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 at 297-298 per Dixon J.

Ryan v Mutual Tontine Westminster Chambers Assoc [12.450] Ryan v Mutual Tontine Westminster Chambers Assoc [1893] 1 Ch 116. The lessor of a block of flats agreed to provide a porter who was to be “constantly in attendance” and perform specified duties. The porter appointed by the lessor was also employed as a chef in a nearby club and during his absence for several hours each day, his duties were performed by other persons. One of the tenants sought an order for specific performance of the obligation. It was held that specific performance could not be ordered since the court could not guarantee by its order that the porter would remain in constant attendance without constantly supervising such attendance.

(d) Where the order is not mutually available [12.460] Specific performance will not generally be granted unless it is available to both parties: Boyd v Ryan (1947) 48 SR (NSW) 163 at 165. Where the circumstances do not fall within one of the above exceptions, specific performance may be ordered. However, since it is an equitable remedy, the court has discretion whether or not to grant an application for the remedy. Accordingly, specific performance will be refused if its effect would be to cause unfairness or undue hardship to the defendant. Such circumstances include where there has been a mistake on the part of the defendant; undue delay in seeking the remedy; or breach by the plaintiff of her or his contractual obligations in circumstances where the grant of specific performance would be unjust to the defendant. A threatened refusal to perform a contract is sufficient to entitle the other party to apply for an order for specific performance: Turner v Bladin (1951) 82 CLR 463 at 472.

Injunction [12.470] An injunction is an order of a court restraining a person from doing a wrongful act. In the present context, an injunction is an order restraining (prohibiting) a party from breaching their contractual obligations. It is usually granted to prevent a party from doing something that he or she has promised not to do. An injunction will not be granted where its effect would be to compel a person to do something that he or she would not have been ordered to do by a decree of specific performance. An injunction will not be granted where its effect would be to require a contract for personal services to be specifically performed: Page One Records Ltd v Britton [1968] 1 WLR 157. On the other hand, if the injunction sought would not necessarily have the effect of forcing the defendant to perform their contract for personal services, then an injunction may be granted if it is necessary to protect the plaintiff from negative consequences flowing from the defendant’s conduct in breaching the contract, for example where the defendant proposes to work with a competitor of the

279

280

Introduction to Business Law in Australia

plaintiff. See for example Warner Bros Pictures Inc v Nelson [1937] 1 KB 209, 219–220 where the Court issued an injunction to prevent the actor Bette Davis performing for a theatrical company other than the plaintiff’s; and Warner Bros Pictures Inc v Ingolia [1965] NSWR 988 where the Court issued an injunction to prevent the actress and singer Connie Stevens performing a cabaret at the Chevron-Hilton while she was in breach of her exclusive performance contract with Warner Bros. Like a decree of specific performance, an injunction is a discretionary remedy and accordingly is likely to be refused where, for example, the plaintiff has been guilty of delay or is in breach of their obligations under the contract. Furthermore, again like an order of specific performance, an injunction will not usually be granted if in the particular circumstances, damages would be an adequate remedy.

Restitution [12.480] As we have seen in Chapter 11, a person is not entitled to any contractual remedy unless he has (at least) substantially performed the contract. However, the courts are prepared to order restitution if the part performance of the contract-breaker enriched the innocent party unjustly. In this context, the term restitution refers to the remedies provided by the law to compel the payment of money by the innocent party to the contract breaker where it would be unjust to allow A to retain the benefit of money, goods or services which he or she has received. An action in restitution is usually brought either because there is no express contract between the parties or such contract is void or unenforceable. Accordingly, an action in restitution may provide a remedy where otherwise there would be none.

The basis of restitution [12.490] The trend of High Court decisions is to regard the remedy of restitution as based on unjust enrichment. That is, the defendant is ordered to restore money or other benefit (or its value) that they have received from the plaintiff because otherwise the defendant would be unjustly enriched at the plaintiff’s expense. The concept of unjust enrichment has been described as “a unifying legal concept which explains why the law recognises, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff”: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256-257. 4 However, the High Court has recently emphasised that unjust enrichment is not a “definitive legal principle” and is “not a principle supplying a sufficient premise for direct application in a particular case”: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 307 ALR 512 at [73].

Pavey & Matthews Pty Ltd v Paul [12.500] Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221. Pavey & Matthews were builders who were licensed under the Builders Licensing Act 1971 (NSW). They carried out building work for Paul pursuant to an oral contract. Under s 45, a building contract was unenforceable unless it was in writing and signed by each of the parties. When the work was completed, a dispute arose and Paul refused to pay the balance of the contract price. The builders sued Paul for a reasonable amount, based not on the contract (which was unenforceable) but on a quantum meruit (the amount that he has earned). 4

See generally R Andrew, “The Fabrication of Unjust Enrichment in Australian Law: Pavey & Matthews v Paul Reassessed” (2010) 26 Building and Construction Law Journal 314.

chapter 12 Remedies

Although the contract was unenforceable, the High Court decided that the plaintiff was entitled to “reasonable remuneration” the basis of which was in “restitution or unjust enrichment”. Paul had accepted the benefit and therefore had to pay a reasonable price that may or may not be the same as the contract price. A person is not entitled to any contractual remedy unless he or she has at least substantially performed the contract. However, the courts will be prepared to order restitution to avoid the other party being unjustly enriched.

Steele v Tardiani [12.510] Steele v Tardiani (1946) 72 CLR 386. Steele contracted Tardiani to chop wood on his farm. The contract stipulated that the wood should be chopped in lengths of between 4 and 6 inches. Tardiani, however, chopped the wood in lengths of 6 to 15 inches. This was clearly a breach of the contract. The court learned that Tardiani did not do this in malice, but because he had limited English language skills and misunderstood the verbal instructions given by Steele. Steele did not correct the mistake when it was discovered, but refused to pay Tardiani anything for his labour when the whole job was finished. Held: The court ordered Steele to pay a reasonable sum for Tardiani’s labour, as Steele would otherwise be unjustly enriched.

[12.520] Restitution will usually be awarded only where: (a)

the defendant has received some form of benefit (that is, has been “enriched”);

(b)

that benefit or “enrichment” was at the plaintiff’s expense;

(c)

it would be “unjust” to permit the defendant to retain the benefit; and

(d)

there are no defences available to the defendant, for example change of position, estoppel, incapacity or illegality.

Further reading See the contract texts list provided in Chapter 2.

Remedies DSK Ong, Ong on Specific Performance (Federation Press, Sydney, 2013). K Barnett and S Harder, Remedies in Australian Private Law (Cambridge University Press, Port Melbourne, 2014). W Covell, K Lupton and J Forder, Covell and Lupton’s Principles of Remedies (5th ed, LexisNexis, Sydney, 2012). D Wright, Remedies (Federation Press, Sydney, 2010).

281

282

Introduction to Business Law in Australia

Restitution K Barker and R Grantham, Unjust Enrichment (LexisNexis, Sydney, 2008). J Edelman and E Bant, Unjust Enrichment in Australia (Oxford University Press, Melbourne, 2006). K Mason, JW Carter and GJ Tolhurst, Mason and Carter’s Restitution Law in Australia (2nd ed, LexisNexis, Sydney, 2008).

Tutorial activities 12.1 Review the contractual documents at the end of Chapter 2 regarding Clayton Sports World and answer the following questions. (a)

Assume that you enter a contract to join the CSW and that you fail to make your payment as required by Clause 2 because you have exceeded the limit on your credit card. What does the agreement entitle CSW to do in response? Do you think that you would be successful in challenging any fee that CSW imposed under this clause as a penalty? Explain why.

(b)

Assume that Giselle enters a contract to join the CSW and that she is injured when a heavy piece of exercise equipment breaks and falls on her and as a result she breaks a leg and an arm and concussion. This happens shortly before and Giselle’s exams at university and she performs very badly in the exams. Giselle seeks your advice about whether she can recover damages from CSW in respect of the following: (i)

her medical bills amount to a total of $25,500;

(ii)

she has lost the $75,000 fee she would have received for modelling in the current Meyer Jones fashion catalogue (CSW knew Giselle was a model);

(iii)

she is ashamed and embarrassed about the poor results recorded on her university academic record.

11.2

In the CSW contract identify a condition, a warranty and an innominate term. What remedy would be available in the event of a breach of each of these terms?

11.3

Explain the difference between liquidated damages and a penalty and between nominal and ordinary damages?

11.4

Assume Paddy has three years left on his contract with the Essendon Football Club. He wishes to join Port Adelaide but Essendon refuses to release him from his contract. Why would a court be reluctant to order specific performance of the contract? Would it be more realistic to order an injunction preventing him from playing with Port Adelaide? How might any damages be calculated?

11.5

What was distinctive about the damages award made to Mr Jarvis in Jarvis v Swans Tours Ltd [1973] 1 QB 233 and to Mrs Dillon in Baltic Shipping Co v Dillon (1993) 176 CLR 344?

11.6

Jeremy is a tenant living in a house in near the university. He pays $1000 per month in rent and has eight months left on his lease. However, he falls in love and moves in with his girlfriend. Larry, his landlord, decides to put a lock on the door, wait until the end of the lease and sue Jeremy for $8000 for the rent he has not been paid. Advise Larry on the wisdom of this strategy.

11.7

Review the facts of Clark v Macourt (2013) 304 ALR 220 at and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [12.110]. Both are very interesting High Court decisions. Please explain what the decisions mean.

chapter 12 Remedies

11.8

The remedies available for breach of contract depend on the nature of the breach. Explain.

283

chapter 13

The Law of Electronic Commerce [13.10] Principles.............................................................................................................................................................. 286 [13.20] Terminology........................................................................................................................................................ 286 [13.30] The regulation of electronic transactions ........................................................................................... 287 [13.120] Shrinkwrap, clickwrap and browsewrap contracts .................................................................... 290 [13.190] Electronic security........................................................................................................................................ 292

286

Introduction to Business Law in Australia

Extracts from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 16.

Aim By the end of this chapter you will be able to:  explain what an electronic transaction is;  explain the main features of the Electronic Transactions Act 1999 (Cth);  explain what security measures are available to protect users of electronic commerce;  describe electronic commerce products and services that have been developed for electronic commercial transactions;  explain who has jurisdiction over an electronic transaction;  explain the right to privacy over an electronic transaction; and  discuss how the authorities have attempted to deal with computer crime.

Principles [13.10] This chapter considers the use of electronic processing and transmission in commercial transactions. Electronic commerce in Australia is governed by electronic transactions legislation, principally the Electronic Transactions Act 1999 (Cth) and mirroring State and Territory legislation. Because electronic transactions may be used in common commercial transactions such as the sale of goods, legislation such as the Australian Consumer Law, and the laws relating to contract, crime, intellectual property (eg, copyright and trade marks), equity (eg, confidential information) and tort (eg, passing off) will also be relevant. The importance of e-commerce to any economy cannot be underestimated. Many businesses now have no physical presence but operate only on the internet (eg, http://www.amazon.com). It is not only the buying and selling of goods that takes place electronically. Banking, share trading, email communication, even the hearing of court cases (Electronic Case Management or ECM Court) are commonly taking place through electronic means. Electronic registers manage title to real property (eg, the Torrens title registers) and security over personal property (the Personal Property Securities Register). This has led to great time and cost efficiencies but has also raised important issues about security, digital signatures and authentication, jurisdiction, privacy and computer crimes.

Terminology [13.20] Below are some of the key terms that are used in this chapter:  browsewrap contract: a browsewrap contract purports to bind the user of a website to a contract created by the user’s mere browsing of the website.  clickwrap contract: a contract formed on the internet where the user has to click on a button that says, eg, “I accept” or the site won’t let the user in.  cybersquatting: registering, selling or using a domain name with the intent of profiting from the goodwill of someone else’s trade mark.  domain name: an internet address.  encryption: transforming data into a form that is unreadable without a key.

chapter 13 The Law of Electronic Commerce

 shrinkwrap contract: in the context of electronic commerce, a reference to the purchase of software products which have a clear plastic wrapping around them; when the consumer opens the shrinkwrap they are accepting the terms and conditions enclosed.  typosquatting: purchasing a domain name that is a variation on a popular domain name with the expectation that the site will get traffic from the original site due to users misspelling the name.

The regulation of electronic transactions [13.30] After consultation with the Australian States a model uniform Electronic Transactions Bill 2000 (Cth) was prepared by the Commonwealth government in 2000. This Bill was closely modelled on the Commonwealth’s Electronic Transactions Act 1999 (Cth) (referred to in this chapter as the “ETA”). All States and Territories subsequently endorsed the Bill and each State and Territory now has an Electronics Transactions Act: Electronic Transactions Act 2001 (ACT); Electronic Transactions Act 2000 (NSW); Electronic Transactions (Northern Territory) Act; Electronic Transactions (Queensland) Act 2001 (Qld); Electronic Transactions Act 2000 (SA); Electronic Transactions Act 2000 (Tas); Electronic Transactions (Victoria) Act 2000; Electronic Transactions Act 2003 (WA). They are, for the most part, identical to the ETA with some slight differences in definitions and section numbers. Section numbers in this chapter refer to the Commonwealth ETA. Since 1 July 2001 the ETA has applied to all Commonwealth laws unless they are specifically exempted from application of the Act by the Electronic Transactions Regulations 2000 (Cth). The Acts aim to ensure that transactions conducted electronically are legally recognised in the same way as transactions conducted on paper (functional equivalence). The main provisions are:  a transaction is not invalid because it only took place electronically (ETA s 8);  a requirement to give information in writing is satisfied if it is given electronically, provided it is reasonably accessible for future usage and the recipient consents (ETA 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 (ETA s 10(1)(a)) and, having regard to all the relevant circumstances at the time the method was used, the method was as reliable as was appropriate for the purposes for which the information was communicated: ETA s 10(1)(b)(i). Alternatively, the signature will be valid where it can be proved as a matter of fact that the method used to sign did identify the signatory and indicated their intention in respect of the information communicated (ETA s 10(1)(b)(ii));  documents may be produced in electronic form rather than hard copy (paper) as long as the integrity of the document can be maintained, the information in the document will be accessible for future reference, and the recipient consents to the provision of an electronic document: ETA s 11. Documents required to be produced in connection with citizenship or migration issues are excluded from the operation of s 11 and must be produced in hard copy (ETA Sch 1);  information and documents can be recorded in electronic form rather than in writing as long as the information will be accessible for future reference and the method of storage is secure. If any particular form of data storage is prescribed, this method must have been used: ETA s 12. If it is an electronic communication that is being recorded, then, in addition, the origin, destination, time of sending and time of receipt must also be retained (ETA s 12(4)(c));  under ETA s 14(1) an electronic communication is deemed to have been dispatched (sent):

287

288

Introduction to Business Law in Australia

(a)

at the time when the electronic communication leaves an information system under the control of the originator or of the party who sent it on behalf of the originator; or

(b)

if the electronic communication has not left an information system under the control of the originator or of the party who sent it on behalf of the originator — the time when the electronic communication is received by the addressee.

 an electronic communication is deemed to have been received when it “becomes capable of being retrieved by the addressee at an electronic address designated by the addressee” (ETA s 14A(1)(a)), or if sent to another address of the addressee it is received when it can be retrieved from that address and the addressee becomes aware that the communication was sent to that other address: ETA s 14A(1)(b). ETA s 14(2) states that it is presumed that an electronic communication can be retrieved “when it reaches the addressee’s electronic address”;  the legislation uses generic expressions and so applies to facsimiles and SMS messages;  a person is not bound by an electronic communication unless it was sent by, or with the authority of, that person: ETA s 15.

SZAEG v Minister for Immigration and Multicultural and Indigenous Affairs [13.40] SZAEG v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FMCA 258The plaintiff was required, as part of his application for refugee status, to notify the Refugee Review Tribunal (RRT) if he changed his address. It was held that his change of address notification had been dispatched when he handed it to an employee of Australia Post; however, because it appeared that it had been sent to an incorrect fax number, it did not enter the designated RRT information system for the purposes of ETA s 14(3) and so was not received by the RRT.

McGuren v Simpson [13.50] McGuren v Simpson [2004] NSWSC 35. An email was a sufficient “written acknowledgment” of a cause of action to allow the action to be brought after the expiry of the limitation period.

Getup Ltd v Electoral Commissioner [13.60] Getup Ltd v Electoral Commissioner (2010) 189 FCR 165. In order to vote in the 2010 federal election one of the applicants applied for registration using a laptop with access to the internet and a digital pen. Getup maintained a site called http://www.ozenrol.com.au. This site provided a facility called the signature tool which allowed users to electronically sign their applications using a digital pen, their finger or a mouse. The online application process produced a PDF document which it faxed to the electoral commissioner. This was found to satisfy the requirement under the Commonwealth Electoral Act 1918 (Cth) that the form “must be signed by the claimant” as well as the requirement in ETA s 10(1)(a) and (b) that the method (of signature) was as reliable as was appropriate for the purposes for which the information was communicated.

chapter 13 The Law of Electronic Commerce

[13.70] Note that certain State Electronic Transactions Acts (eg, Electronic Transactions Act 2000 (NSW) and Electronic Transactions Regulation 2012 (NSW), reg 4) specifically exclude the application of the ETA in relation to State elections.

Exemptions from the Act [13.80] The ETA and the Electronic Transactions Regulations 2000 (Cth) specifically exclude some documents and transactions from the ETA’s operation. Important exceptions include:  Visas, passports and documents produced for other migration purposes such as the cancellation of a visa or deportation of a person.  Cheques and bills of exchange.  Documents relating to the practice and procedure of a court or tribunal (unless this is provided for in the court or tribunal’s own rules or under specific legislation such as the Evidence Act 1995 (Cth)).  Some notices under the Insurance Act 1973 (Cth).

The formation of contracts through electronic communications [13.90] Part 2A of the ETA is particularly concerned with the formation of contracts. It applies to contracts formed between parties domestically and internationally and to business contracts and those formed for personal, family or household purposes: ETA s 15A. Some of the particular contractual provisions of the ETA are:  A contract can be formed through the interaction of an “automated message system” and a natural person, ie, a contract will not be void by reason only of the fact that “no natural person reviewed or intervened in each of the individual actions carried out by the automated message systems or the resulting contract”: ETA s 15C. This covers the situation where goods are ordered through a website without any human input on one side. There is a right to withdraw electronic communications with automated message systems in some cases where an error has been made (eg, by entering the wrong number on an order form) as long as the other party is notified as soon as possible and no material benefit has been received from the goods or services: ETA s 15D.

Theol v Bike Bug Pty Ltd [13.100] Theol v Bike Bug Pty Ltd [2014] NSWCATCD 123. The applicant (buyer) purchased a helmet from the respondent’s (seller’s) website at the advertised price of $224. After the money was paid through PayPal the respondent issued a tax invoice for the sale but later argued that it was entitled to cancel the sale under ETA s 15D on the basis that it had made an “input error” in its electronic transmission. Evidence was that the cost price of the goods to the seller from the manufacturer was $324. The New South Wales Civil and Administrative Tribunal held that s 15D was aimed at protecting consumers in their dealings with an automated message system. It did not apply in this case where the seller had made a mistake with the price and the seller was ordered to deliver the helmet.

289

290

Introduction to Business Law in Australia

[13.110]  Unless a contrary intention is shown, or the electronic communication is addressed to one or more specific parties, a proposal to form a contract will be treated only as an invitation to treat (ie, an invitation to make an offer): ETA s 15B. The effect of this is that a seller who advertises their goods or services generally on the internet is not to be taken as indicating their intention to be contractually bound until they have accepted the price that the customer offers.

Shrinkwrap, clickwrap and browsewrap contracts [13.120] There is no “special” law that applies to contracts formed online. The usual rules of offer, acceptance, consideration and intention to create legal relationships apply, as do the prohibitions found in the Australian Consumer Law on the making of false, misleading or deceptive representations in relation to online advertising. Consumer guarantees under the Australian Consumer Law, or implied terms under the sale of goods legislation (eg, in relation to fitness for purpose or merchantable quality) will also apply: see Chapters 14 and 17. The Australian Guidelines for Electronic Commerce produced by the Commonwealth government in 2006 give additional guidance to business on how to adopt fair business practices in their electronic dealings with consumers. It is important that consumers are able to make an informed decision about dealing online. In relation to the formation of contract, the general rule is that unless some particular form of acceptance is stipulated, the contract is formed when acceptance is communicated to the offeror. It may be possible to apply the “postal” acceptance rule to electronic communications if it can be inferred that the parties intended that the contract could be formed in this way, ie, on the transmission of acceptance from the offeree to the offeror. Some agreements must be made in writing (eg, contracts for the sale of land and credit contracts under the National Credit Code) and many will also require a signature. The use of online auction sites such as eBay also lead to the formation of a valid contract for sale:

Smythe v Thomas [13.130] Smythe v Thomas (2007) 71 NSWLR 537. T listed an aircraft for sale on eBay with a minimum bid of $150,000. S made a bid for that amount in accordance with eBay rules. eBay notified both S and T that the auction had been “won” by S but T stated that he would not proceed with the sale at that price. It was held that the acceptance by both parties of the eBay rules meant that a binding contract was formed between seller and buyer when the auction was closed and specific performance was ordered. The terms and conditions of entering into a contract for a user will fall under one of three types of contract. 1.

A shrinkwrap contract, found on many software packages, arises where there is a notice on the clear plastic wrapping stating that the purchaser accepts the terms and conditions contained inside when they open the package.

chapter 13 The Law of Electronic Commerce

ProCD Inc v Zeidenberg and Silken Mountain Web Services Inc [13.140] ProCD Inc v Zeidenberg and Silken Mountain Web Services Inc 86 F 3d 1447 (1996). On the basis that the buyer could have returned the software if he did not agree with the contractual terms found inside the package, his continued use of the product indicated his acceptance of the terms. 2.

A clickwrap contract is formed on the internet when the user either clicks on the “I agree” or “I accept” button or types “I accept” and then clicks a second button. Increasingly, clickwrap agreements are used to govern the supply of online-based services as well as the sale of software. The user’s acceptance or non-acceptance is generally found at the end of the terms and conditions:

Hotmail Corporation v Van$ Money Pie Inc [13.150] Hotmail Corporation v Van$ Money Pie Inc 47 USPQ 2d 1020 (ND Cal 1998). The court held that the defendant, by clicking on the “I agree” button, was bound by Hotmail’s terms and conditions.

eBay International AG v Creative Festival Entertainment Pty Ltd [13.160] eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450. The respondent was the promoter of the music festival “Big Day Out” (BDO). Tickets had a condition printed on the back, that should the ticket be resold for a profit, the ticket would be cancelled and the holder would be refused entry to the event. Resale through online market or auction sites (such as eBay) was specifically prohibited. Tickets for the event were also sold online through the BDO website and the website of the ticketing company Ticketmaster. On the BDO website, purchasers had to click on a box next to the words “I have read and agree to the following terms and conditions”. On the Ticketmaster website purchasers had to agree to Ticketmaster’s terms and conditions of sale, a copy of which was stated to be available for inspection at the time of purchase or collection of the tickets. It was held that the contract of sale of the tickets sold online was formed when the purchaser completed the process indicated on the website. As far as the BDO website was concerned the promoter was given the option of voiding the tickets, however, as it was not possible for purchasers to view the condition on the Ticketmaster website, the term warning of cancellation did not form part of the contract. 3.

A browsewrap contract may arise where a user downloads software from the web, but there is no unambiguous expression of consent to the terms and conditions:

291

292

Introduction to Business Law in Australia

Specht v Netscape Communications Corporation [13.170] Specht v Netscape Communications Corporation 306 F 3d 17 (2d Cir 2002). To download Netscape software, users clicked on the button “Download”, but reference to terms and conditions was further down the web page with a button asking customers to review and agree to the terms of the software licence before downloading. It was held that this was not sufficient to render an arbitration clause binding. Unlike with other electronic contracts the buyer did not have to agree to the term before downloading or using the software.

[13.180] It is a generally accepted principle of contract law that if a person signs a contract, they are bound by its terms, whether or not they read or understood it: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; (2004) 219 CLR 165. This also applies to documents signed by electronic signature. Legislation such as the Competition and Consumer Act 2010 (Cth) and general law actions such as misrepresentation, estoppel or unconscionable conduct have, in some cases of individual hardship, allowed the contract to be avoided. Now, these types of agreements may come under the particular scrutiny of the unfair terms provisions of the Australian Consumer Law. Most are standard form contracts, the terms of which are imposed by the seller rather than negotiated with the buyer. In the case of shrinkwrap contracts the buyer will not see the terms until the package is opened. Further, most software is now delivered online, meaning that there is no physical product to return in the event of non-agreement.

Electronic security [13.190] Regulating security issues in electronic commerce can occur through:  Encryption: transforming data into a form that is unreadable without a key. The key may be publicly or privately available and may be verified through digital certification;  Electronic signature: a method of authenticating an electronic transmission;  Australian Business Number Digital Signature Certificates (ABN-DSC): developed by the Commonwealth government to foster the use of digital certificates in Australia for identification in online transactions.

chapter 13 The Law of Electronic Commerce

Figure 13.1: Signature

Electronic and digital signatures [13.200] “Electronic signature” refers to data in electronic form. It identifies the signatory and authenticates the signatory’s intention in respect of the information contained in the file. It may be created through the use of a key, biometrics (eg, fingerprint or retinal scan) or a combination of factors. The “digital signature” is a subset of the electronic signature and is attached to specific data. It is used to identify the sender, and identify whether the transmission has been tampered with. If a digital signature is verified, the recipient can be confident that it is authentic. If a digital signature is not verified, the recipient may wish to take further steps to check that the message is bona fide. As indicated at [13.30] ETA s 10 states that:  a signature requirement is met if a method is used to identify the person and to indicate the person’s intention in respect of the information communicated; and  the method was as reliable as was appropriate for the purposes for which the information was communicated; and  if the entity requires a particular information technology method be used, that that requirement has been met; and  the person to whom the signature is required to be given consents to that requirement being met by way of the use of the method.

Evidence of electronic records [13.210] The issue of whether electronic records are admissible in court as evidence is not dealt with consistently across Australia. In New South Wales, Tasmania and the Commonwealth, legislation has been enacted to include electronic documents as admissible evidence by abolishing the best evidence rule and making no reference to “original”. It remains unclear whether a printed version of an email would be admissible as evidence, and how much weight it would be given by a court.

293

294

Introduction to Business Law in Australia

Electronic banking and financial transactions [13.220] Electronic payment may be made by:  credit card;  electronic funds transfers: the authorisation of transfer of cash electronically by virtue of the authorisation;  smart cards: these store data digitally and may be used as a credit or debit card; and  BPAY and PayPal. Associated legal requirements must be complied with when using electronic forms of payment. The responsibility for regulating payment systems and purchased payment facilities has been given to the Reserve Bank, exercised through the Payments System Board, under the Payment Systems (Regulations) Act 1998 (Cth). The Payment Systems and Netting Act 1998 (Cth) regulates multilateral net settlement arrangements. The ePayments Code which came into effect in March 2013 regulates electronic payments such as online payments, internet banking, BPAY, ATM, EFTPOS and credit card transactions. It gives guidance to businesses on how to deal with situations such as mistaken internet payments, “book up” arrangements (where a merchant stores a user’s card and their pass code) and cards left in ATMs. The code continues the protection given under the former EFT Code of Conduct which considered that any financial service provider must abide by the mandate of its customer to validly debit an account and that a customer will only be liable for unauthorised transactions in exceptional circumstances, as long as they have not contributed to the loss.

Domain names [13.230] Internet addresses are known as “domain names” and they represent valuable assets for business. A domain name can infringe the assets of a business where, eg, it constitutes an instance of cybersquatting or typosquatting. These infringements may be actionable under:  The Australian Consumer Law, ss 18 and 29(1): if a false representation is made that two or more companies are associated, eg, through the use of a similar name.

CSR Ltd v Resource Capital Australia Pty Ltd [13.240] CSR Ltd v Resource Capital Australia Pty Ltd (2003) 128 FCR 408. “CSR” and “CSR Sugar” were the registered trade marks of P. D registered the domain names “http:// www.csrsugar.com” and “http://www.csrsugar.com.au” and then offered to sell the names to P. It was held that anyone seeing the domain names would assume that CSR was the real owner and that the act of registering both domain names was misleading and deceptive pursuant to s 52 of the Trade Practices Act 1974 (Cth) (and the equivalent Fair Trading Act 1987 (NSW) provisions). The court ordered the transfer of the names to CSR.

chapter 13 The Law of Electronic Commerce

Macquarie Bank Ltd v Seagle [13.250] Macquarie Bank Ltd v Seagle [2008] FCA 1417. Macquarie Bank successfully argued that the defendant was in breach of s 52 of the Trade Practices Act 1974 (Cth) (misleading and deceptive conduct) by registering a number of domain names including “http://www.macquarry.com”, “http://www.macuarie.info”, “http://www.macuarie.biz”, and “http://www.macuarie.us” which were deceptively similar to the plaintiff’s name and which were linked to the defendant’s own business.

Australian Competition and Consumer Commission v Chen [13.260] Australian Competition and Consumer Commission v Chen (2003) 132 FCR 309. D, a US resident, registered the domain name “http://www.sydneyopera.org” and proceeded to falsely represent that it was affiliated with the Opera House and took credit bookings for events. It was held that D’s conduct was misleading or deceptive pursuant to ss 52, 53(c) and (d) of the Trade Practices Act 1974 (Cth). [13.270]  The Trade Marks Act 1995 (Cth), s 120 (substantially identical, or deceptively similar); or  The tort of passing off:

Architects (Australia) Pty Ltd v Witty Consultants Pty Ltd [13.280] Architects (Australia) Pty Ltd v Witty Consultants Pty Ltd [2002] QSC 139. P traded as Architects Australia. D registered the domain name “http://www.architectsaustralia.com.au”. It was held that the words “Architects Australia” were “distinctive of” P’s business so that P was able to make out a case of passing off. Further, the use of the domain name by D could mislead or confuse the public, amounting to misrepresentation. D’s conduct also amounted to a representation of “affiliation” and a breach of s 53(d) of the Trade Practices Act 1974 (Cth).

The Internet Corporation for Assigned Names and Numbers (ICANN), based in the United States, is responsible for the domain name system management, including resolution of domain name disputes under the Uniform Domain Name Dispute Resolution Policy. Anyone seeking registration of a domain name must agree to abide by the policy under which a complainant must prove that:  the domain name complained of is identical or confusingly similar to a trade mark or service mark in which the complainant holds the rights;  the holder of the domain name has no rights or legitimate interests in the domain name; and  the domain has been registered and is being used in bad faith.

295

296

Introduction to Business Law in Australia

The ICANN Administrative Panel has ruled that it is not necessary for the complainant to be the registered trade mark or service mark holder and that individual names may have sufficient secondary association for “common law trade mark right” purposes:

Jeanette Winterson [13.290] Jeanette Winterson (Case No. D2000-0235). The ICANN Administrative Panel allowed Jeanette Winterson to reclaim her name which had been registered as http:// www.Jeanettewinterson.com (as well as “.org” and “.net”). While the registrant claimed that he intended the sites to promote her works, he asked for a 3% share of her book profits from web sales. The Panel found that the complainant had achieved international recognition and critical acclaim for her works and as a result had established trade mark rights in her name for the purpose of the policy. [13.300] In Australia the .au Domain Administration Ltd (auDA) governs the granting of domain name licences in the open second level domains (2LDs) in the .au domain (subject to reserve powers in the Commonwealth government under the Telecommunications Act 1997 (Cth)). Domain name licences are allocated on a “first come, first served” basis for a fixed period of two years (this period is under review). Renewal depends on compliance with auDa’s policies. Disputes are resolved under the .au dispute Resolution Policy (auDRP) with recourse to the court system.

Australian Style Pty Ltd v .au Domain Administration Ltd [13.310] Australian Style Pty Ltd v .au Domain Administration Ltd [2010] VSCA 184. The appellant was required under the terms of its accreditation by auDA as a domain name registrar to “act in good faith in its dealings with auDA, do all things necessary to ensure that … it continues to meet the accreditation criteria, and immediately give auDA notice of any security breaches affecting its [accreditation].” Australian Style (AS) was the victim of a security breach in which its database, including domain name passwords and credit card details of its registrants, had been offered for sale on the internet. It failed to give notice to auDA and, on being notified of the breach by the Australian Federal Police some two years later, auDA terminated AS’s accreditation. The Victorian Court of Appeal held that the only way in which confidence in the .au domain name system could be maintained was if security breaches were immediately notified so that remedial action could be taken. The supervision of security was at the core of the relationship between registrants and registrars such as AS, and they had failed in their obligations to act in good faith in relation to their registrants and to auDA by not immediately notifying auDA of the breach.

Jurisdiction [13.320] The relevant jurisdiction in paper-based transactions is, in the absence of contrary agreement by the parties, the jurisdiction in which the agreement was made or with which it has the most natural connection.

chapter 13 The Law of Electronic Commerce

Problems with legal control over websites and determinations of which legal system has jurisdiction with respect to disputes and litigation that might arise regarding a particular website in Australia have been settled by the High Court deciding that the relevant law that will apply will be the law where the material was downloaded.

Dow Jones & Co Inc v Gutnick [13.330] Dow Jones & Co Inc v Gutnick (2003) 210 CLR 575. Dow Jones, a US company, published Barron’s magazine. The server was in New Jersey in the United States; however, the magazine could be downloaded by subscribers to a subscription business news site. Some of these subscribers were in Victoria and G brought an action for defamation in Victoria after the magazine published an article alleging financial wrongdoing and association with money laundering activities. Relying on old authority that the place where defamation occurs is where the defamatory material is published, ie, is seen or heard, it was held that the defamation had occurred where the material was downloaded (ie, in Victoria) rather than where it had been uploaded (ie, New Jersey). [13.340] See also Harrods Ltd v Dow Jones & Co Inc [2003] EWHC 1162 but note the difficulty in enforcing judgments outside Australia: see, eg, Australian Competition and Consumer Commission v Chen (2003) 132 FCR 309 at [13.260].

Privacy and data protection [13.350] Privacy is concerned with the use of information about individuals. Privacy is governed by the Privacy Act 1988 (Cth). This was substantially amended by the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) which established 13 Australian Privacy Principles (APPs) outlining minimum requirements on how APP entities should collect, use, keep, secure and disclose personal information in relation to health, finance, law enforcement and other issues. The APPs only apply to businesses with an annual turnover of more than $3 million (although businesses may also have their own privacy code) unless a business or other organisation:  is related to another business that has an annual turnover of more than $3 million;  provides health services and holds health records;  provides personal information for a benefit, service or advantage;  provides someone else with a benefit, service or advantage to collect personal information;  is the contracted service provider for a Commonwealth contract.

Electronic commerce and crime [13.360] Cybercriminals generally use computer viruses, worms and Trojans to attack online systems and to access bank accounts. Computer-based identity theft is a common occurrence. The Criminal Code, which is a Schedule to the Criminal Code Act 1995 (Cth) has specific provisions relating to serious computer crimes in Divs 477 – 478. These provisions apply to a computer or computer system which is owned, leased or operated by the Commonwealth, and to Commonwealth facilities. Similar provisions may be found in the Crimes Acts of some other Australian jurisdictions. The following actions are offences under the Criminal Code Act 1995 (Cth):

297

298

Introduction to Business Law in Australia

 unauthorised access, modification or impairments with intent to commit a serious offence (eg, hacking into a bank computer and accessing credit card details: s 477.1).

Larkin v The Queen [13.370] Larkin v The Queen [2012] WASCA 238. Jail sentences were imposed on L and another person as a result of their agreement to hack into the Western Australian Department of Health’s computer network by installing a malicious “Trojan” which would give them access to the Department’s records.

[13.380]  unauthorised access, modification or impairment with intent to commit a serious offence (eg, a hacker who gains unauthorised access to a computer system and damages data or inserts a virus: Criminal Code Act 1995 (Cth), s 477.2);  unauthorised impairment of electronic communication to or from a computer (s 477.3);  unauthorised access to, or modification of, restricted data (s 478.1);  unauthorised impairment of data held on a computer disc (s 478.2);  possession, control and supply of data with intent to commit a computer offence (eg, trading in programs designed to hack into a computer system: ss 478.3 – 478.4). Other offences relate to interference with telecommunications (Pt 10.6), including the internet, computer services and computer systems. General provisions for stalking under the various Crimes Acts may be interpreted to apply to harassment by electronic means. The Council of Europe Convention on Cybercrime entered into force in 2004. It gives guidance on legislation aimed at curtailing the activities of cybercriminals such as terrorist groups, pornographers and paedophile networks and illegal traffickers in weapons, drugs and human beings. The Cybercrime Legislation Amendment Act 2012 (Cth) was enacted to: make amendments necessary to facilitate Australia’s accession to the Council of Europe Convention on Cybercrime (the Convention) by [amending] … the Telecommunications (Interception and Access) Act 1979 (the TIA Act), the Criminal Code Act 1995 (the Criminal Code), the Mutual Assistance in Criminal Matters Act 1987 (the MA Act) and the Telecommunications Act 1997 (Cybercrime Legislation Amendment Bill 2011 Explanatory Memorandum). The Act has been criticised as imposing heavy obligations, eg, by potentially requiring ISPs to retain and make available all of their traffic data.

Other legislation and codes [13.390] The Spam Act 2003 (Cth) bans the sending of unsolicited commercial electronic messages that have an Australian link (s 16), although the sending of “factual information” is exempt (Sch 1, cl 2) as are messages from government bodies, registered political parties, or charitable organisations: Sch 1, cll 3, 4. In order to avoid being caught under the spamming legislation commercial electronic messages must include information about the individual or organisation who authorised the sending of the message (s 17), and contain a functional unsubscribe facility: s 18. Address-harvesting software and harvested address lists

chapter 13 The Law of Electronic Commerce

must not be sold, acquired or used: s 20. Remedies for breaches of the Act by the Australian Communications and Media Authority (ACMA) include civil penalties and injunctions. Heavy financial penalties may be imposed under the Act. Compliance with the Spam Act 2003 (Cth) is regulated by ACMA and the results of their investigations are published at: http://www.acma.gov.au/ theACMA/ACMAi/Investigation-reports/Telemarketing-and-spam-investigations/spam-acmaenforcement-action. By way of example, in Media release 33/2013—28 May it was reported that Cellarmaster Wines Pty Ltd had paid a $110,000 infringement notice after an ACMA investigation had found that Cellarmaster’s marketing messages had, in some cases, “been sent without an opt-out facility, and in other cases had been sent to customers who had previously chosen to opt out of its email promotions”.

Australian Communications and Media Authority v Mobilegate Ltd (No 9) [13.400] Australian Communications and Media Authority v Mobilegate Ltd (No 9) [2010] FCA 1383. A penalty of $2 million was imposed for contraventions of the Spam Act 2003 (Cth) involving obtaining telephone numbers from responses to false profiles on a dating website and then sending unsolicited SMS messages offering to chat. The judge said that one of the defendants “resembles the highwayman of the 18th century. He does not intercept a coach with a pistol and the words, ‘Stand and deliver.’ What he has done instead is to interrupt the flow of commerce and social contact on the internet by the creation or by the establishment of a company which practises deception on those who use particular websites.” [13.410] The Do Not Call Register Act 2006 (Cth) prohibits non-exempt Australian and overseas telemarketers from contacting numbers that are on the register. Exemptions include charities, government bodies and registered political parties, educational and religious organisations. The Register is administered by the Australian Communications and Media Authority (ACMA).

Australian Communications and Media Authority v FHT Travel Pty Ltd [13.420] Australian Communications and Media Authority v FHT Travel Pty Ltd [2011] FCA 550. A fine of $120,000 was imposed on the defendant where the evidence was that the company had made about 12,500 infringing calls over a period of less than a month without seeking to identify numbers which were on the Do Not Call Register. Both the company and its director were restrained for a period of five years from being engaged in any business which involved the regular use of telemarketing calls without first obtaining ACMA’s approval. [13.430] The Interactive Gambling Act 2001 (Cth) prohibits customers who are physically present in Australia from engaging in interactive gambling and prohibits Australian-based interactive gambling services from being provided in designated countries: ss 9B, 15A. There are a number of activities which are excluded from the operation of this Act (ie, they are permitted) such as betting on horse races, lotteries, games and futures contracts.

299

300

Introduction to Business Law in Australia

The iCode (2014) is a voluntary code for the self-regulation of internet service providers. Managed by the Communications Alliance it aims to help ISPs protect their customers in relation to cyber security risks. It attempts to encourage ISPs to:  help to educate consumers about cyber security;  detect and report malicious activity;  instill a greater level of confidence in the security of internet connections. In May 2011 the Commonwealth government passed the Electronic Transactions Amendment Act 2011 (Cth) which made various amendments to the ETA to bring it more into line with the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce 1996 (the “Model Law”) and with the United Nations Convention on the Use of Electronic Communications in International Contracts 2005. This Convention represents a further development of the Model Law to bring it up to date with technological advances. It is expected that all Australian jurisdictions will accede to the Convention in due course. The aims of the Convention are to facilitate international trade by dealing with some issues that arise in connection with the formation or performance of contracts between parties in different countries.

Guide to Problem Solving In electronic commerce problem situations, you will need to consider the following issues:  whether the transaction is governed by the Electronic Transactions Act 1999 (Cth) (ETA);  whether the transaction is authentic and admissible as evidence;  which jurisdiction the transaction took place in;  whether there has been a breach of other legislation, such as banking law, the Australian Consumer Law or the Privacy Act 1988 (Cth); and  whether any conduct constitutes a criminal act.

Practice Questions Revision Questions 13.1

Why is it important that all the States and Territories in Australia enact uniform legislation mirroring the Commonwealth ETA?

13.2

What is meant by the term “functional equivalence” when referring to transactions undertaken by electronic means?

13.3

What problems are there with reconciling shrinkwrap, clickwrap and browsewrap contracts with traditional contract law?

13.4

What are the requirements for a valid signature of an electronic document? Give an example of technology that would satisfy the requirements.

13.5

What is the advantage of using public key technology rather than private key technology in securing electronic messages?

13.6

Is the printout of an email which contained an advertisement admissible as evidence?

chapter 13 The Law of Electronic Commerce

Problem Questions 13.7

Abe lives on a Pacific island. He has set up a website selling cruises from Florida to his island. He receives payment from 20 interested parties in the United States over the internet, but the cruises are never run. The interested parties want a refund. Advise the parties as to whether they will be able to bring an action against Abe in the United States.

13.8

Would your answer be any different if Abe’s website merely provided information about the cruise, listing his telephone number for further inquiries and bookings?

13.9

Jess is a Commonwealth public servant. One evening, while checking her email at work, Jess notices an advertising link which promises “$10,000 for every download”. She proceeds to download the relevant file, which turns out to be a virus. The virus infects and deletes the entire computer system. Is Jess liable?

Answers to Practice Questions Revision Questions 13.1

[Electronic Transactions Act — uniform legislation] The Commonwealth ETA is subject to constitutional restrictions on its scope: see Chapter 1. Accordingly, it only applies to transactions which occur under a law of the Commonwealth. It is therefore necessary for the States and Territories to enact legislation to regulate those transactions not covered by the Commonwealth Act. If each State and Territory enacted its own legislation, rather than mirroring that of the Commonwealth, discrepancies would arise as to the regulation of electronic transactions. This may make the laws of one State or Territory more favourable than those of another, creating jurisdictional arguments within Australia. The issue of jurisdiction is a serious one, but the enactment of uniform Australian legislation will at least resolve the problem in relation to domestic transactions.

13.2

[functional equivalence] This is the aim of the electronic transactions legislation, ie, to ensure that transactions undertaken by electronic means have the same force and validity as those undertaken on paper. The major elements are provisions that a transaction will not be invalid by reason only that it occurred through electronic means, that data may be stored electronically as long as the integrity of the document can be maintained, and that the requirements for a valid electronic signature are met.

13.3

[shrinkwrap, clickwrap and browsewrap contracts] There are two primary issues with reconciling these contracts with traditional contract law. First is the issue of true agreement. In most cases the buyer of goods will either not have access to all the terms of the agreement until they open the shrinkwrapped package, or they will be required to “click” through many pages of contractual terms, contained in small windows on their computer. Most people simply click “yes” without either reading or understanding what they are agreeing to. Even if all the terms are read and understood there are problems with returning software which has been downloaded, rather than purchased in a hard format, such as a CD or DVD, if the purchaser does not agree with the terms. The second issue is that of fairness. Most agreements are unilaterally created by the seller, without any opportunity for negotiation. They may incorporate, by reference, other agreements to which the buyer has no access, such as agreements between the seller and a distributor or manufacturer. The product is offered on a “take it or leave it” basis. Unfair terms may

301

302

Introduction to Business Law in Australia

include the opportunity for the seller to terminate or vary the terms of the agreement with or without notice. These agreements will now be scrutinised under the unfair contract terms of the Australian Consumer Law. 13.4

[electronic signature] The requirements are that first, a method is used to identify the person, secondly that the signature indicates the person’s intention in respect of the information communicated (ETA s 10(1)(a)), and thirdly that having regard to all the relevant circumstances at the time the method was used, the method was as reliable as was appropriate for the purposes for which the information was communicated: ETA s 10(1)(b)(i). A signature will also be valid (irrespective of the reliability of method used) where it can be proved as a matter of fact that the method used to sign did identify the signatory and indicated their intention in respect of the information communicated: ETA s 10(1)(b)(ii). If the entity receiving the signed document has indicated that a particular information technology method be used that method must be used. There is no one method of electronic signature that will satisfy the requirements. Encryption, with corresponding public and private keys, biometrics (eg, face or voice recognition) or simply typing one’s name at the bottom of a document could be sufficient.

13.5

[encryption] Private key encryption requires the sender and recipient of a message to know each other’s keys or agree on a code. Arranging such access or agreement is inconvenient and creates potential security hazards. Public key encryption involves two keys, only one of which is needed to send someone a message, and this key is freely available and “public”. To read or write a message, however, the recipient or sender uses his or her private key, which is kept secret. There is no need for anyone else to have access to the private key.

13.6

[evidence of electronic records] Sections 47 and 48 of the Evidence Act 1995 (Cth) include electronic documents as documents, which overcomes many of the difficulties in bringing evidence of electronic records at common law. This case, however, concerns a printed version of an email, rather than an electronic document. In Armstrong v Executive of the President 810 F Supp 335 (DDC 1993), a United States court held that the printed version of an email contained less information than the electronic version, as some information was missing. While a printout of an electronic document may be admissible in the Commonwealth, it is likely to be given less weight than the electronic version would have, had it been in existence, particularly if there are issues with the integrity of the document or the circumstances of its storage.

Problem Questions 13.7

[jurisdiction] Abe is not present in the United States, so the United States clearly does not have personal jurisdiction over him. However, as Abe’s website is available in the United States, this may give the United States jurisdiction over Abe. United States cases state that jurisdiction will be found over an interactive website. The sale of cruise tickets over the website offers sufficient activity to give United States courts jurisdiction over Abe. In Compuserve Inc v Patterson 89 F 3d 1257 (6th Cir 1996), the court held that the defendant had been directing his business activities towards residents of Ohio and repeated transmissions showed a substantial connection with Ohio. Similarly, Abe was targeting United States residents, in particular those in Florida, with 20 transactions arising from the United States. This may be sufficient to give the courts of Florida and the United States jurisdiction over Abe’s activities and enable legal action to be taken against Abe in those jurisdictions.

chapter 13 The Law of Electronic Commerce

13.8

[jurisdiction] If Abe’s website merely provides information on the cruises, it is likely to be classified as a “passive” website. This is discussed in Zippo Manufacturing Co v Zippo Dot Com Inc 952 F Supp 1119 (WD Pa 1997): “A passive website that does little more than make information available to those who are interested in it is not grounds for the exercise of personal jurisdiction.” Similarly, in Bensusan Restaurant Corporation v King 937 F Supp 296 (SDNY 1996), the court held that passive websites do not create a substantial connection with a jurisdiction. Accordingly, if Abe’s website does no more than offer information to interested persons, the United States will not have jurisdiction over the site, and no legal action can be taken against Abe under United States law.

13.9

[computer crimes] Jess is working on a computer owned by the Commonwealth, giving the Commonwealth jurisdiction over her actions under the Criminal Code (Cth). The virus Jess downloaded has destroyed data on a Commonwealth computer, which brings it under s 477.2. Liability under s 477.2 requires the person to have acted intentionally and without authority or lawful excuse. It is apparent on the facts that Jess did not intend to destroy any data, and hence has not acted in contravention of the Criminal Code.

Tutorial Questions Discussion Questions 13.10 At what point in time is an electronic communication said to have been sent? 13.11 In contract law, would a web display be considered to be an offer or an invitation to treat? Discuss. 13.12 Does sending an email invoke the postal acceptance rule? 13.13 Discuss some of the legal issues which would be relevant in an individual’s or company’s decision to register a particular domain name.

Problem Questions 13.14 Wayne is a university student studying information technology. As a hobby, he accesses supposedly secure websites and computer systems. On entering a site, he leaves a message to the systems administrator advising them that the system has security flaws but that no harm has been done. On one occasion, he accesses the system of a Commonwealth government department, which decides to take legal action to prevent further embarrassment arising from inadequate security. Advise Wayne. 13.15 What if Wayne had also secretly been finding and recording credit card numbers from the computer systems he accesses? 13.16 Wendy wants to help her fellow students save money on textbooks. While visiting her sister in the UK she spends a weekend scanning a whole textbook onto her sister’s computer. On her return to Australia, Wendy provides the link through her Facebook page but she does not keep any of the textbook on her own computer. Has Wendy infringed the copyright of the textbook author? 13.17 Jennifer wants to attend a rock concert that is to be held at a country vineyard. She looks at the ticketing website and notices that before she can purchase tickets she needs to click on a box which indicates her acceptance of the venue’s terms and conditions. She clicks on this without bothering to read the terms and conditions as this would require her to leave the website she was on and go to another site. She did not want to miss out on the tickets as they are likely to sell out fast. When

303

304

Introduction to Business Law in Australia

Jennifer arrived at the vineyard she was told that the concert had been cancelled because of bad weather and that no refunds were being given. This information had appeared on the terms and conditions website. Jennifer would not have purchased the tickets had she been aware that cancellation was possible. Advise Jennifer. 13.18 A firm of real estate agents in Brisbane produce a newsletter each month which provides their view on the performance of the economy and suggests attractive areas for investment. It sends this list to all of its present and former clients as well as people whose names were on a list of subscribers to a business magazine. The newsletter contains a statement that the estate agents are able to assist individuals, companies and trustees with their property investment decisions. Have the estate agents breached any laws about the sending of unsolicited emails?

chapter 14

Law of Torts [14.10] Terminology........................................................................................................................................................ 306 [14.20] Introduction......................................................................................................................................................... 307 [14.30] Overview............................................................................................................................................................... 308 [14.50] Negligence........................................................................................................................................................... 308 [14.430] Breach of the duty of care........................................................................................................................ 329 [14.630] Remoteness of damage............................................................................................................................ 339 [14.670] Defences to an action in negligence................................................................................................... 340

306

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 28.

Terminology [14.10] Some of the key terms that are encountered in this chapter include:  assault: a tort and a form of trespass involving an intentional act by the defendant which the plaintiff reasonably believes is going to place them in imminent danger of harm, an action without the need for proof of damage.  battery: a tort and a form of trespass involving any direct intentional contact or application of force to the body of another without consent and actionable without proof of damage.  breach of confidence: a breach of trust relating to a breach of privacy.  chattels: the goods or property of a person.  conspiracy: the unlawful combination of two or more persons to act contrary to law or do something which is wrongful or harmful towards another person.  contributory negligence: is the negligence caused by the injured party who is claiming damages; a court will reduce the assessment of damages payable by the amount attributable to the fault of injured party.  conversion: a tort action for the value of goods, available to any person who has a right to immediate possession of the goods against anyone who is intentionally denying the plaintiff the right to the goods.  damnum absque injuria: suffering a loss without injury, a tort even though there is no loss.  deceit: a tort committed by a defendant who knowingly or recklessly makes a false representation with the intention of causing harm to another party.  defamation: a false statement about a person that is likely to damage their reputation in the community (and in some States comprises the two torts of libel and slander).  detinue: a tort action by a person entitled to immediate possession of goods from the defendant, who despite a demand for their return, is refusing to return the goods to their rightful owner.  false imprisonment: a tort and a form of trespass where the defendant intentionally and directly places a total restraint upon the freedom of the plaintiff. This tort is actionable without proof of damage.  frolic: an action by an employee which is totally without permission of the employer and outside a normal work function.  injuria sine damno: a legal wrong that causes no actual damage to anyone.  intimidation: where the plaintiff is coerced by threats of violence or unlawful acts for which they suffer some loss.  libel: defamation in permanent form (eg, letter, film, book, newspaper, internet).  negligence: an action in tort, actionable by a party suffering damage as a result of the defendant’s owing him or her a duty of care and breaching that duty, causing damage as a consequence.  novus actus interveniens: a new or intervening event that breaks the chain of causation.  nuisance: an indirect harm involving unreasonable interference with the use and enjoyment of land and may be either public or private.  passing off: a form of misrepresentation where a party assumes elements of another business’s identity or goodwill.

chapter 14 Law of Torts

 per se: by the very fact (without the need for intention).  private nuisance: a tort involving an indirect interference by the defendant with the plaintiff’s use or enjoyment of their land.  procuring breach of contract: where it can be demonstrated that another party induced a party to breach their obligations under an existing agreement.  public nuisance: a tort involving substantial and unreasonable interference with a public or common right of a class of the population.  slander: defamation in a temporary or non-permanent form (eg, speech).  strict liability: liability without fault (ie, there is no intention or negligence on the part of the defendant).  tortfeasor: the party committing the tort, the wrongdoer.  trespass: a tort providing an innocent party with a remedy for direct interference with their person, land or goods and actionable without proof of actual damage.  ubi jus, ibi remedium: where there is a right there is a remedy.  vicarious liability: the principal is liable for the actions of their agent or some other person so authorised.  volenti non fit injuria: if a person is aware of, and consents to, the risk of the activity, they cannot claim a breach of a duty of care. Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 14.

Introduction [14.20] A “tort” in law is a civil wrong (the word “tort” comes from the Latin “tortus” meaning “crooked” or “wrong”). The “law of torts” is primarily concerned with providing a remedy for one person’s wrongful interference with another’s personal or property rights. Such “rights” arise as a result of corresponding “duties” imposed by law (either common law or statute). Where there is no duty, there is no right. Thus the tort of nuisance that involves a duty not to interfere with an occupier’s use and enjoyment of land creates a corresponding right in the occupier to be able to use and enjoy. Again, the tort of defamation that imposes a duty not to damage a person’s reputation creates a corresponding right to a good reputation. Where a tort is committed, the person committing the tort (the tortfeasor) is liable to pay damages to the plaintiff. The aim of tort damages (unlike contract damages) is to put the plaintiff, as far as money can do it, back in the position that he or she was in before the tort was committed. The law of torts is an important area of law for society generally but, for those involved in business, it is vital to appreciate the potential liability they may have in tort to their customers, consumers, employees, other businesses and to the general public. In this chapter we discuss a number of torts that have particular relevance to commercial activity, including nuisance, torts of strict liability, vicarious liability and defamation. However, the tort that towers above them all is the tort of negligence. For this reason we consider the tort of negligence in detail and deal briefly with some of the other torts that have commercial relevance. If the law of torts is, historically, a creature of the common law courts, it is the legislature that is now playing an important role in clarifying and reforming the law so that we now have to consider both case law and legislation. The “civil liability reforms” referred to in [14.60] and throughout our study of negligence are a perfect example.

307

308

Introduction to Business Law in Australia

It is useful to begin a study of the law of torts by distinguishing it from other branches of the law.

Overview Liability in tort and criminal liability [14.30] As the criminal law is also concerned with wrongful interference with an individual’s person or property it is not surprising that there is an overlap between criminal liability and liability in tort. In some cases the conduct may be both a tort and a crime. However, there is an important difference between the two forms of liability. A crime is considered to be an offence against the state and therefore criminal proceedings are conducted in the name of the state. For instance, in the case of a sexual assault of a woman, the culprit may be prosecuted and, if found guilty beyond a reasonable doubt, will receive a criminal sanction (a fine or imprisonment or some other penalty). The victim is not involved in the prosecution (except as a witness) and will not generally receive any compensation from the defendant. On the other hand, the law of torts is concerned with the individual’s right to compensation for the loss or injury caused by the wrongful conduct. In the case of the assault, it is the victim who is responsible for bringing the action and, provided she can prove her case on the balance of probabilities, she will receive a remedy (usually damages). So we can see that the object or purpose of tort and criminal law are quite distinct: the primary object of tort law is law is compensation for victims whereas the primary object of the criminal law is to deter crime and punish the culprits.

The law of torts and contract law [14.40] As in the case of the commission of a tort, a breach of contract can also give rise to a civil action for damages. However, there are important differences between the rights protected by the law of torts and the law of contract. Contract law is concerned with vindicating a party’s right to have a contractual promise performed. This right arises because the parties voluntarily agreed to mutual obligations. On the other hand, the law of torts protects general rights enjoyed by all individuals that derive not from specific agreement but are imposed by the law itself. In some cases, conduct that amounts to a breach of contract may also constitute a tort. For example, a contract for the provision of services between a professional person, such as a solicitor or an accountant and their client, includes an implied term that the services will be performed with reasonable care. A failure to do so gives rise to an action not only for a breach of contract but also a claim based on the tort of negligence.

Negligence Scope of the tort of negligence [14.50] Negligence emerged as an independent tort following the landmark decision of the House of Lords in Donoghue v Stevenson [1932] AC 562. In the years following the decision, the tort of negligence has assumed prime importance in the law of tort. Unlike other torts, for example trespass, nuisance and defamation, negligence does not involve a specific form of conduct: an action for negligence is about careless behaviour and can therefore be applied to any form of human activity. Successful claims have been brought in a wide variety of circumstances including traffic accidents, actions against retailers and manufacturers for loss or injury incurred as a result of the supply of defective products, and against those

chapter 14 Law of Torts

who fail to exercise reasonable care in carrying on a profession such as doctors, solicitors, accountants and financial advisers. Damages are now recoverable not only for the negligent infliction of physical and psychological injury but also for economic loss. As with the law of torts generally, the tort of negligence was a creature of the common law courts. However as a result of the so-called “civil liability reform” (see below) the study of torts now must include the relevant legislation. The common law remains the key to an understanding the tort of negligence because it puts meat on the bones of the new legislation. We will refer to the legislation at relevant times throughout the chapter.

Civil liability reform Figure 14.1: Civil law reforms – general principles

[14.60] The common law principles governing negligence liability have been reformed by legislation enacted in all Australian States and Territories. 1 These reforms were largely based on the recommendations contained in a report of a review of the law of negligence that was undertaken by the Honourable Justice Ipp (commonly referred to as the “Ipp Report”). 2 As the relevant provision in the New South Wales

1

2

Civil Liability Act 2002 (NSW); Wrongs Act 1958 (Vic); Civil Liability Act 2003 (Qld); Civil Liability Act 1936 (SA); Civil Liability Act 2002 (WA); Civil Liability Act 2002 (Tas); Civil Law (Wrongs) Act 2002 (ACT); Personal Injuries (Liabilities and Damages) Act 2003 (NT). Contrary to the recommendations of the Ipp Report, uniform legislation was not enacted. Where relevant, reference will be made to the Civil Liability Act 2002 (NSW) and, if appropriate, the corresponding legislation in the other States and Territories will be noted.

309

310

Introduction to Business Law in Australia

Civil Liability Act 2002 (NSW) shows, the legislation is broad in its scope 3 and applies to “any claim for damage for harm resulting from negligence regardless of whether the claim is brought in tort, contract, under statute or otherwise”. 4 The laws not only cover personal injury but also property damage and economic loss. 5 One aspect of the operation of these laws is to limit the scope of potential liability for negligence. Broadly speaking, this effect is achieved in two ways: 1.

By modifying the common law principles governing the general ingredients of the cause of action in negligence – such as breach and causation – as well as the circumstances in which a defendant can raise a defence to a plaintiff’s negligence claim; 6 and

2.

By restricting the plaintiff’s right to recover in a number of particular categories of negligence action. For instance, liability is limited in circumstances where the plaintiff’s injury arises from having been engaged in a “recreational activity”. 7 Other examples include cases involving defendants who are professionals, 8 public authorities, 9 volunteers 10 and food donors. 11

3.

Another important objective of this legislation is to reduce the amount of damages that can be awarded to a plaintiff for personal injuries in a negligence action. The common law principle that aims to provide the plaintiff with full compensation has been abandoned and replaced with a new system. For example, the Civil Liability Act 2002 (NSW) places a cap on the amount that can be awarded to a plaintiff for general or non-economic damages. 12 Other measures include the

3

4

5

6 7

8

9

10

11 12

There are areas of exception provided in the legislation. For instance, the Civil Liability Act 2002 (NSW) excludes certain claims including those covered by the relevant legislative scheme for workers’ compensation as well as claims arising from smoking and the use of tobacco products and those covered by the legislation dealing with dust-related diseases: Civil Liability Act 2002 (NSW), s 3B; Wrongs Act 1958 (Vic), s 45; Civil Liability Act 2003 (Qld), s 5; Civil Liability Act 1936 (SA), s 4(4); Civil Liability Act 2002 (WA), s 6; Civil Liability Act 2002 (Tas), s 3B; Civil Law (Wrongs) Act 2002 (ACT), s 41; Personal Injuries (Liabilities and Damages) Act 2003 (NT), s 4. Civil Liability Act 2002 (NSW), s 5A(1) (emphasis added). The corresponding provisions are: Wrongs Act 1958 (Vic), s 44; Civil Liability Act 2003 (Qld), s 4(1); Civil Liability Act 1936 (SA), s 4; Civil Liability Act 2002 (WA), s 6; Civil Liability Act 2002 (Tas), s 4; Civil Law (Wrongs) Act 2002 (ACT), s 41; Personal Injuries (Liabilities and Damages) Act 2003 (NT), s 4. In the Civil Liability Act 2002 (NSW), “harm” is defined to include “damage to property” and “economic loss”: s 5. The corresponding provisions are: Wrongs Act 1958 (Vic), s 43; Civil Liability Act 2003 (Qld), Sch 2; Civil Liability Act 1936 (SA), s 3; Civil Liability Act 2002 (WA), s 3; Civil Liability Act 2002 (Tas), s 3; Civil Law (Wrongs) Act 2002 (ACT), s 40; Personal Injuries (Liabilities and Damages) Act 2003 (NT), s 3. The Personal Injuries (Liabilities and Damages) Act 2003 (NT) is silent in this respect. Compare the other legislation, further reference to which will be made under the appropriate headings below. Civil Liability Act 2002 (NSW), Pt 1A, Div 5; Civil Liability Act 2003 (Qld), Pt 1, Div 4; Civil Liability Act 2002 (WA), Pt 1A, Div 4; Civil Liability Act 2002 (Tas), Pt 6, Div 5. In South Australia, see the Recreational Services (Limitation of Liability) Act 2002 (SA). Compare Wrongs Act 1958 (Vic); Civil Law (Wrongs) Act 2002 (ACT), and Personal Injuries (Liabilities and Damages) Act 2003 (NT), which do not deal with this issue. Civil Liability Act 2002 (NSW), ss 5O, 5P; Wrongs Act 1958 (Vic), ss 59, 60; Civil Liability Act 2003 (Qld), s 22; Civil Liability Act 1936 (SA), s 41 and Civil Liability Act 2002 (Tas), s 22. There is no corresponding provision in the legislation enacted in Western Australia, the Northern Territory or the Australian Capital Territory. Civil Liability Act 2002 (NSW), Pt 5; Wrongs Act 1958 (Vic), Pt XXII; Civil Liability Act 2003 (Qld), Pt 3; Civil Liability Act 2002 (WA), Pt 1C; Civil Liability Act 2002 (Tas), Pt 9 and Civil Law (Wrongs) Act 2002 (ACT), Ch 8. Compare the Northern Territory and South Australian laws which are silent on the matter. Civil Liability Act 2002 (NSW), Pt 5; Wrongs Act 1958 (Vic), ss 34 – 37; Civil Liability Act 2003 (Qld), Pt 3, Div 2; Civil Liability Act 2002 (Tas), Pt 10; Civil Law (Wrongs) Act 2002 (ACT), Pt 2.2. In Western Australia, see the Volunteers (Protection from Liability) Act 2002 (WA) and in South Australia the Volunteers Protection Act 2001 (SA). There is no corresponding legislation in the Northern Territory but see the Volunteers Protection Act 2003 (Cth). Civil Liability Act 2002 (Tas), Pt 8B; Civil Liability Act 1936 (SA), Pt 9, Div 11A; Civil Law (Wrongs) Act 2002 (ACT), Pt 2.2A. Civil Liability Act 2002 (NSW), s 16; Wrongs Act 1958 (Vic), ss 28G, 28H and Pt VBA; Civil Liability Act 2003 (Qld), s 62; Civil Liability Act 1936 (SA), s 52; Civil Liability Act 2002 (WA), ss 9 – 10A; Civil Liability Act 2002 (Tas), ss 27 – 28; Civil Law (Wrongs) Act 2002 (ACT), s 99; Personal Injuries (Liabilities and Damages) Act 2003 (NT), ss 24 – 28.

chapter 14 Law of Torts 13

abolition of exemplary, punitive and aggravated damages for personal injury and a limitation on damages for past or future economic loss due to loss of earnings or impairment of earning capacity. 14 The common law principles of negligence will now be considered and, where relevant, reference will be made to the operation of the reform legislation. Figure 14.2 Negligence criteria

[14.70] The defendant in an action based on negligence will only be liable if the plaintiff can prove: (a)

the defendant owed the plaintiff a duty of care;

(b)

the defendant was in breach of this duty of care;

(c)

the defendant’s breach of duty was the cause of the plaintiff’s loss (“causation”); and

(d)

the damage suffered by the plaintiff was not too remote (“remoteness of damage”).

There are two other considerations: (e)

Whether either of the two defences or mitigating factors to a negligence clain – contributory negligence and voluntary assumption of risk – are relevant

(f)

Whether the civil liability reforms are relevant

13 14

Civil Liability Act 2002 (NSW), s 21 and Civil Liability Act 2003 (Qld), s 52. These provisions are not replicated in the other States or Territories. Civil Liability Act 2002 (NSW), s 12; Wrongs Act 1958 (Vic), s 28F; Civil Liability Act 2003 (Qld), s 54; Civil Liability Act 1936 (SA), s 54; Civil Liability Act 2002 (WA), s 11; Civil Liability Act 2002 (Tas), s 26; Civil Law (Wrongs) Act 2002 (ACT), s 98; Personal Injuries (Liabilities and Damages) Act 2003 (NT), s 20. In Queensland, these provisions must also be read in conjunction with Personal Injuries Proceedings Act 2002 (Qld) which aims to minimise the cost of claims. See also Civil Law (Wrongs) Act 2002 (ACT); and Legal Profession Act 1987 (NSW). The Personal Injuries Proceedings Act 2002 (Qld) and Civil Law (Wrongs) Act 2002 (ACT) also place restrictions on the commencement of actions. See also Personal Injuries (Civil Claims) Act 2003 (NT).

311

312

Introduction to Business Law in Australia

Duty of care [14.80] In the following landmark decision the “neighbour principle” was born, defining the circumstances in which a duty of care could arise. In essence, it involved the idea of “reasonable forseeability”: would a reasonable person have seen that his or her actions would affect this type of plaintiff to this kind of risk if they acted carelessly?

Donoghue v Stevenson [14.90] Donoghue v Stevenson [1932] AC 562. On the evening of Sunday, 26 August 1928, May Donoghue boarded a tram in Glasgow for the short journey to Paisley. She and an unnamed friend went to the Wellmeadow Café. The friend ordered and paid for an ice-cream drink. The owner brought the order and poured ginger beer from an opaque bottle into a tumbler containing ice cream. May Donoghue drank some of the contents and her friend lifted the bottle to pour the remainder of the ginger beer into the tumbler. The remains of a decomposed snail dropped out of the bottle into the tumbler. May Donoghue later complained of stomach pain and her doctor diagnosed her as having gastroenteritis and being in a state of nervous shock. As there was no contract between herself and the café owner (because she was not the purchaser), she could not sue in contract for breach of the implied term that the goods were fit for their purpose. Instead, she sued the manufacturer, David Stevenson, in tort for negligence. The writ alleged that she had become ill after drinking the contaminated ginger beer. She alleged that the manufacturer, “owed her a duty to take reasonable care that the ginger beer he manufactured, bottled, labelled and sealed, and invited her to buy, did not contain substances likely to cause her injury.” Such a writ had never been issued before: up to this point, a manufacturer was not liable to a consumer in the absence of fraud, and in the absence of a contractual or fiduciary relationship. The House of Lords upheld May Donoghue’s appeal by a majority of 3–2. Lord Atkin delivered the leading judgment in which he explained the circumstances when a duty of care would arise: “There must be, and is, some general conception of relations giving rise to a duty of care, of which the particular cases found in the books are but instances. …The rule that you are to love your neighbour becomes in law you must not injure your neighbour; and the lawyer’s question: Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour.” “Who, then, in law, is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions that are called in question …” Then Lord Atkin explained the narrower ratio that addressed the facts in this case: “a manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with knowledge that the absence of reasonable care in the preparation or putting up of products will result in an injury to the consumer’s life or property, owes a duty to the consumer to take that reasonable care. A man has a Duty of Care to conduct himself in such a way as to avoid harm to others, where a reasonable man would have seen that such harm could occur”: at [580]. The case was returned to Scotland for the Court of Session to apply the ruling to the facts of the case. In the event, David Stevenson died within a year of the decision and his executors settled out of court for £200.

chapter 14 Law of Torts

Threshold for a duty of care [14.100] As a result of Donoghue v Stevenson, “forseeability of harm” emerged as the threshold requirement for a negligence action. However, forseeability alone was never enough. If it were, there would be a very heavy burden of potential liability because, after all, reasonable foreseeability of harm is not difficult to establish. For this reason, the courts have restricted the circumstances in which a duty of care is owed to ones where the plaintiff and the defendant are in some form of proximity to one another (or, to use the language of Lord Atkin, the plaintiff must be a “neighbour” of the defendant, one who is “so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions that are called in question”.

The approach to the duty of care situation in novel or unusual situations [14.110] It is not difficult to establish that a duty exists where the plaintiff suffers physical harm (for example, when the plaintiff has been poisoned by a drink made by a careless manufacturer, or run down by a speeding driver, or blinded by a careless ophthalmologist, or injured by a falling brick) or where the courts have recognised in a previous case that a duty relationship exists (such as between manufacturers and consumers, drivers of motor cars and other road users, employers and employees, professionals providing services and clients, schools and students, local authorities and the citizens, occupiers of property and those who enter the property (such as shopping centre owners and customers)). It is when the situation has not come before the courts previously and does not come under one of the recognized relationships or where the damage is purely economic, that courts have had to refine or narrow the circumstances in which a duty of care exists. For instance, in Bryan v Maloney (1995) 182 CLR 609, the question that came before the High Court for the first time was whether a builder who had built a house for one person under a contract with that person owed a duty of care to a subsequent purchaser for defects in the house caused by the builder’s negligent construction. The High Court said sufficient proximity existed between the builder and the subsequent owner arising from: (a)

the fact that residential premises are a significant investment by a residential purchaser;

(b)

the foreseeability that the negligent construction was likely to cause economic loss; and

(c)

the causal proximity between the builder’s negligence and the economic loss suffered.

Kirby J in Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180 succinctly stated what he contends is the best approach or methodology for deciding whether a duty of care exists in unusual circumstances. His Honour suggested that the court must ask three questions: 1.

Was it reasonably foreseeable to the alleged wrongdoer that particular conduct or an omission on its part would be likely to cause harm to persons who have suffered damage or a person in the same position?

2.

Does there exist between the alleged wrongdoer and such person a relationship characterised by the law as one of “proximity” or “neighbourhood”?

3.

If so, is it fair, just and reasonable that the law should impose a duty of a given scope upon the alleged wrongdoer for the benefit of such a person: (at [259])?)

In the following two cases – both of which are unusual cases and both of which involve “psychological harm” – the High Court eschewed proximity per se as a factor in deciding whether a duty of care is owed.

313

314

Introduction to Business Law in Australia

In Kirby J’s words, proximity “gives little practical guidance in determining whether a duty of care exists in cases that are not analogous to cases in which a duty has been established” (at 578). Instead it has settled on a composite test where a number of elements – reasonable forseeability, proximity in one form or another, public policy considerations and indeterminancy issues, particularly in relation to pure economic loss – may be taken into account.

Tame v New South Wales [14.120] Tame v New South Wales (2002) 211 CLR 317: The appellant who had been involved in a car accident in 1991 was tested to determine her blood alcohol content. A police sergeant incorrectly reported as having a reading of 0.14, almost three times the legal limit. It was soon corrected, and it was never acted upon by anybody. However, the appellant, who had consumed very little alcohol for twenty years, became obsessed by the error when informed by her solicitor in 1992 and in 1995 was diagnosed as having developed a psychotic depressive illness because she felt that the community would believe she had been drunk when the accident occurred. She sued the police in negligence. Held: The High Court dismissed the claim. The respondent did not owe a duty of care to the appellant. The police sergeant could not reasonably have been expected to foresee that his mistake carried a risk of harm to Mrs Tame of the kind that resulted. It was not reasonable to require him to have her mental health in contemplation when he recorded the results of the blood tests. The High Court reaffirmed that the reasonable foreseeability inquiry is a composite test involving an issue of fact (is it foreseeable that if D does not exercise reasonable care P would be injured?) and a question of value (is it reasonable to say that a duty of care is owed by the defendant to the plaintiff?). The determination involves an assessment of community standards – objectively speaking, would the community regard it as reasonable for a duty of care to exist? Put simply, the latter element means that the court takes into account the broader question of the effect on society if a duty of care is or is not found to exist. What would the effect be on the broader community? Such policy considerations were evident in relation to the perceived need to restrict claims in pure economic loss and psychological damage cases. For instance, in Tame there were clear policy considerations that affected the decision that the police did not owe a duty of care to Mrs Tame. It would have placed too great a burden on police if they were liable for the consequences of every relatively minor administrative mistake. Similarly, policy considerations affected the decision in the negligent misstatement cases that we will examine later: for many years, the courts were reluctant to find a financial adviser liable to those who suffered loss as a result of the advisor’s negligence because, to do so, might expose advisors to an indeterminate risk. In the following case, the High Court had to calibrate common law duties and statutory obligations.

Sullivan v Moody [14.130] Sullivan v Moody [2001] HCA 59. Sullivan was the father of a young daughter who was referred to a sexual assault referral centre at the Queen Elizabeth Hospital in Adelaide. The defendants, a doctor and two social workers, consistent with their statutory obligations, examined the daughter and, after an examination, concluded she had suffered sexual abuse. Each is alleged to have owed a duty to the plaintiff to exercise reasonable care in the conduct of the examination and

chapter 14 Law of Torts

when investigating the possibility of sexual abuse. But the case was focused as much upon the communication of information by the respondents to the appellants and to third parties as upon the competence with which examinations or other procedures were conducted. The plaintiff alleges that he suffered shock, distress, psychiatric injury, and consequential personal and financial loss. No criminal charges were laid but the allegations were believed by the plaintiff’s wife and they resulted in the breakdown of the marriage. The Family Court resolved the family dispute in favour of the plaintiff. The Community Welfare Act 1972 (SA) not only obliged the defendants to put the child’s welfare first but it also provided: ″Where a person acts in good faith and in compliance with the provisions of this section, he incurs no civil liability in respect of that action: s 95(5). The High Court decided that there was no duty of care owed to the plaintiff. “More fundamentally, however, these cases 15 present a question about coherence of the law… A duty of the kind alleged should not be found if that duty would not be compatible with other duties which the respondents owed … if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that the duty exists. Similarly, when public authorities … are charged with the responsibility of conducting investigations, or exercising powers, in the public interest, or in the interests of a specified class of persons, the law would not ordinarily subject them to a duty to have regard to the interests of another class of persons where that would impose upon them conflicting claims or obligations. The statutory scheme that formed the background to the activities of the present respondents was, relevantly, a scheme for the protection of children required the respondents to treat the interests of the children as paramount. Their professional or statutory responsibilities involved investigating and reporting upon, allegations that the children had suffered, and were under threat of, serious harm. It would be inconsistent with the proper and effective discharge of those responsibilities that they should be subjected to a legal duty, breach of which would sound in damages, to take care to protect persons who were suspected of being the sources of that harm … The interests of the child, in such a case, would favour reporting that the suspicion of abuse has not been dispelled; the interests of a person suspected of the abuse would be to the opposite effect”: at [55]–[62]. Thus, although the duty of care question has been settled in many areas and most relationships, it is clear that it is still an evolving concept and there is still uncertainty as to the correct test to be applied in unusual situations.

15

There were two other cases that raised similar issues heard at the same time as Sullivan v Moody.

315

316

Introduction to Business Law in Australia

The duty of care in specific situations Figure 14.3: Nature of the duty of care

[14.140] We will now consider the duty of care test in five specific situations. There is clearly overlap but it is useful to examine how the courts have formulated the tests depending on the act or omission or the kind of damage inflicted. 1.

Negligent acts causing physical harm.

2.

Negligent acts causing mental harm.

3.

Liability for omissions.

4.

Negligent acts causing pure economic loss.

5.

Negligent statements causing pure economic loss.

1. Acts causing physical harm [14.150] In the case of a positive infliction of physical harm, the existence of a duty of care is well established: see Donoghue v Stevenson [1932] AC 562. It depends on whether the harm suffered by the plaintiff was reasonably foreseeable. The requirement of reasonable foreseeability of harm involves the application of an objective test. The court asks whether a hypothetical reasonable onlooker would have foreseen the possibility of injury to certain individuals involved in the particular event. Physical harm means injury to the plaintiff or damage to his or her person and/or property. As we have seen, the existence of a duty of care depends on whether the harm suffered by the plaintiff was “reasonably foreseeable”. It is not necessary to forsee exactly how the damage might occur.

chapter 14 Law of Torts

Chapman v Hearse [14.160] Chapman v Hearse [1961] 106 CLR 112. Chapman drove negligently and crashed into another car, rolling his car and being flung out onto the road where he lay unconscious. Several people stopped to help. One was Cherry, who was a doctor. Whilst he was attending to the unconscious Chapman, he was struck and killed by Hearse, who was also driving negligently. Cherry’s estate sued Hearse and he was ordered to pay damages. A further issue was whether Chapman was also liable in negligence for Cherry’s death. Chapman claimed that he could not reasonably foresee that he would be thrown out onto the road, and that a person who stopped to assist him would then be killed by another car. The High Court held that there was a duty of care. It said: “It is sufficient … to ask whether a consequence of the same general character as that which followed was reasonably foreseeable as one not unlikely to follow a collision between two vehicles on a dark wet night upon a busy highway. The particular sequence here was of a class that should have been anticipated when driving negligently – driving negligently could very easily result in someone being run over”: at [120].

2. Negligent acts causing mental harm [14.170] A duty of care may arise in so-called “nervous shock” or psychiatric illness cases. However, mindful of the floodgates that could open, the courts have been careful to restrict the circumstances in which a person owes a duty of care in such cases.

Jaensch v Coffey [14.180] Jaensch v Coffey [1984] HCA 52. The plaintiff’s husband, Allan, was a policeman in Adelaide. In the early evening of 2 June 1979 he was on duty riding his motorcycle when he collided with a motor vehicle negligently driven by Mr Jaensch. Allan was seriously injured. He was taken by ambulance to the Royal Adelaide Hospital. Two police officers brought the news to Mrs Coffey. She was at home, away from the scene of the accident. The police brought her to the hospital where she saw Allan in the casualty section in severe pain. She stayed at the hospital and saw what was happening to Allan until a doctor advised her to go home to sleep. He told her that Allan was “pretty bad”. When Mrs Coffey left the hospital that evening, she thought Allan was going to die. She first realized that Allan would survive three to four weeks after the accident. After her experience at the hospital, Mrs Coffey suffered severe anxiety and depression. Her psychiatric condition caused gynaecological problems and a hysterectomy was later performed. The High Court held that Mrs Coffey could recover damages for “nervous shock” because, although she was not present at the scene of the accident, she came to the hospital in the immediate aftermath. There was, therefore, sufficient “proximity” (ie she was “so closely and directly affected by the act”). Following this decision, plaintiffs could recover damages for a recognised psychiatric illness, caused by the death or injury of family or loved ones (or, indeed, work colleagues if the plaintiff is a rescuer: Mt Isa Mines v Pusey (1970) 125 CLR 383) even though they were not physically present at the scene of the accident. However, the claimants must have personally experienced – with eyes or ears – the “immediate aftermath” of the event.

317

318

Introduction to Business Law in Australia

To prevent the floodgates opening on “nervous shock” claims, the High Court excluded a number of claimants including claimants who experienced normal rather than pathological grief as a result of their loved one’s death or injury; claimants who had “mere knowledge” – that is, were told about the death or injury of their loved one, rather than perceiving the accident or its immediate aftermath themselves; and mere bystanders or curious onlookers. By contrast, as we have seen, the High Court in the following case, held that the policeman owed no duty of care for the mental illness that was caused by the administrative error.

Tame v New South Wales [14.190] Tame v New South Wales (2002) 211 CLR 317. (See the facts at [14.120] above.) The High Court decided that a reasonable person in the policeman’s position would not have foreseen that his conduct in carelessly completing the traffic collision report involved a risk of causing a recognisable psychiatric illness to the appellant. “It may be conceded that it was reasonably foreseeable that such carelessness may cause surprise, distress or anger … But it was not reasonably foreseeable that a person in the position of Mrs Tame would sustain a recognisable psychiatric illness from a clerical error which she was told was a mistake that had been rectified and in respect of which she received a formal apology. The appellant’s reaction was extreme and idiosyncratic. The risk of such a reaction was far-fetched or fanciful and … was not one which the law of negligence required a reasonable person to avoid”: at [232]–[233]. The High Court also affirmed that there is no requirement of “sudden shock” or “direct perception” by the plaintiff of a distressing phenomenon or its immediate aftermath. The absence “normal fortitude” on the part of the plaintiff (ie a predisposition to psychiatric illness) does not preclude the existence of a duty of care but will be a factor in assessing whether the injury was reasonably foreseeable.

3. Liability for omissions [14.200] Generally the common law imposes no liability for omissions or failing to act. The classic example concerns the child drowning in a shallow swimming pool. As morally confronting as it may be, unless the onlooker is a parent or a lifeguard or has some close relationship with the child, the common law imposes no duty to rescue the child. The reason for the reluctance to impose liability for an omission is that such liability involves the imposition of a duty to take positive action and the courts see this as a more serious interference with a person’s liberty than imposing an obligation to take care when acting. The only circumstance in which a person may be liable for omissions is where a person has a positive duty to act. Positive duties may be imposed where the parties are in a pre-existing relationship that contains elements of reliance or dependence or where the defendant is in a position of control. Examples include parent and child, doctor and patient, school authority or teacher and student, employer and employee and occupier and visitor.

chapter 14 Law of Torts

We will look at three cases where the issue was whether a duty of care arose in circumstances where the defendant did not act. Two are classic “failure to warn” cases and, in the third, the issue was whether a publican had a duty of care to prevent a drunk customer from driving his bike home.

Rogers v Whitaker [14.210] Rogers v Whitaker (1992) 175 CLR 479. The respondent, Maree Whitaker, had been almost totally blind in her right eye for nearly 40 years. Nevertheless she had lived a normal life. She consulted the appellant, Rogers, an ophthalmic surgeon, who advised her that an operation on the injured eye would not only improve its appearance but would probably restore sight to it. Following the surgery the respondent developed a condition known as “sympathetic ophthalmia” in her left eye which resulted in her losing her sight in that eye. Despite the fact that the operation was conducted with due care and skill, it failed to restore her sight. As a result, she was almost totally blind. She sued the appellant alleging his failure to warn her of the risk of sympathetic ophthalmia was negligent. She had not specifically asked whether the operation to her right eye could affect her left eye but she had incessantly questioned the appellant as to possible complications. Evidence given at the trial was that the risk of sympathetic ophthalmia was about one in 14,000 but, even then, not all cases lead to blindness in the affected eye. The appellant relied on the principle that the standard of care owed to a patient in all things is determined by medical judgment. The High Court rejected that argument. It held that, except in cases of emergency or necessity, doctors have a duty to warn patients of the risks associated with a surgical procedure. “…a medical practitioner has a duty to warn a patient of a material risk inherent in the proposed treatment; a risk is material if, in the circumstances of the particular case, a reasonable person in the patient’s position, if warned of the risk, would be likely to attach significance to it or if the medical practitioner is or should reasonably be aware that the particular patient, if warned of the risk, would be likely to attach significance to it.”: at [490]. This case confirmed is that in the usual circumstances the choice of whether to undergo a procedure is that of the patient but in order to make this decision they need to be informed of the risks that may be involved. Thus there is a duty on the doctor to act. In the following case the High Court considered the extent to which licensees or publicans have a duty of care to look after their customers’ health and welfare.

CAL No 14 Pty Ltd v Motor Accidents Board [14.220] CAL No 14 Pty Ltd v Motor Accidents Board (2009) 239 CLR 390. In January 2002, Shane Scott went to the Tandara Motor Inn in Triabunna, Tasmania for a drink after work. Scott gave the keys to his motorbike to Kirkpatrick, the licensee, and told Kirkpatrick not to allow him to ride home. He remained there drinking for about three hours. Kirkpatrick knew Scott was so drunk that he should refuse him service and that Scott would endanger himself if he left on his motorcycle. Nevertheless, he handed Scott the keys to his motorbike when Scott aggressively demanded them. Scott then left the hotel and, soon after, lost control of the bike, collided with a bridge, and was killed. At the time of his death, Scott had a blood alcohol level of 0.253. His widow, Sandra Scott, sued the owner and licensee of the motor inn, alleging they owed her husband a duty of care.

319

320

Introduction to Business Law in Australia

The High Court unanimously overturned a decision of the Full Court of the Supreme Court of Tasmania which held that a publican owed a duty to prevent a patron from driving his motorcycle home from the premises where he had been drinking. Although the actual decision in this case was decided on a narrower basis, the court took the step of “explicitly stating” the following “fundamental reason” why the lower court’s determination on duty was incorrect: “The reason is that outside exceptional cases … persons in the position of the Proprietor and the Licensee … owe no general duty of care at common law to customers which requires them to monitor and minimise the consequences of the alcohol they choose to consume”: at [52].

[14.230] As the following two cases show, a public authority that controls and manages land, parks, reserves or other public areas can come under a duty to act to protect members of the public against foreseeable danger in those areas.

Nagle v Rottnest Island Authority [14.240] Nagle v Rottnest Island Authority (1993) 177 CLR 423 at 430. Nagle was an employee of the Rottnest Island Authority Board, but had never previously visited the Reserve or swum at the Basin. He dived from a partially submerged rock ledge into the water. His head struck a fully submerged rock and he became a quadriplegic. He sued the Board in negligence arguing that it failed to give any or any adequate warning that the ledge was unsafe for diving when it knew or ought to have known that it formed a natural platform that members of the public would assume to be suitable for diving. The High Court held that the Board was the occupier of the Reserve and was under a statutory duty to manage and control it for the benefit of the public. In these circumstances, the Board owed a duty of care to warn those visitors of any foreseeable risks of injury to which they might be exposed. By encouraging the public to swim in the Basin, the Board came under a duty to take reasonable care to avoid injury to them and the discharge of that duty would naturally require that they be warned of foreseeable risks of injury associated with the activity so encouraged. 16

Graham Barclay Oysters Pty Ltd v Ryan [14.250] Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540. The High Court held that the defendant authority was not liable for injury suffered by the plaintiffs when they contracted hepatitis A after eating oysters from Wallis Lake in New South Wales. The Court pointed to the fact that the relevant legislation did not give the council any specific powers or functions with respect to

16

However, compare: Romeo v Conservation Commission (NT) (1998) 192 CLR 431 and two later decisions which were heard together by the High Court: Vairy v Wyong Shire Council (2005) 223 CLR 422 and Mulligan v Coffs Harbour City Council (2005) 223 CLR 486.

chapter 14 Law of Torts

oysters or the oyster industry. Accordingly, the council had no control over the risk of contamination, that is, the process by which commercial growers cultivated, harvested and supplied oysters. 17 As indicated earlier, there is now legislation dealing with the liability of public authorities. For instance, in New South Wales the Civil Liability Act 2002 (NSW) 18 sets out the principles to be applied in determining whether a public authority has a duty of care or has breached a duty of care. 19 One factor the Act requires to be taken into account is whether the authority’s functions are limited by the availability of resources. 20

4. Negligent acts causing pure economic loss [14.260] In cases concerning pure economic loss, the plaintiff suffers no personal injury or physical damage to their property but is simply financially worse off as a result of the defendant’s negligent acts. In these circumstances the courts have been reluctant to find a duty of care is owed. Something more than forseeability and proximity is required. A major concern in pure economic loss cases is the issue of indeterminancy. In Cardozo J’s famous edict the courts have refused to recognise a duty where it would lead to a liability which is “in an indeterminate amount for an indeterminate time to an indeterminate class (of plaintiff)”: Ultramares v Touche 255 NY 170 [1931] 179 at 179–180.

17

18

19

20

Compare State of South Australia v Lampard-Trevorrow (2010) 106 SASR 331 where the court found that the relevant legislative provisions were directed towards the protection and welfare of Aborigines and that the Aboriginal Protection Board owed a duty to an Aboriginal child in relation to whom it was considering exercising its power to remove a child from the care of and contact with its mother: at [369]. The court found that this duty had been breached by the authority’s failure to adequately satisfy itself that the risk of harm of leaving the child with its mother exceeded the risk from removing the child from the mother. Accordingly, the appeal against the trial judge’s award of damages was dismissed: at [412]. Civil Liability Act 2002 (NSW), Pt 5; Wrongs Act 1958 (Vic), Pt XXII; Civil Liability Act 2003 (Qld), Pt 3; Civil Liability Act 2002 (WA), Pt 1C; Civil Liability Act 2002 (Tas), Pt 9 and Civil Law (Wrongs) Act 2002 (ACT), Ch 8. Compare the Northern Territory and South Australian laws which are silent on the matter. Civil Liability Act 2002 (NSW), s 42; Wrongs Act 1958 (Vic), s 83; Civil Liability Act 2003 (Qld), s 35; Civil Liability Act 2002 (WA), s 5W; Civil Liability Act 2002 (Tas), s 38; Civil Law (Wrongs) Act 2002 (ACT), s 110. The legislation in South Australia and the Northern Territory is silent on the matter. Civil Liability Act 2002 (NSW), s 45; Civil Liability Act 2003 (Qld), s 37; Civil Liability Act 2002 (WA), s 5Z; Civil Liability Act 2002 (Tas), s 42 and the Civil Law (Wrongs) Act 2002 (ACT), s 113. In Victoria, see the Transport (Highway Rule) Act 2002 (Vic) amending the Transport Act 1983 (Vic), effective 1 January 2005 and overturning the common law development by enacting the former “highway rule”. Of similar effect is the Civil Liability Act 1936 (SA), s 42. The Northern Territory legislation does not deal with this issue.

321

322

Introduction to Business Law in Australia

Caltex Oil (Aust) Pty Ltd v The Dredge “Willemstad” [14.270] Caltex Oil (Aust) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529. The respondent’s dredger damaged a pipeline owned and operated by Australian Oil Refinery Pty Ltd (“AOR”). The defendants knew of the existence of the pipeline and the charts showed it went from an oil refinery on one side of Botany Bay to the Caltex Oil terminal on the opposite shore. Owing to the damage, the pipeline could not be used for some time. The defendants admitted liability for the loss of the oil in the pipeline but denied liability for the considerable additional expense incurred by Caltex in transporting the oil by alternative means to its terminal. The High Court held unanimously that Caltex could recover the economic loss suffered. The Court addressed the indeterminacy issue. Three judges said that there were exceptions to the indeterminacy obstacle where, as here, the defendant has the knowledge, or means of knowledge, that the plaintiff individually, and not merely as a member of an unascertained class will be likely to suffer loss. Mason J said that a duty of care could arise when: “a defendant can reasonably forsee that a specific individual as distinct from a general class of persons will suffer financial loss…This approach eliminates the prospect that there will come into existence liability to an indeterminate class”: at [593].

The High Court in the following decision clarified its meaning.

Perre v Apand Pty Ltd [14.280] Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180. Apand is a national manufacturer of potato chips. It negligently introduced bacterial wilt onto the Sparnon’s land in South Australia by importing uncertified seeds to trial a new potato chip. Sparnon and his potato growing neighbours (who included Perre) had a very profitable business selling potatoes to Western Australia because the price of potatoes in Western Australia was higher than in South Australia. Western Australian law prohibited the import of infected potatoes and the import of potatoes from farms in a 20 kilometre radius surrounding an infected farm. Sparnon and other potato farmers were therefore prohibited from exporting potatoes to Western Australia for five years. Perre and the other potato farmers sued Apand for the economic loss they had suffered as a result of the loss of access to the Western Australian market. Apand was aware of the Western Australian law prohibiting the importing of potatoes in such circumstances. The High Court unanimously found Apand did owe a duty to the Perres. Although each justice of the High Court delivered a separate judgment, there were a number of common factors. One of these was the indeterminacy question. McHugh J held that liability is indeterminate only when it cannot be “realistically calculated” and depends on “what the defendant knew or ought to have known of the number of claimants and the nature of their likely claims, not the [actual] number or size of their claims”: at [108]. In relation to the Perre’s, imposing the duty on Apand did not expose it to indeterminate liability. Perre belonged to a limited number of growers within the radius who may have been affected by the defendant’s careless conduct. He was not part of the indeterminate group who suffered loss as part of a “ripple effect” caused by Apand’s negligence. Such a group could include the pickers or truck drivers on Perre’s farm who lost money because the export ban reduced the number of potatoes that needed to be picked and taken to market in Western Australia.

chapter 14 Law of Torts

Another factor that influenced the court was that Perre was the dependency issue completely dependent on the defendant: he could not, himself, do anything to prevent the disease from causing him harm. And, furthermore, he was vulnerable. Vulnerability in this context means that he could not, through insurance or other means, protect himself from the consequences of the defendant’s negligence in a way that would ease the consequences.

Johnson Tiles Ltd v Esso Australia Pty Ltd [14.290] Johnson Tiles Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692. The plaintiffs were commercial gas consumers who suffered economic loss as a result of the interruption to the supply of gas for two weeks week caused by an explosion at the Longford gas plant owned by the defendant. Two men died and eight others were seriously injured in the blast. The economy was disrupted for months while the plant was restored and normal production resumed. Many individuals and businesses suffered property damage (eg Nandos chickens were spoiled) and economic loss flowing from property damage (eg loss of profit from not being able to sell the spoiled chickens) as well as pure economic loss (eg restaurants, supermarkets and manufacturers that had to close because they relied on gas for their daily operations as well as thousands of workers who were stood down because there was no work). Gillard J, building upon the reasoning in Caltex and Perre adopted a “three step methodology of reasoning” in relation to the claims for pure economic loss: 1.

reasonable forseeability of injury

2.

whether there is a relationship of proximity; and

3.

consideration of competing “salient features” for and against the finding that a duty of care exists. Gillard J found that the loss was reasonably foreseeable and there was sufficient proximity in the supplier-customer relationship. However, after weighing up what he referred to as the “salient features”, he held that Esso owed no duty of care for the pure economic loss it caused. The key “salient features” were:  The indeterminacy issue. The Court found that Esso’s customers were not an indeterminate class. Esso was able to ascertain gas customers by accessing the records. It was sufficient that Esso was aware that interruption to the supply could cause substantial harm to gas customers. By contrast, the stood-down workers constituted a class of persons who could suffer loss as a result of the stoppage. However, the principle of indeterminacy applies to deny any duty of care by Esso to the stood-down workers. The first line victim is the employer – the general rule is against recognising a duty of care to “ripple effect” victims, such as the stood-down workers. “The uncertainty of the number of workers and the amount of their losses is a paradigm case of indeterminate liability”: at [945].  Assumption of responsibility. What did Esso agree to do? In simple terms, did Esso take it upon itself to guarantee an uninterrupted supply of gas? The Court found that Esso did not take it upon itself to guarantee the supply of gas.  The vulnerability question. The Court asked whether the relevant plaintiff could have protected itself from economic loss where there was vulnerability. Normally insurance is irrelevant but in this case the Court thought it was because it touched on vulnerability. The commercial customers were insured and prudent parties had in fact taken out insurance. Also back up plant and equipment could be installed.

323

324

Introduction to Business Law in Australia

5. Negligent statements causing pure economic loss [14.300] Two party scenarios: Initially, 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 some time after Donoghue v Stevenson [1932] AC 562, plaintiffs had little success in 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 following US case elaborates on the rationale for the distinction:

Ultramares v Touche [14.310] Ultramares v Touche 255 NY 170 [1931] 179. The plaintiffs, Ultramares, provided extra credit facilities to a client based on a balance sheet that had been certified by the defendant’s accountants. The balance sheet created the impression that the client was in a good financial position. In fact the client company was insolvent but had fraudulently altered its books to conceal its insolvency. If the accountants had acted with reasonable care they would have discovered the fraud. The defendants sued the accountants. The central issue for the court to determine was whether the accountants owed a duty of care to the plaintiffs. The court held that the accountants did not owe the plaintiffs a “duty of care” because it would open the floodgates if accountants were liable in these circumstances. As Cardozo CJ famously said: “A thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.”

[14.320] The breakthrough came in 1964 with the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. In that case the House of Lords unanimously held that, in certain circumstances, the law 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.

Hedley Byrne & Co Ltd v Heller & Partners Ltd [14.330] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. The plaintiff was an advertising agency that was to place television and newspaper advertisements on behalf of a company called Easipower. As the plaintiff was to personally guarantee the payment of these advertising accounts, it sought credit references from the defendant merchant bank, Easipower’s banker. The defendant subsequently supplied a written report indicating that Easipower was creditworthy. The heading on the report said, “without responsibility on the part of this bank or its officials”. In reliance on the written report the agency placed advertising for its client. Easipower, in fact, was not creditworthy and the plaintiff agency was unable to recover the amount paid for the advertisements.

chapter 14 Law of Torts

Although the House of Lords said that a duty of care could arise in circumstances like those before it, the plaintiff’s action failed because the defendant bank had effectively disclaimed responsibility for the reference it had given. The House of Lords rejected earlier suggestions that liability for negligent misstatement, apart from contract, was limited to where there was a fiduciary relationship. A duty of care in making statements could arise in circumstances where there existed what the House of Lords referred to as a “special relationship” between the parties. The House of Lords did not detail the precise nature of this relationship, although it is clear that it would involve some element of reliance.

Mutual Life and Citizens' Assurance Co Ltd v Evatt [14.340] Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556. The officers of a life assurance company (Mutual Life and Citizens’ Assurance Co Ltd (MLC)) made statements to policy holder (Evatt) about the financial affairs of another company, Palmer. As a result of acting on the advice Evatt suffered economic loss. The Privy Council held that MLC owed no duty of care to Evatt in these circumstances. Lord Diplock held that the duty of care arose only where the advice was given in the exercise of business or professional skill possessed or claimed by the adviser or possibly where adviser had a financial interest in the advice being acted upon. However when the case had come before the High Court Australia (on its way to the Privy Council – as could happen until the abolition of the right to appeal to the Privy Council in 1986 – Barwick CJ explained the nature of the “special relationship” that must exist before a duty can arise in cases of pure economic loss: “It seems to me, therefore, that whenever a person gives information or advice to another, whether that information is actively sought or merely accepted by that other upon a serious matter, and particularly a matter of business, and the relationship of the parties arising out of the circumstances is such that on the one hand the speaker realises or ought to realise that he is being trusted, particularly if he is thought by the other to have, or to have particular access to, information or to have a capacity or opportunity to exercise judgment or both as to the matter in hand, to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to seek or accept and in either case to act upon that information and advice the speaker, choosing to give the information or advice in such circumstances, comes under a duty of care both to utilise with reasonable care the information and sources of information at his disposal and to employ with reasonable care what capacity he has for judgment in relation to the matter and to exercise reasonable care in the expression of what he is prepared to convey by way of information or advice”: at 572–573.

[14.350] The High Court’s decision in Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 establishes that the duty extends to the supply of information as well as advice.

325

326

Introduction to Business Law in Australia

Shaddock & Associates Pty Ltd v Parramatta City Council [14.360] Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225. The plaintiffs (property developers) owned property on the south-east corner of Macquarie and O’Connell Streets, City of Parramatta, near Sydney. They intended to redevelop the land by erecting a commercial building on the property. The plaintiff’s solicitor made inquires to the city council about the property. In answers to verbal inquiries and later written inquiries by the plaintiff’s solicitor, the respondent (Parramatta City Council) did not reveal that there proposals for road-widening that affected the property. In actual fact the proposals were, at the time of the solicitor’s inquiries, already adopted in principle by the city council. The plaintiffs claimed that the remaining parts of the property would be unsuitable for their proposed redevelopment. They also alleged that they would not have bought the property if they had been aware of the proposal by the city council to reduce the size of the property to widen the adjacent streets. The plaintiffs argued that the city council owed them a duty of care to inform them about the road-widening proposal. Held: The High Court held that the city council committed the tort of negligence causing pure economic loss and was liable to the plaintiffs for the losses they suffered. The city council was under a duty of care in relation to the provision of advice or information (the court held that no distinction should be drawn between “advice” and “giving of information”) because it was of a kind that called for skill and competence that the city council professed to possess. Further the city council knew or ought to have known that the recipient intended to act or rely on the information (reasonable foreseeable). [14.370] Although it was not specifically discussed, it seems clear that the High Court was anticipating the factors considered by the subsequent High Court decision in Perre v Apand (see above). Compare the two decisions. In Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 liability arose because one particular developer was involved and the amount of pure economic loss was reasonably easy to determine (no indeterminacy of liability); the plaintiffs were vulnerable as they had no other reasonable way of finding out about the city council road widening proposals (test of vulnerability); the defendants knew or ought to have known of the risks and its magnitude by negligently not providing information to the plaintiffs (test of defendants’ knowledge of the risk and its magnitude); and there can be little doubt that this liability would not have placed any serious unreasonable burdens on the autonomy of city councils generally (test of unreasonable burdens on the autonomy of individuals). It is clear from the following case that the High Court has accepted the Barwick CJ formulation of the “special relationship” as the test for determining the existence of a duty of care in the making of statements or the giving of advice.

San Sebastian Pty Ltd v Minister Administering Environmental Planning and Assessment Act 1979 [14.380] San Sebastian Pty Ltd v Minister Administering Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 concerned the publication of a redevelopment plan by the State Planning Authority and the Sydney City Council. The plan encouraged private developers to buy land sites and construct high density office blocks. On the faith of the plan, the plaintiffs bought up land

chapter 14 Law of Torts

with a view to redevelopment. When the plan was abandoned because it was found not to be feasible, the plaintiffs suffered a financial loss. The plaintiffs argued that the defendant had falsely represented that the plan was feasible. The High Court held that the plaintiffs could not succeed unless they could establish “at least, amongst other things, (1) that the alleged representation was made, and (2) that the Authority and the council made the representation with the intention of inducing members of the class of the developers to act in reliance on the representation”. The High Court concluded that the plaintiff failed to establish the first matter and therefore the second did not arise. While Gibbs CJ, Mason, Wilson and Dawson JJ pointed out that in the usual case of negligent misstatement, an antecedent request for information or advice demonstrates reliance which is a key determinant of the existence of a duty of care, their joint judgment held that such a request is not essential and that a defendant volunteering information or advice can be liable for negligent misstatement: “The maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. He may invite the recipient to act on the basis of the information or advice, or intend to induce the recipient to act in a particular way. He may actually have an interest in the recipient so acting”: at 357.

[14.390] An application of the emerging principles regarding liability for negligent misstatements has been in respect of the “overseas foreign currency loan” cases. Thus, banks have been held liable for damages for the loss suffered by their customers who relied on negligent misstatements or advice by bank managers or other bank officials promoting the advantages of borrowing money in a foreign currency without giving adequate warning of the dangers (currency fluctuations causing the loan amount to increase) associated with such loans: Foti v Banque Nationale de Paris [1990] Aust Torts Reports 81-025; Chiarabaglio v Westpac Banking Corp [1989] ATPR 40-971; [1991] ATPR (Digest) 46-067 (FC); Westpac Banking Corp v Spice [1990] ATPR 41-024. However, where no specific representations were made by the bank to the customer in arranging such loan; or the customer was adequately warned of the inherent dangers of such loans and/or advised to seek professional financial advice from those with expertise in the area; or the evidence disclosed that the customer was aware of the dangers associated with such loans from information from other sources, then the bank has been held not liable for the substantial losses suffered by their customers in respect of such loan: David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 (the High Court allowed an appeal on a different issue); McEvoy v ANZ Banking Group Ltd [1988] Aust Torts Reports 80-151; Lloyd v Citicorp Australia Ltd (1986) 11 NSWLR 286. Depending on the particular circumstances, it may be preferable in this context to pursue an action for contravention of the misleading and deceptive conduct provisions of s 18 of the Australian Consumer Law 21 (formerly, s 52 of the Trade Practices Act 1974 (Cth)) rather than the common law principles regarding negligent misstatements: see further at [13.40]. 21

The is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 13.

327

328

Introduction to Business Law in Australia

[14.400] Third party scenarios: The establishment of liability for negligent misstatement has also led to an increasing number of actions against solicitors, accountants, auditors and other financial advisers for recoupment of financial losses allegedly suffered as a result of reliance by third parties, such as investors, creditors shareholders, those considering a takeover, on negligent advice or information provided by the accountant, auditor or solicitor. [14.410] An issue that has arisen in respect of an auditor’s liability for misstatement is whether the auditor’s duty of care is limited to the client for whom the audited accounts are prepared, or whether the duty extends to any person who relies on a statement contained in the auditor’s report. In the United Kingdom, the House of Lords has held that the liability of an auditor does not extend to the situation where the audit statement was relied on by a third party for a purpose other than the particular purpose for which it was prepared: Caparo Industries Plc v Dickman [1990] 2 AC 605. The decision of the High Court in the following case demonstrates how cautious the courts are about recognising a duty of care in a situation where negligent advice or information provided to one person is used by an unintended or unknown person who suffers economic loss as a result. Something more than reasonable forseeability of harm is required: there must be some reliance or assumption of responsibility.

Esanda Finance Corp Ltd v Peat Marwick Hungerfords [14.420] Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241. The plaintiff (Esanda) was a financier who, in reliance on the audited accounts of a company (Excel), lent money to various companies associated with Excel, accepting a guarantee of repayment from Excel. Peat Marwick Hungerfords (PMH) was a firm of chartered accountants and was Excel’s auditor. Excel went bankrupt and Esanda lost considerable amounts of money. In the legal action Esanda claimed that PMH was negligent in carrying out the audit and that Esanda suffered loss as a result of relying on the audited accounts prepared by the defendant accounting firm. Esanda asserted that it would not have entered into the transactions but for its reliance on the audited accounts. It alleged that PMH owed it a duty of care, as Esanda belonged to a class of persons who might reasonably and foreseeably rely on the audited accounts and audit report. Held: The High Court held that PMH did not owe Esanda a duty of care. To establish liability for economic loss, a plaintiff has to show that there was a sufficient relationship between himself or herself and the defendant. However the mere fact that it was reasonably foreseeable that someone (such as lenders or investors) might rely on the statements is not enough. The plaintiff needs to show that the defendant has assumed responsibility for providing the information or advice (though a request is not essential) in circumstances in which the defendant knew or should have known that the plaintiff, himself or herself, would access the information or advice, that he or she would act upon it and would suffer loss if the advice or information was careless. The mere fact that PMH should reasonably have foreseen that members of a particular class (for example, creditors or investors or shareholders) might rely on the accounts was not enough to give rise to a duty of care. The Court said: “… in every case, it is necessary for the plaintiff to … prove that the defendant knew or ought to reasonably have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statements should be untrue or

chapter 14 Law of Torts

the advice should be unsound. If any of these elements are found to be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice”: at [252]. After pointing out that the defendant auditors were in a “particularly advantageous position to know or ascertain the true financial position” of Excel, their audit client, Toohey and Gaudron JJ said that Esanda should have made its own enquiries: “However, there is nothing to suggest Esanda was not itself able to have accountants undertake the same task on its behalf as a condition of its entertaining the possibility of entering into financial transactions with Excel. And, which is much the same thing in the circumstances of this case, there is nothing to suggest that it was reasonable for Esanda to act on the audited reports without further inquiry”.

Breach of the duty of care [14.430] Assuming that it is established or admitted that the defendant owes the plaintiff a duty of care, the plaintiff then has the burden of proving that the defendant was negligent. That is, that the defendant failed to reach the required standard of care. The standard of care expected is that of the reasonable person. Alderson B provided the classic definition of negligence in Blyth v Birmingham Waterworks Co (1856) 11 Exch 781, 156 ER 1047, Alderson B said: “Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs would do, or something which a prudent and reasonable man would not do.” As the relationships or situations that give rise to a duty of care have largely been settled in previous cases, the issue that most commonly arises in negligence disputes is whether or not the defendant has breached his or her duty of care.

Who is the reasonable person? [14.440] The standard of the reasonable person, which is used to determine the issue of whether there has been a breach of the duty of care, involves an objective, impersonal test. The personal idiosyncrasies of the defendant, such as a quick temper or low intelligence, are not taken into account. However, in some cases, the objective standard can be defined in more detail. For example, in a case involving a very young defendant, the reasonable man test gives way to the standard of a child of similar age and experience: McHale v Watson (1964) 111 CLR 384. The reasonable person is also equipped with the same skills and expertise expected of a person exercising a particular trade or profession. For example, in an action against a doctor for professional negligence, the relevant standard is that of an ordinary, competent doctor exercising ordinary professional skill: Chin Keow v Government of Malaysia [1967] 1 WLR 813 (PC). Although a reasonably forseeable risk may give rise to a duty of care, it is the inquiry as to the scope of that duty in the circumstances and the response to the relevant risk by a reasonable person which dictates whether the defendant has breached the duty by not guarding against that risk.

329

330

Introduction to Business Law in Australia

The following two High Court decisions illustrate this point.

Voli v Inglewood Shire Council [14.450] Voli v Inglewood Shire Council (1963) CLR 74. A memorial community hall was built by the Inglewood Shire Council. It was built according to the drawings and specifications prepared by a qualified architect. Unfortunately, just a year after completion at the Annual Meeting of the South Queensland Tobacco Growers’ Co-operative Association the stage collapsed when a lot of people were on the stage casting their vote in a ballot. Several people, including Luigi Voli, a tobacco grower, were injured. The cause of the collapse of the stage was not any deterioration in the structure caused by the passage of time. It was simply that the joists supporting the flooring of it were not strong enough to carry the load that was upon it. This load, however, was not greater than such a stage might reasonably be expected to bear. The general competence of the architect was not questioned: he just made an unfortunate mistake. One of the issues was the standard of care expected of an architect. The High Court said: “An architect undertaking any work in the way of his profession accepts the ordinary liabilities of any man who follows a skilled calling. He is bound to exercise due care, skill and diligence. He is not required to have an extraordinary degree of skill or the highest professional attainments. But he must bring to the task he undertakes the competence and skill that is usual among architects practising their profession. And he must use due care. If he fails in these matters and the person who employed him thereby suffers damage, he is liable to that person”: at [84].

Rogers v Whitaker [14.460] Rogers v Whitaker (1992) 175 CLR 479 (for facts see [14.120]) the High Court, in relation to the standard of care expected of a surgeon said: “In Australia, it has been accepted that the standard of care to be observed by a person with some special skill or competence is that of the ordinary skilled person exercising and professing to have that special skill Further, and more importantly, particularly in the field of non-disclosure of risk and the provision of advice and information, the courts have adopted … the principle that, while evidence of acceptable medical practice is a useful guide for the courts, it is for the courts to adjudicate on what is the appropriate standard of care after giving weight to the paramount consideration that a person is entitled to make his own decisions about his life”: at [6], [12].

The two stage process to determine breach [14.470] As indicated above, the breach of duty issue is central to the civil liability legislation. Section 5B of the Civil Liability Act 2002 (NSW) mirrors the common law principle established in Wyong Shire Council v Shirt (1980) 146 CLR 40 insofar as it provides a two-stage inquiry for determining whether there has been a breach of duty:

chapter 14 Law of Torts 22

1.

Section 5B(1) – foreseeable risk of harm (that is a risk of which the person knew or should have known). The statute requires a greater degree of probability than the common law in determining whether there is a foreseeable risk of harm to which a reasonable person would have responded. At common law, it is thought that a reasonable person would respond to a risk of harm that is not “far-fetched and fanciful”. 23 Under the Act, the defendant will only be in breach of duty for a failure to respond if the risk of harm is “not insignificant”. 24

2.

Section 5B(2) 25 – how would a reasonable person in the defendant’s position have responded? To assess this, the statute adopts the common law approach of taking into account various factors to consider whether, and if so how, a reasonable man would have responded to the risk. These factors, which are not looked at in isolation but are weighed against one another, include the following: (a)

the probability of the risk of injury;

(b)

the gravity of the harm;

(c)

the burden of eliminating the risk; and

(d)

the utility of the defendant’s conduct.

The first stage – the reasonable forseeability test – is not hard to establish. It is only necessary to establish that the general nature, not the precise risk, was foreseeable. It must be a risk that is “not insignificant” or, at common law, the less demanding “not far-fetched or fanciful”. As the High Court said in Wyong Shire Council v Shirt (1980) 146 CLR 40: “A risk of injury which is remote in the sense that it is extremely unlikely to occur may nevertheless constitute a foreseeable risk. A risk that is not far-fetched or fanciful is real and therefore foreseeable”: at [47]. If there is a reasonably foreseeable risk of harm, we move to the second stage because, as Kirby J explained in Romeo v Conservation Commission (NT) (1998) 192 CLR 431, “It is quite wrong to read past authority as requiring that any reasonably foreseeable risk, however remote, must in every case be guarded against”: (at [480] Thus the second stage of the inquiry involves an assessment of the reasonableness of the defendant’s response to the reasonably foreseeable risk. The court may consider the factors listed above (the “calculus of negligence”). One or more of the factors may be considered. For instance in the following case, the court took several factors into account:

22

23 24

25

Civil Liability Act 2002 (NSW), s 5B(1); Wrongs Act 1958 (Vic), s 48(1); Civil Liability Act 2003 (Qld), s 9(1); Civil Liability Act 1936 (SA), s 32(1); Civil Liability Act 2002 (WA), s 5B(1); Civil Liability Act 2002 (Tas), s 11(1) and the Civil Law (Wrongs) Act (ACT), s 43(1). The Northern Territory legislation does not deal with this issue. Wyong Shire Council v Shirt (1980) 146 CLR 40 at 47 per Mason J. In New South Wales v Fahy (2007) 232 CLR 486, the High Court considered whether the common law formulation laid down in Wyong Shire Council v Shirt (1980) 146 CLR 40 should be revisited. While Gleeson CJ at [78] and Crennan J at [241] took the view that there was no need to deal with this issue and Kirby J at [119] said that a re-expression of the Shirt formulation should be rejected, Callinan and Heydon JJ at [226] thought that the common law test should be changed to foreseeability of a risk that is significant “enough in a practical sense”. Civil Liability Act 2002 (NSW), s 5B(2); Wrongs Act 1958 (Vic), s 48(2); Civil Liability Act 2003 (Qld), s 9(2); Civil Liability Act 1936 (SA), s 32(2); Civil Liability Act 2002 (WA), s 5B(2); Civil Liability Act 2002 (Tas), s 11(2) and Civil Law (Wrongs) Act (ACT), s 43(2). The Northern Territory legislation does not deal with this issue.

331

332

Introduction to Business Law in Australia

Romeo v Conservation Commission (NT) [14.480] Romeo v Conservation Commission (NT) (1998) 192 CLR 431. The plaintiff, a 16 year old girl, was drinking and socialising near Dripstone Cliffs, a natural beauty spot near Darwin. The area was under the management of the Conservation Commission. She mistakenly walked too close to the edge, fell several metres down the cliff face and seriously injured herself. She sued the Commission for a breach of its duty of care in that it had failed to prevent the risk of the accident occurring by providing a fence around the cliff face. In the course of deciding that there had been no breach of the duty of care, the High Court made it clear that the first preliminary step is to determine whether or not the risk was “reasonably foreseeable”. As Kirby J said, “It is quite wrong to read past authority as requiring that any reasonably foreseeable risk, however remote, must in every case be guarded against”. In assessing the reasonableness of the Commission’s response to the not insignificant risk the Court held that there was no breach. The factors taken into account included the low probability of injury (no recorded accident of this nature in over a century); the cost and inconvenience (the Commission as a public authority has limited resources); and a fence would undermine the attractiveness of the Cliffs. Taking these factors into account, the High Court decided that the Commission had behaved in a reasonable manner. We will now examine these factors in a more detail.

(a) Probability of the risk of injury Bolton v Stone [14.490] Bolton v Stone [1951] AC 850. The plaintiff brought an action against the defendant cricket club after being injured by a ball that was hit out of the cricket ground during a match. The evidence showed that the risk of a person being struck by a ball hit out of the cricket ground was negligible. The court weighed this factor against the reality that the only sensible way to entirely eliminate the risk of a person being hit by a ball would be to cease playing cricket on the ground altogether. The House of Lords held that in these circumstances a reasonable person would have thought it right to ignore the risk. The case established that a defendant may be justified in disregarding a foreseeable risk of injury where the probability of that risk occurring is small and the circumstances are such that a reasonable man would think it right to neglect the risk.

Roads and Traffic Authority of NSW v Dederer [14.500] Roads and Traffic Authority of NSW v Dederer (2007) 238 ALR 761. The plaintiff, a 14 year old boy, suffered catastrophic injuries when he dived off a bridge and into a river about nine metres below and struck his head on a submerged sandbar. Although there were signs on the approach to the bridge (that the plaintiff was aware of) prohibiting diving there was evidence that

chapter 14 Law of Torts

people had been diving off the bridge for 40 years and this was the first reported diving accident. The High Court found there was no breach of the duty of care. Gummow J said: “What Shirt requires is a contextual and balanced assessment of the reasonable response to a foreseeable risk. Ultimately, the criterion is reasonableness, not some more stringent requirement of prevention. Here, the risk of injury consequent upon jumping or diving from the bridge into water of variable depth was reasonably foreseeable … The magnitude of the risk was self-evidently grave … The probability of that injury occurring was, however, low. Despite the frequency of jumping and diving from the bridge, no-one was injured until Mr Dederer’s unfortunate dive. What, then, of the expense, difficulty and inconvenience of taking alleviating action? The erection of further warning signs should not have been expensive, but … the reasonableness of such measures is open to doubt. … Returning, then, to the assessment of breach mandated by Shirt, it becomes apparent that the RTA did not breach its duty of care. Though grave, the risk … was of a very low probability, and a reasonable response to that risk did not demand the measures suggested by him. This was not a case in which the defendant had done nothing in response to a foreseeable risk. To the contrary, the RTA had erected signs warning of, and prohibiting, the very conduct engaged in. … In the circumstances, that was a reasonable response, and the law demands no more and no less”: at [781]–[782].

(b) Gravity of the harm [14.510] The more serious the risk, the greater the demand for precautions on the part of the defendant. There are two ways in which this factor can be relevant: (a)

where the defendant’s activity is dangerous (Swinton v China Mercantile Navigation Co Ltd (1951) 83 CLR 553). As explained in Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 in the case of dangerous substances or activities, “a reasonably prudent person would exercise a higher degree of care”; and

(b)

where the plaintiff, to the defendant’s knowledge, has a particular susceptibility which increases the seriousness or gravity of the risk: Paris v Stepney Borough Council [1951] AC 367.

A recent decision of the Victorian Supreme Court provides guidance as to how the statutory test of the standard of care for professionals is to be applied.

Brakoulias v Karunaharan (Ruling) [14.520] Brakoulias v Karunaharan (Ruling) [2012] VSC 272. Mrs Brakoulias, the plaintiff, suffered a cardiac arrest when 50 years of age. She stopped breathing. Before being resuscitated by paramedics she was substantially deprived of oxygen for 26 minutes. As a result she has suffered serious, long-term injuries, including loss of motor and cognitive function, speech impairment, loss of memory and other injuries. About four months before her cardiac arrest she had been prescribed a weight loss drug called Reductil by her local general practitioner, Dr Karunaharan, the defendant. Mrs Brakoulias took the drug up until the day of her cardiac arrest. Mrs Brakoulias alleged that Dr Karunaharan was negligent in prescribing her Reductil, and that the taking of Reductil caused her cardiac arrest and her injuries.

333

334

Introduction to Business Law in Australia

Macaulay J instructed the jury that to prove negligence against a professional, a plaintiff must discharge prove negligence according to the common law standard of care, currently expressed in Rogers v Whitaker (1992) 175 CLR 479 where the majority of the High Court said “the standard of reasonable care and skill required is that of the ordinary skilled person exercising and professing to have that specialised skill”: at [483]. If that burden is discharged, a defendant is to be found negligent unless the defendant establishes that he or she acted in a manner that accorded with peer professional opinion as set out in s 59 (virtually identical to s 5O of the NSW legislation) provided it is not unreasonable. The jury determined that Dr Karunaharan had not been negligent in her management and treatment of Mrs Brakoulias and the proceeding was dismissed with costs.

Paris v Stepney Borough Council [14.530] In Paris v Stepney Borough Council [1951] AC 367, the defendant employer knew that the plaintiff, his employee, was blind in one eye. Consequently, the plaintiff’s condition was taken into account in determining whether the defendant was negligent in failing to provide the plaintiff with goggles that would have protected him against injury to his good eye. The House of Lords held that whatever the defendant’s duty to his other workers, the gravity of the consequences of an injury to the plaintiff’s good eye (that is, complete blindness) meant that the defendant employer was in breach of the duty of care owed to the plaintiff employee. In Rogers v Whitaker (1992) 175 CLR 479 (see [14.210]) the High Court held that, although the risk of a potential complication after eye surgery was low (approximately 1 in 14,000), the consequences for a person who was already blind in one eye were so serious that a reasonable person would have warned of the (slight) risk before operating.

(c) Burden of eliminating the risk [14.540] As Denning LJ pointed out in Watt v Hertfordshire CC [1954] 1 WLR 835, 838: “One must balance the risk against the measures necessary to eliminate the risk.” The easier it is to eliminate a risk, the less likely a defendant’s failure to take precautionary steps will be justifiable. In considering this factor, the court can take into account not only the cost and inconvenience involved in taking precautionary measures but also any risk that these steps may themselves involve: Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580. In Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540, a case discussed earlier (see [14.250]) the court found that the cessation of sale of Wallis Lake oysters or the removal of operations to another area constituted “alleviating action of the most difficult, expensive and inconvenient type”: at [201]–[202] per Gummow and Hayne JJ (with whom Gaudron J agreed). 26

26

Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540.

chapter 14 Law of Torts

Woods v Multi-Sport Holding Pty Ltd [14.550] In Woods v Multi-Sport Holding Pty Ltd (2002) 208 CLR 460, the market availability of a protective helmet was a critical issue in determining whether it was reasonable to expect the defendant indoor cricket game organiser to provide the player with such protective gear. In circumstances where such headgear had yet to be designed and manufactured and the rules of the game did not allow for the use of helmets, the High Court held that it was open for the trial judge to find that the defendant was not negligent in failing to provide the plaintiff with a helmet. [14.560] In New South Wales, s 5C of the Civil Liability Act 2002 (NSW) 27 restates three common law principles relating to the reasonableness of the defendant’s response: (a)

the burden of taking precautions to avoid risk of harm includes the burden of taking precautions to avoid similar risks;

(b)

the fact that the risk could have been avoided by doing something a different way does not of itself give rise to liability; and

(c)

the subsequent taking of action does not constitute an admission of liability.

(d) Utility of the defendant's conduct [14.570] The gravity of the risk is also weighed against the utility or social value of the defendant’s conduct. For example, in Watt v Hertfordshire CC [1954] 1 WLR 835, the risk of injury to the plaintiff fireman was weighed against the life-saving activity engaged in by the fire service. More generally, in determining whether there has been a breach of the duty of care, the defendant’s compliance or non-compliance with applicable statutory standards may also be relevant. However, compliance with relevant statutory standards is not conclusive of the issue. For example, a defendant who has complied with the appropriate traffic regulations may still be found to have been in breach of the duty of care they owed to other road-users. Similarly, in professional negligence and industrial accident cases, evidence of compliance with the common practices and customs in the particular profession or industry is relevant but not conclusive.

27

Wrongs Act 1958 (Vic), s 49; Civil Liability Act 2003 (Qld), s 10; Civil Liability Act 2002 (Tas), s 12; Civil Law (Wrongs) Act 2002 (ACT), s 44 and Civil Liability Act 2002 (WA), s 5PB(1). The South Australian and Northern Territory legislation does not contain this provision.

335

336

Introduction to Business Law in Australia

The standard of care for professionals – the statutory tests [14.580] With respect to the liability of professional persons the Civil Liability Act 2002 (NSW), s 5O provides: 28 (1)

A person practising a profession (“a professional”) does not incur a liability in negligence arising from the provision of a professional service if it is established that the professional acted in a manner that (at the time the service was provided) was widely accepted in Australia by peer professional opinion as competent professional practice.

(2)

However, peer professional opinion cannot be relied on for the purposes of this section if the court considers that the opinion is irrational.

(3)

The fact that there are differing peer professional opinions widely accepted in Australia concerning a matter does not prevent any one or more (or all) of those opinions being relied on for the purposes of this section.

(4)

Peer professional opinion does not have to be universally accepted to be considered widely accepted. 29

However, it is clear that s 5O is a defence that is available to a defendant once a breach of the duty has been established according to the common law test enunciated by the High Court in Rogers v Whitaker (1992) 175 CLR 479. To put in another way, where the plaintiff proves that the defendant professional has not exercised reasonable care in the discharge of his or her professional duties, the defendant is liable unless he or she can show by way of defence that he or she acted in a manner that satisfies the “peer professional opinion” test in s 5O: see Dobler v Halverson [2007] NSWCA 335 and Walker v Sydney West Area Health Service [2007] NSWSC 526.

Damages Causation [14.585] It is not enough for the plaintiff to establish the existence of a duty of care and its breach by the defendant. The plaintiff must also be able to prove that, on the balance of probabilities, the defendant’s negligence caused the damage suffered. There is no requirement to prove with absolute certainty that the breach caused the loss. As pointed out earlier, the reform legislation also deals with the issue of causation. In New South Wales, s 5D(1)(a) of the Civil Liability Act 2002 (NSW) provides that the decision whether a breach of duty caused the particular harm involves a test or element of “factual causation”. 30 As the High Court pointed out in Strong v Woolworths Limited (2012) 246 CLR 182; 86 ALJR 267 at [18], the determination of factual causation under this provision is a statutory statement of the common law “but for” test of causation. The application of this test involves the consideration of a hypothetical situation where the circumstances are the same as the facts of the case except for the defendant’s negligence. If, in

28

29 30

Civil Liability Act 2002 (NSW), ss 5O, 5P; Wrongs Act 1958 (Vic), ss 59, 60; Civil Liability Act 2003 (Qld), s 22; Civil Liability Act 1936 (SA), s 41 and Civil Liability Act 2002 (Tas), s 22. There is no corresponding provision in the legislation enacted in Western Australia, the Northern Territory or the Australian Capital Territory. See also, Wrongs Act 1958 (Vic), s 59; Civil Liability Act 2003 (Qld), s 22; Civil Liability Act 1936 (SA), s 41 and Civil Liability Act 2002 (Tas), s 22. There is no equivalent provision in Western Australia or the Territories. Wrongs Act 1958 (Vic), s 51(1)(a); Civil Liability Act 2003 (Qld), s 11(1)(a); Civil Liability Act 1936 (SA), s 34(1)(a); Civil Liability Act 2002 (WA), s 5C(1)(a); Civil Liability Act 2002 (Tas), s 13(1)(a); and Civil Law (Wrongs Act) 2002 (ACT), s 45(1)(a). The legislation in the Northern Territory does not deal with the matter.

chapter 14 Law of Torts

this hypothetical situation, the plaintiff would not have suffered damage then the defendant’s negligence is taken to be the effective cause of the plaintiff’s damage.

Strong v Woolworths Limited [14.590] Strong v Woolworths Limited (2012) 246 CLR 182; 86 ALJR 267. Kathryn Strong, who was disabled and required the use of crutches, was injured when the tip of her crutch came into contact with a chip lying on the floor of an area occupied by Woolworths in a shopping centre in Taree, NSW. She sued Woolworth’s and the occupier. The High Court held that even though the plaintiff could not show exactly when the chip was dropped, by showing that the probabilities were that the chip was dropped more than 20 minutes before the fall she could satisfy her onus of proof. The High Court has affirmed that the main question in any inquiry into causation remains whether it was more probable than not that the defendant’s breach was the cause of the plaintiff’s loss. Where the defendant’s breach of duty is clear or admitted, the plaintiff will not fail on the causation issue only because there is no positive evidence establishing the causal link between the defendant’s breach and the plaintiff’s injury. [14.600] If the plaintiff would have suffered damage in any event, then the defendant’s negligence is not the effective cause of the plaintiff’s damage: Cork v Kirby McLean [1952] 2 All ER 402 at 404. For example, in Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254, a shopping centre worker was injured when set upon by assailants one night in an unlit shopping centre carpark. The High Court held that while the poor lighting may have facilitated the criminal attack, the lack of lighting did not cause the plaintiff’s injuries. Similarly, in Adeels Palace Pty Ltd v Mourabak (2009) 239 CLR 420 at [53], the High Court applying the “but for” test, held that it was not established that the defendant’s negligent failure to provide security personnel would have prevented the shootings that injured the plaintiffs. 31 The “but for” test has been applied in industrial accident cases to determine the causal relevance of a defendant employer’s failure to provide or warn employees to wear protective gear: Qualcast (Wolverhampton) Ltd v Haynes [1959] AC 743; Cummings v Sir William Arrol & Co Ltd [1962] 1 WLR 295. In the latter case, the plaintiff was unable to show that the deceased construction worker who fell to his death from a steel tower would have worn a safety belt if one had been provided. Accordingly, the plaintiff was unable to show that the defendant’s failure to provide the equipment caused the accident. In circumstances where the plaintiff argued that the defendant cinema complex owed a duty to warn of retractable seats, the High Court upheld the trial judge’s finding that a warning would not have had any impact upon the plaintiff’s actions: Hoyts Pty Ltd v Burns (2003) 201 ALR 470. The “but for” test was also applied in Chappel v Hart (1998) 185 CLR 232 where it was held that damage to the plaintiff patient’s vocal chords and resultant voice loss was caused by the defendant specialist doctor’s failure to warn the plaintiff patient of that risk. Although the defendant surgeon performed the operation with reasonable care and skill and surgery would have been required at some later 31

The court also rejected the argument that s 5D(2) of the Civil Liability Act 2002 (NSW) could be applied to establish causation. The plaintiffs had argued that this was “an exceptional case” within the meaning of s 5D(2) of the Civil Liability Act 2002 (NSW) because the presence of security personnel may have prevented the shootings or had a deterrent effect or that security guards could have intervened to prevent injury: Adeels Palace Pty Ltd v Mourabak (2009) 239 CLR 420 at [56].

337

338

Introduction to Business Law in Australia

stage in any event, the plaintiff, had she been made aware of the risk, would have delayed the surgery and taken steps to have it performed by the most experienced surgeon in the field. By contrast, in Rosenberg v Percival (2001) 205 CLR 434 the plaintiff patient was unable to establish that if she had been made aware of temporomandibular joint complications, she would not have gone ahead with the procedure performed by the defendant dental surgeon. Accordingly, any failure to warn of the risk of such complications was not a cause of the plaintiff’s harm. However, the “but for” test is not appropriate in all cases. 32 For instance, its application could lead to absurd results where there was more than one cause that would have been sufficient in itself to bring about the plaintiff’s damage

March v E & MH Stramare Pty Ltd [14.610] March v E & MH Stramare Pty Ltd (1991) 171 CLR 506. March sued to recover damages for personal injuries sustained when, around 1.00 am at night, he collided with the tray of a truck, owned by Stramere, that was parked in the centre of the road for the purpose of loading it with large wooden bins containing fruit and vegetables. March was intoxicated to such an extent that his ability to judge speed and distance was impaired. The primary judge found that, although the parking and hazard lights of the truck were illuminated, the driver should have appreciated that the parked vehicle might, in some circumstances, constitute a danger to oncoming vehicles. The High Court recognised that the “but for” test gives rise to a well-known difficulty in cases where there are two or more acts or events which would each be sufficient to bring about the plaintiff’s injury. In the past, according to the “last opportunity” or “last clear chance” rule, the plaintiff was entitled to recover, despite his or her own negligence, if the defendant had the last opportunity of avoiding the accident but failed to do so due to negligence. If this principle were applied here, March would not succeed because he had the last opportunity to avoid the accident, but did not. Courts now readily recognize that there are concurrent and successive causes of damage and that it is a common sense approach that liability will be apportioned as between the wrongdoers. Thus Stramere’s negligence was a cause of the accident and of March’s injuries. The wrongful act in parking the truck in the middle of the road created a situation of danger, the risk being that a careless driver would act in the way that the appellant acted. In these circumstances, the respondents’ negligence was a continuing cause of the accident. The Court concluded that March was responsible for 70 per cent of his losses and Stramere 30 per cent. In the following medical negligence case, the High Court reinforced the need for the plaintiff to prove that “but for” the negligence of the doctor the injury or damage would not have occurred. Loss of a chance of a better outcome is not enough

Tabet v Gett [14.620] Tabet v Gett (2010) 240 CLR 537. Reema Tabet was a six year old girl when she suffered from persistent headaches and vomiting. She was admitted to the hospital and discharged two days 32

In Strong v Woolworths Limited (2012) 246 CLR 182; 86 ALJR 267 [26] per French CJ, Gummow, Crennan and Bell JJ, the High Court noted that s 5D(2) of the Civil Liability Act 2002 (NSW) makes special provision for cases in which factual causation cannot be established on a “but for” analysis.

chapter 14 Law of Torts

later. When her symptoms persisted she was readmitted to the hospital. The defendant, Dr Gett, diagnosed chicken pox and possibly meningitis and ordered a lumbar puncture. Two days later she became non-responsive and a day later had a seizure. At this point the defendant ordered a CT scan. She was subsequently diagnosed with a brain tumour and suffered irreversible brain damage. The High Court held that the plaintiff could not establish on the balance of probabilities that the brain damage would not have happened “but for” the defendant doctor’s negligent delay in ordering a scan. It said that where the evidence showed that, at most, the defendant doctor’s negligent omission deprived the plaintiff of the chance of a better outcome, this “loss of chance” should not be actionable at common law. In the view of some members of the High Court, the requirement that a plaintiff prove causation aims to strike a balance between the competing interests of plaintiffs and the defendants. For liability to be based on anything other than the plaintiff being able to show the defendant’s conduct was the probable cause of the damage would tip the balance too much toward the plaintiffs and expose medical practitioners (and others) to uncertain legal liability which itself would have an impact on the public and private healthcare system and on professional liability insurance.

Remoteness of damage [14.630] In New South Wales, s 5D(1)(b) of the Civil Liability Act 2002 (NSW) 33 sets out an additional test or element for determining whether a breach of duty caused the particular harm. This requirement relates to the “scope of liability”. It involves a consideration of policy issues including the “remoteness of damage” question considered at common law to determine whether, and to what extent, a defendant should have to answer for the consequences of their negligent conduct. The test for determining whether the damage is too remote, and therefore not recoverable, is whether the damage was reasonably foreseeable by the defendant. A leading case on the issue is the decision of the Privy Council in Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound No 1) [1961] AC 388.

Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd [14.640] Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound No 1) [1961] AC 388. The defendant charterer of a ship negligently spilt a quantity of oil while it was being loaded. The oil floated on the surface of the water in Sydney Harbour. The oil was ignited by some molten metal falling from the plaintiffs’ wharf, where welding operations were being carried out, onto cotton waste floating in the oil which acted as a wick. The ensuing fire extensively damaged the plaintiffs’ wharf. The flashpoint of the oil was 170 F and would not normally have ignited on water. The Privy Council held that the defendant charterer was not liable to the plaintiffs for the damage caused to their wharf because the kind of damage resulting from the spillage of the oil was not reasonably foreseeable in the circumstances.

33

Wrongs Act 1958 (Vic), s 51(1)(b); Civil Liability Act 2003 (Qld), Pt 1, Div 2, s 11(1)(b); Civil Liability Act 1936 (SA), s 34(1)(b); Civil Liability Act 2002 (WA), s 5C(1)(b); Civil Liability Act 2002 (Tas), s 13(1)(b) and Civil Law (Wrongs Act) 2002 (ACT), s 45(1)(b). The legislation in the Northern Territory does not deal with the matter.

339

340

Introduction to Business Law in Australia

[14.650] By way of contrast, in a later case relating to the same incident, the plaintiff owner of a ship which was damaged by the fire succeeded in an action against the negligent charterer where the shipowner proved that the charterer was aware that there was a real risk of fire damage as a result of the oil spill: Overseas Tankship (UK) Ltd v Miller Steamship Co Pty Ltd (The Wagon Mound No 2) [1967] AC 617 (PC). The difference in result between the two cases arose because in the first case the plaintiff wharf owners failed to prove that a reasonable man in the position of the defendant charterer would foresee the real risk of damage by fire as a result of the oil spill, whereas in the later case, the plaintiff shipowner did prove that the damage in question was reasonably foreseeable and therefore not too remote. The damage suffered by the plaintiff must have been reasonably foreseeable, or of the same type or kind as the foreseeable damage.

Rowe v McCartney [14.660] The plaintiff, at the defendant’s request, had allowed the defendant to drive her powerful car. The defendant drove negligently, struck a telegraph pole and suffered severe injuries which resulted in him becoming a quadriplegic. The plaintiff, who was a passenger in the car, incurred only minor physical injury. However, the plaintiff suffered mental illness brought on by her sense of guilt in allowing the defendant to drive her car. The New South Wales Court of Appeal held that the psychiatric illness suffered by the plaintiff was neither reasonably foreseeable, nor was it of the same type or kind of injury that was reasonably foreseeable in the circumstances. The type or kind of injury that would have been foreseeable was mental illness arising from nervous shock from seeing or hearing about the injury of another, or from shock or worry about her own injury.

Defences to an action in negligence [14.670] The principal defences to an action for negligence are: (a)

contributory negligence; and

(b)

voluntary assumption of risk.

Contributory negligence [14.680] At common law, contributory negligence was a complete defence. No compensation could be recovered where the plaintiff suffered damage partly through their own negligence and partly through the negligence of another. However, the defence of contributory negligence is now governed by legislation that allows for an apportionment of damage. 34 For example, in New South Wales the Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 10 provides: “Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of 34

Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 10; Wrongs Act 1958 (Vic), s 26; Law Reform Act 1995 (Qld), s 10; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), s 7; Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA), s 4; Wrongs Act 1954 (Tas), s 4; Law Reform (Miscellaneous Provisions) Act 1955 (ACT), s 15; Law Reform (Miscellaneous Provisions) Act 1956 (NT), s 16.

chapter 14 Law of Torts

the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.” Like actionable negligence, contributory negligence is the failure to take reasonable precautions against a foreseeable risk of injury. However, unlike actionable negligence, it does not involve a duty on the plaintiff’s part to avoid harm to others. Contributory negligence is concerned with the plaintiff’s failure to take precautions for their own safety. To be “contributory”, the plaintiff’s negligence must be causally relevant to the damage suffered. The reform legislation provides that the same principles that apply to determine a breach of duty to another are to be applied to determine whether there has been a failure to take reasonable care for one’s own safety. 35 Contributory negligence is a special defence and must be pleaded by the defendant. The burden of establishing contributory negligence is on the party alleging it. The jury, or the judge (if there is no jury), apportions the damages. An assessment is made of the damages that would have been awarded if there had been no fault on the plaintiff’s part. This amount is then reduced by the percentage of the plaintiff’s contribution. The apportionment is worked out by a comparison of the party’s degree of departure from the standard of a reasonable man: Pennington v Norris (1956) 96 CLR 10. In New South Wales the Civil Liability Act 2002 (NSW) 36 alters the common law relating to contributory negligence by allowing a court to reduce a plaintiff’s damages by any contribution of the plaintiff to their own damage. A court may find that the plaintiff’s contribution was in fact 100 per cent which will have the effect that the defendant has no ultimate liability. 37 In Liftronic Pty Ltd v Unver (2001) 179 ALR 321 [33], the High Court held that it was open for the jury to reduce the plaintiff’s damages by 60 per cent. In that case, the plaintiff sustained back injury lifting heavy objects in the course of his employment with the defendant. However, the defendant had in place a safe system of lifting which, if it had been used by the plaintiff, would have prevented the plaintiff’s injury. In 1999, the High Court held that the apportionment legislation was concerned only with actions in tort, and did not affect actions based on breach of contract whether or not the plaintiff had or could have sued in tort: Astley v Austrust Ltd (1999) 197 CLR 1. All jurisdictions have since amended their apportionment legislation to permit the apportionment of damages for breach of contractual duty of care in cases of contributory negligence. 38

35

36 37

38

Civil Liability Act 2002 (NSW), s 5R; Wrongs Act 1958 (Vic), s 62; Civil Liability Act 2003 (Qld), s 23; Civil Liability Act 1936 (SA), s 44; Civil Liability Act 2002 (WA), s 5K; Civil Liability Act 2002 (Tas), s 23. There is no corresponding legislation in either of the Territories. Civil Liability Act 2002 (NSW), s 5S; Wrongs Act 1958 (Vic), s 63; Civil Liability Act 2003 (Qld), s 24. There is no corresponding provision in the other States or Territories. Compare the decision of the High Court in Wynbergen v Hoyts Corporation Pty Ltd (1997) 149 ALR 25. Note the following legislative provisions governing the effect of the plaintiff’s intoxication on the standard of care and the defence of contributory negligence: Civil Liability Act 2002 (NSW), Pt 6; Wrongs Act 1958 (Vic), s 14G; Civil Liability Act 2003 (Qld), Pt 4, Div 2; Civil Liability Act 1936 (SA), s 46; Civil Liability Act 2002 (WA), s 5L; Civil Liability Act 2002 (Tas), Pt 2; Civil Law (Wrongs) Act 2002 (ACT), ss 95 – 96; Personal Injuries (Liabilities and Damages) Act 2003 (NT), ss 14 – 15. See Law Reform (Miscellaneous Provisions) Amendment Act 1965 (NSW), s 9; Wrongs Act 1958 (Vic) s 26; Law Reform Act 1995 (Qld), s 10; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA); Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA), s 4; Wrongs Act 1954 (Tas), s 44; Civil Law (Wrongs) Act 2002 (ACT), s 102; Law Reform (Miscellaneous Provisions) Act 1956 (NT), s 16.

341

342

Introduction to Business Law in Australia

Voluntary assumption of risk [14.690] Unlike contributory negligence, a successful plea of voluntary assumption of risk is a complete defence. 39 The rationale behind this defence is that no wrong can be done to a person who consents. Over the years the courts have limited the scope of this defence. It is not enough for the defendant to show that the plaintiff knew of the risk. The plaintiff must have fully appreciated the risk and accepted it freely and willingly. The strict requirements of the defence mean that it is now rarely raised successfully. In cases involving an obvious risk, the reform legislation applies to introduce a presumption of awareness of the risk on the part of the plaintiff and place the onus on the plaintiff to show he or she was not aware of that risk. 40

A case study in negligence – the liability of a ratings agency [14.700] The case below was decided in the Federal Court in October 2012. It concerns the liability of a ratings agency (and others) for the damage caused by complex investment products they sold prior to the global financial crisis. Similar litigation is in train in many jurisdictions in Australia and elsewhere so this decision is being examined carefully. Although an appeal is likely the decision is nevertheless significant because it is the first time that a decision such as this has been made against a ratings agency. Such agencies are obviously very exposed to actions of this kind because they gave AAA ratings to products that were very risky, knowing banks and others would sell them to unsophisticated investors who had nothing else to rely on but the ratings of the agency. At the heart of the problem that emerged in (or precipitated) the global crisis is the terrible conflict of interest that exists when the ratings agencies rate products they know investors will rely on, while being paid by the merchant banks and others who need high ratings so they can sell the products to the investors.

Bathurst Regional Council v Standard & Poor's, Local Government Financial Services [14.710] Bathurst Regional Council v Standard & Poor’s, Local Government Financial Services and ABN Amro [2012] FCA 1200. The facts: In late 2006, 12 local councils in NSW purchased a financial product called constant proportion debt obligation (CPDO) from Australian Local Government Financial Services (LGFS). The product, marketed as Rembrandt notes, was created by an investment bank (ABN Amro). ABN Amro submitted the product to the rating agency Standard & Poors (S&P) which gave the product a AAA rating. S&P was assigning a rating to a specific tranche of a complex structured product, limited in terms of both amount, location of issue, and minimum investment sum. S&P knew that its rating was intended to be communicated by ABN Amro to potential investors and gave ABN Amro its express permission to do so. S&P was aware that the only purpose of ABN Amro obtaining the rating was for the purpose of communication to potential investors so as to facilitate the marketing and sale of the product to them and was aware that the class of potential investors would include persons who

39 40

Note that this defence is made redundant in circumstances where the following provisions apply: Civil Liability Act 2003 (Qld), s 48; Civil Liability Act 1936 (SA), s 47; Civil Law (Wrongs) Act 2002 (ACT), s 96. Civil Liability Act 2002 (NSW), s 5G; Wrongs Act 1958 (Vic), s 54; Civil Liability Act 2003 (Qld), s 14; Civil Liability Act 2002 (WA), s 5N; Civil Liability Act 1936 (SA), s 37; Civil Liability Act 2002 (Tas), s 16. There is no corresponding legislation in the Northern Territory. The relevant provision in the legislation of the Australian Capital Territory deals with obvious risk only in cases involving equine activity: Civil Law (Wrongs) Act 2002 (ACT), Sch 3.

chapter 14 Law of Torts

would rely on the rating to assess the creditworthiness of the product. S&P was also aware that those persons could not otherwise assess that aspect of the product even if they did have access to financial advice. The AAA rating assured local municipal councils that the notes, bought from Australian Local Government Financial Services (LGFS), had a less than 1% chance of defaulting. However, within six months, and just prior to the global financial crisis, the product became “toxic” and councils lost A$16 million or 93 per cent of their investment. They sued the bank, the ratings agency and the finance company alleging negligence and misleading or deceptive conduct. The decision: The Federal Court held the defendants were liable and awarded the 12 councils a total of about A$30 million for losses and damages. The Court decided that S&P’s had a duty of care which it breached and had engaged in misleading or deceptive conduct to the class of potential investors in Australia. ABN Amro was knowingly concerned in S&P’s contraventions and LGFS was also negligent and guilty of misleading and deceptive conduct in failing to fully and accurately disclose all of the material risk to the councils. The Court also held that LGFS, the investment manager for local government authorities, breached its fiduciary duty to the councils. The judge was critical of the close relationship between ABN Amro and S&P, finding that the agency was not operating independently of the bank, which had “bulldozed” the agency into giving the products a AAA rating. The court also said that the bank had provided the agency with false information that S&P relied upon. The negligence issue: On the negligence issue the court held that S&P owed the councils a duty of care that had been breached and, as a consequence of the breach, damage resulted. 1.

The duty of care Using the criteria in Perre v Apand, S&P argued that, in this instance, the class of persons to whom the duty was said to be owed was “indeterminate”. The Court rejected the argument: the indeterminacy principle is “designed to protect the defendant against indeterminate liability, not numerous plaintiffs”: Perre v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180, 139. S&P’s liability is not indeterminate because its AAA rating related only to the CPDO notes issued on particular dates so the likely number of claims and the nature of the claims can be reasonably calculated, even though it did not know the identity of the persons to whom the bank intended to market the notes. The Court also rejected the argument that the protection afforded to auditors in Esanda should be extended to ratings agencies. As the Court said: “The purpose of an audit of a company is one thing. The purpose of the assignment of a rating to a financial instrument is another. A rating is assigned to a financial instrument for the very purpose of communication to the class of potential investors for them to take into account, and rely upon, in deciding whether or not to invest. The same cannot be said of a financial audit of a company which is undertaken by an auditor for the company’s own purposes and to comply with the company’s statutory obligations … In Esanda Finance the auditor’s potential liability was disproportionate to any comparative fault because the auditor did not intend financiers and investors to rely on the audit and had not been paid for that purpose. As such, the reliance was ‘self-induced’. In the present case, ABN Amro paid S&P for each rating in circumstances where the sole purpose of the rating was for ABN Amro to communicate the rating to potential investors so that they could take the rating into account in deciding whether or not to, or whether they could, invest”: at [759].

343

344

Introduction to Business Law in Australia

S&P also argued that the councils were not “vulnerable” (as required in the Perre v Apand schema) because they could have and should have protected themselves against such loss by either seeking their own advice or inserting contractual warranties into the contracts made with LGFS or ABN Amro. The Court rejected the argument: “Nothing in the qualifications or experience of the council officers enabled them to deal with an instrument such as the CPDO, let alone the rating of such an instrument … The councils took the rating at face value as indicating that S&P had applied its expertise as a ratings agency to determine that the CPDO notes had an ‘extremely strong capacity’ to meet all financial obligations”: at [769]–[772]. S&P also argued that to impose a duty of care in this competitive environment would be “inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage. In effect it is making ratings agencies the personal insurers of investment performance, a role which it has not undertaken or been remunerated to perform”: at [795]. Again, the Court rejected the argument: “The imposition of a duty of care in this case does not transform S&P into an insurer of investment performance. It does no more than ensure that S&P, if it chooses to earn money from holding itself out as having specialised expertise in ascertaining the creditworthiness of structured financial products, knowing that it can do so because many potential investors do not have or cannot practically access the same expertise, exercises reasonable care in the assigning of ratings to structured financial products. The criterion for potential liability in respect of such a duty of care is not the performance of the product … the assigning of a rating of a structured financial product embodies a forward-looking opinion about creditworthiness assigned at a particular time. The ratings agency either did or did not exercise reasonable care at that particular time”: at [799]. In relation to the two additional requirements for negligent misstatement – (a) the speaker realises or should realise that the recipient intends to act upon the advice in connection with a serious matter and (b) it was reasonable for the recipient to rely on the advice – the Court said that: “… the rating was a record of an opinion of a body which held itself out as having specialist expertise in assessing the creditworthiness of financial products and was intended to be understood to be such. In the circumstances, it was obvious to S&P that the intended recipients of the rating, the potential investors to whom ABN Amro wished to market the CPDO, would act upon the rating in respect of a matter of serious consequence … Similarly, it was reasonable in all the circumstances for the councils to rely upon the rating as a rating”: at [808]. 2.

Breach of the duty of care Having found that there was a duty of care, there could be no breach unless s 5B(1)(a) and (b) of the Civil Liability Act 2002 was satisfied. The first element is to determine if the risk of harm to councils was “not foreseeable and/or was insignificant”. The main argument advanced by S&P is that the global financial crisis, the event that caused the Rembrandt notes to fail, was not foreseen or foreseeable. If it were, the crisis itself would have been averted, billions would not have been lost from markets around the world and State economies would not have been plunged into recession. The Court rejected the argument:

chapter 14 Law of Torts

3.

“The claim against S&P has nothing to do with the question whether or not S&P failed to foresee the GFC. No-one suggests in this case that S&P should have foreseen the GFC as it in fact developed through 2007 and 2008 or that it was negligent for S&P not to have done so. The harm suffered by LGFS and the councils was not ‘the GFC’. This characterisation of the harm is too general and, indeed, meaningless. The harm was the cash-out of the notes which, on the evidence, was caused by the sustained widening in credit spreads which occurred in 2007 and 2008. The fact that this widening occurred as part of a phenomenon labelled the GFC, and the GFC itself might not have been reasonably foreseeable, does not mean that the harm was not reasonably foreseeable. It is the class of harm which must be reasonably foreseeable rather than the ‘precise sequence of events’ leading to the harm … In this case the relevant class of harm was the cash-out of the notes by reason of sustained spread widening … (This) class of harm was thus not only reasonably foreseeable; it was one of the two main anticipated risks the CPDO faced”: at [824]. Damage Causation The principles to be applied in assessing whether the breach caused the loss or damage to the councils are found in s 5D(1) of the Civil Liability Act 2002. This is the common law “but for” test and is called “factual causation” in the section. The Court rejected S&P’s submission that the negligent conduct of the LGFS broke the chain of causation. Without the AAA rating, LGFS would not have completed the purchase and would not have been in a position to persuade the councils to invest in them. S&P knew and intended its AAA rating to stand alone as a representation that the Rembrandts had an “extremely strong” capacity to meet their financial commitments. Although LGFS was also negligent, S&P’s was “a necessary condition for and cause of the harm”: at [847]. Remoteness The Court held that S&P, acting reasonably, must have anticipated that its AAA rating would be used by ABN Amro to persuade others like LGFS to invest in the product and it must have known that its rating would be communicated on to the ultimate investor. The loss the councils suffered is precisely the kind of loss that S&P should have reasonably foreseen potential investors who relied on the AAA rating would suffer in the event of negligence by S&P in assigning the product a AAA rating.

In Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028 the Federal Court, faced with a similar factual scenario came to the same conclusion: Lehman Bros was negligent and had engaged in misleading or deceptive conduct.

Torts of strict liability [14.720] In some cases, tort liability can attach even though there was no intention or negligence on the part of the defendant. Liability is strict in the sense there is no element of fault. Strict liability was once imposed on an occupier of land for any damage caused by the escape of a dangerous or mischievous substance which the occupier brought onto the land. This was known as the rule in Rylands v Fletcher (1868) LR 3 HL 330. However, following the decision of the High Court in Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520, the rule in Rylands v Fletcher is no longer to be regarded as a separate tort. The High Court held that the rule should now be seen, for the purposes of Australian common law, as absorbed by the principles of ordinary negligence. Under those principles, a

345

346

Introduction to Business Law in Australia

person who takes advantage of their control of premises to introduce a dangerous substance, to carry on a dangerous activity, or to allow another to do one of those things, owes a duty of reasonable care to avoid a reasonably foreseeable risk of injury or damage to the person or property of another.

Burnie Port Authority v General Jones Pty Ltd [14.730] Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520. A fire broke out in premises owned by the defendant, part of which was used by the plaintiff to store frozen vegetables. It was held that the risk of damage to the plaintiff’s property by fire was a reasonably foreseeable consequence of the introduction of large quantities of polystyrene to the premises and the carrying out of extensive welding work within the premises by a contractor engaged by the defendant to extend the building. As a result, it was held that the defendant owed the plaintiff a non-delegable duty of care which extended to ensuring that the contractor took reasonable care to prevent the polystyrene being set alight as a result of welding activities.

Vicarious liability [14.740] In certain circumstances a person is regarded by the law as responsible for the acts or omissions of another person: such liability is known as vicarious liability. It is a form of strict liability as the person held responsible for the acts or defaults of another may not themselves have been personally at fault. Vicarious liability arises where a particular relationship exists between the person held responsible and the wrongdoer, the most common example being the relationship of employer and employee. An employer or master is vicariously liable for the acts or omissions committed by their employee or servant. However, an employer is not vicariously liable for the tortious acts committed by an independent contractor: Hollis v Vabu Pty Ltd (2001) 207 CLR 21 at [32]; Sweeney v Boylan Nominees (2006) 226 CLR 161. Accordingly, a distinction is drawn between servants and independent contractors. The general test used to determine the distinction between a servant and an independent contractor is what is known as the “control test”. If an employer has legal authority to tell a worker not only what to do but how to do it then a master-servant relationship will exist: Humberstone v Northern Timber Mills (1949) 79 CLR 389. Other factors can also be relevant such as the mode of remuneration (including who pays any income tax and superannuation), the power of dismissal, whether a uniform is worn, and the provision of equipment. The High Court found that Stevens v Bodribb Sawmilling Co Ltd (1986) 160 CLR 16 and Sweeney v Boylan Nominees (2006) 226 CLR 161 were both cases involving independent contractors. However, in Hollis v Vabu Pty Ltd (2001) 207 CLR 21, an employer/employee relationship was present. In the case of On Call Interpreters and Translators Agency Pty Ltd v the Commissioner of Taxation (No 3) [2011] FCA 366 Blomberg J said whether a person was an employee or an independent contractor was a practical question and depended on whether the person was performing the work as an entrepreneur who owned and operated their own business, or, worked in and for the employer’s business: at [208]. This case was considering liability of the “employer” for superannuation payments and so any considerations may apply to other types of cases, such as negligence causing injury to third parties, need to also be considered. This question of whether a person is an employee or an independent contractor is a very important issue in an era where businesses often contract out tasks and utilise labour hire arrangements.

chapter 14 Law of Torts

Mersey Docks and Harbour Board v Coggins & Griffith (Liverpool) Ltd [14.750] Mersey Docks and Harbour Board v Coggins & Griffith (Liverpool) Ltd [1947] AC 1. The appellants hired out the use of a crane together with its operator to the respondent stevedores to load a ship. The stevedores were entitled to tell the crane driver where to go, what parcels to lift and where to take them. However, it was held that the stevedores were not liable for the crane driver’s negligence because they had no authority to tell him how to handle the crane while carrying out the work.

Frost v Warner [14.760] In Frost v Warner (2002) 209 CLR 509 the High Court held that the fact that the defendant was, pursuant to statutory regulations, the holder of a certificate of registration as a “controller” was insufficient, on its own, to found vicarious liability for the injury caused by the negligence of her husband, the owner and master of a boat which capsized due to overloading. In circumstances where a worker is “borrowed” by another employer, the lending employer prima facie remains liable for the employee’s acts or omissions. A lending employer can only escape liability for the wrongdoing of a “borrowed” employee if they can show that control over the employee has been effectively transferred to the “borrowing” employer. The vicarious liability of an employer is limited to acts or omissions which are committed in the course of the employee’s employment. It is not always easy to determine whether a servant’s act or omission took place in the course of their employment. Clearly, an employer will be vicariously liable for acts or omissions which they authorised or ratified. The notion of “course of employment” also covers conduct which can be regarded as an unauthorised mode of performing an authorised task. For example, the employer of a petrol-tanker driver was held vicariously liable for the damage caused by a fire which ignited when the driver lit a cigarette when delivering petrol to an underground tank. The driver’s action was considered to be an unauthorised way of performing the authorised task, namely, delivering petrol: Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 509. However, an employer will not be liable for an employee’s wrongdoing if it was unrelated to their employment. In New South Wales v Lepore (2003) 212 CLR 511, deliberate predatory sexual behaviour was not seen as having been committed in the course of the teacher’s employment: at [78] per Gleeson CJ; at [243] per Gummow and Hayne JJ.

Deatons Pty Ltd v Flew [14.770] Deatons Pty Ltd v Flew (1949) 79 CLR 370. Where a barmaid threw a glass into the face of an inebriated customer who as a result lost the sight of an eye, it was held that the act was of a personal nature unconnected with the employee’s duties and therefore the employer was not vicariously liable for the injury suffered by the customer.

347

348

Introduction to Business Law in Australia

Further reading RP Balkin and JLR Davis, Law of Torts (5th ed, LexisNexis, Sydney, 2013). K Barker, P Cane, M Lunney and F Trindade, The Law of Torts in Australia (5th ed, Oxford University Press, Melbourne, 2011). A Clarke et al, Torts – A Practical Learning Approach (3rd ed, LexisNexis, Sydney, 2013). H Luntz et al, Torts – Cases and Commentary (7th ed, LexisNexis, Sydney, 2012). C Sappideen and P Vines, Fleming’s The Law of Torts (10th ed, Lawbook Co, Sydney, 2011) C Sappideen, P Vines and P Watson, Torts – Commentary and Materials (11th ed, Thomson Reuters, Sydney, 2012)

Journals Australian Civil Liability Torts Law Journal Torts Law Review

Tutorial activities 14.1

Briefly explain the four elements of a negligence action.

14.2

Carefully explain the different nature of the duty of care that may be owed in circumstances where (a) a negligent act causes physical loss (b) a negligent act causes mental harm (c) a negligent act causes pure economic loss and (d) a negligent statement causes pure economic loss.

14.3

What duty of care is owed where there is an omission to act?

14.4

Briefly explain why the rating agency S&P was found to have acted negligently in the Bathurst Regional Council v Standard & Poor’s, Local Government Financial Services and ABN Amro [2012] FCA 1200.

14.5

What is the “indeterminacy question” that the courts are so concerned about?

14.6

Adam buys a hamburger from Hungry Johns for his best friend, Eve. As Eve eats the hamburger she notices a rat’s tail poking out from under the lettuce. She then realises the unusual taste that she had just mentioned to Adam was not a figment of her imagination. She later suffers terrible gastro, has nervous shock and is off work for a month. Hungry Johns is unable to explain how the contamination occurred because it complies with every health regulation and is acknowledged to have the most hygienic premises in the country. Advise Eve of any claim she may have in the tort of negligence.

14.7

Bob a 10-year-old boy is badly injured when he falls down from the top level of a double bunk when attempting to get down from the bed. He was staying with friends. There is no ladder or guard-rail. Assume a duty of care exists. How would go about assessing whether there been a breach of the duty of care?

14.8

Jack, the CEO of Dax Pty Ltd, had just introduced a new environmentally friendly, chemical-free product into the market that he hoped would transform the cleaning industry. Jack needed to achieve sales quickly, as the company had spent so much money developing the product that it was having serious problems with cash flow. Jack was not a marketing person so he retained the services

chapter 14 Law of Torts

of Wizard, a marketing company. He told Wizard that Dax was unable to pay upfront for its services and would thus need credit. Wizard did its due diligence, obtaining a credit history from Dax’s bank (Mac Bank Ltd). The report was not carefully prepared and did not provide an accurate depiction of Dax’s financial position. Wizard accepted the contract and provided $200,000 worth of services. Unfortunately, despite the marketing efforts, Jack’s products flopped, Dax was put into liquidation and Wizard was paid only $56,000. Advise Wizard whether it should take action against Mac Bank Ltd in tort for negligence. 14.9

Jack is using a grader to excavate his backyard in preparation for a tennis court when he slices through an electrical cable. This affects the electricity supply to Kevin’s factory located nearby. Jack is aware of the factory but had no idea the cable ran through his block. As a result of the disruption, Kevin suffers a financial loss until the cable is repaired. Advise Jack whether he owes a duty of care to Jack.

14.10 Pauline graduated from the KL Horticultural College with a major in floristry. Immediately after graduating, she set up her own cut flower business (“Blossoms”). In early 2012, things were going well and she was thinking about expanding the business. At that very time, she met an old friend, Daniel Sloan, who was an accountant and financial adviser. They discussed Pauline’s expansion plans and Daniel quickly offered to review her financial situation and prepare a business plan free of charge, “as a gift to an old buddy”. As Pauline was financially ignorant and needed expert guidance, she accepted his offer and gave him her financial records. A month later, in March 2012, they met again. After Daniel had prepared some financials for Pauline and had researched the cut flower market, he felt that Pauline was in a sound position to expand. He recommended that she borrow money to set up a store in a trendy part of town. Pauline trusted her friend and decided to act on the advice. In January 2013, she borrowed $30,000 from Eastpac Credit, a small credit union that provided a loan and overdraft facilities. Eastpac relied on the financial statements prepared by Daniel. With him keeping an eye on her, she signed a five-year lease, bought some equipment and hired a firm to set up a web page. Then things went sour. Daniel admitted he had not adequately factored in her pre-existing debts, had underestimated the significant establishment costs associated with setting up a business in the area and had only just learned of the extent to which online florists had eroded the traditional retail market. He advised Pauline to terminate the lease and inform Eastpac that she would be unable to repay the loan. Pauline is told she may have to pay six month’s rental to terminate the lease on the property ($20,000) and she has already spent $7500 of her own money on the webpage and other costs. Eastpac is faced with significant losses as much of the loan was unsecured. Advise Pauline and Eastpac about their prospects of success in an action against Daniel in tort.

349

THE LAW OF TORTS Negligence

Duty of care

Breach of Duty of care

The neighbour test (Donoghue v Stevenson)

Was it reasonably foreseeable that the plaintiff could be injured by defendant’s conduct?

It is not necessary that there is a particular plaintiff or a particular chain of events?

Was the risk of injury reasonably foreseeable?

Established categories

Driver/ road user (Imbree v McNeilly)

Doctor/ patient (Rogers v Whittaker)

Solicitor/ client (Hawkis v Clayton)

School authority/ students (The Commonwealth v Introvigne)

Employer/ employee

Reasonable foreseeability

Risk not insignificant

Damages

Would a reasonable person take precautions?

Probability of harm

Likely seriousness of harm more serious harm, the greater the precaution

Cost and practicality

Burden for similar risks

Standard of care - reasonable person test

Burden of taking precautions

Social utility of activity

May be lower for children (McHale v Watson)

Adjusting the standard of care

No adjustment for inexperienced driver (Imbre v McNeilley)

Mentally ill

Plaintiff bears onus of proof

Scope of liability/remoteness of damage

Factual causation

Issues of proof

Higher standard where defendant holds a special skill

Defences

Proof by inference

Res ipsa loquitur the facts speak for themselves

Common law

Civil liability legislation

‘But for’ test (Barnett v Chelsie Hospital)

Is the breach of duty of care a necessary condition of the occurrence of the harm?

Remoteness of Damage (Wagon Mound Cases)

The type of injury that occurred to the plaintiff must be a reasonably foreseeable consequence of the breach of the duty of care

Harm must be of same kind as reasonably foreseeable

Intervening events

Eggshell skull rule (you must take your victims as you find them)

Voluntary assumption of risk (volenti non fit injuria)

Contributory negligence

Breaks the chain of causation between the breach of duty and the harm suffered

Voluntary and casually independent event

Deliberate malicious act of 3rd party

Plaintiff fails me meet standard of care for own safety

Objective test

Damages apportionedState legislation by up to 100%

Intoxication

Conduct contributes to injury

Common law

Must have full knowledge of risk

Must voluntarily accept precise risk

Legislation

Where risk obvious, knowledge is presumed

Applies where reliance on the skills of on intoxicated defendant

Illegal activity

Joint illegal activity no duty by defendant to plaintiff (Gala v Preston)

Duty cannot be inconsistent with criminal law (Miller v Miller)

chapter 15

Consumer Protection [15.10] Introduction......................................................................................................................................................... 352 [15.20] Overview of the Australian Consumer Law ...................................................................................... 352 [15.60] Prohibition of misleading of deceptive conduct............................................................................... 356 [15.330] Prohibition of unconscionable conduct ............................................................................................. 372 [15.450] Prohibition of unfair contract terms ................................................................................................... 380 [15.490] Specific false representation provisions.......................................................................................... 382 [15.670] Prohibition of other unfair practices................................................................................................... 389 [15.880] Enforcement and remedies for unfair practices .......................................................................... 395 [15.1240] Consumer guarantees............................................................................................................................ 407 [15.1450] Manufacturers' liability for defective goods................................................................................ 416

352

Introduction to Business Law in Australia

Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2014), Chapter 13.

Introduction [15.10] January 1 2011 was a very significant day for consumer protection in Australia. It was the day that the Australian Consumer Law became law, replacing the ramshackle collection of federal and state laws that had proved inadequate in meeting the needs of consumers in the 21 st century.

Overview of the Australian Consumer Law Objectives [15.20] The Australian Consumer Law has benefitted the Australian community by: (a)

giving Australian consumers the same rights and protections wherever they are in Australia;

(b)

simplifying the law and reducing business compliance burdens by replacing provisions set out in 20 existing national, State and Territory laws with a single national consumer law; and

(c)

creating a national enforcement regime, with consistent enforcement powers for Australia’s consumer protection agencies.

When the Australian Consumer Bill was being debated in the Federal Parliament on March 17, 2010 the Minister put the case for reform in his Second Reading Speech: “The complex array of 17 national, state and territory generic consumer laws, along with other provisions scattered throughout many other laws, must be rationalised. While these laws may work well for many purposes, each of them differs and that is to the cost of consumers and business. Australian consumers deserve laws which make their rights clear and consistent, and which protect them equally wherever they live. At the same time, Australian businesses deserve simple, national consumer laws that make compliance easier. A single national consumer law is the best means of achieving these results. Rather than relying on nine parliaments making piecemeal changes, the Australian Consumer Law will ensure responsive consumer laws with a truly national reach … This will enable, for the first time, all Australian consumers to enjoy the benefits of consistent rights wherever they may be, and will allow all Australian businesses to obtain greater efficiencies through a single, simplified national law.” 1 The main reforms introduced in the Australian Consumer Law were:  a new single set of definitions and interpretive provisions;  a new, national law on unfair contract terms;  a new single set of provisions about unfair practices and fair trading, including amendments and additions which reflect existing provisions in State and Territory consumer laws;  a new set of national consumer guarantees provisions;  a new national regime for unsolicited consumer agreements, which will replace existing State and Territory laws on door-to-door sales and other direct marketing;  a simple national set of rules for lay-by agreements;  a new national product safety legislative regime; and  national provisions on information standards. 1

Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 Second reading.

chapter 15 Consumer Protection

Legislative framework [15.30] The Australian Consumer Law is a law of the Commonwealth. 2 It replaced the consumer protection provisions of the former Trade Practices Act 1974 and State and Territory consumer protection legislation, such as the Fair Trading Acts and door-to-door sales legislation. It is administered by the Australian Competition and Consumer Commission (ACCC) and the State and Territory consumer law agencies 3 and enforced by all Federal, State and Territory courts and tribunals. 4 It has very broad application: it applies to conduct engaged in and outside Australia by Australian citizens or persons who are ordinarily resident in Australia, 5 to natural persons engaged in conduct involving postal, telegraphic or telephonic service, including the internet 6, and to corporations 7.

Organisation of the Australian Consumer Law Figure 15.1: Overview of the Australian Consumer Law (ACL)

[15.40] The Australian Consumer Law is organized into the following chapters:  Chapter 1 – contains a single set of definitions and interpretive provisions about consumer law concepts. 2

3

4

Competition and Consumer Act 2010 (Cth), s 131. The section is in Part XI – Application of the Australian Consumer Law as a law of the Commonwealth. Pursuant to an intergovernmental agreement each State and Territory applies the Australian Consumer Law as the law of its jurisdiction. Competition and Consumer Act 2010 (Cth), ss 140 – 140K; Fair Trading Act 1987 (NSW), s 28(1); Australian Consumer Law and Fair Trading Act 2012 (Vic), s 11(1); Fair Trading Act 1989 (Qld), s 16(1); Fair Trading Act 1987 (SA), s 14(1); Fair Trading Act 2010 (WA), s 19(2); Australian Consumer Law (Tasmania) Act 2010 (Tas), s 6(1); Fair Trading (Australian Consumer Law) Act 1992 (ACT), s 7(1); Consumer Affairs and Fair Trading Act 1990 (NT), s 27(1). NSW: Fair Trading; Victoria: Consumer Affairs Victoria; Queensland: Office of Fair Trading; Western Australia: Department of Commerce – Consumer Protection; South Australia: Office of Consumer and Business Affairs: Tasmania: Consumer Affairs and Fair Trading Tasmania; ACT: Office of Regulatory Services; Northern Territory: Consumer Affairs.

5

Competition and Consumer Act 2010 (Cth), ss 138 – 138B. The sections are in Part XI – Application of the Australian Consumer Law as a law of the Commonwealth. Ibid.

6 7

Competition and Consumer Act 2010 (Cth), s 6(3). Ibid, s 131(1).

353

354

Introduction to Business Law in Australia

 Chapter 2 – contains the general protections that create standards of business conduct in the market. These include a general prohibition on misleading and deceptive conduct and unconscionable conduct and specific prohibitions on unconscionable conduct in consumer and some business transactions; and a provision that makes unfair contract terms in consumer contracts void.  Chapter 3 – contains specific protections which address identified forms of business conduct, including specific unfair practices; consumer transactions for goods or services; product safety; the making and enforcement of information standards; and the liability of manufacturers for goods with safety defects.  Chapter 4 – contains the criminal offences that relate to some of the matters covered in Chapter 3.  Chapter 5 – contains additional remedies – both civil pecuniary penalties and private remedies. This chapter broadly follows the Australian Consumer Law, although the provisions concerning enforcement and remedies are considered in their more appropriate context throughout the chapter.

Enforcement of the Australian Consumer Law [15.50] The Australian Consumer Law provides a number of remedies and penalties that are designed to deter breach and ensure compliance with the various consumer protection provisions. The remedies available to individuals who wish to take action for a breach of one or more of the provisions of the Australian Consumer Law are varied. They include:  Damages: to compensate for loss or damage caused by a breach of the Australian Consumer Law: s 236  Injunctions: a court order to stop or prevent a contravention: s 232  Compensation orders: an order to compensate a person who has suffered loss or damage or because of an unfair term in a consumer contract: ss 237–238. There are also penalties that may be imposed on individuals or corporations for contravening the Australian Consumer Law. These may be civil (pecuniary penalties) or criminal (fines). The maximum amount of pecuniary penalties and fines are $1.1m for corporations and $220,000 for individuals.

Misrepresentation under the Australian Consumer Law [15.55] The Australian Consumer Law 8 provides civil remedies where misrepresentations by a person constitute misleading or deceptive conduct. Section 18(1) provides that: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The Act also provides civil remedies, as well as penal sanctions, where misrepresentations are made in connection with the supply of goods or services. 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 make a false or misleading representation: (a) 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) 8

that services are of a particular standard, quality, value or grade;

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)).

chapter 15 Consumer Protection

(c)

that goods are new;

(d)

that a particular person has agreed to acquire goods or services;

(e)

that purports to be a testimonial by any person relating to goods or services;

(f)

concerning: (i)

a testimonial by any person; or

(ii)

a representation that purports to be such a testimonial; relating to goods or services;

(g)

that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits;

(h)

that the person making the representation has a sponsorship, approval or affiliation;

(i)

with respect to the price of goods or services;

(j)

concerning the availability of facilities for the repair of goods or of spare parts for goods;

(k)

concerning the place of origin of goods;

(l)

concerning the need for any goods or services;

(m)

concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy;

(n)

concerning a requirement to pay for a contractual right that: (i)

is wholly or partly equivalent to any condition, warranty, guarantee, right or remedy; and

(ii)

a person has under a law of the Commonwealth, a State or a Territory (other than an unwritten law).

The Australian Consumer Law also prohibits misrepresentations made in relation to the sale or grant of an interest in land. In this context s 30(1) provides: A person must not, in trade or commerce, in connection with the sale or grant, or the possible sale or grant, of an interest in land or in connection with the promotion by any means of the sale or grant of an interest in land make a false or misleading representation: (a)

that the person making the representation has a sponsorship, approval or affiliation;

(b)

concerning the nature of the interest in the land;

(c)

concerning the price payable for the land;

(d)

concerning the location of the land;

(e)

concerning the characteristics of the land;

(f)

concerning the use to which the land is capable of being put or may lawfully be put; or

(g)

concerning the existence or availability of facilities associated with the land.

355

356

Introduction to Business Law in Australia

Prohibition of misleading or deceptive conduct Figure 15.2: The prohibition of misleading or deceptive conduct

Misleading or deceptive conduct [15.60] The statutory prohibition of misleading and deceptive conduct is to be found in s 18 of the Australian Consumer Law. Section 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.” 9 Misleading or deceptive conduct is not defined in the legislation but has been given a very wide interpretation by the courts. The prohibition is not restricted to “consumers” in the traditional sense: 10 any person or corporation is also able to seek a remedy if the breach of s 18 has caused, or is likely to cause, loss or damage. Because of the potential breadth of that section and the uncertainty as to which business practices might fall within its ambit, no civil or criminal penalties may be imposed for its breach. However the full range of civil remedies is available. Section 18 of the Australian Consumer Law largely replicates s 52 of the former Trade Practices Act 1974 (Cth) with the exception that “person” has been substituted for “corporation” in the former provision. Accordingly, many of the cases decided under s 52 of the former Trade Practices Act 1974 will be relevant in interpreting s 18 of the Australian Consumer Law.

9

10

Section 18 of the Australian Consumer Law largely replicates s 52 of the former Trade Practices Act 1974 (Cth) with the exception that “person” has been substituted for “corporation” in the former provision. Accordingly, many of the cases decided under s 52 of the former Trade Practices Act 1974 will be relevant in interpreting s 18 of the Australian Consumer Law. There are a number of definitions of “consumers” in the Australian Consumer Law.

chapter 15 Consumer Protection

Meaning of “in trade or commerce” [15.70] The consumer protection provisions of the Australian Consumer Law prohibit conduct that takes place “in trade or commerce”. The High Court held that the words “trade or commerce” are “not terms of art but are terms of common knowledge of the widest import”: Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 36 FLR 134 Deane J said: “The terms ‘trade’ and ‘commerce’ are not terms of art. They are expressions of fact and terms of common knowledge. While the particular instances that may fall within them will depend upon the varying phrases of development of trade, commerce and commercial communication, the terms are clearly of the widest import. They are not restricted to dealings or communications which can properly be described as being at arm’s length in the sense that they are within open markets or between strangers or have a dominant objective of profit-making. They are apt to include commercial or business dealings in finance between a company and its members which are not within the mainstream of ordinary commercial activities and which, while being commercial in character, are marked by a degree of altruism which is not compatible with a dominant objective of profit-making”: at [167] The Court has held that s 52 of the former Trade Practices Act 1974 (Cth) did not apply to an internal communication between a foreman and a worker about the safety latch on a manhole (which was misleading) because it was not made “in” trade or commerce: Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at 602–3. The Court said that “the conduct of a corporation towards persons (must) bear a trading or commercial character”: at 604. Thus a private one-off transaction such as the sale of one’s private residence will not be caught by s 18(1) because such as sale is not “in” trade or commerce: O’Brien v Smolonogov (1983) 53 ALR 107.

Meaning of “misleading or deceptive” conduct [15.80] Section 18(1) of the Australian Consumer Law concerns “conduct” that is “misleading or deceptive or is likely to mislead or deceive”. What is the meaning of “misleading or deceptive”? In Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Limited [2014] FCA 634 the Chief Justice of the Federal Court has recently provided an excellent summary of the general principles that may be relevant when answering the above question. Chief Justice Allsop said: “For the enquiry under s 18, it is necessary to identify the impugned conduct and then to consider whether that conduct, considered as a whole and in context, is misleading or deceptive or likely to mislead or deceive: Google Inc v Australian Competition and Consumer Commission [2013] HCA 1. … Conduct is misleading or deceptive or likely to mislead or deceive if it has the tendency to lead into error, if there is a sufficient causal link between the conduct and the error on the part of the person exposed to the conduct: Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54. The causing of confusion or questioning is insufficient; it is necessary to establish that the ordinary or reasonable consumer is likely to be led into error. … There is no meaningful difference between the words and phrases “misleading or deceptive” and “mislead or deceive” (s 18), “false or misleading” (s 29(1)(a)) and “mislead” (s 33). … It is necessary to view the conduct as a whole and in its proper context. This will or may include consideration of the type of market, the manner in which such goods are sold, and the habits and characteristics of purchasers in such a market. The context will also include relevant disclaimers. …

357

358

Introduction to Business Law in Australia

In assessing advertising material, the “dominant message” of the material will be of crucial importance. … Where conduct or representations is or are directed to members of the public at large, the conduct or representations must be judged by their effect on “ordinary” or “reasonable” members of the class of prospective purchasers. … Evidence that someone was actually misled or deceived may be given weight. The presence or absence of such evidence is relevant to an evaluation of all the circumstances relating to the impugned conduct. Where the conduct and representations are to the public generally and concern a body of simple direct advertising, the absence of individuals saying they were misled may not be of great significance. … Half-truths may be misleading by the insufficiency of information that permits a reasonably open but erroneous conclusion to be drawn. In Tobacco Institute of Australia Limited v Australian Federation of Consumer Organisations Inc [1992] FCA 630 Hill J, quoting Sheldon and Sheppard JJ in CRW Pty Ltd v Sneddon (1972) AR (NSW) 17 at 28 said the following: An advertisement published in a newspaper is not selective as to its readers. The advertiser must be assumed to know that the readers will include the shrewd and the ingenuous, the educated and the uneducated and the experienced and inexperienced in commercial transactions. He is not entitled to assume that the reader will be able to supply for himself or (often) herself omitted facts or to resolve ambiguities. An advertisement may be misleading even though it fails to deceive more wary readers: at [50]. Where advertising material uses simple phrases and words evoking attractive notions, but without necessarily precise meaning, ambiguity or reasonably available different meanings may well arise. Context and the “dominant message” will be important. If one or more of the reasonably available different meanings is misleading, the conduct may well be misleading or deceptive, or false and misleading”: at [38]–[47]. We will now examine these principles in the context of relevant cases.

Australian Competition and Consumer Commission v TPG Internet Pty Ltd [15.90] Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2012] HCA 54; (2013) 250 CLR 640. TPG Internet Pty Ltd (TPG) ran an advertising campaign. The advertisements involved a number of media to promote TPG’s new “$29.99 per month” unlimited ADSL2+ broadband internet plan. In much smaller print the advertisements stated that the customer was required to bundle the service with a landline rental for an additional $30 per month (for a minimum of six months) and pay an overall minimum of $509.89 including a set-up fee and deposit. His Honour found that the target audience included first time users of ADSL2+ services. The primary judge also found that, by virtue of the array of available internet options, the ordinary or reasonable consumer would not have any starting assumption as to whether TPG’s offering was of a separate or bundled service, and would rely on the advertisement for information as to the service offered. The High Court, restoring the decision of the trial judge, found that the advertisements conveyed a representation that the internet service was available without bundling and, at least in the first phase

chapter 15 Consumer Protection

of the advertisement campaign, a representation that there would be no set-up fee or deposit. The Court held there were breaches of s 52 and s 53 of the Trade Practices Act (s 18 and s 48 of the Australian Consumer Law). On the question of the target audience the High Court decided that the “dominant message” was important. The dominant message was the statement that TPG would provide “unlimited ADSL2+ for $29.99 per month”. The qualifying information in the small print did not do enough to correct the false impression created by the dominant message. The Federal Court, in allowing the appeal from the trail judge, said that the misleading nature of the dominant message was “cured” by the knowledge of the more sophisticated consumer. But the High Court rejected this approach. The Court said: “the circumstance that many consumers might know that ADSL2+ services are commonly offered as a ‘bundle’ was not apt to defuse the tendency of the advertisement mislead especially where the target audience is left only with the general thrust or dominant message after the evanescence of the advertisement”: at [53] A pecuniary penalty of $2m was imposed on TPG for the breach of s 48. The implications of the decision are important: it is the overall impact of an advertisement and not just the dominant message which matters when determining if an ordinary consumer would be misled. To meet the statutory requirement to state the total “all inclusive price” prominently, an advertised single price needs to be very noticeable in the context of the overall message conveyed and not merely discoverable in the “small print”. Further, an advertiser cannot argue that some of its sophisticated consumers would not be misled if other “ordinary” consumers would be a misled. The High Court drew a clear distinction between this case and Puxu (see below at [15.160]). First, TPG’s target audience did not consist of potential purchasers focused on the subject matter of their purchase in the calm of the showroom to which they had come with a substantial purchase in mind. The advertisement was an intrusion on the consciousness of the target audience. As such they may have only paid perfunctory attention. Second the tendency of the advertisements to mislead was to be determined, not by asking whether they were apt to induce consumers to enter into contracts with TPG, but by asking whether they were apt to bring them into negotiation with TPG rather than with one of its competitors on the basis of an erroneous belief engendered by the general thrust of TPG’s message. Thirdly, this is not a case where the tendency of TPG’s advertisements to lead consumers into error arose because the target audience might be disposed, independently of TPG’s conduct, to attend closely to some words of the advertisement and ignore the balance. The tendency of TPG’s advertisements to lead consumers into error arose because the advertisements themselves selected some words for emphasis and relegated the balance to relative obscurity.

[15.100] The following Federal Court decisions resulted from the crackdown by the regulator on suppliers of so-called “organic” or “free-range” or “free-roam” chickens. The court proceedings form part of an ongoing ACCC investigation into the egg industry after which the ACCC issued substantiation notices to several egg processors, demanding they prove their free range claims. The ACCC has several criteria to test if eggs are “free range”, including what time of day and how frequently barns are opened, whether the chickens have been trained to remain indoors and whether the size of the outdoor area is adequate and has shade, food and water available. The decisions indicates how, even though specific regulatory protections may be lacking, innovative legal strategies, such as using the misleading conduct provisions and other sections of the Australian Consumer Law, can be successful in the fight against producers who misrepresent what is really happening

359

360

Introduction to Business Law in Australia

“down on the farm”. The Federal Court recognised that consumers pay a premium for “free range” eggs so producers must not falsely represent that their eggs are from “happy” chooks.

Australian Competition and Consumer Commission v Turi Foods Pty Ltd [15.105] Australian Competition and Consumer Commission v Turi Foods Pty Ltd [2013] FCA 665. Poultry advertising and packaging claimed that their chickens were “free to roam around in large barns.” That was true at some stages of the chickens’ lives, but as the chickens grew their size and number made free roaming impossible. The Federal Court considered the natural meaning of “free to roam” when applied to chickens and agreed with the ACCC’s assessment that it means the “largely uninhibited ability of the chickens to move around at will in an aimless manner”. It also considered that this phrase would be so understood by a significant number of hypothetical consumers to whom the labels, advertising or websites were directed. The Court held that this claim constituted misleading and deceptive conduct (s 18) and a false representation about the history of the goods: s 29(1)(a). The court subsequently imposed a joint penalty of $400,000 against the two poultry suppliers. See also Australian Competition and Consumer Commission v Turi Foods Pty Ltd [2012] FCA 19 and Australian Competition and Consumer Commission v Pirovic [2014] FCA 21. See also Australian Competition and Consumer Commission v Luv-A-Duck Pty Ltd [2013] FCA 1136 where the defendant was found guilty of a breach of s 18 (misleading conduct), s 29(1)(a) (misleading statements regarding standard, quality, history) and s 33 (misleading statements regarding nature, manufacturing process and characteristics of goods) on the basis that its advertising stated that its ducks were raised “in the sunny Victorian Wimmera region … a rural, spacious, pollution free environment” when in fact the ducks did not spend any time outside. It was fined $360,000, restrained by an injunction from using certain words in its advertising, forced to publish corrective advertising and forced to implement a compliance program.

Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [15.110] Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 634. A supermarket advertised that the bread produced in its in-store bakeries was “baked fresh” and “baked today”. In fact the bread had already been partially pre-baked by a supplier to the supermarket and then frozen, often weeks earlier, and sometimes in a faraway place like Ireland. The Federal Court held that it was misleading to describe bread as “baked today” where part of the baking had occurred before the day of sale. It was also misleading to describe the bread as “baked fresh” as that suggested baking from fresh dough. This constituted misleading or deceptive conduct (s 18(1)). Sections 33 (misleading conduct regarding the manufacturing process of goods) and 29(1)(a) (false or misleading representations concerning the history of the goods) were also infringed. As to the test of whether the conduct by Coles was misleading, the Court said: “Where conduct or representations is or are directed to members of the public at large, the conduct or representations must be judged by their effect on ‘ordinary’ or ‘reasonable’

chapter 15 Consumer Protection

members of the class of prospective purchasers. In a context such as the present, the purchasing of a staple such as bread in a supermarket, the ordinary or reasonable person may be intelligent or not, may be well educated or not, will not likely spend any time undertaking an intellectualised process of analysis, will often be shopping for many other items, and will be likely affected by an intuitive sense of attraction rather than by any process of analytical or logical choice. The dominant message of advertising for bread is likely to be simple, though intuitively diffuse. What is reasonable care by members of the public … must be judged in the above context. The purchase of bread from a baker or bread shop should not normally call for astute attention to disclaimers about the wares on sale at the counter … where, as in the present case, the advertisement is capable of more than one meaning … the advertisement will be misleading or likely to mislead or deceive if any reasonable interpretation of it would lead a member of the class, who can be expected to read it, into error”: at [46]. The Federal Court imposed significant fines and made the following orders designed to prevent the conduct from occurring again and to shame Coles into compliance with the ACL. It ordered:  Coles be restrained for three years from making any representation anywhere that its bread products were entirely baked on the day on which they were offered for sale; or were entirely baked in a Coles Bakery Store on the day on which they were offered for sale; or were baked from fresh dough - when that is not the case.  Coles display a Corrective Notice for 90 days in a prominent location clearly visible to customers at all times in each in-store bakery section admitting it: (a)

engaged in misleading or deceptive conduct (s 18)

(b)

made false or misleading statements as to the history of the goods (s 29(1)(a) and

(c)

engaged in conduct that was liable to mislead the public as to the nature, the manufacturing process, and the characteristics of goods in contravention (s 33). 11

Australian Competition and Consumer Commission and Basfoods (Aust) Pty Ltd [15.120] Australian Competition and Consumer Commission and Basfoods (Aust) Pty Ltd. Basfoods (Aust) Pty Ltd (Basfoods) has paid penalties totalling $30,600 following the issue of three infringement notices by the Australian Competition and Consumer Commission (ACCC) in relation to Basfoods’ “Victoria Honey”. The product was prominently labelled with “VICTORIA” and “HONEY”, contained a picture of honeycomb and two bees and was described as “honey” on its website. The ACCC found the product was neither “honey” (it was made predominantly from sugar and corn syrup) nor was it sourced from “Victoria” (it was a product of Turkey and it was no defence that the sides of the label stated, in a smaller font, “Product of Turkey”). The company had thereby breached s 29(1)(a) (misleading false representations regarding the “composition” of goods) and s 29(1)(k) (false representations regarding the “place of origin of goods”) of the Australian Consumer Law.

11

Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Limited (No 2) [2014] FCA 1022.

361

362

Introduction to Business Law in Australia

eBay International AG v Creative Festival Entertainment Pty Ltd [15.130] eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450: In an attempt to deter ticket “scalping” for popular concerts, a concert promoter’s tickets provided that all tickets resold for profit would be cancelled and the holder would be refused entry to the concert. Tickets were resold for profit on the website of the applicant, eBay. The Federal Court held that the promoter had engaged in misleading or deceptive conduct because it did not have reasonable grounds for representing that a ticket sold for profit would in all cases be discovered and cancelled.

Two products have the same name [15.140] There will be no misleading or deceptive conduct if two products have the same name but any impression of a connection between them will be immediately averted by a comparison between the two products: Knight v Beyond Properties Pty Ltd (2007) 242 ALR 586. In that case, an author had written a series of books called “Mythbusters”. A television series called “Mythbusters” had a very different content and format. Any impression on the part of television viewers of a connection between the books and the television show would be quickly put to rest by a brief examination. The Federal Court has held that the statement “no fine print” in an advertisement was too specific to be mere puffery. The statement constituted misleading or deceptive conduct where important contractual terms were not disclosed in the advertisement: Minister for Health and Aged Care v Harrington Associates Ltd (2000) 107 FCR 212. Trade competitors have been held entitled to bring proceedings for an injunction to restrain a trade rival from engaging in conduct that contravenes the consumer protection provisions.

McWilliam's Wines Pty Ltd v McDonald's System of Australia Pty Ltd [15.150] McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394. McDonald’s (the fast food retailer) extensively advertised their “Big Mac” hamburgers. McWilliam’s, a well-known wine company, started to advertise its wines using the words “Big Mac” prominently displayed in the advertisements. McDonald’s sought an injunction to restrain McWilliam’s from using the words “Big Mac” alleging that their use by McWilliam’s constituted engaging in conduct that was misleading or deceptive or likely to mislead or deceive. However, the Full Federal Court was of the view that a case had not been made out that the use of the words “Big Mac” by McWilliam’s was likely to deceive or mislead persons by causing them to think that the wines were a product of McDonald’s. Even though the advertisements might cause confusion or wonder in the mind of a person as to whether or not there was a business connection between McWilliam’s and McDonald’s, such a person was not misled by the advertisement into believing that there was such a connection and accordingly there was no contravention of s 52(1) of the Trade Practices Act 1974 (Cth) (now s 18(1) of the Australian Consumer Law). Thus, conduct which merely tends to cause confusion will not ordinarily be sufficient to constitute misleading or deceptive conduct.

chapter 15 Consumer Protection

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [15.160] Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 The plaintiff manufactured and sold various items of furniture under the name “Post & Rail”, including lounge suites and chairs in its so-called “Contour” range. The defendant also manufactured and sold various items of furniture, including lounge suites and chairs called the “Rawhide” range. The latter furniture was very similar, indeed “almost identical” in shape, design and general appearance to the plaintiff’s Contour range, although on close inspection various differences could be observed. The defendant always labelled its furniture stating that it was the manufacturer. The High Court held that the defendant had not contravened the former s 52(1) of the Trade Practices Act 1974 (Cth) (now s 18(1) of the Australian Consumer Law). The case was determined on the basis that potential purchasers of furniture costing substantial sums of money were able to inspect the furniture that was on display in the retailer’s showroom. The majority of the Court took the view that purchasers would, acting reasonably, pay attention to the label, brand or mark of the suite they were minded to buy and, as a result, would not be misled by similarities in the getup of rival products. Evidence that some members of the public had been misled because the defendant’s label was missing, apparently removed by the retailer, was not relevant since the defendant was not responsible for such conduct.

Action brought against trade competitor [15.170] By way of contrast, the following case involved a successful action being brought against a trade competitor for contravention of s 52(1) of the former Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law):

Apand Pty Ltd v The Kettle Chip Co Pty Ltd [15.180] Apand Pty Ltd v The Kettle Chip Co Pty Ltd (1994) 52 FCR 474. In 1989, the respondent began to market potato chips made by the batch-cooking method under the name “The Kettle Chip”. In 1992, the appellant (“Smith’s Crisps”), to counter loss of market share because of the success of the respondent’s product, began marketing a new line of potato chips under the name “Country Kettle”. The Full Federal Court held that at the time the appellant’s chips came onto the market, the name “Kettle” had obtained a secondary meaning distinctive of the respondent’s product. Accordingly, the court upheld the trial judge’s findings that the appellants had engaged in passing off and had contravened s 52(1) of the former Trade Practices Act 1974 (Cth) (now s 18(1) of the Australian Consumer Law); see also Solahart Industries Pty Ltd v Solar Shop Pty Ltd (2011) 281 ALR 544 at [65]–[79].

363

364

Introduction to Business Law in Australia

Section 18 and misrepresentations in pre-contractual negotiations Figure 15.3: Summary of the features of section 18

[15.190] Section 18 of the Australian Consumer Law may be used by those who have been induced to enter into a contract as a result of misrepresentations made during the course of negotiations leading up to the contract, to obtain damages or other appropriate relief on the ground that the misrepresentations constituted misleading or deceptive conduct. Examples under the former s 52 of the Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law) are below. The BBB Constructions case illustrates how the law in relation to misleading or deceptive conduct, unconscionable conduct and promissory estoppel can affect pre-contractual negotiations.

BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [15.200] BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSWCA 224: In early 2006, BBB Constructions Pty Ltd (“BBB”), obtained development approval for a residential and commercial development on land in Alexandria. For approximately 12 months, between July 2006 and August 2007, BBB negotiated with Aldi Foods Pty Ltd (“Aldi”) which owns and operates supermarkets, about the terms of a proposed agreement under which Aldi would lease a basement in the building, which it would operate as a supermarket. The negotiations proceeded to a point where there was consensus on the principal commercial terms of the lease. Heads of Agreement were exchanged and the drafting of the detailed terms of an agreement for lease was undertaken. But Aldi withdrew from further pursuit of the matter and no agreement for lease was executed. In May 2007, while negotiations were still underway, BBB commenced construction of a second basement to the building, which would have been necessary to accommodate the proposed supermarket then being considered by Aldi. When Aldi terminated negotiations in August 2007, BBB

chapter 15 Consumer Protection

claimed that it had incurred expenditure in developing the second basement in reliance on representations or other conduct on the part of Aldi that it would take a lease of the area. BBB made three submissions: (a) Aldi acted in a way that was misleading or deceptive and/or (b) Aldi’s conduct was unconscionable (both at common law and by statute) or alternatively (c) Aldi was estopped from denying that it had agreed to lease the premises “on terms as finally agreed”. Aldi’s response was that the parties negotiated on the express basis that neither would be liable unless and until an agreement for lease, setting out all the terms of their bargain, was executed and exchanged; and that any commitment of Aldi was subject to board approval, which was never given. The Court of Appeal accepted the trial judge’s decision on all three issues. The misleading or deceptive conduct issue (at [178]–[181]): Central to BBB’s case based on misleading conduct was that Aldi’s conduct, whether by positive acts (including representations) or by silence, was misleading or deceptive or likely to mislead or deceive and that BBB had relied on that conduct. However, the Court held that the evidence demonstrates that BBB was not misled or deceived. Because it knew and accepted that negotiations were in progress, that the process of negotiation went on both before and after the parties signed the heads of agreement and that the purpose of the ongoing negotiations was to produce a form of legal document acceptable to both parties. BBB also knew and accepted that the approval of the CEO of Aldi was a pre-condition to any commitment by Aldi. Also, on the matter of reliance by BBB, the evidence demonstrates that BBB incurred expense in commencing the planning and construction of the second basement before it had completed its negotiations with Aldi because it (BBB) viewed that proposal as a commercially more beneficial arrangement of the available floor space. In the absence of reliance there is no misleading conduct. The unconscionable conduct issue (at [182]–[184]): the Court accepted the trial judge’s decision in relation to unconscionable conduct. Each party to the negotiation was a commercially sophisticated business well able to safeguard its own interests. Each employed lawyers and obviously took heed of its lawyers’ advice. Neither occupied, as against the other, a position of weakness or vulnerability or disadvantage. No aspect of Aldi’s conduct involved dishonesty, sharp practice, cynical resort to technicality or intrinsic unfairness. The estoppel issue (at [185]–[187]): the estoppel submission proceeded on a similar basis to the misleading conduct claim – that Aldi had made representations to BBB or induced an assumption in BBB as to the eventual execution of an agreement for lease from which it was unconscionable for Aldi to resile – and was rejected by the Court for the same reasons. This was not similar to a case like Waltons Stores, where one party gives to the other an assurance that a particular document already prepared will be signed. To the contrary, Aldi’s position, as accepted by BBB throughout, was that there would be no commitment on either side unless and until an agreement for lease was executed and that approval of any final document by Mr Kopp was a pre-condition to commitment. That point was never reached.

365

366

Introduction to Business Law in Australia

[15.210] In the following case the ACCC alleged breaches of the general prohibition of misleading conduct in s 18 as well as three specific false representation provisions contained in s 29 of the Australian Consumer Law that can attract civil penalties. 12

Australian Competition and Consumer Commission v Metricon Qld Pty Ltd [15.220] In Australian Competition and Consumer Commission v Metricon Qld Pty Ltd [2012] FCA 797 the ACCC alleged that between July 2010 and January 2011, Metricon Qld Pty Ltd (Metricon), a construction company that builds and sells residential homes, distributed more than a million advertising brochures to potential buyers. The ACCC alleged the brochures contained representations that were misleading or deceptive and which contained specific false representations in breach of s 29(1)(a)(i) and (m). Metricon admitted that it engaged in the conduct and did so in a number of ways:  Pictorial representations – each brochure contained advertising material that depicted various house designs and elaborate photographs. Metricon knew that many of the features and fittings depicted in the photographs of the particular house designs contained in the brochures were not included in the represented price.  Build time guarantees – Metricon represented that it would guarantee build times and pay $300 per week if delays occurred. This guarantee was subject to terms and conditions which, apart from only being available on the website, were so broad that a majority of homes were not covered by the guarantee.  Discount list price – in another brochure, Metricon nominated a discount price on certain houses, specifying an amount that could be saved if the house were purchased during the relevant promotion. Metricon admitted that each of the houses represented in the brochures had either never been offered for supply by Metricon at all or not been offered for supply at the listed (non-discount) price immediately before the start of the promotion.  Upgrade packages – The “Upgrades Package” brochures advertised additional features and fittings available when purchasing a specific house design. It was intended to mislead the consumers into believing they would save the difference between the standard and the upgrades package. However, the fittings and features advertised were, in fact, usually offered at the promotional or discount price. Metricon admitted liability and was ordered by the Federal Court of Australia to pay fines of $800,000 plus costs and had to provide undertakings concerning the misleading material. Two points to note about the case: first, it illustrates that under s 18 of the Australian Consumer Law, the ACCC does not have to prove that a person was actually misled: it is sufficient that the conduct was “likely to mislead or deceive”. Second, individuals who were induced to purchase a Metricon home because of the company’s misleading conduct and/or false representations must themselves sue Metricon to recover any loss or damage. They may sue for breach of contract (if the statements were contractual) and/or for misleading conduct under the Australian Consumer Law s 18.

12

The maximum penalty stipulated for contravention of each unfair practice provision by a corporation is a penalty of $1,100,000. The maximum penalty for other persons is a penalty of $220,000.

chapter 15 Consumer Protection

What is “conduct”? [15.230] The concept of “conduct” is very broad. Section 2(2)(a) of the Australian Consumer Law states that “a reference to engaging in conduct shall be read as a reference to do or refusing to do any act” (emphasis added).

Can silence constitute misleading “conduct”? [15.240] As we have seen, in most instances, the “act” referred to in s 2(2)(a) will consist of some oral or written statement or representation. However, s 2(2)(c) states that “refusing to do any act” includes “(i) refraining (otherwise than inadvertently) from doing the act”. It is clear from the way the courts have interpreted this sub-section that remaining silent may constitute “engaging in conduct”. In Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1998) 155 ALR 714 at 722–723, Finkelstein J said: “It is clear that a failure to provide information can be conduct which is misleading or deceptive. For the purposes of s 52 (now s 18 of the Australian Consumer Law) “engaging in conduct” is defined [s 2(2)(a)] as a reference to doing or refusing to do any act and by [the current s 2(2)(c)] a reference to refusing to do an act includes a reference to refraining (otherwise than inadvertently) from doing that act. However, when the complaint is that s 52 (now s 18 of the Australian Consumer Law) has been infringed by conduct that involves either refusing or refraining from doing an act before that conduct is actionable it must have been deliberately engaged in … [T]his [follows] from the use of the words “refuse” and “refrain” in [the current s 2(2)] and provided it is “otherwise than inadvertently” … Accordingly, to determine whether [one] has contravened [s 18(1)] … two questions arise for consideration. The first is whether the failure by [one] to inform [the other of the relevant matter] was misleading or deceptive conduct. The second question is whether that conduct was deliberate. Generally, in commercial dealings between parties the law does not impose any obligation upon one party to inform the other party of matters that might be important for the other party to know before that party enters into some agreement or embarks upon some transaction with the first party. Of course there are exceptions. There can be no fraudulent concealment of facts. Further, some relationships require facts to be disclosed”: at [722]–[723]. The cases have established that there are two situations where non-disclosure or silence may contravene s 18 of the Australian Consumer Law: (a)

Where the information provided is incomplete. This could involve either a half-truth, where a statement is literally true but is misleading when the full story is told (eg the shopping centre is fully let – but in fact more than half had given notice of intention to leave); or where something has changed so that what was once true is no longer true (eg. if a vendor had a permit for a subdivision of property and the council subsequently revoked the permit), and

(b)

Where the applicant has a “reasonable expectation” that, in all the circumstances, disclosure will be made. The following case illustrates this principle.

Henjo Investments Pty Ltd v Collins Marrickville [15.250] Henjo Investments Pty Ltd v Collins Marrickville (1988) 79 ALR 83. Henjo Investments owned a licensed restaurant. During negotiations for its sale to Collins Marrickville its agent led the purchaser to believe that that restaurant seated 128 people and, indeed, the restaurant was set up to

367

368

Introduction to Business Law in Australia

seat 128. In fact, the terms of the licence restricted the seating capacity to 84. The reduced seating capacity had an impact on the profitability of the restaurant. The Full Court of the Federal Court affirmed the decision of the trial judge. The vendor, in remaining silent as to the true position with respect to seating, had engaged in misleading conduct. In the words of Lockhart J (at 95): “[T]he vendor sold a business knowing that it was subject to serious limitations upon its lawful seating capacity … which vitally affected the business, its goodwill, takings and profitability and knowing that in fact the restaurant was being conducted contrary to law … (T)hese circumstances gave rise to a duty on the part of Henjo as vendor to reveal the position … before any contract was signed.”

Demagogue Pty Ltd v Ramensky [15.260] Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. Ramensky contracted to purchase land from Demagogue in a proposed development of several units. The plan, annexed to the contract, referred to a “driveway” that was, in fact, a public road. Demagogue had been negotiating with the relevant authority for the right to use the road as a driveway but to that point had not been successful. He did not inform Ramensky of this issue. When Ramensky discovered the problem he sought to rescind the contract. The Court held that Demagogue’s silence constituted misleading or deceptive conduct because there was a reasonable expectation that there should have been disclosure of the unusual circumstances surrounding access to the property. Black CJ said: “Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive … ‘there is in truth no such thing as “mere silence” because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case that if particular matters exist they will be disclosed’”: at [32]

Non-disclosure in commercial matters [15.270] In relation to non-disclosure in commercial matters, s 18 does not compel a party engaged in business negotiations to disclose information that would assist the decision-making of another party to the negotiations. The section does not require a party to disclose information that would enable another party of equal bargaining power and competence to avoid the consequences of carelessly disregarding its own interests. As the following case shows it is clear that the circumstances will not always give rise to a reasonable expectation that silence will not always lead to a finding that the person has engaged in misleading conduct.

chapter 15 Consumer Protection

Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [15.280] In Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 a borrower applied to a lender (BMW) seeking an insurance premium funding loan. The borrower used the services of an insurance broker (Miller). The insurance policy for which finance was sought was a non-cancellable policy. A cancellable policy was appropriate as security for a premium loan, but a non-cancellable policy was not suitable as security. The security value of a cancellable insurance policy to the lender arose because, if the borrower defaulted, the lender would gain control of the insurance policy by virtue of the lender’s right of assignment. If the borrower defaulted, the lender could cancel the remaining period of the policy and recover the premium relating to the cancelled period of the policy. The lender asked the broker for details of the policy. The broker provided an insurance certificate that made reference to monetary limits applying to various properties. The certificate did not state whether the policy was cancellable. Based on a superficial reading, the lender incorrectly assumed that the policy was a property policy, which would usually be cancellable. The borrower defaulted on the loan. The lender unsuccessfully sought to recover the unpaid moneys from the borrower and its directors. The lender then sued the broker, claiming that provision of the insurance certificate constituted a misrepresentation that the policy was cancellable. The lender also claimed that the broker should have disclosed that the policy was not cancellable and was thus not suitable as security. The High Court unanimously held that the broker had not engaged in misleading or deceptive conduct. The Court considered whether the insurance certificate would have conveyed to its target audience (an experienced premium lender) a representation that the policy was cancellable. There were numerous indications on the certificate that it did not convey a representation that it was a cancellable property policy. The Court also considered whether the broker should have disclosed that the policy was not cancellable. The parties had extensive commercial experience. The fact that the insurance certificate did not describe the risks insured should have put the lender on notice that this was an unusual policy. However, the lender did not make any further inquiries. While the failure to make further inquiries would not necessarily defeat a claim of misleading or deceptive conduct, it was a relevant circumstance to consider in determining such a claim. The broker knew that cancellability of the policy was an important consideration in deciding a loan application. However, the lender said nothing to the broker that indicated that it was under a mistaken belief about the cancellability of the policy. The lender had asked about the provision of director’s guarantees, which it would not have done with a cancellable policy. The broker provided the lender with a copy of the policy, which did not provide for cancellation. The broker’s failure to draw the lender’s attention to something that was disclosed in the policy with which it had been provided was not misleading or deceptive conduct. In relation to non-disclosure, the Court observed that s 52 of the former Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law) did not compel a party engaged in business negotiations to disclose information that would assist the decision-making of another party to the negotiations. The section did not require a party to disclose information that would enable another party of equal bargaining power and competence to avoid the consequences of carelessly disregarding its own interests. The lender had been provided with a copy of the policy but failed to read it.

369

370

Introduction to Business Law in Australia

The issue of fault and intention [15.290] Section 18 of the Australian Consumer Law imposes a form of strict liability. A plaintiff must prove that the conduct was misleading and that there is a causal link between the misleading conduct and the loss or damage. However, there is no need to prove the defendant was at fault or intended to mislead or deceive. A corporation is not liable if it acts only as a conduit, passing on information that it received from another, in circumstances where it is clear that the corporation is not the source of the information. In Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299; (1983) 46 ALR 319; (1985) 158 CLR 661 at 666 the High Court affirmed that a corporation could contravene what is now s 18 of the Australian Consumer Law even though it acted honestly and reasonably: “That does not, however, mean that a corporation which purports to do no more than pass on information supplied by another must nevertheless be engaging in misleading or deceptive conduct if the information turns out to be false. If the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive.”

Exclusion clauses and section 18 [15.300] An exemption clause cannot be successfully relied upon as a defence to an action for contravention of s 18 of the Australian Consumer Law. Section 18 cannot be directly excluded by the presence of a term in a contract or by notice. In other words, a notice on a wall of an accountant’s practice or the insertion of a clause in a written contract stating very clearly that “Section 18 of the Australian Consumer Law does not apply” is of course void. However, an exclusion clause might be one factor that the court takes into account in deciding whether the misleading conduct was relied upon by the applicant. In Keen Mar Corp Pty Ltd v Labrador Shopping Centre (1989) ATPR 46-048 the presence of a disclaimer clause (which had been brought specifically to the attention of the applicant) was one factor that persuaded the court that the misleading conduct did not, in fact, induce the applicant to enter the lease agreement. In the following High Court case the presence of the disclaimer was an important element in the decision.

Butcher v Lachlan Elder Realty Pty Ltd [15.310] Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592. In 1996, Mr Butcher and his wife made enquiries with a small suburban real estate agent, Lachlan Elder Realty, about the forthcoming auction of a waterfront property on the northern beaches of Sydney. The agent gave them a one-page double-sided colour brochure, telling them that it contained all the information they would need to know about the property. As well as photographs and a sales pitch, the brochure contained a reproduction of a 1980 survey diagram, which showed that a swimming pool between the house and the water was above the mean high-water mark which was the boundary between the land and the sea. The brochure contained two disclaimers on it, printed in a small font on the bottom of both sides of the brochure. The disclaimers were similar:

chapter 15 Consumer Protection

“Lachlan Elder Reality Pty Ltd ACN 002 332 247. All information contained herein is gathered from sources we believe to be reliable. However, we cannot guarantee its accuracy and interested persons should rely on their own enquiries.” Mr Butcher advised the agent that he wished to relocate the pool to the western boundary. A builder who visited the property with Mr Butcher said that this would be possible, basing his opinion on the survey diagram. Mr Butcher subsequently purchased the property for $1.36 million. Soon after it emerged that the mean high-water mark had changed and now went through the middle of the pool, which meant that part of the pool was on Government land. When the Government refused to allow Mr Butcher to relocate the pool, Mr Butcher sued the agent, alleging that the agent had engaged in misleading and deceptive conduct in breach of what is now s 18 of the Australian Consumer Law when it gave the brochure to him. The trial judge and the New South Wales Court of Appeal dismissed the claim. The purchasers appealed to the High Court. The High Court dismissed appeal. The Court affirmed that s 18 imposed strict liability but the disclaimer put the purchasers on notice not to rely on the representations in the brochure. It was significant that the purchasers were intelligent and shrewd investors who had had the benefit of advice from experts, compared with the agent who ran a small suburban office and did not represent that he had expertise in verifying title details of a property.

Exemption of news media in respect of news and information [15.320] The Australian Consumer Law exempts certain “information providers”, most notably the news media, from the general prohibition of misleading or deceptive conduct: s 19. However, the exemption does not extend to statements such information providers might make in an advertising context (s 19(2)), which will therefore remain subject to the prohibition of misleading or deceptive conduct in s 18. An information provider is not protected where the misleading statements were made under a contract, arrangement or understanding with a person supplying goods or services of the type which was the subject of the publication: s 19(3); Australian Competition and Consumer Commission v Channel Seven Brisbane Pty Ltd (2009) 239 CLR 305 at [9].

371

372

Introduction to Business Law in Australia

Prohibition of unconscionable conduct Figure 15.4: Statutory unconscionable conduct

Introduction [15.330] Unconscionable conduct does not have a precise legal definition. It is a concept that has evolved on a case-by-case basis, usually as part of the law of contract: see Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 (discussed at [7.660]–[7.670]) and Taylor v Johnson (1983) 151 CLR 422 (discussed at [7.220])). Nevertheless it can be said that it generally refers to conduct that is more than simply unfair or harsh – it must have an element of “bad conscience”. For example, the courts, in cases such as those cited above, have found business transactions or dealings to be ’unconscionable’ when they involve conduct that is particularly harsh or oppressive and which is so unfair or unreasonable that it goes beyond hard commercial bargaining. It also includes conduct that may be described as “sharp practice”. Since Amadio there have been a number of legislative initiatives responding to pressure from both the consumers and small business. The focus in this chapter is on ss 20–22 of the Australian Consumer Law. Section 20 deals with unconscionable conduct within the meaning of the common law. This incorporates the principles in the cases such as those cited above and entrenches into legislation the equitable doctrine of unconscionable conduct (as discussed in cases such as Amadio) and thereby extending the range of remedies available to parties affected by unconscionable conduct. Section 21 is a broad prohibition on unconscionable conduct in connection with the selling/supply or acquisition/purchase of goods or services. Section 20 is a safety net provision, designed to “catch” situations that may not be caught by s 21.

chapter 15 Consumer Protection

It is important to recognise that the unconscionability provisions of the ACL protect small businesses from unconscionable conduct by other businesses. Conduct may be unconscionable if it is particularly harsh or oppressive and more than just hard commercial bargaining. It can occur between businesses or between businesses and consumers. 13

Unconscionable conduct within the meaning of the unwritten law [15.340] Section 20(1) of the Australian Consumer Law provides: “A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.” Section 20 refers to conduct that is unconscionable within the meaning of the unwritten law. The “unwritten law” referred to in s 20 is the common law and equity: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at [38]. The general effect of this provision is to extend the remedies available under the Australian Consumer Law to conduct regarded as unconscionable by the courts in accordance with common law or equitable principles: see [7.870].

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [15.350] In Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, a shopping centre tenant was engaged in litigation with the centre owners. The tenant wished to assign their lease as part of the sale of their business. The prospective buyer was willing to buy the tenant’s business provided a new lease could be negotiated by the tenant. However, the lease was about to expire and did not contain an option to renew. The centre owners were willing to agree to a new lease provided the tenant withdrew from the litigation. The tenant agreed to this condition for the new lease. What the ACCC considered to be unconscionable was the exploitation of the weaker bargaining position in which the lessees found themselves. The High Court held that the centre owner’s conduct did not constitute unconscionable conduct under the former s 51AA of the Trade Practices Act 1974 (Cth) (now s 20 of the Australian Consumer Law). A person is not in a position of special disadvantage simply because of inequality of bargaining power. Many contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests: at [13], [63], [184]. The lessees were not at any “special” disadvantage, in that they did not lack an ability to judge their interests and they acted in accordance with their best interests. Thus there were no grounds for setting the contract aside for unconscionable conduct. Taking advantage of a superior bargaining position does not constitute unconscientious exploitation of a special advantage. 14

13

14

Unconscionable conduct in the supply of goods and services to consumers and unconscionable conduct in business transactions were formerly the subject of separate provisions in the Australian Consumer Law ss 21 and 22 respectively. The Competition and Consumer Legislation Amendment Act 2011 (Cth) repealed these separate provisions and replaced them with ss 21 and 22 that apply to both types of transactions. See R Bigwood, “Curbing Unconscionability: Berbatis in the High Court of Australia” (2004) 28 Melbourne University Law Review 203; N Dean, “Australian Competition and Consumer Commission v Berbatis Holdings” (2004) 26 Sydney Law Review 255.

373

374

Introduction to Business Law in Australia

Australian Competition and Consumer Commission v Samton Holdings [15.360] Australian Competition and Consumer Commission v Samton Holdings (2002)117 FCR 301. The ACCC took action against the lessors, Samton Holdings, alleging that they engaged in unconscionable conduct contrary to what is now s 20 of the Australian Consumer Law. The purchasers took an assignment of a lease over the premises but failed to exercise an option to renew the lease within the time permitted. The lessors demanded a payment of $70,000 from the purchasers for the privilege to renew the lease. The Full Federal Court decided that the purchasers were not at a “special” disadvantage. The court said that unconscionable conduct always had to be “at the extreme end of the scale of unreasonable conduct”. The conduct of the lessors, although avaricious and opportunistic, was not at the extreme end of the scale.

Google Inc v Australian Competition and Consumer Commission [15.370] Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435. An internet search engine displayed sponsored search results separately from its other search results. Sponsored results were labeled as such. Some of these results contained misleading or deceptive representations. The advertiser chose the search terms that gave rise to sponsored results. The High Court held that the search engine was not liable for publishing the misleading or deceptive content of the sponsored results. The search engine was not the author of the misleading content, which was supplied by the advertiser. An intermediary such as the search engine would be liable if they adopted or endorsed the misleading content. However, the search engine had not adopted or endorsed the sponsored search results. 15

Application of s 20 of the ACL [15.380] The application of s 20 of the Australian Consumer Law involves consideration of the unconscionable dealings doctrine (see the cases discussed at [7.660]–[7.720]). “Put in short form, that doctrine involves the knowing exploitation by one party of the special disadvantage of another in a dealing between them …”: Australian Competition and Consumer Commission v Radio Rentals Ltd (2005) 146 FCR 292 at [11] per Finn J. Where both parties are labouring under the same mistake in good faith, unconscionable conduct has not been established: Spira v Commonwealth Bank of Australia (2003) 57 NSWLR 544. Section 20 does not apply where the conduct in question falls within the more specific provisions of s 21.

15

See M Richardson, “Why Policy Matters: Google Inc v Australian Competition and Consumer Commission” (2012) 34 Sydney Law Review 587.

chapter 15 Consumer Protection

Unconscionable conduct in connection with goods or services [15.390] Section 21(1) of the Australian Consumer Law prohibits a person from engaging in “unconscionable” conduct in connection with goods or services. 16 It provides: (1)

A person must not, in trade or commerce in connection with: (a)

the supply or possible supply of goods or services to a person (other than a listed public company); or

(b)

the acquisition or possible acquisition of goods or services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable. (3)

(4)

For the purpose of determining whether a person has contravened subsection (1): (a)

the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and

(b)

the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.

It is the intention of the Parliament that: (a)

this section is not limited by the unwritten law relating to unconscionable conduct; and

(b)

this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and

(c)

in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of: (i)

the terms of the contract; and

(ii) the manner in which and the extent to which the contract is carried out; and is not limited to consideration of the circumstances relating to formation of the contract. The term “unconscionable” is not defined. Section 22(1) provides that in determining whether there has been unconscionable conduct by a supplier of goods and services in connection with the supply of goods or services to a customer, the court may have regard to the following matters: (a)

the relative strengths of the bargaining positions of the parties;

(b)

whether conditions imposed upon a customer were not reasonably necessary for the protection of the legitimate interests of the supplier;

(c)

whether the customer was able to understand any documents relating to the supply of the goods or services;

(d)

whether any undue influence or pressure was exerted upon the customer or any unfair tactics used against the customer;

16

Unconscionable conduct in the supply of goods and services to consumers and unconscionable conduct in business transactions were formerly the subject of separate provisions in the Australian Consumer Law, ss 21 and 22 respectively. The Competition and Consumer Legislation Amendment Act 2011 (Cth) repealed these separate provisions and replaced them with ss 21 and 22 that apply to both types of transactions. See generally L Griggs and E Webb, “Section 22 Unconscionability – A Sauropod in Need of Life Support” (2011) 11, 1 QUT Law and Justice Journal 31.

375

376

Introduction to Business Law in Australia

(e)

the amount and terms for which the customer could have acquired equivalent goods or services from another supplier;

(f)

the extent to which the supplier’s conduct was consistent with their conduct towards other customers in similar transactions;

(g)

the requirements of any applicable industry code;

(h)

the requirements of any other industry code where the customer acted on the reasonable belief that the supplier would comply with that code;

(i)

the extent to which the supplier unreasonably failed to disclose intended conduct that might affect the customer or any risks to the customer arising from the supplier’s intended conduct;

(j)

the extent to which the supplier was willing to negotiate with the customer the terms and conditions of the contract; the terms and conditions of the contract; the conduct of the supplier and customer in complying with the contract; and any conduct of the supplier or customer in connection with their commercial relationship after entry into the contract;

(k)

whether the supplier had a contractual right to vary unilaterally a term or condition of a contract with the customer for the supply of the goods or services; and

(l)

the extent to which the supplier and the customer acted in good faith.

A similar list of considerations applies in determining whether an acquirer of goods or services has engaged in unconscionable conduct in connection with an acquisition of goods or services from a supplier: s 22(2). In considering whether conduct is unconscionable, the court may consider the terms of the contract, the manner in which the contract is carried out and the extent to which the contract is carried out. The court is not limited to considering the circumstances in which the contract was formed: s 21(4)(c). The court is not to have regard to any circumstances not reasonably foreseeable at the time of the alleged unconscionable conduct: s 21(3)(a). The court may have regard to conduct or circumstances prior to entry into the contract: s 21(3)(b). Unlike s 20, s 21 does not limit unconscionable conduct to conduct that is unconscionable within the meaning of the unwritten law: s 21(4)(a). This provision can apply to a system of conduct or pattern or behaviour even where an individual is not identified as being disadvantaged by that conduct or behaviour: s 21(4)(b). Furthermore in determining whether conduct is unconscionable the court may consider not only the s 22 factors but also the terms of the contract and the manner in which the contract is carried out: s 21(4)(c).

Australian Competition and Consumer Commission v Lux Pty Ltd [15.400] On the meaning of unconscionable in the former s 51AB of the Trade Practices Act 1974 (Cth) (now s 21 of the Australian Consumer Law), the court in Australian Competition and Consumer Commission v Lux Pty Ltd [2004] FCA 926 said: “The word unconscionable is not a term of art. It is not limited to traditional equitable or common law notions of unconscionability … It bears its ordinary meaning of ‘showing no regard for conscience, irreconcilable with what is right or reasonable’ … What is required is ‘serious misconduct or something clearly unfair or unreasonable’ … It will be relevant whether advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his or her best interests”: at [98]

chapter 15 Consumer Protection

Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [15.410] Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90. An employee of Lux, using its existing customer database or other telephone directory to contact a householder, rang a potential customer and followed a script that went as follows: ostensibly to offer a free maintenance check of their existing vacuum cleaner. “Hi, is Mr or Mrs XXXXX there please? Great! Hi Mr(s) XXXXX, my name is ##### and I’m calling on behalf of Lux Distributors, we look after all the Lux vacuum cleaners. How are you today Mr(s) XXXXX?

NOW, The main reason for my call today is we have someone in your area tomorrow giving a FREE maintenance check to all vacuum cleaners. What kind of cleaner do you use?

Fantastic, now what would be the best time for us to check it for you, XXam or XXpm?” The indication given to the householder was that a representative of the respondent would call by for the purpose of making “a free maintenance check” on the householder’s existing vacuum cleaner. In this way the representative gained entry to the homes of five elderly women (aged in their 80s or 90s). Each of the five elderly women agreed to have a Lux representative visit their home for the purpose of carrying out a free maintenance check. At each of the premises, the representative tested the customer’s existing vacuum cleaner and conducted a test that compared that vacuum cleaner with a near-new demonstration model. The representative used the results of the demonstration together with other selling techniques to show the superiority of the vacuum cleaner they sought to sell. At the trial Jessup J of the Federal Court found that it is not sufficient that conduct is objectively unfair, unjust, wrong or unreasonable. The relevant conduct must involve a significant element of “moral obloquy”, which will often require some deliberate wrongdoing. Specifically, his Honour said that Lux’s conduct was not unconscionable because:  the women were not targeted as elderly people;  their age was not, of itself, a special disadvantage, as each woman, despite her age, was able to decide matters for herself;  Lux genuinely intended to carry out the maintenance check;  door-to-door selling of vacuum cleaners was a traditional way of doing business, and was familiar to almost all householders;  the women were familiar with the product; and  the contracts contained a cooling-off period. The Full Court upheld the appeal by the ACCC. In an important decision the Court held that the seller’s deception about their purpose in entering the homes of the women constituted unconscionable conduct.

377

378

Introduction to Business Law in Australia

The Court took the opportunity to describe the societal values that underpin conscionable conduct. “The task of the Court is the evaluation of the facts by reference to a normative standard of conscience. That normative standard is permeated with accepted and acceptable community values. In some contexts, such values are contestable. Here, however, they can be seen to be honesty and fairness in the dealing with consumers. The content of those values is not solely governed by the legislature, but the legislature may illuminate, elaborate and develop those norms and values by the act of legislating, and thus standard setting … These laws of the States and the operative provisions of the ACL reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure. These considerations are central to the evaluation of the facts by reference to the operative norm of required conscionable conduct”: at [23]. The Court then went on to find that the trial judge erred on a number of points:  He accorded too little weight to the fact that the maintenance check was a deceptive ruse designed to gain entry into the person’s home. The primary purpose of each representative was to sell a vacuum cleaner, and not to carry out a free maintenance check. The initial deception, the ruse, was critical to the creation of the opportunity to sell and was the launching pad for all that followed. This deception tainted all the conduct thereafter.  He did not acknowledge the subtle pressure placed on the women by the representatives. After performing the test on the homeowner’s existing machine, the sales person would then unpack and demonstrate the new model in a helpful and friendly manner (“ingratiating solicitude”) that can be as unconscionable as high-pressure bullying.  He incorrectly assessed the relative bargaining strengths of the parties. Entering and remaining in a person’s home creates a real position of strength for the seller.  Too much weight was given to the cooling off periods in the contracts. First, these were required by law. Secondly, there was no evidence that any of the women was told of the right. Thirdly, one does not look to the conduct that was earlier practised (entry by deception, contravention of relevant legislation, and lengthy sales technique leading to people feeling prevailed upon to buy), and reduce or ameliorate its character as unconscionable because, if the householder knows of it, she or he can get out of the contract. The decision emphasises the importance of considering the nature of the respondent’s conduct, rather than the consumer’s response to that conduct, in determining whether the respondent has engaged in statutory unconscionable conduct. It also establishes that the court must take a holistic view of the conduct: the court should not examine the individual circumstances of the impugned conduct (which may not, of itself, amount to unconscionable conduct) but which may in combination with other circumstances create a situation that does amount to such conduct. It also makes clear that businesses that rely on door-to-door sales (and similar sales strategies) must act in a manner that is “honest and fair and free of deception”.

Unconscionable conduct and small business [15.420] Unconscionable conduct in the supply of goods and services to consumers and unconscionable conduct in business transactions was formerly the subject of separate provisions in the Australian Consumer Law, ss 21 and 22 respectively. The Competition and Consumer Legislation Amendment Act

chapter 15 Consumer Protection

2011 (Cth) repealed these separate provisions and replaced them with ss 21 and 22 that apply to both types of transactions. Thus s 21 also can be used to protect small business from larger businesses engaging in unconscionable conduct. The court may have regard to the same factors listed in s 22(1) including factors which may be particularly relevant to business to business transactions including:  the relative bargaining strength of the parties;  the use of undue influence, pressure or unfair tactics by the stronger party;  the willingness of the stronger party to negotiate; and  the extent to which the parties acted in good faith. Furthermore, as with any unconscionable conduct action, in determining whether conduct is unconscionable the court may consider not only the s 22 factors but may also the terms of the contract and the manner in which the contract is carried out: s 21(4)(c). The ACCC has shown a willingness to use s 21 to protect small business from the allegedly unconscionable conduct of landlords in shopping centres towards lessees and in the case of large supermarket chains and their suppliers. For instance, in October 2014 the regulator initiated action against a large supermarket alleging that, outside of its trading terms with the suppliers concerned, it:  pursued agreements to pay the supermarket for “profit gaps” on a supplier’s goods, being the difference between the amount of profit the supermarket had wanted to make on those goods and the amount it had achieved;  pursued agreements to pay the supermarket, both retrospectively and prospectively, for amounts the supermarket claimed as “waste” on a supplier’s goods which occurred after the supermarket had accepted the goods, and price reductions, or “markdowns” implemented by it to clear goods;  imposed fines or penalties on suppliers for short or late deliveries. The supermarket maintains it did nothing more than drive a hard bargain which it is entitled to do in a market economy.

Intentional breach of contractAn

intentional breach of contract made between

business parties is not necessarily unconscionable and some further “moral obloquy” must be shown: Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536 282 ALR 571 at [91]. A party may take a commercial decision to breach a contract knowing that the other party is able to enforce its right to seek a legal remedy for the breach. Such a breach of contract is not inherently unconscionable.

Remedies for contravention [15.440] Contravention of the unconscionable conduct provisions do not give rise to a criminal offence. However, a pecuniary penalty may be imposed (see [15.940]). Civil remedies, for example, an injunction, or damages for the loss suffered, discussed later in this chapter, may be sought for contravention of the unconscionable conduct provisions.

379

380

Introduction to Business Law in Australia

Prohibition of unfair contract terms Figure 15.5: Prohibition of unfair contract terms

[15.450] The Australian Consumer Law contains provisions prohibiting unfair terms in standard form consumer contracts. 17 An “unfair” term of a standard form consumer contract is void: s 23(1). However, the contract as a whole will not be void if the contract can operate without the unfair term: s 23(2). A consumer contract is one for the supply of goods or services or the sale of land to an individual who acquires them wholly or predominantly for personal, domestic or household use or consumption: s 23(3).

Meaning of “unfair” [15.460] A term is unfair if it: (a)

would cause a significant imbalance in the parties’ rights and obligations;

(b)

is not reasonably necessary to protect the legitimate interests of the advantaged party; and

(c)

would cause detriment to a party if it was applied: Australian Consumer Law, s 24(1).

A term is presumed to be not reasonably necessary to protect the advantaged party’s legitimate interests unless that party proves the contrary: s 24(4). In determining unfairness, the court may take into account any matters it considers to be relevant. However, it must take into account the transparency of the term and the contract as a whole: s 24(2). A term is “transparent” if it is expressed in reasonably plain language, legible, presented clearly and readily available to the affected party: s 24(3).

Examples of unfair terms [15.470] The following are given as examples of potentially unfair terms, namely, a term that: (a) 17

only one party to avoid performing the contract; The unfair contract terms provisions were originally introduced by the Trade Practices Amendment (Australian Consumer Law) Act (No 1) 2010 (Cth), Sch 1, Pt 1 and came into operation on 1 July 2010. The provisions were subsequently repealed and replaced by the present provisions in the same terms in the Australian Consumer Law by the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth), Sch 1. The Australian Consumer Law is set out in Sch 2 to the latter Act and came into operation on 1 January 2011.

chapter 15 Consumer Protection

(b)

permits only one party to terminate the contract;

(c)

penalises only one party for breach or termination of the contract;

(d)

permits only one party to vary the terms of the contract;

(e)

permits only one party to renew the contract;

(f)

permits one party to vary the upfront price payable without allowing the other party to terminate the contract;

(g)

permits one party to unilaterally vary the characteristics of the goods or services to be supplied;

(h)

permits one party to unilaterally determine if the contract has been breached or to interpret the contract;

(i)

limits one party’s vicarious liability for its agents;

(j)

permits one party to assign the contract to the detriment of another party without consent;

(k)

limits one party’s right to sue another party;

(l)

limits the evidence one party can bring in proceedings concerning the contract;

(m)

imposes the evidential burden on one party in proceedings concerning the contract; and

(n)

is of a kind prescribed by the regulations: Australian Consumer Law, s 25(1).

Meaning of standard form contract [15.480] For the provisions as to unfair terms in consumer contracts to apply, the contract must be a “standard form contract”: Australian Consumer Law, s 23(1)(b). Standard form contracts are used by businesses for common business transactions, for example, banks, electricity companies and phone companies use standard form contracts when contracting with consumers. In determining this issue, a court may take into account such matters as it thinks relevant but must consider whether: (a)

one of the parties has all or most of the bargaining power;

(b)

the contract was prepared by one party before any discussion relating to the transaction occurred;

(c)

another party was required, in effect, either to accept or reject the terms of the contract in the form in which they were presented;

(d)

another party was given an effective opportunity to negotiate the terms of the contract;

(e)

the terms of the contract take into account the specific characteristics of another party or the particular transaction; and

(f)

any other matter prescribed by the regulations: s 27(2).

The matters specified in (d), (e) and (f) do not apply to a term that defines the main subject matter of the contract, sets the upfront price payable or is required or permitted by federal, State or Territory law: s 26(1). On the application of a party to the contract or the ACCC, a court may declare that a contract term is unfair: s 250(1).

381

382

Introduction to Business Law in Australia

Specific false representation provisions Figure 15.6: Specific false representations

[15.490] The Australian Consumer Law contains provisions designed to protect consumers against false representations made by a person in connection with the promotion and supply of goods, services and land. Contravention of these provisions gives rise not only to civil remedies, for example the recovery of damages for the loss suffered but also to prosecution for an offence rendering the offender liable to a fine.

Goods and services [15.500] The prohibition against the making of false or misleading representations in connection with the promotion and supply of goods and services is to be found in s 29(1) of the Australian Consumer Law. The section provides that a person must not, in trade or commerce, in connection with the supply 18 or possible supply of goods 19 or services 20 or in connection with the promotion by any means of the supply or use of goods or services make a false or misleading representation: 18 19

Supply is defined as follows: “(a) in relation to goods – supply (including re-supply) by way of sale, exchange, lease, hire or hire-purchase; and (b) in relation to services – provide, grant or confer”: Australian Consumer Law, s 2(1). Goods are defined as including: “(a) ships, aircraft and other vehicles; and (b) animals, including fish; and (c) minerals, trees and crops, whether on, under or attached to land or not; and (d) gas and electricity; and (e) computer software; and (f) second-hand goods; and (g) any component part of, or accessory to, goods”: Australian Consumer Law, s 2(1).

chapter 15 Consumer Protection

(a)

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)

that services are of a particular standard, quality, value or grade;

(c)

that goods are new;

(d)

that a particular person has agreed to acquire goods or services;

(e)

that purports to be a testimonial by any person relating to goods or services;

(f)

concerning: i.

a testimonial by any person; or

ii.

a representation that purports to be such a testimonial; relating to goods or services;

(g)

that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits;

(h)

that the person making the representation has a sponsorship, approval or affiliation;

(i)

with respect to the price of goods or services;

(j)

concerning the availability of facilities for the repair of goods or of spare parts for goods;

(k)

concerning the place of origin of goods;

(l)

concerning the need for any goods or services;

(m)

concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy (including a guarantee under Division 1 of Part 3-2);

(n)

concerning a requirement to pay for a contractual right that:

(i)

is wholly or partly equivalent to any condition, warranty, guarantee, right or remedy; and

(ii)

a person has under a law of the Commonwealth, a State or a Territory (other than an unwritten law).

Contravention of the latter section may occur whether the false representation is contained in an advertisement, or is made orally by the salespeople of a company negotiating the sale of goods to a prospective purchaser, or by representations on the goods themselves as the following cases demonstrate.

20

Services are defined as including: “(a) any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce; and (b) without limiting paragraph (a), the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under: (i) a contract for or in relation to the performance of work (including work of a professional nature), whether with or without the supply of goods; or (ii) a contract for or in relation to the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction; or (iii) a contract for or in relation to the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; or (iv) a contract of insurance; or (v) a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or (vi) any contract for or in relation to the lending of money; but does not include rights or benefits being the supply of goods or the performance of work under a contract of service”: Australian Consumer Law, s 2(1).

383

384

Introduction to Business Law in Australia

Australian Competition and Consumer Commission v Dell Computer Pty Ltd [15.510] In Australian Competition and Consumer Commission v Dell Computer Pty Ltd (2002) 126 FCR 170, the respondent computer company sold computers directly to customers. The company did not permit customers to collect the computers from its premises. The goods were subject to a compulsory delivery charge. The company’s advertisements prominently displayed a price for the goods which did not include the delivery charge. An asterisk next to the price referred consumers to small print text which indicated that there was an additional delivery charge. Section 53(e) of the former Trade Practices Act 1974 (Cth) (now s 29(1)(i) of the Australian Consumer Law) prohibited the making of “false or misleading representation with respect to the price of goods or services”. The Full Federal Court held that the company’s conduct contravened this provision. The prominently displayed price was not the price which would actually be paid by a customer.

Nationwide News Pty Ltd v Australian Competition and Consumer Commission [15.520] In Nationwide News Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 215 the appellant ran a promotion campaign comprising advertisements in newspapers and on television and radio featuring a “free mobile phone”. Reference was made in the advertisements that “conditions apply”. In reality, a subscriber for the “free” telephone was obliged to pay initially a connection fee of $65, a delivery charge of $19.90, a security deposit of $260, followed by monthly payments in advance of $130 for a minimum of 15 months – a total of $2,294.90. The Full Federal Court held that s 53(g) of the former Trade Practices Act 1974 (Cth) (now s 29(1)(m) of the Australian Consumer Law) had been contravened. “Any respect in which goods or services offered as ‘free’ may not be free should be prominently and clearly spelled out so that the magnetism of the word ‘free’ is appropriately qualified”: at 228.

Ascot Four Pty Ltd v Australian Competition and Consumer Commission [15.530] In Ascot Four Pty Ltd v Australian Competition and Consumer Commission (2009) 176 FCR 106 a jeweller’s advertisement included a “sale price” and a “strike through price” for certain jewellery. However, given the prevalence of discounting in the industry the jewellery had never sold at the strike through price, or even near to that price. The Full Federal Court held that the jeweller had made a false or misleading representation about the price of the goods as the strike through price was not what a customer would have paid prior to the sale: at [26]. (The case was decided under s 75AZC(1)(g) of the former Trade Practices Act 1974 (Cth) (now s 29(1)(i) of the Australian Consumer Law). See also Jewellery Group Pty Ltd v Australian Competition and Consumer Commission [2013] FCAFC 144.)

chapter 15 Consumer Protection

Australian Competition and Consumer Commission v Gordon Superstore Pty Ltd [15.540] In Australian Competition and Consumer Commission v Gordon Superstore Pty Ltd [2014] ATPR 42-474; [2014] FCA 452 a Harvey Norman store told a customer that they were not entitled to a refund for a defective refrigerator and that the customer was limited to their rights under manufacturer’s warranty. However, under the Australian Consumer Law the store was obliged to provide a refund for goods that were not of acceptable quality (s 54(1)). The store also told the customer that it would provide a refund after the manufacturer had provided the store with a refund. Under the Australian Consumer Law the store’s obligation to give a refund was independent of the obligations of the manufacturer. The store had thereby made false or misleading representations concerning rights available under the consumer guarantee provisions of the Australian Consumer Law (s 29(1)(m)): at [48].

Penalty for false or misleading representations [15.550] The penalty for making false or misleading representations about goods or services is $1,100,000 for corporations and $220,000 for other parties: Australian Consumer Law, s 151(1).

Country of origin representations [15.560] Under ss 255–257 of the Australian Consumer Law it is not a contravention of s 18 (misleading or deceptive conduct), s 29(1)(a) or (k) or s 151(1)(a) or (k) (false or misleading representations) to represent that goods are, for example, “Made in Australia” if the goods have been “substantially transformed” in Australia and at least 50 per cent of the cost of producing or manufacturing the goods has occurred in Australia. The same applies to representations as to the country of origin of imported goods. The provision does not apply to a representation as to a particular region of origin, for example “made in Tasmania” or “made in California”, and such representations are governed by ss 18, 29(1)(a) or (k) and 151(1)(a) or (k). Further, it is not a contravention of ss 18, 29(1)(a) or (k) and 151(1)(a) or (k) to represent that goods are a “Product of Australia” or “Produce of Australia” provided that all the significant ingredients or components of the goods come from Australia, and virtually all of the production or manufacturing processes associated with the goods occur within Australia. Again, the same applies to representations as to the country of origin of imported goods. The requirement that the goods must have been “substantially transformed” means that the goods must have undergone a fundamental change in their form, appearance or nature, such as the sewing of cloth into a shirt, or the moulding of sheet metal into a panel: s 255(3). There are detailed provisions regarding the method for calculating production or manufacturing costs for the purposes of the sections: ss 256 – 257.

385

386

Introduction to Business Law in Australia

Australian Competition and Consumer Commission v Marksun Australia Pty Ltd [15.570] Australian Competition and Consumer Commission v Marksun Australia Pty Ltd [2011] ATPR 42-363; [2011] FCA 695. A series of websites operated by the respondent claimed that ugg boats were Australian made when they were actually made in China. The websites also used the “Australian Made” logo without authorisation. The Federal Court held that these claims constituted misleading or deceptive conduct (s 18) and falsely representations of the place of origin of the goods (s 29(1)(k)). The respondent had obtained an unfair market advantage over suppliers of products that were genuinely made in Australia: at [107]. The misuse of the Australian made logo had the potential to undermine trust in that logo: at [108]. The court imposed separate pecuniary penalties in relation to the misrepresentation of the place of origin ($330,000) and the use of the “Australian Made” logo ($100,000): at [135], [139].

Land [15.580] The Australian Consumer Law proscribes the making of false or misleading representations in connection with the sale or grant of an interest in land. Section 30(1) provides that a person must not, in trade or commerce, in connection with the sale or grant, or the possible sale or grant, of an interest in land or in connection with the promotion by any means of the sale or grant of an interest in land make a false or misleading representation concerning: (a)

sponsorship, approval or affiliation;

(b)

the nature of the interest in the land;

(c)

the price payable for the land;

(d)

the location of the land;

(e)

the characteristics of the land;

(f)

the use to which the land is capable of being put or may lawfully be put; or

(g)

the existence or availability of facilities associated with the land.

An example of the application of this provision can be seen in the following case:

Given v Pryor [15.590] Given v Pryor (1979) 24 ALR 442; (1980) 30 ALR 189 (FC): In the audio part of a television advertisement for land being offered for sale it was stated, inter alia: “150 quarter acre lots at a sensational price. … A wonderful place to live.” The visual part included the words “watch it grow” and contained various pictures of parts of the land including some showing several houses. The court found that having regard to the advertisement as a whole (including the various pictorial representations) there had been a representation that houses could be built on the land advertised for sale. In reality, however, the land was subject to a planning scheme under which houses could not be built on the land without the special approval of the responsible authority and by satisfying its onerous conditions.

chapter 15 Consumer Protection

Accordingly, it was held that there had been a misleading representation concerning the use to which the land could be lawfully put in contravention of s 53A(1)(b) of the former Trade Practices Act 1974 (Cth) (now s 30(1)(f) of the Australian Consumer Law). The decision was upheld by the Full Federal Court on appeal. [15.600] For a misleading representation to be made “in connection with the promotion of the sale” in contravention of s 30 of the Australian Consumer Law (formerly 53A of the Trade Practices Act 1974 (Cth)), there is no necessity to establish that a sale resulted from or was the likely result of the making of the statement. The fact that a brochure containing the representation was available to the public is sufficient: Videon v Barry Burroughs Pty Ltd (1981) 37 ALR 365. The penalty for making a false or misleading representation about the sale of land is $1,100,000 for a corporation and $220,000 for other parties: Australian Consumer Law, s 152(1).

Profitability of certain business activities [15.610] The Australian Consumer Law provides that a person must not make a representation that is false or misleading in a material particular concerning the profitability or risk or any other material aspect of any business activity that the person has represented as one that can be, or can be to a considerable extent, carried on at or from a person’s place of residence: s 37(1). It is further provided that where a person, whether by advertisement or otherwise, invites persons to engage or participate in a business activity requiring the performance of work, or the investment of moneys and the performance of work associated with the investment, the person must not make a representation that is false or misleading in a material particular with respect to the profitability or risk or any other material aspect of the business activity: s 37(2). This provision is designed to counter, for example, extravagant claims as to earnings which can be made from investment in dubious “franchise” schemes.

Ducret v Colourshot Pty Ltd [15.620] Ducret v Colourshot Pty Ltd [1981] FCA 9; 35 ALR 503. A company, which carried on the business of processing and developing film, set up a network of “franchise” couriers to collect exposed films left at various retail outlets, forward the film to the company’s office and redeliver the developed film and photographs. The franchisees had been induced to part with $7,500 each for their franchises by a false statement in advertisements claiming that they could earn up to $300 a week. In reality the return on their investment was minimal and in some cases virtually nothing, since the only substantive income of the company was derived from the sale of the franchises. The company was convicted of a number of offences arising out of contravention of s 59(2) of the former Trade Practices Act 1974 (Cth) (now s 37 of the Australian Consumer Law) and fined a total of $95,000.

387

388

Introduction to Business Law in Australia

Representations and predictions about future outcomes [15.630] Section 4(1) of the Australian Consumer Law provides that where a person makes a representation as to any future matter, and they do not have reasonable grounds for making the representation, the representation is taken to be misleading.

ALDI Stores (A Limited Partnership) v EFTPOS Payments Australia Ltd [15.640] In ALDI Stores (A Limited Partnership) v EFTPOS Payments Australia Ltd [2011] FCA 1114 Aldi, a supermarket chain, took action against the company that manages the process of eftpos transactions between banks and financial institutions, consumers and retailers, EFTPOS Payments Australia Ltd (ePAL). Changes were introduced to the fees for EFTPOS transactions and which of the parties, banks and retailers, would incur the fees. Under the previous scheme, the bank that issued the consumer’s debit card would pay a processing fee of 4 to 5 cents per transaction to the retailer’s bank. Under the new scheme, the retailer’s bank would pay a fee of 5 cents per transaction to the issuer of the consumer’s debit card, effectively in some cases increasing costs by 9 to 10 cents to the retailer’s bank. ePAL is owned by a group comprising major banks, financial institions and two major retailers, Coles and Woolworths. Because of the fee structure for ePAL members, consumers shopping with Coles and Woolworths would not incur the fee increases. The managing director of ePAL responded to widespread discussion in news media of the effect of the additional fees on retailers and consumers with a media release in a major newspaper, the Herald Sun, saying “[t]hese fees are not paid to eftpos, nor do they affect retailers or consumers directly”. He later clarified that statement saying: “[i]t remains to be seen whether acquirers (banks) will pass part or all of any fee changes on to retailers and what retailers may do in relation to their consumers as a result of any changes. It is therefore premature to state with certainty what impact the planned changes will have on retailers or then upon their consumers”. The evidence showed that some banks had no intention at the time to pass on the fee changes but that the managing director was aware of complaints by some retailers that Westpac and St George had passed on some eftpos charges even though he had not been told about these bank policies. The Court said the question was then “whether ePAL had reasonable grounds” for these statements about the future and that turned on whether the managing director had reasonable grounds for making the representations. The Court said the media release “that ‘[i]t remains to be seen whether acquirers will pass part or all of any fee charges on to retailers’ was misleading because, to [the managing director’s] knowledge, Westpac and St George had probably adopted a policy of partial pass through”. The knowledge of the complaints that Westpac and St George were passing on some fees was inconsistent with the statements made. The Court ordered that ePAL place advertisements correcting the misleading statements in national and state newspapers as well as granting an injunction and ordering costs against ePAL.

chapter 15 Consumer Protection

Australian Competition and Consumer Commission v Taxsmart Group Pty Ltd [15.650] In Australian Competition and Consumer Commission v Taxsmart Group Pty Ltd [2014] ATPR 42-473; [2014] FCA 487 Taxsmart made representations that it was offering a graduate program and 12 months of employment to accounting graduates with no previous work experience in tax accounting that would enable such graduates to satisfy the requirements for registration as a tax agent and commence as franchisees. The ACCC took action against Taxsmart and its executives. The Federal Court ordered by consent that Taxsmart repay $260,400 in franchise fees to five former Taxsmart franchisees following proceedings brought by the ACCC. The court declared that Taxsmart engaged in misleading or deceptive conduct because (a) it had not made proper enquiries or adequately considered whether the graduate program would enable graduates, with no prior experience in tax accounting, to satisfy the legal requirements for registration as a tax agent; and (b) the graduate program was not capable of enabling graduates, without any previous work experience in tax accounting, to satisfy the legal requirements for tax agent registration. It is an implication from the words of s 4(1) that a representation will not be misleading if the defendant can show that they had reasonable grounds for making the representation: Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [1]. (This case discussed the equivalent section of s 4(1), the former 51A of the Trade Practices Act.)

Representations about the profitability of a business [15.660] The penalty for making misleading representations about the profitability of certain business activities is $1,100,000 for corporations and $220,000 for other parties: s 159(1).

Prohibition of other unfair practices [15.670] The Australian Consumer Law also prohibits certain other kinds of business conduct in relation to the supply of goods and services. These are as follows:

Misleading conduct as to employment [15.680] A person must not engage in conduct that is liable to mislead persons as to the availability, nature, terms or conditions, or any other matter relating to employment offered by the person or another person: Australian Consumer Law, s 31. The penalty for misleading conduct relating to employment is $1,100,000 for corporations and $220,000 for other parties: s 153(1).

389

390

Introduction to Business Law in Australia

Offering rebates, gifts, prizes, or other free items with the intention of not providing them as offered [15.690] A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or an interest in land or in connection with the promotion by any means of such activities offer rebates, gifts, prizes or other free items with the intention of not providing them or of not providing them as offered: s 32(1). For example, to offer a “free” gift with goods and at the same time increase the price of the goods to cover the cost of the gift would contravene this provision. The penalty for offering rebates, gifts etc with the intention of not providing them as offered is $1,100,000 for corporations and $220,000 for other parties: s 154(1).

Misleading conduct as to the nature or manufacturing process of goods [15.700] A person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the manufacturing process, the characteristics, the suitability for their purpose or the quantity of any goods: Australian Consumer Law, s 33. The penalty for misleading conduct as to the nature or manufacturing process of goods is $1,100,000 for corporations or $220,000 for other parties: s 155(1).

Misleading conduct in relation to services [15.710] A person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any services: Australian Consumer Law, s 34.

Dawson v World Travel Headquarters Pty Ltd [15.720] Dawson v World Travel Headquarters Pty Ltd [1981] FCA 103. The defendant company conducted a travel business. It published a brochure which advertised a “Swingaway Asia Group Holiday” as being of 16 days’ duration, when in fact it was only 15 days. In earlier proceedings, the defendant had been convicted of accepting payment without intending to supply services as offered in the brochure and fined $3,200. The brochure was subsequently reprinted without the information being corrected. Brochures containing the incorrect information were still on display and available for the public at the defendant’s premises. In the Federal Court, Fisher J said that the crucial feature of the contravention was the defendant’s failure to take any steps to withdraw or correct the misleading statement. Furthermore, the defendant had been guilty of considerable carelessness in permitting the brochures to remain on public display.

Penalty for misleading conduct [15.730] The penalty for misleading conduct in relation to services is $1,100,000 for corporations or $220,000 for other parties: Australian Consumer Law, s 156(1).

chapter 15 Consumer Protection

Bait advertising [15.740] This type of advertising essentially takes the form of attracting customers by the offer of goods at “special” prices, only for the customer to be told on following up the advertisement that the “special” price goods had all been sold but that another product at a higher price is available for sale. Section 35 of the Australian Consumer Law attempts to proscribe this kind of practice by providing that: (1)

A person must not, in trade or commerce, advertise goods or services for supply at a specified price if: (a)

(b) (2)

there are reasonable grounds for believing that the person will not be able to offer for supply those goods or services at that price for a period that is, and in quantities that are, reasonable having regard to: (i)

the nature of the market in which the person carries on business; and

(ii)

the nature of the advertisement; and

the person is aware or ought reasonably to be aware of those grounds.

A person who, in trade or commerce, advertised goods or services for supply at a specified price must offer such goods or services for supply at that price for a period that is, and in quantities that are, reasonable having regard to: (a)

the nature of the market in which the person carries on business; and

(b)

the nature of the advertisement.

Reardon v Morley Ford Pty Ltd [15.750] In Reardon v Morley Ford Pty Ltd (1980) 33 ALR 417 the defendant corporation carried on business as a dealer in Ford cars. It advertised for sale in newspaper advertisements a particular Ford model at the special price of “$6,600 plus on-road costs and delivery fees”. A prospective purchaser visited the defendant’s showrooms where he was informed that there was only one vehicle available at the relevant price but that it had already been sold. The defendant was held to have breached s 56(1) and (2) of the former Trade Practices Act 1974 (Cth) (now s 35 of the Australian Consumer Law). The circumstantial evidence led to the conclusion beyond reasonable doubt that the managing director of the defendant corporation did not intend to offer the particular model of vehicle for sale in accordance with the advertisement: see similarly, Walplan Pty Ltd v Wallace (1985) 8 FCR 27.

Penalty for bait advertising [15.760] The penalty for the bait advertising offences is $1,100,000 for corporations or $220,000 for other parties: Australian Consumer Law, s 157(1)–(2).

Accepting payment without intending or being able to supply as ordered [15.770] A person must not accept payment or other consideration for goods or services where: (a)

the person intends

391

392

Introduction to Business Law in Australia

(b)

(i)

not to supply the goods or services; or

(ii)

to supply goods or services materially different from the goods or services in respect of which the payment or other consideration is accepted; or

there are reasonable grounds, of which the person is aware or ought reasonably to be aware, for believing that it will not be able to supply the goods or services within the period specified or, if no period is specified, within a reasonable time: Australian Consumer Law, s 36.

The penalty for wrongly accepting payment is $1,100,000 for corporations or $220,000 for other parties: s 158(1).

Sending unsolicited credit or debit cards [15.780] A person must not send a credit card, debit card or any article that may be used as a credit or debit card to a person except either: (a)

at her or his written request; or

(b)

in renewal or replacement of a card of the same kind previously sent to and used by her or him: Australian Consumer Law, s 39(1).

This provision is intended to prohibit the unsolicited issue of credit or debit cards. The penalty for sending unsolicited credit or debit cards is $1,100,000 for corporations or $220,000 for other parties: s 161(1).

Assertion of right to payment for unsolicited goods or services [15.790] A person must not, in trade or commerce, assert a right to payment from a person for unsolicited goods or services (that is, goods sent or services supplied to a person without any request being made for them) unless the person has reasonable cause to believe that there is a right to payment, the burden of proof of which lies on the person: Australian Consumer Law s 40(1)–(2), (4). A person is taken to have asserted a right to payment if the person: (a)

makes a demand for the payment or asserts a present or prospective right to the payment;

(b)

threatens to bring legal proceedings with a view to obtaining the payment;

(c)

places or causes to be placed the name of the person on a list of defaulters or debtors, or threatens to do so, with a view to obtaining the payment;

(d)

invokes or causes to be invoked any other collection procedure, or threatens to do so, with a view to obtaining the payment; or

(e)

sends any invoice or other document stating the amount of the payment or setting out the price of the goods or services and not stating that no claim is made to the payment that complies with any requirement prescribed by the regulations: s 10(1).

The penalty for asserting a right to payment for unsolicited goods is $1,100,000 for corporations or $220,000 for other parties: s 162(1).

chapter 15 Consumer Protection

Recipient not liable to pay for unsolicited goods or services [15.800] The recipient of unsolicited goods is not liable to pay for them, nor for the loss of or damage to the goods other than loss or damage resulting from some wilful and unlawful act by the recipient: Australian Consumer Law, s 41(1). Furthermore, the recipient of unsolicited goods becomes the owner of them either: (a)

one month after notifying the sender in writing of the receipt of the goods, or

(b)

in the absence of such notice, after three months of receiving the goods, subject to the following exceptions: s 41(2), (4).

The recipient will not become the owner of the unsolicited goods if, during the one- or three-month periods just mentioned: (a)

the recipient unreasonably refused to permit the sender or owner of the goods to take possession of them; or

(b)

the sender or owner took possession of the goods during the relevant period; or

(c)

the goods were received in circumstances in which the recipient knew, or might reasonably be expected to have known, that the goods were not intended for her or him: s 41(3).

The recipient of unsolicited services is not liable to pay for them, nor for any loss of or damage as a result of the supply of the services: s 42. The penalty for asserting a right to payment for unsolicited services is $1,100,000 for corporations or $220,000 for other parties: s 162(2).

Assertion of right to payment for unauthorised entries or advertisements [15.810] The Australian Consumer Law makes it an offence for a person to assert a right to payment from any person of a charge for making an entry or advertisement in a publication relating to the person or to their profession, business, trade or occupation unless the person knows or has reasonable cause to believe that the other person has authorised the making of the entry or advertisement: s 43(1). In the absence of authorisation, a person is not liable to make payment for and is entitled to recover any payment made for such entry or advertisement: s 43(4). The penalty for asserting a right to payment for unauthorised entries or advertisements is $1,100,000 for corporations or $220,000 for other parties: s 163(1)–(2).

Pyramid selling [15.820] In general terms a pyramid selling scheme is one in which the participants are offered both the right to sell a particular company’s product and to receive payment or other benefit for introducing other persons into the scheme. The problem experienced with such schemes in the past has been that although those at the top of the pyramid (usually the persons who promoted the scheme) may receive considerable benefit derived largely from the contribution of each new participant, those at the base of the pyramid who rely on sales of the product, and the introduction of new participants to recoup their initial investment, find that the market becomes rapidly saturated and the product almost impossible to sell. Such schemes are prohibited by the Australian Consumer Law, ss 44–46. In Australian Communications Network Pty Ltd v Australian Competition and Consumer Commission (2005) 146 FCR 413, the Full Federal Court gave a lucid explanation of the nature of a pyramid scheme:

393

394

Introduction to Business Law in Australia

“The real vice inherent in pyramid selling schemes appears to be that the rewards held out are substantially for recruiting others, who in turn get their rewards substantially for recruiting still more members, and so on. If there is no underlying genuine economic activity the scheme must ultimately collapse and many people will have been induced to pay money for nothing. We see the purpose of the legislation as directed at proscribing schemes where the real or substantial rewards held out are to be derived substantially from the recruitment of new participants, as distinct from rewards for genuine sales of goods or services”: at [46]. In Australian Competition and Consumer Commission v Jutsen (No 3) (2011) 206 FCR 264; 285 ALR 110 a pyramid scheme claimed to offer accommodation and travel discounts and the chance to earn substantial money. Members had to pay $250 to join: at [4]. The accommodation or travel discounts arising from membership were difficult or impossible to realise so were of little or no value: at [114]. Members were told that they could earn money by recruiting new members: at [5]. Nicholas J observed that a pyramid scheme has two essential characteristics. First, new participants make a payment to participate in the scheme: at [105]. Secondly, new participants are induced to make such payments by the prospect of receiving payments for introducing new participants to the scheme: at [106]. The scheme in this case possessed both characteristics: at [112]. The penalty for participating in a pyramid scheme or inducing another person to participate is $1,100,000 for corporations or $220,000 for other parties: s 164(1)–(2).

Pricing [15.830] A person must not supply goods if: (a) the goods have more than one displayed price; and (b) the supply takes place for a price that is not the lowest of the displayed prices: Australian Consumer Law, s 47(1). This is commonly referred to as multiple pricing. Further, a person must not in connection with: (a) the supply of goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption; or (b) the promotion of the supply of goods or services of that kind; make a representation concerning an amount that would constitute a part of the consideration unless they also prominently specify a single price for the goods or services: s 48(1). The regulations may exclude specific classes of representations from the operation of this provision: s 48(4A).

Australian Competition and Consumer Commission v AirAsia Berhad Co [15.840] In Australian Competition and Consumer Commission v AirAsia Berhad Co [2012] FCA 1413 an airline website flight search results page advertised fare prices that did not include various taxes and charges. The displayed prices on this page were thus only part of the price payable. The correct prices were displayed on subsequent pages. The airline admitted the contravention of s 48: at [15].

Penalty for multiple pricing [15.850] The penalty for multiple pricing is $5,000 for corporations or $1,000 for other parties: s 165(1). The penalty for the single price offence is $1,100,000 for corporations or $220,000 for other persons: s 166(1).

chapter 15 Consumer Protection

Referral selling [15.860] This is a method of selling whereby a person persuades a consumer to buy its goods or services by representing that after the consumer has paid over money, he or she will receive a rebate, commission or some other benefit in return for giving the person names of other customers or otherwise assisting the person in selling their goods or services. The practice has been proscribed because consumers who paid in the expectation that they would receive some future benefit and recoup what they paid received nothing, either because they found it almost impossible to obtain referrals or the companies did not honour their promises to pay. A person must not, in trade or commerce, induce a consumer to acquire goods or services by representing that the consumer will, after the contract for the acquisition of the goods or services is made, receive a rebate, commission or other benefit in return for giving the person the names of prospective customers or otherwise assisting the person to supply goods or services to other consumers, if receipt of the rebate, commission or other benefit is contingent on an event occurring after the contract is made: Australian Consumer Law, s 49; see Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (1999) 95 FCR 302. The penalty for referral selling is $1,100,000 for corporations or $220,000 for other parties: s 167(1).

Harassment and coercion [15.870] A person must not use physical force or undue harassment or coercion in connection with the supply or possible supply of goods or services to a consumer or the payment for goods or services by a consumer: Australian Consumer Law, s 50(1). In Australian Competition and Consumer Commission v McCaskey (2000) 104 FCR 8, French J held that when a creditor makes repeated demands for payment and points out that legal proceedings may be brought to recover the debt, such conduct will not constitute undue harassment. However, a creditor will engage in undue harassment where the “frequency, nature or content” of the creditor’s demands “is such that they are calculated to intimidate or demoralise, tire out or exhaust a debtor”: at [48]. In Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472, Hill J defined “undue harassment” as follows: “[A] person will be harassed by another when the former is troubled repeatedly by the latter. The reasonableness of the conduct will be relevant to whether what is harassment constitutes undue harassment”: [60]. “‘Undue’ adds an element of unreasonableness”: at [62]. “‘Coercion’ means ‘force or compulsion or threats of force or compulsion negating choice or freedom to act’”: at [61]. In that case a union had set up a picket line to block departure of a ship that had refused to employ shore-based labour for onboard cleaning. It was held that this conduct amounted to coercion. The penalty for harassment or coercion is $1,100,000 for corporations or $220,000 for other parties: s 168(1).

Enforcement and remedies for unfair practices [15.880] Contravention of the “unfair practices” provisions of the may give rise to an action for: (a)

a criminal penalty: ss 151–168;

395

396

Introduction to Business Law in Australia

(b)

a pecuniary penalty: s 224(1);

(c)

an injunction: s 232;

(d)

damages: s 236; and

(e)

other orders (for example, rescission or variation of contracts): ss 237, 243. 21

Criminal penalties [15.890] Contravention of the unfair practices provisions of the Australian Consumer Law is an offence. Basically, ss 151–168 repeat the unfair practices provisions, and set down the penalty for breach of each provision. The maximum penalty stipulated for contravention of each unfair practice provision by a corporation is a penalty of $1,100,000. The maximum penalty for an individual is a penalty of $220,000. Prosecutions must be commenced within three years of the commission of the offence: s 212. Criminal proceedings may not be brought for contravention of the general prohibition of misleading or deceptive conduct (s 18); the prohibition on unconscionable conduct (ss 20 – 22) or the provisions concerning unfair contract terms (ss 23 – 27): s 217.

Liability of a corporation for the conduct of its employees [15.900] A corporation can only act through its officers, employees and agents. Accordingly, the Competition and Consumer Act 2010 (Cth) makes a corporation responsible for the conduct of such persons. Section 139B(2) of the Act 22 provides that: Any conduct engaged in on behalf of a body corporate – (a)

by a director, employee or agent of the body corporate within the scope of the actual or apparent authority of the director, employee or agent; or

(b)

by any other person: (i)

at the direction of a director, employee or agent of the body corporate; or

(ii)

with the consent or agreement (whether express or implied) of such a director, employee or agent; if the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent; is taken, for the purposes of … the Australian Consumer Law, to have been engaged in also by the body corporate. Certain provisions of the Australian Consumer Law proscribing specific types of unfair conduct require proof of intention (for example, offering “free” gifts with the intention of not providing them as offered (s 32); and accepting payment for goods or services which the corporation intends not to supply (s 36). Where in proceedings for contravention of the Australian Consumer Law arising from conduct engaged in by a corporation, it is necessary to establish the “state of mind” of the corporation, it is sufficient to show a director, employee or agent of the corporation by whom the conduct was engaged in within the scope of

21

22

S Russell, “The Australian Consumer Law: The New Enforcement Powers and Remedies – The Story So Far” (2012) 20 Australian Journal of Competition and Consumer Law 6; JD Heydon, “Are there Stresses and Strains in the Remedial Structure of the Competition and Consumer Act 2010 (Cth)?” (2013) 41 Australian Business Law Review 354. Section 139B(2) is contained in the Competition and Consumer Act 2010 (Cth), Part XI — Application of the Australian Consumer Law as a law of the Commonwealth.

chapter 15 Consumer Protection 23

the person’s actual or apparent authority, had that state of mind: s 139B(1). The “state of mind” of a person refers to the knowledge, intention, opinion, belief or purpose of the person and the reasons for such: s 130. 24 These provisions imposing responsibility on a corporation for the acts and intention of its employees and agents apply generally to the other remedies for contravention of the Australian Consumer Law. For example, a company will be liable in damages for the loss suffered by another for a false representation as to the company’s intention made by one of its directors in pre-contractual negotiations where the representation, although not within the director’s actual authority, is within their apparent authority: Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431. On the other hand, where an employee is acting only in their own interest, and hence not “on behalf of” the company, the latter will not be liable for the employee’s misconduct: Snyman v Cooper (1990) 25 FCR 470.

Defences [15.910] Certain defences are available to a defendant prosecuted for contravention of the unfair practices provisions. It is a defence if the defendant establishes “that the contravention was caused by a reasonable mistake of fact, including a mistake of fact caused by reasonable reliance on information supplied by another person”: Australian Consumer Law, s 207(1). The defence does not apply in relation to information supplied by an employee or agent of the defendant, or if the defendant is a corporation, to information supplied by a director, employee or agent of the corporation: s 207(2).

Thorp v CA Imports Pty Ltd [15.920] Thorp v CA Imports Pty Ltd (1990/1989) 16 IPR 511. The defendants manufactured toy koalas from casings imported from Korea. The toy koalas were labelled “Made in Australia”. The defendants were prosecuted for falsely representing that the toys were made in Australia in contravention of s 53(eb) of the former Trade Practices Act 1974 (Cth) (now s 29(1)(k) of the Australian Consumer Law). Over several years the defendants had received advice from the Department of Trade that if more than 50 per cent of manufacturing costs were incurred in Australia, the product was entitled to be labelled “Made in Australia”. The Federal Court held that although the elements of the offence under s 53(eb) of the former Trade Practices Act 1974 (Cth) had been made out, the defendants had established the defence of reasonable reliance on information supplied by another person under s 85(1)(b) (now Australian Consumer Law, s 207(1)).

[15.930] It is also a defence if the defendant establishes that “(a) the contravention was due to the act or default of another person, to an accident or to some other cause beyond the defendant’s control, and (b) the defendant took reasonable precautions and exercised due diligence to avoid the contravention”: Australian Consumer Law, s 208(1).

23

Section 139B(1) is contained in the Competition and Consumer Act 2010 (Cth), Part XI — Application of the Australian Consumer Law as a law of the Commonwealth.

24

Section 130 is contained in the Competition and Consumer Act 2010 (Cth), Part XI — Application of the Australian Consumer Law as a law of the Commonwealth.

397

398

Introduction to Business Law in Australia

The defences in ss 207 and 208 are limited to where a prosecution is brought for an offence which will render the defendant liable to a fine if convicted and may not be relied on as a defence to a claim for civil relief, for example an action for damages for loss suffered as a result of the defendant’s contravention. A defence is provided for those innocently publishing offending advertisements. Thus, in proceedings for contravention of the offence provisions committed by the publication of an advertisement, it is a defence if the defendant establishes that he or she: (a)

is a person whose business it is to publish or arrange for the publication of advertisements;

(b)

received the advertisement for publication in the ordinary course of business; and

(c)

did not know and had no reason to suspect that its publication would amount to a contravention of an offence provision: ss 209, 251.

Pecuniary penalties [15.940] The court may order the payment of a pecuniary penalty determined by the court: Australian Consumer Law, s 224(1). The penalty is not to exceed maximum amounts that vary depending upon the provision contravened: s 224(3). A pecuniary penalty may not be ordered if the person has been convicted of an offence for the same conduct: s 225(1). A pecuniary penalty may be imposed for contravention of the unconscionable conduct provisions (ss 20 – 22): s 224(1)(a)(i). The general prohibition of misleading or deceptive conduct (s 18) is not subject to a pecuniary penalty. The maximum penalty stipulated for contravention of the unconscionable conduct provisions (ss 20 – 22) and each unfair practice provision by a corporation is a penalty of $1,100,000. The maximum penalty for other persons is a penalty of $220,000. 25

Australian Competition and Consumer Commission v Harvey Norman Holdings Ltd [15.950] In Australian Competition and Consumer Commission v Harvey Norman Holdings Ltd [2011] FCA 1407 Harvey Norman advertised 3D television sets using the phrase “Watch the Grand Finals in HD and 3D with this TV.” However, the AFL and NRL grand finals were to be broadcast in 3D in only six cities. 1.75 million copies of the advertising pamphlet were distributed in areas where the grand finals would not be broadcast in 3D. The advertisement did not mention that the grand finals would only be available in 3D in particular cities. Harvey Norman admitted that it had violated what are now ss 18 and 29(1) of the Australian Consumer Law (misleading or deceptive conduct; false or misleading representations in connection with the promotion and supply of goods and services). The ACCC and Harvey Norman submitted that an appropriate pecuniary penalty for this conduct was $500,000. The Federal Court considered various factors in determining the appropriate penalty. The nature of the contravening conduct included the fact that the television sets could not be put to the advertised use in much of Australia. Harvey Norman was aware of this fact when it began distributing the pamphlets. The judge commented that there had been “an expensive, misleading and

25

An exception is contravention of the multiple pricing provision: Australian Consumer Law, s 47(1); see [15.850] where the maximum pecuniary penalty for a corporation is $5,000 and for an individual $1,000: s 224(3).

chapter 15 Consumer Protection

calculated campaign of sizeable proportions, characterised by blatant and deliberate disregard of the truth [and] cynical strategies to capitalise on contemporary sporting events”: at [45]. The actual loss or damage caused by the violation was not known. During the promotion 819 expensive 3D televisions were sold in areas which could not receive the broadcasts. The advertisement was likely to have induced some recipients to purchase a 3D television at a higher price than would have been payable if they had waited for the 3D medium to be more widely used. The size of the contravener was also relevant in assessing the penalty. Harvey Norman was a large corporation. The period over which the conduct occurred was relevant. In this case the contravening conduct occurred over several weeks. The culture of compliance within the contravener was another relevant factor. The judge observed that the facts permitted the inferences that either “lip-service” was paid to compliance or that the company’s compliance policy was “woefully inadequate”. The judge held that the proposed penalty was within the appropriate range.

Singtel Optus Pty Ltd v Australian Competition and Consumer Commission [15.960] In Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249 Optus advertised that its broadband plans had an overall quota composed of separate peak and off-peak components. However, once the peak quota was exceeded, the download speed slowed without regard to the usage of the overall or off-peak quotas. The disclaimers in the advertisements were invisible or ineffective to dispel the misleading impression. The claim was made in print, billboard and Internet advertising. Optus had previously engaged in similar contraventions. The Full Federal Court held that the trial judge had correctly treated each advertisement in each medium as constituting 11 separate contraventions with a separate penalty applying to each contravention. The scope of the campaign and the different mediums used justified this treatment of the advertisements. Penalties imposed in previous cases did not establish a range of appropriate penalties where their facts differed from those in the present case. The absence of loss or damage to consumers is a factor in favour of reducing a penalty. A penalty must be sufficient to deter businesses from making the “cynical calculation” that the profits to be derived from contravention exceed the cost of any penalty. Given the scale of the contravening advertising campaign in this case, it was necessary to impose a penalty that would “substantially affect” the profitability of the campaign: at [64]. The breaches were “on a grand scale”. Optus was not a first offender. Optus had acted in breach of a previous undertaking. The court imposed a penalty of $3.61 million for the 11 infringements.

399

400

Introduction to Business Law in Australia

Australian Competition and Consumer Commission v Apple Pty Ltd [15.970] In Australian Competition and Consumer Commission v Apple Pty Ltd [2012] ATPR 42-404; [2012] FCA 646 Apple advertised a 4G iPad that was unable to connect to the only Australian 4G network available to consumers: at [10]. Apple continued to run the advertisements after the ACCC had informed Apple of its concerns about their misleading nature. Apple admitted that its advertisements contravened s 33 of the Australian Consumer Law (misleading conduct as to the characteristics of goods). Apple and the ACCC jointly proposed that a penalty of $2.25 million was appropriate. The Federal Court imposed the proposed penalty. Apple’s conduct was deliberate. The ACCC had informed Apple of its concerns about the advertisements but Apple continued to use its worldwide advertising campaign and only ceased doing so when the worldwide campaign changed. Apple had thus placed greater importance upon “global uniformity” in marketing than upon compliance with the Australian Consumer Law. On the other hand, Apple had not previously engaged in similar contraventions. Apple’s admission of liability also reduced the appropriate penalty.

Deterrence [15.980] Two aspects of deterrence are applicable to the imposition of a penalty. There is specific deterrence of the contravener in the case at hand. There is also general deterrence of others who might be tempted to engage in a similar contravention: Australian Competition and Consumer Commission v MSY Technology Pty Ltd (No 2) (2011) 279 ALR 609 at [71]; Australian Competition and Consumer Commission v Apple Pty Ltd [2012] FCA 646 at [18].

Injunction [15.990] An injunction is an order by the court directed to a person requiring her or him to refrain from conduct of the type specified in the order. The court is empowered to grant an injunction restraining a person from engaging in conduct that constitutes a contravention of the Australian Consumer Law: s 232. An injunction may also be granted in respect of a proposed contravention and to restrain ancillary acts such as attempting to contravene, or being directly or indirectly knowingly concerned in a contravention. The court may grant an injunction by consent of all the parties to the proceedings without the court first having to satisfy itself that a person has engaged, or is proposing to engage, in conduct which contravenes the Australian Consumer Law: s 233.

Who may apply [15.1000] Application for an injunction may be made by the ACCC or “any other person”: Australian Consumer Law, s 232(2). By enabling “any other person” to apply for an injunction, access to the court is made available to private persons and organisations to restrain misleading or deceptive practices which contravene the provisions of the Australian Consumer Law: Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (2000) 200 CLR 591.

chapter 15 Consumer Protection

Damages [15.1010] The Australian Consumer Law grants a private right of action to recover damages for the loss or damage suffered by the conduct of another which contravened the statutory provisions. A person who suffers loss or damage by the conduct of another person that was done in contravention of a consumer protection provision may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention: s 236(1). In general terms, proceedings for damages under s 236 that “follow on” from regulatory proceedings initiated by the ACCC, where, for example, it seeks pecuniary penalties, require a lesser evidentiary burden for consumers seeking compensation, particularly where a court has already made findings of fact in relation to the contravention. Section 137H of the Competition and Consumer Act provides that findings of fact made by a court in proceedings under the Australian Consumer Law constitute prima facie evidence in “follow on” proceedings relating to that contravention. Findings by a court that particular facts existed, and that conduct was of a particular level of seriousness, or that particular detriment resulted from the conduct, will all assist potential claimants who seek to recover damages under s 236.

Assessment of damages [15.1020] The measure of damages in tort, rather than contract, is appropriate in most actions under s 236 of the Australian Consumer Law, especially those involving misleading or deceptive conduct and the making of false statements: Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1. However, once a causal connection is identified between the loss and the infringing conduct, the amount recoverable under s 236 is not limited by analogy with the law of tort, contract or equitable remedies. In Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, the High Court unanimously held that the remedies provisions should not be restricted by analogies to the common law. In this case the drawing of such analogies with the tort of deceit led to the mistaken assumption that a claimant can suffer only one form of loss or damage under the former ss 82 and 87 of the Trade Practices Act 1974 (Cth) (now ss 236 – 238 of the Australian Consumer Law).

Wakefield Trucks Pty Ltd v Lach Transport Pty Ltd [15.1030] Wakefield Trucks Pty Ltd v Lach Transport Pty Ltd (2001) 79 SASR 517. The appellant sold the respondent a vehicle. During the negotiations, the appellant made representations as to the vehicle’s fuel consumption that were considerably lower than its actual fuel consumption. The Full Court of the South Australian Supreme Court held that under s 82 of the former Trade Practices Act 1974 (Cth) (now s 236 of the Australian Consumer Law) the respondent was “entitled to all consequential loss directly flowing from its reliance upon the representation”: at [44]. In this case, the respondent’s consequential losses were the difference between the representations made by the appellant regarding fuel consumption and the vehicle’s actual fuel consumption. The Court also permitted recovery of the interest incurred in respect of the extra fuel costs.

401

402

Introduction to Business Law in Australia

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [15.1040] HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640. A valuer advised a prospective purchaser of a shopping arcade about the local rental market. The valuer advised that a shopping centre under construction in the area would not be likely to reduce rental income from the arcade. After the new shopping centre opened, rental income from the arcade was greatly reduced. The value of the arcade was reduced by the fall in rental income. The High Court held that the measure of damages under s 82 of the former Trade Practices Act 1974 (Cth) (now s 236 of the Australian Consumer Law) was the difference between the purchase price and the true value of the arcade (not market value) at the date of sale, along with consequential losses: at [36]. In determining that true value, the court will take into account matters known when the court assesses damages, not simply those known at the date of sale: at [39]. An alternative measure of damages under s 82 of the former Trade Practices Act 1974 (Cth) was the difference between the purchase price and what was left in the purchaser’s hands.

Loss of opportunity [15.1050] The High Court has held that loss of an opportunity to obtain a commercial advantage or benefit is “loss or damage” within s 82(1) of the former Trade Practices Act 1974 (Cth) (now s 236(1) of the Australian Consumer Law) for which damages are recoverable for misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (now s 18 of the Australian Consumer Law): Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. Diminution of an opportunity to exploit a commercial advantage or benefit is also “loss or damage” under s 236(1): Talmax Pty Ltd v Telstra Corporation Ltd [1997] 2 Qd R 444. The value of a lost commercial opportunity is assessed by reference to possibilities and probabilities, so this value generally cannot be assessed with precision: CAJ Investments Pty Ltd v Lourandos (1998) 83 FCR 189. It has been held that exemplary (that is, punitive) damages are not recoverable under s 82 of the Trade Practices Act 1974 (now s 236 of the Australian Consumer Law), since the section only allows for the recovery of the amount of the loss or damage suffered by the conduct of another in contravention of the Act: Musca v Astle Corp Pty Ltd (1988) 80 ALR 251. Entitlement to recover loss or damage under s 236 is not confined to a person who relied on misleading misrepresentations which contravened, for example, s 18. Thus, a trade competitor who suffered loss because of misleading representations of a rival competitor which induced members of the public to purchase the product of the rival competitor was held entitled to recover for the loss of sales which would have been made but for the misleading misrepresentations: Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526.

Liability of persons involved in contravention [15.1060] The Australian Consumer Law makes natural persons such as employees liable in damages for a contravention by a corporation where, in effect, they have been closely involved in the contravention. The definition of “involved” in s 2(1) provides that a reference to a person involved in a contravention (as in s 236(1) above) is to be read as a reference to a person who:

chapter 15 Consumer Protection

(a)

has aided, abetted, counselled or procured the contravention; or

(b)

has induced, whether by threats or promises or otherwise, the contravention; or

(c)

has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)

has conspired with others to effect the contravention.

The High Court held that to establish that a person has “aided or abetted” a contravention of the Act under s 75B(a) of the former Trade Practices Act 1974 (Cth) (now s 2(1) of the Australian Consumer Law, above) it must be shown that he or she intentionally aided, abetted, counselled or procured such contravention. Accordingly, if the defendant merely passes on information given to them by another without knowing that such information is false, the defendant lacks the knowledge to form the required intent and hence such action will not render them personally liable: Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299; (1983) 46 ALR 319; (1985) 158 CLR 661. The facts of that case were as follows:

Yorke v Ross Lucas Pty Ltd [15.1070] In Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299; (1983) 46 ALR 319; (1985) 158 CLR 661 Mr and Mrs Yorke bought a record business from Treasureway Stores Pty Ltd for $44,500. They raised the amount by way of mortgage on their home and loans at high rates of interest. They were assured by Treasureway’s selling agent (R, of Ross Lucas Pty Ltd, who had obtained the figures from M, a director of Treasureway) that the average weekly turnover of the business was $3,500. However, the Yorkes found on running the business that the average weekly turnover was only $1,800. It was held that Treasureway Stores Pty Ltd had engaged in misleading or deceptive conduct in contravention of s 52 of the former Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law) by falsely representing the weekly turnover of the business, which had induced the Yorkes to purchase it. Furthermore, by acting as agent for Treasureway, Ross Lucas Pty Ltd had unwittingly contravened s 52 of the Trade Practices Act 1974 (now s 18 of the Australian Consumer Law). M, the director of Treasureway, was held to have aided or abetted or been knowingly concerned in the contravention under s 75B of the Trade Practices Act 1974 (now s 2(1) of the Australian Consumer Law). However, it was further held that the agent R, of Ross Lucas Pty Ltd, was not personally liable under s 75B of the Trade Practices Act 1974 since he had simply passed on the information provided by M, the director of Treasureway. The judge’s decision on this point was upheld by the High Court which said that R lacked the necessary knowledge to form the required intent to be personally liable under s 75B of the Trade Practices Act 1974. The High Court also doubted whether Ross Lucas Pty Ltd had contravened s 52 of the Trade Practices Act 1974 (now s 18 of the Australian Consumer Law) by merely passing on the information provided by M but did not have to decide this issue as there had been no appeal by the company from the earlier decision against it.

Definition of “involved” [15.1080] The definition of “involved” requires actual knowledge by the accessory of the essential elements of the contravention of the Act: Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [10]. In the case of a misrepresentation, the accessory must have actual knowledge

403

404

Introduction to Business Law in Australia

that the representation is false: Hatt v Magro (2007) 34 WAR 256 at [41]. Liability under s 2(1) of the Australian Consumer Law is based upon a criminal standard of liability. By contrast, a corporation may be liable under s 18 though it acted honestly: Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [8].

Limitation of actions [15.1090] An action for damages must be commenced within six years of the date when the cause of action accrued: Australian Consumer Law, s 236(2). A cause of action does not accrue until actual loss or damage has been sustained, which might not be until some time after the agreement was entered into: Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35. Where the loss is a contingent loss or liability, the time does not begin to run until the contingency is fulfilled, that is, when the loss or damage is actually sustained: see Wardley Australia Ltd v Western Australia (1992) 175 CLR 514.

Other orders [15.1100] In addition to its power to grant injunctive relief and award damages, the court is empowered to make further orders to compensate for the damage suffered or likely to be suffered by a person as a result of another’s contravention of the Australian Consumer Law.

Compensation orders [15.1110] On the application of a person who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that contravened the provisions of the Australian Consumer Law or relied on an unfair term, the court may make such orders as it thinks appropriate against the person who engaged in the conduct to compensate the applicant in whole or in part for their loss or damage: s 237. The ACCC may make an application on behalf of those who have suffered, or are likely to suffer loss or damage. An application for such an order must be made within six years of the date when the cause of action arose: s 237(3).

Orders for non-party consumers [15.1120] Orders may be made in respect of non-party consumers on the application of the ACCC. If a person contravened the consumer protection provisions or was advantaged by an unfair contract term, causing loss or damage to a class of persons, the court may make such orders as it thinks appropriate against that person (excepting an award of damages): Australian Consumer Law, s 239(1). The order must redress the loss or damage in whole or part or prevent or reduce the loss or damage: s 239(3). An application for such an order must be made within six years of the date when the cause of action arose or the contract term was declared to be unfair: s 239(4).

Kinds of orders that may be made [15.1130] The orders which can be made against the person who has contravened the Australian Consumer Law under a compensation order (s 237) or an order for non-party consumers (s 239) referred to above include: (a)

declaring the whole or any part of a contract void;

(b)

varying the terms of a contract;

(c)

refusing to enforce any or all of the terms of a contract;

(d)

directing the refund of money or return of property;

chapter 15 Consumer Protection

(e)

directing the payment of the amount of loss or damage suffered;

(f)

directing the person who contravened or was involved in the contravention, at their own expense, to repair or provide parts for goods supplied, or to render specific services to the person who suffered or is likely to suffer loss or damage caused by their contravention; and

(g)

directing the person who contravened or was involved in the contravention to execute an instrument that varies or terminates a transaction involving land: s 243.

An application for such an order must be made within six years of the date when the cause of action arose: s 237(3).

Sanrod Pty Ltd v Dainford Ltd [15.1140] Sanrod Pty Ltd v Dainford Ltd [1984] FCA 435: Where the purchaser of a home unit was induced to enter into the contract by misleading conduct on the part of the vendor in contravention of s 52(1) of the former Trade Practices Act 1974 (Cth) (now s 18(1) of the Australian Consumer Law), it was held that the purchaser was entitled to have the contract and an associated guarantee declared void under s 87 of the Trade Practices Act 1974 (now s 237 of the Australian Consumer Law), and was also entitled to damages for the loss suffered under s 82 of the Trade Practices Act 1974 (now s 236 of the Australian Consumer Law). [15.1150] While s 243 of the Australian Consumer Law empowers a court to declare a contract void ab initio in appropriate circumstances, this is only one of a number of remedies provided by the section. Thus, the range of options in respect to remedy offered by s 243 allows the court to take into account the defendant’s as well as the plaintiff’s interests in moulding a just response to a proven contravention of the consumer protection provisions: Akron Securities v Iliffe (1997) 41 NSWLR 353.

Other enforcement provisions [15.1160] In addition to the criminal penalties and pecuniary penalties discussed earlier in this chapter, the Australian Consumer Law provides for a number of other enforcement measures to secure compliance with the consumer protection provisions.

Undertakings [15.1170] The ACCC may accept a written undertaking by a person in respect of a breach of the provisions of the Australian Consumer Law. 26 If the court is satisfied that there has been a breach of the undertaking, it may make orders directing compliance with the terms of the undertaking; the payment of any financial benefit reasonably attributable to the breach; the payment of compensation to any person who has suffered loss or damage as a result of the breach or any other order the court considers appropriate: s 218. Failure to comply with a prior undertaking is a factor that favours the imposition of a more severe penalty: Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2012] HCA 54; (2013) 250 CLR 640 at [64].

26

See M Nehme, “The Use of Enforceable Undertakings by the Australian Competition and Consumer Commission” (2008) 27 University of Tasmania Law Review 197.

405

406

Introduction to Business Law in Australia

Substantiation notice [15.1180] The ACCC may issue a notice requiring a person to substantiate a claim promoting the supply of goods or services, the sale of land, or employment opportunities: Australian Consumer Law, s 219. Non-compliance with a substantiation notice is an offence punishable by a penalty of $16,500 for a corporation or $3,300 for another party: s 205(1).

Public warning notice [15.1190] The ACCC may issue a public warning notice about the conduct of a person if it has reasonable grounds to suspect that their conduct contravenes the consumer protection provisions; is satisfied that persons are likely to suffer detriment as a result of the conduct; and that it is in the public interest to issue the notice: Australian Consumer Law, s 223.

Non-punitive orders [15.1200] On application by the ACCC, the court has the power to make a number of non-punitive orders for contravention of the consumer protection provisions. These include a community service order, a probation order for a period up to three years, a disclosure order and an order requiring publication of an advertisement in specified terms: Australian Consumer Law, s 246(2). A community service order is an order requiring a person to perform for the benefit of the community a service that relates to the contravening conduct. A probation order seeks to ensure that a person does not engage in the contravening conduct or similar conduct during the period of the order. The order may direct the person to establish a compliance, education or training program for employees or to revise the internal operations of the person’s business that led to the contravening conduct.

Adverse publicity order [15.1210] On application by the ACCC, the court may make an adverse publicity order in relation to a person who has contravened provisions of the Australian Consumer Law (excluding the general prohibition on misleading and deceptive conduct in s 18). An adverse publicity order requires the person to disclose specified information and requires the person to publish, at their own expense, an advertisement in the terms specified in the order: s 247. See for example Australian Competition and Consumer Commission v Turi Foods Pty Ltd [2012] FCA 19 at [15.105].

Order disqualifying a person from managing corporations [15.1220] If a person has contravened the consumer protection provisions (excluding the general prohibition on misleading and deceptive conduct in s 18 of the Australian Consumer Law), the court may disqualify that person from managing corporations for a period of time the court considers appropriate: s 248(1). 27 The court considers the seriousness of the contravention, the likelihood that the person will act in a similar manner in the future, the potential for harm to the public and the person’s potential for reformation: Australian Competition and Consumer Commission v Excite Mobile Pty Ltd (No 2) [2013] ATPR 42-454; [2013] FCA 1267 at [172]. An undischarged bankrupt is disqualified from managing a corporation. 28 Where a promoter of a pyramid scheme was an undischarged bankrupt, the Federal Court made a disqualification order against 27

Corporations Act 2001 (Cth), s 206B(3).

28

Ibid.

chapter 15 Consumer Protection

the promoter since it would operate as a disqualification after his discharge from bankruptcy: Australian Competition and Consumer Commission v Stott [2013] ATPR 43-439; [2013] FCA 88 at [78].

Australian Competition and Consumer Commission v Halkalia [15.1230] In Australian Competition and Consumer Commission v Halkalia [2012] FCA 534 the ACCC obtained orders against individuals who were guilty of breaches of s 52 and s 59 of the former Trade Practices Act 1974 (Cth) (now ss 18 and 37 of the Australian Consumer Law). Section 59(2) (s 37 of the Australian Consumer Law) prohibits persons from making: “a false or misleading statement concerning the profitability or risk or any other material aspect of any business activity that the corporation has represented as one that can be, or can be to a considerable extent, carried on at a person’s place of residence.” The defendants were directors of companies that sold distributorships of household cleaning products (“Heartlink”). In the advertisements the defendants represented that the business had the potential to generate weekly earnings of $800–$1000 for 3-4 days work a week. The distributorships sold for between $10,000–$15,000 depending on the area. In fact, the defendants were aware that the weekly earnings were around $300–$400 and did not have the potential to improve (there were problems with distributing the products). The Court imposed the following penalties against the individual directors:  an injunction restraining the two directors for 7 and 15 years, respectively, from carrying on businesses or supplying goods or services in connection with which:  people are invited to invest money or perform work;  any claim is made that moneys or profits earned by the sale of goods are donated to charity; or  goods or services concerned are or include household cleaning products;  disqualified for 15 years from managing a corporation; and  ordered to pay a civil penalty of $450,000. Similar penalties and restraining orders were also imposed on the companies involved.

407

408

Introduction to Business Law in Australia

Consumer guarantees An introduction Figure 15.7: Consumer guarantees

[15.1240] Before the introduction of the Australian Consumer Law, the Trade Practices Act 1974 (Cth) operated to imply into contracts for the supply of goods and services to consumers in Australia, a number of conditions and warranties (eg conditions that goods would be of merchantable quality and were fit for their purpose). If there were a breach of an implied condition or warranty, the consumer was entitled to sue for breach of contract. The legislation provided that any attempt to modify, exclude or restrict the implication of terms was void (s 68). Things changed when the Australian Consumer Law took effect. It replaced the old implied conditions and warranties, with statutory consumer guarantees. These guarantees are similar to the implied conditions and warranties of the Trade Practices Act 1974 (Cth). However the remedies for breach of the statutory guarantees are different – no longer does a consumer have a right to sue for breach of contract, but instead has a statutory right to take action under the Australian Consumer Law. Like the old regime, section 64 of the Australian Consumer Law provides that any term of a contract which attempts to modify, exclude or restrict the operation of the consumer guarantees is void – this is the equivalent to s 68 of the Trade Practices Act 1974 (Cth). It is qualified by section 64A of the Australian Consumer Law that provides that a term of a contract that modifies, excludes or restricts the consumer guarantees is not void to the extent that it limits the supplier’s liability for contravention of the guarantees the goods and services are not of a kind ordinarily acquired for personal, domestic or household use or consumption, provided that the acquirer of the goods or services does not persuade the court that the term is unfair.

An overview of Part 3-2 [15.1250] The Australian Consumer Law Pt 3-2 provides for statutory guarantees in contracts for the supply of goods and services to consumers. 29 29

See generally JM Paterson, “The New Consumer Guarantee Law and the Reasons for Replacing the Regime of Statutory Implied Terms in Consumer Transactions” (2011) 35 Melbourne University Law Review 252.

chapter 15 Consumer Protection

In relation to the supply of goods to consumers, there are nine consumer guarantees. Depending on which consumer guarantee is breached (see below), the consumer may have an action against the supplier or manufacturer.

The consumer guarantees re supply of goods [15.1260] Sections 18 to 37 of the Australian Consumer Law set out the following nine consumer guarantees that apply to goods supplied to a consumer:  Guarantee as to title: The supplier of the goods has the right to dispose of the property in the goods when the goods pass to the consumer (s 51).  Guarantee as to undisturbed possession: The consumer has the right to undisturbed possession of the goods (s 52).  Guarantee as to undisclosed securities: The goods are free of any undisclosed security, charge or encumbrance (s 53).  Guarantee as to acceptable quality: The goods are of “acceptable quality” (s 54).  Guarantee as to fitness for any disclosed purpose: The goods are reasonably fit for: (i) a purpose for which the supplier represents they are fit; or (ii) a purpose the consumer makes known to the supplier or manufacturer that they will use the goods for (s 55).  Guarantee relating to supply by description: If goods are sold by description, they correspond to that description (s 56).  Guarantee relating to supply by sample or demonstration model: If goods are sold by sample or demonstration model, they correspond to that sample or model (s 57).  Guarantee as to repairs and spare parts: The manufacturer of the goods will ensure that spare parts and facilities for repair of the goods are reasonably available (s 58).  Guarantee as to express warranties: The manufacturer will comply with any express warranty given by the manufacturer in relation to the goods (s 59(1)) and the supplier will comply with any express warranty given by the supplier (s 59(2)). The manufacturer’s 30 liability is as follows:  Guarantee of acceptable quality of goods (s 54), except where the breach is caused by someone other than the manufacturer, or where the breach is caused by something beyond human control, which occurred after the goods left the control of the manufacturer, or where the breach is because the supplier charged more than the manufacturer’s recommended retail price (s 54, ss s 271(1) – (2));  Guarantee that goods sold by description will comply with that description, except where the breach is caused by someone other than the manufacturer, or where the breach is caused by something beyond human control, which occurred after the goods left the control of the manufacturer (s 56, ss s 271(3) – (4)); 30

Section 7: A “manufacturer” includes the following: (a) a person who grows, extracts, produces, processes or assembles goods; (b) a person who holds himself or herself out to the public as the manufacturer of goods; (c) a person who causes or permits the name of the person, a name by which the person carries on business or a brand or mark of the person to be applied to goods supplied by the person; (d) a person who imports goods into Australia if the person is not the manufacturer of the goods and at the time of the importation, the manufacturer of the goods does not have a place of business in Australia. (e) a person who imports goods into Australia if: (i) the person is not the manufacturer of the goods; and (ii) at the time of the importation, the manufacturer of the goods does not have a place of business in Australia.

409

410

Introduction to Business Law in Australia

 Guarantee that the manufacturer will take reasonable action to ensure facilities for repair of goods, and spare parts, are available (s 58, s 271(5));  Guarantee that the manufacturer will comply with any express warranty given (s 59 or s 271(5)), except where the person affected has relied on an express warranty to require the manufacturer to repair or replace the goods, and the manufacturer has not refused or failed to repair or replace it within a reasonable time (s 271(6)).

The consumer guarantees re supply of services [15.1270] Sections 60 to 64 of the Australian Consumer Law set out four consumer guarantees that apply to services supplied to a consumer:  Guarantee as to due care and skill: the service must be rendered with due care and skill (s 60).  Guarantee as to fit for a particular purpose: the service must be reasonably fit for a purpose that a consumer, expressly or impliedly, makes known to the supplier (where it is reasonable for the consumer to rely on the supplier). Services must also be of a nature, quality, state or condition that they can be expected to achieve the purpose that the consumer has made known (s 61).  Guarantee as to reasonable time for supply: the service must be provided to consumers within a reasonable time if the time is not otherwise fixed in a contract or agreed to between the consumer and supplier (s 62).  Guarantees not to be excluded by contract: a person may not exclude any of the guarantees set out in the ACL (s 64). Before examining some of these guarantees in detail some explanation is required of the terms “supply” and “consumer”.

“Supply” [15.1280] The guarantees are not confined to contracts for the sale of goods since they apply to contracts for the supply of goods, the expression “supply” being defined to include not only contracts of sale but also contracts for the “exchange, lease, hire or hire-purchase” of goods: Australian Consumer Law, s 2(1).

“Consumer” [15.1290] The guarantees apply to contracts for the supply of goods and services to a consumer. A person acquires goods as a consumer only if: (a)

the amount payable for the goods does not exceed is $40,000; or

(b)

the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption; or

(c)

the goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads: Australian Consumer Law, s 3(1).

A person does not acquire goods as a consumer if they acquired them for the purpose of resupply, or for the purpose of using them in the course of production, or in the repair of other goods or fixtures on land: s 3(2). A farm worker who acquired a tyre for the purpose of using it on his tractor was held to be a consumer because the goods were not used up as part of a process of production or manufacture or of repairing or treating other goods or fixtures: Laws v GWS Machinery Pty Ltd (2007) 209 FLR 53 at [142]–[143].

chapter 15 Consumer Protection

A person acquires services as a consumer only if the amount payable for the services does not exceed $40,000 or the services were of a kind ordinarily acquired for personal, domestic or household use or consumption: s 3(3). The statutory guarantees applied by the to “consumer” contracts for the supply of goods 31 are as follows:

As to title [15.1300] In every contract for the supply of goods by a person to a consumer, there is: (a)

a guarantee that the supplier has a right to dispose of the property in the goods; (Australian Consumer Law, s 51(1));

(b)

a guarantee that the consumer has the right to undisturbed possession of the goods except so far as it may lawfully be disturbed by the supplier or by another person who is entitled to the benefit of any security, charge or encumbrance disclosed to the consumer before the contract is made (s 52); and

(c)

in the case of a contract for the supply of goods under which the property is to pass to the consumer – a guarantee that the goods are free, and will remain free until the time when the property passes, from any security, charge or encumbrance not disclosed or known to the consumer before the contract is made (s 53(1)).

However, a supplier is not in breach of the guarantee in (c) above by reason only of the existence of a floating charge over assets of the supplier unless and until the charge becomes fixed and enforceable by the person to whom the charge is given: s 53(2). Where the supplier supplies a limited title to goods there is a guarantee that all encumbrances on the title known to the supplier have been disclosed to the consumer: s 53(3).

Acceptable quality [15.1310] Where a person supplies goods to a consumer in trade or commerce (other than a sale by auction), there is a guarantee that the goods are of acceptable quality: Australian Consumer Law, s 54(1). 32

Meaning of acceptable quality [15.1320] Goods are of acceptable quality if they are as: (a)

fit for all the purposes for which goods of that kind are commonly supplied;

(b)

acceptable in appearance and finish;

(c)

free from defects;

(d)

safe; and

(e)

durable;

as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods) would regard as acceptable having regard to the following matters (Australian Consumer Law, s 54(2)): 31

32

Goods are defined as including: “(a) ships, aircraft and other vehicles; and (b) animals, including fish; and (c) minerals, trees and crops, whether on, under or attached to land or not; and (d) gas and electricity; and (e) computer software; and (f) second-hand goods; and (g) any component part of, or accessory to, goods”: Australian Consumer Law, s 2(1). Under the former Trade Practices Act 1974 (Cth) the implied condition was that the goods were of merchantable quality, the term used in the State and Territory Sale of Goods Acts.

411

412

Introduction to Business Law in Australia

(a)

the nature of the goods;

(b)

the price of the goods (if relevant);

(c)

any statements made about the goods on any packaging or label on the goods;

(d)

any representation made about the goods by the supplier or manufacturer; and

(e)

any other relevant circumstances relating to the supply of the goods: s 54(3).

Goods are taken to be of acceptable quality if the only reason why they were not so was specifically drawn to the consumer’s attention before they were supplied: s 54(4). The reason why the goods were not of acceptable quality is taken to have been specifically drawn to a consumer’s attention if the goods were displayed for sale and the reason or reasons disclosed on a written notice displayed with the goods and that was transparent: s 54(5). Goods do not fail to be of acceptable quality if the consumer causes them to become of unacceptable quality, or fails to take reasonable steps to prevent them from becoming so, and the goods are damaged by abnormal use: s 54(6). Further, goods do not fail to be of acceptable quality if the consumer examines them before agreeing to their supply and the examination ought reasonably to have revealed that the goods were not of acceptable quality: s 54(5). Section 54 provides a guarantee as to acceptable quality in contracts for the supply of goods: accordingly, the section will not apply if the contract is not one for the supply of goods but the supply of services.

E v Australian Red Cross Society [15.1330] In E v Australian Red Cross Society (1992) 31 FCR 299 the appellant was given a blood transfusion in the course of an operation at a hospital. It was subsequently discovered that the blood was infected with the HIV virus and the patient later contracted AIDS. In his action against the hospital, one of the issues to be determined was whether the giving of the blood by the hospital amounted to a supply of goods within s 71 of the former Trade Practices Act 1974 (Cth) (now s 54 of the Australian Consumer Law). It was held by the Full Federal Court that s 71 of the Trade Practices Act 1974 was inapplicable because there was no relevant contract for the supply of goods. The essence of the contract between the appellant and the hospital was one for services, namely, the provision of hospital, medical and nursing services for the purpose of treating the appellant for his medical problem. To the extent that goods were provided to the appellant they were provided as an incident to the contract for the provision of services.

Fitness for disclosed purpose [15.1340] If a person supplies goods to a consumer in trade or commerce (other than a sale by auction) there is a guarantee that the goods are reasonably fit for any disclosed purpose, and for any purpose for which the supplier represents that they are reasonably fit: Australian Consumer Law, s 55(1).

chapter 15 Consumer Protection

Merck Sharp & Dohme (Australia) Pty Ltd v Peterson [15.1350] Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145 284 ALR 1. A pharmacist supplied a prescription drug to a patient. Use of the drug increased the risk of a heart attack in some patients. The Full Federal Court held that the increased risk did not show unfitness for the disclosed purpose of using the drug for managing arthritic pain without gastrointestinal side effects: at [171], [175]. The patient had not expressly or impliedly made known a purpose that the drug be absolutely safe or completely free from side effects: at [172]. Numerous drugs have potential side effects and may be unsafe for certain types of patient: at [173].

Meaning of disclosed purpose [15.1360] A disclosed purpose is a particular purpose (whether or not that is a purpose for which the goods are commonly supplied) for which the goods are being acquired by the consumer and that: (a)

the consumer makes known, expressly or by implication, to the supplier, or a person with whom prior negotiations for the acquisition of the goods were conducted; or

(b)

the consumer makes known to the manufacturer of the goods either directly or through the supplier, or the person with whom prior negotiations were conducted: Australian Consumer Law, s 55(2).

There is no such guarantee where the circumstances show that the consumer did not rely, or that it was unreasonable for the consumer to rely, on the skill or judgment of the supplier, the person with whom the prior negotiations were conducted, or the manufacturer, as the case may be: s 55(3).

Correspondence with description [15.1370] If a person supplies goods by description to a consumer in trade or commerce (other than a sale by auction) there is a guarantee that the goods correspond with the description: Australian Consumer Law, s 56(1). A supply of goods is not prevented from being a supply by description only because, having been exposed for sale or hire, they are selected by the consumer: s 56(2). If the goods are supplied by description as well as by reference to a sample or demonstration model, the guarantees relating to correspondence with description and supply by sample or demonstration model will both apply: ss 56(3), 57.

Supply of goods by sample or demonstration model [15.1380] If a person supplies goods to a consumer by reference to a sample or demonstration model in trade or commerce (other than a sale by auction), there are the following guarantees: (a)

that the goods correspond with the sample or demonstration model in quality, state or condition;

(b)

that if the goods are supplied by reference to a sample, the consumer will have a reasonable opportunity to compare the goods with the sample; and

(c)

that the goods are free from any defect that would not be apparent on reasonable examination of the sample or demonstration model and that would cause the goods not to be of acceptable quality: Australian Consumer Law, s 57(1).

413

414

Introduction to Business Law in Australia

Repairs and spare parts [15.1390] If a person supplies goods to a consumer in trade or commerce (other than a sale by auction), there is a guarantee that the manufacturer will take reasonable action to ensure that repair facilities and spare parts are reasonably available for a reasonable period after the goods are supplied: Australian Consumer Law: s 58(1). There is no such guarantee where the manufacturer gave the consumer written notification that repair facilities or spare parts would not be available after a specified period: s 58(2).

Express warranties [15.1400] If a person supplies goods to a consumer in trade or commerce (other than a sale by auction) there is a guarantee that the manufacturer will comply with any express warranty made in relation to the goods: s 59(1).

Exemption of auction sales [15.1410] It will be observed that, with the exception of the guarantee as to title, the other guarantees outlined above do not apply in sales by auction.

Guarantees and the supply of services [15.1420] The Australian Consumer Law provides for certain guarantees in relation to contracts for the provision of services. If a person supplies services to a consumer in trade or commerce there is a guarantee that the services will be rendered with due care and skill: s 60. Furthermore, if a person supplies services to a consumer in trade or commerce and the consumer, expressly or by implication, makes known to the person any particular purpose for which the services are being acquired, there is a guarantee that the services and any product resulting from the services, will be reasonably fit for that purpose: s 61(1). If a person supplies services to a consumer in trade or commerce and the consumer makes known, expressly or by implication, to the person, or a person by whom any prior negotiations were conducted, the result that the consumer wishes the services to achieve, there is a guarantee that the services, and any product resulting from the services, will be of such a nature and quality, state or condition that they might reasonably be expected to achieve that result: s 61(2). However, there are no such guarantees if the circumstances show that the consumer did not rely, or that it was unreasonable for the consumer to rely, on the supplier’s skill or judgment: s 61(3). Significantly, the section does not apply to a supply of services of a professional nature by a qualified architect or engineer. If a person supplies services to a consumer in trade or commerce and the time for the provision of the services is not fixed by the contract, there is a guarantee that the services will be supplied within a reasonable time: s 62. These guarantees apply in contracts for the provision of “services” as defined in s 2(1) of the Australian Consumer Law, 33 with the exception of: 33

Services are defined as including: “(a) any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce; and (b) without limiting paragraph (a), the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under: (i) a contract for or in relation to the performance of work (including work of a professional nature), whether with or without the supply of goods; or (ii) a contract for or in relation to the provision of, or the use or enjoyment of facilities for,

chapter 15 Consumer Protection

(a)

a contract for the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on by the person for whom the goods are transported or stored; or

(b)

a contract of insurance: s 63.

Where s 63 applies, it will do so unaffected by limitations on the liability of, for example, carriers of goods under State legislation, since to the extent that such legislation is inconsistent with s 63 it would be invalid by reason of s 109 of the Constitution: Wallis v Downard-Pickford (North Queensland) Pty Ltd (1994) 179 CLR 388.

Limitation of liability [15.1430] The general rule is that the guarantees imposed by the Australian Consumer Law in contracts for the supply of goods and services cannot be excluded. A term of a contract is void to the extent that it purports to exclude, restrict or modify the application of the statutory guarantees discussed earlier: s 64(1). Importantly, that general rule is subject to the qualification that where the goods are not of a kind ordinarily acquired for personal, domestic or household use or consumption, a term of the contract will not be void merely because it limits the supplier’s liability for failure to comply with a statutory guarantee to one or more of the following: 34 (a)

in the case of goods: to the replacement or repair of the goods, or payment of the cost of such replacement or repair; and

(b)

in the case of services: supplying the services again, or payment of the cost of having them supplied again: s 64A(1) – (2).

However, a term in the contract so limiting liability cannot be relied on where the person to whom the goods or services were supplied establishes that it is not “fair or reasonable” for the supplier to rely on such term: s 64A(3). In determining whether or not reliance on a term limiting the liability of the supplier is fair or reasonable, a court is to have regard to all the circumstances of the case and, in particular, to the following: (a)

the relative strength of the bargaining positions between the supplier and the person to whom the goods or services were supplied (referred to as the “buyer”) taking into account, among other things, the availability of equivalent goods or services and suitable alternative sources of supply;

(b)

whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity of acquiring the goods or services or equivalent goods or services from any source of supply under a contract that did not include that term;

(c)

whether the buyer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); and

(d)

in the case of the supply of goods, whether the goods were manufactured, processed or adapted to the special order of the buyer: s 64A(4).

34

amusement, entertainment, recreation or instruction; or (iii) a contract for or in relation to the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; or (iv) a contract of insurance; or (v) a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or (vi) any contract for or in relation to the lending of money; but does not include rights or benefits being the supply of goods or the performance of work under a contract of service”: Australian Consumer Law, s 2(1). This does not apply to the guarantees as to title (s 51), undisturbed possession (s 52) and undisclosed securities (s 53) (see [15.1240]–[15.1320]).

415

416

Introduction to Business Law in Australia

It needs to be emphasised that the limitation on the liability of a supplier for, for example, defects in the goods supplied permitted by the above provisions does not apply where the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption: no exclusion of liability is permitted where the goods supplied are of such a kind. The purpose of the limited form of exclusion from liability permitted by the Australian Consumer Law is essentially to enable suppliers to exclude liability for consequential losses which may result from a defect in goods supplied to another company, where the goods supplied are not of a kind ordinarily acquired for personal, domestic or household use or consumption but to which the statutory guarantees may still apply because of the Australian Consumer Law’s broad definition of consumer: s 3. That definition includes purchases by companies in certain instances (for example, where the price did not exceed $40,000 and the goods were not purchased for the purpose of resupply, or to be used up in a process of production or manufacture, or for repairing or treating other goods). There is a second qualification to the general rule that the consumer guarantees cannot be excluded or modified by agreement. A contractual term for the supply of recreational services is not void by reason only that it limits liability for death or personal injury in relation to those recreational services: Competition and Consumer Act 2010 (Cth), s 139A(1), (3). 35 Recreational services are services that consist of participation in sporting activities, similar leisure-time pursuits, or other recreational activities that involve a significant degree of physical exertion or physical risk: s 139A(2). 36

Remedies for non-compliance with consumer guarantees [15.1440] Where the failure to comply with a consumer guarantee in a contract for the supply of goods is not a major failure, the consumer may require the supplier to remedy the failure within a reasonable time or (if the supplier refuses to do so) reject the goods or recover all reasonable costs incurred in remedying the failure: Australian Consumer Law, s 259(1) – (2). A major failure is defined as a situation where: (a)

the goods would not have been acquired by a reasonable consumer who was fully acquainted with the nature and extent of the failure;

(b)

in the case of a supply by description, or reference to a sample or demonstration model, the goods depart in significant respects from their description, sample or demonstration model;

(c)

the goods are substantially unfit for a purpose for which goods of the same kind are commonly supplied and they cannot be easily and within a reasonable time be remedied to make them fit for such a purpose;

(d)

the goods are unfit for a disclosed purpose and cannot be easily remedied to fit that purpose; or

(e)

the goods are not of acceptable quality because they are unsafe: s 260.

If the failure is a major failure or the failure cannot be remedied, the consumer may reject the goods or recover compensation for any reduction in the value of the goods below the price paid: s 259(3). In addition, the consumer may recover damages for any reasonably foreseeable loss or damage caused by the failure to comply with the guarantee (s 259(4)), unless the failure occurred only due to a cause independent of human control that occurred after the goods left the control of the supplier: s 259(5). There are limitations upon the consumer’s right to reject the goods, for example where the rejection period has ended or where the goods have been lost, destroyed or disposed of by the consumer, or were 35

Section 139A(1), (3) is contained in the Competition and Consumer Act 2010 (Cth), Part XI–Application of the Australian Consumer Law as a law of the Commonwealth.

36

Section 139A(2) is contained in the Competition and Consumer Act 2010 (Cth), Part XI–Application of the Australian Consumer Law as a law of the Commonwealth.

chapter 15 Consumer Protection

damaged after being delivered to the consumer: s 262(1). The rejection period is the time within which it would be reasonable to expect that the failure would become apparent, having regard to factors such as the type of goods and the use to which it is likely that they would be put: s 262(2). A consumer who rejects the goods must return them to the supplier, unless doing so would impose significant cost, in which case the supplier must collect the goods: s 263(2) – (3). The supplier must refund the money paid or replace the goods: s 263(4). If the consumer gives the goods to another person as a gift, that person has the same rights and remedies that would have been available if he or she had acquired the goods from the supplier: s 266. Broadly similar remedies apply in relation to failure to comply with guarantees in relation to the supply of services: ss 267 – 268.

Manufacturers' liability for defective goods Figure 15.8: Manufacturers’ liability for goods

[15.1450] Where goods supplied to a consumer are defective then, generally speaking, the immediate supplier of the goods (for example, the retailer) will be liable to the consumer for non-compliance with the statutory guarantees of fitness for purpose or acceptable quality as discussed earlier ([15.1340], [15.1310] respectively). Liability for non-compliance with the guarantees does not depend on proof of negligence on the part of the supplier but simply on the existence of a contractual relationship between the parties. If the consumer suffers personal injury or property damage because of the defective nature of the goods, then the consumer may well have an alternative action for damages for negligence at common law against the manufacturer of the goods. However, an action for negligence requires proof of fault on the part of the defendant, which can give rise to difficult factual and legal questions: see Chapter 14.

417

418

Introduction to Business Law in Australia

It was decided that there was no good reason why a manufacturer should not be directly responsible to a consumer for loss arising from the defective nature of the manufacturer’s products without the need for the consumer to establish fault on the part of the manufacturer as required in an action for negligence. The Australian Consumer Law contains important provisions which impose liability upon manufacturers for defective goods without the need to rely on the more difficult action in tort for negligence against the manufacturer. The provisions of the Australian Consumer Law imposing liability on manufacturers for defective goods are discussed under the following headings: 1.

Liability of manufacturer for goods with safety defects: Pt 3-5 (ss 138 – 150).

2.

Liability of manufacturer to consumer for non-compliance with statutory guarantees: s 271.

3.

Liability of manufacturer to seller of defective goods: s 274.

This is followed by consideration of the product safety and information provisions of the Australian Consumer Law.

Liability of manufacturer for goods with safety defects Circumstances in which liability arises [15.1460] The effect of the Australian Consumer Law is to make the manufacturer of goods containing a “safety defect” liable to compensate a person who is injured, or whose property is damaged, because of the safety defect. More specifically, it is provided that: (1)

A manufacturer is liable to compensate an individual if: (a)

the manufacturer supplies the goods in trade or commerce; and

(b)

the goods have a safety defect; and

(c)

the individual suffers injuries because of the defect: s 138(1).

Where these conditions are satisfied the individual may recover from the manufacturer the amount of the loss or damage suffered by them: s 138(2). The meaning of “safety defect” is considered separately at [15.1470]. It will be observed that liability in the section set out above is not restricted to where the person injured had, for example, bought or hired the defective goods but applies generally whenever a person is injured by goods having a safety defect. Furthermore, where, in effect, the dependants of an individual suffer loss as a result of the injuries sustained or the death of that individual because of a safety defect in the goods, such loss is recoverable from the manufacturer: s 139. Liability extends to loss resulting from other goods of a kind ordinarily acquired for personal, domestic or household use being destroyed or damaged because of the defective goods: s 140. A person who suffers loss or damage because land, buildings or fixtures (for private use) are destroyed or damaged because other goods of a kind ordinarily acquired for personal, domestic or household use or consumption are destroyed or damaged because of the safety defect: s 141. Damage to commercial property is outside the scope of the provisions. Basically, the provisions impose liability on a manufacturer for the loss or damage suffered as a result of the supply of goods that have a safety defect. The meaning of “safety defect”, “goods” and “manufacturer” in this context require further explanation.

chapter 15 Consumer Protection

Meaning of “safety defect” [15.1470] Goods have a safety defect “if their safety is not such as persons generally are entitled to expect”: Australian Consumer Law, s 9(1). This is an objective standard based upon what the public at large, rather than any particular individual, is entitled to expect. In determining the extent of the safety of goods, regard is to be given to all relevant circumstances including: (a)

the manner in which, and the purposes for which, they have been marketed;

(b)

their packaging;

(c)

the use of any mark in relation to them;

(d)

any instructions for, or warnings with respect to, doing, or refraining from doing, anything with or in relation to the goods;

(e)

what might reasonably be expected to be done with or in relation to them; and

(f)

the time when they were supplied by their manufacturer: s 9(2).

An inference that goods have a safety defect is not to be made only because of the fact that, after they were supplied by their manufacturer, safer goods of the same kind were supplied: s 9(3). An inference that goods have a safety defect is not to be made only because: (a)

there was compliance with a Commonwealth mandatory standard for them; and

(b)

that standard was not the safest possible standard having regard to the latest state of scientific or technical knowledge when they were supplied by their manufacturer: s 9(4).

A pharmaceutical drug that increased the risk of a heart attack in some patients and carried no warning to that effect had a safety defect: Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145 284 ALR 1 at [201].

Meaning of “goods” [15.1480] The term “goods” in the present context is not limited to goods of a kind ordinarily acquired for personal, domestic or household use or consumption. The wide meaning of “goods” as defined generally by the Australian Consumer Law applies. 37

Meaning of “manufacturer” [15.1490] A manufacturer includes a person who: (a)

grows, extracts, produces, processes or assembles goods;

(b)

hold themselves out to the public as the manufacturer of the goods;

(c)

causes or permits their name, business name or brand name to be applied to the goods;

(d)

causes or permits another person to hold them out to the public as the manufacturer of the goods; or

(e)

imports the goods and the actual manufacturer does not have a place of business in Australia: Australian Consumer Law, s 7(1).

Defences [15.1500] It is a defence to an action for compensation for the loss suffered as a result of the supply of defective goods to establish that: 37

Goods are defined as including: “(a) ships, aircraft and other vehicles; and (b) animals, including fish; and (c) minerals, trees and crops, whether on, under or attached to land or not; and (d) gas and electricity; and (e) computer software; and (f) second-hand goods; and (g) any component part of, or accessory to, goods”: Australian Consumer Law, s 2(1).

419

420

Introduction to Business Law in Australia

(a)

the safety defect in the goods that is alleged to have caused the loss or damage did not exist at the time they were supplied by their actual manufacturer (or, in relation to electricity, at the time at which it was generated). In other words, the manufacturer is not liable for safety defects occurring later in the distribution chain;

(b)

the goods had the safety defect only because there was compliance with a mandatory standard;

(c)

the state of scientific or technical knowledge at the time the goods were supplied by their manufacturer was not such as to enable that safety defect to be discovered (this is a “state of the art” defence: Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145 284 ALR 1 [203]); or

(d)

if the goods were, in effect, component parts of other goods, the defect is attributable only to the design of the finished goods; the markings on or accompanying the finished goods; or the instructions or warnings given by the manufacturer of the finished goods: Australian Consumer Law, s 142.

If the court finds that the goods had a safety defect only because there was compliance with a Commonwealth mandatory standard for the goods, the Commonwealth is liable to pay the plaintiff for the amount of the loss or damage caused by the safety defect and not the manufacturer: s 148.

Contributory negligence [15.1510] Where in proceedings to recover the loss or damage suffered in respect of goods with a safety defect, the loss was partly due to the contributory negligence of the individual who suffered injury, the damages recoverable are to be reduced to the extent to which the court thinks fit having regard to the individual’s share in the responsibility for the loss or damage: Competition and Consumer Act 2010 (Cth), s 137A. 38

Limitation period [15.1520] An action for compensation for the loss suffered in respect of the supply of defective goods must be brought within three years after the time the person became aware, or ought reasonably to have become aware, of the alleged loss or damage, the safety defect and the identity of the manufacturer of the goods. No action may be brought after 10 years of the supply of the goods by the manufacturer: Australian Consumer Law, s 143.

Non-exclusion [15.1530] The provisions concerning the right to recover from a manufacturer the loss or damage suffered in consequence of a safety defect in goods cannot be excluded, restricted or modified. Any term of a contract which purports to do so is void: Australian Consumer Law, s 150(1).

Work-related injuries [15.1540] The provisions do not apply to a loss recoverable under Commonwealth, State or Territory law relating to workers’ compensation, that is, loss caused by work-related injuries is excluded: Australian Consumer Law, s 146.

Representative action [15.1550] The ACCC and the State and Territory consumer protection agencies are empowered to commence a defective goods action on behalf of persons who have suffered loss or damage provided the written consent of each person has been obtained: Australian Consumer Law, s 149. 38

Section 137A is contained in the Competition and Consumer Act 2010 (Cth), Part XI–Application of the Australian Consumer Law as a law of the Commonwealth.

chapter 15 Consumer Protection

Liability of manufacturer to consumer for non-compliance with statutory guarantees [15.1560] Under the Australian Consumer Law a manufacturer incurs liability to a consumer for non-compliance with certain of the guarantees imposed on a seller on the supply of goods to a consumer discussed earlier in this chapter: s 271. The broad effect of the latter section is to enable a consumer to recover damages from the manufacturer of goods which do not comply with the statutory guarantees for the following reasons: (a)

the goods are not of acceptable quality (ss 54, 271(1));

(b)

the goods do not correspond with a description which the manufacturer has applied, or allowed to be applied to the goods (ss 56, 271(3));

(c)

there is a failure to ensure that facilities for the repair of the goods or spare parts are available (ss 58, 271(5)); or

(d)

there is a breach of express warranties, for example in guarantees or advertising matter (ss 59, 271(5)).

In an action against the manufacturer an “affected person” is entitled to recover damages for: (a)

(b)

any reduction in value of the goods below (i)

the price paid for the goods; or

(ii)

their average retail price at the time of supply (whichever is the lower); and

any loss or damage that was reasonably foreseeable as a result of the failure to comply with the particular guarantee: s 272.

An “affected person” is defined broadly to mean: (a)

a consumer who acquires the goods;

(b)

a person who acquires the goods from the consumer (other than for the purpose of resupply); and

(c)

a person who derives title to the goods through the consumer: s 2(1).

An action for damages may be commenced within three years of the day when the affected person first became aware, or ought reasonably to have become aware, that the guarantee was not complied with: s 273.

Liability of manufacturer to seller of defective goods [15.1570] As a result of the guarantees provided by the Australian Consumer Law in contracts for the supply of goods by a seller to a consumer (see [15.1240]) and the liability imposed on a manufacturer of the goods to a consumer for non-compliance with the statutory guarantees (see [15.1560]), a consumer will often have a choice of whether to sue their immediate supplier (for example, the seller) or sue the manufacturer directly where the goods supplied do not comply with the statutory guarantees. If in such a case the consumer elects to sue their immediate supplier (that is, the “seller”), the Australian Consumer Law requires the manufacturer to indemnify the supplier in respect of the costs incurred by the supplier because of the failure of the goods to comply with certain of the statutory guarantees: s 274. The manufacturer’s liability is to indemnify the supplier for the costs incurred by the supplier because of the failure of the goods to comply with the guarantees as to acceptable quality (s 54); fitness for a disclosed purpose (s 55); and the description applied to the goods (s 56): s 274(2). The supplier may commence an action against the manufacturer at any time within three years after the earliest of the following:

421

422

Introduction to Business Law in Australia

(a)

the day on which the supplier made a payment with respect to the supplier’s liability to the consumer; or

(b)

the day on which the consumer commenced legal proceedings against the supplier.

Limitation of liability [15.1580] The general position is that the manufacturer’s liability to indemnify a supplier under these provisions cannot be excluded. A term of a contract is void to the extent that it purports to exclude, restrict or modify the supplier’s rights against the manufacturer: Australian Consumer Law, s 276. However, if the goods are not of a kind ordinarily acquired for personal, domestic or household use or consumption, the liability of the manufacturer to the supplier who supplied the goods to a consumer is limited to the cost of: (a)

replacing the goods;

(b)

obtaining equivalent goods; or

(c)

having the goods repaired; whichever is the lowest amount: s 276A(1).

Such limitation on the liability of the manufacturer does not apply if the supplier establishes that it is not “fair or reasonable” in the circumstances: s 276A(2). In determining whether or not it is “fair or reasonable” for the manufacturer’s liability to the seller to be so limited, the court is to have regard to all the circumstances of the case and, in particular, to: (a)

the availability of suitable alternative sources of supply of the goods;

(b)

the availability of equivalent goods; and

(c)

whether the goods were manufactured, processed or adapted to the special order of the supplier: s 276A(3).

Furthermore, these provisions are subject to any term of a contract between the manufacturer and seller imposing a greater liability on the manufacturer: s 276A(4). The following case demonstrates that there are a number of causes of action that may be brought against a manufacturer (and the importer/retailer) by a consumer when the goods cause loss or injury to a person, his or her goods or property.

Fulcher & Ors v Knott Investments Pty Ltd & Ors [15.1590] Fulcher & Ors v Knott Investments Pty Ltd & Ors [2012] QSC 232: Early in the morning of 9 February 2004, a fire broke out in a Winnebago motor home which the plaintiffs, Mr and Mrs Fulcher, had recently purchased and had parked in the packing shed on the property where they had a tomato growing and packing business. The shed and its contents were destroyed. The Court found that an electrical fault in the air-conditioning unit of the motor home caused the fire. The plaintiffs sued the dealer, the manufacturer and the importer of the air-conditioning unit in negligence, contract, and under provisions of the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)). The negligence claim. The judge found that the manufacturer had not been negligent because the evidence established that the fault in the electrical system could not have been detected by exercising reasonable care. The unit was acquired fully assembled, the supplier of the unit was reputable and Winnebago had not had problems in the past.

chapter 15 Consumer Protection

Breach of express warranty. The plaintiffs sued the manufacturers under s 74G (now s 59 of the Australian Consumer Law) for breach of an express warranty contained in the sales brochure that said, in part, under the heading “Safety & Warranty”: “You would expect that Australia’s largest manufacturer of motorhomes would have safety and quality as top priorities – spot on. At Winnebago, all of our motorhomes are ‘built better and backed better’”. The judge found that the warranty had not been breached. The warranty did not convey the meaning the manufacturer would detect hidden defects in a component like an air-conditioner. The evidence showed the manufacturer carried out regular safety checks. Breach of statutory implied terms under the Trade Practices Act 1974 (Cth). The judge found that the manufacturer was liable for breaches of ss 74B and 74D (now the “consumer guarantees” in ss 54, 55 and 271 of the Australian Consumer Law). The fact that there was a fault in the air-conditioning unit meant that the Winnebago was not reasonably fit for its ordinary use as a motorhome (now “fitness for disclosed purpose”: see [15.1340]), nor was it of merchantable quality (now “acceptable quality”: see [15.1310]). The retailer and importer were also found to be liable. The plaintiffs also sued the manufacturer under ss 74AF and 74AG of the Trade Practices Act 1974 (Cth) (now ss 140 and 141 of the Australian Consumer Law) for damage to goods and buildings or fixtures caused by a “safety defect” in the Winnebago. Under the legislation goods are “defective” if their safety is “not at a level that persons generally are entitled to expect”: s 9. The manufacturer argued that it had not breached the section because it had carried out safety checks, the defects were hidden and had never occurred before. On this issue the judge rejected the manufacturer’s argument. The test of whether the goods had a “safety defect” is an objective one and is concerned with assessing what the public at large would expect, not a single individual. The judge reiterated that this is not a surrogate negligence test: liability is based upon what the public at large is entitled to expect. The judge decided that persons generally are entitled to expect that a motorhome will not catch fire simply because the air conditioning unit is left on overnight. The fact that the defect was hidden did not affect the decision because Winnebago’s marketing emphasized its high regard for safety and quality (“top priorities”). Although the case was decided under the Trade Practices Act 1974 (Cth), the decision remains relevant because the Australian Consumer Law has very similar provisions. The case demonstrates that a manufacturer may be liable even though (a) there is no evidence it has been negligent (indeed it has taken all reasonable precautions, including safety checks); (b) the defect is hidden and has never occurred before; and (c) the defect is in a component part that is assembled and supplied by a reputable manufacturer. The case also serves as a reminder of how slowly the wheels of justice can turn when a dispute is fully litigated: the accident happened on February 9 2004; the decision was handed down on June 22 2012.

Product safety and information [15.1600] The Australian Consumer Law contains provisions concerning product safety, product recall and information requirements. The provisions are contained in Part 3-3. It is only possible here to outline their general effect. A person must not supply consumer goods that do not comply with a prescribed safety standard: s 106(1). Doing so is an offence subject to a penalty of $1,100,000 for a corporation and $220,000 for any

423

424

Introduction to Business Law in Australia

other party: s 194(1). The Minister may impose an interim or permanent ban on consumer goods that may cause injury: ss 109(1), 114(1). Supplying banned consumer goods is an offence subject to the same penalties: s 197(1). A person must not supply consumer goods in relation to which an interim or permanent ban is in force: s 118(1). The Minister is also empowered to issue a recall notice for consumer goods in certain circumstances. Thus, where a person supplies consumer goods that: (a)

are of a kind which, in the opinion of the Minister, will or may cause injury to a person;

(b)

do not comply with a prescribed safety standard; or

(c)

are the subject of an interim or permanent ban;

and the Minister considers that the supplier of the goods has not taken satisfactory action to prevent the goods causing injury, the Minister may require the supplier to take action to recall the goods: ss 122(1), 123(1). The Minister may also require the supplier to advertise that the supplier undertakes to repair or replace the goods or refund the price: s 123(1)(c). The mandatory recall power is only intended to be exercised where the supplier has not already taken satisfactory remedial action. A supplier must comply with the requirements of a recall notice, and not supply goods in which a defect or dangerous characteristic has been identified in the notice: s 127(1), (2). Where a supplier contravenes the latter provision, and a person suffers loss or damage by reason of a defect in the goods, or as a result of not having information about the unsafe characteristics of the goods, the person is deemed to have suffered loss or damage as a result of the failure of the supplier to comply with the provision: s 127(3). Failure to comply with a recall notice is an offence: s 199(1). The Minister is empowered to publish a notice on the Internet warning of possible risks of using particular goods, or alerting the public that certain goods are under investigation as to their safety: s 129. Suppliers are required to report deaths, serious injuries or illnesses associated with the use or foreseeable misuse of consumer goods: s 131(1). Non-compliance is an offence punishable by a penalty of $16,650 for a corporation and $3,330 for other parties: s 202(1). The Minister may make information standards related to goods or services of a particular kind: s 134. A person must not supply goods that do not comply with an information standard: s 136(1). The supply of goods or services that do not comply with an information standard is an offence subject to penalty of $1,100,000 for a corporation and $220,000 for another party: ss 203(1), 204(1). A defence is provided in relation to a contravention committed by the supplying of goods that did not comply with a safety or information standard. In such a case it is a defence if the defendant (for example, a retailer) establishes: (a)

that the goods were acquired by the defendant for the purpose of resupply and were so acquired from a person who carried on in Australia a business of supplying such goods otherwise than as the agent of a person outside Australia; and

(b)

that the defendant did not know, and could not with reasonable diligence have ascertained, that the goods did not comply with the standard, or the defendant relied in good faith on a representation by the person from whom the goods were acquired that no safety or information standard had been prescribed in respect of the goods: ss 210(1), 252.

chapter 15 Consumer Protection

Further reading Books A Bruce, Consumer Protection Law in Australia (2nd ed, LexisNexis Butterworths, Sydney, 2014). S Corones, The Australian Consumer Law (2nd ed, Lawbook Co, Sydney, 2013). C Lockhart, The Law of Misleading or Deceptive Conduct (3rd ed, LexisNexis Butterworths, Sydney, 2011). R Miller, Miller’s Australian Competition and Consumer Law, Annotated (36th ed, Thomson Reuters, Sydney, 2014). J Paterson, Unfair Contract Terms in Australia (Thomson Reuters, Sydney, 2012). R Steinwall, Annotated Competition and Consumer Act 2010 (LexisNexis Butterworths, Sydney, 2012). P Vout, Unconscionable Conduct (2nd ed, Thomson Lawbook Co., Sydney, 2009). D Wright, Remedies under the Trade Practices Act (Oxford University Press, Melbourne, 2006).

Journals Competition and Consumer Law Journal (formerly Trade Practices Law Journal)

Internet sites Australian Competition and Consumer Commission http://www.accc.gov.au/consumers Australian Consumer Law http://www.consumerlaw.gov.au SCAMwatch http://www.scamwatch.gov.au Competition and Consumer Law Education Programs http://www.ccaeducationprograms.org

Tutorial activities 15.1

“An action under s 18 of the Australian Consumer Law has significant advantages for the plaintiff compared to an action for misrepresentation at common law”. Do you agree? List the main advantages.

15.2

What are the consumer guarantees that are contained in the Australian Consumer Law? What remedies are available for breach? To what extent can they be excluded?

15.3

Refer to Chapter 9 Tutorial Activities 9.2. (a)

Daniel and Hannah seek your advice as to whether they have any rights under the Australian Consumer Law in respect of the statements regarding the appliances and the lake.

(b)

Assume that the property at Red Hills is built a toxic waste dump that was abandoned in the 1960s. Daniel and Hannah do not ask and Max makes no mention of the problem (although

425

426

Introduction to Business Law in Australia

he is aware of it). When Daniel and Hannah learn about the history of the property they seek your advice about whether Max has engaged in misleading or deceptive conduct that is prohibited in s 18 of the Australian Consumer Law. 15.4

Roberto visits the showroom of Tuscan Ovens Pty Ltd (Tuscan) to buy a new pizza oven for his large Carlton restaurant. Tuscan specialises in selling heavy duty commercial-grade gas-fired pizza ovens for restaurants. Roberto tells the manager that he must have an oven which will cook at least 30 pizzas every hour for 16 continuous hours per day. “Otherwise”, he says, “I will lose customers at the peak hours”. The manager assures Roberto that the new “Fiorentino” commercial oven will satisfy his requirements. As a result of the manager’s statements and recommendations, he purchases the oven for $15,000. Soon after the oven is installed in the restaurant, Roberto discovers that it can only cook 12 pizzas per hour and is unreliable. As a result of the problems with the oven, the restaurant is losing approximately $10,000 profit per week. Roberto contacts the manager of Tuscan to inform him that he wants to rescind the contract and wishes to discuss compensation for his losses. The manager reminds Roberto of the large sign above the sales counter that states: “IMPORTANT – LIMITATION OF LIABILITY” “The liability of Tuscan Ovens Pty Ltd for any loss or damage caused by any defective oven supplied by it shall be limited to the cost of replacement of the oven.”

15.5

15.6

(a)

What rights (if any) does Roberto have against Tuscan for breach of any of the consumer guarantees under the Australian Consumer Law?

(b)

Assume that shortly after the oven was installed, it exploded because the manufacturer had installed a faulty gas seal. The restaurant sustains substantial damage. What action would Roberto have against the manufacturer under s 138 of the Australian Consumer Law?

Mbutu has just arrived in Australia from Tanzania. He speaks little English and has little experience of the Australian educational culture. He has two small children who are about to enter primary school. One evening George Spiv, a sales representative with Aussie Encyclopaedias Pty Ltd (“the company”) visits him and asks if he can talk to Mbutu and his wife. After chatting for some time George finally makes his pitch and, within the hour, he has persuaded Mbutu of the need to have a set of encyclopaedias for his children. He has exaggerated the qualities of the encyclopaedias (in the way that sales reps do) and indicated that they are an “essential requirement for a successful educational experience”. Without reading the contract and without consulting anyone, Mbutu signs a contract to purchase the encyclopaedias for $4,000, payable in 12 equal monthly instalments. The price is high by normal market standards and, when he realises that the encyclopaedias are not as necessary for his children as George claimed, Mbutu wants to get out of the deal. (a)

Advise Mbutu of any rights he may have against the company under s 18, s 21 or s 29 of the Australian Consumer Law.

(b)

The contract which Mbutu has signed expressly allows the company (but only the company) to terminate the contract on two weeks’ notice in writing. Advise Mbutu whether he has any remedies under s 23(1) of the Australian Consumer Law.

The NSW Court of Appeal in BBB Constructions Pty Ltd V Aldi Foods Pty Ltd [2012] NSWCA 224 (see facts at [15.200]) noted the trial judge’s comment that if Aldi had made a deliberate decision at some point not to proceed towards completion of the negotiation and then failed to communicate that decision promptly to BBB, so that BBB continued nonetheless to incur expense, Aldi may have

chapter 15 Consumer Protection

engaged in unconscionable conduct. Do you agree that in negotiations such as these (ie, between large corporations) each party should have to consider anything other than its own legal obligations? 15.7

Anthea Crawford owns a fashion boutique in Chapel Street Prahran. After a rash of break-ins and robberies she contracted with Spooks, a security firm, to supply and install a commercial security alarm system called “Bells and Whistles”. The contract price is $38,000. Both parties signed the contract. It contained no express warranty as to the fitness of the alarm for the work it was required to do. After a few months the system proved to be inadequate – thieves broke in and effortlessly disabled the alarm system. They stole dresses and accessories valued at $60,000. Advise Anthea whether she could sue Spooks under the Australian Consumer Law.

427

CONSUMER GUARANTEES

to fitness for service

known the

has no physical

chapter 16

Property [16.20] Meaning of property....................................................................................................................................... 430 [16.30] Principles.............................................................................................................................................................. 430 [16.100] Real property .................................................................................................................................................. 433 [16.720] Personal property ........................................................................................................................................ 451

430

Introduction to Business Law in Australia

Aim Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.10] By the end of this chapter you will be able to:  define and distinguish between real and personal property;  understand the difference between possession and title;  discuss the different forms of title to real property in Australia including Torrens title, old system title and native title;  describe how the doctrine of fixtures may change the nature of property from a chattel to being part of the land;  define different types of interests in land, such as the fee simple, mortgages, leases and easements;  outline the ways in which title to personal property may be transferred.

Meaning of property Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22. [16.20] Property as a legal concept has two distinct meanings. Property can be either an object or thing which is capable of being owned by a person, or the proprietary rights (rights of ownership) to that object or thing. For example, land and a car are objects that are capable of being owned. The proprietary rights to the land and the car will be vested in a particular person or persons, for example, X. Accordingly, it can be said that the land and the car are property, and that the property (that is, rights of ownership) in the land and the car is vested in X.

Principles Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.30] In very simple terms property is about what can be owned and what can be transferred from one person to another. It concerns both tangible and intangible rights that need not necessarily be linked to a physical “thing”. Property is most commonly categorised initially into real and personal property and then into tangible and intangible property.

chapter 16 Property

Figure 16.1: Categories of property

For many people one of the most important roles of the legal system is to provide for safe and secure means of acquiring, transferring and securing title to real and personal property, whether it be their home, car, share portfolio or even their pets. In this chapter we will concentrate on real property; ie, land and interests in land and some means of acquiring and transferring personal property..

Terminology [16.40] Below are some of the key terms that are used in this chapter:  certificate of title: a paper copy of the information about a parcel of land which is found on the central land registry of each State and Territory. The registered proprietor (owner) of land is entitled to hold the certificate of title unless there is a registered mortgage in which case it is held by the mortgagee (the lender).  chose in action: a form of intangible personal property that can only be enforced by bringing an action.  chose in possession: a form of personal property that has a tangible, physical presence. Title can in some cases be transferred through the handing over of possession.  encumbrance: an interest which affects or is held over title to land. The most common example is a mortgage.  fee simple: the most comprehensive form of ownership of land. It may last forever and includes rights to sell, gift or leave property by will.  fixture: a chattel or item of personal property that has become attached to the land in law so that it becomes part of the land.  folio of the register: a data file on the central land registry of each State or Territory which sets out all the relevant information about each parcel of land.  indefeasibility of title: means that a registered owner’s title is free from attack.  lease: a grant of exclusive possession of land for a fixed and certain duration.  life estate: an interest in land which continues for the duration of the grantee’s life or that of someone else.  old system title: the form of title applied in Australia before Torrens title was introduced. Old system title was introduced by the British settlers and was based on common law principles.  registered proprietor: the “owner” of Torrens title property. They acquire their title through registration on a central register.

431

432

Introduction to Business Law in Australia

 severance: the process by which a chattel regains its character as personal property by being severed from the land.  strata title: a form of title to land under which the owner holds title to a three-dimensional stratum of airspace.  tenures: a hierarchical system of granting land based on reciprocal protection and service.  Torrens title: the most common form of title to land in Australia, named after its creator, Robert Torrens, and first introduced into South Australia in 1853. It is based on the registration of title to land on a central register which is operated by the state.

Real and personal property [16.50] Property is divided into two categories: 1.

Real property is land and everything that is attached to the land in such a way as to be considered part of the land (fixtures). Interests over land are divided into corporeal rights which allow possession of the land (either now or in the future) and incorporeal rights which might not include the right to come onto the property.

2.

Personal property is all property that is not real property. Personal property is further classified into tangible and intangible choses or things.  A chose in possession is a chattel that can be possessed. It has a physical presence. Everyday items such as cars, clothes, books, computers and household furniture are examples of choses in possession.  Choses in action are rights that can only be enforced by bringing an action. This type of personal property has no physical existence; possession cannot be transferred by physically handing over the property from one person to another. The most common forms of choses in action are debts, intellectual property (copyright, patents etc) and contractual rights.

There are two major reasons why it is necessary to determine whether property is real or personal: 1.

Different rules for transferring ownership of property exist for real and personal property, eg, writing is required for the creation or transfer of most interests in real property.

2.

Different remedies may be available for loss of the property. An owner of real property may have an action in rem, ie, they will be able to recover the specific property that they lost. Someone who has lost personal property will usually only be able to pursue personal actions such as those in contract or tort to recover damages, rather than being able to recover the actual thing.

Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015)

chapter 16 Property

Figure 16.2: Classification of Real and Personal Property

Real property Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22. [16.100] This brings us to the nature of the interests (that is, rights of ownership, mortgages, etc) that may be created in real property.

Nature of land [16.110] Land generally includes not only the surface of the land but also things attached to it, substances below the surface, and the airspace above. The surface of the land includes not only natural things like soil and water but also those added by human endeavour such as buildings and crops. At common law, land included whatever was beneath the surface of the land extending down to the centre of the earth, for example, minerals and other items. The common law principle that the owner of land owned the minerals beneath the surface of the land did not apply to gold and silver, which belonged to the Crown. 1 Legislation has modified the common law principles; the general effect is to reserve minerals below the surface of land to the Crown. 2 At common law, land also included the airspace above the land but only to the extent necessary for the ordinary use and enjoyment of the land, including any structures on the land: Bernstein v Skyviews & General Ltd [1978] QB 479.

1 2

Case of Mines (1658) 1 Plow 310; 75 ER 472; Wolley v Attorney-General (Vic) (1877) 2 App Cas 163. See, for example, Crown Lands Act 1989 (NSW), s 171; Coal Acquisition Act 1981 (NSW), s 5; Petroleum (Onshore) Act 1991 (NSW), s 6; Mineral Resources (Sustainable Development) Act 2006 (Vic), s 9; Petroleum Act 1998 (Vic), s 13; Mineral Resources Act 1989 (Qld), s 8; Petroleum Act 1923 (Qld), ss 9, 10; Mining Act 1971 (SA), s 16; Petroleum Act 2000 (SA), s 5; Mining Act 1978 (WA), s 9; Petroleum and Geothermal Energy Resources Act 1967 (WA), s 9; Mineral Resources Development Act 1995 (Tas), s 6; Crown Lands Act 1976 (Tas), ss 16, 54.

433

434

Introduction to Business Law in Australia

Fixtures [16.120] Land includes things fixed to the land such as buildings and fences. The test for determining whether an object is a fixture is whether the object is affixed to land with the intention of becoming a permanent feature. The necessary intention is ascertained by reference to the facts and circumstances surrounding the fixing of the object to the land. Jordan CJ explained the relevant principles in Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 at 712: “If a chattel is actually fixed to land to any extent, by any means other than its own weight, then prima facie it is a fixture; and the burden of proof is upon anyone who asserts that it is not. … The test of whether a chattel which has been to some extent fixed to land as a fixture is whether it has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period, or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose. In the former case it is a fixture. … If it is proved to have been fixed merely for a temporary purpose it is not a fixture. The intention of the person fixing it must be gathered from the purpose for which and the time during which user in the fixed position is contemplated.” In National Australia Bank v Blacker (2000) 104 FCR 288 at [16], Conti J emphasised that: “There is no single test which is sufficient to determine whether an item of property is a chattel or a fixture. It is clear that the court ought to have regard to all the circumstances of the case in making its determination … No particular factor has primacy and each case depends on its own facts.” Applying these principles, it has been held that air-conditioning plants installed in certain buildings were fixtures: Pan Australian Credits (SA) Pty Ltd v Kolim Pty Ltd (1981) 27 SASR 353. Similarly, a fibreglass home erected at an exhibition centre and attached to the floor by steel rods driven into the ground and bent over onto welded metal plates had become a fixture: Wellsmore v Ratford (1973) 23 FLR 295. On the other hand, the construction of a temporary office by the licensee of a warehouse was not a fixture: Ball-Guymer v Livantes (1990) 102 FLR 327. In that case, the office’s partition walls were fixed to the floor with masonry nails and bolted to the warehouse’s sidewalls.

Interests in land [16.130] This brings us to the nature of the interests that may be created in land. Such interests fall under the following headings: (a)

estates in land;

(b)

co-ownership of land (that is, joint tenancies and tenants in common);

(c)

legal and equitable mortgages; and

(d)

other equitable interests in land.

Estates in land [16.140] Due to the historic growth of the feudal system of landholding (known as “tenures”), one of the basic doctrines of real property law is that the Crown owns all land. Owners of interests in land hold the land directly or indirectly from the Crown. In other words, a person cannot own land absolutely; what they own is an interest in the land. This is an estate in land, separate from the land itself. Estates in land vary according to the length of time they are held. Estates in land are classified as either: (a)

freehold estates; or

chapter 16 Property

(b)

leasehold estates.

Freehold estates are of uncertain duration, while leasehold estates are of certain duration, or at least for a period capable of being rendered certain.

Freehold estates [16.150] There are two main types of freehold estate. They are: (a)

the estate in fee simple; and

(b)

the life estate.

Fee simple is the most absolute form of ownership in land. It confers ownership on the holder of the fee simple estate and their assigns and successors indefinitely. It is the most common estate in land and is the interest usually acquired in real property transactions. The holder of a fee simple estate can freely dispose of the estate by sale, gift, or will. The other main type of freehold estate in land, the life estate, is granted to a person for the duration of his or her life, or for the life of some other identified person. A life estate can be created by sale, or gift, or by will. The holder of a life estate, who is called the life tenant, is entitled to occupy the land for the duration of his or her life, or the life of some other identified person. The life tenant is entitled to receive the rents and profits of the land while his or her life estate endures. The life tenant is obliged not to commit acts of waste which will diminish the value of the land, like permitting the house or fences to fall into disrepair, unless the terms of the instrument creating the life estate expressly allow the life tenant to commit waste. When the person who defines the duration of the life estate dies, the estate ceases and vests in the person who is entitled to the future interest in the land. A future interest arises where a person is granted an estate which does not allow immediate possession; rights to the land are to begin at some future time. A future interest may be a remainder or a reversion. The holder of an estate creates a reversion when he or she grants a lesser estate to another person – for example, when the owner of a fee simple estate grants a life estate to another person. In this case the land will revert to the grantor upon termination of the life estate. A remainder is the grant of a future interest to a person not previously entitled to such an interest, for example where A grants land to B “for her life, then to C”, C acquires a future interest in the property by remainder.

Leasehold estates [16.160] The other principal type of estate is the leasehold estate where, for example X, as lessor, grants a lease to Y, the lessee, for a period of 20 years. A leasehold estate creates an interest in land; a lease is more than a personal contract between landlord and tenant.

Co-ownership [16.170] Two or more persons can hold concurrent interests in land. There are two types of concurrent interest in land: (a)

joint tenancy; and

(b)

tenancy in common.

Joint tenancy [16.180] In a joint tenancy, each joint tenant owns an equal, undivided interest in the whole of the property. If A, B and C purchase 100 hectares of land as joint tenants, each of them owns an undivided one-third interest in the whole 100 hectares. It follows that none of the joint tenants is entitled to a distinct parcel of the land separate from the others.

435

436

Introduction to Business Law in Australia

The distinguishing elements of a joint tenancy are the “four unities” and the right of survivorship.

Unities of a joint tenancy [16.190] The four unities must be present for a joint tenancy to exist. They are: (a)

unity of possession;

(b)

unity of interest;

(c)

unity of title; and

(d)

unity of time.

Unity of possession means that each joint tenant is entitled to possession of the whole of the land concurrently with the other joint tenants. Unity of interest means that each joint tenant is entitled to the same kind of estate in the land (such as a fee simple, or life estate). Each joint tenant’s estate must be of the same nature, extent and duration. If A, the owner in fee simple of an estate, grants a life estate to B (a freehold estate) and a lease to C (a leasehold estate), B and C cannot be joint tenants because they have estates of a different nature and duration. Likewise, if A grants a two thirds interest to B and a one third interest to C, B and C are not joint tenants for they have estates of a different extent. Unity of title means that the title of all the joint tenants must have arisen by virtue of the same legal instrument such as a will or a deed. Unity of time means that the concurrent interest of each joint tenant must vest at the same point in time.

Right of survivorship [16.200] The final element of a joint tenancy is the right of survivorship. “Survivorship is the most important incident of a joint tenancy and unless the right of survivorship exists the tenancy is not joint”: Re Robertson (1943) 44 SR (NSW) 103 at 105 per Roper J. The right of survivorship means that on the death of one joint tenant, that concurrent interest automatically passes to the surviving joint tenant or tenants. Accordingly, a deceased joint tenant’s interest cannot be disposed of by will, nor does it pass to the deceased’s heirs under the rules of intestacy. “If one joint tenant dies his interest is extinguished. He falls out, and the interest of the surviving joint tenant or joint tenants is correspondingly enlarged”: Wright v Gibbons (1949) 78 CLR 313 at 323 per Latham CJ.

Severance [16.210] Severance of a joint tenancy occurs on destruction of one of the four unities. A joint tenancy can be severed by: 1.

Sale or assignment of a joint tenant’s interest. A joint tenant can dispose of his or her interest by way of sale. This effects a severance of the joint tenancy – converting it into a tenancy in common. In other words, a joint tenancy no longer exists as between the interest of the joint tenant who has sold and the other joint tenants. The purchaser of the alienated interest is entitled to dispose of it – by will, for example.

2.

An agreement, or a course of dealing, which shows that the joint tenants are mutually treating the joint tenancy as having been severed: Abela v Public Trustee [1983] 1 NSWLR 308.

3.

Merger, that is, where one of the joint tenants acquires an interest in the estate larger than that held by the other joint tenants. This destroys the unity of interest in the joint tenancy.

chapter 16 Property

4.

Partition, that is, where the joint tenants agree to or seek a court order to compel severance of the joint tenancy.

5.

A maintenance agreement approved by, or a court order of the Family Court.

Tenancy in common [16.220] A tenancy in common is a form of co-ownership where two or more persons own distinct shares in land, although each is equally entitled to possession of the land. In other words, although they have distinct and several title to shares in the land, it is not physically divided between them. Accordingly, tenants in common have unity of possession. This is the only similarity between a joint tenancy and a tenancy in common. A tenancy in common need not have the elements of unity of title, unity of time or unity of interest, all necessary for a joint tenancy. Tenants in common can acquire their interests at different points of time, and the size of the estates or interests in the land held by them need not be equal. One tenant in common can hold a two-thirds interest and the other, a one-third interest. Tenants in common are in the same position as owners of an entire separate estate with respect to their undivided shares. Accordingly, a tenant in common can dispose of that interest by way of sale, gift, or will. The most important difference between a tenancy in common and a joint tenancy is that there is no right of survivorship for a tenancy in common: in other words, the interest of a tenant in common does not terminate on their death and pass to the surviving tenants in common. If A and B acquire the ownership of land as tenants in common and B dies, B’s undivided interest in the land passes to the beneficiaries named in the will or, in the event of intestate death, to the next of kin under the intestacy rules.

Termination of co-ownership [16.230] Both a joint tenancy and a tenancy in common can be terminated either by partition or by a statutory trust for sale pursuant to a court order. If the court orders a statutory trust for sale, the property is sold and the proceeds divided between the co-owners. If the property is partitioned, it will be subdivided and a separate lot transferred to each of the former co-owners.

Creation of concurrent interests [16.240] Where an estate in land is disposed of to two or more people concurrently, then the nature of their concurrent interests (that is, whether there is a joint tenancy or a tenancy in common) will be determined by the express or implied intention of the words used in the conveyance. At common law, a disposition “to X and Y” was presumed to create a joint tenancy. Some jurisdictions have statutorily affirmed this presumption, 3 while others have reversed it. 4 It is possible for two or more people to hold an estate as joint tenants between themselves and as a tenant in common with respect to a third person. If X, Y and Z are joint tenants and Z sells his interest to A, A is a tenant in common as to one third of the estate, while X and Y hold the remaining two thirds as joint tenants between themselves but as tenants in common with A.

Forms of title to land in Australia Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. 3

For example, with respect to Torrens title land: Real Property Act 1900 (NSW), s 100; Transfer of Land Act 1958 (Vic), s 30(2); Real Property Act 1886 (SA), s 74; Transfer of Land Act 1893 (WA), s 60; Land Titles Act 1980 (Tas), s 44.

4

For example, with respect to “old system” land: Conveyancing Act 1919 (NSW), s 26; Property Law Act 1974 (Qld), s 35. Also in Queensland as regards Torrens title land: Land Title Act 1994 (Qld), s 56.

437

438

Introduction to Business Law in Australia

[16.250] The legal rules dictating the way in which real property may be sold, leased or mortgaged depend on the form of title by which the land is held.

Old system title Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22. [16.260] “Old system” title is “general law” or “common law” title. Documents (called “deeds of conveyance”) trace the “chain of title” to the land by reference to the various owners of the land. To establish the title of the present owner, a potential purchaser of the land must trace the owner’s title back over a period of years. This involves examination of all documents (that is, deeds of conveyance, mortgages, wills and other documents relevant to title) to ensure that the land is not subject to interests not mentioned in the contract of sale that might take priority over that of the purchaser. Purchasers had to make a time-consuming search, sometimes back to the original Crown grant of title, laboriously tracing a vendor’s title to an unchallengeable beginning – to a “good root of title”. Legislation lessened this task, obliging a purchaser to trace the vendor’s chain of title back for a period of 30 years only. 5 In time, authorities established a general registry of documents, enabling the registration of documents affecting land. This alleviated some of the problems arising from checking a vendor’s title to land. 6 All documents registered in conformity with the registration of deeds legislation have priority over other instruments, whether registered or not, according to the date of their registration, not creation. However, registration does not give a document any greater validity than that which it possesses intrinsically. It gives a document priority and no more. Even if a deed is registered, the efficacy of a transaction depends on the deeds that, if inherently defective, create similar defects in the chain of title.

Torrens title Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22. [16.270] Torrens title is a system of registered title. It was introduced in South Australia in 1858 by Sir Robert Torrens with the object of simplifying title to land, facilitating dealings with it, and securing indefeasibility of title to all registered proprietors except in certain specified cases. Other Australian States adopted it soon after under the Real Property Acts and the Land Titles Acts, and the bulk of land in Australia is now held subject to it. 7 Torrens is based upon a document of certification (the Certificate of Title) issued by the State in duplicate. This certifies as to the title of the person named. One copy of this certificate is held by the owner or registered proprietor and the other by the State, and is recorded in the Register. 8 The proper government office must register all dealings with land on the duplicate deeds. The certificate of title reveals a person’s 5 6

7 8

Conveyancing Act 1919 (NSW), s 53(1); Property Law Act 1958 (Vic), s 44(1); Property Law Act 1974 (Qld), s 237(1); Sale of Land Act 1970 (WA), s 22; Conveyancing and Law of Property Act 1884 (Tas), s 35 (20 years). Conveyancing Act 1919 (NSW), Pt 23; Property Law Act 1958 (Vic), Pt 1; Property Law Act 1974 (Qld), ss 241 – 249; Registration of Deeds Act 1935 (SA); Registration of Deeds Act 1856 (WA); Registration of Deeds Act 1935 (Tas); Land Title Act 2000 (NT), Pt 2, Div 1. Real Property Act 1900 (NSW); Transfer of Land Act 1958 (Vic); Land Title Act 1994 (Qld); Real Property Act 1886 (SA); Transfer of Land Act 1893 (WA); Land Titles Act 1980 (Tas); Land Titles Act 1925 (ACT); Land Title Act 2000 (NT). In Queensland, a certificate of title no longer issues automatically in paper form. Such certificate will be issued only where the registered proprietor lodges a written request with the Registrar: Land Title Act 1994 (Qld), s 42(1).

chapter 16 Property

title to land and dealings with it; it does away with the necessity of keeping many documents. The cost of dealing (by sale, mortgage, etc) with land under the Torrens system is much less than dealing with old system title. To confer a legal interest under the Torrens system, only certain statutory instruments, such as transfer, lease and mortgage are acceptable. These statutory instruments must be registered. If the land is dealt with in some other way, even when still in the form prescribed by the relevant Torrens statute, but not registered, the interest conferred is equitable only. Torrens title is more than a system of merely registering documents to obtain priority and enable accurate searching (as with the registry of deeds legislation). Torrens title is a system of title by registration. Registration of dealings under the Act vests title to the interest in the proprietary owner of that interest. On registration, the owner of a registered interest in land has a paramount estate, subject only to certain limited exceptions. Exceptions may arise where the title was obtained by fraud or where a claim can be enforced in personam against a registered proprietor: Bahr v Nicolay (No 2) (1988) 164 CLR 604; see further Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89. Subject to limited statutory exceptions, the title obtained through registration is absolute and indefeasible, a state-guaranteed title: Breskvar v Wall (1971) 126 CLR 376; Frazer v Walker [1967] 1 AC 569. A registered proprietor takes the interest free from any other unregistered interests like equitable interests. While these equitable interests could have been enforceable against the earlier registered proprietor who created them, they are not enforceable against a properly registered purchaser’s interest. Registration cures any defects in the previously registered proprietor’s title. Contrast this with the registry of deeds legislation for old system land, which does not cure defects in title. The owner of an estate in fee simple who is the registered proprietor of Torrens title land has an interest recorded on the Register. If he or she transfers this estate, creates a leasehold estate, or grants a mortgage, upon the registration of the appropriate instrument, the new registered proprietor’s lease, mortgage, etc, is recorded on the Register. The register contains a listing of all interests in each parcel of land including the owner (registered proprietor) and any encumbrances such as mortgages, leases or easements. Strata title, whereby parcels of airspace in horizontal or vertical strata may be owned, eg, in the form of a multi-storey apartment building, is a form of Torrens title. Torrens title is administered under legislation of the various States and Territories: Land Titles Act 1925 (ACT); Land Title Act (NT); Real Property Act 1900 (NSW); Land Title Act 1994 (Qld); Real Property Act 1886 (SA); Land Titles Act 1980 (Tas); Transfer of Land Act 1958 (Vic); Transfer of Land Act 1893 (WA). The important elements of Torrens title are:  It is title by registration with the aim being that interests can pass only by registration.  The state guarantees that the register is correct and complete and will compensate from the Torrens Assurance fund anyone who suffers loss because it is not.  Dealings which cannot or have not been registered may be protected by the lodging of a caveat (a warning) on the register.

439

440

Introduction to Business Law in Australia

Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22.

Frazer v Walker [16.280] In Frazer v Walker [1967] 1 AC 569 Mr and Mrs Frazer were the registered proprietors of property. Mrs Frazer forged her husband’s signature on a mortgage (under old system title this would have meant that the document was void and passed no interest). The mortgage was then registered on the New Zealand equivalent of the Torrens title register. After default in payment the mortgagee sold the property to W and the Privy Council upheld the doctrine of immediate indefeasibility which meant that because Walker’s interest had become registered without any wrongdoing on his part his title was not open to attack.

The boundaries of real property Extract from Davenport, and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.290] Land comprises the physical surface of the earth together with things either growing in (eg, trees and other naturally occurring plants), or embedded in the earth (eg, rocks and minerals). Although a landowner’s rights are sometimes described by the Latin maxim “cuius est solum eius usque ad coelum et ad inferos” or, roughly translated, an owner owns from the heavens above to the centre of the earth, this is an overstatement of the limits of an owner’s land. The physical extent of an owner’s rights to their “land” has been affected both by the common law and by statute.

Airspace Rather than owning to the heavens above, a landowner has rights only to such height as is, or may become, necessary for the ordinary use and enjoyment of their land.

Bernstein of Leigh (Baron) v Skyviews & General Ltd [16.310] Bernstein of Leigh (Baron) v Skyviews & General Ltd [1978] 1 QB 479. B objected when the defendant flew over his property at a height of several hundred feet, took photos of the property and then offered to sell them to B. The court stated that it was necessary to balance the rights of the owner against the rights of the public to take advantage of modern uses of airspace. This required a limitation on an owner’s rights to such height as is necessary for the ordinary use and enjoyment of their land and the structures on it: no trespass had been committed by the defendant. Less transitory intrusions into airspace may be trespass.

Break Fast Investments Pty Ltd v PCH Melbourne Pty Ltd [16.320] Break Fast Investments Pty Ltd v PCH Melbourne Pty Ltd (2007) 20 VR 311. Metal cladding extending between 3 and 6 centimetres into the airspace over the respondent’s adjoining property was held to be a trespass. A mandatory injunction was awarded requiring the appellant to remove the cladding.

chapter 16 Property

[16.330] Section 72 of the Civil Liability Act 2002 (NSW) precludes any action in trespass or nuisance for the flight of an aircraft at a height that is in accordance with Air Navigation Regulations and reasonable in the circumstances. Similar legislation applies in other States, although strict liability in respect of loss, damage or injury caused through impact with an aircraft in the air or on the surface of land arises under the Damage by Aircraft Act 1999 (Cth) and under the various State and Territory Civil Liability Acts.

Rights beneath the surface A similar approach is taken to rights below the surface as that taken to airspace, ie, an owner’s rights are limited to what is necessary for the reasonable use and enjoyment of the land.

Star Energy UK Onshore Ltd v Bocardo SA [16.350] Star Energy UK Onshore Ltd v Bocardo SA [2009] EWCA Civ 579. Without B’s permission, Star Energy laid pipes below B’s land at a minimum depth of 800 feet in order to extract oil. The English Court of Appeal held that this was a trespass to B’s land even though the energy company had a statutory licence to extract the oil but only nominal damages of £1,000 were awarded. [16.360] Some minerals and metals are excluded from an owner’s rights:  under the common law (gold and silver are royal minerals and belong to the Crown);  because they were excluded by the original Crown grant (coal is commonly excluded); or  by statute. For example the Crown Lands Act 1989 (NSW), s 171 states that a sale, lease or other disposal of land by the Crown does not include the sale, lease or disposal of any minerals contained in the land.

Water At common law water could not be privately owned although a landowner whose land adjoined a river or stream had the right to use the water for ordinary domestic purposes and to water stock and to irrigate land. This right was subject to the limitation that other landowners downstream were entitled to an undiminished flow of water. Most Australian jurisdictions now have legislation that governs the use of both surface and subsurface water (such as in aquifers). Legislation such as the Water Management Act 2000 (NSW) provides for the grant of licences which allow a maximum volume of water to be taken by a licence holder. One of the most important river systems, the Murray-Darling Basin, which extends over parts of New South Wales, Victoria, Queensland and South Australia, is managed by the Commonwealth Government through the Murray-Darling Basin Authority which assumed responsibility for the integrated planning and management of the water resources of this area in 2008.

Fixtures Extracts from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22 and Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.380] Land includes things fixed to the land such as buildings and fences. The test for determining whether an object is a fixture is whether the object is affixed to land with the intention of becoming a

441

442

Introduction to Business Law in Australia

permanent feature. The necessary intention is ascertained by reference to the facts and circumstances surrounding the fixing of the object to the land. Jordan CJ explained the relevant principles in Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 at 712: “If a chattel is actually fixed to land to any extent, by any means other than its own weight, then prima facie it is a fixture; and the burden of proof is upon anyone who asserts that it is not. … The test of whether a chattel which has been to some extent fixed to land as a fixture is whether it has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period, or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose. In the former case it is a fixture. … If it is proved to have been fixed merely for a temporary purpose it is not a fixture. The intention of the person fixing it must be gathered from the purpose for which and the time during which user in the fixed position is contemplated.” In National Australia Bank v Blacker (2000) 104 FCR 288 at [16], Conti J emphasised that: “There is no single test which is sufficient to determine whether an item of property is a chattel or a fixture. It is clear that the court ought to have regard to all the circumstances of the case in making its determination … No particular factor has primacy and each case depends on its own facts.” Applying these principles, it has been held that air-conditioning plants installed in certain buildings were fixtures: Pan Australian Credits (SA) Pty Ltd v Kolim Pty Ltd (1981) 27 SASR 353. Similarly, a fibreglass home erected at an exhibition centre and attached to the floor by steel rods driven into the ground and bent over onto welded metal plates had become a fixture: Wellsmore v Ratford (1973) 23 FLR 295. On the other hand, the construction of a temporary office by the licensee of a warehouse was not a fixture: Ball-Guymer v Livantes (1990) 102 FLR 327. In that case, the office’s partition walls were fixed to the floor with masonry nails and bolted to the warehouse’s sidewalls. A fixture is an item of personal property that has become attached to land in such a way that it has become part of the land. The determination of whether a chattel has changed its character in this way is important in a number of situations including where the land has been sold, left by will or is part of an insolvent estate. Some common examples of chattels that may become fixtures are ovens and dishwashers, built-in barbeques, carpets, pool filtering equipment, garden sheds and paving tiles. All of these are originally movable chattels but in some cases they can become part of the land through the doctrine of fixtures. Whether something has become affixed to the soil depends ultimately on the objectively ascertained intention of the parties and in order to ascertain such intention two things are relevant: 1.

the degree of annexation, ie, by what method and how firmly the thing is attached to the land, as well as the ease with which it could be removed; and

2.

the object (purpose) of annexation.

There is a presumption that if the object is attached to the land in some way then it is a fixture. If it is not attached, but rests solely by its own weight, the presumption is that it is not part of the land but retains its character as a chattel. These presumptions are easily overturned by evidence of contrary intention. If the object has been attached to the land to improve the enjoyment of the land, it will usually be a fixture. Conversely, if it has been attached to the land to improve enjoyment of the thing itself, it will remain a chattel. Although many case examples can be given, each case will ultimately be decided on its own facts.

chapter 16 Property

Cases Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22.

Holland v Hodgson [16.390] In Holland v Hodgson (1872) LR 7 CP 328, weaving looms were attached to a mill floor by nails driven through holes in their feet. These were held to be fixtures because they increased the value of the mill.

Attorney-General v RT Co Pty Ltd (No 2) [16.400] In Attorney-General v RT Co Pty Ltd (No 2) (1957) 97 CLR 146, heavy printing presses were secured by nuts and bolts to a concrete foundation. These were held not be fixtures since they had been secured with the intention of increasing the efficiency of the machines themselves by keeping them steady.

Reid v Smith [16.410] In Reid v Smith (1905) 3 CLR 656, a wooden house resting on its own weight on wooden piles sunk into the ground was held to be a fixture despite being attached to the ground only by wooden steps nailed to the verandah.

Palumberi v Palumberi [16.420] In Palumberi v Palumberi [1986] NSW ConvR 55-287, the dispute was over a number of household items such as venetian blinds, curtains, a television antenna, carpets, light fittings, a stove and a portable heater. Despite the fact that the stove and carpet were only lightly affixed to the property it was found that the purpose of affixing them was the better enjoyment of the premises themselves. Therefore, they were fixtures. The other items had been fixed to ensure that they would operate effectively and so remained chattels.

National Australia Bank Ltd v Blacker [16.430] In National Australia Bank Ltd v Blacker (2000) 104 FCR 288 the bank’s mortgage over B’s property included all plant, machinery and other equipment affixed to the land. It was claimed that two irrigation pumps had become fixtures. The Federal Court held that all the irrigation equipment comprising the pumps, pipes weighing some 500 kilograms, about 6.5 kilometres of

443

444

Introduction to Business Law in Australia

polythene pipe and 200 sprinkler heads retained their character as chattels since there was no intention to make the pumps part of the land. They were not affixed to the land but had rested on their own weight and were not too heavy to move if the necessity arose.

Tenants' fixtures Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.440] Chattels that are affixed to rented property by tenants may, on the expiry of the lease, become the property of the landlord. It is very important that the subject of tenants’ fixtures be dealt with by specific terms of the lease. Subject to the lease the tenant will usually be able to remove:  ornamental and decorative items;  chattels which are particularly relevant to or necessary for the operation of the tenant’s business, eg, shelves and display cabinets in a retail shop, machinery in a factory that needs to be affixed in order to operate steadily, and annual crops on a farm (emblements).

Vopak Terminal Darwin Pty Ltd v Natural Fuels Darwin Pty Ltd [16.450] In Vopak Terminal Darwin Pty Ltd v Natural Fuels Darwin Pty Ltd [2009] FCA 742 V subleased land to NFD on which NFD constructed a biodiesel plant at a cost of more than $80 million. Under the terms of the sublease V was entitled to terminate the sublease in the event that NFD became insolvent and NFD was required to remove its fixtures before the termination date. If they did not remove their fixtures within three months of this date V was entitled to use them, remove them or sell them. A dispute arose over computer/control systems for operation of the biodiesel plant that remained on the land after the sublease was terminated because of the insolvency of NFD. The court found that all of the items were “extensively affixed and that detachment would be a difficult, lengthy and expensive process. The object of the attachment was the use of the premises as a whole as a biodiesel manufacturing plant on a long term basis”. As such the lessor was entitled to the equipment.

Re Cancer Care Institute of Australia Pty Ltd [16.460] In Re Cancer Care Institute of Australia Pty Ltd [2013] NSWSC 37 a dispute arose over valuable medical equipment (worth approximately $9 million) used in the treatment of cancer between the holder of a purchase money security interest and the landlord of premises in which the equipment was installed, the landlord arguing that the equipment had become a fixture. The equipment, which was attached to a steel frame which was then cemented to the floor, was held to be a chattel as the purpose of affixing it to the floor was to ensure that it remained absolutely steady during operation.

chapter 16 Property

Gift In order for there to be a valid gift of personal property three things must be shown: 1.

that the donor intended to make a gift of the property to the donee;

2.

that the donee accepted the gift;

3.

that the intention of the donee and the donor was evidenced by some action:

[16.480] Personal property can be described diagrammatically as follows in Figure 16.3. Figure 16.3: Categories of personal property

Personal property is initially divided into chattels real and chattels personal. The only chattel real of any historical importance is the lease. In modern times it is recognised that the lease is not merely personal property but is also an interest in land (real property). This means that a tenant may bring an action to recover possession of the land itself, not merely damages. The category of chattels personal comprises all other personal property. Choses in possession are things (choses) that can be taken into physical possession. Mere possession of a chattel carries certain rights of ownership. A chose in action cannot be physically possessed — it is intangible and can only be protected by bringing an action. Some choses in action exist under the general law (eg, debts) but many are created and protected by statute. Examples of statutory choses in action are intellectual property rights such as copyright, designs, trade marks and patents.. The subcategory of documentary intangibles refers to documents of title to goods (such as bills of lading) and some negotiable instruments where the property or right is considered to be “locked up” in the document. Ownership of the property represented by the document may be transferred by handing over the document, rather than requiring a handover of the property itself.

Ownership and possession [16.490] Ownership and possession of property do not always coincide. Where they are separated, eg, when property is lost, stolen, bailed, or sold subject to a retention of title clause, possession is an important factor when trying to determine who has title to property. Since ownership of many items of personal property is not recorded in a document (think of, eg, clothes, jewellery or a loaf of bread) possession itself

445

446

Introduction to Business Law in Australia

gives good title against everyone except the true owner. This is the concept of relativity of title. Title is often not perfect — it is the person with the best title who will be entitled to property. Possession can exist both in fact and in law. Possession in fact is about physical control of the property. Possession in law includes both a physical and a mental element, the intention to possess the thing coupled with an appropriate measure of control over it. The means of control may be actually holding the thing (actual possession) or it may be the means of controlling it (constructive possession). Examples of constructive possession would include the keys to a locker or safety deposit box.

Distinction between ownership and possession Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22. [16.500] The legal concept of property in the sense of rights of ownership to a particular object is contrasted with the legal concept of possession. A person has possession of an object (that is, an item of property) at law if he or she has control of it and intends to retain that control. Clearly, ownership and possession often coexist but they may also vest in different persons. For example, X may own a car but give possession of the car to Y. In other words, the legal owner of an object need not also be in possession of the object. A person in possession of an object has rights which are recognised at law even where that person is not the owner. Possession confers a right to retain control of an object against any other person except the person who has rights of ownership in the object. In other words, possession is good against all the world except the true owner. The old case of Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 established this principle:

Armory v Delamirie [16.510] In Armory v Delamirie (1722) 1 Stra 505; 93 ER 664, a chimney sweep’s boy found a jewel and offered it to a jeweller for sale. The jeweller refused either to pay a price acceptable to the boy or to return it. It was held that the jeweller was liable to the boy for the value of the jewel. Pratt CJ said: “[T]he finder of a jewel, though he does not by such finding acquire an absolute property or ownership, yet he has such a property as will enable him to keep it against all but the rightful owner.”

Hannah v Peel [16.520] A later illustration of the same principle is Hannah v Peel [1945] 1 KB 509, where the defendant was the owner of a house that he had never occupied. The house was requisitioned during the war. The plaintiff, a soldier who was stationed in the house, found a brooch in a crevice on a windowsill. The soldier gave the brooch to the police who subsequently gave it to the owner of the house who sold it. There was no evidence that the owner had any knowledge of the existence of the brooch before the soldier found it. It was held that the soldier had a better claim to the brooch by virtue of his possession than anyone except the true owner, who could not be found. Accordingly, the court awarded him damages against the homeowner equal to the value of the brooch.

chapter 16 Property

Transfer of personal property Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.530] Personal property may be transferred by:  sale  gift  finding  accession and intermingling  will or donatio mortis causa.

Sale [16.540] The transfer of goods by sale is dealt with by legislation. Domestically, the Competition and Consumer Act 2010 (Cth) which has as Sch 2 of that Act, the Australian Consumer Law, and the various Sale of Goods Acts are relevant. International sales are regulated by the Sale of Goods (Vienna Convention) Acts of the States and Territories. Many other forms of personal property such as intellectual property are also transferred in accordance with legislation: eg, Copyright Act 1968 (Cth); Patents Act 1990 (Cth); Designs Act 2003 (Cth). For detailed discussion of these areas see Chapters 14, 15, 17 and 30 of Davenport.

Gift [16.550] In order for there to be a valid gift of personal property three things must be shown: 1.

that the donor intended to make a gift of the property to the donee;

2.

that the donee accepted the gift;

3.

that the intention of the donee and the donor was evidenced by some action:

Rowland v Stevenson [16.560] In Rowland v Stevenson [2005] NSWSC 325 S handed R the keys of his boat on the morning of S’s birthday, saying: “It’s all yours son.” Later, at a party, S said: “And you can have the boat.” R accepted the gift in his birthday speech saying: “Thank you for the French Bee; there’s a yacht out there.” It was found that all the elements of a gift were established and that property in the yacht had been transferred. The yacht had been constructively “delivered” by handing over the keys.

Papathanasopoulos v Vacopoulos [16.570] In Papathanasopoulos v Vacopoulos [2007] NSWSC 502 P and V had been engaged. P broke off the engagement, taking off the engagement ring and placing it on a table in front of V. V told her that he did not want the ring and that it was a gift to her. She placed the ring and other gifts from V in a box which was later thrown in the garbage by her father. V brought an action to recover the ring or its value. The court held that as the ring had been given in contemplation of marriage P was

447

448

Introduction to Business Law in Australia

required to return it if the marriage did not take place. When the engagement was terminated she became a bailee of the ring and, as such, was not entitled to throw it away.

Finders [16.580] The question of who has the best claim to found property is dependent upon where the property is located at the time of finding. It may also depend on whether the finder is acting in the course of their employment at the time of finding the property. The occupier of property will have the best right to any chattels found on their property if they can show that they had the intention to exercise control over the premises and everything in it. The owner of premises open to the public such as parks, shops, restaurants and the like may not be able to exercise control over anything that is brought onto their property. The owner or occupier of private premises can exercise control, not only over who enters the property, but of everything that is on or in the property.

Bridges v Hawkesworth [16.590] Bridges v Hawkesworth (1851) 21 LJ QB 75. B found a bundle of banknotes on the floor of the public area of H’s shop. He gave the money to H but requested that it be returned to him if the owner could not be found. After three years the owner had not been found but H asserted that, as the owner of the premises on which the money was found, he had the superior right. The court found that B was entitled to the return of the money; because it had been found in a public area H could not be said to have had custody of it.

Chairman, National Crime Authority v Flack [16.600] Chairman, National Crime Authority v Flack (1998) 86 FCR 16. The NCA, exercising a search warrant, found a briefcase holding $433,000. The briefcase was in a cupboard on a property of which Mrs F was the sole tenant. She had been visited by her son, who was the subject of police investigation for drug offences, about twice a week. As she was able to show an intention to exercise control over the premises, she had the right to sue in conversion for the return of the briefcase and the money despite the fact that she claimed to have no knowledge about the true owner of the briefcase or how it came to be in her cupboard.

The principles applied in the “finding” cases Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22. [16.610] The principles applied vary according to whether the articles are found in, or attached to land; or the articles are found on land.

chapter 16 Property

(a) Articles found in, or attached to land [16.620] Where an article is found in, or attached to land, then as between the owner or possessor of the land and the finder of the article, the owner or lawful possessor of land has the better title.

Elwes v Brigg Gas Co [16.630] In Elwes v Brigg Gas Co (1886) 33 Ch D 562 the plaintiff leased land to the defendants for 99 years. While excavating foundations for a gasholder, the defendants found a prehistoric boat 6 feet below the surface. The lessor claimed the boat. It was held that the plaintiff lessor was entitled to the boat; he had lawful possession good against the world. It was immaterial that he had not been aware of the existence of the boat: . [16.640] A similar situation arose in South Staffordshire Water Co v Sharman [1896] 2 QB 44:

South Staffordshire Water Co v Sharman [16.650] In South Staffordshire Water Co v Sharman [1896] 2 QB 44 the plaintiff water company owned land containing a pool and employed the defendant, with other workmen, to clean it. While doing so, a workman found two gold rings in the mud at the bottom of the pool. He gave the rings to the police who could not find their true owner and later handed them back to him. The water company sued to recover the rings. The court held that the plaintiff company, as owner of the land containing the pool, was entitled to the rings.

[16.660] The legal position of the finder of an article under the surface of land was considered in Waverley Borough Council v Fletcher [1996] QB 334:

Waverley Borough Council v Fletcher [16.670] Waverley Borough Council v Fletcher [1996] QB 334: While using a metal detector in a public park owned by the plaintiff local authority, the defendant discovered the presence of an object below the surface. He dug some nine inches and found a valuable medieval gold brooch. The local authority claimed the brooch. The court held that applying the principle that the owner or lawful possessor of land has better title to an object found in or attached to the land than the finder; the plaintiff local authority was entitled to the brooch. The defendant’s right as a member of the public to engage in recreational pursuits in the park did not confer on him a superior right to the brooch. The defendant’s digging and removal of property in the land were acts of trespass that, together with metal detecting, were not recreational pursuits permitted under the terms by which the park was owned.

449

450

Introduction to Business Law in Australia

(b) Articles found on land [16.680] Where an article is found unattached on land, then between the owner or lawful possessor of land and the finder of the article, the owner or lawful possessor of the land has a better title only if he or she exercised such manifest control over the land as to indicate an intention to control the land and anything that might be found on it. On the other hand, where there is no evidence of a manifest intention on the part of the owner or occupier of premises to exercise control over everything on the premises, then the finder will be entitled to possession as against the occupier in the event that the true owner cannot be found. Thus, where the customer of a shop found a roll of banknotes on the shop floor, the customer was held entitled to the banknotes as against the shopkeeper: Bridges v Hawkesworth (1851) 21 LJ QB 75. The issue also arose in the case of Parker v British Airways Board [1982] 1 QB 1004:

Parker v British Airways Board [16.690] In Parker v British Airways Board [1982] 1 QB 1004, the plaintiff aircraft passenger found a gold bracelet on the floor of the executive lounge at Heathrow Airport in London. He handed the bracelet to an employee of the defendant Airways Board, which was the licensee of the premises. The owner of the bracelet was never found and the defendants sold it for £850. The finder sued the Board for the value of the bracelet. The court held that since there was no evidence that the Board had manifested an intention to exercise control over all things that might be upon or in the premises (for example, by searching for lost items on a regular basis) the finder had a better right to possession of the bracelet. Nonetheless, it is clear from the judgments given in Parker v British Airways Board [1982] 1 QB 1004 that the court would have taken a different view had the bracelet been found on the floor of a private home or in a bank vault, where a manifest intention to exercise control over all chattels on the premises would be more readily apparent. This principle was applied in Chairperson, National Crime Authority v Flack (1998) 86 FCR 16 where the occupier of premises was held entitled to the return of a briefcase containing $433,000 found by police during a search under warrant.

(c) Articles found in the course of employment [16.700] Where an employee finds goods in the course of employment, the general principle is that they belong to the employer: City of London Corp v Appleyard [1963] 1 WLR 982. However, where the employment is not the cause of the finding but merely incidental to it, it has been held that the employee is entitled to the goods as against the employer.

Byrne v Hoare [16.710] In Byrne v Hoare [1965] Qd R 135 the plaintiff, a Queensland policeman, was performing special duty at a drive-in picture theatre. While walking towards the area where he was to supervise traffic leaving the drive-in, he found a small ingot of gold. He claimed the ingot as against the Crown. A majority of the Queensland Supreme Court held that in finding the ingot he was in the same position as any casual passer-by, and that the performance of his duties was not the real or effective

chapter 16 Property

cause of the finding. Accordingly, he was entitled to the ingot. The plaintiff as finder was entitled to possession of the ingot against the world – except the true owner who could not be found.

Personal property Extract from Turner and Trone, Australian Commercial Law (30th ed, Lawbook Co, 2015), Chapter 22. [16.720] The most important aspects of the law of personal property concern ownership and possession.

Acquisition of ownership [16.730] Ownership of personal property can be acquired in various ways: (a)

by purchase;

(b)

by gift;

(c)

by will or descent; or

(d)

by taking possession of abandoned property.

Acquisition by purchase [16.740] The most common method of acquiring ownership of personal property is by purchase of the property from the owner. In the case of the sale of tangible personal property, such as the sale of a car, television set, or book, there is a contract for the sale of goods, the principles applicable to which have been dealt with separately in this work. In the case of the sale or assignment of intangible personal property, such as a debt, or copyright in a book or painting, statutory provisions may require compliance with certain formalities. For example, the Copyright Act 1968 (Cth), s 196(3) provides that an assignment of copyright does not have effect unless it is in writing signed by, or on behalf of the assignor.

Acquisition by gift [16.750] Ownership of personal property may be acquired by gift. The person who makes the gift is the donor, and the person who receives the gift the donee. For a valid gift, the donor must intend to make an unconditional transfer of rights to the property. There must be delivery of the property, handing it over to the donee and thereby giving up control and possession of it.

Acquisition by will or intestacy [16.760] Personal property may be left to a person by will. Alternatively, personal property may pass to a person according to the rules of intestacy, where a person has died leaving property but without having made a will. In all States there is legislation setting out the rules to be applied in determining which of the intestate’s next of kin is entitled to the property.

Acquisition by taking possession of abandoned property [16.770] Ownership of personal property may be acquired by taking possession of abandoned property with the intention of excluding others. However, the owner of the property must have intended to abandon

451

452

Introduction to Business Law in Australia

it, that is, relinquish ownership permanently. Thus, “to attract the principle, it would be necessary for the party asserting the abandonment to present evidence which established an express intention to abandon or from which such an intention might be inferred”: Moorhouse v Angus & Robertson (No 1) Pty Ltd [1981] 1 NSWLR 700 at 706 per Samuels JA. In Moorhouse it was held that the plaintiff author of short stories published by the defendant publishers had not abandoned his ownership in the original typewritten manuscripts of the stories, although he did not request the return of the original manuscripts for some years after their publication. The publishers were liable for the loss of his manuscripts.

Co-ownership of personal property [16.780] Two or more persons may own personal property together. Where they do so, they will hold the property either as joint tenants or tenants in common. For example, in Calabrese v Miuccio [1984] 1 Qd R 430 a husband and wife originally held a savings bank account as joint tenants, and on severance of the joint tenancy held the funds in the account as tenants in common. The distinction between tenancies in common and joint tenancies is discussed in the context of the co-ownership of real property at [16.100]. The principles are applicable to co-ownership of both real and personal property.

Liens [16.790] A lien is a right of one person to retain the possession of goods, property or securities of another until a liability is satisfied. Liens as a class are very large but one common characteristic is that they arise not by contract to create them but by implication of law. The most common type of lien is the possessory lien. A possessory lien is a right to retain possession of the goods, property or securities of another until the liability of that person has been discharged. For example, at common law a person who does work upon goods is entitled to retain possession of the goods until the charges for the work have been paid, provided the work was done by the order or at the request of the owner or some person authorised by them. Possession is essential to the existence of this type of lien. Such possession must be continuous (that is, uninterrupted possession). For example, a trainer of racehorses who would on general principle have a lien because of their skill and care in improving the horse would have no lien if the owner retained the right to remove the horse and send it to run in races: Thomas v Ranford (1922) 24 WALR 137. Possessory liens are divided into two classes: (a)

general liens; and

(b)

particular liens.

General (possessory) lien [16.800] A general lien entitles a person in possession of chattels to retain them until all claims or accounts of the person in possession against the owner of the chattels are satisfied. Such a lien arises by usage of trade, custom or express contract. Solicitors or bankers (except as to documents specially lodged for safe custody) have a general lien on the documents of their clients which are in their possession until their professional charges have been paid: Hamilton v Bank of New South Wales (1894) 15 LR (NSW) 100. General liens have also been established in the case of mercantile agents, stockbrokers and insurance brokers. Outside those occupations which the common law has previously recognised as giving rise to a right of general lien, the existence of a trade custom or usage establishing such lien is a question of fact and like all other customs must be strictly proved. It must be so notorious that everybody in the trade enters

chapter 16 Property

into a contract with that usage as an implied term. It must be uniform as well as reasonable and must be certain: Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 129 CLR 48.

Particular (possessory) lien [16.810] A particular lien is the right of holding particular goods until all charges in respect of those goods only are paid. If the owner of such goods is prepared to pay such charges they cannot be retained pending payment of a general balance due to the person having the particular lien. Examples of a particular lien include situations where: (a)

the person in possession of goods has employed skill in working on the goods, and the goods are thereby improved, for example an accountant has a lien in respect of work done on books of account (Re Gleebs Pty Ltd [1933] VLR 293) and a repairer has a lien for the cost of repairs to goods (Stoker v Picken (2012) 209 FCR 132); and

(b)

a person is compelled to accept and maintain goods on behalf of another and the charges remain unpaid.

Personal property as security [16.820] Personal property can be security for the payment of a debt. A mortgage over personal property can be given, allowing the mortgagee to take possession of the goods and sell them in the event of default by the mortgagor under the contract for the loan of money. Where security over personal property is given in writing, it will usually constitute a bill of sale and, historically, would have to be registered under the relevant bills of sale or other chattel securities legislation in the various States and Territories. To harmonise regulation across jurisdictions and to minimise complexity caused by multiple registers, a new national personal property securities regime came into force on 30 January 2012 through a single national law (the Personal Property Securities Act 2009 (Cth)) supported by a national online register of security interests. The Act applies to personal property security interest transactions, which have the effect of securing payment or performance of an obligation, having regard to the substance of the transaction, rather than the form: see further Turner [19.900].

Bailments [16.830] A bailment is the legal relationship arising from the transfer of possession of personal property from one person (the bailor) to another person (the bailee) under circumstances that when the purpose for which the goods were bailed has been fulfilled, the bailee is under a duty to return the property to the bailor, or deliver them according to the bailor’s instructions. The subject of bailments does not involve the transfer of ownership in personal property but rather the legal incidents arising from the temporary transfer of possession to a person who is not the owner. The relationship of bailor and bailee gives rise to certain legal rights and obligations considered separately in Chapter 21 of CACL.

453

chapter 17

Intellectual Property [17.05] Terminology........................................................................................................................................................ 456 [17.10] Introduction......................................................................................................................................................... 456 [17.20] Copyright .............................................................................................................................................................. 457 [17.1570] Designs........................................................................................................................................................... 499 [17.1780] Patents ........................................................................................................................................................... 506 [17.2180] Trade marks................................................................................................................................................. 525 [17.2560] Passing off .................................................................................................................................................... 537 [17.2600] Character merchandising ..................................................................................................................... 539 [17.2700] Confidential information........................................................................................................................ 542 [17.2770] Franchising ................................................................................................................................................... 544

456

Introduction to Business Law in Australia

Extract from Davenport and Parker, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 22.

Terminology [17.05] Some of the key terms that are encountered in this chapter include:  copyright: intangible property which allows the owner an exclusive right to copy a published literary, dramatic, musical or artistic work.  design: in relation to a product, means overall appearance of the product resulting from one or more visual features of the product such as shape or pattern.  franchise: a commercial arrangement in which individuals (the franchisees) distribute or sell a product, or run a business, developed by someone else (the franchisor).  passing off: a tort action to prevent financial loss arising from a person’s representation that their own goods or services are those of another person or business in a way that is likely to injure the reputation or goodwill of that person or business.  patent: a temporary monopoly right granted to the patentee by the Crown to the exclusive use and right to sell an invention in return for the disclosure to the public of the invention.  prior art base: In relation to deciding whether an invention involves an inventive step or an innovative step the prior art base is any information in a document that is publicly available, whether in or out of the patent area; and information made publicly available through doing an act, whether in or out of the patent area.  public domain: when a right can no longer be protected under the intellectual property laws it is said to have entered the public domain. It can then be freely used by anyone without the permission of the author.  springboarding: where a manufacturer uses patented information during the patent period to produce a generic product with the aim of introducing it into the market as soon as the patent expires.  trade mark: a distinctive identification mark or symbol. Extracts from Turner, C and Trone J, Australian Commercial Law (30th ed, LawBook Co., 2015), Chapter 30.

Introduction [17.10] The expression intellectual property is a general term encompassing the law relating to copyright, designs, patents, trade marks, passing off and confidential information. These particular areas of law are concerned with the legal protection of the creative manifestations of human thought whether in the form of literary, artistic or musical expression, which is the province of copyright law; or in the form of new inventions, which is the concern of patent law. Designs law is primarily concerned with the protection of industrial designs, that is, with the design or appearance of manufactured products. Trade marks law is concerned with the protection of a trader’s individual mark or symbol which distinguishes the particular trader’s goods or services from those of others in the market place. An action for passing off provides relief against those falsely representing their goods or services as those of another. The law of confidential information concerns the protection of information imparted to another in confidence against unauthorised use or disclosure. The chapter also outlines the method of marketing goods and services by franchising because of the intellectual property aspects of this rapidly growing industry.

chapter 17 Intellectual Property

Copyright [17.20] Australian copyright law is contained in the Copyright Act 1968 (Cth) which came into operation on 1 May 1969. The Act repealed earlier copyright legislation then in force and was passed pursuant to s 51(xviii) of the Commonwealth Constitution which empowers the federal Parliament to make laws with respect to copyright, patents of inventions and designs, and trade marks.

Nature of copyright [17.30] Copyright, as its name implies, is basically the right to reproduce or copy a particular form of expression, and thus a right to prevent others from doing so without the authority of the copyright owner. Basically, copyright comprises a number of exclusive rights, for example a right to reproduce or publish, in relation to certain categories of subject matter such as a literary or artistic work, for the term of the copyright. Accordingly, it is an infringement of copyright for a person to do, or authorise the doing of, one of the exclusive rights comprised in the copyright, for example to reproduce or publish a literary or artistic work without the licence or permission of the copyright owner. For copyright to exist in a particular subject matter it must fall within one of the categories recognised by the Copyright Act 1968 (Cth). Both published and unpublished works are protected by the Act. The categories of subject matter recognised by the Act comprise original literary, dramatic, musical and artistic works, and also sound recordings, cinematograph films, radio and television broadcasts, and published editions of works (that is, the typographical arrangement of works). No formal steps by way of registration are necessary for copyright protection: in other words, where copyright exists, it does so automatically.

Subject matter of copyright [17.40] The subject matter of copyright for the purposes of the Copyright Act 1968 (Cth) falls into two broad categories, namely: (a)

copyright in works, that is, original literary, dramatic, musical and artistic works, which are the concern of Pt III of the Act; and

(b)

copyright in subject matter other than works, that is, copyright in sound recordings (for example, CDs), cinematograph films, television and radio broadcasts, and published editions of works (that is, the typographical arrangement of a work). Copyright in such subject matter is dealt with in Pt IV of the Act and is considered separately at [17.760].

It is important to bear in mind that copyright is an incorporeal right, that is, a right to prevent an unauthorised reproduction or copying of one’s work, which is quite distinct from the general rights of property or ownership in the chattel, for example the book or painting, which is copied: Pacific Film Laboratories Pty Ltd v Commissioner of Taxation (1970) 121 CLR 154. In other words, copyright is quite separate from the physical object on which the ideas of the author or artist may be expressed. For example, when a person buys a painting that person will own the physical object, that is, the canvas, but not usually the copyright in the painting itself. Accordingly, in the absence of an assignment (that is, transfer) of copyright, or a licence or permission from the copyright owner (usually the artist), the purchaser may not reproduce the work, and if they do so, will be in breach of the artist’s copyright: Blackwell v Wadsworth (1982) 64 FLR 145.

Basis of copyright protection in works [17.50] The Copyright Act 1968 (Cth) deals separately with the question of the subsistence (that is, existence) of copyright in:

457

458

Introduction to Business Law in Australia

(a)

unpublished works; and

(b)

published works.

Unpublished works [17.60] Copyright subsists in an unpublished original literary, dramatic, musical or artistic work if the author of the work was a qualified person at the time when the work was made: Copyright Act 1968 (Cth), s 32(1). A qualified person means, in essence, an Australian citizen or a person resident in Australia: s 32(4).

Published works [17.70] Copyright subsists in a published original literary, dramatic, musical or artistic work if: (a)

the first publication of the work took place in Australia; or

(b)

the author of the work was a qualified person at the time when the work was first published (as to the meaning of qualified person, see [17.70]: Copyright Act 1968 (Cth), s 32(2).

A literary, dramatic, musical or artistic work is deemed to have been published only if reproductions of the work have been supplied (whether by sale or otherwise) to the public: s 29(1).

Meaning of an original work [17.80] As we have seen, copyright may subsist in an unpublished or published original literary, dramatic musical or artistic work. This raises the question of what constitutes an original work. If the work in question originates from the author in the sense that it is the result of her or his skill, labour or judgment and is not copied from another, it is an original work for the purposes of copyright law: University of London Press Ltd v University Tutorial Press [1916] 2 Ch 601; Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 (HL). Copyright may subsist in an original literary, dramatic, musical or artistic work: Copyright Act 1968 (Cth), s 32. These categories of “works” require further explanation.

Literary work [17.90] Literary work has a much broader meaning in copyright law than its conventional usage. The expression is not confined to a work of literature but includes, inter alia, work which is expressed in writing irrespective of whether the quality or style is high: University of London Press Ltd v University Tutorial Press [1916] 2 Ch 601 at 608. In other words, one is not concerned with the question of the quality of a work in determining whether it is a literary work for the purposes of copyright law. The Copyright Act 1968 (Cth) defines “literary work” as including (s 10(1)): (a)

a table or compilation, expressed in words, figures or symbols; and

(b)

a computer program or compilation of computer programs.

The definition of literary work is not exhaustive. Accordingly, the court has to determine whether a particular work is a “literary work” and therefore whether copyright exists in it. For example, it has been held that copyright does not subsist in individual headlines of newspaper articles since they are generally too insubstantial to qualify for protection as literary works: Fairfax Media Publications Pty Ltd v Reed International Books Australia Pty Ltd (2010) 189 FCR 109.

Compilations [17.100] The definition of literary work includes, inter alia, a table or compilation. Consequently, it has been held that the following constituted a literary work for the purposes of the Copyright Act 1968 (Cth):

chapter 17 Intellectual Property

(a)

football pool coupons (Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 (HL));

(b)

trade catalogues of motorcycle parts (A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478);

(c)

racing programs (Mander v O’Brien [1934] SASR 87); and

(d)

published lists of winning bingo numbers: Mirror Newspapers Ltd v Queensland Newspapers Pty Ltd [1962] Qd R 305.

Compilations are protected as “literary works” under the Copyright Act 1968, provided they are “original”: s 32(1), (2).

Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd [17.110] Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491. Telstra published annual telephone directories consisting of an alphabetical listing of subscribers’ names, addresses and telephone numbers. Another company, Desktop, copied the information in the Telstra directories onto CD-ROMs which they then sold. Desktop argued that there was no copyright in the Telstra directories because they lacked the necessary element of originality. The Full Federal Court held that copyright subsisted in Telstra’s telephone directories as original literary works and that copyright had been infringed by the substantial reproduction of the directories in Desktop’s CD-ROMs. The court held that as regards a compilation of factual material, the requirement of originality will be satisfied where sufficient labour and expense has been involved in collecting the information. It was not necessary to go further and establish some element of creativity by the compiler of the information. [17.120] However, the later decision of the High Court in IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 signals a departure from the approach in Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491:.

IceTV Pty Ltd v Nine Network Australia Pty Ltd [17.130] In IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458, the Channel Nine television station produced a Weekly Schedule of programs to be broadcast on Nine Network stations. The Weekly Schedules were produced from a database on Nine’s computer network and included particulars of the time and title of programs to be broadcast, additional programming information and synopses of the programs. The Weekly Schedules were distributed to licensees who combined the information with similar information provided by other broadcasters. IceTV accessed the aggregated guides and provided, via the Internet, a subscription-based electronic television guide containing program titles, times, duration and other details. Channel Nine claimed that IceTV had infringed its copyright by copying information from the aggregated guides. The High Court unanimously held (reversing the decision of the Full Federal Court) that IceTV had not infringed copyright since it had not reproduced a substantial part of Nine’s Weekly Schedules. The High Court emphasised that the role of copyright is to protect authors’ particular form of expression of facts and information, not the facts or information themselves.

459

460

Introduction to Business Law in Australia

Since IceTV had conceded that copyright subsisted in Nine’s Weekly Schedules, the question of subsistence did not have to be determined by the High Court. However, the High Court did comment on the issue and noted that the reasoning in Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491, with respect to compilations, may be “out of line with the understanding of copyright law over many years” and that its emphasis on “‘labour and expense’ per se” should be treated “with some caution”: IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 at [188] per Gummow, Hayne and Heydon JJ.

Telstra Corporation Ltd v Phone Directories Co Pty Ltd [17.140] Subsequently, in Telstra Corporation Ltd v Phone Directories Co Pty Ltd (2010) 194 FCR 142, an action by Telstra for alleged infringement of copyright in its White Pages and Yellow Pages directories failed on the ground that Telstra was unable to establish that copyright subsisted in the directories. The Full Federal Court held that to establish originality in a literary work, it is essential that the work originate from one or more human authors. In contrast, the directories could not be characterised as having originated from human authors because the compilation of the directories in the form in which they were published was primarily by an automated computerised process. 1

Computer programs [17.150] The definition of literary work set out at [17.100] expressly includes computer programs which are therefore protected by the Copyright Act 1968 (Cth). 2 A computer program is defined as meaning “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result”: s 10(1). 3

Dramatic work [17.160] The essential character of a dramatic work is that it is intended to be represented or performed in some way, such as by acting or dancing. The Copyright Act 1968 (Cth) defines a dramatic work as including a choreographic show (for example, ballet or modern dance) or other dumb show: s 10. The

1

See D Lindsay, “Protection of Compilations and Databases after IceTV: Authorship, Originality and the Transformation of Australian Copyright Law” (2012) 38 Monash University Law Review 17; J McCutcheon, “The Vanishing Author in Computer-Generated Works: A Critical Analysis of Recent Australian Case Law” (2012) 36 Melbourne University Law Review 917; J McCutcheon, “Curing the Authorless Void: Protecting Computer-Generated Works following IceTV and Phone Directories” (2013) 37 Melbourne University Law Review 46.

2

A complementary piece of legislation, the Circuit Layouts Act 1989 (Cth) provides special copyright style rights for original circuit layouts for integrated circuits (in essence, the design of a computer chip) called EL (that is, eligible layout) rights. EL rights are protected for 10 years after first commercial exploitation, a much shorter period of protection than under the Copyright Act 1968 (Cth) which is generally the life of the author plus 70 years. For the application of the Copyright Act 1968 (Cth) to computer programs, see Autodesk Inc v Dyason (1992) 173 CLR 330; Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300; compare Data Access Corpn v Powerflex Services Pty Ltd (1999) 202 CLR 1. See also, P Knight, “Copyright in Databases and Computer Programs: Why is it so Hard to Understand?” (2010) 21 Australian Intellectual Property Journal 118.

3

chapter 17 Intellectual Property

definition also includes a scenario or script for a cinematograph film but does not include the film itself, since copyright in a film is the subject of a separate copyright: see [17.840]. 4

Musical work [17.170] There is no definition of “musical work” in the Copyright Act 1968 (Cth) and consequently, the ordinary meaning of the expression applies. 5

Artistic work [17.180] The Copyright Act 1968 (Cth) (s 10) defines an artistic work as meaning: (a)

a painting, sculpture, drawing, engraving or photograph, whether the work is of artistic quality or not;

(b)

a building or a model of a building, whether the building or model is of artistic quality or not; or

(c)

a work of artistic craftsmanship whether or not mentioned in paragraph (a) or (b).

A number of the expressions used in the definition are further defined. For example, a “drawing” includes a diagram, map, chart or plan: s 10. Accordingly, copyright may subsist in an architect’s plan as an artistic work and if reproduced without permission will constitute an infringement of copyright: see, for example, Ancher Mortlock Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278; Clarendon Homes (Aust) Pty Ltd v Henley Arch Pty Ltd (1999) 46 IPR 309. 6

Works of artistic craftsmanship [17.190] For an item to fall within category (c) of the definition of “artistic work”, it must be a “work of artistic craftsmanship”. Basically, the expression would include all kinds of articles made by craftspersons, for example, jewellery, metal work, pottery, furniture and so on. However, beyond these obvious cases it can be difficult to determine whether a particular object constitutes a “work of artistic craftsmanship”. In its analysis of the expression in Burge v Swarbrick (2007) 232 CLR 336, the High Court said that the phrase is a composite one that needs to be construed as a whole. The issue is one for “objective determination by the court, assisted by admissible evidence” (at [63]). More particularly, the High Court said: “[D]etermining whether a work is ‘a work of artistic craftsmanship’ does not turn on assessing the beauty or aesthetic appeal of work or on assessing any harmony between its visual appeal and its utility. The determination turns on assessing the extent to which the particular work’s artistic expression, in its form, is unconstrained by functional considerations”: at [256].

Burge v Swarbrick [17.200] In Burge v Swarbrick (2007) 232 CLR 336, the respondent, Swarbrick was a naval architect. In the course of designing a new class of yacht, he made a hand-built full-scale model of the 4 5 6

See S Bellingham, “Exploring the Boundaries of Copyright Subsistence in Dramatic Works” (2011) 22 Australian Intellectual Property Journal 106. See WPH Forrest, “Musicological and Legal Perspectives on Music Borrowing: Past Present and Future” (2011) 22 Australian Intellectual Property Journal 137. On indigenous works, see M Wyburn, “Protecting the Works of Indigenous Artists Under Copyright Law and at its Borders” (2012) 86 Australian Law Journal 829.

461

462

Introduction to Business Law in Australia

hull and deck sections of the yacht. This was known as a “plug” and was the precursor for the creation of fibreglass moulds used for reproducing the design. A number of yachts were made from the moulds and sold to customers. The appellants obtained a hull and deck moulding of the yacht from a former employee of the respondent and intended to manufacture and sell the yachts. The respondent, Swarbrick (the plaintiff in the original proceedings), had contended, inter alia, that the “plug” hull and deck mouldings of the yacht were works of artistic craftsmanship and had obtained an injunction restraining the appellants from, in effect, copying his yacht design. The High Court allowed the appellant’s appeal and held that the “plug” of the yacht did not constitute “a work of artistic craftsmanship”. The court said that the “plug” was primarily influenced by functional and utilitarian considerations such as how to make the yacht travel faster rather than by artistic or aesthetic considerations. Since the “plug” was not “a work of artistic craftsmanship”, it followed that the hull and deck moulds made from it were also not works of that character and the same applied to the hull and deck mouldings.

Copyright does not protect ideas as such [17.210] A basic principle of copyright law is that copyright does not protect ideas as such but only the particular form of expression in which they are embodied. This principle can be seen in Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106:

Donoghue v Allied Newspapers Ltd [17.220] In Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106, the plaintiff, a famous jockey, recounted his racing experiences to a journalist who wrote articles based on what the jockey had told him. The articles were published in a newspaper. The court rejected the plaintiff jockey’s argument that he was an author of the articles. In the course of his judgment Farwell J said (at 109): “This at any rate is clear beyond all question, that there is no copyright in an idea, or in ideas. A person may have a brilliant idea for a story, or for a picture, or for a play, and one which appears to him to be original; but if he communicates that idea to an author or an artist or a playwright, the production which is the result of the communication of the idea to the author or the artist or the playwright is the copyright of the person who has clothed the idea in form, whether by means of a picture, a play, or a book, and the owner of the idea has no rights in the product.”

Material form [17.230] Once the idea has been reduced to some material form, for example in a novel, painting or drawing, then although copyright law will protect the formulated expression of the idea as seen, for example in the series of events or pattern of incidents set down in the novel, it does not protect the general idea or concept behind the work. The distinction between the general idea or concept behind a work that is not protected by copyright, and the formulated expression of the idea which is protected, is often difficult to draw. In Zeccola v Universal City Studios Inc (1982) 46 ALR 189, Lockhart and Fitzgerald JJ stated the basic position as follows (at 192):

chapter 17 Intellectual Property

“In general, there is no copyright in the central idea or theme of a story or play, however original it may be; copyright subsists in the combination of situations, events and scenes which constitute the particular working out or expression of the idea or theme. If these are totally different, the taking of the idea or theme does not constitute an infringement of copyright.” In that case it was held that an Italian film had gone beyond merely taking the basic idea of a killer shark terrorising a community but had copied many of the incidents from the book and script on which Jaws the film was based and therefore had prima facie infringed copyright. By way of contrast, the United Kingdom Court of Appeal held that the popular thriller, The Da Vinci Code, had not infringed copyright in an earlier non-fiction work, The Holy Blood and the Holy Grail, which had raised a number of the themes of historical conjecture which provided the background to The Da Vinci Code: Baigent v Random House Group Ltd [2007] All ER (D) 456; (2007) 72 IPR 195.

Ownership of copyright General principles [17.240] The general rule is that the author of a literary, dramatic, musical or artistic work is the owner of the copyright in the work: Copyright Act 1968 (Cth), s 35(2). The Act does not define author (except in relation to photographs) but the term means, in essence, the person who created the work in the sense of originating the particular form of literary, dramatic, musical or artistic expression: Donoghue v Allied Newspapers Ltd [1938] 1 Ch 106. Author in relation to a photograph taken after the commencement of the Act, that is, 1 May 1969, means the person who took the photograph: s 10.

Statutory exceptions [17.250] There are certain statutory exceptions to the general rule that the author of the work is the owner of the copyright in the work. These are as follows:

Works created in the course of employment [17.260] Where a literary, dramatic, artistic or musical work is made by the author “in pursuance of the terms of his or her employment” under a contract of service or apprenticeship, the employer is the owner of copyright in the work (Copyright Act 1968 (Cth), s 35(6)): Beloff v Pressdram Ltd [1973] 1 All ER 241. The expression “in pursuance of the terms of his or her employment” raises for consideration not only the question of whether the author was employed under a contract of service at the time a work is made but also “whether the relevant work is made in furtherance of the contract of employment with the employer. That is, did the employee make the work because the contract of employment expressly or impliedly required or at least authorised the work to be made”: Edsonic Pty Ltd v Cassidy (2010) 189 FCR 271 at [41] per Moore J. If the contract between the parties is not one of service (that is, if the relationship between the parties is not that of employer and employee) but a contract for services, the author of the work will retain copyright in it subject to any contrary agreement between the parties. This can be of considerable importance because a good deal of copyright material is created by people who work on a freelance or consultancy basis, and in those circumstances they remain the owner of any copyright material they produce unless the contract provides otherwise: Oceanroutes (Aust) Pty Ltd v MC Lamond [1984] AIPC 90-134.

Special provisions for journalists [17.270] Under the Copyright Act 1968 (Cth) special provisions apply to journalists employed by newspapers and magazines. The provisions apply where a literary, dramatic or artistic work:

463

464

Introduction to Business Law in Australia

(a)

is made by the author (that is, a journalist) under the terms of their employment by the proprietor of a newspaper, magazine or similar periodical under a contract of service; and

(b)

is made for the purpose of inclusion in a newspaper, magazine or similar periodical. In such a case, the author (that is, the journalist) is the owner of the copyright only in so far as the copyright relates to: (i)

reproduction of the work for the purpose of inclusion in a book; or

(ii)

reproduction of the work in the form of a hard copy facsimile (that is, a photocopy) made from a paper edition of an issue of the newspaper, magazine or similar periodical.

The proprietor of the newspaper or magazine is the owner of copyright for any other purpose: s 35(4).

De Garis v Neville Jeffress Pidler Pty Ltd [17.280] De Garis v Neville Jeffress Pidler Pty Ltd (1990) 37 FCR 99. Three articles of a journalist employed by a metropolitan newspaper were photocopied by a company as part of its press-clipping and news-monitoring service for distribution to its subscribers. It was held that the journalist was entitled to sue the company for infringement of his copyright in the articles he had written for the newspaper. Although the case was decided under an earlier provision of the Copyright Act 1968 (Cth), the result would be the same under the current section.

[17.290] The newspaper proprietor owns copyright in the work of their employed journalists for inclusion of the work in some form of electronic transmission including, for example, computer networks, computer databases or pay-TV services. Self-employed or freelance journalists retain all rights in their works, subject to a provision of their contract to the contrary.

Certain commissioned artistic works [17.300] The general principle in relation to commissioned works is that the author of the work, not the person who commissioned it, is the owner of the copyright unless there is agreement to the contrary: Blackwell v Wadsworth (1982) 64 FLR 145. However, the Copyright Act 1968 (Cth) makes special provision for ownership of copyright for certain commissioned artistic works, namely, photographs taken for a private or domestic purpose, portraits and engravings: s 35(5). The latter section provides, in effect, that where A makes an agreement with B for the taking of a photograph for a private or domestic purpose, the painting or drawing of a portrait, or the making of an engraving by B, A is the owner of any copyright in the work if the agreement is made for valuable consideration and the work is made in pursuance of the agreement. A photograph taken for a private or domestic purpose is defined as including a portrait of family members, a wedding party or children: s 35(7). The section further provides that if at the time the agreement was made A made known to B, expressly or by implication, the purpose for which the work was required, B is entitled to restrain the doing of any act comprised in the copyright in the work otherwise than for that purpose: s 35(5). One effect is that a commercial photographer may license future uses of their photographs where such photographs are not commissioned for a private or domestic purpose.

chapter 17 Intellectual Property

Apart from these limited exceptions, the person who was commissioned to do the work will retain copyright in it and accordingly will be entitled to use the work for other purposes: Cope Allman (Marrickville) Ltd v Farrow (1984) 3 IPR 567. The provisions may be excluded or modified by agreement.

Rights comprised in copyright and infringement [17.310] Copyright comprises certain exclusive rights in relation to specified subject matter. In the case of a literary, dramatic or musical work, the Copyright Act 1968 (Cth), s 31(1)(a) provides that copyright is the exclusive right to do all or any of the following acts: (i)

to reproduce the work in a material form;

(ii)

to publish the work;

(iii)

to perform the work in public;

(iv)

to communicate the work to the public;

(v)

to make an adaptation of the work;

(vi)

to do, in relation to a work that is an adaptation of another work, any of the aforementioned acts.

Copyright in the case of an artistic work is the exclusive right to do all or any of the following acts (s 31(1)(b)): (i)

to reproduce the work in a material form;

(ii)

to publish the work;

(iii)

to communicate the work to the public.

The Copyright Act 1968 also includes a commercial rental right in respect of computer programs (s 31(1)(d)), and literary, musical or dramatic works reproduced in a sound recording (for example, a CD or tape): s 31(1)(c) (see further, [17.430]). Copyright in a literary, dramatic, musical or artistic work is infringed by a person who, not being the owner of the copyright (and without the licence of the owner), does or authorises the doing in Australia of any act comprised in the copyright: s 36(1). The nature of the exclusive rights of the copyright owner set out above requires further explanation.

Reproduction in a material form [17.320] Copyright protects against unauthorised reproduction of a work in a material form: Copyright Act 1968 (Cth), s 31(1)(a)(i), (b)(i). The infringing act need not be done in relation to the whole of the work: it is sufficient if it is done in relation to a substantial part of the work: s 14(1). In other words, to establish an infringement of copyright it is not necessary to show, for example, that the whole of the work was copied, it is sufficient that a substantial part of the work was reproduced. What constitutes a substantial reproduction in any particular case is a question of fact to be determined having regard to all the circumstances. The most important factor is the quality of what is taken rather than the quantity: Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 (HL). For example, to copy a few bars of music of a popular song may constitute a substantial reproduction where the bars copied constitute the main theme of the song: Hawkes & Son (London) Ltd v Paramount Film Service Ltd [1934] 1 Ch 593. In EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd (2011) 191 FCR 444 the Full Federal Court held that the inclusion of two bars of the air or theme of the musical round “Kookaburra Sits in the Old Gum Tree” in a flute riff in the appellants’ recordings of the song “Down Under” constituted an infringement of the respondent’s copyright in the “Kookaburra” round.

465

466

Introduction to Business Law in Australia

The exclusive right being considered is the exclusive right of the copyright owner to reproduce the work in a material form. Reproduction in the present context essentially means copying, and to establish infringement of copyright on this ground requires proof of: (a)

a sufficient degree of objective similarity between the plaintiff’s and the defendant’s work, that is, the defendant must have produced a work which closely resembles the plaintiff’s; and

(b)

a causal connection between the two works, that is, the defendant’s work must be derived directly or indirectly from the plaintiff’s copyright work.

The general position was succinctly stated in the High Court by Gibbs CJ in SW Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466 at 472, as follows: “The notion of reproduction, for the purposes of copyright law, involves two elements – resemblance to, and actual use of, the copyright work, or, to adopt the words which appear in the judgment of Willmer LJ in Francis Day & Hunter Ltd v Bron [1963] Ch 587 at 614, ‘a sufficient degree of objective similarity between the two works’ and ‘some causal connection between the plaintiffs’ and the defendants’ work’.” If the defendant can show that, despite the similarity between the two works, he or she was not aware of, or did not have access to, the plaintiff’s work, there will have been no infringement of the plaintiff’s copyright: Francis Day & Hunter Ltd v Bron [1963] Ch 587.

Reproduction where sound recording or film made of the work [17.330] A literary, dramatic, musical or artistic work is deemed to have been reproduced in a material form if a sound recording or cinematograph film is made of the work (Copyright Act 1968 (Cth), s 21(1)); for example, where the words or music of a song are used in making a record of the song without the licence of the copyright owner there will be an infringement of copyright.

Reproduction in a digitised form [17.340] A copyright owner’s exclusive right to reproduce a work now includes, in effect, the right to digitise the work, that is, to convert it into or from a digital or other electronic machine-readable form: Copyright Act 1968 (Cth), s 21(1A).

Reproduction in three-dimensional form [17.350] Copyright in a two-dimensional artistic work is deemed to have been reproduced if a representation of it is produced in a three-dimensional form, or vice versa: Copyright Act 1968 (Cth), s 21(3). For example, the construction of a building by making unauthorised use of an architect’s plans would constitute a reproduction of the plan (the two-dimensional work) in the form of the building (the three-dimensional version of the two-dimensional artistic work) and hence infringement of the architect’s copyright in her or his plans: Ancher Mortlock Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278. Similarly, to manufacture a truck trailer which substantially reproduces without permission another company’s sketches and drawings of a trailer constitutes an infringement of copyright in the sketches and drawings: Vawdrey Australia Pty Ltd v Kreuger Transport Equipment Pty Ltd (2009) 261 ALR 269.

Publication [17.360] An author has the exclusive right to publish her or his work: Copyright Act 1968 (Cth), s 31(1)(a)(ii), (b)(ii). The High Court has held that to publish in this context means to make public in Australia that which has not previously been made public: Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88.

chapter 17 Intellectual Property

Public performance [17.370] Copyright in a literary, dramatic or musical work includes the exclusive right to control public performance of the work: Copyright Act 1968 (Cth), s 31(1)(a)(iii). Basically, a performance of a work given to members of the public is a performance in public unless it is shown to be private or domestic in character. For example, in Australasian Performing Right Assoc v Canterbury-Bankstown League Club Ltd [1964] NSWR 138, it was held that music played by a dance band at a sporting and social club for members and their guests constituted a performance in public and hence an infringement of copyright of the performing rights in the music being played. The term performance includes any method of visual or aural presentation: s 27(1). The playing of music over a loudspeaker system in a record shop was held to constitute a performance in public of the music played (Performing Right Society Ltd v Harlequin Record Shop Ltd [1979] 1 WLR 851), as was the playing of music over car radios displayed for sale in a chain of retail automotive equipment shops: Australasian Performing Right Assoc Ltd v Tolbush Pty Ltd [1986] 2 Qd R 146.

Australasian Performing Right Assoc Ltd v Commonwealth Bank of Australia [17.380] In Australasian Performing Right Assoc Ltd v Commonwealth Bank of Australia (1992) 40 FCR 59 a musical work was incorporated in an instructional video cassette and played to 11 employees of the defendant bank at one of its branches prior to opening for business. It was held that this constituted a public performance of the musical work which, since it was unauthorised, constituted an infringement of copyright.

Australasian Performing Right Association (APRA) [17.390] Copyright in the performing rights of most popular music played in Australia is usually assigned to the Australasian Performing Right Association (APRA) and, accordingly, permission should be obtained from APRA to perform such music in public which will usually be granted on payment of the appropriate licence fee. The revenue collected by APRA is distributed to the members of the Association comprising composers and publishers of musical works.

Communication of the work to the public [17.400] The Copyright Amendment (Digital Agenda) Act 2000 (Cth) introduced a broadly-based, technology neutral right of communication to the public. The right is an exclusive right in literary, dramatic, musical and artistic works (Copyright Act 1968 (Cth), ss 31(1)(a)(iv) and 31(1)(b)(iii)), and sound recordings, films and broadcasts: ss 85(1)(c), 86(c) and 87(c), respectively. “Communicate” means to make available online or electronically transmit (whether over a path, or a combination of paths, provided by a material substance or otherwise) a work or other subject matter: s 10(1). The exclusive right of communication to the public replaces and extends the former technology-specific broadcasting right that was limited to wireless broadcasts: it also includes cable transmissions. The right covers making copyright material available online, for example uploading material onto the Internet. The expression “to the public” is defined as meaning to the public within or outside Australia: s 10(1).

467

468

Introduction to Business Law in Australia

Adaptations [17.410] The right to make an adaptation of a literary, dramatic or musical work is one of the exclusive rights conferred on the copyright owner: Copyright Act 1968 (Cth), s 31(1)(a)(vi). Adaptation means a dramatisation of a non-dramatic literary work; a non-dramatic version of a literary work in a dramatic form; a version of a computer program; a translation; a pictorial version of a literary work, and in the case of a musical work an arrangement or transcription of the work: s 10. The copyright owner has the same exclusive rights in the adaptation as he or she had in the original work (s 31(1)(a)(vii)), that is, the right to reproduce, publish, perform in public and communicate the work to the public.

The commercial rental right [17.420] A commercial rental right only applies to: (a)

a sound recording (for example, a CD) (Copyright Act 1968 (Cth), s 85, see [17.770]);

(b)

a literary, musical or dramatic work reproduced in a sound recording (s 31(1)(c)); and

(c)

a computer program: s 31(1)(d).

The nature of the exclusive right is expressed as a right to enter into a commercial rental arrangement: s 31(5). In essence, the owner of copyright in a sound recording, a work embodied in the recording, or in a computer program, has the exclusive right to rent out the sound recording or computer program for consideration in the course of a business. The Federal Court has rejected the contention that a “movie” embodied in a DVD is, in essence, a computer program and therefore subject to the copyright owner’s right to control commercial rental arrangements in respect of computer programs: Australian Video Retailers Association Ltd v Warner Home Video Pty Ltd (2001) 114 FCR 324.

Authorising infringement of copyright [17.430] Infringement of copyright occurs not only by doing an act comprised in the copyright without the licence of the copyright owner but also by authorising such act: Copyright Act 1968 (Cth), s 36(1). What amounts to an authorisation was considered by the High Court in the University of New South Wales v Moorhouse (1975) 133 CLR 1:

University of New South Wales v Moorhouse [17.440] In University of New South Wales v Moorhouse (1975) 133 CLR 1, a graduate of the University of New South Wales made two photocopies of a story on a photocopying machine in the university library. In making the two photocopies of the same story, the graduate had infringed the copyright in the work. However, the proceedings were brought by the author and the publishers not against the graduate but against the university on whose photocopying machines the infringement had occurred. The High Court held that the university had “authorised” the infringement of copyright. The reason was that the university had provided the books and the photocopying machine and taken inadequate steps to warn potential users against possible infringement of copyright. The High Court gave a broad interpretation to the expression “authorises” as meaning sanction, approve or countenance.

chapter 17 Intellectual Property

Infringement of copyright by authorisation To establish infringement of copyright by authorisation, some connection should exist between the person alleged to have authorised the infringing act and the infringer. That is, the person alleged to have authorised another to commit an infringing act must have had some form of control over the latter at the time the infringing act occurred or, alternatively, have been responsible for placing in the other’s hands materials which by their nature would almost invariably be used for the purpose of an infringing act: RCA Corp v John Fairfax & Sons (1981) 34 ALR 345; WEA International Inc v Hanimex Corp Ltd (1987) 17 FCR 274. The Copyright Act 1968 (Cth) requires that in determining the issue of authorisation, the matters that must be taken into account include: (a)

the extent (if any) of the person’s power to prevent the doing of the act concerned;

(b)

the nature of any relationship existing between the person and the person who did the act concerned; 7 and

(c)

whether the person took any reasonable steps to prevent or avoid the doing of the act, including whether the person complied with any relevant industry codes of practice: s 36(1A).

Importation and sale of infringing copies [17.460] So far we have been concerned with the infringement of copyright by the doing, or authorising of doing, of one or more of the exclusive rights of the copyright owner set out in Copyright Act 1968 (Cth), s 31, for example, reproducing the work in a material form without the licence (that is, consent) of the copyright owner. In addition, the Copyright Act 1968 provides that certain other acts also constitute an infringement of copyright. These are sometimes referred to as secondary infringements as distinct from primary infringements under s 31. These other activities involving an infringement of copyright are: (a)

importing articles which infringe copyright: under s 37; and

(b)

selling or otherwise dealing in articles which infringe copyright: under s 38.

In contrast with infringement of copyright in respect of the owner’s exclusive rights set out in s 31, infringement of copyright by way of importation and/or sale of “infringing articles” under ss 37 and 38 require proof of knowledge on the part of the defendant. That is, there is no liability for the importation and/or sale of the “infringing articles” unless the defendant knew or ought reasonably to have known that the articles being imported or sold infringed copyright.

Importation [17.470] Copyright in a literary, dramatic, musical or artistic work is infringed by a person who, without the licence of the owner of the copyright, imports an article into Australia for sale, hire or other trade purpose, if the importer knew, or ought reasonably to have known, that if the importer had made the article in Australia it would have constituted an infringement of copyright: Copyright Act 1968 (Cth), s 37. 7

B Scott, “Authorisation under Copyright Law and ’the Nature of any Relationship’” (2011) 22 Australian Intellectual Property Journal 172.

469

470

Introduction to Business Law in Australia

Under this provision if the article imported is an unauthorised reproduction or pirate copy of the plaintiff copyright owner’s work, and the importer knew this, then the importer will infringe copyright by importing the pirate copy.

Milpurrurru v Indofurn Pty Ltd [17.480] In Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240 the respondent company imported carpets from a factory in Vietnam. The carpets reproduced five Aboriginal artworks and substantially reproduced three others, copyright in which was owned by the applicants. The Federal Court held that the company had infringed the applicants’ copyright by importing the carpets. Thus, the managing director of the respondent company knew, or ought reasonably to have known, that had he made the carpets in Australia that making would have constituted an infringement of copyright. The managing director’s knowledge in that respect was imputed to the company, that is both the managing director and the company were held liable for infringement of copyright.

Parallel importation [17.490] A further important effect of the importation provision is that the article imported might be lawfully made and purchased overseas, that is, be a genuine work, but its importation into Australia will constitute an infringement of the Australian copyright in the work if the making of it in Australia by the importer would have infringed copyright and the importer knew this. The effect of the provision on the importation of genuine goods in which copyright subsists can be seen in the leading decision of the High Court in Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534:

Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV [17.500] In Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534, Time Incorporated owned the copyright in a series of cookery books. Time Incorporated granted to its affiliate company, Time-Life, an exclusive licence to distribute the books. Angus & Robertson, a Sydney bookseller, wanted to obtain the books to sell in Australia. The bookseller found that it was able to purchase the books by wholesale in America and sell the books cheaper by retail than the price at which it could buy them at wholesale through Time-Life’s authorised distribution channels in Australia. Accordingly, the bookseller purchased 8,400 copies of the book from a Californian book wholesaler. After the sale of the first consignment, Angus & Robertson ordered a further 8,400 copies from the Californian book wholesaler having been warned by Time-Life that its importation and sale of the books was in breach of copyright. Time-Life sought an interlocutory injunction to restrain the bookseller from selling any of the second consignment of books. The High Court held that the importation and sale of the books by Angus & Robertson infringed Time-Life’s copyright under ss 37 and 38 of the Copyright Act 1968 (Cth). The Court rejected the bookseller’s argument that the sale of the books in the US without restriction on their resale in

chapter 17 Intellectual Property

Australia, implied a licence for their importation into this country. In the Court’s view only a positive licence from the copyright owner or exclusive licensee would prevent infringement of copyright (under ss 37 and 38) by the importer.

Relaxation of the restrictions on parallel importation [17.510] In view of the potential anti-competitive effects of the copyright importation provisions, there has been a gradual relaxation of the restrictions on parallel importation by a series of statutory amendments to the importation provisions.

1. Partial relaxation in the case of books [17.520] Following amendments to the Copyright Act 1968 (Cth) in 1991, there has been a partial relaxation of the copyright restrictions on the parallel importation of books. Broadly, books can be imported from overseas without the licence or permission of the copyright owner in the following situations (s 44A): 1.

Where a book is first published outside Australia and not published in Australia within 30 days, it is not an infringement of copyright to import non-pirated copies of the book for commercial purposes. In such a case the right of the copyright owner to control the importation of the book into Australia is permanently lost.

2.

Where a copyright owner does first publish a book in Australia, or makes copies available within 30 days of first publication overseas, the copyright owner will lose the right to prevent importation by another person to the extent that the copyright owner is unable to meet an order for supply of the book within 90 days.

3.

A single copy of a book may be imported for a customer who does not intend to use the book for commercial purposes.

4.

Multiple copies of books may be imported for a non-profit library.

2. Removal of restrictions on parallel importation by reliance on labels and other copyright material accompanying a product [17.530] An overseas copyright owner was formerly able to control the distribution of goods in Australia through its own distribution channels by relying on copyright in a label or packaging of the goods. For example, in RA & A Bailey & Co Ltd v Boccaccio Pty Ltd (1986) 4 NSWLR 701, the overseas manufacturer of the liqueur “Bailey’s Original Irish Cream” was able to prevent the parallel importation of the liqueur by relying on copyright in the distinctive label on the bottle. However, this practice no longer applies following amendment of the Copyright Act 1968 (Cth). It is now provided that it is not an infringement of copyright in a work (for example, an artistic work), a copy of which is, or is on, or embodied in, a non-infringing accessory (for example, a label) to an article, to import the accessory with the article: s 44C. The definition of “accessory” in s 10(1) is wide and includes labels and packaging and also written instructions, warranties and other information provided with an article and instructional records and films. A “non-infringing accessory” is, in essence, an “accessory” made with the permission of the owner of the

471

472

Introduction to Business Law in Australia

copyright in the accessory material: s 10(1). If the importation of the accessory is not an infringement of copyright in a work, subsequent commercial dealings with the accessory (for example, sale) are also not infringing acts: s 44C(2).

Polo/Lauren Company LP v Ziliani Holdings Pty Ltd [17.540] In Polo/Lauren Company LP v Ziliani Holdings Pty Ltd (2008) 173 FCR 266 the respondent imported into Australia from the United States for the purposes of sale genuine Polo Lauren garments. The garments bore the well-known polo player logo which is a representation of a polo player swinging a mallet while astride a cantering polo pony. The garments had been acquired at various trade fairs in the United States where the previous season’s fashions could be purchased at a substantial discount. The appellant sought to prevent the respondent’s importation and sale of the garments relying on its copyright in the logo as an artistic work. The Full Court of the Federal Court upheld the decision at first instance that the logo was a label incorporated into the surface of the garments and therefore an “accessory” 8 and that, in consequence, the respondent could rely on s 44C of the Copyright Act 1968 (Cth) as a defence to the appellant’s action.

3. Removal of restrictions on parallel importation of computer software [17.550] The Copyright Amendment (Parallel Importation) Act 2003 (Cth) enacted provisions allowing the parallel importation of legitimate computer software including computer games: see Copyright Act 1968 (Cth), s 44E.

4. Removal of restrictions on parallel importation of certain electronic items [17.560] The Copyright Amendment (Parallel Importation) Act 2003 (Cth), referred to in the previous section, removes the restrictions on the parallel importation of non-infringing copies of an “electronic literary or musical item”. The latter phrase is defined (in s 10) to mean a book, a periodical publication or sheet music in electronic form. As will be discussed at [17.1010], the former restrictions on the parallel importation of sound recordings (for example, CDs) have been removed in recent years.

Sale [17.570] Copyright in a work is infringed by a person who sells or hires an article in Australia if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement: Copyright Act 1968 (Cth), s 38. Accordingly, if a retailer sells articles in which copyright subsists knowing that the articles are pirate copies, or that their importation into Australia infringed copyright, the retailer will be liable for infringement of copyright in selling the infringing articles.

Proof of knowledge [17.580] The provisions as to importation and sale outlined at [17.480] and [17.580] require proof of knowledge on the part of the defendant, that is, that the defendant knew, or ought reasonably to have 8

The Copyright Act 1968 (Cth), s 10(1) provides: “accessory, in relation to an article, means one or more of the following: (a) a label affixed to, displayed on, incorporated into the surface of, or accompanying, the article” (emphasis added).

chapter 17 Intellectual Property

known, of the necessary facts which would suggest a breach of copyright was being committed: Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88.

Statutory defences to an action for infringement [17.590] The Copyright Act 1968 (Cth) contains a number of statutory defences that are available to a defendant who would otherwise be liable for infringement of copyright.

Fair dealing [17.600] The most important statutory defence is that of fair dealing for certain specific purposes. The Copyright Act 1968 (Cth) provides that a fair dealing with a literary, dramatic, musical or artistic work does not constitute an infringement of copyright where the fair dealing was for the purpose of: (a)

research or study (s 40);

(b)

criticism or review (s 41);

(c)

parody or satire (s 41A);

(d)

the reporting of news (s 42); or

(e)

the giving of professional advice by a legal practitioner, patent attorney or trade marks attorney: s 43(2).

The expression “fair dealing” is not defined by the Copyright Act 1968 (except in relation to copying a work for the purpose of research or study (see [17.660])) and, accordingly, the question of what constitutes a fair dealing requires a careful assessment of the nature and extent of the use of the work in the circumstances of each case.

Hubbard v Vosper [17.610] In Hubbard v Vosper [1972] 2 QB 84, the defendant’s book, entitled the Mindbenders, was highly critical of the cult of Scientology. The book contained substantial extracts from the plaintiff’s writings on the subject. The United Kingdom Court of Appeal held that the defence of fair dealing for the purpose of criticism or review had been made out on the particular facts.

Meaning of “fair dealing” [17.620] On the meaning of fair dealing Lord Denning MR said in Hubbard v Vosper [1972] 2 QB 84 at 94: “It is impossible to define what is ‘fair dealing’. It must be a question of degree. You must consider first the number and extent of the quotations and extracts. Are they altogether too many and too long to be fair? Then you must consider the use made of them. If they are used as a basis for comment, criticism or review, that may be fair dealing. If they are used to convey the same information as the author for a rival purpose, that may be unfair. Next, you must consider the proportions. To take long extracts and attach short comments may be unfair. But, short extracts and long comments may be fair. Other considerations may come to mind also. But, after all is said and done, it must be a matter of impression.”

473

474

Introduction to Business Law in Australia

Commonwealth v John Fairfax & Sons Ltd [17.630] In Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39 an interlocutory injunction was sought to restrain the intended publication by certain newspapers of extracts from a book containing classified government documents concerning Australian foreign policy. The defence of fair dealing was rejected by the High Court since it was clear that the primary intention was publication of the documents themselves, rather than the publication of extracts for the purpose of criticism or review, or the reporting of news.

De Garis v Neville Jeffress Pidler Pty Ltd [17.640] In De Garis v Neville Jeffress Pidler Pty Ltd (1990) 37 FCR 99 it was held that to photocopy articles from newspapers for distribution to subscribers as part of a press-clipping and news monitoring service did not constitute a fair dealing with the material copied for the purposes of research or study, criticism or review, or for the reporting of news and therefore constituted an infringement of the copyright of those who had written the articles.

Fair dealing – copying for research or study [17.650] The Copyright Act 1968 (Cth) sets out certain criteria to be taken into account in determining whether the copying of a literary, dramatic, musical or artistic work constitutes a fair dealing for the purpose of research or study. These include the purpose and character of the dealing; the nature of the work or adaptation; the possibility of obtaining the work or adaptation within a reasonable time at an ordinary commercial price; the effect of the dealing upon the potential market for, or value of, the work or adaptation; and where part only of the work or adaptation is copied, the amount and substantiality of the part copied in relation to the whole: s 40(2). Reproduction for research or study of all or part of an article in a periodical publication is taken to be a fair dealing (s 40(3)); this does not apply if another article in the publication is reproduced for different research or a different course of study: s 40(4). Further, reproduction for research or study of not more than a “reasonable portion” of a work is taken to be a fair dealing: “reasonable portion” is 10 per cent of a published edition of a work (except a computer program) provided it is not less than 10 pages, or one chapter of the work: ss 40(5) and 10(2). The reproduction of part of a literary or dramatic work in electronic form will be taken to contain only a reasonable portion of the work if the number of words copied does not exceed 10 per cent of the number of words in the work or if the work is divided into chapters, a single chapter of the work: s 40(5) and s 10(2A).

Educational copying of broadcast programs [17.660] The Copyright Act 1968 (Cth), Pt VA (ss 135A – 135ZA) provides a statutory licence scheme for educational institutions to copy off-air television and radio broadcasts. The scheme allows a participating institution to copy for educational purposes any program without infringing the broadcasting copyright, or the copyright in any subject matter included in the broadcast, provided the institution complies with certain requirements including the payment of equitable remuneration to the copyright owners. Copyright owners exercise their rights through a single collecting society approved by the Attorney-General.

chapter 17 Intellectual Property

Educational photocopying [17.670] The Copyright Act 1968 (Cth), Pt VB (ss 135ZB – 135ZZH) provides for the photocopying of works for educational purposes subject to a number of limitations and compliance with certain formalities.

Format-shifting [17.680] The Copyright Act 1968 (Cth) (following amendment by the Copyright Amendment Act 2006 (Cth)) permits a person who has purchased a legitimate copy of some categories of copyright material to make a copy in a different format. The format-shifting provisions apply to four categories of copyright material and provide that it is permissible to copy, without infringing copyright: (a)

the content of a book, newspaper or periodical into another format (for example, this allows a person to scan an article from a newspaper they have purchased to save on their computer) (s 43C);

(b)

a photograph from hardcopy into electronic format, or from electronic format into hardcopy form (47J);

(c)

a sound recording from a CD, tape or record to any other format (for example, this allows a person to store their personal music collection recorded on CDs, audio tapes or vinyl records in the memory of an MP3 player or home entertainment personal computer) (s 109A); and

(d)

a film from video to electronic format: s 110AA.

The provisions allowing format shifting referred to above are subject to a number of conditions: (a)

a person is only able to copy for their own “private and domestic use”;

(b)

a person can only copy from a legitimately purchased or owned original, that is, it is not permissible to copy from a borrowed or pirated copy;

(c)

the provisions do not apply if a copy is sold, let for hire, offered for sale or hire, or distributed for trade or other purposes, or if the owner of the original item disposes of it to another person;

(d)

the copy may be lent to a member of the lender’s family or household for the member’s private and domestic use; and

(e)

a person can only make one copy in any given format.

Other statutory exceptions to infringement [17.690] The Copyright Act 1968 (Cth) contains other provisions delineating acts that do not constitute an infringement of copyright. These include: (a)

performance in the course of educational instruction (s 28);

(b)

performance of works on for example, a radio or television set, at premises where persons reside or sleep (s 46);

(c)

public reading or recitation of literary or dramatic works (s 45); and

(d)

the making of a painting, drawing or photograph or inclusion in a film or television broadcast of a sculpture situated in a public place or of a building: ss 65 – 67.

Copying Acts of Parliament or judgments [17.700] The Copyright Act 1968 (Cth) provides that it is not an infringement of copyright, or any prerogative right or privilege of the Crown, for an individual to make one copy for herself or himself or another of certain prescribed works by reprographic reproduction: s 182A. These works include the whole or part of a federal, State or Territory Act, or a judgment, order or award of a court or tribunal.

475

476

Introduction to Business Law in Australia

Copyright in a literary, dramatic, musical or artistic work is not infringed by anything done for the purposes of a judicial proceeding or of a report of a judicial proceeding: s 43(1).

Statutory licences and the manufacture of records of musical works [17.710] The Copyright Act 1968 (Cth) contains provisions for the grant of statutory licences for the manufacture of recordings of musical works: the relevant provisions are to be found in ss 54 – 64 and s 215 and in the Copyright Regulations 1969 (Cth). The royalty payable in respect of a record is the amount agreed between the manufacturer and the owner of copyright in the work or, if the parties cannot agree, the amount determined by the Copyright Tribunal of Australia or, if there is no agreement or Tribunal determination, the royalty is 6.25 per cent of the retail selling price of the record: Copyright Act 1968 (Cth), s 55. The statutory licence only permits the making of records of musical works (and associated lyrics): it does not permit the copying of sound recordings of musical works made in or imported into Australia.

Duration of copyright in works Literary, dramatic and musical works [17.720] The general rule is that copyright in a literary, dramatic or musical work subsists for 70 years after the end of the calendar year in which the author died: Copyright Act 1968 (Cth), s 33(2). However, if, before the death of the author, the work or an adaptation of it has not been published, performed in public, broadcast, or offered for sale to the public in the form of records, any copyright subsisting in the work will continue to subsist for 70 years after the end of the calendar year in which one of those events happens for the first time: s 33(3).

Artistic works [17.730] Copyright in artistic works subsists for 70 years after the end of the calendar year in which the author died: Copyright Act 1968 (Cth), s 33(2). The term of copyright in engravings published during the life of the author is the same as for other artistic works, that is, the life of the author plus 70 years. However, if the engraving has not been published before the death of the author, then copyright continues to subsist in it for 70 years after the end of the calendar year in which the engraving is first published: s 33(5).

Works of joint authorship [17.740] In the case of works of joint authorship, insofar as the duration of copyright is dependent on the life of the author, the period of protection runs from the death of the last surviving joint author: Copyright Act 1968 (Cth), s 80. The Act contains special provisions where a work of joint authorship is first published under two or more names of which one or more (but not all) are pseudonyms: see s 81.

Copyright in subject matter other than works [17.750] While Pt III of the Copyright Act 1968 (Cth) deals with copyright in original works, Pt IV concerns copyright in subject matter other than works, that is: (a)

sound recordings (including CDs, tapes and records);

(b)

cinematograph films (including movies);

chapter 17 Intellectual Property

(c)

television and sound broadcasts; and

(d)

published editions of works (that is, the typographical arrangement of a work).

Part IV contains provisions dealing with the subsistence, ownership and duration of copyright in respect of each of the categories referred to above. The nature of the exclusive rights in each of those categories is also set out separately as discussed below. Copyright is infringed by a person who, not being the owner of the copyright (and without the licence of the owner), does or authorises the doing in Australia of any act comprised in the copyright: s 101(1). In determining the issue of authorisation, the matters to be taken into account include: (a)

the extent (if any) of the person’s power to prevent the doing of the act concerned;

(b)

the nature of any relationship existing between the person and the person who did the act concerned;

(c)

whether the person took any reasonable steps to prevent or avoid the doing of the act, including whether the person complied with any relevant industry codes of practice: s 101(1A).

The High Court held in Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42 that the respondent internet service provider (ISP) was not liable for authorising infringements of copyright by its customers using its facilities to make the appellants’ films available online to be downloaded by others through the use of the BitTorrent peer-to-peer file-sharing system. The ISP had no power to prevent the infringements and could take no reasonable steps to prevent or avoid the infringements (see further, [19.1010]–[19.1020]). Copyright in Pt IV subject matter (sound recordings, cinematograph films, television and sound broadcasts and published editions of works) is in addition to, and independent of, any copyright subsisting in a work (for example, a literary or musical work under Pt III) embodied in the sound recording, film, broadcast or edition: s 113(1). Each of the categories of subject matter in which copyright may subsist by virtue of Pt IV is discussed in turn.

1. Sound recordings [17.760] A sound recording as defined by the Copyright Act 1968 (Cth) (s 10) includes, for example, CDs and tapes of music.

Subsistence of copyright [17.770] Copyright subsists in a sound recording provided one of the following factors exists (Copyright Act 1968 (Cth), s 89): (a)

the maker was a qualified person at the time when the recording was made;

(b)

the recording was made in Australia; or

(c)

the first publication of the recording took place in Australia (or in a country to which the Act applies).

Qualified person means an Australian citizen, an Australian protected person, a person resident in Australia, or a body corporate incorporated under a law of the Commonwealth or of a State: s 84. A sound recording is deemed to have been published if, but only if, records embodying the recording or a part of the recording have been supplied (whether by sale or otherwise) to the public: s 29(1)(c).

Exclusive rights [17.780] Copyright in a sound recording is the exclusive right to: (a)

make a copy of the sound recording;

477

478

Introduction to Business Law in Australia

(b)

cause the recording to be heard in public;

(c)

communicate the recording to the public; and

(d)

enter into a commercial rental arrangement in respect of the recording: Copyright Act 1968 (Cth), s 85(1).

The exclusive right to communicate the recording to the public replaces and extends the former exclusive right to broadcast the recording: as to the meaning of “communicate” and “to the public”, see [17.950]. It will be observed that the owner of copyright in a sound recording has an exclusive right to enter into a “commercial rental arrangement”, that is, to rent out the CD for instance. As to the meaning of “commercial rental arrangement”, see [17.430].

Ownership of copyright [17.790] The maker of a sound recording is the owner of copyright in the recording: Copyright Act 1968 (Cth), s 97(2). However, where the maker of the sound recording made it under contract for some other person, then the latter (that is, the party commissioning the making of the recording) is the owner of the copyright in the absence of any agreement to the contrary: s 97(3).

Statutory licences [17.800] The Copyright Act 1968 (Cth) provides for statutory licences to play sound recordings in public and to broadcast them: ss 108, 109. For example, it is not an infringement of copyright in a published sound recording for a person to cause it to be heard in public, or to broadcast it, if the required royalties are paid and the recording has been published in Australia; the royalty is such amount as the parties agree upon or, in default of agreement, the amount determined by the Copyright Tribunal of Australia (ss 108, 151; ss 109, 152): see Reference by Australasian Performing Right Assoc Ltd; Re Australian Broadcasting Corp (1985) 5 IPR 449.

Exception to infringement: format-shifting [17.810] The Copyright Act 1968 (Cth), s 109A permits the owner of a sound recording, for example a CD, to make a copy of the recording for private and domestic use in a different format, for example on an MP3, subject to certain conditions: see [17.690].

Duration of copyright [17.820] Copyright subsists in a sound recording for 70 years after the end of the calendar year in which the recording is first published: Copyright Act 1968 (Cth), s 93.

2. Cinematograph films [17.830] The Copyright Act 1968 (Cth) defines a cinematograph film as meaning the aggregate of the visual images embodied in an article or thing so as to be capable by the use of that article or thing of being shown as a moving picture, and includes the aggregate of the sounds embodied in a soundtrack associated with such visual images: s 10.

chapter 17 Intellectual Property

Galaxy Electronics Pty Ltd v Sega Enterprises Ltd [17.840] Galaxy Electronics Pty Ltd v Sega Enterprises Ltd (1997) 75 FCR 8. A computer video game has been held to be a cinematograph film notwithstanding that the game’s visual images were created by a computer running a computer program.

Subsistence of copyright [17.850] Copyright subsists in a cinematograph film if either: (a)

the maker was a qualified person for the whole or a substantial part of the period during which the film was made;

(b)

the film was made in Australia; or

(c)

the first publication of the film took place in Australia: Copyright Act 1968 (Cth), s 90 (for the meaning of “qualified person”, see [17.780]).

A cinematograph film is deemed to have been published if copies of the film have been sold, let on hire, or offered or exposed for sale or hire to the public: s 29(1)(b).

Exclusive rights [17.860] Copyright in a cinematograph film is the exclusive right: (a)

to make a copy of the film;

(b)

to cause the film to be seen or heard in public; and

(c)

to communicate the film to the public.

The exclusive right to communicate the film to the public replaces and extends the former exclusive right to broadcast the film. As to the meaning of “communicate” and “to the public”, see [17.410].

Ownership of copyright [17.870] The owner of the copyright in a cinematograph film is the maker of the film: Copyright Act 1968 (Cth), s 98(2). The maker of a film is the person who does the things necessary for the production of the first copy of the film: s 22(4). However, where the maker of the film has made it under contract for some other person, then the latter (that is, the party commissioning the making of the film) is the copyright owner in the absence of any agreement to the contrary: s 98(3).

Exception to infringement: format-shifting [17.880] The Copyright Act 1968 (Cth), s 110AA permits the owner of a videotape embodying a cinematograph film to make a copy of the film in electronic form for his or her private and domestic use subject to certain conditions: see [17.690].

Duration of copyright [17.890] Where copyright subsists in a cinematograph film under the Copyright Act 1968 (Cth) it continues to subsist until the film is published, and thereafter for 70 years after the end of the calendar year in which the film is first published: s 94(1).

3. Television and sound broadcasts [17.900] The Copyright Act 1968 (Cth) defines television broadcast as meaning visual images broadcast by way of television, together with any sounds broadcast for reception along with those images: s 10. A

479

480

Introduction to Business Law in Australia

sound broadcast means sounds broadcast otherwise than as part of a television broadcast. A broadcast is a communication to the public delivered by a broadcasting service within the meaning of the Broadcasting Services Act 1992 (Cth).

Subsistence of copyright [17.910] Copyright subsists in a television broadcast or a sound broadcast made from a place in Australia: (a)

under the authority of a licence under the Broadcasting Services Act 1992 (Cth); or

(b)

by the Australian Broadcasting Corporation (ABC) or the Special Broadcasting Service Corporation (SBS): Copyright Act 1968 (Cth), s 91.

Exclusive rights [17.920] Copyright in relation to a television broadcast or sound broadcast is the exclusive right: (a)

in the case of a television broadcast insofar as it consists of visual images, to make a cinematograph film of the broadcast, or a copy of such a film;

(b)

in the case of a sound broadcast or television broadcast, so far as it consists of sounds, to make a sound recording of the broadcast, or a copy of such a sound recording; and

(c)

in the case of a television or sound broadcast, to rebroadcast it or otherwise communicate it to the public: Copyright Act 1968 (Cth), s 87.

TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) [17.930] In TCN Channel Nine Pty Ltd v Network Ten Pty Ltd (No 2) (2005) 145 FCR 35 Network Ten used excerpts from Channel Nine programs as part of its satirical program, The Panel. The excerpts ranged from eight seconds to 42 seconds in duration. The Full Federal Court held that Network Ten, by making a video tape (that is, cinematograph film) of the excerpts (see Copyright Act 1968 (Cth), s 87(a) at [17.930]) and rebroadcasting them (see s 87(c) at [17.930]), had infringed copyright in Channel Nine’s television broadcasts from which the excerpts were extracted. The High Court (by a majority of 3:2) allowed Channel Ten’s appeal. In doing so, the High Court rejected the Full Court’s decision that each visual image capable of being observed as a separate image on a television screen and accompanying sounds is “a television broadcast” in which copyright subsists. The High Court held “a television broadcast” comprised a television program identified by a title such as The Today Show, Wide World of Sports etc. The issue therefore was whether the excerpts broadcast by Channel Ten constituted a substantial part of the Channel Nine programs for the purposes of s 14(1) and the case was remitted back to the Full Federal Court to be decided on the basis of the High Court’s decision: Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273. In later proceedings, the Full Federal Court emphasised that substantiality involves a question of quality and not primarily quantity. The majority held that a substantial part of six of the eleven programs was copied by re-broadcasting extracts that were material, important, central or which were highlights. However, the extracts of five of the programs were held not to be substantial because they were insignificant in the context of the program.

chapter 17 Intellectual Property

Meaning of “communicate” and “to the public” [17.940] As to the meaning of “communicate” and “to the public”, in relation to the exclusive right to communicate the broadcast to the public in (c) at [17.930], see [17.410].

Ownership of copyright [17.950] The maker of a television or sound broadcast is the owner of any copyright subsisting in the broadcast: Copyright Act 1968 (Cth), s 99. A broadcast is taken to have been made by the person who provided the broadcasting service by which the broadcast was delivered: s 22(5).

Exception to infringement: time-shifting [17.960] The Copyright Act 1968 (Cth), s 111 (following amendment by the Copyright Amendment Act 2006 (Cth)) permits “time-shifting”, that is, the recording of broadcasts for replaying at a more convenient time than when the broadcast is made. More specifically, it is not an infringement of copyright to make a cinematograph film or sound recording of a broadcast solely for private or domestic use by watching or listening to the broadcast at a more convenient time: s 111(1). The making of the film or recording does not infringe copyright either in the broadcast itself or in any work or other subject matter included in the broadcast: s 111(2). If a copy is sold, let for hire, offered for sale or hire, or distributed for trade or other purposes then the recording becomes an infringing copy: s 111(3). The person making the recording may lend it to a member of their family or household for the member’s private and domestic use: s 111(4). The Full Federal Court held that the provision did not apply to an electronic subscription service provided by Optus which allowed its customers to play back television broadcasts of football matches at a later time on their mobile devices or personal computers: National Rugby League Investments Pty Ltd v Singtel Optus Pty Ltd (2012) 201 FCR 147; see further, [19.990]–[19.1000].

Duration of copyright [17.970] Copyright in a television or sound broadcast subsists until the expiration of 50 years after the end of the calendar year in which the broadcast was made: Copyright Act 1968 (Cth), s 95(1).

4. Published editions [17.980] The Copyright Act 1968 (Cth) provides for copyright in a new published edition of a literary, dramatic, musical or artistic work: s 92. Thus, copyright subsists in the typographical arrangement of the printed pages separate from any copyright that may subsist in the material published. Copyright subsists in a published edition of a work where the first publication of the edition took place in Australia, or the publisher of the edition was a qualified person at the date of the first publication of the edition (as to the meaning of “qualified person”, see [17.780]). An edition of a work is deemed to have been published if reproductions of the edition have been supplied (whether by sale or otherwise) to the public: s 29(1). Copyright in a published edition of a literary, dramatic, musical or artistic work is the exclusive right to make a facsimile copy of the edition: s 88. The owner of the copyright is the publisher of the edition: s 100. Copyright in a published edition of a work subsists for 25 years after the end of the year in which the edition was first published: s 96.

Importation and sale [17.990] Part IV (ss 102, 103) of the Copyright Act 1968 (Cth) contains analogous provisions to those found in Pt III (ss 37, 38, [17.470]) under which it is an infringement of copyright for a person to import an article into Australia for sale or hire if it would have been an infringement of copyright for the importer to

481

482

Introduction to Business Law in Australia

have made the article in Australia and the importer knew, or ought reasonably to have known, this: s 102. Similarly, it is an infringement for a person to sell or hire an article if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement: s 103. The importation and sale provisions can be used to prevent the sale of pirate copies of CDs, tapes and videos, provided the requisite knowledge on the part of the retailer that they were infringing copies can be shown: Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88. Furthermore, importers are strictly liable for the importation of goods with, for example, pirate labelling or packaging: s 102(2).

Removal of the restrictions on the parallel importation of sound recordings [17.1000] Formerly, ss 102 and 103 of the Copyright Act 1968 (Cth) were frequently used by the overseas owners of the Australian copyright in CDs and tapes to prevent their importation other than through authorised Australian distributors. However, the use of the importation and sale provisions in ss 102 and 103 to prevent the parallel importation of genuine copies of CDs and tapes from overseas has been effectively removed. It is now provided that it is not an infringement of copyright in a work (that is, a musical, dramatic or literary work) recorded in a sound recording (including CDs and tapes), nor is it an infringement of copyright in the sound recording itself, to import a non-infringing copy of the sound recording into Australia and to deal commercially with that copy: ss 44D and 112D. It is important to observe that the provisions permitting the parallel importation of sound recordings only apply to legitimate (as distinct from pirate) sound recordings, referred to in the Act as a “non-infringing copy” as defined in s 10AA. Further, if the importation of a sound recording is challenged, the onus is on the importer or seller to establish that it is genuine: s 130A.

Statutory defences Fair dealing [17.1010] Originally, the defence of fair dealing was only applicable in respect of works, that is, literary, dramatic, musical and artistic works. However, it is now provided that a fair dealing with an “audio-visual item” (that is, a sound recording, a cinematograph film, and a sound or television broadcast (Copyright Act 1968 (Cth), s 100A)), does not constitute an infringement of the copyright in the item, or in any work or other audio-visual item included in the item, if it is for one of the following purposes: (a)

criticism or review – provided a sufficient acknowledgment of the work is made (s 103A);

(b)

parody or satire (s 103AA);

(c)

the reporting of news – either in a newspaper, magazine or similar periodical (with acknowledgment), or by means of a communication or in a cinematograph film (s 103B); or

(d)

research or study: s 103C.

In determining whether a dealing with an audio-visual item constitutes a fair dealing for the purpose of research or study, regard is to be had to a number of matters including: (a)

the purpose and character of the dealing;

(b)

the nature of the audio-visual item;

chapter 17 Intellectual Property

(c)

the possibility of obtaining the audio-visual item within a reasonable time at an ordinary commercial price;

(d)

the effect of the dealing on the potential market for, or value of, the audio-visual item; and

(e)

where only a part of the audio-visual item is copied, the amount and substantiality of the part copied in relation to the whole item.

Acts done for purposes of judicial proceedings [17.1020] Copyright subsisting by virtue of Pt IV of the Copyright Act 1968 (Cth), that is, in sound recordings, cinematograph films, television and sound broadcasts, and published editions of works, is not infringed by anything done: (a)

for the purposes of a judicial proceeding or a report of a judicial proceeding;

(b)

for the purpose of seeking professional advice from, or the giving of professional advice by, a legal practitioner, patent attorney or trade marks attorney: s 104.

Assignments and licences [17.1030] Copyright can be dealt with in the same way as other forms of personal property. It can be assigned, included in a will or passed on according to the laws relating to intestacy: Copyright Act 1968 (Cth), s 196(1).

Assignments [17.1040] An assignment must be in writing and signed by or on behalf of the assignor, that is, the copyright owner, in order to be effective against third parties: Copyright Act 1968 (Cth), s 196(3). Partial assignments are generally permissible: thus, an assignment may be limited to one or more of the exclusive rights comprised in the copyright, or to rights not separately specified in the Act as being comprised in the copyright (for example, serial rights) but which fall within one of the classes of acts which the copyright owner is given the exclusive right to do (for example, to reproduce the work in a material form). Further, the assignment may be limited as to time or geographical area: s 196(2). Consequently, there may be a number of legal owners entitled to copyright according to their respective interests, independently of the other owners: s 30. Each legal owner has a right to sue, for example, for damages to compensate for breach of copyright according to the nature of their interest.

Licences [17.1050] A licence is to be distinguished from an assignment. In the case of an assignment there is a transfer of copyright to the assignee that vests the copyright in the assignee, whereas a licence authorises the licensee to do an act that without the licence would constitute an infringement of copyright. A licence is as effective and enforceable against successors in title of the grantor of the licence as it was against the grantor: Copyright Act 1968 (Cth), s 196(4). A licence may be exclusive or non-exclusive.

Exclusive licence [17.1060] An exclusive licence must be in writing, signed by or on behalf of the owner or prospective owner of the copyright, authorising the licensee to the exclusion of all other persons (including the grantor) to do an act that the owner of the copyright would have the exclusive right to do but for the licence: see definition of “exclusive licence” in Copyright Act 1968 (Cth), s 10, and Young v Odeon Music House Pty Ltd (1976) 10 ALR 153.

483

484

Introduction to Business Law in Australia

The Copyright Act 1968 gives the exclusive licensee a right of action concurrent with that of the owner of the copyright in relation to the remedies of injunction, damages or account of profits provided by s 115, and an exclusive right of action for conversion or detention provided by s 116 in respect of infringing copies: s 119; see also ss 120 – 125. On the remedies for infringement generally, see [17.1110].

Implied licences [17.1070] A licence that is not exclusive may be oral or implied by conduct or the custom of the trade, since only an exclusive licence must be in writing. For example, where an author is engaged for a fee to prepare a particular work which would of its nature be reproduced, there is an implied permission or consent by the author for use of the work in the manner and for the purpose contemplated between the parties at the time of the engagement: Beck v Montana Constructions Pty Ltd [1964] NSWR 229. In that case, it was held that payment by the owner of land for an architect’s sketch plans included implied permission or consent to use the plans for the purpose of building a structure on the land in substantial accordance with the plans and the right to transfer them to the new owner of the land. This principle appears to have been accepted by the High Court in Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577, at least in circumstances where the architect is paid a professional fee to prepare the plans and drawings. However, such implied licence may be excluded either by an express provision of the contract or if it is inconsistent with the terms of the contract: Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 37 IPR 477:

Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd [17.1080] In Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 37 IPR 477 an engineer prepared plans for a client for the construction of a building. The contract provided that a licence to use the plans was granted to the client only and prohibited assignment of the benefit of the contract without the consent in writing of the engineer. The client, who was in financial difficulty and had not paid for the plans, sold the building site to a developer who used the engineer’s plans to construct the building. It was held by the Full Federal Court that any term which otherwise might be implied in the contract between the engineer and the client was superseded or supplanted by the terms of the contract. Accordingly, the use of the plans by the developer to construct the building constituted an infringement of the engineer’s copyright in the plans.

Transfer of future copyright [17.1090] A future copyright is also transferable either wholly or partially. Where an agreement is made assigning a copyright not yet in existence (for example, in a contract by an author with a publisher to write a book), the copyright vests in the assignee (for example, the publisher) when it comes into existence: Copyright Act 1968 (Cth), s 197(1).

Remedies for infringement of copyright [17.1100] The civil remedies available for infringement of copyright are: (a)

an injunction;

(b)

damages;

(c)

an account of profits;

chapter 17 Intellectual Property

(d)

additional damages;

(e)

damages for conversion; and

(f)

delivery up of infringing copies or plates used for making such copies: Copyright Act 1968 (Cth), ss 115, 116.

Injunction [17.1110] The Copyright Act 1968 (Cth) provides that a court may grant an injunction for infringement of copyright subject to such terms, if any, as the court thinks fit. The court may grant either an interlocutory or final injunction to restrain the infringement or threatened infringement. To obtain a final injunction the plaintiff must prove an infringement which is likely to continue or a strong case of threatened infringement, and at least a probability of damage, although actual damage need not be proved: Sydney Organising Committee for the Olympic Games v Clarke (1998) 41 IPR 403. An interlocutory injunction is an injunction granted before the trial of the action to ensure that the specified acts do not take place pending the trial and the final determination of the rights of the parties. In determining whether to grant an interlocutory injunction, the court must first inquire whether there is a serious question to be tried and then consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief being sought: Hinchliff v Abu-Dabat (1998) 41 IPR 400. What is meant by balance of convenience in this context is whether the inconvenience or injury that the plaintiff would be likely to suffer if an injunction was refused, outweighs or is outweighed by the injury which the defendant would suffer if an injunction was granted.

Damages [17.1120] In an action for infringement of copyright the court may grant either damages or an account of profits: Copyright Act 1968 (Cth), s 115(2). These remedies are alternative not cumulative. Accordingly, if a plaintiff elects to seek damages for infringement, they cannot obtain relief by way of an account of profits and vice versa. In appropriate cases, the measure of damages may be assessed as the price the infringer would have had to pay had they obtained a licence or permission to use the work.

Caj Amadio Constructions Pty Ltd v Kitchen [17.1130] In Caj Amadio Constructions Pty Ltd v Kitchen (1991) 23 IPR 284, the appellant project builder was awarded $3,000 against the respondents, a husband and wife, who had used the appellants’ floor plan with some slight modifications to have a house built for them by another builder since they regarded the appellant builder’s price for building the house as too high. The damages were assessed on the basis of what would be the appropriate licence fee for the user of the plans in question; see similarly, Tolmark Homes Pty Ltd v Paul (1999) 46 IPR 321.

485

486

Introduction to Business Law in Australia

The “innocent infringer” defence [17.1140] Where in an action for infringement of copyright it is established that an infringement was committed but it is also established that at the time of the infringement the defendant was not aware, and had no reasonable grounds for suspecting, that the act constituting infringement was an infringement, the plaintiff cannot recover damages for the infringement although he or she is entitled to an account of profits: Copyright Act 1968 (Cth), s 115(3).

Kiama Constructions v MC Casella Building Co Pty Ltd [17.1150] In Kiama Constructions v MC Casella Building Co Pty Ltd (1980) 10 IPR 345 the plaintiff builder had given a couple a plan for building a house on land which they owned. The couple made a pencil sketch of the plan which they showed the first defendant, another builder. The defendant builder suggested that a draftsman prepare a more detailed plan which was done and the house was built by the first defendant builder. It was held that the pencil sketch made by the couple, the plans drawn up by the draftsman, and the house built by the defendant builder all infringed copyright in the plaintiff builder’s plan. However, it was further held that the defendant builder was not liable for damages for infringement because he was unaware of the plaintiff’s copyright in the plan and hence was able to make out the “innocent infringer” defence. Accordingly, only the couple were liable for infringement of the plaintiff’s copyright; see also, Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479.

Account of profits [17.1160] A court may order an account of profits in an action for infringement of copyright: Copyright Act 1968 (Cth), s 115(2). An account of profits is an equitable remedy and, accordingly, the court has a discretion whether to order an account. The purpose of the remedy is not to punish the infringer but to prevent unjust enrichment. An account of profits may be awarded even if the infringer was unaware and had no reasonable grounds for suspecting there was an infringement of copyright: s 115(3). In quantifying an account of profits, it is only those profits that can be attributed to the infringing use that will be awarded. Accordingly, without any evidence to demonstrate the profits actually made attributable to the infringing use, an account of profits will not be awarded: Facton Ltd v Toast Sales Group Pty Ltd (2012) 205 FCR 378. Where an order for an account of profits is made, the applicant is entitled to recover a sum which represents that proportion of the respondent’s profit which was fairly attributable to the infringement of the applicant’s copyright: Robert J Zupanovich Pty Ltd v B & N Beale Nominees Pty Ltd (1995) 59 FCR 49.

LED Builders Pty Ltd v Eagle Homes Pty Ltd [17.1170] In LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24 the plaintiff company was a project home builder. It successfully argued that the building plans for some 90 houses built by the defendant company, which was also a project home builder, infringed copyright in nine of the plaintiff’s floor plans.

chapter 17 Intellectual Property

It was held that the plaintiff company was entitled to 35 per cent of the defendant company’s profits as the amount calculated as being derived by the defendant as a result of its infringement of the plaintiff’s copyright. This figure was based on the plaintiff being entitled to the proportion of the defendant’s building profit that fairly reflected the extent to which the infringing plans (as opposed to other factors) induced the defendant’s customers to contract with the defendant.

Additional damages [17.1180] Where an infringement of copyright is established, the Copyright Act 1968 (Cth) gives a court power to award additional damages where it is satisfied that it is appropriate to do so having regard to: (a)

the flagrancy of the infringement;

(b)

the need to deter similar infringements of copyright;

(c)

the conduct of the defendant after the act constituting the infringement or, if relevant, after the defendant was informed that the defendant had allegedly infringed the plaintiff’s copyright;

(d)

whether the infringement involved the conversion of a work or other subject-matter from hardcopy or analogue form into a digital or other electronic machine-readable form;

(e)

any benefit shown to have accrued to the defendant by reason of the infringement; and

(f)

all other relevant matters: s 115(4).

Autodesk Australia Pty Ltd v Cheung [17.1190] Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472: the defendant offered to supply prospective customers with an unauthorised copy of the plaintiff’s computer program as an inducement for them to purchase a personal computer from him. The plaintiff owner of the copyright was awarded $15,000 compensatory damages for the defendant’s infringement of copyright in the computer program, and a further $35,000 additional damages for the flagrancy of the infringement; see similarly, Microsoft Corpn v Ezy Loans Pty Ltd (2004) 63 IPR 54.

Milpurrurru v Indofurn Pty Ltd [17.1200] In Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240 substantial additional damages of $70,000 were awarded for the personal harm caused by the flagrant pirating of Aboriginal cultural heritage on imported carpets which reproduced Aboriginal artworks without authority. This amount was in addition to compensatory and conversion damages and an order for the delivery up of those infringing carpets which had not been sold.

487

488

Introduction to Business Law in Australia

Facton Ltd v Erdogan (No 1) [17.1210] In Facton Ltd v Erdogan (No 1) (2012) 99 IPR 46 the Full Court of the Federal Court awarded additional damages of $200,000 for the blatant infringement of copyright in the artwork panels on reconditioned electronic gaming machines and the computer programs that operated the machines: Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564. The plaintiff collecting society was awarded additional damages of $60,000 against the defendant directors of a Melbourne restaurant in which sound recordings were played without a licence for over five years despite repeated requests to either obtain a licence or cease playing the recordings: Phonographic Performance Company of Australia Ltd v Cattch Pty Ltd (2013) 102 IPR 286. Infringement of copyright by the importation and sale of counterfeit branded clothing resulted in an award of additional damages of $17,000 as well as damages of $8,662.50 for lost sales and $10,000 damages for loss of reputation.

Damages for conversion or detention [17.1220] The owner of copyright in a work or other subject matter (that is, a sound recording, film, broadcast or published edition) has the right to bring an action for conversion or detention in respect of infringing copies and any device used in making them. In such an action the court may grant those remedies that would be available as if the copyright owner had been the owner of the infringing copy since the time the copy was made, or the owner of the device used in making them: Copyright Act 1968 (Cth), s 116(1), (1A). However, the court is not to grant relief in an action for conversion or detention if the relief the court has granted under s 115 (that is, an injunction, damages or an account of profits) is, in the court’s opinion, a sufficient remedy. In deciding whether to grant relief and in assessing the amount of damages payable, the court may have regard to: (a)

the expenses incurred by the defendant in manufacturing or acquiring the infringing copy;

(b)

whether the expenses were incurred before or after the infringing copy was sold or otherwise disposed of by the defendant; and

(c)

any other matter that the court considers relevant.

If the infringing copy is an article of which only part consists of material that infringes copyright, the court, in deciding whether to grant relief and in assessing the amount of damages payable, may also have regard to: (a)

the importance to the market value of the article of the material that infringes the copyright;

(b)

the proportion the material that infringes copyright bears to the article; and

(c)

the extent to which the material that infringes copyright may be separated from the article: s 116(1C) – (1E); see Sony Entertainment (Australia) Ltd v Smith (2005) 64 IPR 18.

chapter 17 Intellectual Property

The “innocent infringer” defence [17.1230] As in the case of a claim for damages for infringement (see [17.1150]), the Copyright Act 1968 (Cth) provides, in essence, that damages cannot be obtained against an innocent defendant in an action for conversion or detention: s 116(2). Under the latter subsection a plaintiff is not entitled to any damages, or to any other pecuniary remedy other than costs, in an action for conversion or detention if it is established that at the time of the conversion or detention: (a)

the defendant was not aware, and had no reasonable grounds for suspecting, that copyright subsisted in the work or other subject matter to which the action relates; or

(b)

the defendant believed, and had reasonable grounds for believing, that the articles converted or detained were not infringing copies (see, for example, Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479); or

(c)

where the article converted or detained was a device used or intended to be used for making articles, the defendant believed, and had reasonable grounds for believing, that the articles so made or intended to be made were not or would not be infringing articles.

Delivery up of infringing copies or plates [17.1240] As indicated in the previous section, a claim may be made by the copyright owner in an action for detinue under s 116(1) of the Copyright Act 1968 (Cth) for the delivery up of infringing copies or plates on the basis that the copyright owner is deemed to be the owner of the copies or plates. Independently of the Copyright Act 1968, the court may order to be delivered up any infringing copies based on the general jurisdiction of the court to order delivery up of all articles which have been created in violation of the plaintiff’s rights: Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240.

Anton Piller orders [17.1250] Australian courts have power to make orders on the application of a plaintiff whereby the defendant is ordered to permit the plaintiff’s solicitors to enter the defendant’s premises for the purpose of searching for and removing into custody infringing copies of works or other subject matter and documents relating to them: Polygram Records Pty Ltd v Monash Records (Aust) Pty Ltd (1985) 10 FCR 332. Such order is of particular value against a recalcitrant defendant. It is commonly referred to as an Anton Piller Order from the name of the English case (Anton Piller KG v Manufacturing Processes Ltd [1976] 1 Ch 55) from which it is derived. However, the power to make such an order will only be exercised in exceptional circumstances: Microsoft Corporation v Goodview Electronics Pty Ltd (1999) 46 IPR 159.

Limitations on the liability of carriage service providers [17.1260] One of the purposes of the Copyright Amendment (Digital Agenda) Act 2000 (Cth) was to clarify the liability of carriage service providers, for example Internet service providers (ISPs), for infringements of copyright committed by third parties while using their facilities. A carriage service provider is not directly liable for an infringement of copyright involved in a communication (that is, making copyright material available online – see [17.410]) where they were not responsible for determining the content of the communication: Copyright Act 1968 (Cth), s 22(6). Furthermore, a carriage service provider is not to be taken to have authorised an infringement of copyright simply by providing facilities which are used to infringe copyright: Copyright Act 1968 (Cth), ss 39B, 112E.

489

490

Introduction to Business Law in Australia

On the matters to be taken into account in determining whether a carriage service provider has authorised an infringement of copyright under Pt IV, see [17.760] and Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42. Following the introduction of Div 2AA (ss 116AA – 116AJ) in the Copyright Act 1968 (Cth) by the US Free Trade Agreement Implementation Act 2004 (Cth), limitations have been placed on the remedies available against carriage service providers who comply with certain conditions on becoming aware of infringing material on the facilities provided by them.

Technological protection measures The anti-circumvention provisions [17.1270] The growth of copyright material in digital form and the ease with which virtually perfect reproductions of such material, legitimate or otherwise, could be made led to copyright owners incorporating various “technological protection measures” (TPMs) in their digital products to prevent copyright material from being copied or accessed. TPMs would commonly include program locks, password protection and encryption mechanisms. However, TPMs could be circumvented by password cracking tools, software decompilation programs and so on. Accordingly, the Copyright Amendment (Digital Agenda) Act 2000 (Cth) introduced civil remedies and criminal sanctions against the manufacture, commercial dealing, making available online and advertising of a circumvention device or service used to circumvent TPMs. The provisions were designed to assist copyright owners in enforcing their rights in the digital environment. The federal government gave undertakings in the Australia–United States Free Trade Agreement 2004 (AUSFTA) to implement a new liability regime for circumventing TPMs. The result was the introduction of wider provisions by the Copyright Amendment Act 2006 (Cth) to fulfil Australia’s obligations under the AUSFTA: Copyright Act 1968 (Cth), ss 116AK – 116AQ. Basically, action may be taken in respect of three types of conduct in relation to technological protection measures. That is, the owner or exclusive licensee of copyright may bring an action against a person who: (a)

does an act that results in the circumvention of an “access control technological protection measure” (s 116AN);

(b)

manufactures, imports, distributes, offers to the public or otherwise provides to another person a “circumvention device” for a “technological protection measure” (s 116AO); or

(c)

provides a “circumvention service” 9 for a technological protection measure: s 116AP.

An “access control technological protection measure” is defined as a device, product technology or component (including a computer program) that in the normal course of its operation “controls access” 10 to the work or other subject matter: s 10(1). A “technological protection measure” is defined as a device, product, technology or component (including a computer program) that in the normal course of its operation prevents, inhibits or restricts the doing of an act comprised in the copyright, or is an “access control technological protection measure”: s 10(1). Excluded from these definitions is a device or other 9

10

A “circumvention device” (in (b) above) and a “circumvention service” (in (c) above) are defined as a device or service which is promoted, advertised or marketed as having the purpose or ability to circumvent a technological protection measure; has no other or only a limited other commercially significant purpose; or is primarily or solely designed to produce or facilitate the circumvention of the technological protection measure: Copyright Act 1968 (Cth), s 10(1). A device, product technology or component (including a computer program) “controls access” if it requires the application of information or a process to gain access to the subject matter: Copyright Act 1968 (Cth), s 10(1).

chapter 17 Intellectual Property

measure which controls geographic market segmentation by preventing the playback in Australia of a non-infringing copy of a cinematograph film or computer program (including a computer game) acquired outside Australia.

Exceptions [17.1280] There are a number of exceptions to the provisions outlined in the previous section. A person is not liable if the action was done: to facilitate interoperability; 11 to enable encryption research; 12 to allow computer security testing; 13 or for the purposes of law enforcement and national security. 14 Further exceptions in relation to an act that results in the circumvention of an “access control technological protection measure” (Copyright Act 1968 (Cth), s 116AN) include: where the circumvention was done with the permission of the copyright owner or exclusive licensee; 15 to provide online privacy; 16 to enable non-profit libraries and archives to make acquisition decisions; 17 and to enable a person to do a prescribed act. 18

Remedies [17.1290] The civil remedies available in actions relating to technological protection measures include an injunction and either damages or an account of profits, and an order that the circumvention device be destroyed or otherwise dealt with. In assessing damages, the court is also empowered to award such additional damages as it considers appropriate having regard to the flagrancy of the defendant’s actions; the need to deter similar acts; any benefit shown to have accrued to the defendant and any other relevant matters: Copyright Act 1968 (Cth), s 116AQ. The defendant’s conduct may also constitute a criminal offence: ss 132APC – 132APE.

Electronic rights management information [17.1300] Civil remedies and criminal offences have been introduced in respect of the intentional removal and alteration of electronic rights management information, or the commercial dealing with copyright material where such information has been removed: Copyright Act 1968 (Cth), ss 116B, 116C. Electronic rights management information is information attached to, or embodied in, a copy of the work or other subject matter that identifies the work or other subject matter, its author or copyright owner; indicates the conditions on which the work may be used; or any numbers or codes that represent such information in electronic form: s 10(1). A copyright owner or their exclusive licensee may bring a civil action against a person who removes or alters any electronic rights management information attached to a copy of a work or other subject matter where such person knew, or ought reasonably to have known, that the removal or alteration would induce, facilitate or conceal an infringement of the copyright in the work or other subject matter. The defendant is presumed to have had the requisite knowledge unless they prove otherwise: s 116B. A copyright owner or an exclusive licensee also has a right of action against a person who distributes, imports or communicates a copy of a work or other subject matter in circumstances where the rights management information has been removed or altered: s 116C. 11 12

Copyright Act 1968 (Cth), ss 116AN(3), 116AO(3), 116AP(3). Copyright Act 1968 (Cth), ss 116AN(4), 116AO(4), 116AP(4).

13

Copyright Act 1968 (Cth), ss 116AN(5), 116AO(5), 116AP(5).

14 15 16

Copyright Act 1968 (Cth), ss 116AN(7), 116AO(6), 116AP(6). Copyright Act 1968 (Cth), s 116AN(2). Copyright Act 1968 (Cth), s 116AN(6).

17

Copyright Act 1968 (Cth), s 116AN(8).

18

Copyright Act 1968 (Cth), s 116AN(9).

491

492

Introduction to Business Law in Australia

Remedies [17.1310] The civil remedies available for actions in relation to rights management information are the same as those discussed at [17.1300] with respect to circumvention devices: Copyright Act 1968 (Cth), s 116D. The defendant’s conduct may also constitute a criminal offence: ss 132AQ – 132AS.

Unauthorised access to encoded broadcasts [17.1320] The Copyright Amendment Act 2006 (Cth) introduced a scheme enabling action to be brought in relation to unauthorised access to encoded broadcasts: Copyright Act 1968 (Cth), Pt VAA, ss 135AL – 135AU. The scheme enables a channel provider or any person with an interest in an encoded broadcast to bring an action against a person who: makes, sells or deals in an unauthorised decoder (s 135AOA); makes a decoder available online (s 135AOB); causes unauthorised access to an encoded broadcast (s 135AOC); or makes unauthorised commercial use of a subscription broadcast: s 135AOD. An “encoded broadcast” is defined as a subscription broadcast or an encrypted broadcast (other than a subscription or radio broadcast) delivered by a commercial broadcasting service or national broadcasting service within the meaning of the Broadcasting Services Act 1992 (Cth): Copyright Act 1968 (Cth), s 135AL. The civil remedies available include an injunction and either damages or an account of profits, and an order that the decoder be destroyed or otherwise dealt with. In assessing damages, the court is also empowered to award such additional damages as it considers appropriate having regard to the flagrancy of the defendant’s actions; the need to deter similar acts; any benefit shown to have accrued to the defendant and any other relevant matters: ss 135AOE, 135AOF. The defendant’s conduct may also constitute a criminal offence: ss 135ASA – 135AU.

Offences General [17.1330] The Copyright Act 1968 (Cth) provides for offences and penalties for certain dealings in infringing copies and devices: Pt V, Div 5, ss 132AA – 132AT. There is a tiered system of copyright criminal offences, namely: indictable, summary and strict liability offences. The main differences between the three levels of offence provisions lie in the degree of fault that must be satisfied and in the penalties. To establish an indictable offence, it is necessary to show that the infringement was either intentional or reckless. Indictable offences have penalties of up to five years’ imprisonment and/or between 550 ($93,500) to 850 ($144,500) penalty units for natural persons. In the case of corporations, the fine is up to five times that for a natural person. Most summary offences require intention and/or negligence with penalties of up to two years’ imprisonment and/or 120 penalty units ($20,400). The strict liability offences do not contain a fault element and are designed to deal with lower level copyright criminal activity such as first-time offenders, street stall or market operators and attract maximum penalties of 60 penalty units ($10,200). Examples of the offence provisions include:  commercial scale infringement prejudicing the copyright owner (Copyright Act 1968 (Cth), s 132AC);  making an infringing copy commercially (s 132AD);  selling or hiring out an infringing copy (s 132AE);  importing an infringing copy commercially (s 132AH);

chapter 17 Intellectual Property

 circumventing an access control technological protection measure (s 132APC); and  removing or altering electronic rights management information: s 132AQ.

Performers' protection [17.1340] The Copyright Act 1968 (Cth) contains provisions dealing with performers’ protection: Pt XIA, ss 248A – 248V. The provisions do not confer on performers copyright in their performances but do provide civil remedies and criminal sanctions for the unauthorised use of a performer’s performance.

Meaning of “performance” [17.1350] Broadly, performers are given civil remedies against those making unauthorised use of their performances. A performance includes any live performance (or improvisation) of a dramatic or musical work, performance of a dance, presentations of literary works, and performances of circus or variety acts. News reading and sporting performances are excluded: Copyright Act 1968 (Cth), s 248A.

What constitutes unauthorised use [17.1360] It is an unauthorised use, giving rise to a claim by the performer, to do the following acts without the authority of the performer: (a)

to record a performance, for example on film, video or audio tape, either directly, that is, from a live performance, or from a broadcast of a live performance; or

(b)

to broadcast or re-broadcast a live performance or an unauthorised recording.

A performer also has a right of action for unauthorised use of a performance against a person who knows, or ought reasonably to know, that a recording is unauthorised and who, inter alia, copies, sells, hires, distributes, exhibits, imports for commercial purposes, is in possession of, or gives a public performance of the unauthorised recording: Copyright Act 1968 (Cth), s 248G.

Remedies for unauthorised use [17.1370] In an action brought by a performer for unauthorised use of their performance, the court may grant an injunction to restrain further unauthorised use, damages and such additional damages as are considered to be appropriate in the circumstances: Copyright Act 1968 (Cth), s 248J.

Effect of consent to use [17.1380] Once a performer has consented to the initial recording of their performance on, for example, cassette, disc, film or video, the performer generally has no legal right to control subsequent uses of that recording. The one exception is that where the performance is recorded on a soundtrack of a film or video, the performer can prevent the recording being used for other purposes. A performer will have no claim in respect of an exempt recording which includes, for example, a recording of a performance made off-air (that is, from a broadcast) for the private and domestic use of the person who made it, scientific research, education, helping the disabled, and a recording of a performance either made live or off-air for the reporting of news, criticism and review, judicial proceedings and legal advice: Copyright Act 1968 (Cth), s 248A.

Duration of protection [17.1390] The general period of protection for a performance is 20 years after the calendar year in which the performance was given (although this period has been extended to 50 years in respect of certain of the

493

494

Introduction to Business Law in Australia

offence provisions referred to at [17.1410]): Copyright Act 1968 (Cth), s 248CA. The provisions apply to all acts done in relation to a performance after the commencement of Pt XIA (that is, 1 October 1989), whether the performance took place before or after the commencement of the Part. The right of a performer to bring an action under the provisions is not assignable.

Offences [17.1400] It is an offence, inter alia, without the authority of the performer to: (a)

make a sound recording or film of a live performance;

(b)

make a film or sound recording of a broadcast of a performance, subject to the exceptions with respect to exempt recordings;

(c)

broadcast or rebroadcast a live or recorded performance; or

(d)

give a public performance of a sound recording or film of a performance known to be an unauthorised recording or film: Copyright Act 1968 (Cth), s 248P.

Additional offences relating to the unauthorised use of a performer’s performance include: copying a recording known to be unauthorised; selling, hiring, or by way of trade offering for sale or hire a recording known to be unauthorised; and the commercial exhibition of a recording known to be unauthorised. Penalties for breach are analogous to those outlined in the previous section with respect to other criminal penalties for offences committed under the Copyright Act 1968: s 248Q. As indicated above, the general period of protection of a performance is 20 years after it was given. However, in order to implement Australia’s international obligations under the Agreement on Traderelated Aspects of Intellectual Property Rights (TRIPS) (discussed at [17.1570]), the Copyright (World Trade Organization Amendments) Act 1994 (Cth) amended the Copyright Act 1968 (Cth) to extend the period of protection of performers in respect of certain of the offence provisions outlined above. Thus, in the case of existing unauthorised sound recordings of performances given before 1 July 1995 the offence provisions apply for a period of 50 years from the end of the calendar year in which the performance was given. A further 50-year protection period also applies to future unauthorised sound recordings of performances: s 248CA. The performers’ protection provisions of the Copyright Act 1968 discussed above apply to a live performance given in Australia, or a performance given by one or more qualified persons, that is, Australian citizens and residents. In addition, protection is extended by the Copyright (International Protection) Regulations 1969 (Cth), regs 4A, 4B to overseas performances and performers in countries which offer equivalent protection to Australian performers and to certain performances having a connection with certain World Trade Organisation countries: see “International copyright protection” at [17.1560].

Extension of protection for performers [17.1410] As a consequence of the Australia–United States Free Trade Agreement 2004 (established under the US Free Trade Agreement Implementation Act 2004 (Cth)), the rights of performers have been extended in certain respects. A performer is now recognised as a co-owner with the maker of the copyright in sound recordings: Copyright Act 1968 (Cth), ss 22(3A), 22(3B) and s 116AAA. Moral rights have also been extended to performers. Broadly, performers’ moral rights closely follow the moral rights granted to authors discussed at [17.1430]: that is, a performer has a right of attribution of performership (s 195ABA); a right not to have performership falsely attributed (s 195AHA) and a right of integrity of performership: s 195ALA. Detailed discussion of these provisions is beyond the scope of the present work.

chapter 17 Intellectual Property

Moral rights [17.1420] The Copyright Act 1968 (Cth) was amended by the Copyright Amendment (Moral Rights) Act 2000 (Cth) to provide greater recognition of the moral rights of authors: Copyright Act 1968 (Cth), Pt IX, ss 189 – 195AZO. The provisions came into effect on 21 December 2000.

Nature of moral rights [17.1430] The expression moral rights refers to the personal or non-economic rights of authors. They are rights that are essentially concerned with the personal relationship between authors, artists and other creators and their works. Moral rights are in addition to, and separate from, the economic rights protected by copyright. The basic moral rights recognised by the legislation are (Copyright Act 1968 (Cth), s 189): (a)

the right of attribution of authorship (that is, the right to be recognised as the author of a work);

(b)

the right not to have authorship falsely attributed; and

(c)

the right of integrity of authorship (that is, the right of a creator to object to derogatory treatment of their work).

These rights are additional to any other rights in relation to the work that the author or anyone else has under the Act: s 192.

Beneficiaries of protection [17.1440] Moral rights are held by individual creators of literary, dramatic, musical and artistic works, and the makers of cinematograph films. The maker of a film includes the director, producer and the screenwriter of the film: Copyright Act 1968 (Cth), s 189.

Right of attribution of authorship [17.1450] The right of attribution is the right to be identified as the author of a work if any attributable act is done in relation to the work: Copyright Act 1968 (Cth), s 193(2). “Attributable act” essentially means the doing of an act comprised in any of the exclusive economic rights conferred on the work or film under the provisions of Pt III or IV of the Act, for example, reproducing or publishing the work: s 194. In the case of an artistic work, an attributable act also includes exhibiting the work in public (s 194(2)(c)); accordingly, where an artistic work is exhibited, the artist must be identified. An author may be identified by any reasonable form of identification which, however, must be clear and reasonably prominent: ss 195(1), 195AA, 195BB. The moral right of attribution is infringed where a person does an attributable act in respect of the work, for example reproduces or publishes the work, without identifying the author in accordance with these provisions: s 195AO.

Right not to have authorship falsely attributed [17.1460] This is the right of an author not to have a person do any of the acts of false attribution enumerated by the Copyright Act 1968 (Cth), for example, affixing a person’s name on a work or film in such a way as to imply falsely that the person is the author of the work or film: ss 195AC – 195AH. The right is infringed if a person does an act of false attribution in respect of the work (s 195AP), for example, puts a person’s name on a work so as to falsely represent that the person is the author of the work.

495

496

Introduction to Business Law in Australia

Right of integrity of authorship [17.1470] An author’s right of integrity is the right not to have their work or film subjected to derogatory treatment: Copyright Act 1968 (Cth), s 195AI. Derogatory treatment includes the doing of anything that results in a material distortion of, the mutilation of, or a material alteration to, the work that is prejudicial to the author’s honour or reputation: ss 195AJ – 195AL. A person infringes an author’s right of integrity if the person subjects the work to derogatory treatment: s 195AQ. The alteration by a disc jockey of the sound recording of a song by the introduction of extraneous matter and streaming the edited version from his website resulted in an award of $10,000 damages for infringement of the author’s right of integrity in the song: Perez v Fernandez (2012) 260 FLR 1. 19

Consent provisions [17.1480] The Copyright Act 1968 (Cth) provides for the users of material to which moral rights attach to obtain the written consent of an author to do, or omit to do, something which would otherwise constitute an infringement of the author’s moral rights. In the case of cinematograph films, and works used in films, such consent may be given in relation to all or any acts occurring before or after the consent is given, and may relate to a specified work or works, or a work of a particular description, the making of which has not yet begun or is not yet completed: s 195AW. In relation to other works, there are similar consent provisions but they require an author to specify the acts or omissions, or specified classes or types of acts or omissions to which the consent relates: s 195AWA. Employees may give consent in favour of their employer in relation to all works produced in the course of their employment: ss 195AW(4), 195AWA(4).

Defences to alleged infringements [17.1490] The Copyright Act 1968 (Cth), provides a defence to an alleged infringement of the right of attribution or the right of integrity: that the act or omission was reasonable in all the circumstances. In determining whether the act or omission was reasonable, the matters to be taken into account include: (a)

the nature of the work and, in the case of a cinematograph film, the primary purpose of the film;

(b)

the purpose, manner and context in which the work or film is used;

(c)

any practice used in the industry concerned, or specified in a voluntary code of practice developed by the relevant industry;

(d)

in relation to the right of attribution, any difficulty or expense that would have been incurred as a result of identifying the author; and

(e)

whether the work or film was made in the course of the author’s employment: ss 195AR, 195AS.

There is no express provision for judicial immunity as a defence to proceedings for infringement of moral rights; however, the common law doctrine of judicial immunity provides a defence to a judge alleged to have infringed an author’s moral rights in the course of judicial proceedings: Ogawa v Spender (2006) 151 FCR 228.

Provisions in relation to buildings [17.1500] The Copyright Act 1968 (Cth) contains provisions regarding moveable artistic works such as public art, and artistic works affixed to buildings or comprising the building itself. Basically, the Act 19

See J McCutcheon, “Perez v Fernandez: Australia’s First Decision on the Moral Right of Integrity” (2013) 24 Australian Intellectual Property Journal 174.

chapter 17 Intellectual Property

provides that an architect’s or artist’s moral rights in a building, or a work attached to a building, will not prevent the alteration, demolition or destruction of the building provided the owner has undertaken certain actions. Broadly, the owner is required to contact the artist or architect and advise them of the proposed change or demolition. Provided the artist or architect responds within a specified time period, then where, for example, the building is to be demolished, they are to be given a reasonable opportunity to make a record of, or remove, the work: s 195AT.

Remedies for infringement of moral rights [17.1510] The relief which a court may grant in an action for infringement of an author’s moral rights include: (a)

an injunction;

(b)

damages for loss resulting from the infringement;

(c)

a declaration that a moral right of the author has been infringed;

(d)

an order that the defendant make a public apology for the infringement; and

(e)

an order that any false attribution of authorship, or derogatory treatment, of the work be removed or reversed: Copyright Act 1968 (Cth), s 195AZA.

Meskenas v ACP Publishing Pty Ltd [17.1520] In Meskenas v ACP Publishing Pty Ltd (2006) 70 IPR 172 the respondent published in one of its magazines a photograph of Princess Mary, wife of the Crown Prince of Denmark, standing in front of a portrait of the late Dr Victor Chang which had been painted by the applicant artist shortly before Dr Chang was murdered in Sydney. Unfortunately, the caption to the photograph incorrectly attributed the portrait to another artist. The applicant, distressed by the wrong attribution, sought a correction and an apology. A meeting was held between the applicant artist, his son and representatives of the respondent publisher. A personal apology was given at the meeting but no apology was published until over a year later, when the respondent published a photograph. However, the respondent had managed to reverse the image of the negative so that the photograph did not accurately reproduce the portrait. The Federal Magistrate awarded the applicant artist $1,100 for infringement of his moral rights of attribution of authorship in respect of the portrait and not to have his work falsely attributed (Copyright Act 1968 (Cth), ss 195AO and 195AP) and a further $8,000 in aggravated damages arising out of the conduct of the respondent newspaper in the particular circumstances.

Application and duration of moral rights [17.1530] Moral rights exist in works whether the works are made before or after the commencement of the legislation but only in relation to infringements that take place after commencement. However, for cinematograph films, and works included in a film, moral rights apply only to films made after the legislation came into force: Copyright Act 1968 (Cth), ss 195AZM – 195AZO. Generally, an author’s moral rights in respect of a work continue in force for as long as copyright subsists in a work, that is, the life of the author plus 70 years for works and 70 years from the first publication of a film. However, in the case of a cinematograph film, the right of integrity ceases on the

497

498

Introduction to Business Law in Australia

death of the maker of the film: s 195AM. After an author’s death, their moral rights can be enforced by their legal personal representative (other than the right of integrity in respect of a cinematograph film): s 195AN.

Resale royalty right for visual artists [17.1540] A resale royalty scheme has been established under the Resale Royalty Right for Visual Artists Act 2009 (Cth). The scheme commenced on 9 June 2010. Broadly, artists are eligible to receive 5 per cent of the sale price on the “commercial resale” of their original works. A “commercial resale” means, in essence, a resale through the art market, for example, by an art auctioneer, the owner of an art gallery or an art dealer. The resale royalty is payable on the sale of an artwork if: (i) the sale occurs on after 9 June 2010; (ii) the sale price is not less than $1,000; (iii) the artist is living or has been dead for less than 70 years; (iv) the artist, or beneficiary of the artist’s estate, is an Australian citizen or permanent resident; and (v) it is not the first change of ownership on or after 9 June 2010. Artworks covered by the scheme include artists’ books; batiks; carvings; ceramics; collages; digital artworks; drawings; engravings; fine art jewellery; glassware; installations; lithographs; multimedia artworks; paintings; photographs; pictures; prints; sculptures; tapestries; video artworks; and weavings. The scheme is administered by Copyright Agency Limited (CAL).

International copyright protection The Berne and UCC Conventions [17.1550] Australia is a member of the Berne Convention for the Protection of Literary and Artistic Works of 1886 and the Universal Copyright Convention of 1952. In consequence, it is part of a worldwide international system of copyright protection since most of the major countries of the world are members of one or both of these international Conventions. Briefly, the Conventions provide for certain minimum standards of protection for works and also embody the principle of national treatment whereby works of nationals of member countries and works first published in a member country must be given the same protection as each member country gives to the works of its own nationals. In Australia, the Copyright Act 1968 (Cth) makes provision for the Act to be applied to member countries of the Berne Convention and the Universal Copyright Convention: ss 184 – 188. This is achieved by the Copyright (International Protection) Regulations 1969 (Cth), which have extended the operation of the Copyright Act 1968 (Cth) in relation to works and other subject matter to cover making or first publication in a Convention country or by a national or resident of such a country: Copyright (International Protection) Regulations 1969 (Cth), reg 4. In this way literary, dramatic, musical and artistic works, sound recordings and cinematograph films made or published in a Convention country are given the same protection as they would be given in the event of making or first publishing in Australia. However, the protection afforded to foreign works will not be greater than that given by the law of the Convention country concerned. For example, the Copyright (International Protection) Regulations 1969 provide for the recognition of a public performance right or broadcasting right only where such rights are recognised under the law of the Convention country concerned: regs 6, 7. Australian authors and publishers are accorded similar copyright protection for their works and other subject matter in the member countries of the Berne and Universal Copyright Conventions.

The TRIPS agreement [17.1560] On 1 January 1995, Australia became a party to the World Trade Organization (WTO), an international body which administers certain international trade agreements including the Agreement on

chapter 17 Intellectual Property

Trade-Related Aspects of Intellectual Property Rights (TRIPS). TRIPS requires Member States to comply with the basic provisions of the Berne Convention and sets down a number of other minimum requirements for the protection of intellectual property. The significance of TRIPS is that it contains extensive provisions for the enforcement of intellectual property rights. The Copyright (World Trade Organization Amendments) Act 1994 (Cth) amended the Copyright Act 1968 (Cth) to comply with the requirements of TRIPS as it applies to copyright and related rights.

Designs [17.1570] Designs law is concerned with the protection of the visual form of articles with the object of encouraging innovation in the creation of new designs. The Australian law of designs is governed by the Designs Act 2003 (Cth) which came into operation on 17 June 2004. The Act implements many of the recommendations of the Australian Law Reform Commission in its report on designs 20 which was highly critical of the operation of the former legislation governing the protection of industrial designs, the now repealed Designs Act 1906 (Cth). 21 Protection for industrial designs is available by way of registration of new and distinctive designs for products in the Register of Designs administered by the Designs Office in IP Australia. Designs are registered for a very wide range of articles including electrical and electronic goods, building materials, domestic items such as chairs and air conditioners, sporting goods and fashion accessories, optical goods, jewellery, cutlery, toys and so on.

Meaning of “design” [17.1580] The definition of “design” in the Designs Act 2003 (Cth) emphasises that a design for the purposes of the Act means the visual features of a product: design, in relation to a product, means the overall appearance of the product resulting from one or more visual features of the product: s 5. A “visual feature” in relation to a product is in turn defined as including the shape, configuration, pattern and ornamentation of the product. A visual feature may serve a functional purpose: s 7. The definition of a “design” (above) refers to the overall appearance of a “product” which is “a thing that is manufactured or hand made”: s 6(1). A component part of a product may itself be a product if it is made separately: s 6(2). A kit which forms a product when assembled is also included in the definition: s 6(4).

Registration of a design [17.1590] An application in respect of a design may be made by one or more persons in relation to one or more designs and must specify the person or persons who is or are entitled to be entered on the Register as the registered owner or owners of the design: Designs Act 2003 (Cth), ss 21, 22.

Design must be new and distinctive [17.1600] To be registrable the design must be new and distinctive. Section 15(1) of the Designs Act 2003 (Cth) provides: 20 21

ALRC, Report No 74, Designs (1995). The Designs Act 1906 (Cth) was discussed in previous editions of this work, for example C Turner, Australian Commercial Law (24th ed, Lawbook Co., Sydney 2003), pp 886-891.

499

500

Introduction to Business Law in Australia

A design is a registrable design if the design is new and distinctive when compared with the prior art base for the design as it existed before the priority date of the design. The “prior art base” against which the question of whether the design is new and distinctive is to be compared, essentially consists of those designs publicly used in Australia and designs published in Australia and overseas at the priority date of the design. For example, the design of a vacuum cleaner on a brochure distributed at the Canton fair in China was held to be part of the “prior art base” for the purpose of determining registrability of a similar design in Australia: World of Technologies (Aust) Pty Ltd v Tempo (Aust) Pty Ltd (2007) 71 IPR 307. The “prior art base” also includes designs disclosed in published designs applications with an earlier priority date: s 15(2). The priority date is usually the filing date of the design application: s 27. The standards for determining whether the design is new and distinctive are set out in s 16. Under s 16 a design will be “new” unless it is “identical” to an existing design, and it will be “distinctive” unless it is “substantially similar in overall impression” to an existing design. The factors to be considered in assessing “substantial similarity in overall impression” are set out in s 19. In particular, s 19 requires more weight to be given to similarities when comparing the designs than to the differences between them. Further, the standard of the “informed user” is to be applied, that is, “the standard of a person who is familiar with the product to which the design relates, or products similar to the product to which the design relates”: s 19(4). The standard of the “informed user” does not require that the notional person be a user of the products in question: the necessary and only qualification is that the notional person is familiar with those products: Multisteps Pty Ltd v Source and Sell Pty Ltd (2013) 214 FCR 323 at [66]–[70]. The issue of whether a design is “new” and “distinctive” is to be assessed not by comparing the design in question to the prior art base as a whole but by comparing it individually to each relevant piece of prior art. In other words, a design that combines various features each of which can be found in the prior art base when considered as a whole but not in any one particular piece of prior art, is capable of being new or distinctive: LED Technologies Pty Ltd v Elecspess Pty Ltd (2008) 80 IPR 85 at [12] and [55] per Gordon J. The decision in that case that the plaintiff’s registered designs of lenses in combination rear lights for motor vehicles were new and distinctive designs which had been infringed by the defendant’s imported products was upheld by the Full Federal Court: Keller v LED Technologies Pty Ltd (2010) 185 FCR 449.

Ownership of a design [17.1610] Basically, the owner of an unregistered design is entitled to be entered on the Register as the registered owner of the design. More particularly, the Designs Act 2003 (Cth) provides that a person in any of the following categories is entitled to be entered on the Register as the registered owner of a design that has not yet been registered: (a)

the person who created the design (the “designer”);

(b)

if the designer created the design in the course of employment, or under a contract, with another person – the other person (that is, the employer or the party who commissioned the design), unless they have agreed to the contrary;

(c)

a person who derives title to the design from a person mentioned in (a) or (b) (for example, under an assignment) or by devolution by will or by operation of law;

(d)

a person who would, on registration of the design, be entitled to have the exclusive rights in the design assigned to the person; or

(e)

the legal personal representative of a deceased person in one of the above categories: s 13(1).

chapter 17 Intellectual Property

The registered owner of a registered design is the person who, at a particular time, is entered in the Register as the registered owner of the design, or if there are two or more such persons, each of them: s 14(1).

Registration procedure [17.1620] The registration procedure under the Designs Act 2003 (Cth) is significantly different than under the previous legislation. The purpose of the provisions is to streamline the system so that an application for registration of a design will only be examined in the first instance to check that it complies with the formal requirements. The Registrar must register a design if the prescribed formalities are all satisfied: ss 39 – 40. After a formalities check, the application will proceed to grant and publication: s 45. So, essentially an application for design registration will be granted if the forms are correctly completed and official fees paid. In other words, a design application will not be examined before grant. However, any person may request examination of whether a design is new and distinctive (that is, a substantive examination). On receiving a request, for example, by the owner of the design or the order of a court, the Registrar is required to examine a registered design: s 63. In examining the registered design, the Registrar is to consider whether grounds exist for the revocation of the registration, either because the design is not a registrable design or on the basis of any other ground specified in the regulations: s 65. If a ground of revocation is established, the Registrar may revoke the registration if it is not possible to amend it so as to remove the ground for revocation: ss 66, 68. If the Registrar is satisfied that a ground of revocation has not been made out or that any ground of revocation has been removed, the Registrar issues a certificate of examination as prima facie evidence of the validity of the design registration: s 67. The important point is that a design must have been examined and a certificate of examination granted before the applicant can bring an action for infringement: s 73(3).

Priority date [17.1630] The priority date of a design application is important since it is the date from which design rights are deemed to commence and therefore enabling the registered owner to bring an action for infringement in respect of the registered design. The priority date of a design disclosed in a design application is the filing date of the application: Designs Act 2003 (Cth), s 27(1). The validity of a design is not affected by publication or use after the priority date, or by the registration of a design with the same or a later priority date: s 16(3).

Infringement of a registered design Exclusive rights of a registered owner [17.1640] The owner of a registered design has a number of exclusive rights; these, in short, are the exclusive right to: (a)

make a product which embodies the design;

(b)

import, sell, hire or dispose of such a product;

(c)

use such a product for the purposes of any trade or business;

(d)

keep a product to do any of these things; and

(e)

authorise another person to do any of these things: Designs Act 2003 (Cth), s 10(1).

501

502

Introduction to Business Law in Australia

The registered owner’s exclusive rights are personal property which may be assigned or may devolve by will or operation of law: s 10(2). To be effective, an assignment must be in writing and signed by, or on behalf of, the assignor and the assignee: s 10(2).

Infringement proceedings [17.1650] The registered owner of a registered design may bring proceedings against another person alleging that the person has infringed the registered design: Designs Act 2003 (Cth), s 73. The circumstances in which a person will infringe a registered design are set out in s 71(1) which provides: A person infringes a registered design if, during the term of the registration of the design, and without the licence or authority of the registered owner of the design, the person: (a) makes or offers to make a product, in relation to which the design is registered, which embodies a design that is identical to, or substantially similar in overall impression to, the registered design; or (b)

imports such a product into Australia for sale, or for use for the purposes of any trade or business; or

(c)

sells hires, or otherwise disposes of, or offers to sell, hire or otherwise dispose of, such a product;

(d)

uses such a product in any way for the purposes of any trade or business; or

(e)

keeps such a product for the purpose of doing any of the things mentioned in paragraph (c) or (d) [emphasis added].

An infringement under s 71(1)(a) is referred to as a “primary” infringement, whereas infringement by conduct falling within s 71(1)(b) – (e) is referred to as a “secondary” infringement. The difference is relevant to the issue of the remedies available for infringement discussed in [17.1680]. Infringement is determined by comparing the allegedly infringing product against the registered design, not by comparing a product embodying the registered design against the infringing product: LED Technologies Pty Ltd v Elecspess Pty Ltd (2008) 80 IPR 85 at [77] per Gordon J.

Meaning of “substantially similar in overall impression” [17.1660] Section 71(1)(a) of the Designs Act 2003 (Cth) (see [17.1660]) refers to a person being liable for infringement where that person makes a product, in relation to which the design is registered, which embodies a design that is: “identical to, or substantially similar in overall impression to, the registered design”. The heads of infringement in s 71(1) (see [17.1660]) basically concern dealings with a product embodying such a design. Section 71(3) provides that in determining whether an allegedly infringing design is “substantially similar in overall impression to the registered design, a court is to consider the factors specified in section 19” (emphasis added). As we saw earlier when discussing the eligibility of a design for registration (see [17.1610]) s 19 requires, inter alia, a person to give more weight to similarities between the designs than the differences between them when deciding whether a design is substantially similar in overall impression to another design. The Act provides that a person does not infringe a registered design by importing a product embodying a design that is identical to or substantially similar in overall impression to the registered design where the product embodied the design with the licence or authority of the registered owner: s 71(2). In other words, the Act does not prevent the parallel importation of genuine goods.

chapter 17 Intellectual Property

A defendant in infringement proceedings may counter-claim for revocation of the registration of the design under s 93.

Remedies for infringement [17.1670] The relief which a court may grant in infringement proceedings includes: (a)

an injunction; and,

(b)

at the option of the plaintiff – damages or an account of profits: Designs Act 2003 (Cth), s 75(1).

The court may refuse to award damages, reduce the damages that would otherwise be awarded, or refuse to make an order for an account of profits, if the defendant satisfies the court: (a)

(b)

in the case of primary infringement: (i)

that at the time of the infringement, the defendant was not aware that the design was registered; and

(ii)

that before that time, the defendant had taken all reasonable steps to ascertain whether the design was registered; or

in the case of secondary infringement – that at the time of the infringement, the defendant was not aware, and could not reasonably have been expected to be aware, that the design was registered: s 75(2). (For conduct constituting a “primary” infringement and a “secondary” infringement, see [17.1660].)

It is prima facie evidence that the defendant was aware that the design was registered if the product, or the packaging of the product, is marked so as to indicate registration of the design: s 75(4). The court may award such additional damages as it considers appropriate having regard to the flagrancy of the infringement and all other relevant matters: s 75(3). For example, the respondent was ordered to pay $7,500 compensatory damages and $10,000 additional damages for making and selling dresses which were substantially similar in overall impression to the applicant’s registered design for a particular style of dress: Review Australia Pty Ltd v Innovative Lifestyle Investments Pty Ltd (2008) 166 FCR 358.

Duration of a registered design [17.1680] The term of registration of a design under the Designs Act 2003 (Cth) is initially five years from the filing date of the design application with provision for renewal for a further five years, that is, a maximum of 10 years: ss 46, 47. After this time the design will be open for any other person to use.

Right of repair defence for spare parts [17.1690] One of the more contentious issues in designs law is the extent to which the manufacturer of products requiring replacement parts, for example motor vehicle parts, should be able to obtain, in effect, monopoly protection for such parts by design registration with the potential for high prices being charged. To deal with this issue, the Designs Act 2003 (Cth) provides, in essence, a right of repair defence. A design is not infringed where: (a)

a person uses, or authorises another to use, a product in relation to which the design is registered;

(b)

the product embodies a design that is identical or substantially similar in overall impression to the registered design;

(c)

the product is a component of a complex product; and

503

504

Introduction to Business Law in Australia

(d)

the purpose of the use or authorisation is the repair of the complex product so as to restore its overall appearance in whole or in part: s 72(1).

A “complex product” is a product comprising at least two replaceable component parts (s 10), that is, in effect a product comprising at least two spare parts. In essence, the defence applies where a spare part is being used to repair a complex product. It does not apply where the use of a component part embodying a design results in the enhancement of the appearance of the complex product: s 72(3). “Repair” in this context includes: (a)

restoring or replacing a decayed or damaged component;

(b)

necessarily replacing incidental items at the same time; or

(c)

carrying out maintenance on the complex product: s 72(5).

The onus is on the owner of the design to prove that parts were being used for non-repair purposes: s 72(2). The approach taken by the Designs Act 2003 is aimed at striking a balance between providing an incentive for creative activity in design and enabling competition in the spare parts market.

Registration or publication [17.1700] The Designs Act 2003 (Cth) provides for a design applicant to request publication of their design as an alternative to registration: s 35. Registration gives the creator an exclusive property right in the design, preventing others from applying the design. In contrast, publication does not prevent others from applying the design but prevents them from registering the design for their own exclusive benefit since the design would no longer be new and therefore not registrable. The reason for the introduction of this novel procedure appears to be that publication may be of advantage to certain industries, for example the textile industry, where because of the large numbers of short-lived designs produced, registration could be too costly.

Relationship between copyright and designs protection [17.1710] In the absence of special provision, it would be possible for some designs to be protected not only as registered designs under the Designs Act 2003 (Cth) but also as artistic works under the Copyright Act 1968 (Cth). For example, the drawing of a chair would constitute a two-dimensional artistic work protected against unauthorised copying by the Copyright Act 1968. The owner of the copyright in the drawing also has the exclusive right to reproduce the drawing in three dimensions; that is, to make a chair in accordance with the drawing: s 21(3). However, the drawing of the chair may also be registrable as a design under the Designs Act 2003 (Cth). If the shape of the chair was registered as a design, then the owner would not only obtain the benefits of registration under the Designs Act 2003 but also the much longer period of protection as an artistic work under the Copyright Act 1968 (Cth). Accordingly, ss 74 – 77 of the Copyright Act 1968 are designed to prevent such dual protection. The present sections are the product of significant amendments by the Designs (Consequential Amendments) Act 2003 (Cth). The amended ss 74 – 77 of the Copyright Act 1968 (Cth) came into operation on 17 June 2004, the same date as the commencement of the Designs Act 2003 (Cth). Their general effect is to remove the possibility of copyright protection for essentially three-dimensional industrial products. Designs for the latter, if they are to be protected at all, must be registrable and be registered under the Designs Act 2003.

chapter 17 Intellectual Property

Position where the corresponding design is registered [17.1720] Section 75 of the Copyright Act 1968 (Cth) provides that, where copyright subsists in an artistic work and a “corresponding design” has been registered under the Designs Act 2003 (Cth), it is not an infringement of that copyright to reproduce the work by embodying that corresponding design in a product.

Meaning of “corresponding design” [17.1730] “Corresponding design” is defined by s 74 of the Copyright Act 1968 (Cth) which provides: corresponding design, in relation to an artistic work, means visual features of shape or configuration which, when embodied in a product, result in a reproduction of that work, whether or not the visual features constitute a design that is capable of being registered under the Designs Act 2003. The general effect of s 75 of the Copyright Act 1968 (Cth) is to preclude an action for copyright infringement where the artistic work is reproduced by making products in accordance with the corresponding design. Protection of the registered design in such a case is provided only under the Designs Act 2003 (Cth), not the Copyright Act 1968 (Cth).

Position where the corresponding design is not registered [17.1740] Section 77 of the Copyright Act 1968 (Cth) deals with the situation where the corresponding design either has not been registered under the Designs Act 2003 (Cth) or is not registrable under that Act. The section applies where: (a)

copyright subsists in an artistic work (other than a building or a model of a building, or work of artistic craftsmanship) whether made before or after the commencement of the section;

(b)

a corresponding design is applied industrially, whether in Australia or elsewhere, by or with the licence of the owner of the copyright in the work;

(c)

products to which the corresponding design has been applied are sold, let for hire, or offered for sale or hire, whether in Australia or elsewhere; and

(d)

at that time, the corresponding design is not registrable under the Designs Act 2003 (Cth), or has not been registered under that Act or under the Designs Act 1906 (Cth): Copyright Act 1968 (Cth), s 77(1).

Where the above criteria are met, then it is not an infringement of the copyright in the artistic work to reproduce the work by embodying the corresponding design in a product: Copyright Act 1968 (Cth), s 77(2)(a). For example, it would not be an infringement of copyright in the drawing of an exhaust pipe (that is, the artistic work) for another manufacturer to copy exhaust pipes made in accordance with the design (that is, the corresponding design) where the latter was either not registrable or not registered under the Designs Act 2003 (Cth).

Meaning of “applied industrially” [17.1750] It will be observed that for s 77 of the Copyright Act 1968 (Cth) to apply, the corresponding design must have been “applied industrially”. A design is deemed to have been applied industrially if it is applied to more than 50 articles, or to one or more articles (other than handmade articles) manufactured in lengths or pieces: Copyright Regulations 1969 (Cth), reg 17(1). However, this is not an exhaustive definition and hence there may be an industrial application of a design for the purposes of s 77 of the Copyright Act 1968 (Cth) even where the plaintiff has made fewer than 50 articles in accordance with her or his design: Shacklady v Atkins (1994) 30 IPR 387 at 393.

505

506

Introduction to Business Law in Australia

Exceptions to the operation of s 77 of the Copyright Act 1968 [17.1760] It is important to note the exceptions to the operation of s 77 of the Copyright Act 1968 (Cth): 1.

Section 77 does not apply to works of artistic craftsmanship (for the meaning of this expression, see [17.200]. Accordingly, even where a work of artistic craftsmanship is industrially applied, the artist will still retain full copyright protection where the work has not been registered, or is not registrable under the Designs Act 2003 (Cth).

2.

The section does not apply to a building or model of a building. 22

3.

The section does not apply in relation to any articles in respect of which, at the time when they were sold or hired, the corresponding design was excluded from registration by regulations made under the Designs Act 2003: Copyright Act 1968 (Cth), s 77(3). There are currently no relevant provisions in this context in the Designs Regulations 2004 (Cth).

4.

The section would not appear to apply to designs involved in “surface” printing. The reason is that the section requires a “corresponding design”. However, the definition of “corresponding design” in s 74(2) of the Copyright Act 1968 (Cth) (see [17.1740]) refers to visual features “embodied in” a product which expression is defined as including “woven into, impressed on or worked into the product” and therefore would not include designs for surface printing (for example, Christmas cards).

The Copyright Act 1968 (Cth) also provides a defence to copyright infringement for certain reproductions of artistic works made in the course of, or incidental to, products that do not themselves infringe copyright: s 77A.

Summation of the basic position [17.1770] In summary, protection for the design of a three-dimensional industrial product must be obtained by registration of the design under the Designs Act 2003 (Cth), subject to the limited exceptions mentioned at [17.1770]. If the design is either not registered, or is not registrable under that Act, copyright law will not fill the gap, that is, will not provide a right of action against those who copy the design of another’s product: compare Digga Australia Pty Ltd v Norm Engineering Pty Ltd (2008) 166 FCR 268 (FCAFC).

Patents The Patents Act 1990 [17.1780] The protection of new inventions by way of the grant of a patent is regulated by the Patents Act 1990 (Cth) and the Patents Regulations 1991 (Cth). Patents are granted for a very wide range of inventions including new mechanical products and chemical and biological products and processes. The Patents Act 1990 (Cth) was significantly amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) to address concerns, inter alia, that the threshold for the grant of patents was too low. The general effect of the provisions is to raise the quality of patents which are granted by increasing the threshold of patentability of inventions and requirements for a valid patent specification. The amendments are intended to raise the standard set in Australia to a level that is more consistent with that of our major trading partners. 22

Section 77(5) of the Copyright Act 1968 (Cth) provides that a building or model of a building “does not include a portable building such as a shed, a pre-constructed swimming pool, a demountable building or similar portable building”.

chapter 17 Intellectual Property

The new provisions of the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) concerning the patentability and validity of patents came into operation in respect of patent applications filed after 15 April 2013, or for which examination of the patent is requested after that date: they do not apply to patent applications for which examination of the patent was requested prior to 15 April 2013 to which the previous law still applies. Certain provisions, more particularly those providing for access to patented inventions for experimental purposes (see [17.2130]) commenced on 15 April 2012. The discussion of patent law which follows is based on the provisions of the Patents Act 1990 (Cth) as amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) and the Patents Regulations 1991 (Cth) as amended by the Intellectual Property Legislation Amendment (Raising the Bar) Regulation 2013 (Cth).

The nature of a patent [17.1790] A patent is a temporary monopoly granted by the Crown to a patentee in return for the disclosure of an invention to the public in the form of a patent specification. It gives the owner, that is, the patentee, the right to prevent others from exploiting her or his invention in Australia for a limited period. The basic rationale behind the patent system is to stimulate technical development, and hence promote industry, by offering the opportunity of acquiring exclusive rights in an invention for a limited period. The grant of a patent is said to be a kind of bargain between the inventor and the state in that, in consideration for the grant of letters patent, the applicant must disclose her or his invention by lodging at the Patent Office a patent specification clearly describing what he or she has invented. Subsequently, the specification will become open to public inspection and the invention then becomes public knowledge. In return for the disclosure, the patentee enjoys the exclusive right to exploit the invention during the term of the patent. In other words, the patentee is given a monopoly on her or his invention for the term of the patent. On expiry of the patent, the invention becomes public property and may be freely used by anybody. There are two types of patent that can be granted under Australian patent law, namely: (a)

a standard patent; and

(b)

an innovation patent.

The term of a standard patent is 20 years from the date of the patent (that is, the date of filing the complete specification): Patents Act 1990 (Cth), ss 67, 65. The term of an innovation patent is eight years from the date of the patent: s 68. The principal differences between standard and innovation patents are more appropriately considered later in this chapter: see [17.2070]–[17.2100].

Subject matter of a patent [17.1800] In order for an invention to be patentable, it must satisfy certain requirements. The Patents Act 1990 (Cth), s 18(1) provides that: [A]n invention is a patentable invention for the purposes of a standard patent if the invention, so far as claimed in any claim: (a) is a manner of manufacture within the meaning of section 6 of the Statute of Monopolies; 23 and 23

The Statute of Monopolies 1624 (IMP) declared all monopolies void but specifically exempted the grant of letters patent for an invention. Thus, s 6 provided that the declaration of invalidity contained in the preceding section of the statute: “shall not extend to any letters patents and grants of privilege … hereafter to be made, of the sole working or making of any manner of new manufactures within this Realm, to the true and first inventor and inventors of such manufactures, which others at the time of making such letters patents and grants shall not use, so as also they be not contrary to the law or mischievous to the State, by raising prices of commodities at home or hurt of trade, or generally inconvenient”.

507

508

Introduction to Business Law in Australia

(b)

when compared with the prior art base as it existed before the priority date of that claim: (i)

is novel; and

(ii)

involves an inventive step; and

(c)

is useful; and

(d)

was not secretly used in the patent area before the priority date of that claim.

It will be seen from that section that the basic requirements for an invention to be patentable as a standard patent are that it must: (a)

be a manner of manufacture;

(b)

be novel, that is, new;

(c)

involve an inventive step;

(d)

be useful; and

(e)

not have been secretly used.

Each of these requirements is discussed at [17.1830]–[17.1930]. However, before doing so, it is necessary to consider the threshold requirement of patentability.

Threshold requirement [17.1810] The High Court held in NV Philips Gloeilampenfabrieken v Mirabella International Pty Ltd (1995) 183 CLR 655 that, in order to be patentable, the subject matter of a claim must first satisfy the threshold requirement imposed by traditional principles of patent law, that is, that the claim must disclose a manner of new manufacture. Accordingly, if it is apparent on the face of the relevant patent specification that the subject matter of the claim is, by reason of the absence of the necessary quality of inventiveness, not a manner of new manufacture, the alleged invention is not patentable. It is only if the latter requirement is satisfied that it is necessary to then consider the further requirements of novelty, inventive step and so on: compare Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd (1998) 194 CLR 171.

Manner of manufacture [17.1820] The question of whether the subject matter of an invention concerns a manner of manufacture has occupied the courts on many occasions, since on the interpretation of that expression will often depend the patentability of the invention claimed. 24 To constitute a manner of manufacture the invention must relate to something tangible in a commercial sense. Thus, mere discoveries, theoretical principles, or information per se are not patentable: some practical application of the discovery or theoretical principle with an economically significant result must be shown. On the other hand, the expression “manner of manufacture” covers not only a new product, for example a new article, contrivance or substance, but also a new method or process. The leading decision in this area is that of the High Court of Australia in National Research Development Corp v Commissioner of Patents (1959) 102 CLR 252, where a method of eradicating weeds from a growing crop by spraying with a selective weed killer was held to be patentable. 24

The requirement under the Patents Act 1990 (Cth), s 18(1) is essentially the same in this respect as that under the former Patents Act 1952 (Cth).

chapter 17 Intellectual Property

Methods of medical treatment [17.1830] Formerly, methods of surgery and processes for treating diseases of the human body were considered to be outside the concept of invention. However, the Full Federal Court subsequently determined in two cases (although strictly obiter) that a new method of medical treatment is patentable: Anaesthetic Supplies Pty Ltd v Rescare Ltd (1994) 50 FCR 1; Bristol-Myers Squibb Co v FH Faulding & Co Ltd (2000) 97 FCR 524. The High Court (by a majority of 4:1) has recently confirmed that a method of medical treatment is patentable in Australia: Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 88 ALJR 261. More particularly, the majority upheld the validity of the respondents’ patent for a new method of medical treatment of a disease by use of a known drug. French CJ said (at [50]): “The exclusion from patentability of methods of medical treatment represents an anomaly for which no clear and consistent foundation has been enunciated. Whatever views may have been held in the past, methods of medical treatment, particularly the use of pharmaceutical drugs, cannot today be conceived as ‘essentially non-economic’… In my opinion the application of the rubric ‘manner of new manufacture’ in a logically and normatively coherent way is not served by excluding from its scope methods of medical treatment of human beings. Methods of medical treatment can fall within the scope of a manner of new manufacture within the meaning of s 6 of the Statute and therefore within s 18(1)(a) of the 1990 Act”: see similarly at [276]–[286] per Crennan and Kiefel JJ.

Biological processes [17.1840] Biological processes and their products are patentable. On the other hand, the Patents Act 1990 (Cth), s 18(2) provides that: “Human beings, and the biological processes for their generation, are not patentable inventions.” 25 Naturally occurring DNA and RNA sequences (that is, nucleic acids encoding genes) as they exist inside the human body cannot be the subject of a valid patent. By contrast, a full bench of the Federal Court in D’Arcy v Myriad Genetics Inc [2014] FCAFC 115 recently held unanimously that an isolated nucleic acid, the so-called “breast cancer gene”, BRCA1, is patentable. In its joint judgment, the Court (Allsop CJ, Dowsett, Kenny, Bennett and Middleton JJ) said (at [215]): “It is the chemical changes in the isolated nucleic acid which are of critical importance, as this is what distinguishes the product as artificial and economically useful.” The Court concluded (at [218]): “The isolated nucleic acid, including cDNA, has resulted in an artificially created state of affairs for economic benefit. The claimed product is properly the subject of letters patent. The claim is an invention within the meaning of s 18(1) of the Act.” The Court declined to follow the decision of the United States Supreme Court in Association for Molecular Pathology v Myriad Genetics Inc 596 US 12-398 (2013) where, on similar facts, the Supreme Court held that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it had

25

See E O’Sullivan, “The Patentability of Human Embryonic Stem Cells in Australia and Europe: Section 18(2) Reconsidered in Light of Brüstle v Greenpeace eV” (2013) 24 Australian Intellectual Property Journal 18; C Lawson, “’Human Beings’ as Excluded Subject Matter for the Purposes of the Patents Act 1990 (Cth)” (2009) 20 Australian Intellectual Property Journal 223.

509

510

Introduction to Business Law in Australia

been isolated. An application has been made for special leave to appeal to the High Court from the decision in D’Arcy v Myriad Genetics Inc [2014] FCAFC 115. 26

Computer programs [17.1850] Computer programs per se are not patentable, although a computer program-related invention is patentable. For example, an application to patent a method of producing an improved curved image used in computer graphics displays was held to disclose patentable subject matter: International Business Machines Corp v Commissioner of Patents (1991) 33 FCR 218. See similarly, CCOM Pty Ltd v Jiejing Pty Ltd (1994) 51 FCR 260 (the storage and retrieval of Chinese characters represented on a computer screen for word processing held by the Full Federal Court to be patentable); and RPL Central Pty Ltd v Commissioner of Patents [2013] AIPC 92-458; [2013] FCA 871 (a method of gathering evidence for the purpose of assessing an individual’s competency relative to a recognised qualification standard held to be patentable subject matter).

New plant varieties [17.1860] New plant varieties are patentable provided that the other requirements as to patentability discussed at [17.1880]–[17.1930] are satisfied. It should also be observed in this context that an alternative method of protection for new varieties of plants is provided by a separate piece of legislation, namely, the Plant Breeder’s Rights Act 1994 (Cth). The plant breeder’s right (PBR) obtained under the latter Act lasts for 25 years in the case of trees and vines, and 20 years for any other plant variety: s 22.

Novelty [17.1870] The essential purpose behind the requirement of novelty is that a patent should not be granted for inventions that are already known. In other words, once the public has been made aware of an invention, a subsequent patent cannot be granted for it or, if granted, is invalid. To say that an invention, or a claim in a complete specification, lacks novelty is, in essence, to say that a claim or claims of the patent specification includes something that has already been published or used before the priority date of the claim. The claim is then said to have been anticipated by the prior publication or the prior user, that is, to have been anticipated by the prior art. The Patents Act 1990 (Cth) provides that the novelty of each claim in a complete specification is to be assessed against the prior art base as it existed immediately before the priority date of the claim: s 18(1)(b)(i). This requires an explanation of the meaning of “prior art base”.

Prior art base [17.1880] The “prior art base” is defined in the Dictionary in Sch 1 of the Patents Act 1990 (Cth) to include information in a document that is publicly available whether in or out of the patent area (that is, Australia): in other words, novelty is assessed by reference to information in a document anywhere in the world. In addition, “prior art base” also includes information made publicly available through doing an act whether in or out of the patent area: that is, in assessing novelty against alleged prior use of the invention regard is given to prior use of the invention anywhere in the world. 26

See T Vines and T Faunce, “Cancer Voices Australia v Myriad Genetics Inc [2013] FCA 65: Should Gene Patent Monopolies Trump Public Health?” (2013) 20 Journal of Law and Medicine 747; S Huang, “Biotech Patents in Australia: Raising the Bar on the Generally Inconvenient Exception” (2013) 24 Australian Intellectual Property Journal 40.

chapter 17 Intellectual Property

Assessment of novelty [17.1890] In determining the question of novelty, the Patents Act 1990 (Cth) provides that an invention is to be taken as novel when compared with the prior art base unless it is not novel in the light of any one of the following categories of information, each of which must be considered separately: (a)

information made publicly available in a single document or through the doing of a single act;

(b)

information made publicly available in two or more related documents, or through the doing of two or more related acts, if the relationship between the documents or acts is such that a person skilled in the relevant art would treat them as a single source of information; and

(c)

information contained in a single, published patent specification which was filed but not published at the priority date of the claim under consideration: s 7(1).

Where it is contended that a claim lacks novelty because of a prior publication, the general proposition is that the prior document must disclose all the essential integers, that is, features, of the claim to a person skilled in the relevant area: Nicaro Holdings Pty Ltd v Martin Engineering Co (1990) 91 ALR 513. Broadly: “The concept of novelty in Australia involves a comparison between the invention as claimed in the claims of the patent and prior art information. Often, this must be determined by looking to prior publications which are to be read by the skilled addressee to determine what they disclose”: H Lunbeck A/S v Alphapharm Pty Ltd (2009) 177 FCR 151 at [178] per Bennett J. The learned judge added (at [182]): “If the prior art discloses some but not all integers of a claimed patent to a product, such as a combination, there is anticipation [that is, a lack of novelty] if the skilled addressee would add the missing information as a matter of course and without the application of inventive ingenuity or undue experimentation: Nicaro 91 ALR 530-1”: see similarly, SNF (Australia) Pty Ltd v Ciba Specialty Chemicals Water Treatments Ltd (2012) 204 FCR 325 at [321]. It has been held that what is disclosed to the skilled addressee is to be judged as at the date of publication of the prior art information (for example, the earlier patent specification) and not the date of the claim in the patent specification at issue, although the authorities appear to be divided on the question: Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd (2012) 210 FCR 21 at [210]–[214]. Earlier disclosure of the same invention in a document (for example, a patent specification) even if in a foreign language will result in lack of novelty (Dennison Manufacturing Co v Monarch Marketing Systems Inc (1983) 66 ALR 265), as will publication of photographs in a magazine if enough detail is shown: Van der Lely NV v Bamfords Ltd [1963] RPC 61. Prior public use of the invention by others who had earlier created the same device will result in a lack of novelty: Windsurfing International Inc v Petit (1983) 3 IPR 449. The test applied by the courts in determining whether an invention lacks novelty is what is known as the “reverse infringement test”. In Meyers Taylor Pty Ltd v Vicarr Industries Ltd (1977) 137 CLR 228 at 235, this test was stated by Aickin J as follows: “The basic test for anticipation or want of novelty is the same as that for infringement and generally one can properly ask oneself whether the alleged anticipation would, if the patent were valid, constitute an infringement.” In other words, if the prior publication contained a description of the invention that would have constituted an infringement if performed, or if the prior use would constitute an infringement of the patent if valid, the invention has been anticipated by the prior publication or prior use and accordingly lacks novelty.

511

512

Introduction to Business Law in Australia

The previous position was that disclosure of an invention to a single person before the priority date with no restrictions on the use that could be made of the invention would anticipate the patent and result in its invalidity on the ground of lack of novelty: Re Bristol-Myers Company’s Application [1969] RPC 146. However, a “grace period” now applies in respect of any information made publicly available by or with the consent of the patentee provided that a complete specification for the invention is made within 12 months: s 24(1). 27

Inventive step [17.1900] It is not sufficient for an invention to be novel in order to be patentable: it must also involve an inventive step. 28 In determining the issue of inventive step consideration needs to be given to the prior art base (discussed at [17.1890]), that is, to information publicly available in a document, or the doing of acts, either in Australia or anywhere else in the world. However, not all information so disclosed is taken into account in deciding whether the invention involves an inventive step. Following amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the Patents Act 1990 (Cth) provides that an invention is to be taken to involve an inventive step when compared with the prior art base unless the invention would have been obvious to a person skilled in the relevant art in the light of the common general knowledge as it existed whether inside or outside of Australia 29 before the priority date of the relevant claim in the specification, whether that knowledge is considered separately or together with the information described in s 7(3) of the Patents Act 1990 (Cth): s 7(2). In other words, only those disclosures which form part of the common general knowledge of those skilled in the relevant field are relevant, either separately or together with the additional information specified in s 7(3). The additional information that can be taken into consideration under s 7(3) is: (a)

any single piece of prior art information (that is, information in a document or the doing of an act); or

(b)

a combination of any two or more pieces of prior art information that the skilled person could be reasonably expected to have combined.

Prior to the Patents Act 1990, the notion of common general knowledge was described as the general body of knowledge known or used by all those in the relevant trade, and as such formed the background knowledge and experience which was available to all in the trade in considering the making of new products or the making of improvements in old products: Minnesota Mining & Manufacturing Co v Beiersdorf (Aust) Ltd (1980) 144 CLR 253 at 292; Winner v Ammar Holdings Pty Ltd (1993) 41 FCR 205. Factors to be considered include whether the skilled person would have understood and appreciated the relevance of the prior art to the problem the invention was seeking to solve. The basic issue is whether the invention would have been obvious to a skilled, non-inventive worker in the field, equipped with such knowledge. In other words, would it have been obvious to such person to take the same steps as the inventor if faced with the same problem? If so, the invention will lack the necessary requirement that it involve an inventive step. On the other hand: “When skilled, non-inventive persons, and in this case also a skilled inventive person … looking for improvements, fail to arrive at the invention, 27

28 29

The grace period is in addition to the protection already afforded to applicants who have previously disclosed their invention under certain specified prescribed circumstances such as: the showing of the invention at a recognised exhibition; disclosure in a paper read before a learned society; or the working of the invention within 12 months for the purpose of reasonable trial: Patents Act 1990 (Cth), s 24(1) and the Patents Regulations 1991 (Cth), regs 2.2 – 2.2D. The alternative way of expressing this requirement, in the language of the now repealed Patents Act 1952 (Cth), is that the invention must not be obvious. Prior to the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the common general knowledge of the person skilled in the field was limited to that existing within Australia.

chapter 17 Intellectual Property

it is impossible to suggest that it would have been obvious to the skilled and not necessarily inventive person”: Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (No 2) (2007) 235 CLR 173 at [119]. On the quantum of inventiveness required it has been said that: “The inventive element needed to sustain a patent may be small. A ‘scintilla of inventiveness’ is sufficient. … However, while a simple idea may be inventive, it is nevertheless essential for the validity of a patent that there be some inventiveness”: Aktiebolaget Hässle v Alphapharm Pty Ltd (2000) 51 IPR 375 at [31].

The invention must be “useful” [17.1910] The requirement that the invention must be useful in order to be patentable has been construed as meaning that the result claimed can be achieved by following the instructions in the specification, in other words, that what is claimed actually works. For example, a plaintiff’s patent for a sailboard used for windsurfing was held invalid on the ground, inter alia, of lack of utility because the claims in the specification included a method of working the invention which would not produce the results mentioned in the specification: Windsurfing International Inc v Petit (1983) 3 IPR 449. Following amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the Patents Act 1990 (Cth), s 7A provides that: (1)

An invention is taken not to be useful unless a specific, substantial and credible use for the invention (so far as claimed) is disclosed in the complete specification.

(2)

The disclosure in the complete specification must be sufficient for that specific, substantial and credible use to be appreciated by a person skilled in the relevant art.

Secret use [17.1920] The Patents Act 1990 (Cth) requires that for an invention to be patentable, it must not previously have been secretly used. The rationale behind the provision is that where the actual inventor has secretly used her or his invention prior to applying for a patent, then to allow the patent to continue may give the inventor a longer monopoly than the statutory period as a result of the earlier secret use of the invention before the grant of the patent. “Secret use” involves some element of deliberate concealment of the invention: Bristol-Myers Co v Beecham Group Ltd [1974] AC 646. The Patents Act 1990, s 9 provides that the following acts do not constitute a secret use of the invention: (a)

use for the purpose of reasonable trial and experiment only;

(b)

use pursuant to a confidential disclosure;

(c)

use of the invention for a purpose other than trade or commerce;

(d)

use by a Commonwealth, State or Territory authority to whom the patentee has disclosed the invention; and

(e)

any use of the invention by or on behalf of the patentee for any purpose, if a complete application is made for the invention within the “prescribed period”, that is, within 12 months of filing a complete patent application: Patents Regulations 1991 (Cth), reg 1.6. This significant additional exception to secret use was introduced following amendment of the Patents Act 1990 by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012.

513

514

Introduction to Business Law in Australia

Procedure for obtaining a patent Persons who may be granted a patent [17.1930] Any person or group can apply for a patent but must nominate a person, either an individual or body corporate, who is eligible to be granted the patent. The Patents Act 1990 (Cth) limits the class of persons to whom a patent can be granted. The potential grantee must be a person who: (a)

is the inventor; or

(b)

would, on the grant of a patent for the invention, be entitled to have the patent assigned to her or him;

(c)

derives title to the invention from either of the above (for example, an assignee); or

(d)

is the legal representative of a deceased person who falls into one of the above categories: s 15.

The provision under (b) above, is primarily intended to cover employment or service contracts under which an employer may be entitled to have assigned to them rights in inventions made by their employees: see “Employee Inventions” at [17.2160]. Most patents are owned by corporations as persons entitled to take an assignment from the actual inventor.

Application for a patent [17.1940] An application for a patent is made to the Patent Office in Canberra or to one of its sub-offices in each of the State capital cities. A person may apply for a patent by filing in accordance with the Patent Regulations 1991 (Cth) a patent request and such other documents as are prescribed: Patents Act 1990 (Cth), s 29(1). A patent request is a form which identifies the applicant, the nominated person (that is, the person nominated to be granted a patent), the inventor, the type of application (that is, whether it is for a complete specification or a provisional specification, and whether it is for a standard patent or an innovation patent), and lists any earlier associated provisional applications. The application for a patent may be a provisional application or a complete application: s 29(2). A patent request in relation to a provisional application must be accompanied by a provisional specification: s 29(3). A patent request in relation to a complete application must be accompanied by a complete specification: s 29(4). A complete specification should also be accompanied by a notice of entitlement which sets out the relationship between the person nominated for the grant of a patent and the inventor. A complete specification must also be accompanied by an abstract of the invention.

Specifications [17.1950] In essence, the purpose of a patent specification is to describe the invention. A specification is extremely important in the patent procedure and needs to be carefully drafted since the value and validity of a patent that may be subsequently granted will to a large extent depend on the competence with which the specification has been prepared. Accordingly, patent specifications are usually drafted by a patent attorney who specialises in this kind of work.

Provisional specification [17.1960] As indicated at [17.1950], a provisional application must be accompanied by a provisional specification: Patents Act 1990 (Cth), s 29(3). The Patents Act 1990 (Cth) as amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) provides that:

chapter 17 Intellectual Property

A provisional specification must disclose the invention in a manner which is clear enough and complete enough for the invention to be performed by a person skilled in the relevant art: s 40(1). A provisional application and specification will lapse unless a complete application and a complete specification are filed within 12 months of the filing of the provisional application: ss 38, 142(1), Patents Regulations 1991 (Cth), reg 3.10. The advantage of a provisional application is that it gives the applicant a further 12 months for further development of their invention before a complete application has to be filed. In essence, the purpose of a provisional specification is to establish a priority date for the invention, that is, to establish a priority date for the claims made subsequently in a complete specification (priority dates are discussed further at [17.2000]).

Complete specification [17.1970] As mentioned at [17.1950], a complete application must be accompanied by a complete specification: Patents Act 1990 (Cth), s 29(4). The complete specification forms the basis for the grant of a patent. The Patents Act 1990, s 40(2), as amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) provides that a complete specification must: (a)

disclose the invention in a manner which is clear enough and complete enough for the invention to be performed by a person skilled in the relevant art;

(b)

disclose the best method known to the applicant of performing the invention; and

(c)

where it relates to an application for a standard patent – end with a claim or claims defining the invention.

The specification of a complete application must include a precise technical statement of what is claimed to be the invention and be sufficient for a person who knows the technology involved to put into practical effect. If the complete specification does not comply with these requirements, for example if it fails to disclose to those who might wish to make the product after the patent expires how the product should be constructed, then if a patent is granted it will be invalid and may be revoked.

Claims in a complete specification [17.1980] The object of the claims in a patent specification is to define the exact scope of the protection sought by the patent, if granted, and the field from which the patent will seek to exclude others. The claim or claims in the complete specification must be clear and succinct and supported by matter disclosed in the specification: Patents Act 1990 (Cth), s 40(3). 30 The claim or claims must relate to one invention only: s 40(4). A patent will only protect what is claimed in the complete specification.

Priority dates [17.1990] The purpose of a provisional application and provisional specification is to establish a priority date for the claims made subsequently in a complete specification. One of the important features of the Patents Act 1990 (Cth) is the notion of priority dates since the rights of the patentee, if the patent is granted, will operate from this date and, for example, give the patentee priority over any later application. The general position is that the priority date of a claim of a complete specification is the date of filing the complete specification in the Patent Office. However, following amendment by the Intellectual Property 30

Prior to amendment by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), the Patents Act 1990 (Cth), s 40(3) required that the claims must be “fairly based” on the matter described in the specification.

515

516

Introduction to Business Law in Australia

Laws Amendment (Raising the Bar) Act 2012 (Cth) where a provisional specification discloses the invention in the claim in a manner that is clear enough and complete enough for the invention to be performed by a person skilled in the relevant art, the priority date of the claim in the complete specification will be the date of making the provisional application: Patents Act 1990 (Cth), s 43(2)(b). Thus, where a provisional application for a patent is made, the provisional specification should contain a clear description of the main essentials of the invention since the priority date of claims in the complete specification depends on whether there is sufficient disclosure of the invention in the provisional specification. The Patents Act 1990 provides that a patent is not invalid, so far as the invention is claimed in any claim, merely because of the publication or use of the invention on or after the priority date of the claim, or the grant of another patent which claims the invention in a claim of the same or a later priority date: s 23.

Examination [17.2000] An examination of a patent request relating to a complete application with its accompanying complete specification must be conducted by a patent examiner before a standard patent may be granted. There is no automatic examination of patent applications and such examination will only be conducted at the request of the applicant: Patents Act 1990 (Cth), s 44(1). The basic position is that an application will lapse if a request for examination is not made within five years from the filing date of the complete application, or within two months after notice of direction to request such examination by the Commissioner of Patents: ss 44(2), 142(2); Patents Regulations 1991 (Cth), regs 3.15, 3.16. Where a request for examination is made, the patent request and complete specification are referred to a patent examiner. The examiner will report, inter alia, on whether the specification complies with the requirements of the Patents Act 1990 (Cth) and whether it satisfies the criteria of a patentable invention (that is, whether it is a manner of manufacture, is novel, involves an inventive step and is useful under s 18(1)(a), (b) and (c)): s 45. Broadly, one of the principal functions of the patent examiner is to report on whether the patent application and specification has, in essence, been anticipated by the prior art, for example lacks novelty or an inventive step in the light of earlier patent specifications. The examiner will conduct a search of such material. Should the examiner report adversely to the patent application the applicant may seek leave from the Commissioner of Patents to make amendments to overcome the examiner’s objections: s 104. When an examiner is satisfied that there are no further objections and has issued a clear report, the application is ready for acceptance.

Acceptance and publication [17.2010] The Commissioner must accept a patent request and complete specification if the Commissioner is satisfied, on the balance of probabilities, that the specification complies with the requirements of the Patents Act 1990 (Cth) (see [17.1980]); satisfies the criteria of a patentable invention (namely, that it is a manner of manufacture, is novel, involves an inventive step and is useful under s 18(1)(a), (b) and (c)) and complies with any other matters that may be prescribed by the regulations: s 49(1). This does not mean that the patent is then automatically granted; it simply means that the Commissioner is prepared, in the absence of objections from interested persons, to grant a patent. Once the patent request and complete specification are accepted, the applicant is notified of such, and a notice of the acceptance is published in the Australian Official Journal of Patents, Trade Marks and Designs. If the patent request and complete specification have not already become open to public inspection, the notice must include a statement to the effect that the patent request and complete

chapter 17 Intellectual Property

specification are open to public inspection: s 49(5), (6)(b). The general public is thereby notified that the Commissioner is ready to grant the patent unless the grant of the patent is opposed. The patent documents may have become open to public inspection at an earlier date. Thus, the complete specification normally becomes open to public inspection 18 months after the date of the filing of the specification, or 18 months from the earliest provisional application associated with the complete specification: s 54(3); Patents Regulations 1991 (Cth), reg 4.2(3). An applicant may also request that the patent documents become open to public inspection at an earlier date: Patents Act 1990 (Cth), s 54(1); Patents Regulations 1991 (Cth), reg 4.2(2).

Grounds of opposition to the grant of a standard patent [17.2020] Once the application for a standard patent becomes open to public inspection, it is likely to be scrutinised by competitors who may decide to oppose the grant of the patent. Thus, a person may oppose the grant of a standard patent by giving notice of opposition within three months of publication in the Official Journal of the Commissioner’s notice of acceptance of the patent request and complete specification: Patents Act 1990 (Cth), s 59; Patents Regulations 1991 (Cth), reg 5.4(1). Section 59 of the Patents Act 1990 (Cth) provides that the only grounds on which a patent may be opposed are: (a)

that the nominated person is either: (i)

not entitled to a grant of a patent for the invention; or

(ii)

entitled to a grant of a patent for the invention but only in conjunction with some other person;

(b)

that the invention is not a patentable invention; or

(c)

the complete specification does not comply with the requirements of s 40(2), (3): see [17.1980]–[17.1990].

The parties will argue the matter before the Commissioner: s 60. If the Commissioner is satisfied, on the balance of probabilities, that a ground of opposition to the grant of the standard patent exists, the Commissioner may refuse the application: s 60(3A). An appeal lies to the Federal Court against a decision of the Commissioner: s 60(4); Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd (2012) 210 FCR 21. The Patents Regulations 1991 (Cth) contain detailed provisions regarding the procedural requirements in respect of opposition proceedings: regs 5.5 – 5.26.

Re-examination [17.2030] The Patents Act 1990 (Cth) provides for the re-examination of a patent in certain circumstances. If, after acceptance of an application, the Commissioner becomes aware of information which may affect the validity of the patent were it to be granted, the Commissioner may re-examine the complete specification: s 97(1). Furthermore, even where a patent has been granted the Commissioner may re-examine the complete specification and must do so if asked by the patentee or any other person: s 97(2). Where the validity of a patent is disputed in court proceedings, the court may direct the Commissioner to re-examine the complete specification: s 97(3). The re-examination must be carried out in accordance with the regulations: s 97(3A). On re-examining a complete specification, the Commissioner must ascertain and report on whether the complete specification complies with the requirements of s 40(2), (3) (see [17.1980]-[17.1990]) and whether to the best of his or her knowledge, the invention, so far as claimed, satisfies the criteria mentioned in s 18(1)(a), (b) and (c) (namely, that it is a manner of manufacture, novel, involves an inventive step and is useful): s 98.

517

518

Introduction to Business Law in Australia

The Commissioner may refuse to grant a patent if the Commissioner: (a)

makes an adverse report on a re-examination of the relevant specification under s 97(1) (that is, after acceptance of an application); and

(b)

is satisfied, on the balance of probabilities, that there is a lawful ground of objection to the specification: s 100A(1).

Further, the Commissioner may, by notice in writing, revoke a patent, either wholly or so far as it relates to a particular claim, if the Commissioner: (a)

makes an adverse report on a re-examination of the relevant specification under s 97(2) (that is, after a patent has been granted); and

(b)

is satisfied, on the balance of probabilities, that there is a lawful ground of objection to the relevant specification: s 101(1).

An appeal lies to the Federal Court against a decision of the Commissioner under these provisions.

Grant, date, and term of a standard patent [17.2040] If there is no opposition to the grant of the patent, or such opposition is unsuccessful, the Commissioner must grant a standard patent for the invention by sealing a standard patent in the approved form. A standard patent is to be granted within three to six months of publication of notice of acceptance of the patent request and complete specification in the Official Journal in the absence of opposition or court proceedings: Patents Regulations 1991 (Cth), reg 6.2. The term of a standard patent is 20 years from the date of the filing of the complete specification: Patents Act 1990 (Cth), ss 65, 67. The Patents Act 1990 contains provisions enabling a four-year extension for a standard patent of a pharmaceutical substance per se for human use: ss 70 – 79. An extension may be opposed on the ground that a requirement for the extension was not satisfied (s 75(1)); an appeal lies to the Federal Court by an applicant and any opponent against a decision of the Commissioner (s 75(4)): Spirit Pharmaceuticals Pty Ltd v Mundipharma Pty Ltd (2013) 216 FCR 344. 31

Innovation patent [17.2050] The discussion so far has centred on the application and grant of a standard patent. However, as previously mentioned, an application can be made for either a standard patent or for an innovation patent. The innovation patent was introduced on 24 May 2001 following the enactment of the Patents Amendment (Innovation Patents) Act 2000 (Cth). The innovation patent is intended to provide local industry, particularly small to medium size businesses and individuals, with a relatively cheap patent right that is quick and easy to obtain for minor or lower-level inventions. 32

31

C Lawson, “How are Pharmaceutical Patent Term Extensions Justified? Australia’s Evolving Scheme” (2013) 21 Journal of Law and Medicine 379.

32

At the time of writing, the Federal Government was considering its response to the recommendations of the Advisory Council on Intellectual Property in its Review of the Innovation Patent System – Final Report (May, 2014).

chapter 17 Intellectual Property

Principal differences between an innovation patent and a standard patent 1. No substantive examination prior to grant [17.2060] Basically, an application (that is, a patent request and complete specification) for an innovation patent will be accepted and an innovation patent granted provided that the formalities of the application have been complied with: Patents Act 1990 (Cth), s 52. That is, there is no substantive examination of the application before the innovation patent is granted.

2. Certification necessary to bring an action for infringement [17.2070] For an innovation patent owner to be able to enforce their rights under the innovation patent, certification of the patent is necessary: Patents Act 1990 (Cth), s 120(1A). This will require examination of the innovation patent. That is, the patentee may request examination if they intend to enforce their rights against a potential infringer. Examination of the innovation patent will also occur where requested by the Commissioner of Patents or a third party: s 101A. In examining an innovation patent the Commissioner is to report on whether, inter alia, the specification complies with the general provisions as to specifications in s 40(2)-(4) (see [16.1970]–[16.980]) and the requirements of an innovation patent (see [17.2090]): s 101B. If the Commissioner decides in writing that he or she is satisfied on the balance of probabilities that the patent complies with these requirements, the Commissioner must: (a)

notify the patentee that the patent has been examined and that a certificate of examination is to be issued;

(b)

publish a notice of the examination in the Official Journal;

(c)

issue a certificate of examination to the patentee; and

(d)

register the issue of the certificate: s 101E.

If these requirements are found on examination not to have been complied with the Commissioner must revoke the innovation patent: s 101F. Provision is made for the re-examination of an innovation patent (s 101G) and for its revocation in the event of an adverse report where the Commissioner is satisfied, on the balance of probabilities, that there is a ground of revocation: s 101J. Any person can oppose, in accordance with the regulations, an innovation patent that has been certified and seek its revocation on the grounds that the patentee is not entitled to the patent or only entitled to it in conjunction with some other person; that the complete specification does not comply with the general provisions as to specifications in s 40(2) – (3) (see [16.1970]–[16.980]); or does not comply with the requirements of an innovation patent (see [17.2090]): s 101M.

3. Requirements of an innovation patent [17.2080] The basic requirements for an invention to be patentable as an innovation patent are essentially the same as those in respect of standard patents, including that the invention is a manner of manufacture, novel, useful and not secretly used before the priority date of the claim: Patents Act 1990 (Cth), s 18(1A)(a), (b) and (c). However, there is one important difference. For a claim of a standard patent to be valid it must involve an inventive step (s 18(1)(b)(ii), see [17.1910]). The corresponding requirement in the case of an innovation patent is that the claim must involve an innovative step: s 18(1A)(b)(ii). An innovative step requires a substantial contribution to the working of the invention: s 7(4). This is a lower inventive threshold than that of an inventive step required for a standard patent. The prior art base against which an innovative step is judged is essentially the same as for a standard patent (see [17.1890]). The presence or

519

520

Introduction to Business Law in Australia

absence of a substantial contribution when the invention as claimed in each claim is compared with a prior disclosure involves a finding of fact: Dura-Post (Australia) Pty Ltd v Delnorth Pty Ltd (2009) 177 FCR 239. There are additional restrictions in respect of an innovation patent. Thus, an innovation patent cannot be obtained for plants and animals and the biological processes for the generation of plants and animals: s 18(3). This restriction does not apply to microbiological processes or the products of such processes: s 18(4). An application for an innovation patent must have one and no more than five claims: s 40(2)(c). In contrast, there is no limit to the number of claims that may be made in a standard patent.

4. Term of an innovation patent [17.2090] The maximum term of an innovation patent is eight years (compared with the usual 20 years for a standard patent): Patents Act 1990 (Cth), s 68.

Exclusive rights given by a patent [17.2100] A patent gives the patentee the exclusive right, during the term of the patent, to exploit the invention: Patents Act 1990 (Cth), s 13(1). The term “exploit” is defined in the Dictionary in Sch 1 of the Act as including: (a)

where the invention is a product – make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things; or

(b)

where the invention is a method or process – use the method or process or do any act mentioned in paragraph (a) in respect of a product resulting from such use.

Furthermore, the Patents Act 1990 has extended the grounds of infringement to include, in certain circumstances, the supply of a product, the use of which would infringe the patent: s 117; Northern Territory of Australia v Collins (2008) 235 CLR 619; cf Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 88 ALJR 261. The exclusive rights of a patentee are personal property and are capable of assignment and of devolution by law: s 13(2). As personal property, patent rights can be dealt with in the same way as any other chose in action, that is, they can be sold, leased, mortgaged or bequeathed in a will. An assignment of a patent must be in writing signed by or on behalf of the assignor and assignee, and a patent may be assigned for a place in or part of Australia: s 14. An inventor may benefit from their patented invention in any of the following ways, namely: (a)

exploit the rights under the patent personally;

(b)

sell or assign the patent or the rights to the patent outright; or

(c)

grant licences either exclusively to one person, or non-exclusively to several, in consideration of the payment of royalties.

Provision is made for the court to make an order requiring the patentee to grant an applicant a compulsory licence to work the patented invention, where the court is satisfied that the reasonable requirements of the public have not been satisfied and the patentee has given no satisfactory reason for failing to exploit the patent: ss 133 – 136.

chapter 17 Intellectual Property

Infringement of a patent [17.2110] A patent will be infringed where a person does something in relation to the invention which falls within the scope of the patentee’s exclusive rights (as outlined in the previous section) without the patentee’s consent. An alleged infringement must be assessed against a claim or claims for the patented invention. To establish an infringement of a patent, it must be shown that each of the essential integers, that is, features or elements, of the patent claim in issue has been taken by the alleged infringer in, for example, making their product or used in their process. Conversely, there will be no infringement if one or more of the essential elements in the claim is omitted or substituted by something different, that is, by something which does not fall within the description used by the claim: Populin v HB Nominees Pty Ltd (1982) 41 ALR 471; MJA Scientifics International Pty Ltd v SC Johnson & Son Pty Ltd (1998) 43 IPR 287. An essential element in an infringement action is the construction of the relevant claim or claims in the specification. The modern trend is to adopt what is referred to as a purposive construction, that is, regard is to be given to the purpose of the particular words used in a claim, rather than merely applying a purely literal construction: Catnic Components Ltd v Hill & Smith Ltd [1982] RPC 183 (HL); Nesbit Evans Group Australia Pty Ltd v Impro Ltd (1997) 39 IPR 56. In Kimberly-Clark Australia Pty Ltd v Multigate Medical Products Pty Ltd (2011) 92 IPR 21, the Full Federal Court held that the claims of the appellant’s patent specification for a “sterilization wrap” (used for sterilising surgical instruments) comprised of two fabric sheets joined together was not infringed by the respondent’s sterilisation wrap consisting of a single sheet folded over to give two layers.

Exemptions from infringement [17.2115] The Patents Act 1990 (Cth) was amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) to provide a new exemption from infringement where a patent is used for experimental purposes. A person may undertake an act without infringing a patent if it was for experimental purposes relating to the subject matter of the invention: s 119C(1). “Experimental purposes” include, but are not limited to: (a)

determining the properties of the invention;

(b)

determining the scope of a claim relating to the invention;

(c)

improving or modifying the invention;

(d)

determining the validity of the patent or of a claim relating to the invention; and

(e)

determining whether the patent for the invention would be, or has been, infringed by the doing of an act: s 119C(2).

The provision applies to acts done on or after 15 April 2012 in relation to patents granted before or after that date. A further exemption has been introduced with respect to acts undertaken for regulatory approval. A person may do an act without infringing a patent if it was solely for: (a)

purposes connected with obtaining an approval required by law to exploit a product, method or process; or

(b)

purposes connected with obtaining a similar approval under a law of another country: s 119B.

The provision does not apply in relation to a pharmaceutical patent which already had, and will continue to have, a similar exemption under s 119A.

521

522

Introduction to Business Law in Australia

Remedies for infringement [17.2120] Proceedings for infringement may be brought either by the patentee or an exclusive licensee, although where proceedings are brought by an exclusive licensee, the patentee must be joined as a party to the proceedings either as a co-plaintiff or as a defendant: Patents Act 1990 (Cth), s 120. The relief which a court may grant for infringement of a patent includes an injunction and, at the option of the plaintiff, either damages or an account of profits: s 122(1). 33 A court may refuse to award damages, or to make an order for an account of profits, if the defendant satisfies the court that at the date of the infringement the defendant was not aware, and had no reason to believe, that a patent for the invention existed. However, if patented products, marked so as to indicate that they are patented in Australia, were sold or used to a substantial extent before the date of the infringement, the defendant is to be taken to have been aware of the existence of the patent unless the contrary is established: s 123. Broadly, damages or an account of profits for infringement of a patent can be awarded back to the time when the patent became open to public inspection but proceedings for infringement cannot be instituted until the patent is granted: s 57. The High Court has stated that the purpose of the remedy of an account of profits is to prevent the unjust enrichment of the defendant: Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101. The court held in the latter case that a proportion of general overhead costs is allowable as a deduction in determining the profits made by the defendant from their infringement of the plaintiff’s patent. An interlocutory injunction may be granted in a case of a threatened infringement to restrain the importation and/or sale of goods alleged to infringe the plaintiff’s patent before the trial of the action. When determining whether to grant an interlocutory injunction, the court considers whether there is a prima facie case of infringement and the balance of convenience, that is, whether the inconvenience or injury that the plaintiff would be likely to suffer if an injunction was refused, outweighs or is outweighed by the injury which the defendant would suffer if an injunction was granted: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618. In another example, Apple succeeded at first instance in obtaining an interlocutory injunction restraining Samsung from launching its tablet computer, the Galaxy Tab 10.1, into the Australian market just prior to Christmas 2011: Apple contended that the Samsung tablet computer infringed its patents in the Apple iPad computer. The Full Federal Court discharged (that is, set aside) the interlocutory injunction on appeal by Samsung: Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238.

Revocation of a patent [17.2130] It is important to appreciate that even where a patent is granted, this does not make the patent immune from further challenge. In other words, the grant of a patent is no guarantee of its validity. This is made clear by the Patents Act 1990 (Cth) which provides that nothing done under the Act guarantees that a patent is valid: s 20(1). Thus, a patent, once granted, may be subsequently revoked on certain specified grounds. A person may apply to the court for the revocation of a patent, either wholly or so far as it relates to a particular claim or claims, on one or more of the following grounds: (a) 33

that the patentee is not entitled to the patent; See G Adkins, “Decisions, Decisions: Damages or an Account of Profits for Patent Infringement?” (2011) 22 Australian Intellectual Property Journal 10.

chapter 17 Intellectual Property

(b)

that the invention is not a patentable invention (that is, under s 18);

(c)

that the patentee has contravened a condition in the patent;

(d)

that the patent was obtained by fraud, false suggestion or misrepresentation;

(e)

that an amendment of the patent request or the complete specification was made or obtained by fraud, false suggestion or misrepresentation;

(f)

that the specification does not comply with s 40(2) or (3) (that is, the requirements as to specifications, see [17.1970]–[17.1990]): s 138.

Furthermore, a defendant who is sued for infringement of the patent may counterclaim in the proceedings for revocation of the patent on one or more of the above grounds: s 121.

Register of Patents [17.2140] The Patents Act 1990 (Cth) provides for a Register of Patents in which are recorded particulars of patents in force; particulars of an entitlement as mortgagee, licensee or otherwise to an interest in a patent; and particulars of a transfer of an entitlement to a patent or licence, or to a share in a patent or licence: ss 186 – 187; Patent Regulations 1991 (Cth), reg 19.1. On the other hand, notice of any kind of trust relating to a patent or licence is not receivable by the Commissioner and must not be registered: Patents Act 1990 (Cth), s 188. The Register can be inspected by any person during office hours at the Patent Office: s 190.

Employee inventions [17.2150] The Patents Act 1990 (Cth) does not explicitly deal with an employer’s rights to inventions made by employees. The Act simply lists in s 15(1) those to whom a patent may be granted which includes, under s 15(1)(b), those who would, on the grant of a patent, be entitled to an assignment of the patent. This would include, in an appropriate case, an employer. The question of the ownership of employee inventions will, in essence, turn on the contractual relationship between an employer and employee. In the absence of an express contractual provision dealing with the subject of ownership of inventions, the question will be determined by the terms implied by law in a contract of employment. The general principle is that where an employee in the course of their employment makes an invention which it was part of their duty to make, the law implies into the contract of employment a term that the invention is the property of the employer: Sterling Engineering Co Ltd v Patchett [1955] AC 534; Triplex Safety Glass Co Ltd v Scorah (1938) 55 RPC 21. On the other hand, where the invention falls outside the scope of the employee’s normal duties, the invention will belong to the employee. For example, the Federal Court held that an invention had not been produced by an employee in the course of his employment but during his own time and therefore the employee was entitled to the benefit of the invention as against his former employer: Spencer Industries Pty Ltd v Collins (2003) 58 IPR 425. Usually, the rights of an employer to inventions made by their employee would be specifically dealt with in the contract of employment. Most large employers have a standard clause to be included in the service agreement of any employee who is likely to have an opportunity to make inventions connected with their work. Furthermore, professional employees owe their employers fiduciary obligations not to profit from their position at the expense of their employer and to avoid conflicts of interest and duty: Victoria University of

523

524

Introduction to Business Law in Australia

Technology v Wilson (2004) 60 IPR 392 at [149]. In the latter case it was held that two university academics had breached this duty in respect of an invention and associated software they had devised and for which they sought patent protection: they were ordered to account to the university for the benefits they had derived from their inventions. The general position of academics in universities who devise inventions in the course of their employment in the absence of specific contractual provision was considered by the Full Court of the Federal Court in University of Western Australia v Gray (2009) 179 FCR 346:

University of Western Australia v Gray [17.2160] In University of Western Australia v Gray (2009) 179 FCR 346 Dr Gray was appointed professor of surgery by the University of Western Australia (UWA). He was required to teach and to conduct and stimulate research. Dr Gray discovered an innovative way of treating liver cancer by developing a range of microspheres which could be injected into the liver’s blood supply and carried different anti-cancer agents to tumour sites. He was also a director and shareholder of a publicly listed company which was floated to commercialise and market the microspheres. UWA commenced proceedings against Dr Gray and the company claiming an interest in certain technologies UWA claimed were developed by Dr Gray while he was employed by the university. UWA alleged that Dr Gray had breached his contract of employment by failing to comply with disclosure and associated obligations imposed by its Patents Regulations; however, it was found that these had not been effectively promulgated. UWA further argued that it was an implied term of Dr Gray’s contract of employment that intellectual property developed in the course of his employment belonged to the university. However, this contention was rejected at first instance in the Federal Court by French J who said: “Absent express agreement to the contrary, rights in relation to inventions made by academic staff in the course of research and whether or not they are using university resources, will ordinarily belong to the academic staff as the inventors under the [Patents Act 1990 (Cth)]. The position is different if staff have a contractual duty to try to produce inventions. But a duty to research does not carry with it a duty to invent” (University of Western Australia v Gray (No 20) (2008) 246 ALR 603 at [12]). French J considered that the “only secure way” for UWA to acquire property rights from its academic staff in respect of intellectual property developed by them in the course of research was by express provision in their contracts of employment: at [12], [14]. UWA appealed to the Full Federal Court. However, the latter unanimously upheld the decision of French J and dismissed UWA’s appeal. In particular, the Full Federal Court agreed with the analysis of French J in rejecting UWA’s contention that there was an implied term in Dr Gray’s contract of employment with the university that inventions developed in the course of his research belonged to the university. The High Court refused special leave to appeal against the decision of the Full Federal Court.

Foreign patents [17.2170] A patent granted in one country only receives protection in that country. To extend such protection to other countries separate applications must be made in the countries concerned.

chapter 17 Intellectual Property

Practically all the major countries of the world are parties to the International Convention for the Protection of Industrial Property (the Paris Convention) dating from 1883, which provides, inter alia, for certain priorities to be given to patent applications in member countries. For example, a foreign applicant for an Australian patent is enabled to claim priority for the application based on the date of their application made in another country that is a party to the Convention, provided the Australian application is made within 12 months of the application in the other Convention country. The Patent Co-operation Treaty 1970 to which Australia became a party in 1979 is aimed at simplifying the procedures for obtaining patents in other countries but the scope of that treaty and of the European Patent Conventions lie outside the scope of the present work.

Trade marks Nature of a trade mark [17.2180] A trade mark is a distinctive symbol which when applied to the goods or services of a particular trader distinguishes the trader’s goods or services from those of other persons. The function or essential characteristric of a trade mark is to indicate the commercial or trade origin of the goods or services to which it is applied: EJ Gallo Winery v Lion Nathan Australia Pty Ltd (2010) 241 CLR 144 at [42]-[43]. The Trade Marks Act 1995 (Cth) provides for the registration of trade marks and remedies for their infringement by those who use the same or similar trade mark.

Definition of a trade mark [17.2190] The Trade Marks Act 1995 (Cth) defines a trade mark as follows: A “trade mark” is a sign used, or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provided by any other person: s 17. It will be observed that central to that definition is the concept of a trade mark as a sign. A sign is in turn defined as including the following (or any combination): Any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent: s 6. The inclusion of any aspect of packaging, shape, colour, sound or scent significantly broadens the range of features or signs which are registrable under the present Trade Marks Act 1995 compared with the position under the former Trade Marks Act 1955 (Cth). For example, it was held by the House of Lords in Coca-Cola Trade Marks [1986] 1 WLR 695 that the well-known shape of the Coke bottle could not be registered as a trade mark; such would be registrable under the present legislation. Furthermore, sounds and smells are now registrable as trade marks.

Rights given by registration of a trade mark [17.2200] The registered owner of a trade mark has the exclusive rights to: (a)

use the trade mark;

(b)

authorise other persons to use the trade mark in relation to the goods and/or services in respect of which the trade mark is registered; and

(c)

obtain relief under the Trade Marks Act 1995 (Cth) if the trade mark has been infringed: s 20.

525

526

Introduction to Business Law in Australia

Infringement of a registered trade mark is discussed at [17.2400]. The Trade Marks Act 1995 provides that a registered trade mark is personal property: s 21.

Application for registration of a trade mark [17.2210] A trade mark may be registered in respect of goods or services, or both goods and services: Trade Marks Act 1995 (Cth), s 19. A person may apply for the registration of a trade mark in respect of goods and/or services if: (a)

the person claims to be the owner of the trade mark; and

(b)

one of the following applies: (i)

the person is using or intends to use the trade mark;

(ii)

the person has authorised or intends to authorise another person to use the trade mark;

(iii)

the person intends to assign the trade mark to a body corporate that is about to be constituted: s 27(1).

The application must be in accordance with the Regulations and be filed at the Trade Marks Office in Canberra or at one of the sub-offices in the State capital cities. Trade marks are divided into 34 classes for goods and eight classes for services: Trade Marks Regulations 1995 (Cth), Sch 1. An application for registration of the trade mark may be made in respect of goods and services of one or more of these classes: Trade Marks Act 1995 (Cth), s 27(5). Registration of a trade mark may be in respect of goods or services of more than one class: s 19(2). The application will be examined to determine whether it is in accordance with the Act and whether there are grounds for rejecting it: s 31. Depending on the examination, the Registrar of Trade Marks will either accept or reject the application but may not reject an application without giving the applicant the opportunity of being heard: s 33. The Registrar must notify the applicant in writing of the decision to accept or reject the application and advertise the decision in the Official Journal: s 34. The applicant may appeal to the Federal Court against a decision of the Registrar to reject the application or to accept it subject to conditions or limitations: s 35.

Grounds for rejecting an application for registration [17.2220] The Trade Marks Act 1995 (Cth) contains a number of grounds on which the Registrar may reject an application for the registration of a trade mark.

Trade mark cannot be represented graphically [17.2230] An application for the registration of a trade mark must be rejected if the trade mark cannot be represented graphically: Trade Marks Act 1995 (Cth), s 40.

Trade mark does not distinguish the applicant's goods or services [17.2240] An application for the registration of a trade mark must be rejected if the trade mark is not capable of distinguishing the applicant’s goods or services in respect of which the trade mark is sought to be registered from the goods or services of other persons: Trade Marks Act 1995 (Cth), s 41(1). 34 A trade mark is taken not to be capable of distinguishing the designated goods or services from those of other persons only if either s 41(3) or (4) (discussed below) applies to the trade mark: s 41(2). 34

It is important to note that s 41 above is a reworded section replacing the former s 41 of the Trade Marks Act 1995 (Cth) under the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth), Sch 6, Item 113. The new s 41 came into operation on 15 April 2013.

chapter 17 Intellectual Property

In deciding whether or not a trade mark is capable of distinguishing the designated goods or services from those of other persons, the Registrar is first to take into account the extent to which the trade mark is inherently adapted to distinguish the applicant’s goods or services from those of others: s 41(3). Trade marks that are not inherently adapted to distinguish goods or services are mostly trade marks that consist of a sign that is ordinarily used to indicate the kind, quality, quantity, intended purpose, value, geographical origin, or some other characteristic, of goods or services. If the Registrar is unable to decide whether the trade mark is capable of distinguishing the applicant’s goods or services, then the following provisions apply. If the Registrar finds that the trade mark is to some extent inherently adapted to distinguish the applicant’s goods or services, then the Registrar is to consider whether that fact combined with the use, or intended use, of the trade mark by the applicant, together with any other circumstances, are sufficient to conclude that the trade mark does or will distinguish the applicant’s goods or services from those of others: s 41(4). If the Registrar finds that the trade mark is not inherently adapted to distinguish the applicant’s goods or services from those of others but the applicant establishes that, because of the extent to which the applicant has used the trade mark before filing the application, it does distinguish the applicant’s goods or services, then the trade mark is taken to be capable of distinguishing the designated goods or services from those of other persons and is therefore registrable: Trade Marks Act 1995 (Cth), s 41(3).

Cantarella Bros Pty Ltd v Modena Trading Pty Ltd [17.2245] In Cantarella Bros Pty Ltd v Modena Trading Pty Ltd [2014] HCATrans 157 (5 August 2014) the respondent owned registered trade marks for “Oro” and “Cinque Stelle” (the Italian words for “gold” and “five stars”) in relation to coffee and related products. The respondent alleged that the appellant had infringed its trade marks by importing into Australia Italian coffee products in packaging containing the words. The appellant cross-claimed, seeking cancellation of the respondent’s registered trade marks on the basis that they were not capable of distinguishing the respondent’s goods from those of other persons within the meaning of the former s 41 of the Trade Marks Act 1995 (Cth) (see the first footnote in [17.2240]). The primary judge found that the words were sufficiently inherently adapted (that is, distinctive) to distinguish the respondent’s products from those of other persons on the basis that they were not commonly understood by ordinary, English-speaking Australians as signifying any particular attribute of the relevant goods. The Full Federal Court allowed the appellant’s appeal. The Full Court held that the primary judge had erred in the test he applied in determining the issue of distinctiveness. The correct test is whether or not traders in the relevant goods are likely, in the ordinary course of their business and without any improper motive, to desire to use the marks in connection with their own goods, as informed by how the marks would be understood by consumers in the relevant market: Modena Trading Pty Ltd v Cantarella Bros Pty Ltd (2013) 215 FCR 16 at [74], [80] and [83]–[85]. Consequently, the Court ordered that the Register of Trade Marks be rectified by cancelling the registration of the respondent’s trade marks (see further on the cancellation of a registered trade mark [17.2280]). The High Court has reserved its decision in the case.

527

528

Introduction to Business Law in Australia

Trade mark likely to deceive or cause confusion [17.2250] An application for the registration of a trade mark in respect of particular goods or services must be rejected if the use of the trade mark in relation to those goods or services would be likely to deceive or cause confusion: Trade Marks Act 1995 (Cth), s 43.

Substantially identical trade marks [17.2260] An application for the registration of a trade mark in respect of goods must be rejected if the applicant’s trade mark is substantially identical with or deceptively similar to a trade mark registered by another person in respect of similar goods or closely related services, or to a trade mark being sought in respect of similar goods or services by another person, unless the priority date for the registration of the applicant’s trade mark is earlier. There is a similar provision in respect of an application for the registration of a trade mark relating to services: Trade Marks Act 1995 (Cth), s 44(1), (2). However, the above discussion is subject to the honest concurrent use provisions of the Act. Thus, sometimes traders may adopt the same or a similar mark for their goods and services in good faith and quite independently of each other. To deal with this situation, the Trade Marks Act 1995 provides that if the Registrar is satisfied that there has been an honest concurrent use of the two trade marks, or that because of other circumstances it is proper to do so, the Registrar may accept the application for the registration of the applicant’s trade mark subject to any conditions or limitations that the Registrar thinks fit to impose. If the applicant’s trade mark has been used only in a particular area, the limitations may include that the use of the trade mark is to be restricted to that particular area: s 44(3). Furthermore, if the Registrar is satisfied that the applicant, or her or his predecessor in title, have used the trade mark in respect of similar goods or closely related services for a period before the priority date for the registration of the other trade mark up to the priority date for the registration of the applicant’s trade mark, the Registrar is not to reject the application because of the existence of the other trade mark: s 44(4).

Other grounds for rejection [17.2270] An application for the registration of a trade mark must be rejected if: (a)

the trade mark contains or consists of scandalous matter; or

(b)

its use would be contrary to law: Trade Marks Act 1995 (Cth), s 42.

An application must also be rejected if the trade mark contains a sign that, under the regulations, is not to be used as a trade mark: s 39. This includes, for example, the words Patent, Patented, By Royal Letters Patent; or a representation of the Arms, flag or seal, of the Commonwealth, a State or Territory: Trade Marks Regulations 1995 (Cth), reg 4.15.

Opposition to registration [17.2280] Where the Registrar has accepted an application for the registration of a trade mark, a person may oppose the registration by filing a notice of opposition within three months from the day on which the acceptance of the application is advertised in the Official Journal: Trade Marks Act 1995 (Cth), s 52; Trade Mark Regulations 1995 (Cth), reg 5.1. After hearing both the applicant and the opponent, the Registrar must decide whether to refuse to register the trade mark, or register the trade mark (with or without conditions or limitations) in respect of the goods and/or services specified in the application: Trade Marks Act 1995 (Cth), ss 54, 55. The applicant or opponent may appeal to the Federal Court from a decision of the Registrar: s 56.

chapter 17 Intellectual Property

Grounds for opposing registration [17.2290] The registration of a trade mark may be opposed on any of the grounds on which an application for the registration of a trade mark may be rejected (see previous section), except the ground that the trade mark cannot be represented graphically: Trade Marks Act 1995 (Cth), s 58. Further grounds of opposition set down in the Trade Marks Act 1995 are as follows:

Applicant not the owner of the trade mark [17.2300] The registration of a trade mark may be opposed on the ground that the applicant is not the owner of the trade mark: Trade Marks Act 1995 (Cth), s 58.

Applicant not intending to use the mark [17.2310] A further ground of opposition is that the applicant does not intend: (a)

to use, or authorise the use of, the trade mark in Australia; or

(b)

to assign the trade mark to a body corporate for use in Australia: Trade Marks Act 1995 (Cth), s 59.

Trade mark similar to a trade mark that has acquired a reputation in Australia [17.2320] The registration of a trade mark in respect of particular goods and services may be opposed on the ground that: (a)

it is substantially identical with, or deceptively similar to, a trade mark that had already acquired a reputation in Australia; and

(b)

because of that reputation, the use of the applicant’s trade mark would be likely to deceive or cause confusion: Trade Marks Act 1995 (Cth), s 60.

Allergan Inc v Di Giacomo [17.2325] In Allergan Inc v Di Giacomo (2011) 199 FCR 126 the Federal Court upheld the opposition of the registered owner of a number of registered trade marks comprising the word “BOTOX” to an application for registration of the trade mark “No-Tox” in relation to facial care products on the ground that the use of the “No-Tox” mark would be likely to deceive or cause confusion within the meaning of s 60.

Trade mark contains a false geographical indication [17.2330] The registration of a trade mark in respect of particular goods may be opposed on the ground that the trade mark contains or consists of a sign that is a geographical indication for goods originating in a country, or in a region or locality in a country, other than that in which the goods actually originated: Trade Marks Act 1995 (Cth), s 61.

Application defective [17.2340] A further ground of opposition to registration is that the Registrar accepted the application on the basis of evidence or representations that were false: Trade Marks Act 1995 (Cth), s 62.

Application made in bad faith [17.2345] The registration of a trade mark may be opposed on the ground that the application was made in bad faith: Trade Marks Act 1995 (Cth), s 62A. The issue to be decided is whether the applicant’s

529

530

Introduction to Business Law in Australia

knowledge, in all the circumstances, was such that “persons adopting proper standards would regard the decision to register as in bad faith, or that reasonable and experienced persons in the field would view such conduct as falling short of acceptable commercial behaviour”: Fry Consulting Pty Ltd v Sports Warehouse Inc (No 2) (2012) 201 FCR 565 at [174] per Dodds-Sreeton J; cf DC Comics v Cheqout Pty Ltd (2013) 212 FCR 194.

Registration and term of registration [17.2350] When a trade mark has been registered, the Registrar must advertise the registration in the Official Journal, and give the registered owner of the trade mark a certificate of registration: Trade Marks Act 1995 (Cth), s 71. The registration of a trade mark expires after 10 years and may be renewed indefinitely for further periods of 10 years on payment of prescribed fees: ss 72(3), 77. The registration of a trade mark ceases if the trade mark is removed from the Register because of non-renewal or for non-use, or because the registration of the trade mark is cancelled: s 73.

Rectification of the register and cancellation [17.2360] On the application of an aggrieved person (that is, a person with a trading interest to protect) the court may order that the Register of Trade Marks be rectified by: (a)

entering in the Register particulars that were wrongly omitted from it; or

(b)

correcting any error in an entry: Trade Marks Act 1995 (Cth), s 85.

More significantly, the court, on the application of an “aggrieved person”, may order that the Register be rectified by: (a)

cancelling the registration of a trade mark;

(b)

removing or amending an entry wrongly made or remaining on the Register; or

(c)

entering any condition or limitation affecting the registration of a trade mark that ought to be entered: Trade Marks Act 1995 (Cth), s 88(1).

The High Court has held that the expression “aggrieved person” is to be liberally construed and that it is sufficient that the applicant and the proprietor of the mark both trade in the class of goods in respect of which the challenged mark is registered: Health World Ltd v Sin-Shun Australia Pty Ltd (2010) 240 CLR 590. The grounds on which an application for rectification may be made include: (a)

any of the grounds on which the registration of the trade mark could have been opposed (see [17.2320]–[17.2380]);

(b)

where an amendment of the application for registration was obtained as a result of fraud, false suggestion or misrepresentation;

(c)

where, because of the circumstances applying at the time when the application for rectification is filed, the use of the trade mark is likely to deceive or cause confusion for a reason other than one for which the application for registration could have been rejected (see [17.2240]–[17.2300]) or opposed (see [17.2320]–[17.2380]); and

chapter 17 Intellectual Property

(d)

where the entry on the Register was made, or had previously been amended, as a result of fraud, false suggestion or misrepresentation: Trade Marks Act 1995 (Cth), s 88(2).

Vivo International Corpn Pty Ltd v TiVo Inc [17.2365] In Vivo International Corpn Pty Ltd v TiVo Inc (2012) 294 ALR 661 TiVo Inc registered the trade mark “TiVo” in respect of audio-visual products in 2000. Vivo International Corpn Pty Ltd obtained registration of its trade mark “Vivo” in 2009 for similar audio-visual products. The Full Federal Court held that the “Vivo” trade mark was deceptively similar to the “TiVo” mark because of the “strong phonetic similarity” between the two marks. An order was made for the cancellation of the “Vivo” trade mark and an injunction granted restraining further use of the mark.

Trade mark liable to deceive or confuse [17.2367] If the ground for the application for rectification is that the trade mark is liable to deceive or confuse, the court may decide not to grant the application if the registered owner of the trade mark satisfies the court that this did not arise through any act or fault on her or his part: s 89.

Removal of a trade mark for non-use [17.2370] A trade mark is defined as a sign used or intended to be used to distinguish a person’s goods or services in the course of trade from those of any other person: Trade Marks Act 1995 (Cth), s 17. In other words, a basic requirement of a registered trade mark is that the owner is using it, or at least has a definite intention to use it. Accordingly, the Trade Marks Act 1995 contains provision for the removal of a registered trade mark for non-use: s 92. The latter section provides that a person aggrieved may apply to the Registrar for a trade mark to be removed from the Register for non-use. That is, a non-use application may be made to the Registrar for a trade mark to be removed from the Register on the grounds that: (a)

the applicant had no intention in good faith of using, authorising the use of, or assigning the trade mark to a body corporate for use in Australia, at the time the application for registration of the trade mark was filed, and the registered owner has not used the trade mark, or not used it in good faith, in Australia up to a month before the non-use application was filed (s 92(4)(a)); or

(b)

the trade mark has remained registered for a continuous period of three years up to a month before the non-use application was filed, and the registered owner has not used it, or not used it in good faith, in Australia at any time during that period. A non-use application on this ground may not be made before the expiry of five years from the filing of the application for the registration of the trade mark: ss 92(4)(b), 93(2); EJ Gallo Winery v Lion Nathan Australia Pty Ltd (2010) 241 CLR 144.

Any person may oppose an application to the Registrar for removal of a trade mark for non-use: s 96. If the Registrar is of the opinion that the application for the removal of the trade mark should be determined by the court, the Registrar can refer the matter to the court: s 94.

Infringement of trade marks and remedies for infringement [17.2380] A registered trade mark is infringed by a person who uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to goods or services in

531

532

Introduction to Business Law in Australia

respect of which the trade mark is registered: Trade Marks Act 1995 (Cth), s 120(1). To be liable for infringement, the defendant must have used the trade mark as a trade mark. Accordingly, merely to produce and deal in goods having the shape (being a functional shape) of something depicted by a trade mark is not to engage in a use of the mark:

Koninklijke Philips Electronics NV v Remington Products Australia Pty Ltd [17.2390] In Koninklijke Philips Electronics NV v Remington Products Australia Pty Ltd (2000) 100 FCR 90, the Full Federal Court held that the manufacture and sale of a rotary shaver with three shaving heads by Remington did not infringe the registered trade mark of Philips depicting three shaving heads forming an equilateral triangle.

“Substantially identical with” A person also infringes a registered trade mark if the person uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to: (a)

goods of the same description as that of goods (registered goods) in respect of which the trade mark is registered; or

(b)

services that are closely related to registered goods; or

(c)

services of the same description as that of services (registered services) in respect of which the trade mark is registered; or

(d)

goods that are closely related to registered services.

However, the person is not taken to have infringed the trade mark if the person establishes that using the sign as the person did is not likely to deceive or cause confusion: Trade Marks Act 1995 (Cth), s 120(2). Furthermore, a person infringes a registered trade mark if: (a)

the trade mark is well known in Australia; and

(b)

the person uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to: (i)

goods (unrelated goods) that are not of the same description as that of the goods in respect of which the trade mark is registered (registered goods) or are not closely related to services in respect of which the trade mark is registered (registered services); or

(ii)

services (unrelated services) that are not of the same description as that of the registered services or are not closely related to registered goods; and

(c)

because the trade mark is well known, the sign would be likely to be taken as indicating a connection between the unrelated goods or services and the registered owner of the trade mark; and

(d)

for that reason, the interests of the registered owner are likely to be adversely affected [emphasis added]: s 120(3).

chapter 17 Intellectual Property

In determining whether trade marks are substantially identical they are compared side by side, their similarities and differences assessed having regard to their essential features as identified by the court’s own judgment and by the evidence. If they differ only in non-essential respects, then they will be held to be substantially identical. As regards the issue of deceptive similarity, the Act provides that a trade mark is taken to be deceptively similar to another trade mark if it so nearly resembles that other trade mark that it is likely to deceive or cause confusion: s 10. Accordingly, it is a matter of comparing the impression that persons of ordinary intelligence would have of the plaintiff’s mark, as based on their recollection of it, and the impression created by use of the defendant’s mark: Shell Co of Australia Ltd v Esso Standard Oil (Aust) Ltd (1963) 109 CLR 407; Berlei Hestia Industries Ltd v Bali Co Inc (1973) 129 CLR 353. The Federal Court recently held that certain types of sports shoes (but not others) bearing four stripes marketed by the respondent were deceptively similar to the applicant’s registered trade marks of three stripes for sports shoes since: “[T]here is a real, tangible danger of confusion occurring, beyond a mere possibility, and a number of persons will be caused to wonder whether it might not be the case that the two products come from the same source”: Adidas AG v Pacific Brands Footwear Pty Ltd (No 3) (2013) 103 IPR 521. By contrast, the Federal Court held that the mark “DIGITAL POST AUSTRALIA” was not deceptively similar to the mark “AUSTRALIA POST”: Australian Postal Corporation v Digital Post Australia Pty Ltd (No 2) (2012) 96 IPR 532.

Statutory defences [17.2410] The Trade Marks Act 1995 (Cth) provides that, notwithstanding the factors constituting infringement set out at [17.2450] and [17.410], a person does not infringe a registered trade mark, inter alia, when the person: (a)

uses in good faith, her or his name, or the name of her or his place of business, or the name of her or his predecessor in business;

(b)

uses a sign in good faith to indicate the kind, quality, quantity, intended purpose, value, geographical origin, or some other characteristic of goods or services;

(c)

uses the trade mark in good faith to indicate the intended purpose of the goods (in particular as accessories or spare parts) or services;

(d)

uses the trade mark for the purposes of comparative advertising;

(e)

exercises a right to use a trade mark given to the person under the Act; or

(f)

the court is of the opinion that the person would obtain registration of the trade mark in her or his name if the person were to apply for it: s 122.

The Act also provides that a person who uses a registered trade mark in relation to goods that are similar to goods in respect of which the trade mark is registered does not infringe the trade mark if it has been applied to the goods by, or with the consent of, the registered owner of the trade mark; there is a similar provision in respect of the use of a trade mark in relation to services: s 123.

533

534

Introduction to Business Law in Australia

Transport Tyre Sales Pty Ltd v Montana Tyres Rims and Tubes Pty Ltd [17.2420] In Transport Tyre Sales Pty Ltd v Montana Tyres Rims and Tubes Pty Ltd (1999) 93 FCR 421 a trade mark had been applied overseas to tyres by the Australian registered owner of the trade mark. The Full Federal Court held that s 123 of the Trade Marks Act 1995 (Cth) provided a defence to the importer (that is, parallel importer) of the tyres into Australia.

Paul's Retail Pty Ltd v Sports Leisure Pty Ltd [17.2425] However, in Paul’s Retail Pty Ltd v Sports Leisure Pty Ltd (2012) 95 IPR 151 the Full Federal Court has held that the defence in s 123 does not apply to an importer where the registered owner consents to another person applying the registered mark on condition that the goods must not be supplied outside a designated territory, for example, India. In such a case the registered owner would not usually be regarded as having consented to the application of the mark to goods which the licensee knows at the time he or she applies the mark are to be supplied by him or her outside the designated territory.

No infringement A person does not infringe a registered trade mark by using an unregistered trade mark that is substantially identical with, or deceptively similar to, the registered mark in relation to similar goods or services, if the person and her or his predecessor in title, have continuously used the unregistered trade mark in the course of trade from a time before the date of registration of the registered trade mark, or first use of the trade mark by the registered owner, or a predecessor in title: Trade Marks Act 1995 (Cth), s 124.

Remedies for infringement [17.2450] The remedies for infringement of a trade mark include an injunction and, at the option of the plaintiff, either damages or an account of profits: Trade Marks Act 1995 (Cth), s 126(1). Section 126 was amended by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 (Cth) to give a court the discretion to award additional damages if the court considers it appropriate to do so having regard, inter alia, to: (a)

the flagrancy of the infringement;

(b)

the need to deter similar infringements of registered trade marks; and

(c)

any benefit shown to have accrued to the infringer because of the infringement: Trade Marks Act 1995 (Cth), s 126(2).

Halal Certification Authority Pty Ltd v Scadilone Pty Ltd [17.2455] In Halal Certification Authority Pty Ltd v Scadilone Pty Ltd (2014) 107 IPR 23 the respondent was found to have breached the applicant’s trade mark which was a food label indicating the food was “halal”, that is, slaughtered in accordance with Islamic rites. The respondent had

chapter 17 Intellectual Property

provided a false certificate each time a kebab shop asked for one. Substantial additional damages were awarded to “operate as a sufficient deterrent to ensure that the conduct will not occur again”: at [111] per Perram J.

Damages not to be awarded Damages or an account of profits are not to be awarded in respect of an infringement by the defendant if the latter has applied to the court for an order directing the Registrar to remove the trade mark from the Register for non-use (under s 92(4), see [17.2440]), and the court finds that there are grounds for so removing the trade mark because it had not been used in good faith by the registered owner: s 127.

Authorised users [17.2460] A person is an authorised user of a trade mark if the person uses the trade mark in relation to goods or services under the control of the owner of the trade mark. Where the owner of a trade mark exercises quality control over the goods and services provided by the user of the trade mark, or exercises financial control over the trading activities of the user, then such person is taken to use the trade mark in relation to the goods and services under the control of the owner of the trade mark: Trade Marks Act 1995 (Cth), s 8. The authorised user of a trade mark may do any of the following (subject to any agreement between the registered owner and the authorised user): (a)

use the trade mark in relation to the goods and/or services in respect of which the trade mark is registered;

(b)

bring an action for infringement of the trade mark if the registered owner refuses or neglects to do so within the prescribed period;

(c)

cause to be displayed on goods in respect of which the trade mark is registered a notice prohibiting certain acts, for example, altering, partially removing or obliterating the trade mark, or applying another trade mark to the goods;

(d)

give the Comptroller-General of Customs a notice (under s 132) objecting to the importation of goods that infringe the trade mark, or revoke such notice;

(e)

give permission to any person to alter, deface or remove the trade mark; and

(f)

give permission to any person to apply the trade mark in relation to goods, or in relation to goods or services in respect of which the trade mark is registered: s 26(1).

If the authorised user brings an action for infringement of the trade mark, the registered owner must be made a defendant to the action. However, the registered owner is not liable for costs if he or she does not take part in the proceedings: s 26(2).

Collective, certification and defensive trade marks [17.2470] The Trade Marks Act 1995 (Cth) makes provision for the registration of collective, certification and defensive trade marks.

Collective trade marks [17.2480] A collective trade mark is a sign used, or intended to be used, in relation to goods or services dealt with or provided in the course of trade by members of an association to distinguish those goods or

535

536

Introduction to Business Law in Australia

services from goods or services provided by persons who are not members of the association: Trade Marks Act 1995 (Cth), s 162. An application for registration of a collective trade mark must be made by the association to which the mark belongs: s 164. A collective trade mark may not be assigned: s 166. In an action by an association in whose name a collective trade mark is registered seeking relief for infringement of the collective trade mark, the association may take into account in claiming damages, any damage or loss of profits incurred by members of the association as a result of the infringement: s 167.

Certification trade marks [17.2490] A certification trade mark is a sign used to distinguish goods or services certified by the owner of the certification trade mark, in relation to quality, accuracy or some other characteristic, including (in the case of goods) origin, material or mode of manufacture, from other goods or services which are not so certified: Trade Marks Act 1995 (Cth), s 169. A person who has filed an application for the registration of a certification trade mark must also file a copy of the rules governing the use of the certification mark: s 173. Where the Registrar is satisfied that there are no grounds for rejecting the application, he or she must send a copy of the application to the Australian Competition and Consumer Commission for consideration as to whether the applicant is competent to certify the goods and/or services in respect of which the certification trade mark is to be registered, and that the rules governing the use of the certification mark would not be to the detriment of the public: ss 174, 175. A registered certification mark may be assigned only with the consent of the Commission: s 180. An example of certification trade marks are the trade marks owned by the Australian Standards Association.

Defensive trade marks [17.2500] The Trade Marks Act 1995 (Cth) provides further protection for well known registered trade marks by enabling their registration as defensive trade marks to prevent them from being used by others in relation to goods or services. Thus, if because of the extent to which a registered trade mark has been used in relation to all or any of the goods or services in respect of which it is registered, it is likely that its use in relation to other goods or services will be taken to indicate that there is a connection between those other goods or services and the registered owner of the trade mark, then on the application of the registered owner, the trade mark may be registered as a defensive trade mark in respect of any or all of those other goods or services. A trade mark may be registered as a defensive trade mark in respect of particular goods or services even if the registered owner does not use or intend to use the trade mark in relation to those goods or services: s 185. For example, the trade mark Ford is so well known in respect of motor vehicles that its use by some other person on motor vehicle batteries would be likely to indicate a connection between the batteries and the Ford Motor Company. Accordingly, such use could be prevented by registration of Ford for motor vehicle batteries as a defensive trade mark.

Assignment of trade marks [17.2510] A registered trade mark, or a trade mark whose registration is being sought, may be assigned. The assignment may be partial, that is, it may apply to some only of the goods and/or services in respect of which registration is sought or the trade mark is registered. The assignment may be with or without the goodwill of the business concerned in the relevant goods and/or services: Trade Marks Act 1995 (Cth), s 106. Where a registered trade mark is assigned, the person registered as the owner of the trade mark, or the person to whom the trade mark has been assigned, must apply to the Registrar for the assignment to be entered in the Register of Trade Marks: s 109.

chapter 17 Intellectual Property

Voluntary recording of claims to interests in trade marks [17.2520] The Trade Marks Act 1995 (Cth) makes provision for the recording of interests in registered trade marks in the Register of Trade Marks. Thus, if a person (other than the registered owner of the trade mark) claims to have an interest in a registered trade mark, that person and the registered owner of the trade mark may together apply to the Registrar to have particulars of the claim recorded in the Register: s 113. There is a similar provision where a person has applied for the registration of a trade mark: s 117. These provisions allow, for example, a bank to record a security interest (for example, a mortgage) in a trade mark. The voluntary recording scheme may also be utilised by a licensee who wishes to put third parties on notice that the registered owner has licensed the use of the trade mark to the licensee.

Importation of goods infringing Australian trade marks [17.2530] The Trade Marks Act 1995 (Cth) contains detailed provisions allowing the ComptrollerGeneral of Customs to seize and deal with goods that are imported into Australia if the importation infringes, or appears to infringe, a registered trade mark: ss 131 – 143.

Offences [17.2540] The Trade Marks Act 1995 (Cth) contains a number of offences in relation to trade marks. For example, it is an offence for a person: (a)

to intentionally or recklessly falsify (for example, alter, deface or obliterate) or unlawfully remove a registered trade mark that has been applied to goods or services (s 145);

(b)

to intentionally or recklessly falsely apply a registered trade mark to goods or services (s 146); or

(c)

to intentionally sell or import goods knowing that a falsified registered trade mark is applied to them, or has been unlawfully removed from them: s 148.

A person guilty of these offences is punishable on conviction by a fine not exceeding 500 penalty units ($85,000), or imprisonment for a period not exceeding two years, or by both a fine and imprisonment: s 149.

International trade mark registration [17.2550] Australia has acceded to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (the Madrid Protocol), the instrument of accession coming into force on 11 July 2001. The effect of acceding to the Madrid Protocol is to make it easier and less expensive for Australian trade mark owners to seek protection for their trade marks overseas. Formerly, it was necessary to apply separately for trade marks in each of the countries where registration was sought in the language and currency of that country. In contrast, trade mark owners will now only need to file a single application in English through IP Australia’s Trade Marks Office to seek protection in any one or more of the countries which are parties to the Madrid Protocol.

Passing off Nature of the action of passing off [17.2560] Passing off occurs where a person falsely represents their goods or services as those of the plaintiff, or that their business is associated with the plaintiff, so as to cause damage or likely damage to the

537

538

Introduction to Business Law in Australia

plaintiff’s goodwill or reputation. The basic characteristics of an action for passing off were described by Lord Diplock in Erven Warnink v J Townend & Sons (Hull) Ltd [1979] AC 731 at 742 as follows: “(1) a misrepresentation (2) made by a trader in the course of trade, (3) to prospective customers of his or ultimate consumers of goods or services supplied by him, (4) which is calculated to injure the business or goodwill of another trader (in the sense that this is a reasonably foreseeable consequence) and (5) which causes actual damage to a business or goodwill of the trader by whom the action is brought or … will probably do so.” The principal elements of a passing off action outlined in that passage and as subsequently developed by the courts are: (a)

the existence of some reputation or goodwill in the plaintiff’s name, mark, or the get-up (for example, the packaging) of her or his goods;

(b)

deceptive conduct on the part of the defendant by the use of the same or deceptively similar name, mark, or get-up; and

(c)

either actual damage or the threat of damage to the plaintiff’s business reputation or goodwill as a result of the defendant’s conduct (that is, the passing off).

The scope of the tort of passing off has been steadily expanded by a process of judicial development over the years and adapted to meet new circumstances involving the deceptive or confusing use of names, descriptive terms or other indicia to persuade purchasers or customers to believe that goods or services have an association, quality or indorsement which belongs to goods or services of, or is associated with, another person or business: Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 at 445-446. Examples of the action of passing off:

Red Bull Australia Pty Ltd v Sydneywide Distributors Pty Ltd [17.2570] In Red Bull Australia Pty Ltd v Sydneywide Distributors Pty Ltd (2001) 53 IPR 481 the applicants imported for sale in Australia a carbonated energy drink known as “Red Bull” which was widely advertised. The drink was sold in a drink can of distinctive appearance. The respondents imported for sale cans of an energy drink under the trade mark “LiveWire”. It was held that the applicants’ claim for passing off had been made out since, notwithstanding the obvious difference in the trade marks of the two products, the packaging get-up of “LiveWire” was so deceptively similar to “Red Bull” as to have enabled the respondents to appropriate part of the applicants’ goodwill in the marketplace for energy drinks.

Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [17.2580] In contrast, in Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851 (PC) the plaintiffs were the manufacturers of a tangy lemon drink called “Solo” which was sold in a yellow can with a medallion design. The defendants marketed a similar drink called “Pub Squash” which was also marketed in a yellow can with a medallion design. It was held that the claim in passing off failed, since it was found that consumers would not be deceived into inferring a connection between the respective drinks or their producers.

chapter 17 Intellectual Property

ConAgra Inc v McCain Foods (Aust) Pty Ltd [17.2590] In ConAgra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302 the plaintiff manufactured and marketed frozen food products in the US under the brand name “Healthy Choice”. The defendant was a manufacturer of frozen foods in Australia. The defendant adopted the name “Healthy Choice” and the same form of packaging for its new line of frozen food products as that developed by the plaintiff in the US. The plaintiff’s action for, inter alia, passing off was dismissed by the Full Court of the Federal Court since the plaintiff failed to establish a reputation in Australia in respect of its products. The court stated that it is not a requirement for a plaintiff to carry on business in Australia or have a physical presence here. “It is sufficient if his goods have a reputation in this country among persons here … of a sufficient degree to establish that there is a likelihood of deception among consumers and potential consumers and of damage to his reputation.” The requisite reputation may be proved by a variety of means including, for example, advertisements in the various forms of media and the exposure of people in this country to the goods of the overseas owner. However, the evidence failed to show that the plaintiff enjoyed a reputation for its products in Australia.

Character merchandising [17.2600] The action of passing off has also been utilised in recent years in relation to the increasing practice of “character merchandising”, that is, the marketing of goods and services by taking advantage of an association with some real or fictitious person, character, group or film. “All manufacturers, traders and consumers are familiar with marketing practices involving ‘character merchandising’. Many purchasers are prepared to pay more for goods simply because they bear the name of, or some symbol or drawing associated with, a popular character (who may be real or fictitious) or a well known institution or event.” 35 The representation of, for example, a popular fictional character on toys, T-shirts, posters and other forms of merchandise is common and the licensing of the use of such representation by others is often a valuable right for the creator or owner of the character. An action for passing off will lie in an appropriate case to protect the unauthorised use of such representation as the following cases illustrate.

Childrens Television Workshop Inc v Woolworths (NSW) Ltd [17.2610] In Childrens Television Workshop Inc v Woolworths (NSW) Ltd [1981] 1 NSWLR 273 the first plaintiff was the maker of the television program “Sesame Street” and the second plaintiff was the owner of copyright in the Muppet characters appearing on the television program. The plaintiffs had licensed a large range of products for sale, including plush toys, which reproduced the essential characteristics of the Muppet characters and were made under strict quality control. The first defendant began selling in their retail stores in New South Wales a number of plush toys made in Korea which were alleged to be copies of those sold under licence from the plaintiffs.

35

Industrial Property Advisory Committee, The Legal Protection of Character Merchandising in Australia (March 1988), p 2.

539

540

Introduction to Business Law in Australia

In granting the interlocutory injunction sought by the plaintiffs restraining the sale of the toys by the defendants, Helsham J found that the public knew the first plaintiff made the television program and associated the Muppet characters with them; that it was well known that the creators of this type of fictional character license others to manufacture or deal in products which are representations of those characters; that the evidence established that the public believed that the plush toys being sold in Australia were sold under licence under some sort of arrangement with the producers of the television show, that is, the plaintiffs; and that the toys sold by the defendants were all intended to be representations of the television characters and could pass as such.

Pacific Dunlop Ltd v Hogan [17.2620] In Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553 the appellant produced a television advertisement for its shoes which was easily recognisable as being a parody of the famous “knife scene” from the film Crocodile Dundee starring the respondent, actor Paul Hogan. In an action for, inter alia, passing off, the Full Court of the Federal Court upheld the trial judge’s finding that a significant section of those seeing the advertisement would be misled into believing that the actor had given his approval for the use of the film’s characters and images under some commercial arrangement with the appellant; see similarly, Hogan v Koala Dundee Pty Ltd (1988) 20 FCR 314.

Twentieth Century Fox Film Corp v South Australian Brewing Co Ltd [17.2630] In Twentieth Century Fox Film Corp v South Australian Brewing Co Ltd (1996) 66 FCR 451; 34 IPR 247 the plaintiffs were the producers of the cartoon series “The Simpsons”. They had adopted “Duff Beer” as the name of an imaginary beer associated with a leading character of the series, Homer Simpson. The defendant, a South Australian brewer, promoted a new beer entitled “Duff Beer”. The plaintiffs succeeded in their claim that the defendant’s use of the name “Duff Beer” constituted misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law 36), and amounted to passing off the defendant’s product as being associated with “The Simpsons”.

Action for passing off [17.2640] An action for passing off has similarly been used to restrain a trader from misrepresenting that a well-known person has a connection with the trader’s product or business:

36

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 17 ([17.10]).

chapter 17 Intellectual Property

Henderson v Radio Corp Pty Ltd [17.2650] In Henderson v Radio Corp Pty Ltd (1960) 60 SR (NSW) 576 the plaintiffs were two well-known professional ballroom dancers. The defendants put out a record of ballroom dancing music showing a photograph of the plaintiffs on the cover without their consent. The New South Wales Full Supreme Court upheld the plaintiffs’ claim in passing off since their potential to exploit the goodwill in their names and reputation had been damaged by the defendants’ conduct. [17.2660] In contrast, an action for passing off did not succeed in the following case:

Honey v Australian Airlines Ltd [17.2670] In Honey v Australian Airlines Ltd (1989) 14 IPR 264 at 283 per Northrop J an action photograph of the applicant, a well-known champion athlete, was used on a poster produced by Australian Airlines to promote sport, the poster bearing the name of the Airline and logo in small print. The photograph was later used with the Airline’s permission on the front cover of a book and magazine published by a religious organisation. The applicant’s permission had not been sought in either case. The applicant’s action for, inter alia, passing off failed since it was held that he was unable to establish that “a reasonably significant number of persons seeing the poster, the magazine or the book, would draw or be likely to draw from them the message that the applicant was giving his indorsement to Australian Airlines or to [the religious organisation]”.

Remedies [17.2680] The principal remedy sought in passing off actions is an injunction to restrain the defendant from engaging, or continuing to engage, in the conduct complained of. In an appropriate case, the plaintiff may also recover damages or an account of profits: Apand Pty Ltd v Kettle Chip Co Pty Ltd (No 2) (1999) 88 FCR 568.

Other remedies [17.2690] Where the passing off in question concerns a registered trade mark, then it may be more appropriate to seek a remedy under the Trade Marks Act 1995 (Cth) rather than by way of the common law action for passing off. In many instances, the conduct in question may also involve contravention of the Australian Consumer Law, 37 in particular, contravention of s 18 proscribing a person (including a corporation) in trade or commerce from engaging in misleading or deceptive conduct, or conduct which is likely to mislead or deceive, and a remedy sought under that legislation as an alternative to an action for passing off.

37

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Chapter 17 ([17.10]).

541

542

Introduction to Business Law in Australia

Confidential information Nature of the action for breach of confidence [17.2700] Where one person imparts information to another in confidence and the latter uses that information for their own purposes or discloses it to third parties without permission, then an action for breach of confidence may be available to the person who provided the information. In contrast to, for example, patent protection, there are no disclosure or registration requirements to be complied with before legal proceedings for breach of confidence may be instituted. In certain circumstances, protection is provided which may not otherwise be available, for example, ideas of commercial significance which are imparted to another in confidence may be protected from unauthorised disclosure or use by the recipient. Commercial, industrial or scientific information confidential to a business (usually referred to as “trade secrets”) may be protected by an action for breach of confidence, for example, engineering drawings and manuals (Warman International v Envirotech Australia Pty Ltd (1986) 11 FCR 478), techniques, processes, formulae and customer lists. However, the action is not limited to such matters and the type of information which may be protected is diverse and extends, for example, to information contained in confidential government documents or information of a personal nature: Argyll v Argyll [1967] 1 Ch 302. An action for breach of confidence has also been used to limit the dissemination of Aboriginal tribal secrets disclosed to an anthropologist (Foster v Mountford and Rigby Ltd (1977) 14 ALR 71), and to recover damages for the unauthorised use of the concept for a television program divulged in confidence: Talbot v General Television Corp Pty Ltd [1980] VR 224.

Fraser v Thames Television [17.2710] In Fraser v Thames Television [1984] 1 QB 44 the plaintiffs were the members of a pop group who developed an idea for a television series based on the experiences of the group. The series was to emphasise the unusual feature of a rock group of three girls, each of whom was an established actress, and was to be part fact and part fiction. One of the plaintiffs orally communicated the idea in confidence to one of the defendants, a scriptwriter, who expressed interest in the idea. Protracted negotiations with the other defendants, a producer and a television company, eventually broke down. Subsequently, the television company screened 12 episodes of a series in which the plaintiffs’ idea was put into effect without their agreement. It was held that the defendants had breached their obligation not to use the plaintiffs’ idea, which had been communicated in confidence, for their own benefit. The judge said: “This of course does not mean that every stray mention of an idea by one person to another is protected. To succeed in his claim the plaintiff must establish not only that the occasion of communication was confidential, but also that the content of the idea was clearly identifiable, original, of potential commercial attractiveness and capable of being realised in actuality”: at 66 per Hirst J.

Success in action for breach of confidence [17.2720] To succeed in an action for breach of confidence the following elements need to be satisfied: 1.

The information must have the necessary quality of confidence about it, that is, it must be

chapter 17 Intellectual Property

confidential or secret in nature and not public property or public knowledge. For a concept to be protected as a “trade secret” it must have some quality of novelty or originality which makes it recognisable as potentially valuable, be capable of precise statement and not merely speculative: Secton Pty Ltd (t/a BWN Industries) v Delawood Pty Ltd (1991) 21 IPR 136. If the plaintiff makes the information known to the public, or a relevant section of it, then the information is no longer confidential and no action will lie, for example, the publication of a patent specification precludes a claim of confidentiality in respect of the information contained in it: O Mustard & Son v Dosen [1964] 1 WLR 109. 2.

The information must be imparted in circumstances where the recipient knows, or ought reasonably to know, that the information is confidential. “It seems to me that if the circumstances are such that any reasonable man standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given to him in confidence, then this should suffice to impose upon him the equitable obligation of confidence”: Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 48 per Megarry J.

3.

There must be an unauthorised use of the information imparted. Thus, there will be no breach of confidence if the information in question has been derived independently. A third party who receives confidential information as a result of another’s breach of confidence may be restrained from using or disclosing the information once they have actual or constructive notice of the breach: Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37.

In addition to the equitable action for breach of confidence, a contract may expressly or by implication impose an obligation of confidence upon the other contracting party in respect of confidential information to be supplied under the contract. For example, when parties commence negotiations in respect of the possible commercialisation of an invention they may enter into a confidentiality agreement to treat information about the invention as confidential. However, if the terms of such an agreement are drawn too widely, for example by seeking to preserve the obligation of confidentiality forever, they may be held to be invalid and unenforceable by the application of the doctrine of restraint of trade: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181.

Public interest defence [17.2730] In certain circumstances, a defendant may rely on the defence of disclosure of the confidential information in the public interest. However, the scope of this defence is limited and it has been said that it does not extend beyond disclosure of matters in breach of the country’s security, or in breach of law, including statutory duty, fraud, or otherwise destructive of the country or its people, including matters medically dangerous to the public; and doubtless other misdeeds of similar gravity: Beloff v Pressdram Ltd [1973] 1 All ER 241 at 260 per Ungoed-Thomas J; compare Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39.

Remedies [17.2740] The remedies available in an action for breach of confidence are an injunction to restrain disclosure or use of the information, damages (Talbot v General Television Corp Pty Ltd [1980] VR 224), or an account of profits for improper use of the confidential information: Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1964] 1 WLR 96; RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011) 280 ALR 125.

543

544

Introduction to Business Law in Australia

Employee obligations [17.2750] Issues concerning breach of confidence often arise in the relationship of employer and employee. The general principles discussed at [17.2790] regarding breach of confidence apply to employees. In addition, an obligation of confidence may arise from the express or implied terms of the employee’s contract of employment as regards confidential information of the employer. It is common for contracts of employment to contain a provision to the effect that the employee will not disclose trade secrets acquired in the course of the employee’s employment. However, the position is further complicated in that during the employment relationship the employee is subject to a duty of fidelity to their employer not to use confidential information except for the purposes of their employment: Angus & Coote Pty Ltd v Render (1989) 16 IPR 387. Disputes often arise as to the extent to which an employer is entitled to protect confidential information acquired by an employee during the period of employment after the employee has left their employment. Determination of the issue will depend on the nature of the information acquired by the employee and the particular provisions of the contract of employment: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317. In the absence of contractual restraints restricting the employee’s post-employment freedom (which are subject to the common law doctrine of restraint of trade proscribing undue interference with trade, see [8.360]), the question will be whether use or disclosure of the information by the employee is actionable as a breach of confidence, or whether it has become part of the former employee’s skill and know-how which they are entitled to use for their own or a future employer’s benefit.

NP Generations Pty Ltd v Feneley [17.2760] In NP Generations Pty Ltd v Feneley (2001) 80 SASR 151 as part of her employment an employee had compiled an address book of her employer’s customers, which was confidential information. After her employment was terminated, the employee retained this address book. The Full Court of the South Australian Supreme Court held that the employee’s equitable obligation of confidence required her to return the address book. The court pointed out that it was a breach of confidence if an employee surreptitiously makes a list of customers for use after leaving their employment. The same principles applied where the list of customers was legitimately compiled as part of the employee’s work for their former employer.

Franchising Nature of franchising [17.2770] Franchising is not a separate category of intellectual property. However, intellectual property rights are often a significant feature of franchise agreements. The increasing importance of the franchising industry in Australia requires some discussion of its basic features. Basically, franchising is a particular business arrangement by which individuals (called franchisees) distribute or sell a product, or run a business developed by another (called the franchisor) utilising the trade marks, trade names, product, know-how or confidential information of the franchisor. The franchisor

chapter 17 Intellectual Property

normally provides ongoing support services in the form, for example, of training, marketing strategies and group advertising. Broadly, commercial franchising in Australia comprises three types of business arrangement, namely: (a)

product franchises, where the franchisee acts as the distributor of a particular product (for example, the retailing of motor vehicles or petrol);

(b)

system franchises, where a franchisor develops a unique or individual manner of doing business and permits the franchisee to use that system in a controlled way in the operation of the franchisee’s business (for example, fast food outlets, laundries and dry cleaners); and

(c)

processing or manufacturing franchises where the franchisor provides an essential ingredient or know-how to a processor or manufacturer (as, for example, in the soft drink industry).

The most significant of these various forms of franchising is system franchising or, as it is now more commonly referred to, business format franchising. The latter has developed rapidly in Australia in recent years and the discussion which follows is essentially directed to this form of franchising. Basically, business format franchising is a method of marketing goods and services utilising an already established successful business format under a trade name or brand. The franchisor sells to the franchisee the right to use the business format including, for example, the name or trade mark of the business, product or service. The franchisee normally also pays a fee, usually based on a percentage of turnover, to the franchisor for advertising and other support services. The benefits of a franchise from the franchisee’s point of view are that: (a)

the franchisee benefits from the name, reputation and goodwill already gained by the franchisor;

(b)

the franchisee is assisted by technical, marketing and other support systems provided by the franchisor which are not available to the sole trader;

(c)

the risk of failure tends to be reduced since the franchisee is usually buying into a successful business; and

(d)

generally, less capital is required to enter a franchise than to try to establish a new business.

The advantage to the franchisor is the ability to expand rapidly utilising capital provided by the franchisees. On the other hand, the disadvantages of a franchise include misrepresentation by the franchisor of the opportunities offered by the franchise, for example, profit projections may be unrealistic, and the promise of continued interest and support services may not be fulfilled because of the franchisor’s subsequent inability or unwillingness to supply them. Furthermore, on expiry or termination of the agreement the franchisee has no right to continue operating the business and no right, in the absence of a specific provision in the agreement, to any goodwill that may have accrued to the franchise while it was operated by the franchisee: Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251. 38

Franchise agreement [17.2780] There will normally be a written franchise agreement between the franchisor and the franchisee governing the legal aspects of their relationship. The agreement will deal with the nature and extent of the rights granted by the franchisor to the franchisee including the formal granting of rights to use the franchisor’s trade marks, trade names, copyright materials and the franchisor’s business system and know-how. The franchise agreement will usually specify the nature and extent of the services to be provided by the franchisor to the franchisee both initially and on a continuing basis, for example training and supply of equipment. 38

See further, J Buchan, “Franchising: A Honey Pot in a Bear Trap” (2013) 34 Adelaide Law Review 283; A Terry and J Huan, “Liability for Franchisee Conduct” (2014) 39 Monash University Law Review 388.

545

546

Introduction to Business Law in Australia

The franchisee will undertake to comply with the operating, accounting and other administrative systems of the franchise which will be detailed in the franchisor’s operations manual. The franchise agreement will usually specify the period of its duration and allow the franchisee a right of renewal. Other typical provisions will include the procedure to be adopted in the event of the franchisee wishing to sell the business; provision for the termination of the agreement in the event of default by the franchisee; and a procedure for the resolution of disputes, for example, arbitration or some other method of alternative dispute resolution.

Franchising Code of Conduct [17.2790] A Franchising Code of Conduct came into effect on 1 July 1998 with the most recent amendments to the Code taking effect from 1 July 2010. 39 The Code contains comprehensive disclosure requirements with the object of assisting franchisees and franchisors to make an informed decision prior to entering into a franchise agreement and also makes provision for the resolution of disputes between franchisors and franchisees. A significant feature of the Code is that it is a prescribed mandatory industry code under Pt IVB of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)), the effect of which is that the remedies provided by the latter Act will apply to contraventions of the provisions of the Code. The principal requirements under the Franchising Code of Conduct are: 1.

Disclosure by the franchisor. The franchisor must provide a disclosure document to a prospective franchisee (or a franchisee proposing to renew or extend a franchise) at least 14 days before the franchise agreement is entered into. The disclosure document must contain the comprehensive information set down in the Code including: the names and qualifications of the franchisor’s directors; a summary of the franchisor’s business experience; details of criminal or civil proceedings against the franchisor; the number of existing franchises and details of their franchisees; and the number of franchises terminated or not renewed over the past three years. Information about the franchise itself is to include: details of the territory of the franchise and whether the franchisor may grant other franchises in the area; requirements as to the purchase of goods and services from the franchisor and restrictions on the purchase of goods or services by the franchisee from other sources; details of any central marketing or advertising fund to which the franchisee has to contribute; and details as to the establishment costs to start operating the business. Financial information as to the profitability of the franchisor must also be provided. The disclosure document must be updated annually. The purpose of a disclosure document is to give to a prospective franchisee, or a franchisee proposing to renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise.

2.

Cooling off period. A franchisee may terminate an agreement within seven days of entering into the agreement. A franchisee who exercises this right is to be refunded, within 14 days, all moneys paid under the agreement less the reasonable expenses of the franchisor specified in the agreement.

3.

Dispute resolution. A franchise agreement must provide for a complaint-handling procedure which complies with the Code. The procedure essentially involves the party who has a dispute setting out the nature of the dispute in writing and stating what action the complainant thinks will settle the dispute. The parties should then try to agree about how the dispute is to be resolved. If the parties

39

The Franchising Code of Conduct is contained in the Schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth).

chapter 17 Intellectual Property

cannot reach an agreement within three weeks, then either party may refer the matter to a mediator. In the event of the parties not agreeing about who should be the mediator, either party can ask the mediation adviser (appointed for this purpose by the Minister) to appoint a mediator. The mediator can determine the time and place for mediation and the parties are required to attend the mediation to try to resolve the dispute. This procedure does not affect the right of a party to take legal proceedings under the franchise agreement. Non-compliance with the requirements of the Code does not have the effect of the franchise agreement being illegal and unenforceable: Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101. However, non-compliance will amount to a contravention for which remedies are available under the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth), Pt VI (see further at [18.680])). For example, the Full Federal Court set aside a franchise agreement when the franchisors breached the Franchising Code of Conduct by not providing a current disclosure document; the franchisees would not have entered into the franchise agreement had they known the true financial position of the franchisor: Spar Licensing Pty Ltd v Mis Qld Pty Ltd [2014] FCAFC 50; see also, Rafferty v Madgwicks (2012) 203 FCR 1. The Australian Competition and Consumer Commission (ACCC) is responsible for enforcing the provisions of the Code and, accordingly, may take action against a franchisor for non-compliance with the Code.

Other provisions of the Competition and Consumer Act 2010 relevant to franchisees [17.2800] Prior to the advent of the Franchising Code of Conduct, the principal avenue of redress for franchisees who had been induced to enter into a franchise agreement as a result of misrepresentations by franchisors was to bring proceedings for misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law 40). For example, the Federal Court awarded damages to a franchisee who had suffered substantial financial loss in a retail franchise business which had been represented by the franchisor as a completely proven concept and where there had been misrepresentations as to anticipated turnover and profitability, risk and site suitability: Bateman v Slatyer (1987) 71 ALR 553; see similarly Cut Price Deli Pty Ltd v Jacques (1994) 49 FCR 397; Camila Pty Ltd v Actus Australia Ltd [1994] ATPR 41-367; Australian Competition and Consumer Commission v Taxsmart Group Pty Ltd [2014] ATPR 42-473; [2014] FCA 487 (see further as to s 18 of the Australian Consumer Law, Turner [17.40]). The unconscionable conduct provision of s 22 of the Australian Consumer Law may also be apposite to a franchisee in an appropriate case: see Turner [17.270].

Further reading C Bodkin, Patent Law in Australia (2nd ed, Thomson Reuters, Sydney, 2013). K Bowrey, M Handler and D Nicol, Australian Intellectual Property (Oxford University Press, Melbourne, 2011). M Davison and I Horak, Shanahan’s Australian Law of Trade Marks and Passing Off (5th ed, Thomson Reuters, Sydney, 2012). MJ Davison, AL Monotti and L Wiseman, Australian Intellectual Property Law (2nd ed, Cambridge University Press, 2012). 40

The Australian Consumer Law is Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)): see Turner Chapter 17 ([17.10]).

547

548

Introduction to Business Law in Australia

JC Lahore and W Rothnie, Copyright and Designs (subscription service, LexisNexis Butterworths, Sydney). JC Lahore, Patents, Trade Marks and Related Rights (subscription service, LexisNexis Butterworths, Sydney). D Price, C Bodkin, B Arnold and P Adjei, Intellectual Property: Commentary and Materials (5th ed, Thomson Reuters, Sydney, 2012). S Ricketson and C Cresswell, The Law of Intellectual Property: Copyright, Designs and Confidential Information (subscription service, Thomson Reuters, Sydney). S Ricketson, M Richardson and M Davison, Intellectual Property: Cases, Materials and Commentary (5th ed, LexisNexis Butterworths, Sydney, 2012). A Stewart, P Griffith, J Bannister and A Liberman, Intellectual Property in Australia (5th ed, LexisNexis Butterworths, Sydney, 2014).

Internet sites Australasian Legal Information Institute (AustLII) http://www.austlii.edu.au (decisions of courts, Designs Office, Patents Office, Trade Marks Office, Copyright Tribunal) Australian Copyright Council http://www.copyright.org.au (information on copyright issues) IP Australia http://www.ipaustralia.gov.au (extensive materials concerning patents, trade marks and designs) Franchise Council of Australia http://www.franchise.org.au

Journals Australian Intellectual Property Journal Australian Intellectual Property Law Bulletin Copyright Reporter

chapter 18

Agency [18.10] Introduction......................................................................................................................................................... 550 [18.20] Agency distinguished from other relationships .............................................................................. 551 [18.90] Creation of agency .......................................................................................................................................... 553 [18.200] Nature and scope of an agent's authority....................................................................................... 557 [18.340] Duties of an agent........................................................................................................................................ 564 [18.470] Rights of agents ............................................................................................................................................ 568 [18.520] Liabilities of agents...................................................................................................................................... 569 [18.680] Termination of agency............................................................................................................................... 574 [18.800] Particular types of agents ....................................................................................................................... 576 [18.850] Statutory regulation of agents .............................................................................................................. 577

550

Introduction to Business Law in Australia

Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 15.

Introduction Figure 18.1 Agency

[18.10] An agent is a person who has agreed to act on the principal’s behalf and subject to the principal’s control in dealing with a third party. The law allows one person to authorise another person to do any act that he or she has capacity to do themselves – negotiate or enter contracts, receive information, perform work, buy and sell real estate or other property, make representations – as if the principal were acting in person. However, the foundational principle of the law of agency is that the principal, who has chosen to conduct his or her business through an agency agent, must bear the consequences of that decision (and, naturally, the principal is entitled to the benefits created by the relationship). Agency is a consensual relationship. Therefore the use of an agent by a principal will always be voluntary, even if a particular act by the agent is not authorised. In other words, A will not be bound by the acts of B, apparently acting on A’s behalf, unless A has consented to B acting on his behalf. If it were not so, we would all be very vulnerable. Discussion of risks and benefits raises the issue of what authority an agent has to act on the principal’s behalf. This authority may be actual or apparent. Actual authority is the authority actually conferred on the agent (either express or implied) by the principal. Obviously, the principal is responsible for any contracts made by an agent acting within his or her actual authority. For example, a principal may instruct her agent (a stock broker) to enter into a contract to purchase shares up to a value of $1 million. The agent binds the principal if and when he does so. More problematically, the principal may be bound by the acts of an agent acting within his or her apparent authority. This is the authority that the agent appears to have but which, in fact, he or she does not have. The principal is responsible for the foreseeable consequences of the agent who acts outside of his or her actual authority but within his or her apparent authority. In the above example, if the agent purchases

chapter 18 Agency

shares worth $1.3 million, the question will be whether the agent (who clearly does not have actual authority) has apparent authority to do what he did. If so, the principal will be bound by the acts of the agent. The principal may also be liable in tort for the actions of his or her agent. For instance, the partners in an accounting firm are both principals and agents for one another. So for instance, if a partner were to provide negligent advice to a client or steal the client’s funds, the other partners may be liable (as principals) for the conduct of the partner (who was acting as an agent of the firm). A final introductory concept: an agency relationship is a fiduciary relationship, one in which the agent must always act in good faith towards the principal, putting the principal’s interests above his or her own interests and act under the control and direction of the principal at all times. In this chapter we compare agency with other relationships and then examine various types of agency, look at how an agency relationship may be created and how it may be ended, explore in some detail the power and authority an agent may have and the various rights and responsibilities of each of the parties – principal, agent and third parties.

Agency distinguished from other relationships [18.20] Agency overlaps with two other relationships that appear at first sight to be somewhat similar, namely, that of employer and employee and that between an independent contractor and the person with whom he or she contracts. Employees and independent contractors are mutually exclusive classes. The former comprises persons employed on such terms that they are subject to control regarding the manner in which their work is to be carried out. Independent contractors, on the other hand, exercise their own discretion as to the manner in which they carry out the work they undertake to perform. The difference may be further illustrated by distinguishing between a person employed under a contract of service (an employee) and a person engaged under a contract for services (an independent contractor). There are many reasons why it may be important for an employer to distinguish between an employee (agent) and an independent contractor.

International Harvester Co of Australia v Carrigan’s Hazeldene Pastoral Co [18.30] International Harvester Co of Australia v Carrigan’s Hazeldene Pastoral Co. Carrigan bought a machine from H & K, a machinery supplier, which described itself as the “agent” in that area for International Harvester (IH) products. However, H & K owned the machine it had bought from IH and which was on-sold to Carrigan. When the machine broke down and the suppliers went bankrupt, the question arose as to whether the suppliers were acting as agents of IH. If so, Carrigan could sue IH as the principal. The High Court decided that no agency relationship existed between IH and H & K. The fact that H & K described itself as an “agent” was not determinative – the word was not used in a legal sense. One had to look at all the circumstances including the control that IH exercised over H & K.

551

552

Introduction to Business Law in Australia

[18.35] Some independent contractors are agents for those who employ them and some employees are general agents for their employers, but it is not true to say that all employees or all independent contractors are agents for their employers. Employers risk breaching taxation, superannuation and workplace laws and regulations if they incorrectly classify a worker as an independent contractor rather than an employee/ agent. In the case of some types of employee this will be readily implied, for example a shop assistant employed to sell goods is an agent. On the other hand, an auctioneer (an independent contractor) retained to sell goods is an agent of the vendor but not an employee. Sometimes it will not be clear and, as in International Harvester, all the facts and circumstances will need to be considered. For instance, owners of a pizza restaurant must carefully consider whether their delivery driver, who supplies his or her own car, is an employee or an independent contractor. If the person is characterized as an employee, there are implications for payroll tax, superannuation contributions and workplace safety. An agent should also be distinguished from a trustee. Both act in a similar manner, that is, on behalf of other persons. However, although a trustee exercises their powers on behalf of beneficiaries, a trustee is not the agent of the beneficiaries. Thus, a trustee does not bring the beneficiaries of the trust into a contractual relationship with third parties that is the normal function of an agent. In dealing with matters relating to the trust, the trustee is considered a principal not an agent.

Capacity to act as principal and agent [18.40] There is a marked distinction between a person’s capacity to act as a principal and their capacity to act as an agent. Generally speaking, only those persons with full contractual capacity may employ an agent. Any person can be employed as an agent and can exercise any of the rights and powers conferred by the contract of agency, even though they may not have the necessary contractual capacity to bind themselves in similar negotiations. For example, although a minor is not able to bind herself or himself to certain contracts, a minor may be employed as an agent, and consequently may bind the principal to contracts he or she has entered into as agent. In respect of contracts to which a minor is able by law to bind herself or himself, it is permissible for the minor to appoint an agent for such purpose. A minor’s capacity to act through an agent is coextensive with the minor’s capacity to do the act that he or she purports to delegate. An agent cannot have greater powers conferred upon them than the principal possesses; and, if the principal is under some disability, the powers of the agent are equally limited according to the nature of such disability. Where the alleged principal is in fact incapable of giving authority to an agent to act on their behalf, an agent who represents that he or she has such authority is liable to the third party for breach of warranty of authority.

Classification of agents [18.50] A general classification of agents is as follows: (a)

special agents;

(b)

general agents; and

(c)

universal agents.

These classifications have no special legal significance apart from illustrating the varying authorities of the agents mentioned. The real problem is the actual extent of the agent’s authority.

Special agents [18.60] A special agent is one who is appointed for the performance of some special act, or to represent the principal in some particular transaction, such act or transaction not being in the ordinary course of the

chapter 18 Agency

agent’s trade, profession, or business as an agent. For example, P appoints A his agent for the purpose of procuring a truck suitable for towing; the only authority given to A as agent, is that necessary to procure the type of truck mentioned.

General agents [18.70] A general agent is an agent who has authority: (a)

to act for the principal in all matters, or in all matters concerning a particular trade or business, or of a particular nature; or

(b)

to do some act in the ordinary course of their trade, profession or business as an agent on behalf of the principal, for example where a solicitor or broker is employed as such.

Universal agents [18.80] A universal agent is one whose authority is unlimited to do such things which the principal may do through the instrumentality of another. Such types of agents are rare in practice and, when they do exist, they are appointed by extensive powers of attorney. The only limits which are imposed upon the authority of a universal agent are those which the law imposes with regard to the legality of the objects and the capacity of the parties in relation to contracts in general.

Creation of agency [18.90] The relationship of principal and agent may be created in the following ways: (a)

expressly (that is, by agreement) (i)

by deed;

(ii)

by writing;

(iii)

by word of mouth;

(b)

“holding out” or estoppel;

(c)

ratification; or

(d)

operation of law (i)

agency of necessity;

(ii)

agency arising by cohabitation.

Expressly By deed [18.100] The appointment of an agent by deed (that is, instrument under seal) is necessary where the agent is required to execute any instrument under seal on behalf of their principal, in which case the document creating the power is termed a power of attorney. 1 A power of attorney is often given where a principal is going abroad and desires to leave another in charge of their affairs. 1

Powers of attorney to enable attorneys to deal with land under the Torrens system of registration in force in the various States require registration or deposit of copy. See Transfer of Land Act 1958 (Vic), s 94; Real Property Act 1886 (SA), s 156; Transfer of Land Act 1893 (WA), ss 143, 144. The corresponding provision in the Real Property Act 1900 (NSW), s 88 was repealed by the Real Property (Amendment) Act 1970 (NSW), s 13. As to dealings with land under the general law by

553

554

Introduction to Business Law in Australia

By writing [18.110] An agent is often appointed in writing. In some cases the appointment is required by statute to be in writing. For example, in most States agents employed to sell or buy land and agents employed to sell or buy businesses cannot sue for remuneration, that is, commission, unless the appointment of the agent is in writing.

By word of mouth [18.120] A verbal offer followed by acceptance in writing or verbally is sufficient to conclude a contract of agency for most purposes other than those mentioned above. In practice, it is usually desirable that the appointment of an agent be in writing.

Holding out or estoppel [18.130] The relationship of principal and agent may arise between two persons by virtue of one, by words or conduct “holding out” that the other is their agent or permitting the latter to do so. That is, where P, either by words or conduct, leads others to believe that A is P’s agent, then P will not be allowed to subsequently deny the authority of A to act as P’s agent where a third person has entered into an agreement with A on the faith of the representation that A was the agent of P: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480. The question whether one person has led third parties to believe that another person is their agent is a question of fact to be decided upon the circumstances of each particular case: Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72.

Ratification [18.140] The relationship of agency may also arise as a result of “ratification”. Where one person acts on behalf of another, without having authority to do the particular act, the person on whose behalf the act is done may, by “ratifying” it, render the act as valid and effectual as if it had been done by their duly authorised agent. This may arise where an agent has exceeded their authority. For example, where an estate agent enters into a contract for a lease for a term longer than the principal has stipulated, the principal may adopt the transaction and thus bind themselves to the unauthorised act of the agent. In order that the ratification may be effectual, the following rules should be observed: 1.

The acts must have been done as agent for and on behalf of the supposed principal: Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68. For the legal position where an agent does not disclose to the third party that he or she is acting as an agent, see [18.580].

2.

The ratification may only be by a principal who was in existence at the time of the making of the contract. However, s 131 of the Corporations Act 2001 (Cth) provides that where a nonexistent company purports to contract and the company is within a reasonable time subsequently formed, the company may then ratify the contract.

3.

The principal must have the capacity to make the contract both at the date of the contract and at the date of ratification. attorneys, see Conveyancing Act 1919 (NSW), s 163; Instruments Act 1958 (Vic), Pt XI; Land Title Act 1994 (Qld), ss 132 – 135; Registration of Deeds Act 1935 (SA), s 35; Property Law Act 1969 (WA), s 85; Powers of Attorney Act 2000 (Tas), requiring registration of powers to validate such dealings.

chapter 18 Agency

4.

Ratification must be of the whole contract. A principal cannot ratify that which is beneficial and reject the remainder: Cox v Mosman [1909] QSR 45.

5.

Ratification must be with full knowledge of what has been done so that the inference may properly be drawn that the principal intended to take upon themselves the responsibility for such acts: Marsh v Joseph [1897] 1 Ch 213.

Where the rules set out above are satisfied, ratification operates retrospectively to validate a previously unauthorised act. The position is the same as if the agent had been vested with authority at the outset.

Operation of law [18.150] An agency can arise by operation of law, that is, irrespective of assent or intention, in two main situations; namely, in cases of: (a)

necessity; and

(b)

arising out of cohabitation.

Agency of necessity [18.160] The common law recognises that an emergency situation may occur which allows one person to bind another without the authority of that other. In such a case an agency of necessity arises, not through any contract or agency agreement but from the relationship of the parties in the particular case. Four factors are essential to establish such an agency of necessity: 1.

A person must have been entrusted with another’s property.

2.

An immediate expense must be required for the preservation of the property, or there must be some commercial necessity for the action, that is, there must be an emergency.

3.

It must be commercially impossible or extraordinarily difficult to communicate with the owner of the property: Sachs v Miklos [1948] 2 KB 23.

4.

The agent must act bona fide in the interest of the principal.

Great Northern Railway Co v Swaffield [18.170] In Great Northern Railway Co v Swaffield (1874) LR 9 Exch 132 the plaintiff railway company agreed to deliver the defendant’s horse to a particular railway station. However, on arrival at the station at night there was no-one to take possession of the horse on the defendant’s behalf. Accordingly, the plaintiff’s stationmaster sent the horse to a nearby livery stable. Subsequently, the plaintiff paid the stablekeeper his charges. It was held that the plaintiff had acted reasonably in placing the horse in the livery stable and was entitled to recover from the defendant the expense it had incurred in doing so.

Munro v Willmott [18.180] Munro v Willmott [1949] 1 KB 295: Another example of an agency of necessity is where the master of a ship is compelled to pledge (hypothecate) the ship in order to effect essential repairs to preserve the ship, or to sell damaged cargo which would be ruined if there was further delay. On the

555

556

Introduction to Business Law in Australia

other hand, the fact that property (for example, a parked car) may be causing a person inconvenience does not mean that such an emergency has arisen which compels its disposal.

Agency arising by cohabitation Debenham v Mellon [18.190] Debenham v Mellon (1880) 5 QBD 394: In the case of a married woman cohabitating with her husband, and even in the case of an unmarried woman cohabitating with a man, the law presumes that she has his authority to pledge his credit for necessaries in all domestic matters ordinarily entrusted to a wife. It is possible for the man to rebut the presumption of such authority in various ways, for example, by showing that he had expressly warned the tradesman not to supply his wife or de facto wife, that he had expressly forbidden her to pledge his credit or that he had provided her with a sufficient allowance to pay for necessaries. The common law also recognised that a wife left without adequate means of support by her husband, for example in the case of desertion, had the authority to pledge the husband’s credit for goods that she reasonably required for her maintenance. In New South Wales, South Australia, the Australian Capital Territory and the Northern Territory the common law doctrine enabling a wife to pledge her husband’s credit has been abolished. 2

2

In New South Wales, the Married Persons (Equality of Status) Act 1996 (NSW), s 7 provides: “A married person does not, by reason only of the person’s status as a spouse, have authority to pledge the credit of the other spouse for necessaries or to act as agent for the other spouse for the purchase of necessaries.” See similarly, Law of Property Act 1936 (SA), s 104; Married Persons’ Property Act 1986 (ACT), s 5; Northern Territory, Married Persons (Equality of Status) Act 1989 (NT), s 5.

chapter 18 Agency

Nature and scope of an agent's authority Figure 18.2: Agent’s authority

[18.200] The fact that an agency has been created does not mean the that the principal is bound by all the actions of the agent. The principal will only be bound by those acts of the agent which fall within the scope of the agent’s authority. The principal will not be affected by what the agent does in excess of her or his authority, unless the principal subsequently ratifies the unauthorised act of the agent. Furthermore, if the agent acts outside their authority, the agent may be liable to the principal for breach of the contract of agency or to third parties for breach of implied warranty of authority. The following case is an example of the importance of determining the scope of an agent’s authority. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 (see Chapter 9 at [9.360] for the facts of the case) the main issue was whether the principle of L’Estrange v Graucob applied. Alphapharm also submitted that Richard Thomson Pty Ltd was not acting within its authority when its employee signed the contract. If not, the Conditions of Contract that included the exclusion clause would not bind Alphapharm. The High Court rejected the argument and concluded that Thomson was acting as an agent for Alphapharm and acting within its authority. The Court said: “In contracting to obtain the supply of those services, Richard Thomson was acting for the benefit of Alphapharm. As Dixon AJ said in Press v Mathers [1927] VLR 326” ’in any ordinary case the question whether one person authorized another to do an act or series of acts on his behalf is best answered by considering for whose benefit or in whose interest it was intended it should be done. Such a consideration may not be conclusive, but it is a useful practical starting point’ [at 70]. The evidence compels the conclusion that Alphapharm authorised Thomson to contract with Finemores and to agree upon rates of freight, terms of payment, and such other standard terms and conditions of the contract of storage and transportation as were required by Finemores. So long as the terms and conditions to which Richard Thomson agreed were Finemores’ standard terms and conditions then Richard Thomson was acting within its authority: at [81]–[82]. The authority of an agent may be:

557

558

Introduction to Business Law in Australia

(a)

actual authority; or

(b)

apparent or ostensible authority.

Actual authority [18.210] Actual authority arises out of an agreement between the principal and the agent. The general nature and effect of the actual authority of an agent was explained by Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502-503 as follows: “An ‘actual’ authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’ authority, it does create contractual rights and liabilities between the principal and the contractor” emphasis added.) The actual authority of an agent can be express or implied. That is to say, the actual authority of an agent is either: (a)

actual express authority; or

(b)

actual implied authority.

Actual express authority [18.220] The express authority of an agent is the authority the principal has expressly given the agent in words or writing, for example where the principal gives the agent specific instructions to enter into a contract on the principal’s behalf or to purchase a particular piece of land at a stipulated price, or to sell a specific item. In other words, the agent’s authority may be specifically created and limited by the terms of the agreement which gives rise to the agency relationship.

Actual implied authority [18.225] In addition to the express authority contained in the agency agreement, the agent may have a further implied authority to do whatever is necessarily incidental to carrying out the principal’s express instructions. For example, where an agent is expressly authorised to sell goods, the agent will also have implied authority to do everything in the usual course of business to complete the transaction, such as receive cash, issue receipts or arrange delivery of the goods. Furthermore, where a person employs a particular type of agent to carry out some act on behalf of the principal, the agent will have such implied authority as agents of that class normally have; that is, the agent will have the usual authority which agents of that particular profession or calling normally have to carry out their functions. For example, when the board of directors of a company appoints one of their number to be managing director: “They thereby impliedly authorise him to do all such things as fall within the usual scope of that office”: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583. Similarly, a solicitor in a law firm is an agent and has the actual implied authority to carry out the tasks in respect of which she has actual express authority.

chapter 18 Agency

Hopcroft v Edmunds [18.230] In Hopcroft v Edmunds (2013) 116 SASR 191 the respondent’s accountant sent a shareholders agreement to the appellants for signature. The respondents did not sign the agreement. The appellants argued that the accountant had authority to make an offer on the respondent’s behalf by sending the contract for their signature. It was held that the accountant did not have actual authority to bind the respondents. The respondents had told their accountant to “do whatever [is] necessary”: at [33]. The court held that such an instruction related only to ascertaining the necessary actions and preparing the necessary documents, not binding the respondents. The expectation that the respondents would need to have signed the agreement in order to be bound could only have been displaced by clear evidence of the accountant’s authority to bind them.

[18.235] Implied authority is regarded as an aspect of an agent’s actual authority since such implications of implied authority are made on the basis that the principal has consented to the agent having authority to act in such a manner. If there is evidence that the principal has not so consented, for example where the board of directors specifically limited the managing director’s authority in some respect, then to the extent of such limitation an implication of implied authority cannot be made. However, it may well be that in such a case the third party can rely on the agent’s apparent authority to enter into the particular transaction.

Apparent (or ostensible) authority [18.240] Apparent (also known as ostensible) authority is conceptually distinct from actual (express or implied) authority. There is no actual authority, but instead the mere appearance of authority. It is a device to protect third parties who contract or otherwise engage with an agent based on the authority that he or she appears to have. This may be more important than the actual authority because third parties will often not be aware of the actual authority of an agent. Thus, where a principal represents either by words or conduct that an agent has authority to contract on the principal’s behalf, the principal will be bound by those acts of the agent which fall within that represented authority. The agent in such a case is said to act within the scope of their apparent or ostensible authority. This principle applies whether or not the agent has any actual authority, or such actual authority has been limited. The principal may specifically represent to the third party that a person has authority to act on the principal’s behalf, for example where the principal tells the third party that a particular person has been authorised to negotiate for the purchase of goods on behalf of the principal. More often, however, the representation which creates the apparent or ostensible authority is representation by conduct, for example by the principal permitting a person to act in the management or conduct of the principal’s business so that the third party is led to believe that such person has authority to contract on behalf of the principal. The courts have taken the view that if a principal allows or acquiesces in an agent occupying a particular position, for example where the board of directors of a company permits one of the directors to act as a managing director without having been formally appointed, the agent will have apparent or ostensible authority to deal with third parties in a manner consistent with the functions and duties normally falling within the usual authority of the holder of such position.

559

560

Introduction to Business Law in Australia

The leading case on this point is Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [18.250] In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Kapoor and Hoon formed the defendant company to purchase, develop and then resell the Buckhurst Park Estate in Berkshire, UK. The board of directors comprised Kapoor, Hoon and a nominee of each. The Articles contained a power to appoint a managing director but none was appointed. The development of the land was left to Kapoor who, with the knowledge of the board of directors, acted as managing director although he had never been formally appointed to the position. Kapoor employed Freeman and Lockyer, the plaintiff firm of architects. Kapoor had no specific authority to do this, either in the Articles or from the Board. When the architects claimed their fees from the company, the company refused to pay, arguing that Kapoor had no authority to employ the architects. The plaintiffs sued the company for payment of their fees. It was held by the Court of Appeal that the defendant company was liable for the plaintiffs’ fees. Diplock LJ first differentiated between actual and apparent authority. Actual authority arises from the relationship that exists between the principal and the agent. The third party does not affect the extent of actual authority. Provided the agent acts within the scope of his or her actual authority the principal is bound by the acts of the agent. On the other hand apparent authority arises from the relationship between the principal and the third party. The agent does not affect the extent of apparent authority. The extent of the authority depends on what the principal represents to the third party (expressly or impliedly, by words or conduct) about the authority of the agent. Once the principal relies on the representations by the principal, the principal cannot subsequently claim the agent did not in fact have that authority. The Court of Appeal rejected the submission that Kapoor had actual authority. There was no express authority to engage the architects and there was no implied actual authority, which might have existed had Kapoor been appointed managing director. However the Court of Appeal unanimously agreed that Kapoor had apparent authority to engage the plaintiffs. Kapoor was the driving force behind the venture (Hoon was absent for most of the time) and evidence from the Board meetings indicated Kapoor should carry out all the acts necessary to make the venture a success. However the Court did find that Kapoor had apparent authority. But before such authority exists Diplock LJ set out four criteria that must be met: “… (1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; (2) that such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates; (3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and (4) that under its memorandum or articles the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent”: at 505–506. (The fourth condition applies only when a company is the principal and, as there are now usually no restrictions under the memorandum, it is not as relevant today). Thus, on the one hand, the law protects third parties by allowing them to rely on a principal’s representations about the agent’s authority (when those representations are inconsistent with the

chapter 18 Agency

agent’s actual authority). On the other hand, the law is protecting principals, who otherwise may find themselves bound to a contract made by an agent who acted without authority, by stating (in Diplock LJ’s conditions 1 and 2) that for apparent authority to exist, someone with actual authority (usually the principal) must have represented that the agent is acting within his authority.

Usual authority [18.260] Where a person is appointed to a particular position such person will have as part of their apparent authority all the usual authority of a person occupying that position.

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [18.270] In Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 the secretary of a company (Fidelis) contracted with a hire-car company (Panorama) to hire expensive cars, ostensibly to transport Fidelis’ clients from Heathrow airport to the company’s offices. In fact, the secretary had no actual authority to enter into such agreements and was using the cars for his own purposes. The hire-car company sued Fidelis to recover the hiring charges. It succeeded. The Court of Appeal held that entering into contracts like this was within the usual authority of company secretaries and therefore within the apparent authority of this particular secretary. The Court said that a company secretary is an officer of the company with wide responsibilities. They may be seen to have authority to make representations and enter contracts on behalf of the company in respect of the day to day administration of the company. This would include such routine matters as hiring cars. So whilst a company secretary may not have actual authority to do such things, he or she has apparent authority.

Agent's apparent authority [18.280] A principal is bound by those acts of an agent that fall within the scope of the agent’s apparent authority even though the agent acted outside the terms of their actual authority. Where an agent occupies a particular office, or exercises a particular profession or calling the agent, by virtue of the position he or she holds, may have both implied actual authority and apparent authority to do a particular act binding on the principal. That is to say, although actual authority and apparent authority are independent of each other, in certain circumstances they may co-exist and coincide in the same person. In such a case, the agent’s ostensible authority is likely to be wider than their actual authority (whether express or implied) which may be limited by the terms of the agreement between the agent and the principal: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.

561

562

Introduction to Business Law in Australia

Pacific Carriers Ltd v BNP Paribas [18.290] In Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 NEAT Ltd sold legumes to an Indian grain trader Royal Trading Company (RTC). While the cargo was in transit to India the world price of legumes fell sharply and RTC delayed accepting the cargo and refused to pay the purchase price. The original bills of lading were not available to enable the cargo to be unloaded, and Pacific Carriers (the shipper) required bank-endorsed letters of indemnity before releasing the cargo. NEAT and BNP Paribas (a large French merchant bank) signed letters of indemnity. Ira Dhiri, the documentary credits department manager at BNP signed for BNP and faxed them to Pacific allowing legumes to be released to Royal. Discharge of legumes occurred in stages then stopped. Pacific sustained losses and claimed against BNP, NEAT having become insolvent. BNP claimed that the indemnities were signed without its authority, and did not bind it. The High Court held that Ms Dhiri’s belief about what the documents were meant to convey is irrelevant. The question was what a reasonable person in Pacific’s position would have understood them to mean, based on their wording and the surrounding circumstances. Ms Dhiri had authority to sign and stamp documents verifying NEAT’s undertaking but no authority to sign letters of indemnity. However nothing put Pacific on notice or inquiry as to her lack of authority. The High Court held that Ms Dhiri had apparent authority, Pacific reasonably relied on that authority, and therefore BNP was bound. “A kind of representation that often arises in business dealings is one which flows from equipping an officer of a company with a certain title, status and facilities … The holding out might result from permitting a person to act in a certain manner without taking proper safeguards against misrepresentation”: at [38].

Representation of authority [18.300] The basis of apparent (or ostensible) authority is that there has been a representation of authority of the agent on which the third party relied. However, only someone who has the actual authority to make the representation can make the representation of authority. For example, in the case of a company, only a person who had actual authority (not apparent authority) to manage the business of the company can make the representation.

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd [18.310] In Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 ADMA was a family company. Bruce Williams Snr was the Chair of the Board. His son, Bruce Jnr, was the managing director. The other son, Peter, had resigned as a director because he was a bankrupt, but continued to do the same work. Peter placed an order for machinery with Crabtree-Vickers. The order was on ADMA’s standard form order. At the bottom of the form was Bruce’s printed signature, next to which was “per” and then Peter’s written signature. When ADMA backed out, Crabtree Vickers sued for breach of contract. One of ADMA’s defences was that there was no contract because Peter had no authority to place the order. He had no apparent authority because someone who had actual authority to enter into that contract had not made the

chapter 18 Agency

representation. In the company the actual authority to enter into this contract rested with the Board. The managing director alone did not have actual authority and therefore could not represent that Peter had apparent authority. The High Court accepted this argument, relying on Diplock LJ’s judgment in Freeman and Lockyer. 3 It has been held that the apparent authority of a solicitor includes authority to compromise a dispute on behalf of their client. Accordingly, the client will generally be bound by a compromise entered into by the solicitor with a third party, notwithstanding that the solicitor’s actual authority to compromise on behalf of the client had been withdrawn: Waugh v HB Clifford & Sons Ltd [1982] 1 Ch 374. Even where the solicitor mistakenly exceeds the client’s instructions as to the amount of a proposed settlement the client will generally be bound, unless it would be unconscionable for the party seeking to enforce the compromise to rely on it: Buseska v Sergio (1990) 102 FLR 157. Where the plaintiff’s solicitor exchanged identical signed contracts that included terms to which the plaintiff had not agreed at the time of signature, it was held that the plaintiff’s solicitor possessed ostensible authority to bind the plaintiff: Zhang v VP302 SPV (2009) 223 FLR 213 at [34], [51]. A third party will generally rely on the apparent or ostensible authority of an agent when contending that the principal is bound by the acts of the agent, since: (a)

the third party will usually be unaware of the terms of the agreement between the principal and the agent, and therefore be unaware of the extent of the agent’s actual authority; and

(b)

the agent’s apparent or ostensible authority will be unaffected by limitations on the agent’s actual authority (whether express or implied) of which the third party was unaware. In other words, it is usually easier for the third party to establish that the agent acted within the scope of their apparent authority, rather than the agent’s actual authority.

Ratification [18.320] A person may be an agent but act outside his or her actual authority. In these circumstances the principal may retrospectively ratify the contract concluded with the third party. Such “ratification” can occur provided:  at the time the subsequently ratified agreement was created, the agent represented to the third party that he or she was acting on the principal’s behalf;  the principal had contractual capacity at the time of the creation and ratification of the contract; and  the principal ratifies the whole contract.

Keighley, Maxsted & Co v Durant [18.330] In Keighley, Maxsted & Co v Durant [1901] AC 240 Keighley, Maxsted & Co authorised Roberts to buy wheat on a joint account for himself and Keighley, Maxsted & Co at or below a certain price. Roberts, on his own behalf, bought wheat from Durant at a higher price than the price for which he had authority. Roberts did not disclose to Durant that he was acting as an agent for 3

It is perplexing that a managing director may bind the corporation because it has clothed him with apparent authority (as in Freeman v Lockyer) but that same person is unable to represent that someone else has apparent authority.

563

564

Introduction to Business Law in Australia

Keighley, Maxsted & Co as well as himself. Keighley, Maxsted & Co, however, later agreed with Roberts to ratify his purchase and buy the wheat at the higher price but eventually failed to do so. Durant resold it at a loss and sued Keighley, Maxsted & Co for the loss. The issue was whether a contract made by an agent, purporting to act on his own behalf, and not on behalf of a principal, but having an intention to give the benefit of the contract to a principal, can be ratified by that principal, so that the principal becomes liable on that contract. The House of Lords held that a contract made by an agent in his own name cannot be ratified. Lord Lindley noted the anomaly in holding a person bound to another of whom he knows nothing and with whom he did not in fact intend to contract. He said, “what Roberts intended was never disclosed to Durant and cannot be inferred from the nature of the transaction itself. His intention, therefore, cannot be allowed to affect the rights of the parties”.

Duties of an agent [18.340] Every agent owes certain duties to their principal that varies in degree according to the nature of the agency or according to the express terms of the contract of agency. These duties include the: (a)

duty to follow the principal’s instructions;

(b)

duty to act in person;

(c)

duty to act in good faith;

(d)

duty to make full disclosure of any personal interest;

(e)

duty not to make a secret profit;

(f)

duty to exercise reasonable care and skill; and

(g)

several other duties.

Each of these duties will be examined in turn.

Duty to follow principal's instructions [18.350] The primary duty of every agent is to follow the principal’s instructions, written or verbal. An agent must comply with the provisions of the contract of agency before he or she will be entitled to remuneration. Failure to comply with the principal’s instructions, except where they are illegal, will render the agent liable for the loss suffered by the principal as a result of the breach.

Duty to act in person [18.360] Every agent must act in person and, apart from the express or implied authority of the principal, or from particular usage, an agent has no authority to delegate their duties as agent to another. This is expressed in law by the maxim “Delegatus non potest delegare”, that is, a person to whom authority has been given cannot delegate that authority to another. Owing to the exigencies of business, this rule is relaxed in order to enable the agent in certain cases to delegate their powers and appoint a sub-agent. The authority of an agent to delegate their duties may be implied in the following situations:

chapter 18 Agency

1.

Where by the usage of a trade an agent usually acts through other agents; for example a country solicitor may employ a city agent whose acts will bind the client. However, where the principal forbids the employment of a sub-agent, the agent has no authority to delegate.

2.

Where the duties to be performed by the agent are purely ministerial, and do not involve the exercise of any discretion or skill on the part of the agent in person; for example, collecting rents.

3.

Where from the nature of the transaction it is clear that the parties intended, or may be reasonably presumed to have known, that it might be necessary to act through a sub-agent.

4.

Where unforeseen circumstances arise which necessitate the agent delegating. The necessity must be urgent and the sub-agent must be appointed with discretion.

Duty to act in good faith [18.370] An agent occupies what is called a fiduciary position. A fiduciary relationship exists between one person and another where the former is bound to exercise rights and powers in good faith for the latter. An agent’s duty to make full disclosure of any personal interest and not to make a secret profit, discussed separately below, are really aspects of the agent’s basic duty to act in good faith. The agent is under a duty in all cases to act in the interests of the principal and must not allow their own interests to conflict with those of the principal.

Lintrose Nominees Pty Ltd v King [18.380] In Lintrose Nominees Pty Ltd v King [1995] 1 VR 574 the respondent purchaser had bought property from the appellant vendor on the advice of an agent to whom the purchaser had paid a fee for the advice. Unknown to the purchaser, the vendor had also retained the agent to sell the property. The Full Court of the Supreme Court of Victoria, held that the purchaser was entitled to rescind the contract of sale with the vendor. “[T]he vendor could not properly sell its property through its agent, knowing that the agent was retained to advise the purchaser on the purchase, without knowing also that the dual allegiance of the agent was disclosed to the purchaser”: at 576.

Proper course to be adopted [18.390] The proper course to be adopted by every agent upon entering into an agreement to act on behalf of another is to consider whether he or she has any personal interest in the matter which might conflict with the duty owed to the intended principal and, if so, he or she should decline to act as agent.

Duty to make full disclosure of any personal interest [18.400] An agent must disclose to the principal all the material circumstances of which they are aware which might influence the principal in entering into any negotiation. If the agent fails to make such disclosure he or she is not entitled to commission: Dargusch v Sherley Investments Pty Ltd [1970] Qd R 338. Any profit received by the agent resulting from non-disclosure is recoverable by the principal on learning the true facts: Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815. Should any question arise as to the validity of any transaction on this score, the onus lies upon the agent to prove that they acted bona fide and also that they made full disclosure of all material facts. After the

565

566

Introduction to Business Law in Australia

termination of their employment, an agent may not use information acquired in the course of the agency in a manner prejudicial to the interests of the principal: Robb v Green [1895] 2 QB 315.

Duty not to make a secret profit [18.410] A fundamental duty of an agent is not to use their position to make a gain for themselves without the knowledge and assent of the principal. In the case of Parker v McKenna (1874) 10 Ch App 96, James LJ said: “No agent in the course of his agency, in the matters of his agency can be allowed to make any profit without the knowledge of his principal; … that rule is an inflexible rule and must be applied inexorably by this court, which is not entitled, in my judgment, to receive evidence, or suggestion or argument as to whether the principal did or did not suffer any injury in fact, by reason of the dealing of the agent”.

Regal (Hastings) Ltd v Gulliver [18.420] In Regal (Hastings) Ltd v Gulliver [1942] UKHL 1 the defendants were the directors of Regal, a company which operated a cinema. It created HAC, intending it to be a subsidiary, to acquire the leases on two cinemas nearby. However, because the company itself did not have sufficient money, the directors and the company solicitor personally paid for 60% of the shares in HAC. HAC acquired the cinemas, and then both were sold off to the plaintiff [Gulliver] for a tidy profit. The plaintiff, as the new management of Regal, sued the ex-directors and solicitor, seeking an account of profits made on the sale of their personal shares in HAC saying that this profit was in breach of their fiduciary duty to the company. The four directors were ordered to disgorge the profit they made from the sale of shares because they had acquired the shares through their positions as directors. The House of Lords said that the rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or considerations as whether the property would or should otherwise have gone to the plaintiff, The liability arises from the mere fact of a profit having been made. Lord Wright put the ethical responsibilities of fiduciaries well in the following statement: “Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it…(however) the person in the fiduciary position may be the only person in the world who could not avail himself of the opportunity”: at [157] (emphasis added).

Secret commission or profit [18.430] Should the agent receive a secret commission or profit the principal may recover it as well as dismiss the agent without notice. Where the agent desires to act for both vendor and purchaser and to obtain commission from both, the agent must make full disclosure to each party of her or his intention to act for and receive payment from the other, and must obtain the assent of each party for so acting: Fullwood v Hurley [1928] 1 KB 498.

chapter 18 Agency

This general principle applies unless a special usage or custom which is notorious, certain and reasonable is proved to the contrary. Thus, it has been held that a firm of stock and sharebrokers were entitled as a matter of custom, which had been established to be sufficiently notorious and certain and which was reasonable in the circumstances of the case, to “marry” or cross certain selling and buying orders for shares without express reference to the respective clients. Where such custom is established, it would seem that the share broker is entitled to commission from both the seller and the buyer of the shares: Jones v Canavan [1972] 2 NSWLR 236.

Duty to exercise reasonable care and skill [18.440] An agent who is employed for remuneration is presumed to have and is bound to exercise such skill, care and diligence in the performance of the undertaking as is usual or necessary for the ordinary or proper conduct of the profession or business in which the agent is employed, or is reasonably necessary for the proper performance of the duties. If the agent fails to exercise the requisite care and skill in carrying out the terms of the contract of agency, the agent will be liable to the principal for the loss sustained by the latter as a result of the agent’s breach of duty.

Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp [18.450] In Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp [1984] WAR 365 an insurance broker was instructed by a client to obtain unqualified insurance cover against damage caused by storm and flood. Unknown to the client, the broker obtained insurance cover excluding flood caused by the sea. Subsequently the client suffered loss as a result of flooding by the sea in a cyclone but the insurance company avoided liability by virtue of the exclusion clause. The broker was held liable because of his failure to exercise reasonable care and skill in effecting the insurance.

Further duties [18.460] Further duties of the agent are: (a)

to take such care in keeping the property (which includes money) of the principal as a reasonably prudent person would take in caring for their own property;

(b)

to keep all moneys and property of the principal separate from their own;

(c)

to keep separate accounts of all dealings on behalf of the principal, and to have such accounts ready for inspection by the principal, and, subject to the agent’s right of lien, to hand over to the principal, if so required, all moneys, papers and documents relating to the principal’s affairs; and

(d)

to preserve confidentiality in all matters coming to their knowledge whilst acting as agent: Weld-Blundell v Stephens [1920] AC 956.

567

568

Introduction to Business Law in Australia

Rights of agents Right to remuneration [18.470] The amount of remuneration for an agent depends upon the agreement made between the principal and the agent. In commercial transactions remuneration often takes the form of a percentage commission on the value of the transaction. In order to determine the agent’s right to commission, the terms and circumstances of the appointment must be examined as the agent may be entitled to remuneration only if he or she completes the sale, or again, in special cases, commission may be payable if the agent simply brings the parties together. Further, there may exist a time limit for the completion of the contract or the remuneration may be of a continuous nature payable on all further business arising from the same source.

Agent must be effective cause of sale [18.480] The transaction in relation to which the agent claims remuneration must not only come within the scope of the agent’s authority but the transaction must have resulted from the services he or she has rendered. The agent must, in effect, have been the means whereby the two contracting parties were brought together and entered into a legally binding contract: Luxor (Eastbourne) Ltd v Cooper [1941] AC 108. That is to say, the agent must have been the effective cause of the sale to be entitled to remuneration. This principle is illustrated by the following cases:

L J Hooker Ltd v W J Adams Estate Pty Ltd [18.490] In L J Hooker Ltd v W J Adams Estate Pty Ltd (1977) 138 CLR 52 the respondent company was the owner of a property in Sydney and engaged the appellant real estate agent to find a purchaser for it. The appellant introduced the property to company A that made several unsuccessful offers to purchase it. Meanwhile, the respondent was negotiating for the sale of the property to company B that the appellant had not introduced. On company A and company B learning of each other’s interest in the property, they entered into a joint venture agreement for the purpose, inter alia, of avoiding the risk of forcing up the price by competing bids. The joint venture agreement provided that each company would continue to negotiate upon agreed terms and conditions with the respondent, and that upon one of the companies becoming the purchaser, that party would complete the purchase and carry out the redevelopment of the site with the other on an equal basis. Neither the appellant estate agent nor the respondent owner was then aware of the joint venture agreement. The respondent owner eventually sold the property to company B. The appellant then sued the respondent to recover commission. It was held by a majority of the High Court that the appellant estate agent was not entitled to recover any commission as it had not been an effective cause of the sale to company B, nor of any sale of any interest in the property to company A. The Court said: “The proper analysis in the present case … is that company A, without the intervention of the appellant or the knowledge of the respondent, agreed with company B to acquire an interest in common with company B in the whole of the property upon its purchase by company B. The situation is not comparable to a sale by a vendor to a purchaser of part of the property, where that purchaser was introduced to the property or the vendor by the agent. Further, it seems to me that in this case the acquisition by company A of an interest in the property as

chapter 18 Agency

joint purchaser would not entitle the appellant to commission simply because the appellant had introduced company A to the property and to the respondent. In my opinion, the acceptance by the respondent of company A as a purchaser would be indispensable to the success of the appellant’s claim … I am unable to accept the conclusion that, because company A made an agreement with company B through which it acquired an interest in the property the subject of sale by the respondent to company B, the appellant is entitled to any commission upon that sale. The argument that the appellant was an effective cause of the sale to company B is to my mind completely unacceptable”: at [60] (emphasis added).

Right to indemnity and reimbursement [18.500] Every agent is entitled to be indemnified against all losses and liabilities sustained, and to be reimbursed for all expenses lawfully incurred in the carrying out of the principal’s instructions. Attention is drawn to the word “lawfully” for where the agent has acted outside the scope of her or his authority, or has engaged in an unlawful act, or suffered loss through their own negligence or default, the agent has no claim to be reimbursed or indemnified.

Right of lien [18.510] An agent has what is called a particular lien on such property of the principal as comes into the agent’s hands for the due payment of all expenses and remuneration lawfully incurred by the agent in transacting the principal’s affairs. However, the transactions must relate to the property over which the agent desires to exercise a lien. The agent may have a general lien extending to all claims arising out of the agency either by express contract or by usage.

Liabilities of agents [18.520] An agent may incur liability: (a)

to the principal; and

(b)

to third parties.

Liability of agent to principal [18.530] The general position is that the agent is an intermediary who is employed to negotiate some transaction on behalf of one person with another in order to effect the completion of a contract between them. Generally the agent incurs no liability to the principal in regard to the contract. However, where the agent disobeys the principal’s instructions, the agent will be liable for the loss suffered by the principal as a result of the breach of the contract of agency. Furthermore, where the agent is negligent in carrying out their duties, the agent will be liable to make good the damage suffered by the principal as a consequence of the agent’s negligence: Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp [1984] WAR 365. Any confidential knowledge acquired by an agent during the course of the agency should not be used by the agent or made available to third parties, and should the agent do so, he or she may be liable in an action for damages.

569

570

Introduction to Business Law in Australia

Liability of agent to third parties Figure 18.3: Liability of agent to third parties

[18.540] The agent’s liability towards third parties depends upon the agent’s method of contracting and in particular as to whether: 1.

The agent discloses the name of the principal.

2.

The agent does not disclose the name of the principal but does disclose the existence of the principal.

3.

The agent does not disclose the existence of any agency, that is, where the agent acts as if he or she were a principal.

Name of principal disclosed [18.550] Where the agent discloses the name of the principal, the contract is deemed to be that of the principal, and the agent is not liable on the contract except: (a)

where the agent contracts outside the scope of their actual or apparent authority, in which case the agent will be liable to the third party in damages for breach of warranty of authority (discussed at [18.600]);

(b)

the agent agrees to be liable;

(c)

usage or custom makes the agent liable;

(d)

the agent contracts by deed in their own name; or

(e)

where the principal is in fact non-existent.

Regarding (e) above, if a person professes to contract on behalf of a principal and the principal is a fictitious or non-existent person, the person is presumed to have intended to contract personally, unless a contrary intention is proved; and where the contract is in writing, such contrary intention cannot be proved by oral evidence, but must appear from the terms of the contract or from the surrounding circumstances. The fundamental question must be what the parties intended, or must be fairly understood to have intended; thus, where the intention is that the contract be made by the company, and the person who signs

chapter 18 Agency

“For and on behalf of” the company does not purport to contract as agent, he or she will not be personally liable on the contract: Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506.

Kelner v Baxter [18.560] In Kelner v Baxter (1866) LR 2 CP 174 the promoters of a company entered into a contract to buy goods, the contract being signed by them “on behalf of the proposed Gravesend Royal Alexandra Hotel Company”. It was held that, as the contract was not contingent upon the company being formed, the only persons who could be liable were the promoters.

Existence but not name of principal disclosed [18.570] The general rule is that where the agent discloses the fact that a principal exists but not the name of the principal, the agent’s liability, provided he or she contracts as agent, is similar to the cases where the name of the principal is disclosed. If the third party contracts knowing there is a principal and yet does not ascertain the principal’s name, the third party cannot sue the agent: Marsh & McLennan Pty Ltd v Stanyers Transport Pty Ltd [1994] 2 VR 232 at 241. In other words, the agent’s liability is the same, provided he or she contracts as agent, whether or not the principal’s name is disclosed. This principle may alter where the custom of trade makes the agent personally liable.

Existence of principal not disclosed [18.580] Sometimes an agent does not disclose to the third party that he or she is acting as an agent. Accordingly, the third party believes that the person they have been negotiating with is the other party to the contract, whereas in reality such person is acting on behalf of an undisclosed principal. In such a case either the undisclosed principal or the agent can sue or be sued on the contract, unless the contract between the agent and the third party expressly or impliedly excludes the rights of persons other than the agent to be a party to the contract: Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141. However, the legal rights and obligations of the undisclosed principal only arise where the agent was in fact her or his agent at the time of the transaction, that is, where the agent had actual authority from the principal to enter into the contract. An undisclosed principal cannot purport to ratify as the act of their agent a transaction entered into without their authority by one who purports at the time to be a principal and does not disclose that he or she is an agent: Keighley, Maxsted & Co v Durant [1901] AC 240. The general principles applying to undisclosed principals were summarised in Siu Yin Kwan (Administratrix of the Estate of Chan Ying Lung, Decd) v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207 per Lord Lloyd as follows: “(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on the principal’s behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.” While at the outset it is open to the third party to hold either the agent or the undisclosed principal liable on the contract, once the third party has elected to hold liable either the agent or the principal, the third party is then irrevocably bound by the election and cannot afterwards charge the other on the contract. Where

571

572

Introduction to Business Law in Australia

the third party sues and recovers judgment against the agent on the contract, the third party is conclusively deemed to have elected to hold the agent liable and cannot thereafter sue the undisclosed principal. Where the third party has not sued the agent to judgment the question whether the third party has so elected or not is a question of fact depending on the circumstances of the particular case; the mere fact that the third party has commenced an action against the agent is not of itself conclusive although it may be some evidence of an election. [18.590] The undisclosed principal may intervene and sue on the contract unless the contract is such as to be entirely inconsistent with agency. The undisclosed principal may be met with any right of set-off which the third party has acquired against the agent before the third party discovered the existence of the principal. Where an agent contracts in such a manner as to make themselves personally responsible, the agent will be liable whether the principal was or was not known at the time of the contract, for example where the agent signs a bill of exchange in their own name instead of on behalf of the principal.

Breach of warranty of authority [18.600] So long as the agent does not exceed their authority the agent will not be personally liable to persons with whom he or she deals. It is a complete answer for the agent to show that he or she acted only as an agent as the other party well knew, and that everything they did was within the scope of their authority. Where an agent represents, either expressly or impliedly, that he or she has authority to enter into a particular transaction and a third party relies on that representation of authority, the agent is taken to warrant that such representation is true. If it is in fact untrue, the agent is liable in damages for breach of warranty of authority. The measure of damages is the actual loss sustained by the third party. It will be no defence that the agent acted innocently or in mistake as to the precise extent of the authority conferred upon her or him. A person who purports to act as an agent impliedly warrants that they have authority and is liable for breach of that warranty even though their authority has come to an end by reason of facts of which they have no knowledge or means of knowledge: Yonge v Toynbee [1910] 1 KB 215. However, the agent is not liable where the other party knew of the agent’s lack of authority: Weigall & Co v Runciman & Co (1916) 85 LJKB 1187.

Liability of principal and agent for misrepresentations [18.610] Where an agent is engaged to sell property, it will normally fall within the scope of the agent’s ostensible authority to describe the nature and quality of the property the agent is selling on behalf of the principal. Accordingly, if the agent’s representations are untrue, the vendor will be liable to the purchaser for the loss suffered by the purchaser as a result of relying on the agent’s representations: Aliotta v Broadmeadows Bus Service Pty Ltd [1988] ATPR 40-873 at 49,445. Where the agent made a negligent misrepresentation that was relied on by the purchaser, the agent will be liable in damages to the purchaser for the loss suffered. For example, a real estate agent for the vendor of a business was held liable to the purchaser for negligent misrepresentations made by the agent as to earnings of the business: Roots v Oentory Pty Ltd [1983] 2 Qd R 745; cf Norris v Sibberas [1990] VR 161. A principal is vicariously liable for a tort committed by an agent where the agent has acted within the scope of their actual or apparent authority. The liability of the principal includes liability for the negligent misrepresentations of their agent. For example, the vendor of a building was held vicariously liable to the purchaser for damages because of the negligent misrepresentation made by the vendor’s agent as to the

chapter 18 Agency

“lettable” floor space of the building: Thompson v Henderson & Partners Pty Ltd (1990) 58 SASR 548. In the latter case the agent was also held liable to the purchaser; furthermore, the vendor was entitled to an indemnity from the agent in respect of the vendor’s liability to pay damages to the purchaser. The representations of an agent may also constitute, in an appropriate case, misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law 4 (formerly s 52 of the Commonwealth Trade Practices Act 1974 (Cth)): Aliotta v Broadmeadows Bus Service Pty Ltd [1988] ATPR 40-873). Where an agent’s representation to a third party comprises information provided to the agent by their principal, the agent will be entitled to an indemnity from the principal in the event of the agent being liable to the third party because the representation proves to have been untrue. In such a case, the agent would have the ordinary right of indemnity of an agent against a principal where the agent has acted within the scope of their authority.

Liability of principal and agent for wrongful acts [18.620] An agent is liable for their tortious acts but the principal will also be liable for any tort committed by the agent where the agent has acted within the scope of their actual or apparent authority, whether the tort was committed for the benefit of the principal or of the agent. The liability of the principal includes liability for the negligence or negligent misrepresentations of their agent (see previous section). The principal will also be liable for the fraudulent conduct of their agent where such was committed within the scope of the agent’s apparent authority.

Royal Globe Life Assurance Co Ltd v Kovacevic [18.630] In Royal Globe Life Assurance Co Ltd v Kovacevic (1979) 22 SASR 78 an insurance agent persuaded Kovacevic to enter into certain life assurance proposals. Kovacevic paid the agent an initial premium and was given a receipt for the amount by the agent from a receipt book provided by the insurance company. Some months later, the agent again approached Kovacevic and invited him to invest moneys on loan with the insurance company. The agent told Kovacevic that a deposit of moneys with the company would return a higher rate of interest and give Kovacevic the right to obtain from the company a loan on mortgage for the purchase of a house. Kovacevic paid the agent $2,000 and was again given a receipt from the agent’s receipt book. The agent misappropriated the money and disappeared and Kovacevic sued the insurance company for the $2,000. It was held that the agent had received the money from Kovacevic in the course of his employment by the insurance company which was accordingly liable to Kovacevic for the agent’s fraud. [18.640] Thus the principal may be liable in tort for damages if the agent is guilty of a wrong or deceit or fraudulent misrepresentation. The fraud may be the fraud of the principal in instructing the agent that a certain fact is true, whereas it is actually untrue; or it may be the fraud of the agent in taking upon themselves to say that it is true whereas the agent knows that it is untrue. In either case the principal is liable. [18.650] A principal will not be liable for the fraud of an agent where the agent was not authorised to do the act; where the act was not within the class of acts that an agent in their position is usually authorised to 4

The Australian Consumer Law is Sch 2 to the Commonwealth Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)).

573

574

Introduction to Business Law in Australia

do; and the principal has done nothing to represent that the agent had authority to do the act: Armagas Ltd v Mundogas SA [1986] 1 AC 717. Similarly, a principal will not be liable for other wrongful acts of an agent that are outside the agent’s actual or apparent authority, for example where an agent commits an unauthorised assault upon third parties:

Deatons Pty Ltd v Flew [18.660] In Deatons Pty Ltd v Flew (1949) 79 CLR 370 D conducted a hotel in which it employed B as a barmaid. P, a customer in the hotel, acted in an offensive manner and B asked him to go away. In the course of an altercation B threw a glass of beer and then the glass itself in the face of P. It was held that, whether or not B had been provoked as D alleged, B was not acting within the scope of her employment in doing what she did and that accordingly D was not liable to P in damages. [18.670] A principal (or employer) will not be liable for the negligence of an agent (or employee) who acts without any authority and in their own interests and not on behalf of the principal (or employer): Kooragang Investments Pty Ltd v Richardson & Wrench Ltd [1982] AC 462 (PC).

Termination of agency [18.680] The time when, and the circumstances upon which, the relationship of principal and agent will end depend upon the terms of the original contract of agency.

Performance or completion of agency [18.690] Where the agent is appointed either for the performance of one specific act, or for the duration of a definite period, then the authority of the agent will extend only until such act has been done, or the specified period has expired.

Impossibility of performance [18.700] Where it becomes impossible for the agent to carry out their obligations, for example where the subject matter of the agency is destroyed, the authority of the agent must cease there and then, for example where the building that an agent has been instructed to sell is destroyed by fire.

Agreement [18.710] Whilst the agency is still current both the principal and agent may mutually agree to its termination.

Revocation [18.720] In considering the rights of the principal to revoke the agent’s authority or the right of the agent to renounce, it must be borne in mind that in any contract of agency, unless some express stipulation has been made to the contrary, there is an implied term that either party may terminate it upon notice. But neither notice of revocation nor notice of renunciation will affect any rights or liabilities that may have been created between the principal and third parties prior to the notice. The right of the principal to revoke the agent’s authority may be limited or affected by the rights of:

chapter 18 Agency

(a)

third parties; and

(b)

the agent.

Rights of third parties [18.730] The principal may be liable to third parties even after the principal has validly revoked the authority of the agent, where such parties have had previous dealings with the agent and continue to deal with the agent without notice of the withdrawal of the agent’s authority. An example would be where a commercial traveller had authority to collect the debts of their firm and was dismissed without the firm notifying the customers of the termination of the traveller’s authority. The traveller continues to call and receive from the old customers, payment of their accounts supposedly for the firm. The traveller’s action would bind the firm as payment to the traveller would be held as good payment to the firm as regards customers unaware of the traveller’s dismissal.

Rights of the agent [18.740] The right of the principal to revoke the authority of their agent may be limited by the principal’s obligation to indemnify the agent against any loss or damage the agent may have suffered as a result of their employment, for example expenses in advertising, etc, connected with the agency. Further, the agent may be entitled to claim for loss of commission in certain cases depending upon the nature of the agency, the terms upon which commission is payable and the circumstances existing at the time the principal revoked the agent’s authority. For instance, the principal cannot capriciously or without reasonable grounds refuse to enter into a contract and determine the agency when the agent has found and introduced a purchaser ready, willing and able to buy at the stipulated price: Trollope (George) & Sons v Martyn Bros [1934] 2 KB 436.

By death [18.750] The death (or in the case of a corporation, the liquidation) of either principal or agent immediately puts an end to the agency. Accordingly, an agent’s authority to draw on the principal’s bank account terminates on the principal’s death: Noonan v Martin (1987) 10 NSWLR 402. The general rule is that the death of the principal terminates the authority of the agent even though the agent is unaware of and had no means of ascertaining the fact. Consequently the agent becomes personally liable to third parties for having made any contract entered into by the agent after the death of the principal and on behalf of the deceased principal, and may be sued by such party for breach of warranty of authority even though the agent was ignorant of the principal’s death. The estate of the principal is not liable under such a contract though the personal representative (for example, the executor) may confirm the contract. In some States, every act done in good faith within the scope of a power of attorney after the death of the donor and before the receipt of notice thereof is valid and the donee of such power is not liable. 5

By insanity [18.760] Once insanity has overtaken either principal or agent, the contract of agency, with its attendant rights and liabilities, is at an end: Yonge v Toynbee [1910] 1 KB 215. However, a third party is entitled to treat the authority of the agent as subsisting until they receive notice of the insanity in cases where the principal, before becoming insane, had held out the agent as having authority. 5

Powers of Attorney and Agency Act 1984 (SA), s 12; Property Law Act 1969 (WA), s 85(2); Powers of Attorney Act 2000 (Tas), s 52; Powers of Attorney Act 1956 (ACT).

575

576

Introduction to Business Law in Australia

Bankruptcy Of the agent [18.770] The bankruptcy of the agent determines their authority, except where the bankruptcy does not affect their capacity to contract as agent. Thus where the duties of the agent are merely formal, the agent’s bankruptcy would not necessarily affect their authority.

Of the principal [18.780] The bankruptcy of the principal also determines the relationship of principal and agent. However, an agent, even after notice of the principal’s bankruptcy, may do such acts as are necessary to complete some transaction which was already binding on the principal before the bankruptcy.

Renunciation by the agent [18.790] The agent may renounce the agency at any time but must compensate the principal for any loss occasioned by such renunciation.

Particular types of agents Factors and mercantile agents [18.800] A factor is considered at common law to be an agent employed to sell goods, the possession or control of which has been entrusted to the factor’s care by the principal. A factor has been generally recognised as possessing certain powers which apply in the absence of any special instructions from the principal to the contrary. Thus a factor may sell goods in their own name as though he or she was the principal. In the various States there exist Acts 6 relating to factors and mercantile agents. They define a mercantile agent as “an agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale or to buy goods, or to raise money on the security of goods”.

Brokers [18.810] A broker is a general agent who buys and sells goods for a principal without being entrusted either with the possession or control of the goods or of their documents of title. Often a broker does little more than bring the parties together, and when a contract is concluded takes their commission and entirely drops out of the transaction. The general practice of brokerage is for the broker, upon making the contract, to enter a note in their book signed by the broker, and send a note or memorandum to both parties. The one sent to the purchaser is called the “bought note”, that to the vendor is the “sold note”.

Partners [18.820] Each partner is a general agent of the other with regard to partnership matters, and the partnership is bound by any act done by one of its members in the course of the firm’s business, unless the 6

Factors (Mercantile Agents) Act 1923 (NSW); Goods Act 1958 (Vic), ss 65 – 72; Factors Act 1892 (Qld); Mercantile Law Act 1936 (SA); Imperial Act 5 & 6 Vict, c 39 (WA); Factors’ Acts Amendment Act 1878 (WA); Factors Act 1891 (Tas).

chapter 18 Agency

partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows that he or she has no authority or does not know or believe her or him to be a partner.

Directors [18.830] Subject to the qualification that they must act together as a board, directors are agents for their company, and a company is liable in respect of all contracts made on its behalf by directors acting within the scope of the authority given to them by the rules of the company.

Estate agents [18.840] Generally the term “estate agent” is used in statutes to include agents entrusted with the duty of buying or selling land, or of buying or selling businesses, on behalf of principals. Sometimes, however, the statutes differentiate between “land agents” or “real estate agents” and “business agents”. An auctioneer is an agent for the sale of property at a public auction.

Statutory regulation of agents [18.850] There is considerable regulation by State statutory law of auctioneers and “estate agents”. Thus in most States auctioneers and estate agents have to be licensed. 7 In most States repossession and debt collecting agents (referred to as “commercial agents”) are subject to licensing requirements. 8 Finance brokers (that is, agents who negotiate loans for other persons) are required to be licensed and are subject to certain obligations in the conduct of their business under the national scheme established by the Commonwealth National Consumer Credit Protection Act 2009 (Cth). In all States and Territories “uniform” legislation formerly required the licensing of travel agents and regulated their operations. One of the conditions to be satisfied before a licence would be granted was that the applicant be a participant in the Travel Compensation Fund which was established to compensate travellers who suffer loss as a result of misappropriations by travel agents. However, it is intended that these licensing requirements will be repealed in all jurisdictions and the Compensation Fund will be closed. See Victorian Legislative Assembly Hansard, 13 November 2013, p 4024. The legislation has already been repealed in New South Wales, Queensland, Victoria, South Australia Northern Territory and the Australian Capital Territory. 9

7

8

9

In New South Wales, the Married Persons (Equality of Status) Act 1996 (NSW), s 7 provides: “A married person does not, by reason only of the person’s status as a spouse, have authority to pledge the credit of the other spouse for necessaries or to act as agent for the other spouse for the purchase of necessaries.” See similarly, Law of Property Act 1936 (SA), s 104; Married Persons’ Property Act 1986 (ACT), s 5; Married Persons (Equality of Status) Act 1989 (NT), s 5. See also Estate Agents Act 1980 (Vic), ss 49A, 50; Property Agents and Motor Dealers Act 2000 (Qld), ss 117, 140, 217, 288, 346; Land Agents Act 1994 (SA), s 6(2); Real Estate and Business Agents Act 1978 (WA), s 60; Property Agents and Land Transactions Act 2005 (Tas), s 18. The following statutes should also be considered: Auction Sales Act 1973 (WA); Agents Act 2003 (ACT); Auctioneers Act 1935 (NT); Agents Licensing Act 1979 (NT). The National Competition Review “concluded that the benefits of licensing auctioneers of goods are outweighed by the costs”: Victorian Hansard (Assembly), 5 April 2001, p 761. As a result of this recommendation, the Victorian Auction Sales Act 1958 (Vic) was repealed: Auction Sales (Repeal) Act 2001 (Vic), s 3. Commercial Agents and Private Inquiry Agents Act 2004 (NSW); Property Agents and Motor Dealers Act 2000 (Qld), s 45; Security and Investigation Agents Act 1995 (SA); Debt Collectors Licensing Act 1964 (WA); Security and Investigations Agents Act 2002 (Tas); Commercial and Private Agents Licensing Act 1979 (NT). Travel Agents Act 1985 (WA); Travel Agents Act 1987 (Tas). The Travel Agents Act 1986 (NSW) was repealed by the Travel Agents Appeal Act 2014 (NSW). The Travel Agents Act 1986 (Vic) was repealed by the Travel Agents Appeal Act 2014 (Vic). The Travel Agents Act 1988 (Qld) was repealed by the Construction and Tourism (Red Tape Reduction) and Other

577

578

Introduction to Business Law in Australia

Employment agents may also be subject to licensing requirements. 10

Further reading G Dal Pont, Law of Agency (3rd ed, LexisNexis Butterworths, Sydney, 2014). S Fisher, Agency Law (Butterworths, Sydney, 2000).

Tutorial activities 18.1

Distinguish between express and implied actual authority.

18.2

Distinguish between actual and apparent authority.

18.3

When can an agent exercise apparent authority?

18.4

When is ratification of an agent’s action possible?

18.5

Anwar was appointed to the stationery purchasing agent position during his time at Awesome Accountants. He regularly purchased stationery on Awesome Accountant’s account from Stationery Express Ltd with Awesome Accountant’s knowledge and acquiescence. Anwar’s purchasing limit was $500 per week, although he never needed to order stationery worth more than $300 at a time. After the end of his internship with Awesome Accountants, he placed a $250 stationery order with Stationery Express. Anwar picked up this stationery and took it home for his own use. Awesome Accountants has received the invoice for the stationery and does not wish to pay.

18.6

18.7

10

(a)

Is there an agency relationship between Awesome Accountants and Anwar?

(b)

Assuming there is, is the purchase within Anwar’s authority?

Janice owns a computer shop. Terry is her most knowledgeable, experienced and trusted salesperson. It is very hard to keep good people and she fears losing him to a large computer store that has recently opened. To try to keep him she gives him a pay increase and the title “Manager” (although his actual duties do not change – he is still mainly responsible for selling to the public and has no authority to make commercial decisions or enter into contracts other than those with customers). Janice introduces him to people as her “Manager” and encourages him to go to computer fairs where managers gather. At a fair in early 2011, Terry meets Harold, a software representative from Macrowares Pty Ltd, and, after lengthy discussions, he agrees to purchase software valued at over $43,000 for the shop. When Janice receives the invoice she refuses to pay and seeks your advice. (a)

Please advise Janice of her rights and obligations in relation to Harold and Terry.

(b)

It is later revealed that Harold paid Terry cash to purchase the goods. Terry did not reveal this to Janice. Advise Janice of any rights she may have against Terry.

Ricardo is the senior curator and ground manager at Noora Norra Golf Club Resort, a luxury facility in north Queensland owned by Gabba Pty Ltd. Noora Noora has been under financial pressure since the Global Financial Crisis affected the flow of Japanese tourists. The Board cut budgets and informed Ricardo that he could not enter into any contracts valued at over $10,000. Legislation Amendment Act 2014 (Qld) , s 52. The Travel Agents Act 1986 (SA) was repealed by the Travel Agents Repeal Act 2014 (SA). The Consumer Affairs and Fair Trading Act 1990 (NT), Pt 11 was repealed by the Consumer Affairs and Fair Trading Amendment Act 2014 (NT), s 6. Agents Act 2003 (ACT), s 21 was repealed by the Justice and Community Safety Legislation Amendment Act 2014 (ACT), Sch 1 Pt 1.1 Item 1.3. Employment Agents Registration Act 1993 (SA), s 6; Employment Agents Act 1976 (WA), s 12; Agents Act 2003 (ACT), s 22.

chapter 18 Agency

Despite this instruction he proceeded to negotiate a landscaping contract with Willow Landscaping that was valued at $13,000. An associated water feature cost an extra $4000. When work commenced the CEO asked Ricardo what was happening. Ricardo informed him of the landscaping project but did not mention the water feature. After considering the circumstances, the CEO tells Willow to proceed. Soon after the Board understands the totality of the commitment. Advise the Board of its rights and obligations. 18.8

Jeremy is an estate agent in the Melbourne inner city area of Docklands. He is selling high-rise units “off the plan” for Aspirational Developments Pty Ltd. He has friends who work for other developers and becomes aware that a competing high-rise that is also selling “off the plan” has run into difficulties and is unlikely to go ahead. The result is that the units he is selling are likely to be more valuable than previously thought. Being an opportunist, Jeremy assists a friend to arrange finance so she can buy three of the units with a view to selling later at a profit that they will split 50–50. Furthermore, in return for a small payment, he informs several people who have expressed an interest in purchasing a unit of the news. Aspirational Developments learns of Jeremy’s conduct and seeks your advice.

579

chapter 19

Business Structures other than Companies [19.20] Introduction......................................................................................................................................................... 582 [19.100] Introduction to business organisations............................................................................................ 586 [19.110] Business names ........................................................................................................................................... 587 [19.120] Comparing business entities.................................................................................................................. 588 [19.210] Introduction to partnerships................................................................................................................... 593 [19.280] Nature of partnership ................................................................................................................................ 596 [19.510] Relationship of partners with each other ........................................................................................ 604 [19.680] Relationship of partners to third parties.......................................................................................... 613 [19.720] Liability of partners to third parties .................................................................................................... 614 [19.970] Dissolution of partnership ....................................................................................................................... 624 [19.1080] Limited partnerships ............................................................................................................................... 628

582

Introduction to Business Law in Australia

Introduction Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 26.

Terminology [19.20] Below are some of the key terms that are used in this chapter:  agent: a party authorised to enter into enforceable legal relationships on behalf of the principal.  assignment: to assign means to transfer a right or property to another.  co-operative: on registration with their State authority under special legislation, the co-operative (collective), while not a company, gives shares to its members, and creates a separate legal entity with limited liability to members and operators.  dissolution: the termination or bringing to an end of a business organisation (and a distribution of its assets).  fiduciary duty: an obligation to act in good faith, honestly, diligently, carefully and with all the implied duties that flow from that duty.  franchise: is a contractual agreement between the owner of a registered business system who leases out the use of their property to various operators; it is not a separate legal entity but rather a business arrangement.  goodwill: an asset of the firm that is usually expressed as the value to a business of its reputation and relationship formed with its customer base and its location.  holding out: the act of a person allowing themselves to be represented, or representing, by words or conduct that they are a partner of a firm, also referred to as estoppel.  incorporated association: an association established for “not-for-profit” purposes which does not distribute dividends to its members, but which is registered under State legislation enhancing it with a separate legal entity and limited liability.  incorporated partnership: (venture capital limited partnerships) some jurisdictions allow a partnership to register as a separate legal entity. It requires general partners to have unlimited liability and is specifically established to facilitate large-scale investments over $20 million.  joint and several liability: each partner is liable individually (severally), and all are liable jointly, where the party suing has the option to sue one or more partners individually or all partners jointly.  joint liability: in partnership law generally each partner is liable jointly or together for any debts or contractual obligations incurred by the partners on behalf of the firm, in the ordinary course of business, and the party suing has only one opportunity to sue.  joint venture: two or more people entering into a one-off or longer term agreement for a share of the gross returns (but not as a partnership).  limited partnership: a partnership in which there is at least one general partner with unlimited liability, and one or more partners whose liability for debts and obligations of the partnership is limited.  novation: the transfer of an interest from one party to another.  partnership: the relationship which subsists between persons carrying on a business with a view of profit.  prima facie: means on the face of it, an assumption that is made in the first instance, unless some other evidence appears to contradict (rebut) a first impression.

chapter 19 Business Structures other than Companies

 sole trader: where a single (natural) person personally owns and operates a business with unlimited liability.  syndicate: syndicates are similar to a joint venture whereby the participants are investors as separate legal entities, not as a business in common.  trust: consists of a Settlor who transfers property (possibly a business) to a Trustee who holds and manages the property on behalf of the ultimate Beneficiaries.  unincorporated association: an association, club or society, established for “not-for-profit” purposes which is not registered and does not pay dividends to its members.  vicarious liability: an employer will be liable for the actions of an employee who harms another while acting within the authority of the employer.

Choosing a business type [19.30] Any organisation which trades, ie, receives moneys and supplies goods and services, whether a charity, a church, sporting club or an enterprise designed to give its owners an income, is a business which must choose a format to operate within. Each type of business organisation has particular advantages and disadvantages which each enterprise operator(s) must consider with regard to the type, size, administration and risks associated with the business. The operators of an enterprise may even choose to change their business type over time as their organisation grows or because of a need to attract capital. Some of the considerations that a business may take into account when choosing their format might be:  Size: small businesses would tend to be sole traders, but larger businesses that carry risk might choose some corporate form.  Risk: where the enterprise has high risk it might consider a corporate structure to separate the operators from the entity.  Enterprise objectives: clubs and charities might choose to be an incorporated association or guarantee company which are means of separating risk from the operators where there is a not-for-profit purpose; businesses which seek to share dividends would choose alternative forms.  Capital requirements: where a large number of participants are involved the enterprise might choose a format from that of a company, unit trust or even a joint venture.  Privacy issues: companies are extensively subject to outside scrutiny by the public and regulators while other business types, eg, partnerships, are much more private.  Considerations of the longevity and transfer of the business: businesses based on personal services (often sole traders and partnerships) may cease with the retirement of its owners, whereas corporate bodies with their own entity may live on beyond their members, particularly since ownership of the company is by holding shares, which are readily transferable and can be sold or willed to another.  The costs of establishing and conducting a business: simpler businesses such as sole traders are inexpensive to create and run, whereas companies are more expensive to establish and run due to ongoing legal requirements.  Regulation and sanctions: sole traders are generally the least regulated bodies whereas companies are highly regulated and can suffer quite severe sanctions, as can their operators, for breach of the law.  Taxation: while some taxes are unavoidable such as GST, separate entities such as companies must pay their own tax, as do their shareholders. Sole traders pay their own tax, though this could be at higher marginal rates than a company if they are successful, rather than the flat rate paid by companies.

583

584

Introduction to Business Law in Australia

Sole trader [19.40] A sole trader (sole proprietor) is a one-person business which is owned and operated by a natural person (a human!) who contributes the business capital. Because a sole trader operates the business personally and has no separate legal entity, the operator has unlimited liability, which means the personal assets of the trader are subject to claims by the creditors. A sole trader may have to register a business name with the Australian Securities and Investments Commission (ASIC) under the National Business Names Registration System, if he or she operates under a name other than their own, however, unless the enterprise is specifically regulated, this form of enterprise is the least regulated of the business forms. Developments in the law, however, mean that a sole trader may need to register for GST with an Australian Business Number, and similarly could be subject to the Competition and Consumer Act 2010 (Cth) (CCA), so that the provisions of the Australian Consumer Law (ACL) and State law may apply to business practices of all traders (incorporated and otherwise). Some professions require a sole trader to be both qualified and insured in order to operate their business. Sole traders tend to be smaller in size due to the risk they carry and their access to limited capital.

Unincorporated associations [19.50] Where persons form a club, society or any other not-for-profit group to conduct some public purpose “enterprise”, eg, a football club, without any registration as a company, then it is an unincorporated body. An association could be characterised as having some “formality”, eg, club rules or officers, in order to distinguish it from a single-person enterprise. A “not-for-profit” business may still be seeking to make profits for its public purpose, but must not divide the profits between the members as “dividends”, or it may be considered to be a partnership. Historically, unincorporated associations had no recognised legal entity and therefore could not hold property, sue and be sued or hold bank accounts. Under case law before 1981, the courts indicated that the committee, or at least the party who entered a contract on behalf of the association, might become personally liable.

Peckham v Moore [19.60] In Peckham v Moore [1975] 1 NSWLR 353 Peckham, a football player, was injured and sued for workers’ compensation. The club was an unincorporated association and the court found the committee liable, though they were able in turn to claim against the club funds.

Incorporated associations [19.70] All States and Territories of Australia now allow an association to register as an incorporated association with the appropriate authority: Associations Incorporation Act 2009 (NSW); Associations Incorporation Reform Act 2012 (Vic); Associations Incorporation Act 1981 (Qld); Associations Incorporation Act 1964 (Tas); Associations Incorporation Act 1985 (SA); Associations Incorporation Act 1987 (WA); Associations Incorporation Act 1991 (ACT); Associations Act (NT). Registration gives the association recognition as a separate legal entity, which in turn provides limited liability to its members and management. As a legal person, an incorporated association can hold property in its own right, open a bank account and sue and be sued like any other entity — which overcomes many of the historical problems associated with unincorporated associations. There are a number of differences between jurisdictions regarding registration and ongoing requirements which must be complied with. Some States

chapter 19 Business Structures other than Companies

designate a large incorporated association (according to turnover and assets tests) as being a “prescribed association”, which is then required to lodge an annual return and to have its finances audited according to different standards depending on the level of turnover between $250,000 and $1,000,000. An incorporated association must meet certain conditions in order to be both registered and to keep that registration, eg, to have a minimum of five members. An incorporated association which operates in more than one State must register with ASIC as an Australian Registered Body (ARB). An incorporated association must have a constitution, appoint a public officer, must keep records and hold an Annual General Meeting. An incorporated association is wound up using the same procedures and rules as a company under the Corporations Act 2001 (Cth), unless modified by State legislation or the association’s own constitution. The wound up incorporated association’s surplus must not be distributed to members but must be given to a benevolent organisation. Incorporated associations are subject to the law of meetings, agency principles (at least the management committee), natural justice principles, fiduciary principles (for those entrusted as officers), tort law, health and safety, fair trading provisions under the ACL and even taxation regulation.

Joint ventures [19.80] A joint venture is a business agreement whereby separate businesses enter into a binding contract to conduct some project, venture, or undertaking, and share the resulting product or losses in a pre-determined manner. A joint venture is not a separate entity but is rather composed of a number of separate and independent entities who are not (like a partnership) mutually liable for each other. Contributions into, and share of product from, the venture are determined by the joint venture agreement. Joint ventures are used in Australia to facilitate projects that require diverse inputs which one party might not have, eg, property development, farming enterprises, developments of pharmaceuticals or musical events, to name but a few types of ventures. Parties might contribute different inputs to a project: capital, land, a licence, expertise or even particular industry contacts which when combined can expedite a better quality product than if the one party needed to find all the different inputs for an enterprise. Some States utilise joint ventures in the form of public–private partnerships, which despite their name are joint ventures to build tolled highways, bridges or other public utilities. Joint venturers are not liable for each other’s actions. Joint ventures can be composed of varied participants, eg, a government body and a company, two or three companies or a sole trader and a partnership. Each party to a joint venture is able to keep its business private from other participants, can make its own capital and taxation arrangements and is only liable for its own liabilities, not those of fellow venturers; a participant may even sell their “share”. A joint venture is dependent on how clear and precise the agreement is in distinguishing the parties as separate parties. In some instances where the agreement to conduct a project is unclear, not written properly or where parties intermingle their assets and employees, then the law may determine the relationship is a partnership rather than a joint venture. Of particular interest are situations where a manager or management committee is established, and whether a manager can act as agent for members of the joint venture, or whether such powers are specially proscribed by the joint venture agreement. If a court determines that an enterprise is actually a partnership, then the parties will be mutually liable for each other’s debts and obligations. The question of whether a relationship between the parties is a partnership, joint venture, employment contract, agent to principal or merely one of independent contractors requires an application of various tests. In the case of a joint venture, the test of whether the

585

586

Introduction to Business Law in Australia

elements of a partnership are present would be the most appropriate. It is important to note that a joint venture is determined by law, rather than merely by what the parties think or intend the relationship to be.

Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [19.90] In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 the parties were involved in a music promotion which resulted in losses. Different parties contributed to management and the provision of capital, and some of the parties assumed it was a joint venture. When the court looked at the actual relationship, the documentation, and interaction of the parties, the court determined it to be a partnership and not a joint venture: the parties were mutually liable for losses as a result of each individual’s actions.

Introduction to business organisations Extracts from Turner, C, Trone, J and Gamble, R, Concise Australian Commercial Law (3rd ed, LawBook Co., 2015), Chapter 16. [19.100] There are numerous forms of business organisations from the simplest – a sole trader – to more complex arrangements – such as partnerships, joint ventures, franchises, corporations and trusts. The choice of business structure depends on a number of factors:  The size, type and purpose of the business  The expected duration of the enterprise  The need for start-up finance and credit thereafter  Risk and liability factors  Ownership and management  Taxation  Regulation and compliance costs. We can generally say that more complex business organisations are suitable for larger businesses where ownership is diverse, proper management requires expertise in a number of areas, there is a need to raise capital and access credit from time to time. Complex structures, whether corporations or not, are more expensive to establish, and if a public company will require a significant degree of financial and accounting transparency and have serious compliance obligations. There are many important differences between the three business organisations referred to. But the central differentiating feature of a corporation is the fact that, after it is incorporated, it becomes a separate legal entity, separate from its owners and separate from its managers. It is a full and separate (legal) person, able to sue and be sued in its own name, own property, pay tax, enter into contracts, commit civil wrongs and engage in criminal conduct. And, most importantly, it is responsible for its own debts and liabilities, leaving its owners with what has come to be known as “limited liability”. Neither a sole trader’s business nor a partnership has the status of a separate legal person and this has profound consequences when considering risk and liability: the sole trader and (most) partners have unlimited personal liability for the debts and liabilities of the business or the firm. We will now briefly define the main types of business organisations, however first it is helpful to distinguish between the business organisation and the business name that the organisation trades under.

chapter 19 Business Structures other than Companies

Business names [19.110] For various reasons, usually to do with marketing considerations, a business operator may wish to trade under a name that is not simply their own name. For example, John Smith may wish to mow lawns under the business name “Smithy’s Mowing”. A company, for example named Melbourne Catering and Food Supplies Pty Ltd, may wish to operate two business, one under the business name “Melbourne Budget Catering” and another under the business name “Exclusive Silver Service Catering”. No matter what sort of business entity is chosen for conducting a business, if the name that the business uses is not the name of the sole trader or partners, or the Australian Company Number allocated by ASIC, then the parties must register the business name. We will not discuss this in detail, but it is important to know that when a party uses a name that is not its own name, then it is required to register that name. 1 This is to protect consumers and creditors, so that they can identify who they are really dealing with. In the examples given above, the business names “Smithy’s Mowing”, “Melbourne Budget Catering” and “Exclusive Silver Service Catering” are only names and not legal entities. A consumer or creditor may look up the business names register in the relevant state or territory to find out who is the legal entity behind the name. The business name is not a legal entity in its own right. Note that many business operators will want to ensure they have the exclusive right to use the business name. To do this, they may also seek to register the business name as a trade mark under the Trade Marks Act 1995 (Cth). In this chapter we examine in detail the two most common forms of business organisation – one incorporated (the company) and one unincorporated (the partnership).

1

Since 2012 a national system for registering business names has been in operation, the National Business Names Registration Service. The Service is administered by the Australian Securities and Investments Commission (ASIC).

587

588

Introduction to Business Law in Australia

Comparing business entities Figure 19.1 Incorporated and unincorporated entities

Sole trader [19.120] A sole trader, or sole proprietor, is simply a single person who carries on business in their own name. The legal entity conducting the business is the person. The person will enter contracts in their own right and will be personally liable if anything goes wrong. For example, if John Smith, from our discussion above, runs over a client when mowing their lawn, the client will sue John personally. If John buys a new mower, then the contract to purchase the mower will be between John personally and the supplier. This is so even if John is operating the mowing business under the name “Smithy’s Mowing”.

Partnership [19.130] Staying with our example above, if John Smith teamed up with his friend Suzi Menkes so they they could work together to carry on a lawn mowing business under which they share the profits then they would have created a partnership. This is so even if John and Suzi continue to operate the mowing business under the name “Smithy’s Mowing”. John and Suzi may negotiate a formal partnership agreement that

chapter 19 Business Structures other than Companies

documents what contributions they will each make to the business, or they may simply start carrying on a business together. We will discuss partnerships in detail in this chapter.

Joint venture [19.140] A “joint venture” shares some characteristics with a partnership. A joint venture is created whenever two or more people enter into an agreement to exploit a business opportunity with respect to a particular project or undertaking (for example, for the development of land, or the exploitation of some asset such as minerals or patent rights). The joint venture agreement will stipulate the contributions of each joint venturer, as well as their share of any profits made from the venture. Joint ventures are a popular way of gathering together resources, experience and funds to undertake a commercial venture. Given that a joint venture involves two or more parties working together on a venture, a joint venture can seem like a partnership. However there are important differences and consequences depending on whether an entity is a joint venture or a partnership. Joint venturers are not usually liable for each other but partners often are. Some venturers do not mind whether their joint venture is a partnership or not but many seek to enter non-partnership joint ventures. They want the benefits of joint involvement without the unlimited liability that is a characteristic of partnership. They can achieve this if they structure their venture so that it avoids taking on the features of a partnership.

Cox v Coulson [19.150] In Cox v Coulson [1916] 2 KB 177 two persons agreed to hire a theatre, put on a show and divide the proceeds between them 60/40. One party had to pay the expenses of the hall, the other paid the actors. The judge explained that this arrangement was a joint venture, not a partnership (at [181]): “Although the gross takings were divided between them, there was not any partnership; each had to discharge his own separate liabilities in respect of the venture. The travelling expenses, the remuneration of the actors, the cost of the appliances had to be borne entirely by one party. The theatre rent and outgoings, the cost of lighting, and the cost of the playbills were wholly to be borne by the other party. One of them might have made a profit out of the venture, and the other might have made a loss. Neither of them had authority to bind the other in any way; there was no agency between them. The sharing of gross returns does not of itself create a partnership”.

Co-ownership may resemble partnership [19.160] Co-ownership may closely resemble a partnership. Staying with our example above, if John and Suzi decided to buy an investment property together, sharing the purchase and the returns, they would be co-owners of the property. They own the asset of the property in their respective shares. They are not carrying on a commercial activity together. Specifically the Partnership Act 2 itself provides that co-ownership “does not of itself create a partnership”. The main differences between the two are:

2

Partnership Act 1892 (NSW), s 2; Partnership Act 1958 (Vic), s 6; Partnership Act 1891 (Qld), s 6; Partnership Act 1891 (SA), s 2; Partnership Act 1895 (WA), s 8; Partnership Act 1891 (Tas), s 7; Partnership Act 1963 (ACT), s 7; Partnership Act 1997 (NT), s 6.

589

590

Introduction to Business Law in Australia

1.

Partnership involves the carrying on of business in common and the sharing of profits and losses; co-ownership does not necessarily involve this.

2.

Partnership is the result of agreement; this is not necessarily so with co-ownership, which may arise through actions of a third party, such as in the case of beneficiaries under a will.

3.

A partner cannot transfer their interest and make the assignee a partner without the consent of the other parties to the partnership; a co-owner may do so.

4.

A partner is an agent of the partnership; a co-owner is not necessarily an agent of other co-owners.

5.

A partnership involves carrying on a business for gain but co-ownership need not be for such purpose.

The distinction between partnership and co-ownership where the co-owners share profits is a very fine one and determination of the nature of the association will depend upon the arrangements between the parties.

Corporations [19.170] A company, once incorporated under the Corporations Act 2001 (Cth) is a separate legal person, separate from its owners (its shareholders) and its management (its directors and other managers). ASIC controls and administers the registration of companies and it will allocate the company an Australian Company Number upon registration. This is the moment the company comes into being. It is possible to request that the company be given a specific name on registration. ASIC will record the information about the shareholders, the shares that they own, the directors, and the business of the company. Again, staying with our example above, John Smith could apply to ASIC to register a company, including to name the company “Smithy’s Mowing Pty Ltd”. Note the suffix “Pty Ltd” which indicates the entity is a proprietary limited company. The company will also be allocated an Australian Company Number (ACN) as a unique identifier. When the company, “Smithy’s Mowing Pty Ltd” purchases new lawn mowers, the contract is between the company and the supplier. John is not a party to the contract. If John runs over a client with a lawn mower then the client would sue the company and not John personally.

Differences between a partnership and a company [19.180] At the outset it is important to appreciate the fundamental difference between a company and a partnership. In a large company shareholders usually have a limited role in managing the company. In a small company, such as a family business operated through a company, the shareholders may be the same people as the directors and managers of the company. Because the company is a separate legal entity, the property, the profits and the debts and liabilities of a company belong to the company itself, not to the shareholders and directors of the company. The directors of the company may or may not decide to pay a dividend to shareholders if the company makes a profit. The liability of the owners (shareholders) of a company is limited. For example if the company is sued for negligence, the shareholders and directors will not have personally liability (except in specific circumstances). The company can sue and be sued in its own right. A partnership, on the other hand, is not a separate entity – in the eyes of the law, a partnership is simply a “relation” of “persons” who carry on business together. The “firm” (as a partnership is called) is nothing other than the partners, who share the in the profits and are personally liable for its debts. The lines may have been blurred by the limited liability partnership but the essential difference between the two entities remains.

chapter 19 Business Structures other than Companies

Figure 19.2: Main Differences between a Limited Liability Company and a Partnership

Incorporated associations [19.190] The benefits of incorporation (including limited liability of members) have been extended to non-profit type organisations, for example, sporting clubs. Such organisations are not operating a “business” in the strict sense, as they are conducting their operations for purposes other than making a profit, such as providing sporting facilities and events for members or the community. Limiting liability by use of an incorporated association as the legal entity can be very beneficial to protect members in the event of a accident or claim for negligence. Providing the operations are not for profit, the association will be able to incorporate under the legislation applying in their state or territory. 3 In other respects, the incorporated association will be very similar to a corporation.

3

For example, in Victoria the Associations Incorporation Reform Act 2012 (Vic) applies. This legislation replaces the Associations Incorporation Act 1981 (Vic). Similar legislation applies in other states and territories.

591

592

Introduction to Business Law in Australia

[19.200] The following table contains a summary of the main differences between the most common forms of business structures; a partnership, a limited liability company and a sole trader.

Number of Members:

Liability of Members: Formation:

Company Minimum of one but no maximum except in certain cases such as a proprietary company.

Limited to the amount unpaid on the shares held. Mainly under the Corporations Act 2001 (Cth). Property and Belong to the company as Assets: such and not the members. Capital: Small parcels of shares may be held by an individual member. Management: Vested in the directors and exercised under the provisions of the articles of association, constitution or replaceable rules. Legal Action: Company must sue and be sued in its own name.

Partnership Minimum two; maximum number restricted by provisions of the Corporations Act 2001 (Cth). Unlimited and extends to private property. By private partnership agreement or may be implied. Vests in the partners.

Partners may be required to contribute substantial amounts. Each individual partner is entitled to share in the management subject to the terms of the partnership agreement. Partners may sue and be sued personally but, except in New South Wales, actions may be commenced or defended in the firm name. Agency: A member as such is not an Each partner is, unless restricted, an agent of the agent of the company and has no authority to bind the partnership. company. A matter of mutual consent Alteration of Must be carried out under between partners. Constitution: the provisions of the Corporations Act 2001 (Cth). Continuity of Death or bankruptcy of a Dissolution occurs upon Existence: member or members does any change in the not affect the company. composition of the partnership. Transfer of Transfer is made under the Partner may assign all or Interest: provisions of the articles of part of her or his interest in association, constitution or the partnership but the consent of the remaining replaceable rules. partners must be obtained if assignee is to be accepted as a partner in substitution for the vendor.

Sole trader One.

Unlimited and extends to private property. By conduct.

Owned by trader. Private only.

Trader owns and manages.

Trader may sue and be sued.

N/A

N/A

Business ends when sole trader decides.

N/A

chapter 19 Business Structures other than Companies

Status:

Company Partnership A separate legal entity apart Does not have a separate from members forming it. legal existence apart from members.

Sole trader Business is not a legal entity.

Introduction to partnerships [19.210] Although the use of partnerships has been eclipsed by the rise of the limited liability company, it is still a common and important form of business association. It is the chosen (or only) permitted form of joint activity allowed in many professions – for example many firms of public accountants are partnerships, and it is a way of gathering resources and expertise for major projects. There are other reasons for forming a partnership: partners may not wish to take on the formality and expense that is a necessary part of the incorporation of a company; they may complement each other by bringing new or different skills to the business and new partners may bring new capital or broader funding options. It is also a default entity: many small or family businesses are partnerships in law without the partners being aware of that fact. Unlike the formal process of incorporation process required for the creation of a company, a partnership requires no formalities. Simply put, a partnership exists when two or more persons are carrying on business together with a view of making a profit. So whilst the law and accounting firms have detailed and complex partnership agreements that cover every aspect of the relationship, the extended family that opens a café or fruit shop, with no written agreement of any kind, may, in law, also be regarded as a partnership. And, as seen throughout this chapter, there are important reasons why it may be necessary to decide whether or not a partnership relationship exists: a number of significant rights and obligations – of both the parties involved in the relationship, as well as third parties – turn on the decision. The legal relationship arising out of a partnership is similar to the relationship between principal and agent, except that a partner is both a principal to and agent for the other partners, able to bind the other partners (as an agent) and be bound by the actions of the other partners (as a principal). It is therefore, above all, a fiduciary relationship: “Ordinary partnerships are by the law assumed and presumed to be based on the mutual trust and confidence of each partner in the skill, knowledge and integrity of every other partner. As between the partners and the outside world (whatever may be their private arrangements between themselves), each partner is the unlimited agent of every other in every manner connected with the partnership business, and not being in its nature beyond the scope of the partnership”: Re Agriculturist Cattle Insurance Co (1870) LR 5 Ch App 725, 733 per James LJ. The legislation in each State is basically uniform and will be referred to in this chapter as the “Partnership Act”. 4 However, in New South Wales, Victoria, Queensland, South Australia, Western Australia and Tasmania provision is also made for limited partnerships. 5 The Australian Capital Territory, Northern Territory, New South Wales, Queensland, South Australia, Tasmania and Victoria have also introduced incorporated limited partnerships. 6 These specialised partnership forms are discussed separately at the end of this chapter. 4

5 6

The various Partnership Acts are: Partnership Act 1892 (NSW); Partnership Act 1958 (Vic); Partnership Act 1891 (Qld); Partnership Act 1891 (SA); Partnership Act 1895 (WA); Partnership Act 1891 (Tas); Partnership Act 1963 (ACT); Partnership Act 1997 (NT). Partnership Act 1892 (NSW), Pt 3; Partnership Act 1958 (Vic), Pt 3; Partnership Act 1891 (Qld), Ch; Partnership Act 1891 (SA), Pt 3; Limited Partnerships Act 1909 (WA); Partnership Act 1891 (Tas), Pt 3. Partnership Act 1963 (ACT), Pt 6; Partnership Act 1997 (NT), Pt 3; Partnership Act 1892 (NSW), Pt 3; Partnership Act 1958 (Vic), Pt 5; Partnership Act 1891 (Qld), Ch 4; Partnership Act 1891 (SA), Pt 6; Partnership Act 1891 (Tas), Pt 3.

593

594

Introduction to Business Law in Australia

The principles of partnership law contained in the Partnership Act are essentially declaratory of the pre-existing common law and are not to be taken as an exhaustive exposition of the law on the topic. Most provisions of the Partnership Act may be supplemented, amended or excluded by agreement, and the Act provides that the rules of the common law and equity are to continue in force except insofar as they are inconsistent with the Act. 7

Formation of partnership [19.220] A partnership is created by agreement. The agreement may be oral, written, under seal or inferred from a course of dealing adopted or agreed upon by all the partners. 8 Capacity to enter into a contract of partnership is governed by the general law of contract but minors are in a special position: see [19.260].

Number in partnership [19.230] Under the Corporations Act 2001 (Cth), s 115 the maximum number of persons who may form a partnership for the acquisition of gain is 20, except where partnerships are formed to carry on certain professions or callings 9 or are incorporated or formed under another Australian law. A person who takes part in the formation of a business association with more than the allowed number of members, known as an “outsize partnership”, becomes liable to a criminal penalty ($500) but the agreement is not invalid and does not affect the enforceability of contracts or other arrangements made. 10 Both partners and outsiders should be able to implement the transactions of outsize partnerships to the same extent as those of ordinary partnerships.

Capacity to be a partner [19.240] Certain types of persons have restricted capacity to enter into partnership. The most important of these are persons of unsound mind and minors.

Persons of unsound mind as partners [19.250] A person of unsound mind is capable of entering into partnership during a period of sanity. To escape liability as a partner it must be proved that they were of unsound mind when they entered the partnership, and the party with whom they entered the partnership knew this. Otherwise the partner who is of unsound mind is both capable of binding the firm as a partner and of being bound by their co-partners.

Minors as partners [19.260] A minor (that is, a person under 18 years of age) may be a partner although generally it is not a satisfactory arrangement for the other partners. If a partner who is a minor enters into contracts with third parties on behalf of the firm, such contracts bind the adult partners but the minor is not liable for partnership debts so far as their private assets are 7

8

Partnership Act 1892 (NSW), s 46; Partnership Act 1958 (Vic), s 4; Partnership Act 1891 (Qld), s 48; Partnership Act 1891 (SA), s 46; Partnership Act 1895 (WA), s 6; Partnership Act 1891 (Tas), s 5; Partnership Act 1963 (ACT), s 5; Partnership Act 1997 (NT), s 4. Considered in Cameron v Murdoch (1986) 60 ALJR 280 at 286. Formerly, if the partnership was to continue for more than one year, the agreement had to be evidenced in writing to be enforceable under the Statute of Frauds 1677 (IMP). However, this particular requirement of the Statute of Frauds 1677 has been repealed in all States and Territories with the exception of Tasmania: see Mercantile Law Act 1935 (Tas), s 6.

9

The Corporations Regulations 2001 (Cth), reg 2A.1.01 sets maxima of 50 for actuaries, medical practitioners, patent attorneys, sharebrokers and stockbrokers, and trademark attorneys; 100 for architects, pharmaceutical chemists and veterinary surgeons; 400 for legal practitioners and 1,000 for accountants.

10

Corporations Act 2001 (Cth), s 103.

chapter 19 Business Structures other than Companies

concerned. The adult partners, however, have the right to apply the whole of the partnership assets (including the capital contributed by the minor) to pay all partnership debts. A creditor who has obtained judgment against the firm may seize all partnership property but not the minor’s separate property. On or before attaining majority the minor may repudiate the partnership agreement but unless the minor repudiates it within a reasonable time after attaining majority, he or she will become liable as an ordinary partner. 11

Firm name [19.270] Those who have entered into partnership with one another are called collectively a firm, and the name under which their business is carried on is called the firm name. 12 The firm name may be the name of one or more members of the partnership or may be an assumed name, for example Excelsior Estate Agency. A partnership may include the word “company” in its name, for example Weir & Co but must not use the word “limited” as the last word in its name. There is separate legislation which controls the actual registration of the firm name. 13 Registration of the firm name as a business name is required, unless the firm name consists only of the full names or surnames and initials of all partners. For instance, it would be necessary to register the firm name of the following partnerships: Brown & Co

Wilson & Smith

Apex Motor Garage

The particulars requiring registration include the business name, the general nature and principal place of the business, and in respect of every individual partner there must be disclosed: (a)

their given names and surnames;

(b)

their usual residence; and

(c)

any other business occupation that they follow.

A change or alteration in the constitution of the firm must also be registered. The legislation also prohibits the inclusion of certain words in a trade or business name, for example, Royal, Crown, etc.

11

12

13

However, in New South Wales the legal position of minors differs markedly from that in the other States as a result of the Minors (Property and Contracts) Act 1970 (NSW) while, in South Australia, the Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) provides both a way of validating minors’ contracts and the possibility of minors avoiding some common law liabilities. Partnership Act 1892 (NSW), s 4; Partnership Act 1958 (Vic), s 8; Partnership Act 1891 (Qld), s 3; Partnership Act 1891 (SA), s 4; Partnership Act 1895 (WA), s 10; Partnership Act 1891 (Tas), s 9; Partnership Act 1963 (ACT), s 8; Partnership Act 1997 (NT), s 8. Business Names Registration Act 2011 (Cth) replaced State and Territorial Acts on 28 May 2012.

595

596

Introduction to Business Law in Australia

Nature of partnership Definition of a partnership: the Partnership Act [19.280] The first question often considered when a partnership dispute arises is whether or not a partnership exists. 14 It is often a difficult question to answer. The Partnership Act defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. 15 Business includes every trade, occupation or profession. 16 A partnership, therefore, has three elements: 1.

carrying on a business;

2.

in common; and

3.

with a view to profit.

We will consider each of these elements:

1. “carrying on a business” [19.290] The traditional requirement of “carrying on” a business “implies a repetition of acts, and excludes the case of an association formed for doing one particular act which is never to be repeated”: Smith v Anderson (1880) 15 Ch D 247.

Smith v Anderson [19.300] In Smith v Anderson (1880) 15 Ch D 247 a group of investors subscribed for the purchase of shares through a trust in various submarine cable companies. The shares were sold to these investors by the trustees of the trust who then issued certificates to the subscribers. A £100 certificate was issued for each £90 certificate that was subscribed. Smith, along with more than 20 other people, received a certificate. Later Smith applied to wind up the trust on the basis that it was an illegal association under s 4 of the English Companies Act 1862. Section 4 of this Act provided so far as was relevant: “No company, association or partnership consisting of more than twenty persons shall be formed after the commencement of this Act for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered.” The question was whether the trust was, in fact, a partnership. The court looked at the nature of the trust and of the relationship of those involved in it and held that s 4 did not apply. The fact that the there were no mutual rights and obligations amongst the subscribers indicated there was no partnership agreement. In these circumstances, the court held that the trust was not a partnership as there was no association for the purpose of “carrying on a business”.

14

The question usually arises when one (alleged) partner denies that a partnership exists in order to avoid liability to a partner or third party, or an (alleged) partner asserts that a partnership exists in order to share in the profits.

15

Partnership Act 1892 (NSW), s 1; Partnership Act 1958 (Vic), s 5; Partnership Act 1891 (Qld), s 5; Partnership Act 1891 (SA), s 1; Partnership Act 1895 (WA), s 7; Partnership Act 1891 (Tas), s 6; Partnership Act 1963 (ACT), s 6; Partnership Act 1997 (NT), s 5.

16

Partnership Act 1892 (NSW), s 45; Partnership Act 1958 (Vic), s 3; Partnership Act 1891 (Qld), s 3; Partnership Act 1891 (SA), s 45; Partnership Act 1895 (WA), s 3; Partnership Act 1891 (Tas), s 4; Partnership Act 1963 (ACT), s 4; Partnership Act 1997 (NT), s 3.

chapter 19 Business Structures other than Companies

Single enterprise [19.310] The following case indicates that the courts now recognise that a single enterprise engaged in by a joint venture may constitute a partnership particularly where there is profit sharing and a more integrated business structure:

Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [19.320] In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 Fourth Media Management Pty Ltd (FM) entered into contracts with two entertainers, Elton John and Cilla Black, to perform in Australia. Volume Sales (Finance) (VS) agreed to lend FM the money in consideration of FM assigning to VS a one-half interest in the contracts with the singers. The loan from VS was described as a “loan to the joint venture” which was repayable prior to the distribution of profits. The agreement provided that, after VS had been repaid the loan and other disbursements, any profits were to be shared equally between FM and VS. The day after this agreement was made, FM granted an equitable charge (a form of security against which, for instance, money could be borrowed) over its property (including its interest in the box office takings resulting from the tour) to Canny Gabriel, an advertising agency that had the advertising contract for the tour. Canny Gabriel was unaware of the agreement between VS and FM. Later Canny Gabriel sought to exercise its rights under the equitable charge, including the rights to FM’s share of the box office takings. The question for the court was which of the claims by VS and Canny Gabriel had priority. If the arrangement between FM and VS had created a partnership, then VS, as a partner, would have a beneficial and indivisible interest in the box office takings that would have priority over the charge given to Canny Gabriel. Although the agreement was described as a “joint venture” the real question is whether, on the facts, the essential elements of a partnership exist. The High Court held that they did. Some of the factors that led the court to this conclusion were: (1)

the parties became joint venturers with a view to profit;

(2)

net profits were to be shared;

(3)

the policy of the joint venture was a matter for joint agreement and it was provided that differences relating to the affairs of the joint venture should be settled by arbitration;

(4)

the parties were concerned with the financial stability of one another in a way which is common with partners: at [326].

The court said that the contract exhibited all the indicia of a partnership except that it did not describe the parties as partners and did not provide expressly for the sharing of losses. Thus VS’s indivisible interest in the partnership property – the box office takings – prevailed over FM’s equitable charge to Canny Gabriel.

597

598

Introduction to Business Law in Australia

[19.330] In the following case, the issue concerned the point at which parties begin “carrying on a business”.

Khan v Miah [19.340] Khan v Miah [2000] 1 WLR 2123: In May 1993 Miah and his colleague were the head waiter and chef, respectively, at an Indian restaurant. They wanted to open a restaurant of their own but were not in a position to put up any significant amount of money themselves. So they asked the appellant, Khan, to invest in the venture. It was agreed that they would be partners, that Khan would provide most of the initial capital, and that Miah would manage the restaurant and his colleague would be the chef. A brother, the third respondent, who owned an Indian restaurant, was brought in later in order to provide the business experience and financial standing that the prospective lessor required. By December, the parties had found suitable premises, got planning permits for its conversion to a restaurant, taken a lease of the premises and had agreed to buy the freehold, opened a partnership bank account in the names of Khan and the third respondent, arranged to borrow up to £60,000 from the bank towards the purchase of the freehold, commissioned a design, entered into a contract with a firm of builders for the conversion and fitting out of the premises as a restaurant, and contracted for the purchase of equipment and table linen. Khan deposited virtually all the moneys in the partnership bank account. This account was used solely to make payments for work done in preparation for the opening of the restaurant. By this time the parties had authorized the expenditure of £51,000 on the venture. The opening was delayed because of various difficulties that led to a breakdown in the relationship, which then ended in January 1994. At this time the restaurant was still not open for trade. However the parties had acquired the freehold, taken delivery of furniture and equipment and arranged for the purchase of carpets etc and advertised the restaurant in the local press. It opened for business on 14 February 1994. The respondents carried on the business on their own account but without any settling of accounts with Khan. The House of Lords held there was a partnership. The Court decided that the partnership commenced when the proposed partners took their first steps to implement their business plan. Lord Millett said: “There is no rule of law that the parties to a joint venture do not become partners until actual trading commences. The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it … The work of finding, acquiring and fitting out a shop or restaurant begins long before the premises are open for business and the first customers walk through the door. Such work is taken with a view to profit, and may be undertaken as well by partners as by a sole trader”: at [2127].

chapter 19 Business Structures other than Companies

[19.345] In the following two cases the court was concerned with a similar question – when does the “carrying on” of a business commence?

Goudberg v Herniman Associates Pty Ltd [19.350] Goudberg v Herniman Associates Pty Ltd [2007] VSCA 12: In September 2000, Herniman Associates (HA), a firm of architects, entered into a contract with Williams (W) for the provision of architectural services and advice regarding a project that W was involved with. At the original trial it was decided that at the time that contract was made, Williams was in partnership with Goudberg (G) and on that basis G was held to be jointly liable with W for unpaid fees totalling $55,000 due to HA under the contract. G appealed. The Court of Appeal unanimously decided that, although G and W were clearly acting “in common with a view of profit”, nothing done by them in the period leading up to September 2000 constituted the “carrying on of a business”. Nor was this preparatory in the sense conveyed by Lord Millett in Khan v Miah [2000] 1 WLR 2123. It was true that W had developed a plan for the establishment of a business and had involved G in the furtherance of that plan. However by September 2000, when HA was engaged, all that W and G had done was some market research and demographic surveys and made two trips to the US to explore potential franchise models and a potential franchisor. As G was not a partner he was not jointly responsible for the fees.

Keith Spicer Ltd v Mansell [19.360] Keith Spicer Ltd v Mansell [1970] 1 All ER 462. Mansell and Bishop planned to establish a restaurant and intended to form a company for this purpose. Before the company was formed and a suitable location found for the restaurant, Bishop purchased furniture from Spicer and opened a joint bank account. The furniture was not paid for. Shortly afterwards, Bishop went bankrupt and Spicer sued Mansell on the basis that he and Bishop were in a partnership (and partners are jointly liable for the debts of the partnership). The court said there was no partnership as A and B were not “carrying on business in common” at that stage but were preparing to do so. Ordering goods and opening a joint bank account, carried out in contemplation of a business, are not sufficient.

2. “in common” [19.370] To be a partnership there must be a “mutuality of rights and obligations”. That is, the business must be carried on by, or on behalf of, all the partners. In order to meet this criterion, it is not necessary that each of the alleged partners should take an active part in the direction and management of the firm. In many smaller or family partnerships, there is often a dominant partner and a non-active or dormant partner or partners. That does not mean that the arrangement is not a partnership – the important question is whether there is a sense that each is acting for and on behalf of the others.

599

600

Introduction to Business Law in Australia

The following case turned on whether the business was carried on “in common”.

Degiorgio v Dunn [19.380] In Degiorgio v Dunn [2004] NSWSC 767 the plaintiff and the defendant were members of a rock band. The four members of the band operated as a partnership, the business of which consisted of doing cover versions of AC/DC songs. Shortly after the group disbanded, the defendant took steps to put together another group to perform AC/DC music. He discussed his plans with the plaintiff and invited him to join up. The plaintiff argued that upon the formation of the second band, the plaintiff and the defendant entered into a new partnership of which they were the only members and that, as partners, they carried on the business of the second band. Therefore he was entitled to a share of the profits. The NSW Supreme Court denied the plaintiff’s claim. It held that there was no partnership: the business was run with a view of profit but was not run “in common”. Some of the factors that persuaded the Court that no partnership existed in this case were:  the plaintiff did not share the establishment costs with the defendant;  he chose to be paid a fixed fee ($150) for each performance;  he did not mention the partnership in his tax returns (the plaintiff returned as income “professional fees” of $6,550);  just after the partnership was allegedly formed, the plaintiff went to Canada for 17 months and during this time he did not involve himself in any way in the business; and  the plaintiff approached performers in the band and tried to persuade them to join him in a new band called “High Voltage” which was also to be an AC/DC tribute band.

Re Ruddock [19.390] In Re Ruddock (1879) 5 VLR 51 Ruddock, a sole trader, owed a debt to B. Ruddock entered into an agreement with B. Under the agreement:  B would purchase a one quarter share in the business and would receive a one quarter share of the net profits. However it was expressly agreed that B should not be liable as a partner for any losses and that Ruddock would indemnify her for any expenses.  B had full control over the share, including the power of disposition.  The purchase price of the share was to be treated as having been paid by the discharge of the debt owing to B.  B’s name was not to be used and she was not to be held out as a partner.  B had access to the books and Ruddock was to behave and manage the business “as one partner should do to another”. Later Ruddock became bankrupt and B argued she was a creditor not a partner. The other creditors argued she was a partner and therefore not entitled to priority as a creditor.

chapter 19 Business Structures other than Companies

The court agreed with the other creditors. Although B took no part in the day-to-day management of the business, she was a partner. She and Ruddock treated each other as partners – there was a mutuality of rights and obligations – and this was more important than the words they used in the agreement. According to Molesworth J: “The general principle of the authorities is, that a right to participate in profits constitutes a partner: and that, notwithstanding stipulation of being dormant or not liable to losses. But there are cases in which it has been held that the relative rights and liabilities of the persons dealing so far varied from those usual between partners, that the general rule should not apply … The cases show that the relation of partners is the result of their respective substantial rights, not of the words employed”: at [58].

3. “with a view to profit” [19.400] Partnerships do not have to make profits but they must be created with a view to profit. However, it is possible for a person to be a partner, even though they do not have a direct claim to a share of the profits. On the other hand, associations for the purpose of sport (such as cricket clubs) or charity (benevolent associations) or those not organised for the purpose of making profits (religious associations) are not partnerships. These associations may make profits from ancillary business activities, but they reinvest those profits in their primary activities and, critically, do not distribute them as dividends to their members. Members of a corporation incorporated under the provisions of the Corporations Act 2001 (Cth), a special Act of Parliament, or Royal Charter are not partners and are not governed by the Partnership Acts.

Evidence of a partnership: the statutory rules [19.410] As we have seen from the cases in the previous section, it is not always easy to apply the statutory definition of a partnership to the particular facts of a case. To assist in determining whether a business is being carried on in common, the Partnership Act 17 contains a number of statutory rules “to which regard shall be had” in determining whether a partnership exists. These rules have been included in the Act to supplement, not replace, the statutory definition. However, note that each rule simply states a negative: that a certain fact does not of itself create a partnership – it is only indicative of a partnership. For example, the fact that a person shares in the profit of a business enterprise may be some evidence of a partnership but it does not necessarily prove a partnership and will not do so if the other essential criteria of a partnership are not present. [19.420] The Act provides that in determining whether or not a partnership exists, regard shall be had to the following rules: 1.

17

Joint or part ownership or joint tenancy, or tenancy in common whether or not the owners or tenants share the profits, does not of itself create a partnership as to anything so held or owned. “Joint tenancy” and “tenancy in common” are different types of co-ownership of real property. Co-ownership alone does not prove that a partnership exists. Partnership Act 1892 (NSW), s 2; Partnership Act 1958 (Vic), s 6; Partnership Act 1891 (Qld), s 6; Partnership Act 1891 (SA), s 2; Partnership Act 1895 (WA), s 8; Partnership Act 1891 (Tas), s 7; Partnership Act 1963 (ACT), s 7; Partnership Act 1997 (NT), s 6.

601

602

Introduction to Business Law in Australia

2.

The sharing of gross returns whether the persons sharing such returns have or have not a joint or common right or interest in any property from which the returns are derived, does not of itself create a partnership.

Cribb v Korn [19.440] In Cribb v Korn (1911) 12 CLR 205 a farmer entered into an agreement with Cribb under which he had the exclusive use and occupation of a certain area of Cribb’s land. As part of the agreement, the farmer would pay Cribb half of the proceeds of sale of the produce of the land and stock. Korn, a farmworker employed by the farmer was injured while working and claimed worker’s compensation from Cribb on the basis that Cribb and his employer were partners. The High Court held that as the farmer had exclusive right to occupy the land and Cribb had no right to direct or control the farmer’s working of the land, there could be no partnership and the sharing of gross returns was not enough to establish a partnership. It was a tenancy agreement and the payments were tantamount to rent. The Court said: “To be partners, they must be shown to have agreed to carry on some business – in this case the business of farming – in common with a view of making profits and afterwards of dividing, or of applying them to some agreed object. There is nothing to show that the appellant intended to engage in farming at all, or to be concerned in the transaction beyond his right to compensation”: at [216].

[19.450] 3.

The receipt by a person of a share of the profits of a business is prima facie evidence that they are a partner in the business, but the receipt of such a share, or of an amount of money varying with the profits of the business, does not itself make that person a partner in the business, and in particular the following circumstances do not of themselves make such person a partner: (a)

the receipt of a debt by instalments or otherwise from the profits;

Cox v Hickman [19.460] In Cox v Hickman (1860) 11 ER 431 B and J Smith carried on business as iron workers and corn merchants under the name of B Smith & Son. They owed a lot of money to the creditors including Cox. A deed of arrangement was executed. The creditors were to carry on business until the debts were paid off at which time ownership would revert to the partners. Until that time, all profits from the business were to be shared by the creditors. The question was whether the creditors were partners in the business (and thereby liable for the debts of the partnership). The Court held that they were not, even though they had a right to share in the profits.

[19.470] (b)

the receipt of remuneration by a servant or agent of a person engaged in business, by a share of the profits of that business;

Employees are often offered a share of the profits as part of an incentive package. This, alone, does not make the employee a partner in the firm. In Plummer v Thomas [2002] NSWSC 1185 there was an

chapter 19 Business Structures other than Companies

agreement between two parties to split profits equally. In every other sense Thomas did everything including arranging a lease, paying the bond, registering the name of the business and hiring and firing workers. Despite the agreement on splitting profits, there was no partnership. (c)

the receipt by a spouse or child of a deceased partner of an annuity out of the profits made in the business in which the deceased person was a partner;

This protects the family of a deceased partner that receives a payment based on profits (d)

the receipt of interest varying with the profits, or of a share of the profits in consideration of an advance. However, a contract providing for such interest or profit must be in writing and signed by all the parties, otherwise a partnership may exist;

Re Megevand; Ex parte Delhasse [19.480] This provision protects a creditor who has advanced money in return for a share of the profits. However in Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511, the court decided that, in all the circumstances, a partnership existed. When Delhasse agreed to lend money to two others he stressed that the advance was a loan only and did not make the lender a partner. However, provision was made for him to share in the profits, have a right to inspect the accounts, and have the option of dissolving the partnership in specified circumstances. Further, the loan was not to be repayable until after the dissolution of the firm and the loan represented the entire capital of the firm. The Court held that this was a partnership. It went further than a mere lender-creditor relationship. [19.490] (e)

the receipt by way of annuity or otherwise of a portion of the profits of a business in consideration of the sale by that person of the goodwill of such business.

This subsection protects a person who sells a business and then receives an annuity, based upon a percentage of the profits, until the purchase price of the business has been paid in full. The courts will look at the agreement but, without more, the purchaser and vendor are not partners in the business.

M Young Legal Associates Ltd v Zahid [19.500] In M Young Legal Associates Ltd v Zahid [2006] 1 WLR 2562 Young, a legal funding firm, was suing the now dissolved firm of Zahid for unpaid commissions. Two former partners in Zahid acknowledged their association. However, Lees, a retired solicitor, who had agreed to become a principal in the business on the understanding that he would contribute no capital and take no share of profits but would accept an annual retainer for his supervisory role in the firm, denied that he was a partner. His name appeared on the letterhead of Zahid until the firm failed but Young had not noticed this. The court confirmed that it is possible for a person to be a partner in a firm, and thus liable jointly with the other partners to creditors of the firm, if his agreement with them is that he should be paid by the firm a fixed sum, irrespective of profits, for work to be done by him. There is no minimum threshold that has to be reached in relation to a person’s rights to (a) profits or (b) involvement in management before he can be regarded as a partner.

603

604

Introduction to Business Law in Australia

The absence of a direct link between the level of payment and the profits of the firm is in most cases a strongly negative pointer towards the critical conclusion as to whether the recipient is among those who are carrying on its business. But the conclusion must be informed by reference to all the features of the agreement: at [2574] The correct question is simply whether, by their words and conduct, the parties intended to create a partnership. A partner need not contribute capital, need not receive a share of profits, although those may be factors indicating that a partnership has not been created.

Relationship of partners with each other Figure 19.3 Liability of partners to third parties

[19.510] The rights and obligations of the partners to each other arise from three distinct areas of law – the partnership agreement, the statute and the equitable concept of the fiduciary. Partnerships arise by agreement and partnership law affords partners great latitude to establish the terms of their relationship. In most partnerships, an agreement, usually written, details the major terms of the partnership relation. However, to the extent that the agreement does not cover aspects of the relationship and does not exclude the statutory terms, the relationship will be governed by the implied terms detailed in the statute. Superimposed upon the contractual arrangement are the fiduciary obligations that require partners to deal openly and in good faith with each other in all matters concerning the partnership. The agreement establishes the nature and extent of the partnership business; but the fiduciary obligations are the prime regulator of partners’ conduct one to another within that range.

chapter 19 Business Structures other than Companies

1. The partnership agreement [19.520] Although an agreement can be reached orally or by a course of conduct, it is good practice for the rights, duties and liabilities of the partners among themselves to be set out in a written partnership agreement. While oral arrangements may be subsequently denied and it is difficult to prove a course of conduct, a written agreement places on record the intention of the partners to create a partnership. It is desirable that, at least, the following matters should be covered in a partnership agreement: (a)

the names of the partners and the firm name;

(b)

the nature of the business;

(c)

the term of the partnership;

(d)

the capital to be introduced by each partner;

(e)

provisions for proper accounts and their audit;

(f)

the authority of partners;

(g)

provision as to the division of the profits;

(h)

arrangements as to partners’ drawings;

(i)

arrangements as to partners’ salaries;

(j)

provision regarding interest on capital;

(k)

arrangements as to interest on advances;

(l)

arrangements as to interest on drawings;

(m)

provisions regarding the death or bankruptcy of a partner;

(n)

details regarding the retirement of a partner;

(o)

the amount to be paid to an outgoing partner;

(p)

method of valuing goodwill upon death or retirement of a partner; and

(q)

any special restraints to be observed by partners.

The rights and duties of partners may be varied during the partnership with the consent of all partners (such consent being either express or implied), or in any manner specially provided by the partnership agreement. For instance, it may be provided in the agreement that the senior partner is solely responsible for hiring and firing the practice manager. Further, because the law of contract applies, there may be terms implied into the agreement provided there is no agreement on the matter in the agreement itself.

2. The Partnership Act [19.530] The partnership agreement may be silent on a particular issue (eg how are profits and losses to be shared? can a partner be paid a wage? can a majority of partners expel a partner? can a partner be excluded from management?) or it may be an issue that has arisen since the partnership began. When the partnership agreement does not cover the issue, then the Partnership Act determines the rights, duties and interests of partners. 18 1.

All the partners are entitled to share equally in the capital and profits of the business, and must

18

Partnership Act 1892 (NSW), s 24; Partnership Act 1958 (Vic), s 28; Partnership Act 1891 (Qld), s 27; Partnership Act 1891 (SA), s 24; Partnership Act 1895 (WA), s 34; Partnership Act 1891 (Tas), s 29; Partnership Act 1963 (ACT), s 29; Partnership Act 1997 (NT), s 28.

605

606

Introduction to Business Law in Australia

contribute equally towards the losses, whether of capital or otherwise, sustained by the firm. The Act provides for equality of profits notwithstanding that capital has been contributed unequally. This recognises the fact that partners may contribute a personal value to the firm apart from the monetary value of any capital paid in. 2.

The firm must indemnify every partner in respect of payments made and personal liabilities incurred by those partners: (a)

in the ordinary and proper conduct of the business of the firm; or

(b)

in or about anything necessarily done for the preservation of the business or property of the firm.

3.

A partner making for the purpose of the partnership any actual payment or advance beyond the amount of capital which they have agreed to subscribe is entitled to interest at the rate of 7 per cent per annum in New South Wales, Victoria and South Australia, Australian Capital Territory and Northern Territory and to 6 per cent in Queensland, Western Australia and Tasmania, from the date of the payment or advance.

4.

A partner is not entitled before the ascertainment of profits to interest on the capital subscribed by them.

5.

Every partner may take part in the management of the partnership business. Unless specially provided by agreement between the parties, one partner has no more authority than another.

6.

No partner is entitled to remuneration for acting in the partnership business. This provision is often varied by the partnership agreement but unless so provided the partners must give their services to the partnership affairs gratuitously. Where one of the partners has neglected to meet commitments to the partnership business and has thus thrown extra burdens on their co-partner, then the partner not in default may be entitled to claim compensation for the extra work done by them.

7.

No person may be introduced as a partner without the consent of all existing partners. This is recognised as one of the fundamental principles of partnership. If two or more persons have sufficient faith in one another to enter into an agreement of partnership, they are entitled to have the right of determining if others are to be admitted. However, it is not uncommon to find a partnership agreement providing for a majority of the partners to have the right to introduce another person into the partnership.

8.

Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of partners. However, no change may be made in the nature of partnership business without the consent of all existing partners.

9.

The partnership books are to be kept at the place of business of the partnership (or the principal place if there is more than one) and every partner may have access to inspect and copy any of them when he or she thinks fit.

Further, a majority of the partners cannot expel a partner unless power to do so has been conferred by express agreement between the partners. 19 If such a power of expulsion is conferred by the partnership agreement it must be exercised in the utmost good faith by all the partners whose concurrence is necessary. 19

Partnership Act 1892 (NSW), s 25; Partnership Act 1958 (Vic), s 29; Partnership Act 1891 (Qld), s 28; Partnership Act 1891 (SA), s 25; Partnership Act 1895 (WA), ss 35, 36; Partnership Act 1891 (Tas), s 30; Partnership Act 1963 (ACT), s 30; Partnership Act 1997 (NT), s 29.

chapter 19 Business Structures other than Companies

In general, a partner that the others propose to expel is entitled to natural justice: they must be given notice of the charge and a reasonable opportunity of meeting the case against them before receiving notice of expulsion but, except in Western Australia, partnership agreements may dispense with the need for notice or a hearing. Provided the partners exercise the power of expulsion in good faith with a view to the benefit of the firm and strictly in accordance with the terms of the partnership agreement, the court will not interfere. The following case provides an excellent example of the effect of s 28(1) of the Partnership Act 1958 (Vic) and the benefit of a prompt settlement of accounts after a partnership is wound up.

Popat v Schonchhatra [19.540] In Popat v Schonchhatra (1997) 3 All ER 800 the plaintiff and defendant were partners in a newsagency. After the partnership was terminated, the defendant continued to operate it himself but did not settle the accounts between himself and the plaintiff. Two and a half years later the defendant sold the business and made a capital profit of £12,000. Although he had contributed only a small part of the capital at the outset (and had done not played any part since the termination), he claimed, inter alia, half the capital profits, including the profits that had accrued after the partnership ended. The Court decided that Popat was entitled to half the profits on the sale of the business. In the absence of an agreement to the contrary, partners are entitled to an equal share of the capital profits. In this case there was no contrary agreement. The court also held that Popat was entitled to a share of the profits that had accrued after the dissolution of the partnership but before the final settlement of accounts.

3. Fiduciary obligation [19.550] The partners are bound to exercise the utmost good faith in their dealings with one another. This obligation continues throughout the term of the partnership. It does not conclude with dissolution but continues until the final settlement of accounts on winding up. These fiduciary duties have been expressly incorporated into the Partnership Acts: 20 1.

Duty of partners to render accounts etc. Partners are to render true accounts and full information of all things affecting the partnership to any partner or his legal representative. 21 In the event that a partner does not reveal the accounts to the other partner or partners a court order may be sought.

2.

Accountability of partners for private profits. (1) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from any use by him of the partnership property name or business connection. (2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner and before the affairs thereof have been completely wound up either by any

20

Partnership Act 1892 (NSW), s 28 – 30; Partnership Act 1958 (Vic), s 32 – 34; Partnership Act 1891 (Qld), s 31 – 33; Partnership Act 1891 (SA), s 28 – 30; Partnership Act 1895 (WA), s 39 – 41; Partnership Act 1891 (Tas), s 33 – 35; Partnership Act 1963 (ACT), s 33 – 35; Partnership Act 1997 (NT), s 32 – 34.

21

Partnership Act 1892 (NSW), s 28; Partnership Act 1958 (Vic), s 32; Partnership Act 1891 (Qld), s 31; Partnership Act 1891 (SA), s 28; Partnership Act 1895 (WA), s 39; Partnership Act 1891 (Tas), s 33; Partnership Act 1963 (ACT), s 33; Partnership Act 1997 (NT), s 32.

607

608

Introduction to Business Law in Australia

surviving partner or by the representatives of the deceased partner. 22 If A and B were in a legal partnership and, as a result of work done for a client corporation A received an additional annual fee to be “on call” for that client, the fee would belong to the partnership. Similarly if A submitted (and won) a tender in his own name to perform legal work on an infrastructure projects, any monies received by him would belong to the partnership. 3.

Duty of partner not to compete with firm. If a partner without the consent of the other partners carries on any business of the same nature as and competing with that of the firm he must account for and pay over to the firm all profits made by him in that business. 23

An example of the fiduciary obligation and its effect is found in each of the following three cases:

Chan v Zacharia [19.560] In Chan v Zacharia (1984) 154 CLR 178 Chan and Zacharia were partners in a medical practice which they conducted from leased premises. The lease had an option to renew that had to be exercised by both partners. Zacharia sued for a declaration that Chan held the lease as a constructive trustee for himself and Zacharia. On the dissolution of a medical partnership, one of its more valuable assets was the lease of surgery premises, with rights of renewal. One of the partners suggested to the other that the option to renew should be exercised but the other negotiated a new lease of the premises in his own name. The court decided that that the fiduciary relationship continued until the partnership had finally been wound up. Therefore Chan was not permitted to put his interests ahead of those of the partnership and he had to account to the partnership for any profit he obtained from the lease. As Deane J put it: “Dr Chan abused his fiduciary position as a trustee and former partner to seek an advantage for himself and … he holds any fruits of that abuse … upon constructive trust for those entitled to the property of the dissolved partnership”: at 205.

United Dominion Corp Ltd v Brian Pty Ltd [19.570] In United Dominion Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 three joint venturers – a property owner (Special Projects Ltd (SPL)), a finance company (United Dominion Corp Ltd (UDC)) and an investor (Brian Pty Ltd (B)) – began negotiating an agreement to build a shopping centre on land owned by SPL. They intended that SPL would be registered on the title as the owner with most of the finance provided by UDC, secured by a mortgage over the land, with the balance being provided by each of the parties in proportion to their interests. The parties would share the profits. On October 24 1983, nine months before the written partnership agreement was executed, SPL executed a mortgage in favour of UDC to secure loans that UDC had made to SPL for this development as well 22

Partnership Act 1892 (NSW), s 29; Partnership Act 1958 (Vic), s 33; Partnership Act 1891 (Qld), s 32; Partnership Act 1891 (SA), s 29; Partnership Act 1895 (WA), s 40; Partnership Act 1891 (Tas), s 34; Partnership Act 1963 (ACT), s 34; Partnership Act 1997 (NT), s 33.

23

Partnership Act 1892 (NSW), s 30; Partnership Act 1958 (Vic), s 34; Partnership Act 1891 (Qld), s 33; Partnership Act 1891 (SA), s 30; Partnership Act 1895 (WA), s 41; Partnership Act 1891 (Tas), s 35; Partnership Act 1963 (ACT), s 36; Partnership Act 1997 (NT), s 34.

chapter 19 Business Structures other than Companies

as other ventures. Without B’s knowledge, the mortgage included a clause stating that no share of the joint venture profits would be distributed to B until the loan monies were repaid to UDC in full. The joint venture made a substantial profit but because of the effect of the clause, B received nothing. B sued UDC arguing that the joint venture was a partnership and, as such, B was owed a fiduciary duty which was breached when SPL and UDC failed to give it notice of the clause. The High Court held that the joint venturers were “intending partners” after the agreement of October 24 1983 was signed and became “partners” on July 23 1984 when the joint venture agreement was executed. The Court said: “[A] fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled”: at 12.

[19.575] The following recent decision of the Full Court of the Federal Court concerns the consequences of a breach of the fiduciary duty owed by a partner to his fellow partner.

Scotts and Momentum Productions Pty Ltd v Lewarne [19.580] Scotts and Momentum Productions Pty Ltd v Lewarne [2009] FCAFC 30. In April 2003 Wellfox agreed to sell a hotel business to a company (Momentum Productions Pty Ltd) owned by Scotts for $1.7 million. Scotts needed about $400,000 to complete the deal and approached Lewarne with a proposal that he should contribute $300,000 in exchange for a 15% share of the equity of the pub and 15% of the profits. Lewarne agreed and paid $300,000 to Scotts. Scotts used that money to discharge a mortgage over property held by his mother, transferred that property into his name, and used the property as security for a loan which he used to purchase the hotel business. (Scotts’ brother Anthony contributed $100,000 but he was subsequently bought out and played no role in this litigation.) The hotel traded under Scotts’ management from July 2003. By early 2004, it had become clear that there were significant structural problems with the premises and for several months in 2004 the building was covered in scaffolding. These problems affected the profitability of the business. On 12 May 2005, Momentum commenced proceedings against Retemu (the owners of the land on which the hotel was built) in the Supreme Court of New South Wales, seeking damages for loss of trade. In late 2004, Lewarne expressed concerns about the management of the business and soon after wanted to extract himself from the business and recover his money. The question was whether the $300,000 was simply a debt to the partnership (including himself) or whether the defalcating partner was liable for the breach of fiduciary duty. The Court decided that Scotts was not entitled to use the $300,000 to discharge the mortgage over his mother’s property. Doing so resulted in loss to the partnership. It was appropriate for Scotts to account to the partnership for the $300,000. A partner who has, in breach of his or her fiduciary duty, applied to his or her own benefit, part of the partnership capital cannot be regarded as no more than the debtor of the partners generally, including himself. If a partner, in breach of his duty of trust, misapplies partnership property, he or she is failing to treat property under his control, as the property of the partners as such. Equity would, on the suit of a person beneficially entitled, intervene to prevent that happening and hold the fiduciary accountable for his breach of trust:

609

610

Introduction to Business Law in Australia

“To allow Scotts to retain the funds which he took from the partnership pending the finalisation of accounts as between the partners is, in our view, an outcome which equity would be most reluctant to countenance. Rather, those funds should be restored to the partnership”: at [82].

Retirement of partner [19.590] Where no fixed term has been agreed upon for the duration of the partnership, that is, in the case of a partnership at will, any partner may determine the partnership at any time by giving notice of their intention to do so to all the other partners. 24 The dissolution takes place from the date mentioned in the notice or if none is specified then from the date when the notice is communicated. If a partnership has been constituted by deed, written notice signed by the partner giving it is sufficient notice.

Revocation of guarantee by change in firm [19.600] A continuing guarantee given by or to a partnership, subject to any agreement to the contrary, is revoked as to future transactions by any change in the constitution of the partnership. 25 Should one partnership give such a guarantee for another partnership the guarantee would be revoked by a change in the construction of either partnership.

Continuance of business after expiration of term [19.610] Where a partnership which has been entered into for a fixed term is continued after the term has expired, and without any express new agreement, the rights and duties of the partners remain the same as they were at the expiration of the term, but the partnership becomes a partnership at will. 26

Partnership property [19.620] Partnership property must be used exclusively for the purposes of the partnership and in the manner set out in the partnership agreement. 27 Partnership property consists of: (a)

property originally brought into the partnership;

(b)

property acquired whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business;

24

Partnership Act 1892 (NSW) s 26; Partnership Act 1958 (Vic) s 30; Partnership Act 1891 (Qld) s 29; Partnership Act 1891 (SA) s 26; Partnership Act 1895 (WA) s 37; Partnership Act 1891 (Tas) s 31; Partnership Act 1963 (ACT) s 31; Partnership Act 1997 (NT) s 30.

25

Partnership Act 1892 (NSW) s 18; Partnership Act 1958 (Vic) s 22; Partnership Act 1891 (Qld) s 21; Partnership Act 1891 (SA) s 18; Partnership Act 1895 (WA) s 25; Partnership Act 1891 (Tas) s 23; Partnership Act 1963 (ACT) s 22; Partnership Act 1997 (NT) s 22. Partnership Act 1892 (NSW) s 27; Partnership Act 1958 (Vic) s 31; Partnership Act 1891 (Qld) s 30; Partnership Act 1891 (SA) s 27; Partnership Act 1895 (WA) s 38; Partnership Act 1891 (Tas) s 32; Partnership Act 1963 (ACT) s 32; Partnership Act 1997 (NT) s 31.

26

27

Partnership Act 1892 (NSW) s 20; Partnership Act 1958 (Vic) s 24; Partnership Act 1891 (Qld) s 23; Partnership Act 1891 (SA) s 20; Partnership Act 1895 (WA) s 30; Partnership Act 1891 (Tas) s 25; Partnership Act 1963 (ACT) s 24; Partnership Act 1997 (NT) s 24.

chapter 19 Business Structures other than Companies

(c)

property acquired with the firm’s money unless the contrary intention of the parties appears from the transactions; and

(d)

the goodwill of the business.

The right of a partner in a trading partnership to sell the property of the partnership cannot be limited by stipulation between the partners, unless the purchaser has express notice of the limitation: Montefiore v Smith (1876) 14 SCR (NSW) 245. The Partnership Act also provides that, in the absence of any agreement to the contrary, where co-owners of land share the profits resulting from the land (say, from the sale of wheat or cattle) and they purchase additional lands out of those profits to be used in a similar way (buying more farm land), they also own the new property as co-owners in the same shares as they owned the original land. So if the original land purchase was made as co-owners, this position flows through to any subsequent purchase made with funds from the sale of the original land. 28 Whether the separate property of one partner used in a partnership becomes part of the assets of the partnership or remains the separate property of the partner ultimately depends upon the agreement between the partners. Where no express agreement has been reached between the partners, agreement may be inferred from the manner in which the affairs of the partnership have been conducted. However, to conclude as a matter of inference that the parties intended that the separate property of one partner was to become part of the assets of the partnership their conduct must plainly lead to that result: Kelly v Kelly (1990) 64 ALJR 234 (HC).

Harvey v Harvey [19.630] In Harvey v Harvey (1970) 120 CLR 529 Harvey owned a property which he was considering selling. When his brother suggested that he and his sons would work the land, Harvey agreed. There were mutual benefits for both families – for Harvey it would mean that the property could one day be available for his son, who was then only six; for his brother it would mean his own sons could get valuable experience running a farm. They agreed that Harvey would provide stock and machinery but would not take part in the management of the farm. His brother and his sons would provide skill and labour but no capital. Profits and expenses, including the cost of capital improvements, would be shared equally. The partnership lasted 20 years. During this time improvements, like farm buildings, fences, dams as well as extensive land clearing, were made. This increased the value of the property. When the partnership ended, the High Court held that the land did not become partnership property. The evidence supported the view that both parties to the agreement recognized that H intended that his son take over the land one day and this would not have been possible if the land had become part of the partnership property. Furthermore, the Court decided that, in the absence of agreement to the contrary, there is no general principle that an appreciation in the capital value of a partner’s personal property, as a result of the expenditure of partnership money, should become a part of the final accounts of the partnership thereby become available for distribution among the partners.

28

Partnership Act 1892 (NSW) s 20; Partnership Act 1958 (Vic) s 24; Partnership Act 1891 (Qld) s 23; Partnership Act 1891 (SA) s 20; Partnership Act 1895 (WA) s 30; Partnership Act 1891 (Tas) s 25; Partnership Act 1963 (ACT) s 24; Partnership Act 1997 (NT) s 24.

611

612

Introduction to Business Law in Australia

What is the nature of a partner's interest in the partnership property? [19.640] A partner has an interest in all partnership property. But what is the nature of that interest? The High Court in Sharp v Union Trustee Co of Aust Ltd (1944) 69 CLR 539 confirmed that a partner’s interest in the partnership property is in the nature of an enforceable right, not a fixed asset. Rich J said: “Business partners own between them the whole of the partnership assets, and each proprietor has a proprietary interest in each and every item. But his interest is not a fixed proportion of each item … it is an indefinite and fluctuating interest, which at any given moment is in proportion to his share in the ultimate surplus coming to him if at that moment the partnership were wound up and its accounts taken.”

Goodwill [19.650] Associated with professions, trade and commerce is an intangible asset commonly known as “goodwill”. Goodwill has been defined as “the probability that the old customers will resort to the old place”: Cruttwell v Lye (1810) 34 ER 129. It consists of the advantages a business has in connection with its customers. Lord Macnaghten in Trego v Hunt [1896] AC 7 described goodwill thus: “Often it happens that the goodwill is the very sap and life of the business, without which the business would yield little or no fruit. It is the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expenditure of money”: at 23. The goodwill of a partnership business, like any other partnership asset is, in the absence of any agreement to the contrary, to be sold upon the dissolution of a partnership for the benefit of all the partners.

Provisions in partnership agreement [19.660] A deceased partner’s representative or a retiring partner is entitled to a share of the goodwill at the date of death or retirement. To avoid disputes or the necessity of selling the business to determine the value of goodwill, provision should be contained in the agreement as to the basis upon which the value of the goodwill is to be estimated. The agreement, for instance, may provide that the goodwill upon the death or retirement of a partner is to be calculated as worth, say, two years’ purchase of the average profits over the last five preceding years, and that the retiring or deceased partner is to be entitled to their share of the total value of the goodwill according to the proportion in which they shared profits. In some agreements it is provided that the goodwill is to be valued as at the date of death or retirement by a public accountant.

Charging a partner's share [19.670] Partnership property is not liable to be seized for the private debt of a partner and may only be made liable on a judgment against the partnership. A creditor who has obtained judgment in respect of the separate debt of a partner, however, may obtain an order charging that partner’s interest in the partnership property and profits with the amount of the debt and interest. In addition, the creditor may obtain by the same or a subsequent order the appointment of a receiver of that partner’s share of profits and of any other money which may be coming to the partner

chapter 19 Business Structures other than Companies

in respect of the partnership. The other partner or partners may at any time redeem the interest charged, or, in the case of a sale being directed, purchase the same. 29 If a partner allows their share of a partnership to be so charged for their separate debt the other partners may dissolve the partnership.

Relationship of partners to third parties [19.680] There are two sources of law that are relevant when considering how partners bind their partners when dealing with third parties. There is firstly the common law (including equity) of agency and then there is the Partnership Act. The common law complements the provisions of the Partnership Act in relation to the authority that an agent has. The Partnership Acts state that the acts of every partner who does any act for carrying on in the usual way, business of the kind carried on by the firm of which they are a member, bind the firm and the partners unless: (a)

the partner exceeds their authority in the particular matter and the person with whom the partner is dealing knows that the partner has exceeded their authority; or

(b)

the person with whom the partner is dealing does not know or believe them to be a partner. 30

Actual express and actual implied authority [19.690] A partner will have express actual as well as implied actual authority to engage in particular activities with third parties, and provided he or she acts within this actual authority (express or implied) he or she will bind the other partners. A partner may be granted express authority orally or in writing. The implied actual authority of a partner extends to all matters necessary for carrying on the business of the firm in the usual way in which businesses of a like kind are carried on. The implied actual authority only extends to transactions in the usual course of the partnership business. There are certain acts which partners are entitled to perform and for which the partner will have implied actual authority (even if he or she no express actual authority): (a)

to sell any goods or personal chattels of the firm;

(b)

to purchase on account of the firm any goods of a kind necessary for or usually employed in the business carried on by it. For example, a member of a partnership conducting the business of farming was deemed to have implied authority to purchase farming machinery on time payment (Molinas v Smith [1932] QSR 77);

(c)

to receive payment of debts due to the firm, and give receipts or releases for them;

(d)

to engage employees for the partnership business.

If the partnership is a trading one (for example, is engaged in the buying and selling of goods), every partner may also bind the firm by any of the following acts: (e)

accept, make, and issue bills and other negotiable instruments in the name of the firm;

(f)

borrow money on the credit of the firm;

29

Partnership Act 1892 (NSW) s 23; Partnership Act 1958 (Vic) s 27; Partnership Act 1891 (Qld) s 26; Partnership Act 1891 (SA) s 23; Civil Judgments Enforcement Act 2004 (WA) s 14(4); Partnership Act 1891 (Tas) s 28; Civil Procedure Rules 2006 (ACT); Partnership Act 1997 (NT) s 27.

30

Partnership Act 1892 (NSW) s 5; Partnership Act 1958 (Vic) s 9; Partnership Act 1891 (Qld) s 8; Partnership Act 1891 (SA) s 5; Partnership Act 1895 (WA) s 26; Partnership Act 1891 (Tas) s 10; Partnership Act 1963 (ACT) s 9; Partnership Act 1997 (NT) s 9.

613

614

Introduction to Business Law in Australia

(g)

for that purpose, pledge any goods or personal chattels belonging to the firm; and

(h)

for the like purpose, give an equitable mortgage, by deposit of deeds or otherwise, of real estate or chattels real belonging to the firm but he or she cannot give a legal mortgage of land.

Authority not implied [19.700] A partner has no implied authority to bind the firm by deed for such authority must be given to that partner by deed. Furthermore, a partner has no implied authority to give a guarantee in the name of the firm or to bind the firm by a submission to arbitration. A partner cannot pledge the firm’s credit for a purpose not apparently connected with its ordinary course of business without express authority, 31 nor can he or she pledge the firm’s assets for private debts where the other party knows they are not that partner’s own assets. However, where the party is unaware that the assets are not the partner’s private property the charge is effective. If it has been agreed between the partners that any restrictions be placed upon the power of any one or more of them to bind the firm, an act done in contravention of the agreement is not binding on the firm with respect to persons having notice of the agreement. 32

Apparent authority [19.710] A partner acting within his or her apparent authority will also bind the firm. The apparent authority of a partner will be determined according to the ordinary rules of principal and agent and so will depend on what authority the partner is held out to have. Apparent authority was considered in detail in Chapter 18.

Liability of partners to third parties [19.720] As we have seen, a partnership is not a separate legal person. It is nothing more than individual partners and it is those partners who are (a) jointly liable for the debts of the partnership (b) jointly and severally liable for the wrongful acts of the partner(s) and (c) jointly and severally liable for misapplication of money or property. We will look at each in some detail.

(a) Liability for debts and obligations [19.730] The Partnership Act explains that: [e]very partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners

31

32

Partnership Act 1892 (NSW) s 7; Partnership Act 1958 (Vic) s 11; Partnership Act 1891 (Qld) s 10; Partnership Act 1891 (SA) s 7; Partnership Act 1895 (WA) s 14; Partnership Act 1891 (Tas) s 12; Partnership Act 1963 (ACT) s 11; Partnership Act 1997 (NT) s 11. Partnership Act 1892 (NSW) s 8; Partnership Act 1958 (Vic) s 12; Partnership Act 1891 (Qld) s 11; Partnership Act 1891 (SA) s 8; Partnership Act 1895 (WA) s 15; Partnership Act 1891 (Tas) s 13; Partnership Act 1963 (ACT) s 12; Partnership Act 1997 (NT) s 12.

chapter 19 Business Structures other than Companies

unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner. 33 Thus partners may be bound by the actions of a partner:  when the partners have authorised a partner to enter into a transaction on their behalf with the outsider. Here the normal rules of agency apply so that if the agent has acted within his or her actual or apparent authority, the partners will be bound to the transaction;  when one of the partners has acted, without express authorisation, in circumstances where the four requirements of the Partnership Act have been met: (i)

the act or transaction was entered into by a partner;

(ii)

the act or transaction entered into must be within the scope of the kind of business carried on by the firm;

(iii)

the act or transaction must be carried out in the usual way; and,

(iv)

the other party to the transaction must either know or believe that the person lacks authority or do believe him or her to be a partner.

We will consider each element. But first we should note that in a commercial partnership, the following acts come within the scope of a partners normal authority: he or she may pledge or sell the partnership property, may buy goods on account of the partnership, may borrow money, incur and pay debts on account of the partnership, sign cheques and hire employees: see Bank of Australasia v Breillat (1847) 13 ER 642 at 657–658.

(i) The act or transaction was entered into by a partner The partners will only be bound to a transaction made with a third party when that transaction was made by one or more of their partners. If the person entering into the contract was not a partner, the other partners would not be liable under this section of the Partnership Act and the situation would then have to be analysed in accordance with normal agency rules.

(ii) The act or transaction entered into must be within the scope of the kind of business carried on by the firm Whether an act or transaction is within the scope of the kind of business that is carried on by the firm is a question of fact. Although the following case involves the liability of the partners for a civil wrong, the issue concerning the scope of the partnership’s business is relevant here.

Polkinghorne v Holland [19.760] In Polkinghorne v Holland (1934) 51 CLR 143 Florence Polkinghorne was a long-standing client of a firm of three solicitors that included Thomas Holland and his son, Harold. The advice concerned the investment of Florence’s money which was generally in low risk, low yield government bonds and first mortgages. However, at one point, Harold advised her to invest in two risky companies run by his associates. When the companies failed Florence sued the firm. 33

Partnership Act 1892 (NSW) s 5; Partnership Act 1958 (Vic) s 9; Partnership Act 1891 (Qld) s 8; Partnership Act 1891 (SA) s 5; Partnership Act 1895 (WA) s 26; Partnership Act 1891 (Tas) s 10; Partnership Act 1963 (ACT) s 9; Partnership Act 1997 (NT) s 9.

615

616

Introduction to Business Law in Australia

The High Court decided that Harold’s partners were liable for Florence’s losses. After noting that solicitors do not have special skills in relation to financial investments, the Court said that they had a duty to give careful advice when they were asked to provide it. In giving Florence the advice he did, Harold had failed to act reasonably and, in fact, had probably been guilty of fraud. As the advice was provided in his role as solicitor, it had been given “in the ordinary course of the business of the firm” and the firm was therefore liable. The Court went on to say that the giving of financial or investment advice was within the usual course of business of that firm of solicitors. “But it is one thing to say that a valuation or expression of his own judgment upon a commercial or financial question is not within the scope of a solicitor’s duties, and another to say that when he is consulted upon the wisdom of investing in the shares of a company of which his client knows nothing, it is outside his province as a solicitor to inquire into the matter and to furnish his client with the information and assistance which the facts upon the register will give, to point out what inquiries may be made, and, if required, to undertake them or invoke the aid of those who will”: at [158]–[159].

It should be noted that the partners may be liable for a contract entered into by one of the partners, even though it is outside the scope of this particular firm’s business, where the business transaction is of a kind that is usually entered by other firms in the same kind of business: Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103.

(iii) The act or transaction must be carried out in the usual way Notwithstanding that a partner has entered into a transaction which is within the scope of the kind of business carried on by the partnership, the third party will be put “on notice” that the partner may lack authority if the transaction is carried out in an unusual way.

Mercantile Credit Co Ltd v Garrod [19.780] In Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 two partners were in a partnership that leased out garages. Both were prohibited, under the partnership agreement, from selling motor vehicles. Despite this, Parkin, one of the two partners, sold a car which he did not own, and he had also done so in the past. The plaintiff sued the partnership and recovered damages. The court looked at the transaction as it would have appeared to the plaintiff and concluded that from the plaintiff’s point of view the sale was within the usual course of business. The court held that when Parkin entered into the sale of the Mercedes Benz to the plaintiff, “he was doing an act of a like kind to the business carried on by the persons trading as a garage”. Further: “whatever express restrictions there might earlier have been on Mr Parkin’s authority, the defendant had known … that Mr Parkin had been selling cars in the firm’s name and that he intended to continue doing so, and … the defendant, having taken no steps to prevent such sales, was liable for his partner’s actions”: at [1107].

chapter 19 Business Structures other than Companies

Goldberg v Jenkins [19.790] Goldberg v Jenkins (1889) 15 VLR 36. A partner purported to borrow money on behalf of the firm at over 60% interest when at the time the comparable rates were between 6% and 10%. It was held that such borrowing was beyond “the usual way” of the firm and thus the firm was not bound to the transaction. According to Hodges J: “A person conducting his transactions in the ordinary way … would have been able to obtain all the advances which he could reasonably require at rates varying from 6 to 10 per cent; but in this case, referring to the last transaction, the interest was something over 60 per cent and the person lending money on those terms knows that the person borrowing is not conducting an ordinary business transaction, and that, therefore the partner borrowing would have no power to bind his co-partners”: at [38]–[39].

(iv) The other party to the transaction must either know or believe that the person acting is a partner or must not know of his or her lack of authority to act Where a partner, without actual authority, enters a contract that is within the scope of the kind of business carried on by the firm and it is entered in the usual way, it will not be binding on the partners if the third party knows of the lack of authority or does not know or believe that the partner with whom they acted was a partner.

Construction Engineering Pty Ltd v Hexyl Pty Ltd [19.810] Construction Engineering Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541. Tembel Pty Ltd and Hexyl formed a partnership in order to develop some property. The partnership agreement expressly said that Tembel would enter the construction contract on its own behalf and not on behalf of the partnership and, in fact, when Tembel signed a contract with Construction Engineering to construct the building, it did so under its own name. After a dispute arose, Construction Engineering sued both Tembel and Hexyl for breach of the contract. Hexyl denied liability. Held: The High Court held that Hexyl had no liability. The construction contract was between Construction Engineering and Tembel. There was no liability under the section because (a) there was no actual authority (the partnership agreement expressly limited Tembel’s authority to bind the firm) and (b) there was no apparent authority (Construction Engineering, at the time of making the contract with Tembel, was unaware of Hexyl – it had assumed Tembel was acting on his own behalf only): “Even though actual authority may be lacking, the act of every partner who does any act for carrying on in the usual way of business of the kind carried on by the firm of which he is a member binds the firm and his partners unless the other party ‘either knows that he has no authority or does not know or believe him to be a partner’”: at [547].

617

618

Introduction to Business Law in Australia

Joint liability for debts [19.820] In the absence of special statutory provision, although each partner is liable with the others for the whole of the debts of the firm, their liability is only joint. 34 That is a creditor can bring only one action against the members of a partnership and any partner can insist that the action be stayed until all other partners are joined as parties. This is because where a debt is joint, as opposed to joint and several, only one cause of action is possible. If judgment is obtained against one or more partners of a firm no action may be taken against the others even if satisfaction cannot be obtained from the partner(s) sued.

Liability of incoming partner [19.830] A person admitted into an existing firm does not become liable for debts or obligations contracted before he or she became a partner. 35 However, liability may be incurred where it is specially agreed upon, for example, where it is agreed to release a retiring partner from the firm’s debts and substitute an incoming partner. Such a contract, however, cannot be enforced by a third party (that is, a creditor) against the incoming partner unless the third party was a party to the contract.

Liability of retiring partner [19.840] A partner who retires from a firm does not thereby cease to be liable for partnership debts incurred before their retirement. However, a retiring partner may be discharged from any existing liabilities by an agreement to that effect between themselves and the members of the firm as newly constituted and the creditors. The agreement may be either express or inferred from the course of dealing between the creditors and the firm as newly constituted. 36 Such an agreement is called a tripartite agreement. The creditors (first party) will agree to release the retired partner (second party) and the continuing (and new) partners (third party) will agree to accept liability. The position in relation to debts subsequently incurred is different. When a person deals with a firm after a change in its constitution, they are entitled to treat all apparent members of the old firm as still being members of the firm until they have notice of the change. 37 In such a case, the person dealing with the firm has two potential but alternative courses of action. She may either sue the members of the firm as they were prior to the change, or she may sue the members of the firm after the change; but she cannot in the one action sue both the partners prior to the change and the partners after the change. In order to avoid being made liable for debts incurred after their retirement, a retiring partner should give specific notice of their retirement to those persons with whom the firm has had dealings. The mere 34

35

Partnership Act 1892 (NSW) s 9; Partnership Act 1958 (Vic) s 13; Partnership Act 1891 (Qld) s; Partnership Act 1891 (SA) s 5; Partnership Act 1895 (WA) s 26; Partnership Act 1891 (Tas) s 10; Partnership Act 1963 (ACT) s 9; Partnership Act 1997 (NT) s 9. Partnership Act 1892 (NSW) s 17; Partnership Act 1958 (Vic) s 21; Partnership Act 1891 (Qld) s 20; Partnership Act 1891 (SA) s 17; Partnership Act 1895 (WA) s 24; Partnership Act 1891 (Tas) s 22; Partnership Act 1963 (ACT) s 21; Partnership Act 1997 (NT) s 21.

36

Partnership Act 1892 (NSW) s 17; Partnership Act 1958 (Vic) s 21; Partnership Act 1891 (Qld) s 20; Partnership Act 1891 (SA) s 17; Partnership Act 1895 (WA) s 24; Partnership Act 1891 (Tas) s 22; Partnership Act 1963 (ACT) s 21; Partnership Act 1997 (NT) s 21.

37

Partnership Act 1892 (NSW) s 36; Partnership Act 1958 (Vic) s 40; Partnership Act 1891 (Qld) s 39; Partnership Act 1891 (SA) s 36; Partnership Act 1895 (WA) s 47; Partnership Act 1891 (Tas) s 41; Partnership Act 1963 (ACT) s 41; Partnership Act 1997 (NT) s 40.

chapter 19 Business Structures other than Companies

alteration of the names on the letterhead of a firm and receipt of communications on the changed letterhead is insufficient notice, unless the letterhead or the body of a letter spells out in clear terms what alteration there has been to the partnership.

Hamerhaven Pty Ltd v Ogge [19.850] In Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488 Ogge was a senior partner in a law firm in Melbourne. He retired in 1987. Two years later the firm transferred H’s funds to a finance company that promptly collapsed. H sued the firm, including all those who were partners in 1989. For one year after he retired, Ogge was retained as a consultant and his name appeared as such on the letterhead. After 1988, he retired completely and his name no longer appeared. The issue was whether the removal of his name from the letterhead prior to 1989 was proper notice. The Court of Appeal decided that the removal was not proper notice for the purposes of s 40 of the Partnership Act 1958 (Vic). A general advertisement is also insufficient for this purpose. Notice of dissolution published in a certain manner is however deemed sufficient notice to persons who have not had prior dealings with the firm. In Queensland, South Australia and Tasmania advertisement of notice of retirement or dissolution in the Government Gazette is enough. The Australian Capital Territory permits publication in the Gazette as an alternative to publication in a newspaper circulating in the Territory. In the three other States and the Northern Territory there are further requirements in addition to the Government Gazette advertisement, viz: (a)

in Victoria, advertisement in a local newspaper in each district in which the business is carried on;

(b)

in New South Wales, advertisement in a Sydney newspaper and a local newspaper in the district where the firm carries on business;

(c)

in Western Australia, advertisement in a Perth or local newspaper (if any); and

(d)

in the Northern Territory, where the firm has its principal place of business in the Territory, an advertisement in a newspaper circulating in the area where the firm carries on business.

Dissolution of partnership or retirement of partner [19.860] On the dissolution of a partnership or retirement of a partner any partner may publicly notify the fact of the dissolution or retirement, and may require the other partner or partners to concur in any necessary acts which cannot be done without their concurrence. 38 The estate of a partner who dies, or who becomes bankrupt, or of a partner who not having been known to the person dealing with the firm to be a partner (that is, a dormant partner) retires from the firm, is not liable for partnership debts contracted after the date of the death, bankruptcy or retirement, respectively.

38

Partnership Act 1892 (NSW) s 37; Partnership Act 1958 (Vic) s 41; Partnership Act 1891 (Qld) s 40; Partnership Act 1891 (SA) s 37; Partnership Act 1895 (WA) s 48; Partnership Act 1891 (Tas) s 42; Partnership Act 1963 (ACT) s 42; Partnership Act 1997 (NT) s 41.

619

620

Introduction to Business Law in Australia

Tower Cabinet Co Ltd v Ingram [19.870] Tower Cabinet Co Ltd v Ingram [1949] 2 KB 397. C and Ingham dissolved their partnership (running a furniture store) but no notice was given or advertisement published. After the dissolution, C ordered goods from Tower Cabinet using the firm’s old notepaper that showed Ingham as a partner. The supplier failed in his action against Ingram because Ingham had not knowingly allowed himself to be represented as a partner and, indeed, the plaintiff was unaware that Ingram was a partner of the firm before its dissolution.

Liability for “holding out” as a partner [19.880] A person who represents themselves, or who knowingly allows themselves to be represented, as a partner, is liable as a partner to anyone who has on the faith of any such representation given credit to the firm, that is the “partner” is estopped from denying to third parties that he or she is a partner and liable as such. 39 This section makes it clear that it is the person who is represented as a partner or who represents themselves as a partner that is liable to outsiders who have on the faith of the representation given credit to the firm. This operates in cases where: (a)

a person has by words or by conduct represented themselves or knowingly allowed themselves to be represented as a partner in a firm; and

(b)

another person has given credit to the firm; and

(c)

the person has so given credit on the faith of the representation: Lynch v Stiff (1944) 68 CLR 428.

It is not necessary for the person who has given credit to the firm on the faith of the representation to show that, apart from the holding out, they would not have given credit. A representation may be made indirectly but must identify a particular person(s) as partners; liability of other members of the partnership is not incurred by a representation that a local firm is part of a national partnership: Duke Group Ltd v Pilmer (1999) 73 SASR 64 at 287. That case, also, suggested that the giving of credit involves a commercial arrangement and requires more than continuing to deal with the firm after a change in its membership.

Liability for crimes or civil wrongs [19.890] Partners are liable jointly and severally for the wrongful act or omission of any partner acting in the ordinary course of business of the firm, or with the authority of their co-partners. 40 This means that the plaintiff can sue one, some or all of the partners. A wrongful act or omission may be a tort (such as a negligent act, such as negligent driving when engaged in the usual course of business), negligent misrepresentation or defamation), engaging in misleading or deceptive conduct under s 18 of the Australian Consumer Law and Fair Trading Act 2012, 39

Partnership Act 1892 (NSW) s 14; Partnership Act 1963 (Vic) s 18; Partnership Act 1891 (Qld) s 17; Partnership Act 1891 (SA) s 14; Partnership Act 1895 (WA) s 21; Partnership Act 1891 (Tas) s 19; Partnership Act 1963 (ACT) s 18; Partnership Act 1997 (NT) s 18.

40

Partnership Act 1892 (NSW) ss 10, 12; Partnership Act 1958 (Vic) ss 14, 16; Partnership Act 1891 (Qld) ss 13, 15; Partnership Act 1891 (SA) ss 10, 12; Partnership Act 1895 (WA) ss 17, 19; Partnership Act 1891 (Tas) ss 15, 17; Partnership Act 1963 (ACT) ss 14, 16; Partnership Act 1997 (NT) ss 14, 16.

chapter 19 Business Structures other than Companies

breach of fiduciary duty (such as acting in a way that involves a conflict of interest) or a crime (such as fraudulent misappropriation of funds) but it does not include breach of contract. In order for liability to be established it must be shown that the wrongful act or omission of the partner: (a) occurred in the ordinary course of the business of the firm; or (b) was authorized by the co-partners. In deciding whether the wrongful act or omission was committed while the partner was acting in the ordinary course of business of the firm, it is necessary to identify the nature and scope of the firm’s business. This will be determined by reference to the agreement between the partners.

Walker v European Electronics Pty Ltd [19.900] In Walker v European Electronics Pty Ltd (1990) 23 NSWLR 1 there were three partners in a firm of chartered accountants. One specialised in receivership work, another specialised in tax and another specialised in bankruptcy and liquidations. Garrity misappropriated a large sum of money when acting as the receiver of a company. He was jailed for fraud and made bankrupt. The defrauded company then sued the other partners. They argued that as Garrity was the only partner who did receivership work the receivership practice was not part of “the ordinary course of the firm’s business”. After examining the partnership agreement, and taking into account that the fees earned from the receivership work went into the partnership, the NSW Court of Appeal disagreed. It said: “If partners have agreed to carry on a certain kind of business and that business includes acting in a particular manner or capacity then conduct by one of them in pursuance of that agreement will attract the operation of s 10 [of the Partnership Act 1892 (NSW)]. It is their agreement to go into that kind of business which is the foundation of their joint and several liability”: at 11, per Gleeson CJ. In that case, the New South Wales Court of Appeal held that two partners of a firm of chartered accountants were liable for the fraudulent misappropriation of $221,064 by a third partner who was acting as the receiver and manager of a company. On the other hand, a partner will not be liable for the fraud of a co-partner who was not acting in the ordinary course of the firm’s business.

National Commercial Banking Corp of Australia Ltd v Batty [19.910] In National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251 Batty and Davis were partners in a firm of accountants. Davis fraudulently deposited cheques of a company of which he was a director into the firm’s trust account and misappropriated the proceeds. The company, on discovering the fraud, successfully sued the National Australia Bank (the collecting bank) in the tort of conversion. The bank then sought an indemnity from Batty (Davis died before the action was heard) arguing that he was liable for the fraud of his partner. It was held by the High Court that in depositing the cheques to the firm’s trust account, the partner had not been acting in the course of the firm’s business and accordingly his co-partner was not liable for his fraudulent conduct. Gibbs CJ said:

621

622

Introduction to Business Law in Australia

“It is beyond argument that (it) was … not in the ordinary course of the business of the firm, or within the general scope of the authority of Mr Davis as a partner, to deposit to the firm’s trust account cheques which he had obtained for his own purposes and to which the firm was not entitled. In depositing those cheques he was not doing unlawfully an act within the scope of his authority, or acting unlawfully in the ordinary course of the firm’s business, but was doing something outside his authority and outside the course of the firm’s business”: at 261–262.

Polkinghorne v Holland [19.920] In Polkinghorne v Holland (1934) 51 CLR 143 Mrs Polkinghorne was a client of a firm of solicitors that consisted of three partners. She received advice from one of these partners (Holland) about an investment in which he had a financial interest. The investment failed and Mrs Polkinghorne lost a lot of her investment. She sued the firm. The main issue was whether the two innocent partners were liable for her loss. The High Court in upholding her appeal, found that the other partners were liable. The Court said: “The difficulty of the case really lies in determining what is within the course of a solicitor’s business. By associating themselves in a partnership with Harold Holland, the respondents made themselves responsible, as principals are for an agent, for all his acts done in the course of his authority as a partner. That authority was to do on behalf of the firm all things that it is part of the business of a solicitor to do. If, in assuming to do what is within the course of that business, he is guilty of a wrongful act or default, his partners are responsible, notwithstanding that it is done fraudulently and for his own benefit … But, to make his co-partners answerable, it is not enough that a partner utilises information obtained in the course of his duties, or relies upon the personal confidence won or influence obtained in doing the firm’s business. Something actually done in the course of his duties must be the occasion of the wrongful act”: at [156]–[157] The Court then held that the giving of financial or investment advice was within the usual course of business of that firm of solicitors: “But it is one thing to say that a valuation or expression of his own judgment upon a commercial or financial question is not within the scope of a solicitor’s duties, and another to say that when he is consulted upon the wisdom of investing in the shares of a company of which his client knows nothing, it is outside his province as a solicitor to inquire into the matter and to furnish his client with the information and assistance”: at [158]–[159] In other words, notwithstanding that a solicitor had no special skill regarding the investments it was within the ordinary scope of the business to enquire on the client’s behalf and give her relevant information and assistance.

Joint and several liability for wrongs [19.930] Partners are liable jointly and severally for the wrongful act or omission of any partner acting in the ordinary course of business of the firm, or with the authority of their co-partners. This means that the plaintiff can sue one, some or all of the partners:

chapter 19 Business Structures other than Companies

“Every partner is liable jointly with the partner’s co-partners and also severally for everything for which the firm while the partner is a partner therein becomes liable under either of the last two preceding sections.” 41

Liability for misapplication of trust moneys [19.940] The Partnership Act 42 specially provide for the liability of the firm where the money or property of a third person has been received and misapplied by a member of a partnership: A partnership must make good any loss occasioned: (a) where one partner acting within the scope of their apparent authority receives the money or property of a third person and misapplies it; and (b)

where a firm in the course of its business receives the money or property of a third person and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm.

Under (a) above, the liability of the firm depends on whether the partner who misapplies the money had express or apparent authority to receive it; whereas under (b) the liability of the firm depends on the money being in the custody of the firm whether its receipt was in the ordinary course of the business of the firm or not. For example, if a member of a firm of solicitors acting for a vendor in a sale receives a deposit and then absconds with it, their partners are also liable to refund the money. Innocent partners are also liable for the misrepresentation by one of their partners or employees in matters connected with the ordinary business of the firm. They are also liable for damages caused by the negligence of a partner in the ordinary conduct of the partnership business. This follows the rule applicable to the liability of a principal for the wrongs of their agent. A principal is liable for the fraud or other illegal act committed by their agent within the general scope of the authority given to the agent.

Lloyd v Grace, Smith & Co [19.950] Lloyd v Grace, Smith & Co [1912] AC 716. Where a managing clerk of a firm of solicitors acting within the scope of his authority interviewed a client concerning an alteration in her investments and induced her to sign papers that enabled him to misappropriate property, it was held that the firm was responsible for the fraud committed by their representative in the course of his employment.

[19.960] If a partner, being a trustee, improperly employs trust property in the business or on account of the partnership, the other partners are not liable to the persons beneficially interested therein unless they were aware of the breach of trust.

41

Partnership Act 1892 (NSW) s 12; Partnership Act 1958 (Vic) s 16; Partnership Act 1891 (Qld) s 15; Partnership Act 1891 (SA) s 12; Partnership Act 1895 (WA) s 19; Partnership Act 1891 (Tas) s 17; Partnership Act 1963 (ACT) s 16; Partnership Act 1997 (NT) s 16

42

Partnership Act 1892 (NSW) s 11; Partnership Act 1958 (Vic) s 15; Partnership Act 1891 (Qld) s 14; Partnership Act 1891 (SA) s 11; Partnership Act 1895 (WA) s 18; Partnership Act 1891 (Tas) s 16; Partnership Act 1963 (ACT) s 15; Partnership Act 1997 (NT) s 15.

623

624

Introduction to Business Law in Australia

This relates only to the private affairs of the partner, that is where the partner is a trustee in a personal capacity and not as a member of the partnership. The trust money may be followed and recovered from the firm if still in its possession or under its control. 43

Dissolution of partnership [19.970] Partnership is a fragile entity. Any change in membership effects a dissolution of the existing partnership since it destroys the identity of the firm. “It is a fundamental principle of the law of partnership that any change in the membership of the partnership, whether occurring as a result of the retirement, expulsion, death or otherwise of a partner, effects a dissolution of the partnership”: Atwell v Roberts (2013) 43 WAR 507 at [122] per Buss JA and similarly at [11] per Pullen JA. The addition of a new partner also effects the dissolution of the former partnership and the creation of a new partnership: “[T]he transfer of a share to a non-partner inevitably breaks the continuity of the firm, thus constituting a new firm or partnership of those members of the former partnership who remain, together with the newcomer”: SJ Mackie Pty Ltd v Dalziell Medical Practice Pty Ltd [1989] 2 Qd R 87 at 90 per McPherson J. In the absence of other arrangements, the dissolution of a partnership should be followed by a winding up and final settlement of accounts. However, many partnership agreements contain provisions to enable the transition from one firm to another to be effected without the disruption of a formal winding up. A term is frequently included in the agreement to the effect that the other partners have the right to purchase the retiring or deceased partner’s interest at a valuation, calculated according to an agreed formula. These are essential in large firms, such as many accounting and legal practices, where there are regular changes in membership. A partnership may be dissolved by operation of law, by agreement of the partners, in accordance with the provisions of the partnership agreement or by the court upon application. If the partnership agreement contains any provisions for the dissolution these must be followed. The Partnership Act, however, sets out certain specific circumstances which are grounds for dissolution.

Operation of law [19.980] Apart from any agreement between the partners or any decision of the court, a partnership is dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on, or for the members of the firm to carry on in partnership, for example where one member becomes – by outbreak of war – a resident in an alien territory. 44

By partners [19.990] Subject to any agreement between the partners, a partnership is dissolved: (a) 43

44

if entered into for a fixed term, by the expiration of that term; Partnership Act 1892 (NSW) s 13; Partnership Act 1958 (Vic) s 17; Partnership Act 1891 (Qld) s 16; Partnership Act 1891 (SA) s 13; Partnership Act 1895 (WA) s 20; Partnership Act 1891 (Tas) s 18; Partnership Act 1963 (ACT) s 17; Partnership Act 1997 (NT) s 17. Partnership Act 1892 (NSW) s 34; Partnership Act 1958 (Vic) s 38; Partnership Act 1891 (Qld) s 37; Partnership Act 1891 (SA) s 34; Partnership Act 1895 (WA) s 45; Partnership Act 1891 (Tas) s 39; Partnership Act 1963 (ACT) s 39; Partnership Act 1997 (NT) s 38.

chapter 19 Business Structures other than Companies

(b)

if entered into for a single adventure or undertaking by the termination of that adventure or undertaking, for example a partnership entered into for the purpose of salvaging a shipwreck would be terminated by the recovery and disposal of the wreck;

(c)

if entered into for an undefined time (that is, a partnership at will), by any partner giving notice to the other or others of their intention to dissolve the partnership. The partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, as from the date of the communication of the notice. A valid notice of dissolution once given cannot be withdrawn except by consent of all parties. However, in a partnership where the agreement provided that the partnership could be terminated by “mutual agreement only” the court held that one of the partners could not determine the partnership by notice against the will of the other: Moss v Elphick [1910] 1 KB 846;

(d)

by the death, bankruptcy or insolvency of any partner. If a partner gives a valid notice of dissolution but dies before the expiration of the notice, the partnership is dissolved by death and not by the notice; or

(e)

at the option of the other partners, if any partner allows their share of the partnership property to be charged for their separate debt.

In Hurst v Bryk [2002] 1 AC 185, the House of Lords was asked to consider whether a partnership could be terminated by one partner accepting a repudiatory breach of contract by the others, a doctrine not known to the law when the Partnership Act was enacted. Lord Millett declared that, by subjecting themselves to the principles of equity, partners renounced the right to take unilateral action to terminate their relationship and submitted themselves to the discretion of the court.

By the court [19.1000] On application by a partner the court may order a dissolution of the partnership in any of the following cases: 1.

When a partner has been declared to be of unsound mind and incapable of managing their affairs, or is shown to the satisfaction of the court to be of permanently unsound mind.

2.

When a partner, other than the partner suing, 45 becomes in any other way permanently incapable of performing their part of the partnership contract.

3.

When a partner, other than the partner suing, has been guilty of such conduct as in the opinion of the court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business.

4.

When a partner, other than the party suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts themselves in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with them. For example, the following have been held to be grounds for dissolution: continuous quarrelling or consistently keeping the accounts incorrectly, or such mutual incompatibility of temper of the partners as to make it impossible to carry on the business successfully or beneficially: Knight v Bell (1887) 13 VLR 878.

5.

When the business of the partnership can only be carried on at a loss. Every partnership is entered into with a view to profit and if it can only be carried on at a loss the whole purpose of the partnership fails, and it may be dissolved.

45

In 2, 3 and 4 it will be noticed the partner who has committed the breach upon which the court may order the dissolution is not entitled to bring an application to the court on these grounds for such dissolution.

625

626

Introduction to Business Law in Australia

6.

Whenever in any case circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved. 46

Continuing authority of partners for purposes of winding up [19.1010] After the dissolution of a partnership the authority of each partner to bind the firm and the other rights and obligations of the partners continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution. The firm, however, is in no case bound by the acts of a partner who has become bankrupt but this does not affect the liability of any person who has, after the bankruptcy, allowed himself or herself to be represented as a partner of the bankrupt. 47

Boghani v Nathoo [19.1020] In Boghani v Nathoo [2011] EWHC 2101 (Ch) the partnership at will between Boghani and Nathoo was involved in hotel development. At dissolution the firm was constructing two multi-million pound hotels. Boghani argued that the “hotels” should be sold “as is”, while Nathoo claimed that accounts should not be settled until the construction contracts were completed. Chancellor Morritt recognised that, as the contracts were assignable and there was a market for such contracts, the “hotels” should be sold.

Application of partnership property on dissolution [19.1030] On dissolution every partner is entitled to have the partnership property applied towards the payment of the partnership liabilities and thus free themselves from these liabilities. A partner also has the right to have any surplus assets, after the payment of the firm’s liabilities, applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm. For the purpose of having the assets applied towards the payment of the partnership debts and for the distribution of the surplus assets, any partner or their representatives may, on the termination of the partnership, apply to the court for a decree dissolving the partnership and for the appointment of a receiver to wind up the business and affairs of the firm. 48

Rights of outgoing partner to share profits made after dissolution [19.1040] Where a partnership is dissolved (for example, by the death or retirement of one of its members), and there is no final settlement of accounts, and the remaining partners continue the business 46

47

48

Partnership Act 1892 (NSW) s 35; Partnership Act 1958 (Vic) s 39; Partnership Act 1891 (Qld) s 38; Partnership Act 1891 (SA) s 35; Partnership Act 1895 (WA) s 46; Partnership Act 1891 (Tas) s 40; Partnership Act 1963 (ACT) s 40; Partnership Act 1997 (NT) s 39. Partnership Act 1892 (NSW) s 38; Partnership Act 1958 (Vic) s 42; Partnership Act 1891 (Qld) s 41; Partnership Act 1891 (SA) s 38; Partnership Act 1895 (WA) s 49; Partnership Act 1891 (Tas) s 43; Partnership Act 1963 (ACT) s 44; Partnership Act 1997 (NT) s 42. Partnership Act 1892 (NSW) s 39; Partnership Act 1958 (Vic) s 43; Partnership Act 1891 (Qld) s 42; Partnership Act 1891 (SA) s 39; Partnership Act 1895 (WA) s 50; Partnership Act 1891 (Tas) s 44; Partnership Act 1963 (ACT) s 45; Partnership Act 1997 (NT) s 43.

chapter 19 Business Structures other than Companies

without finalising matters with the outgoing partner or their estate, then the outgoing partner, or their personal representative, is entitled at their option to such share of the profits made since dissolution as the court may find to be attributable to the use of their share of the partnership assets or he or she may elect to have interest on their share of the partnership assets at 6 per cent per annum in New South Wales, Western Australia and Tasmania, at 7 per cent in Victoria, South Australia, Australian Capital Territory and Northern Territory and at 5 per cent in Queensland. 49 In the past when courts took a strict approach to ascertaining the profits attributable to the use of a deceased partner’s share and often attributed profits to the personal skills of the continuing partners, it was usual to claim interest on the deceased partner’s share but more recently courts have assumed that profits were earned from the application of partnership assets, unless the continuing partners were able to demonstrate that it arose from some other source.

Fry v Oddy [19.1050] In Fry v Oddy [1999] 1 VR 557 a partner who retired from a legal firm was not paid out until two years later. He sued for his payment and was allowed one-ninth of the profits of the firm for that period, after an allowance of $130,000 per year had been made for the profit contributions of each continuing partner.

Final settlement of accounts on dissolution [19.1060] The Partnership Act provides a number of rules on the final settlement of accounts between partners in the event of dissolution. Subject to any agreement between the partners as to their rights and liabilities inter se, the following rules must be observed: 1.

Losses, including losses and deficiencies of capital, must be met first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits.

2.

The assets of the firm, including the sums, if any, contributed by the partners to make up any losses or deficiencies of capital, must be applied in the following manner and order: (a)

in paying the debts and liabilities of the firm to persons who are not partners in the firm;

(b)

in paying to each partner rateably what is due by the firm to her or him for advances as distinguished from capital;

(c)

in paying to each partner rateably what is due from the firm to them in respect of capital; and

(d)

the ultimate residue, if any, is to be divided among the partners in the proportion in which profits are divisible. 50

49

Partnership Act 1892 (NSW) s 42; Partnership Act 1958 (Vic) s 46; Partnership Act 1891 (Qld) s 45; Partnership Act 1891 (SA) s 42; Partnership Act 1895 (WA) s 55; Partnership Act 1891 (Tas) s 47; Partnership Act 1963 (ACT) s 48; Partnership Act 1997 (NT) s 46.

50

Partnership Act 1892 (NSW) s 44; Partnership Act 1958 (Vic) s 48; Partnership Act 1891 (Qld) s 47; Partnership Act 1891 (SA) s 44; Partnership Act 1895 (WA) s 57; Partnership Act 1891 (Tas) s 49; Partnership Act 1963 (ACT) s 50; Partnership Act 1997 (NT) s 48.

627

628

Introduction to Business Law in Australia

Bankruptcy of partners [19.1070] In bankruptcy the joint estate of the partners is, in the first instance, applied to the payment of their joint debts, and the separate estate of each partner is, in the first instance, applied to payment of their separate debts. If there is a surplus in the separate account it is dealt with as part of the joint estate so far as is necessary to meet the joint debts; if there is a surplus in the joint account it is dealt with as part of the respective separate estates in proportion to the interest of each partner in the partnership. Where a sequestration order 51 is made against one partner, a creditor of the firm if, or to the extent, that he or she is not paid by the solvent partners cannot receive a dividend out of the bankrupt’s separate property until all separate creditors of the bankrupt partner have been paid in full. The Bankruptcy Act 1966 (Cth) 52 also provides that any creditor, whose debt is sufficient to entitle them to present a bankruptcy petition against all the partners of a firm, may present a petition against any one or more partners of the firm without including the others. A creditor of a partnership may present a bankruptcy petition against it if the creditor would be entitled to present such a petition against any one of the members of such partnership in respect of a partnership debt. 53

Limited partnerships [19.1080] In the states, but not the territories, provision is made for limited partnerships. 54 The basic scheme of the legislation is to enable the formation of a partnership in which there is at least one general partner with unlimited liability and one or more limited partners whose liability for the debts and obligations of the partnership is limited. Limited partnerships thus allow firms to bring in partners who provide capital for the firm effectively as investors in the firm. Like other passive investors, limited partners do not participate in management. If a limited partner takes part in the management of the business of the firm, they will be liable as if the partner was a general partner. The advantages, in certain circumstances, of a limited partnership for commercial purposes over an ordinary partnership, corporation or trust are seen to include: (a)

the comparative simplicity of the formal requirements for the formation of a limited partnership;

(b)

the advantage of conferring limited liability on a limited partner without having to achieve this via a limited liability company under the Corporations Act 2001 (Cth);

(c)

in New South Wales, Victoria, Queensland, South Australia and Tasmania the absence of a limit on the maximum number of limited partners; and

(d)

the ability of the partners to utilise income tax losses incurred by the partnership.

Incidents of limited partnerships [19.1090] The limited partnership legislation in all states provides that a limited partner must not take part in the management of the business and does not have power to bind the firm. If a limited partner does take part in the management of the business, he or she will be liable as a general partner. A limited partner has the right to inspect the books of the firm at any time. 51 52 53 54

A sequestration order is the order by which a debtor becomes a bankrupt and which vests the property of a bankrupt in the trustee of their estate for division among the creditors of the bankrupt. Bankruptcy Act 1966 (Cth) s 45(2). Bankruptcy Act 1966 (Cth) s 45(1). Partnership Act 1892 (NSW) Pt 3; Partnership Act 1958 (Vic) Pt 3; Partnership Act 1891 (Qld) Ch 3; Partnership Act 1891 (SA) Pt 3; Limited Partnerships Act 1909 (WA); Partnership Act 1891 (Tas) Pt 3.

chapter 19 Business Structures other than Companies

Subject to the terms of any agreement to the contrary between the partners in a limited partnership: (a)

any differences arising as to ordinary matters connected with the firm’s business are to be decided by a majority of the general partners;

(b)

a limited partner may assign their share in the partnership with the consent of the general partners;

(c)

a person may be admitted as a partner without the consent of any limited partner;

(d)

the other partners are not entitled to dissolve the partnership by reason that a limited partner has suffered their share of the partnership property to be charged for their separate debt; and

(e)

a limited partner is not entitled to dissolve the partnership by notice.

In New South Wales, Victoria, Queensland, South Australia and Tasmania any document (for example letters, notices, contracts and cheques etc) issued on behalf of a limited partnership in connection with the conduct of the partnership’s business must contain in legible letters the words “A Limited Partnership” immediately adjacent to its firm name. A partnership ceases to be a limited partnership if none of the partners is a limited partner or the partners agree that they will carry on the business of the partnership otherwise than as a limited partnership. Subject to the provisions of the limited partnership legislation, the ordinary rules of partnership as set out in the Partnership Act apply.

Incorporated limited partnerships [19.1100] The incorporated limited partnership is a further variant of the limited partnership found in New South Wales, Victoria, Queensland, South Australia, Tasmania, Australian Capital Territory and Northern Territory. 55 This category of limited partnership wraps a corporation around the basic limited partnership structure. In consequence, the general partner manages the business on behalf of the company and there is no risk that the limited partners will be vicariously liable for tortious or other breaches of duty by the general partner. Registration is limited to associations registered or registering under the Venture Capital Act 2002 (Cth).

Further reading K Fletcher, The Law of Partnership in Australia (Lawbook Co, 9th ed, 2007). S Graw, An Outline of the Law of Partnership (Thomson Reuters, 4th ed, 2011).

Tutorial activities 19.1

What are the advantages and disadvantages of a partnership?

19.2

What are the factors that determine whether a partnership exists?

19.3

What does a retiring partner need to do to avoid liability for partnership debts after he or she retires?

19.4

What is partnership property and why is it important to be able to identify it?

19.5

In what way can a partnership be terminated?

55

Partnership Act 1892 (NSW) Pt 3; Partnership Act 1958 (Vic) Pt 5; Partnership Act 1891 (Qld) Ch 4; Partnership Act 1891 (SA) Pt 6; Partnership Act 1891 (Tas) Pt 3; Partnership Act 1963 (ACT) Pt 6; Partnership Act 1997 (NT) Pt 3.

629

630

Introduction to Business Law in Australia

19.6

Review the example webpage and contractual documents at the end of Chapter 2 regarding Clayton Sports World and answer the following question: Max is very interested in fitness and the fitness industry and he has been offered the opportunity to invest in CSW. CSW has suggested that Max invest as a “partner” and Max seeks your advice. Would you recommend partnership as a suitable structure for Max? What sort of partner, if any, would you recommend Max become? Explain your answer and include consideration of the liability risks of a partnership for Max.

19.7

Vance and Cadel are good friends and enthusiastic cyclists. Vance has won several major events and is well-known amongst the lycra set. Now in their sixties, they decide to start a small business selling bicycles. They register the name “Cycle World” and open for business in January 2009. No formal agreement is signed. In order to acquire working capital, Rupert, a retired local businessman, is approached and asked to lend the partnership $40,000. The terms of the loan are that Rupert is to be paid 25% of the annual profits for each of the next five years after which time any amount still outstanding shall be repaid. He also regularly assists with the financial bookkeeping and is often in the shop, sometimes answering the phones and assisting with sales and orders. His name is not on the letterhead. It is agreed that Cadel will play a more active role in the day-to-day running of the shop whilst Vance will do promotions and continue racing on the veterans’ circuit, wearing the firm’s colours. Vance also provides a computer and a van. The business is a great success for over two years. Then a series of incidents occur. Vance, riding recklessly along the beach road one Sunday morning, strikes Amber, a pedestrian, and injures her badly. Amber threatens to sue both Vance and the firm. Shortly afterwards, Cadel purchases six high performance Italian racing bikes from Avanti’s agent in Melbourne. Each is valued at $15,000. When the invoice arrives, Vance is angry and refuses to agree to pay. These were clearly the most expensive bikes that Cadel had ever ordered. Avanti threatens legal action against the firm and, when it learns of Rupert’s role in the business, threatens to include him in the action. Vance seeks the following advice:

19.8

(a)

Is this a partnership? Explain. What is Rupert’s position?

(b)

Is he liable for damages suffered by Amber and for the purchase of the racing bikes on the Avanti account?

(c)

Can he unilaterally terminate the partnership without Cadel’s consent and, if so, can he get his computer and van back?

George is a financial planner with MC. Mike is an accountant with Trimest Pty Ltd. They have known each other for many years and have regularly referred clients to one another. In 2007, they decided to go into business together under the name FinServe. George handles the financial services and planning side of the business, and Mike provides the accounting services. They rent premises together and hire some administrative assistants. They do not get involved in each other’s advice but jointly manage the overall direction of the business. They do not execute any formal agreement but agree to share the profits and losses. It costs them $100,000 to set up the business. Mike contributes $60,000 and George contributes $40,000. Initially things go well and in the 2009–2010 financial year, the business makes a profit of $250,000. Unfortunately, problems arise when Mike claims that he is entitled to 75% of the profit, because he generated 75% of the revenue. Furthermore, he argues that his initial contribution was greater. To try to increase his contribution, George decided to purchase an expensive Mac computer and some new software, on which he could run more sophisticated financial planning models. It cost $15,000. George did not consult with Mike about the purchase, and when Mike was presented with

chapter 19 Business Structures other than Companies

the Apple invoice he refused to authorise payment. To make matters worse, George was unfamiliar with his new computer and its software, and as a result produced a misleading report. This led to negligent advice being given to a client, JB, who suffered significant financial damage as a result. Both Apple and JB wish to sue the firm. Please advise on the following matters:

19.9

(a)

What proportion of the profits from the 2009–2010 financial year is Mike entitled to?

(b)

Who, if anyone, is legally responsible for the cost of the Apple computer?

(c)

Who, if anyone, is legally responsible for JB’s losses?

Kevin and Julia are good friends who live in Canberra. They see the need to make some money for their local art-house cinema that is the only one of its kind left in Canberra. They decide to sell popcorn and ice-creams with chocolate topping from a groovy van set up outside the cinema. They need around $15,000 to set up the business. They invested their own money and Kevin takes out a $7500 loan from the local financial co-op. Their business plan was to recoup their expenses from the profit they anticipated making, especially during the film festival that is held each year, and then everything after that would go straight into the cinema’s account administered by a committee of management. However things don’t quite go to plan: the films did not attract sufficient audience during the cold Canberra winter and the 2012 film festival had to be cancelled at the last minute. They shut the doors of the van and sold everything. They recouped some of their outlay but Kevin was unable to repay the loan. Is Julia liable for the debt? Explain your answer.

19.10 Alex and Brenda run a large plant nursery together called Terra Cotta in Geelong. There is no formal agreement about their respective roles, rights and responsibilities. However, they have orally agreed that as Alex does not take an active role in the day-to-day management of the nursery, He will only receive 25% of the profits and will only be liable for 25% of the costs of the business. No one but Alex and Brenda is aware of this arrangement. After being successful for quite a while the business has suddenly gone bad and closed down. Brenda has taken all the cash out of the bank and gone to Kathmandu. Before leaving, Brenda borrowed $100,000 from a finance company, Shark Ltd, at high interest rates. Brenda told Shark that she was authorised by Terra Cotta to borrow the money for the purpose of expanding the business. This was not true. The money disappeared along with Brenda. Shark wants Alex to repay the $100,000. Alex claims that he is either not responsible or, if he is liable, his liability is limited to $25,000 (ie 25%). Advise Alex of his liability to Shark. Cite relevant cases and statutes.

631

chapter 20

Company Law [20.10] Principles.............................................................................................................................................................. 634 [20.20] Terminology........................................................................................................................................................ 634 [20.30] The corporations law ..................................................................................................................................... 636 [20.50] Nature and formation.................................................................................................................................... 638 [20.90] Piercing the veil of incorporation............................................................................................................. 639 [20.130] The criminal liability of a company...................................................................................................... 640 [20.140] Types of companies .................................................................................................................................... 642 [20.165] Pre-incorporation (pre-registration).................................................................................................... 643 [20.250] Membership .................................................................................................................................................... 648 [20.335] Share capital ................................................................................................................................................... 650 [20.410] Debentures ...................................................................................................................................................... 655 [20.430] Corporate financing..................................................................................................................................... 657 [20.490] Management and control......................................................................................................................... 659 [20.690] Meetings ........................................................................................................................................................... 665 [20.720] Takeovers ......................................................................................................................................................... 666 [20.730] Company receivers...................................................................................................................................... 666 [20.800] Arrangements, reconstructions and voluntary administrations........................................ 668 [20.830] Winding up ...................................................................................................................................................... 669

634

Introduction to Business Law in Australia

Extracts from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 27.

Aim By the end of this chapter you will be able to:  explain the essential characteristics of a corporation;  outline different types of companies;  describe the registration process of a company;  explain how companies are regulated by legislation, common law and the company’s own internal rules;  explain the constitution (internal rules) and powers of a company;  outline the liability of the company for its agents;  explain the rules relating to membership of a company;  explain how a company may raise funds to commence and run the enterprise;  explain how a company may reduce capital or buy back its shares;  explain the role, duties and responsibilities of directors and officers in the management of a company;  discuss the appointment of a receiver to a company;  explain the powers and duties of a receiver, and their liability;  describe the effect of arrangements, reconstructions and voluntary administration on a company;  explain how a company may be wound up;  explain the effects of winding up on the company and creditors.

Principles [20.10] This chapter outlines significant provisions of the Corporations Act 2001 (Cth) and common law principles as they affect the formation, management and general operation of Australia’s more than 2 million registered companies. References in this chapter to sections are to the Corporations Act 2001 (Cth), unless otherwise stated. A company (or corporation) is an artificial entity created under law which, on registration (incorporation), is recognised as a legal person (entity) with its own property, rights and liabilities — separate from that of its members. A limited liability company means that its members have limited liability up to what they have promised to pay (or guarantee) for their shares: ss 515 – 518.

Terminology [20.20] Below are some of the key terms that are used in this chapter:  ASIC: the Australian Securities and Investments Commission.  chose in action: legal standing that allows the enforcement of a right (usually to non-physical property).  circulating security interest: replaces the old floating charge on the circulating assets of a debtor; non-circulating security interests replace the old fixed charges system.

chapter 20 Company Law

 company (also known as a corporation): a distinct legal entity separate from its shareholders.  company constitution: the internal rules, created by the company itself, governing the management and members of the company.  debenture: a documented promise by a company to repay borrowed money through a security.  director: a person either appointed or defined to be a director as per s 9 of the Corporations Act 2001 (Cth).  disclosing document: a document that must be prepared by companies offering securities publicly.  dividend: represents the division of a company’s profits amongst its shareholders.  execution: the carrying out of a duty or proper signing and preparation of a document.  liquidator: the person appointed to carry out the winding up of a company.  managed investment scheme: the offer to participate in an investment which is not normally defined as a security.  member: a shareholder of the company, or member of a guarantee company which has no shares.  officer: a person who holds a significant managerial position in the company as defined by s 9 of the Corporations Act 2001 (Cth).  oppression: an action by members of the company which is unfair, discriminatory or prejudicial against a member of the company.  Personal Property Securities Register: a means by which all security interests are recorded on a national register.  phoenix company: a phoenix was a mythical bird who died by setting itself on fire, only to rise out of the ashes to live again. Similarly, directors have been known to revive a company that was liquidated without its creditors being paid by simply starting a new (and thus debt-free) company to carry on the business.  pre-registration contract: a contract made by a promoter or some other party on behalf of a company which is still to be registered.  promoter: is the party who brings together interested parties in order to register a company.  proprietary company (also known as a private company): a company limited by shares, or unlimited with share capital, and with no more than 50 non-employee shareholders.  prospectus: a disclosure document setting out the nature and objects of an issue of shares or debentures created by a company and inviting the public to subscribe to (buy) them.  public company: a company which is able to invite the public to invest in its shares.  ratify: to agree to, to accept responsibility for.  receiver: a person appointed by a creditor can be a private receiver, or a public receiver if appointed by a court, who then enters into possession of the property of a company in accordance with the powers granted by the creditors or the court.  registration: also referred to as incorporation, whereby a company comes into existence through registration with ASIC.  replaceable rules: a set of basic rules enshrined in the Corporations Act 2001 (Cth) at s 141 which determine the internal management of a company.  security interest: a lender registers a claim or interest in property held by the borrower.  shares: a security, a chose in action (intangible personal property) and the parts into which the capital of a company is divided.

635

636

Introduction to Business Law in Australia

 statutory derivative action: a member or officer can take legal action on behalf of a company by force of statute.  ultra vires: acting beyond proper powers.

The corporations law [20.30] The law regulating companies is primarily contained in the Corporations Act 2001 (Cth), though the common law explains and expands upon these provisions. The Australian Securities and Investments Commission Act 2001 (Cth) gives the Australian Securities and Investments Commission (ASIC) responsibility and powers for the administration and enforcement of regulation over companies. ASIC has a number of roles which include:  undertaking civil actions and criminal prosecutions (through the Commonwealth Department of Public Prosecutions (DPP));  conducting investigations and surveillance of companies;  initiating and researching law reform;  keeping (accessible) databases of information for the public;  disseminating information regarding companies and financial institutions; and, further,  conducting some consumer education regarding the financial sector. ASIC has quite extensive powers in carrying out these various roles, eg, the ability to question persons, force parties to provide information, hold hearings and seize documents: Australian Securities and Investments Commission Act 2001 (Cth), ss 19, 28 – 29. ASIC ultimately answers to the Treasurer, a federal Minister. ASIC works co-operatively with a number of Commonwealth regulatory agencies including the Australian Competition and Consumer Commission (ACCC), the Australian Securities Exchange (ASX) and the Australian Prudential Regulatory Authority (APRA). ASIC has a number of associated specific bodies through which it conducts its activities including:  the Corporations and Markets Advisory Committee (CAMAC) which is the principal body which advises ASIC on law reform; it specifically researches and reports on current corporate issues. Note that a Bill has been introduced to end the role of CAMAC and to move its functions to Treasury;  the Takeovers Panel, which advises on and resolves disputes about takeovers;  the Companies Auditors and Liquidators Disciplinary Board (CALDB), which is a disciplinary body that hears complaints against auditors and liquidators;  the Financial Reporting Council (FRC), which advises on accounting and auditing standards;  the Australian Accounting Standards Board (AASB) which, working in conjunction with the FRC, sets accounting standards; and  the Auditing and Assurance Standards Board (AUASB), which advises on and sets standards for auditors. There are a number of other bodies that may also assist, eg, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) which consists of parliamentarians who oversee the operation of company legislation, ASIC and other related bodies. ASIC liaises with foreign governments, and is also a member of some bodies which co-operate internationally in regulating companies and developing new laws, eg, the International Organisation of Securities Commissions (IOSC).

chapter 20 Company Law

Background to the Corporations Act [20.40] In 1989 the Commonwealth introduced legislation giving itself total control over company legislation. A number of States then challenged the Commonwealth’s right to monopolise company legislation in the High Court: New South Wales v Commonwealth (1990) 169 CLR 482. The High Court found that company law was a shared power between the Commonwealth and the States: the States had the power to create companies but it was the Commonwealth that regulated them once they were registered. Complementary application legislation has since been passed by each State and Territory to provide a uniform national corporations law. However, there have been a number of constitutional challenges regarding the validity of the Commonwealth legislation, and the High Court found that certain State matters could not be dealt with by the Federal Courts when hearing company law matters: Re Wakim; Ex parte McNally (1999) 198 CLR 511. The Commonwealth and the States agreed at the commencement of the national corporations law on a co-operative arrangement to pass cross-vesting legislation to enable uniform company law. Cross-vesting means that the Commonwealth and the States give each other the power to hear matters which would otherwise be outside their jurisdiction; some of this legislation is a result of individual challenges by litigants seeking to question the right of the Commonwealth to hear State matters: Bond v The Queen (2000) 201 CLR 213. In 1993 the government decided to simplify and streamline legislation which affected business. The aim was to make it easier to establish and carry on a business in Australia. Small business, in particular, would also be subject to less complex regulation. The government introduced changes in company legislation, tax legislation and trade practices law to facilitate business within Australia through what is now called the Corporate Law and Economic Reform Program (CLERP). Although it predated the term “CLERP”, the First Corporate Law Simplification Act 1995 (Cth) marked the beginning of the major CLERP reforms, such as allowing one-person companies for the first time. Later legislative changes under CLERP saw the introduction of replaceable rules (which a company could use instead of a constitution composed of a memorandum and articles) and rights for members, such as the right to represent the company in a legal action (a statutory derivative action). Many sections of the Corporations Act were simplified and put into easy-to-read tables. In 2004 the government introduced CLERP 9 which imposed greater financial disclosure requirements on particular companies and auditors, eg, auditors must now attend the annual general meeting and answer questions put to them at that meeting. Changes to the Corporations Act promoted independence of auditors in listed companies, with requirements to change auditors after five years’ service: ss 324DA – 324DA. Company law is also subject to other legislative change on an ongoing basis, eg, the Corporations Amendment (Short Selling) Act 2008 (Cth), which restricts short-selling activities while requiring greater disclosure by sellers (short selling is the sale of securities for which the seller has not actually paid). The Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 (Cth) gives greater powers to members to question and even veto excessive termination payments to directors. Another notable change came about with the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth), designed to allow investigation of directors suspected of involvement with phoenix companies. Legislation is also proposed on “Similar Names”, ie, companies that re-register with a similar name after being liquidated. While the most important source of law applying to companies is Commonwealth statute (the Corporations Act 2001 (Cth) in particular), other Commonwealth and State legislation such as that relating to taxation, and work health and safety, must also be applied. Common law also applies to

637

638

Introduction to Business Law in Australia

companies and assists in interpreting the meaning of the Corporations Act and other statutes. Company law is quite dynamic and this is reflected in the relatively high level of legislative change each year.

Nature and formation Corporate personality [20.50] A company is a distinct entity like a person. It has some advantages not available to a natural person running a business but, to a certain extent, also has some disadvantages comparable to non-corporate bodies. Companies are able to give their members limited liability and therefore encourage entrepreneurship, in theory they have perpetual existence, and are a means of raising capital by issuing shares which allows for a spreading of enterprise risk. However, companies are more expensive than other business organisations to establish, run and maintain compliance with the extensive regulatory regime. Managers of companies are also heavily regulated and face quite severe penalties if they do not comply with the law. The principle behind company law is that a company is a distinct legal entity with an existence separate from its shareholders who are its members. It is regarded as a “legal person”, giving it the powers and capacity of an individual. This means that the company itself (not its individual shareholders or members) is held responsible for its acts and owns its assets and property:

Salomon v Salomon & Co Ltd [20.60] Salomon v Salomon & Co Ltd [1897] AC 22. S formed a company in which he held 20,001 shares and the remaining six shares were held by family members. S was a secured creditor, employee and shareholder of the company. When the company fell into financial difficulty and some creditors could not be paid, a court (eventually) held that the company was a separate legal person from S — and as a secured creditor, S was entitled to repayment of his loan ahead of non-shareholder unsecured creditors.

Lee v Lee's Air Farming Ltd [20.70] Lee v Lee’s Air Farming Ltd [1961] AC 12. L held all the shares in an aerial crop-dusting company, except for one held by his solicitor. L was also the company’s the governing director and only employee. A court found that L was still a separate legal entity from his company so when L died at work his estate was entitled to employee insurance.

Macaura v Northern Assurance Co Ltd [27.80] Macaura v Northern Assurance Co Ltd [1925] AC 619. M formed a company and transferred his timber business to the company in exchange for shares. He forgot, however, to transfer the business insurance policy into the company’s name. M lost timber in a fire and was unable to claim on the insurance policy because the company now owned the destroyed property —

chapter 20 Company Law

the separation of entities (ie, M being a separate legal entity from his company) worked against M in this case.

Piercing the veil of incorporation [20.90] While Salomon v Salomon & Co Ltd [1897] AC 22 established that the company entity created is separate from its members and is presumed not to pass on liability to its agents, management or shareholders, there are some exceptions. While registration (incorporation) of a company creates an entity that “veils” or “shields” the activities of a company’s owners and managers from liability, there are instances whereby a court, acting under common law principles or statute, will deny the separation of entities between a company and its participants. A court may refuse to recognise a company as a separate entity where the company is used by an individual to breach an individual duty, to commit a fraud, to breach a contract or to avoid tax. There are many State and Commonwealth statutes which will deny individuals the protection of the corporate entity; this is referred to as statutory piercing. Section 588G determines that directors will be personally liable for the debts of an insolvent company where they have allowed the company to trade without a reasonable belief that those debts would be repaid. Other provisions under the Corporations Act hold directors personally liable where employee entitlements are inappropriately used (Pt 5.8A), or where they authorise uncommercial transactions prior to a company wind-up: ss 588FB – 588FF. Various other statutes allow for piercing to hold individuals (sometimes along with the company) to be personally liable for certain acts, thereby negating the protection of the company: examples are found in environmental legislation, work health and safety and taxation offences. Consider the following instances of general law piercing:

Green v Bestobell Industries Ltd [20.100] Green v Bestobell Industries Ltd [1982] WAR 1. G, a manager of company B, learned of a profitable tender that his employer was pursuing. G formed his own company which then competed against B. G’s company won the tender and B took action against G, who claimed the defence that he was a separate entity from the company he had established. The court found that G had formed the company in breach of his fiduciary duty to B, his employer. The court also refused to allow the separate entity doctrine and found that G had to personally account for (hand back) the profits he made to B.

Gilford Motor Co Ltd v Horne [20.110] Gilford Motor Co Ltd v Horne [1933] Ch 935. H signed an employment contract in which he promised, should he leave his employment, not to compete with that employer. H did leave his employer and organised his wife and son to establish a company, of which he became a managing director. The company competed directly against H’s old employer but he claimed, as an individual separate from the company of which he was a director, that he did not breach his contract with his ex-employer. The court, however, looked at H’s reason for establishing the company, and held that it was purely to avoid a contractual duty — it was a cloak or sham to cover up H’s wrongdoing.

639

640

Introduction to Business Law in Australia

[20.120] The courts in Australia are generally reluctant to pierce the veil of incorporation unless there is very good reason to do so, eg, on grounds of fairness. In the case of Mcleod v The Queen (2003) 214 CLR 230 a court refused to pierce the veil, resulting in the company’s single director (and only shareholder) being found liable for theft from his own company! This was a case of reverse piercing, where a shareholder was asking a court to find that a company and its shareholders are one entity, so that an individual could not steal from a company of which he was a shareholder — the court refused. Piercing is usually requested by an outsider seeking to show that a shareholder has misused the corporate form.

The criminal liability of a company [20.130] A company can be liable for a crime, though historically a crime might be hard to prove, as in Tesco Supermarkets Ltd v Nattrass [1972] AC 153. In this case a manager allowed a misleading product price to be displayed at one of his company’s supermarkets; this led to a complaint by a customer to a regulatory body who prosecuted the company for a crime under a particular United Kingdom statute. In order to convict the authorities had to prove that the company’s offence was intentional and consequently that there was a “guilty mind” at work within the company. The court found that the “guilty mind” and intentions of the company were exercised by the company’s board of directors, and not by the manager who had displayed the offending advertisement. Therefore there was no conviction because no intent on behalf the company could be proved. If the directors had delegated their powers to the manager then the directors and, in turn, the company, would have been criminally liable. Tesco’s case was interesting in its conclusion since it demonstrated how difficult it is to convict a company on the grounds that directors have inappropriately delegated their powers to employees, since the board would always deny any delegation for a wrongful purpose. Legislators in Australia, and indeed in other countries, have constructed a strict liability provision in the company law statute which makes a company liable for certain acts, irrespective of any intention manifested by the company. Some other cases have expanded the idea of company liability, eg, Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, where the knowledge and intention of persons within the company were taken to represent the “mind” of the whole company. In this case the director, who controlled the companies in question, was held to be the mind of the company and so expressed its intentions. This is sometimes called the organic theory, whereby the company is held to act through its various organs (ie, its directors, officers and employees), whose actions and intentions give the company a working personality. A company can be convicted of manslaughter, eg, in a case of criminal negligence, where it provided a driver with a defective truck which ultimately led to the company’s liquidation: R v Denbo Pty Ltd (1994) 6 VIR 157. A company can be forced to pay huge fines, eg, Esso, a petrol producer, was forced to pay a $2 million fine for safety breaches: Director of Public Prosecutions v Esso Australia Pty Ltd (No 2) (2001) 126 A Crim R 13. Examining whether a company is liable for a crime is a form of piercing the veil, in that a court looks behind the shield of the company at the actions of its managers and employees. Also, directors and officers cannot have the protection of the corporate veil where they commit a crime or conspire with the company to do something wrong. Under the Criminal Code Act 1995 (Cth) which came into force in 2001, a company may be liable where the corporate culture encouraged employees to break the law, even if there were no specific instructions to actually commit a criminal act.

chapter 20 Company Law

Under s 124(1) of the Corporations Act a company has generally the same powers as any legal person, although in some instances it also has powers to issue shares and debentures, grant options and register security interests against its assets. The main features of a company that flow from having a separate legal entity include:  high regulation: both a company as a separate entity, and its directors and officers, must comply with onerous regulations, breach of which can lead to penalties;  complexity and expense are much greater when setting up and running a company than for most other business entities;  separate taxation: companies pay their own tax at a flat rate separately from their members;  limited liability of its members, ie, the limit of members’ liability is the unpaid portion of any shares they hold;  transfer of interest in the company is quite easy to do by transferring the shares to a new owner;  perpetual existence: a company can live forever, irrespective of the death or bankruptcy of a member;  that it can sue and be sued in its own name;  that it can enter into contracts;  an ability to amass capital from a large number of investors/members;  that it is liable only to the extent of its separate property; creditors can only take company property, not that of members; and  that a company may be convicted of a crime and have a criminal record.

Companies that commenced operating after 1998 no longer require a constitution as internal management can be governed by replaceable rules. A constitution can still be used for internal governance, however, as can a combination of the company’s own rules and some replaceable rules: s 134.

641

642

Introduction to Business Law in Australia

Types of companies [20.140] Figure 20.1: Types of companies

When registering a company the promoter must decide whether the company is to be a public or proprietary (private) company. There are further categories of public and proprietary company from which the promoter must choose, bearing in mind the enterprise they wish to conduct and noting that a company can change its status as the enterprise develops: ss 162, 163. The different types of company are set out in s 112(1). In particular, a public or proprietary company can be a company whose shares are unlimited, meaning that the members have unlimited liability. Unlimited companies are relatively rare and generally established in order to show the members’ utmost good faith in themselves and their enterprise to anybody dealing with the company.

Proprietary companies [20.150] Proprietary (or private) companies:  can be formed with only one person (s 114);  must have a share or shares (excluding guarantee companies which have no shares);  can be unlimited companies;  are limited to not more than 50 non-employee shareholders, though membership can exceed 50 where other members are employee shareholders;  must not engage in any activity that would require disclosure (eg, a prospectus) to investors under Ch 6D of the Corporations Act;  must have the word “Proprietary” or “Pty” as part of its name inserted before “Limited” or “Ltd” (s 148(2)) if a limited proprietary company, and if unlimited must have the word “Proprietary” or “Pty” at the end of its name (s 148(3));

chapter 20 Company Law

 can be a “small” proprietary company if over a financial year they can satisfy any two of the following conditions (s 45A(2)): – they have a gross operating revenue of less than $25 million; – they hold consolidated gross assets of less than $12.5 million; – they have fewer than 50 employees. A company that does not meet these conditions will be classified as a “large” proprietary company and will have to meet more stringent financial reporting requirements. Small proprietary companies do not have to lodge annual audited financial reports, unless required to do so by ASIC or a member, and an officer of a small proprietary company can act as an auditor: ss 324CA – 324CD. Special provision is made in the Corporations Act for the management of one-director/shareholder proprietary companies, eg, incapacity or death, appointment of another director, quorum of one, passing of resolutions, etc: ss 198E, 201F, 202C. In Australia the vast majority of companies are proprietary companies, particularly small proprietary companies.

Public companies [20.160] A company can register as, or change its status to, a public company which allows it to operate as a larger company than a proprietary company, though with some disadvantages. In particular, public companies:  are more highly regulated than proprietary companies;  can be limited or unlimited by shares;  must have three directors and one shareholder, and therefore cannot be a one-person company;  can be a guarantee company — a company where the members do not hold shares but personally guarantee a fixed amount (though some old companies may have both guarantee and shares): s 117(2). Guarantee companies are generally not-for-profit companies and an alternative to incorporated associations. They can remove the word “Limited” from their name under certain conditions (s 150(1));  can be a No Liability company, ie, a registered mining company that promises its enterprise will be confined to mining; these companies have certain advantages in not having to return capital, nor can they force a member to meet a call on unpaid capital: s 112(2) – (3). Of the more than 2 million companies in Australia, only some 20,000 are public companies, and of these only about 2,000 are listed on the ASX. Listed companies must meet minimum requirements as to membership (eg, have at least 300 members) and capital contributed.

Pre-incorporation (pre-registration) [20.165] Before registration of a company there are only intending members and the promoters (who can also be the members). A promoter is the party (person or company) who organises the registration of the company specifically for profit, as distinct from a professional such as a solicitor who, despite being paid, is merely facilitating the registration: Twycross v Grant (1876-77) LR 2 CPD 469. Promoters may also be active or passive: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. The designation “promoter” is important because a promoter has a duty not to misuse their position and inside knowledge; they must declare to other investors their interest and benefits to be gained from the registration process (Erlanger v New Sombrero Phosphate Co [1878] 3 App Cas 1218); and allow for some independent valuation of the proposed company: Gluckstein v Barnes [1900] AC 240. An officer of a company who organises the registration of a new company on behalf of their existing company may be construed as a promoter:

643

644

Introduction to Business Law in Australia

Aequitas Ltd v AEFC Leasing Pty Ltd [2001] NSWSC 14. A breach of these duties may mean that contracts with the promoter may be rescinded and they might have to pay damages to the company or other shareholders. An unregistered company does not exist in law and cannot enter into a contract: Black v Smallwood (1966) 117 CLR 52. The promoters undertake to form the company and can enter into pre-registration contracts on its behalf (subject to ss 131 – 133). If the contract is entered into or on behalf of, or for the benefit of, a non-existent company, the company becomes bound by the contract once it is registered and ratifies the contract within the time agreed, or a reasonable time if no time is set down: s 131(1). The promoter will potentially be held liable in contract by a court (unless exempted by the other party to the contract) if the company is not registered, or is registered but fails to ratify the contract: s 131(2). Ultimately, it is up to the court to determine who must pay if a pre-registration contract is not upheld, but someone or the company will always be liable.

The registration process [20.170] Figure 20.2: Registering a company

chapter 20 Company Law

Incorporation (registration) [20.180] An application must be lodged with ASIC (s 117(1)) in accordance with the requirements set out in the Act: s 117(2). A company on registration is said to be incorporated throughout Australia. Upon lodgment of the application, ASIC will issue the company an ACN (Australian Company Number), register the company and issue a certificate of registration (s 118(1)) which gives the company existence as a body corporate: s 119. A company seal is not required (s 123) and is thus optional. A company can choose to reserve a name for itself, though it does not have to have a name and can be identified through its ACN. If a partnership business reaches 20 members it is required to register as a company (s 115(2)), unless it falls within one of the exemptions which apply to certain professions, eg, solicitors, doctors and dentists. Foreign companies (ie, those registered outside Australia) must register with ASIC (s 601DA) if they wish to carry on business in Australia. Companies can be registered electronically with ASIC by filling out the necessary form online, supplying the required information, paying the appropriate fees ($400) and appointing the necessary officers. A company will be considered to be active until or unless it is deregistered by ASIC: s 601AD(1). There are a number of matters a company must attend to after registration, including:  appointing a company secretary in a public company, if this has not already been done (s 204D);  establishing financial records (s 286) and minute books to record meeting resolutions (s 251A);  appointing an auditor (if a public company or large proprietary company) (s 327(1));  establishing registers for shares, debentures and other securities (s 168);  issuing shares;  appointing a public officer for tax purposes (s 252);  holding an annual general meeting if a public company (s 250N);  updating ASIC on any changes that have taken place, eg, change of address or directors;  displaying a notice with the company’s address: s 144.

The constitution or replaceable rules [20.190] Originally, a company had a memorandum of association and articles of association. While some companies retain these features, there is now no distinction between the memorandum and articles as components of the constitution, and companies can just elect to use replaceable rules. The replaceable rules are set out in s 141, which is a signpost section in that it indicates where each rule is stated in the various sections of the Corporations Act. A company replaces the rules in s 141 by passing a resolution with its own rule, or even making rules in addition to the set of replaceable rules. A company may choose whether it wants its internal management governed by a constitution or replaceable rules, or a combination of both: s 134. Some companies must have a constitution, eg, a no liability company must restrict itself to mining activities (s 112(2)); and a guarantee company must provide that members guarantee creditors a limited amount in the event of insolvency: s 117(2)(m). Many companies will choose to pass resolutions, and consequently create a constitution, in order to impose internal rules such as:  the right to confiscate shares if a member fails to comply with a call-up of unpaid capital;  a restriction on the transfer of shares, eg, by designating who is allowed to purchase them;  the ability to issue different types of shares while outlining the different rights attaching to those shares; and

645

646

Introduction to Business Law in Australia

 the promise to comply with ASX rules in order to be listed on the exchange. The Corporations Act sets out 39 “replaceable rules” (s 141) covering directors, directors’ meetings, meetings of members, the company secretary, inspection of books, shares and transfer of shares. Note that there are some differences between the rules for public and proprietary companies, eg, a public company must allow for the appointment of a proxy: s 249X. A proprietary company has the right to restrict a transfer of shares (s 254D), and the right to pay dividends to different members: s 254W(2). A company may modify or replace the replaceable rules by adopting a constitution: s 136(1). This can be done on registration of the company or by special resolution after registration. A company with a constitution can modify or repeal it by special resolution (s 136(2)) unless some further requirement for change to take place is specified in the constitution: s 136(3). However, there are circumstances where existing members will not be bound by subsequent changes to the constitution: s 140(2). A party seeking to enforce a company’s constitution must be a member of that company, or else they have no standing: see Forbes v New South Wales Trotting Club Ltd (1979) 143 CLR 242, where a party excluded from a club’s racetrack could not enforce the club rules as they were not a club member. A right enshrined in the constitution can only be enforced by a party when that right relates to the party’s membership. If a constitutional right is not membership-related, eg, where it relates to an employment contract, it is not capable of being enforced by the party: Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88. As a one-person proprietary company does not need formal rules governing its internal management most of the replaceable rules do not apply: s 135(1). The replaceable rules that do apply are as follows:  a company must be managed by a director (s 198E(1));  a director can draw up and issue negotiable instruments (s 198E(2));  a director can appoint another director (s 201F); and, further,  a director can determine their own remuneration: s 202C. A one-person company is not required to have a constitution.

Ultra vires [20.200] A company can restrict its activities by provisions in its constitution which determine the objects of the company (s 125(2)), or by provisions that either prohibit or restrict the way in which the company must conduct business or its internal or external activities: s 125(1). A company has the legal capacity and powers of an individual so that any act by officers that is within the powers set out in s 124(1) will not be invalid (ultra vires) even if that act is:  restricted or prohibited by restrictions (s 125(1));  contrary to the objects (purpose) of the company (s 125(2));  not in the best interests of the company (s 124(2)). A person is not assumed to be aware of information about the company just because it is available publicly: s 130.

Liability of agents [20.210] As an artificial body, a company must act through its directors, officers and other agents. People dealing in good faith with a company are entitled under s 128 to make the assumptions set out in s 129 which are that:

chapter 20 Company Law

 the company constitution and replaceable rules have been complied with;  directors and the company secretary have been properly appointed, and have authority to exercise the powers customarily exercised by a person in that position;  officers and agents are properly appointed and exercise their powers properly;  documents are properly executed with or without a seal and that any signatures are correct; and  officers or agents with authority can give undertakings that any document issued by the company is a genuine or a true copy. The rule that outsiders can make such assumptions is inapplicable if the outsider had knowledge or suspicions that those assumptions are incorrect: s 128(4).

Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [20.220] Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279. When Brick & Pipe was taken over by the Goldberg group, the controllers of Brick & Pipe required it to charge its assets for $57 million in favour of Occidental as a third party guarantee of existing Goldberg group borrowings. The deed was executed without board authority by Goldberg (who was also controller of all the companies in the group) and Furst, both of whom were Brick & Pipe board members, with the latter signing as secretary though he had never been appointed as such. When the Goldberg group collapsed, Brick & Pipe refused to honour the guarantee and claimed it was not bound by the deed because Furst was not a properly appointed secretary. The court found the company liable since Goldberg, as group controller, had authority to implicitly represent Furth as secretary. It was not necessary to designate the offices of the persons executing the deed as they were directors anyway.

Northside Developments Pty Ltd v Registrar-General [20.230] Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146. A director of Northside and his son, who was yet to be appointed as a company secretary, signed and sealed a document to borrow from a bank. Northside’s property was mortgaged but the money flowed to a company controlled by the director. When Northside’s other directors found out about the borrowing they claimed the company was not liable. The court found that Northside was liable for the contract and that the bank could not rely on the usual assumptions because the transaction was highly unusual — Northside mortgaged property yet received no benefit — and this was so suspicious as to invalidate the contract.

[20.240] Section 127 contains provisions whereby a company can execute (draw up and put in writing) a contract (or other documents), without a seal, where they are signed by directors or a director and company secretary. Similarly, a document can be executed with a seal by directors and the company secretary.

647

648

Introduction to Business Law in Australia

Membership [20.250] A member is any person whose name appears on the company register: s 231. The register is proof of membership (s 168) and contains all details relating to membership, eg, the paid up amount of the share. Note that a party may be a member of a company if they have agreed to become a member of a company without shares, eg, a guarantee company. A person may become a member by buying shares, or receiving shares in some manner, eg, through inheritance. Membership can come to an end, signified by the removal of the member’s name from the register. This can occur where the shares are transferred by sale, death, bankruptcy, forfeiture or where the company is deregistered. A person can apply to a court for a correction of the register, eg, where a company is refusing to register a new member: s 175(1). Membership is important because it gives particular rights of action, eg, through a statutory derivative action (even where that member has been improperly removed from the register: s 236) or an action for oppression: s 232. The effect of membership is that the constitution and replaceable rules of a company effect a contract between:  the company and each member;  the company and each director and secretary of the company; and  the member and each other member, under which each agrees to observe and perform the constitution and rules so far as they apply to that person: s 140(1).

Hickman v Kent or Romney Marsh Sheep Breeders Association [20.260] Hickman v Kent or Romney Marsh Sheep Breeders Association [1915] 1 Ch 881. H was a member of an association which had a rule that any dispute had to go to arbitration before a court heard the matter. However, when H had a complaint about the association he took it to straight to court. The court refused to deal with his complaint, finding that H was bound by the constitution of the association of which he was a member.

Rayfield v Hands [20.270] Rayfield v Hands [1960] Ch 1. P and D were shareholders of a company and D was also one of its directors. The company’s constitution stated that if a member wished to transfer shares, they could inform the directors, who were then obliged to take the shares equally amongst themselves at a fair value. P informed the directors of his wish to transfer shares and asked that the shares be acquired by the directors. D refused to carry out P’s instructions. The court held that the constitution created an obligation, ie, a contract between the members (including the directors), and that it was enforceable. [20.280] There are other members’ rights throughout the Corporations Act including:  the right to enforce the company constitution (s 140(1));  the right to seek an injunction where the Corporations Act may have been contravened (s 1324);  the right to receive dividends (s 254V);

chapter 20 Company Law

 the right to appoint directors (s 203D);  the right to call a meeting (s 249D);  the right to attend meetings (s 249J);  the right to receive financial reports (s 314); and  the right to object to an alteration of rights attaching to shares: s 246B.

Changes to company constitution [20.290] A company can change its constitution, although changes must comply with the law, be fair and be in the best interests of all members of the company. A change in the rules might also constitute oppression under s 232, and s 233 allows for certain remedies such as an order to undo changes to the constitution or to remove unfair changes. Under s 140(2), after becoming a member of the company that member will not be bound by later changes to the constitution which:  require the member to purchase more shares;  require a member to contribute more money or capital; or  impose a restriction on the ability to transfer shares after becoming a member unless the member agrees in writing to be bound by these new changes. Some further restrictions are that members who hold shares with special rights can object if those rights are removed (ss 246B – 246G), whereby members must give their approval for any such change. Further, if the constitution is changed in order to confiscate shares, even for a beneficial purpose, then that change may not be valid.

Gambotto v WCP Ltd [20.300] Gambotto v WCP Ltd (1985) 182 CLR 432. A company, having acquired more than 99% of a takeover target’s shares, proposed through a change in the company constitution to compulsorily buy out the remaining shares at a higher than market price. The object of the buy-out was to make substantial savings in tax and administrative costs. G objected to the change in the company constitution and the court agreed that the change was not in the interests of all shareholders — or, in this case, not in the interests of a very small shareholding. The court observed that for a change to be valid it had to be for a valid purpose and fair in all circumstances. The savings alone could not justify the expropriation of shares. This court decision means companies will find it difficult to justify a change to their constitution when it is made to facilitate the expropriation of shares.

[20.310] A company must set up and maintain a register of its members, stating the member’s name, address and entry date on the register (ss 168(1)(a), 169(1)), as well as the date when they stopped being a member if membership ceased within the last seven years: s 169(7). Some larger companies will employ specialist companies to maintain their registers. If a company has a share capital then it must comply with s 169(5A) which, amongst other things, specifies requirements on the maintenance of the register as to the number and class of shares, as well as the amount unpaid on them. The register is open to the public, except where someone seeking to inspect the register plans to use the information they acquire to make unsolicited offers to members: s 177(1). Making misleading and deceptive offers to members might be misleading behaviour under s 1041H, eg, making a market offer but then paying in small instalments: National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90.

649

650

Introduction to Business Law in Australia

Membership can cease on death, valid transfer of the shares, forfeiture or disposal for non-payment of calls, bankruptcy, or surrender.

Remedies of members [20.320] As a company becomes a separate legal entity on registration, distinct from its members, it can sue and be sued in its own name. In the case of a wrong done to a company, the company is the proper person to take legal action to enforce its legal rights. Members have a number of rights under various parts of the Corporations Act, eg, the right to enforce the company constitution (s 140(1)), rights of classes of shareholders (s 246D) and the right to call a meeting: s 249D. A company may even be wound up where it is just and equitable to do so (s 461): in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 a court wound up a company where a director was able to demonstrate they had been unfairly squeezed out of the company by other directors. Where the wrong is done by the company’s directors or is the result of a decision by a majority of the company’s members, minority shareholders may:  seek permission of the court (s 236) to bring proceedings as a representative on behalf of a company (a statutory derivative action: s 237) if they can satisfy the court (amongst other things) that they are acting in good faith and that the company would not bring proceedings even though there is a serious matter to be tried; or  seek an order in accordance with s 233(1) that the conduct of the company is contrary to the interests of the members individually or as a whole — where a company action is prejudicial, oppressive or unfair (s 232):

Wayde v NSW Rugby League Ltd [20.330] Wayde v NSW Rugby League Ltd (1985) 180 CLR 459. When the NSW Rugby League decided to reduce the competition to 12 teams, Wests was the club selected to be dropped from the competition. As a member of a company (ie, the NSW Rugby League) Wests argued that the decision was unfairly prejudicial to them. The High Court acknowledged that the decision was harsh but refused to intervene. The court found that the board had acted in what it perceived to be the best interests of the game, and the decision was not oppressive, unfairly prejudicial or discriminatory.

chapter 20 Company Law

Share capital [20.335] Figure 20.3: Types of share capital

There is no limit on a company’s share capital and, unless stated otherwise in its constitution (which can be changed by special resolution: s 1427), there is no limit on share issue. A company can determine its own terms and conditions on a share issue and the rights and restrictions attached to those shares: s 254B.

651

652

Introduction to Business Law in Australia

Shares [20.340] Figure 27.4: Types of shares

Shares are a security and a form of personal property (s 1070A), referred to as a chose in action (an enforceable and intangible right) (s 1085(1)). Shares represent the parts into which the capital of a company is divided, entitling the holder to share in the profits of the company to the extent permitted by the constitution or rules. Shares no longer have a face value (par value) (s 245C) and can be issued at different monetary amounts at different times. A company can issue full or partly paid shares (s 254A(1)(c)) and is still owed any unpaid amount: s 254M. This means there is reserve capital which can be (charged) attached with a registered security interest, though a company may choose to restrict its ability to make a call on this by resolution. Once a share is fully paid there is no further liability on the member (unless it is an unlimited share). Companies no longer have an authorised capital, which historically limited the number of shares they could issue under their constitution, unless they choose to do so. Shares can be issued with different rights attached to classes of shares. For example, A, B, C shares may give some members a preference to receive a dividend, while other members may receive dividends only after everyone else has been paid (deferred shares). Rights relate to matters such as voting (or ineligibilty to vote), receipt of dividends (fixed, preferential or accumulating) and the right to receive a distribution from a company wind-up. Different share rights can be enforced by members against the company, while a member’s lack of rights might give greater control to a class that has superior rights. A company must set out these rights in its constitution (ss 254A(2), 254G(2)) and its contract for the issue of shares. One common class of shares is that of preference shares, which give preferential treatment regarding the payment and accumulation of dividends, although other preferences might be given in terms of the right to vote or on the return of capital during a wind-up. Preference shares might allow dividends to accumulate, or might allow the holder to participate in further profits, while the shares themselves might even be convertible (into another form) — depending on what is specified in the constitution. Preference shares might also be redeemable preference shares (s 254A(1)(b)), eg, where the company contracts to buy back the shares at some future point in time. Alternatively, there are deferred shares, whereby members receive dividends only after all other members have been paid.

chapter 20 Company Law

A company can change the rights attaching to shares under ss 246B – 246G, but with severe restrictions, and any changes must take place according to the company constitution; if there is no constitution then this must be done by special resolution passed at a meeting of the holders of the special shares (class), and with the written consent of members with 75% of votes of the affected class: s 246B(2). Under s 246F(1) ASIC must be notified and a public company must lodge a document regarding any change or resolution that affects the rights attaching to issued shares. Under s 246D(1), 10% of an affected class can ask for a court to set aside the variation, cancellation or modification of the rights attaching to shares on the grounds of unfairness. Members of a special class might also stop any such change with an injunction (s 1324), action for oppression (s 232), or by enforcing the provisions of the constitution: s 140(1). A company should only exchange shares for equivalent consideration, which could be an exchange for other shares, or property from the promoter. The principle in company law is that there must be equivalent value. If shares are given away or exchanged for less than appropriate value, this diminishes the value of the company and contravenes the principle of maintenance of capital: Trevor v Whitworth (1887) 12 App Cas 409. Any exchange not in cash must be in writing and a copy must be lodged with ASIC: s 254X. The issue of shares operates according to the rules of offer and acceptance, and is sometimes referred to as the allotment of shares. Although the terms “issue” and “allotment” can be used interchangeably, by law an allotment is an allocation of securities which is preparatory to the issue of the shares. A potential member makes an offer to buy shares and the company responds with either acceptance, or a counter-offer if the company offers to sell fewer shares than the individual requested than what was requested by the investor. If an issue of shares does not take place according to legal requirements, then this transaction can be validated by a court at a later point in time, as long as there is no inequity to any party if a court does so: Re Swan Brewery Co Ltd (No 2) (1978) 3 ACLR 168.

Transfers of shares [20.350] Under the Corporations Act shares may be bought, sold, bequeathed and given as security (or transferred by transmission by operation of law: s 1091), but until the transfer is registered the transferee of the shares remains the holder: s 1091D. The transfer of shares is determined both by the internal rules (the constitution) of the company and the Corporations Act. Under s 1071B there should be a proper instrument of transfer unless it takes place on an open exchange (such as the ASX where a security holder number is normally sufficient). If a company refuses to register the transfer of shares they must, at the request of the transferee, give reasons for the refusal (s 1071E), after which a court may, on application of the transferee and if convinced there is unfairness, order the company to register the member: s 1071F. A member can obtain a court order for rectification to correct defects in the register: s 175. The register is available to the public (s 173), although use of the information therein is restricted: s 177.

Dividends [20.360] The rules governing payment of dividends are contained in either the company’s replaceable rules (ss 254U, 254W(2)), or its constitution (if any). Directors are usually given the power to determine dividends under the company constitution and, unless the rules state differently, the directors can withdraw the payment at any time up until the payment falls due. Dividends are the division of the company’s profits among shareholders (s 254T) and may be paid either as cash, by the issue of shares (bonus shares), grant of share options, transfer of assets or applied to partly paid shares. Dividends can be paid out of profits, even where there have been losses in previous years or where the overall assets of the company have declined.

653

654

Introduction to Business Law in Australia

A dividend which is not paid out of profits represents a reduction of capital and if it is not authorised (by s 256B) the company officers may be liable for a civil penalty (s 256D), though this will not invalidate the dividend payment. In some exceptional cases dividends can be paid out of revalued property, where that property is now surplus to needs.

Reduction of share capital [20.370] There is a common law rule that a company should not deliberately reduce its capital, since this reduces shareholder value and potential security for creditors: this is the rule in Trevor v Whitworth (1887) 12 App Cas 409. However, in modern times it is possible for a company to reduce its capital by returning capital, buying back shares and lending in order to assist others to purchase securities in the company, as long as it follows correct procedures and the action does not materially affect the company or the company’s creditors.

Share buy-backs [20.380] A company is not permitted to buy its own shares: s 259A. However, ss 256A – 258F set out a number of exceptions:  a reduction of capital, which takes place by a buy-back of shares, is permitted if conducted according to the steps prescribed by statute (s 257A);  a buy-back is permitted where there is a forfeiture of shares by the company (s 258D), or under a court order; or  a buy-back is permitted in circumstances under s 259B(1), (2) and (3), such as where a company takes security over its shares under an approved employee share scheme, or security is taken over the shares in the ordinary course of business of the lender. Interestingly, it is not a crime if a company does buy its own shares, though it could be a breach of civil provisions if the buy-back was for improper purposes, eg, to give a benefit to a member that is not available to the membership at large. Modern companies may conduct a buy-back in order to gear up the company (replace member capital with borrowed funds), or perhaps to reduce the number of members in order to push up the price and/or the earning ratio of each share.

Permissible share buy-backs [20.390] Section 257A provides that a company can buy back its shares as long as it does not materially prejudice the company’s ability to pay back its creditors. The company must also follow the procedures specified in the Corporations Act. “Materially prejudice” means to significantly affect the company, which is determined by facts surrounding a buy-back situation. Section 257B(1) outlines and details the procedures for five different buy-back schemes which are set out in a tabular form: see Figure 20.5 at [20.400]. There are some differences between each of the schemes, eg, a selective buy-back must have a special resolution and more particular requirements than other types, although all types of buy-backs require that the shares be cancelled and ASIC notified. Engaging in share buy-backs, similarly to a company giving financial assistance, requires the company to disclose to members all information regarding the buy-back, followed by a shareholder vote. The directors must ensure that the company remains solvent and able to pay its creditors — or the directors may find themselves personally liable for insolvency: s 588G. A company may provide “financial assistance” (s 260A) to a person to acquire shares in the company or a holding company if the giving of assistance is:  not going to affect the company’s ability to pay its creditors;

chapter 20 Company Law

 approved by the shareholders by special resolution at a general meeting (s 260B); or  exempted under s 260C. Contravention of s 260A does not affect the validity of the transaction and the company is not guilty of an offence, but any person involved in a contravention by a company of s 260A contravenes s 260D(2) and is liable to a civil penalty. A director is not excused even if they followed an approved procedure or obtained shareholder approval (s 260E):

Australian Securities and Investments Commission v Adler [20.400] Australian Securities and Investments Commission v Adler (2002) 168 FLR 253. Following discussions between Adler and Williams (who were directors of HIH), HIH Casualty, a wholly owned subsidiary of HIH, made a $10 million payment to Pacific Eagle Equity, a subsidiary of Adler Corporation half-owned by Adler, which became trustee of Australian Equities Unit Trust, in which HIH Casualty was granted units. The $10 million was used to purchase HIH shares and some unlisted stock, and $2 million out of that amount was loaned to Adler or Adler Corporation. Both purchases created losses for the Trust, made worse because Adler sold his own HIH shares before the Trust could sell its HIH shares on a falling market. It was held that as HIH Casualty suffered material loss on the purchase of the HIH shares, there had been a breach of s 260A and Adler, Williams, and Adler Corporation had contravened s 260D(2).

Figure 20.5: Permissible buy-backs

Debentures [20.410] Rather than issuing shares a company may choose to raise loan capital through the issue of debentures. A debenture is a document that acknowledges the debt of a company to a creditor: s 9. The definition of a debenture does not include money lent by a financial or commercial institution, bank deposits, negotiable instruments, promissory notes or lending to related companies. If debentures are offered to the public, then a disclosing document would usually be required, and there are further requirements to appoint a trustee to look after the interests of debenture holders under a trust deed, which describes the rights of debenture holders. The Corporations Act sets out three specific types of debenture, each of which has mandatory requirements as to how each security is named in any offer document: 1.

mortgage debentures — which must be secured by a mortgage against land;

655

656

Introduction to Business Law in Australia

2.

debentures — which must be secured by a registered security interest; or

3.

unsecured debentures — which have a backing registered security interest or guarantee.

The system of charging property as security for borrowing has now been changed with the introduction of the Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth) which amends the Corporations Act in line with the reforms introduced by the Personal Property Securities Act 2009 (Cth) (PPS Act). The amendments introduced by the PPS Act provide a uniform national Act for all borrowing where the borrower gives a lender an interest in the (borrower’s) property as security. The Act also replaces the previous system of registering charges and establishes a national register administered by a Commonwealth government authority, the Insolvency and Trustee Service Australia (ITSA). The PPS Act applies to security interests in “personal property”, which is defined as tangible or intangible personal property other than land, or anything attached to the land such as a building: s 10. The Act defines under s 51A that a security interest is a “PPSA security interest” (short for “Personal Property Securities Act 2009 (Cth) security interest”), which attaches to the property, and further provides that a security interest is widely defined irrespective of the nature of the transaction or the resulting obligation. A secured party is the person to whom a security interest has been granted. If properly registered the security interest is said to be “perfected”, as against a non-registered or unregistered security interest, which is “unperfected”. A secured party, therefore, includes a chargee, lienee or pledgee where the security interest consists of a charge, lien or pledge. The term “secured party” replaces previous references in the Corporations Act to chargees, lienees, pledgees and mortgagees. The PPS Act replaced the concepts of fixed and floating charges with new terminology. Security agreements may create security interests that have the features of fixed and floating charges, which are now called “non-circulating security interests” or “circulating security interests” respectively. Because a grantor is able to sell or otherwise dispose of circulating assets in the ordinary course of business without obtaining the secured party’s prior consent, a circulating security interest provides a grantor with the means to use constantly changing circulating assets, such as inventory and book debts, as security for a loan. The grantor is also able to replace individual items of the collateral in the future and the replaced items would also be subject to the circulating security interest. If a company becomes insolvent, then a perfected claim will take priority against an unperfected (unregistered) security interest. Similarly, a first perfected interest will be take priority over a later perfected (registered) security interest. A company that plans to borrow funds through a debenture offering must:  appoint a trustee corporation (only certain bodies are qualified to act as a trustee for debenture holders: see Corporations Act s 283AC(1)) for the debenture holders and prepare a trust deed (ss 260FA – 260FC); and  comply with a number of general (s 260GB) and specific duties (ss 260GC – 260GF) imposed by the Corporations Act. The trustee is subject to a range of duties (ss 283DA, 283DB) including:  an obligation to exercise reasonable diligence to ensure that the borrower’s property is sufficient to repay the loan when it is due;  that there is no breach of the provisions of the trust deed; and  if there is a breach of the deed, or a non-payment of interest of capital, to advise the security holders of a course of action.

chapter 20 Company Law

Managed investment schemes [20.420] A managed investment scheme (MIS) is defined in s 9, whereby investors join to pool their funds in the hands of a manager in order to invest in a profit-making project, such as a unit trust, which does not fall within the normal definition of an issued security regulated by ASIC. An MIS will have to be registered as a “responsible entity” with ASIC if the scheme:  has more than 20 members; or  has been promoted by a person who is in the business of promoting such schemes, or is an associate of that person: s 601ED. The responsible entity, which has all the powers of a trustee subject to the scheme’s constitution (s 601GA), must be a public company that holds a dealer’s licence enabling it to operate such a scheme (s 601FA) and is subject to a wide range of statutory duties: s 601FC. An MIS must prepare a disclosing document when it is offering investment opportunities publicly, unless it qualifies as an exempt offer under s 708, eg, an offer to fewer than 20 persons seeking to raise less than $2 million.

Corporate financing [20.430] A company can offer securities, which represent either borrowing, eg, in the form of debentures, or an offer of a share (or classes of shares) in the company. A party who lends money is a creditor, while those who purchase shares become shareholders (members), equity holders or owners of the company — ultimately the rights of creditors and members will be different. In ss 92, 700 and 761A securities are defined and categorised to include shares, classes of shares, debentures, options, warrants and managed investment schemes. Managed investment schemes have been brought within the definition of securities because the offeror is seeking investors to put money into an investment scheme, such as a unit trust, without receiving a conventional security. The financing provisions in Ch 6D of the Corporations Act require companies wishing to raise funds through an offer of securities to provide investors with a disclosure document: s 727. A disclosing document sets out various details of the company and the reasons for seeking to raise capital. The disclosing document should identify the company making the offer and further set out the nature and price of the securities. However, a company may not need to prepare and lodge a disclosing document where the offer is one of the exempt types in s 708, including offers:  to fewer than 20 investors for less than $2 million;  to sophisticated investors who are experienced or professional investors;  to sophisticated investors with considerable earnings from their investments ($250,000) or with considerable assets ($2.5 million);  where the minimum purchase amount is $500,000 or more;  to employee shareholders, including managers;  where the securities are listed on the ASX;  to existing security holders;  where nothing needs to be paid; and  under a compromise, arrangement or takeover. However, where a company is not exempt under s 708, then in order to offer securities the company must decide which type of disclosing document to use. There are basically three forms of prospectus which may be offered:

657

658

Introduction to Business Law in Australia

1.

a full prospectus; or

2.

a short-form prospectus or profile statement, which are summarised versions of the full prospectus; or

3.

a non-prospectus offer called an Offer Information Statement (OIS) which is a much simpler and less regulated process for smaller raisings of capital.

Under s 715A there is a requirement that all disclosure documents are presented and expressed in a clear, concise and effective manner, and that proper procedures be followed by each type of disclosure document: s 717. ASIC can exempt a company from any disclosure provisions. Forecasts made must be reasonable. Listed companies are subject to different disclosure requirements than other types of companies, eg, if things change materially at any time a listed company must disclose the change to the ASX and ASIC. This is known as continuous disclosure. If there is something material that has not been disclosed in a document then the document may be struck down: Fraser v NRMA Holdings Ltd (1995) 55 FCR 452. A short-form prospectus and profile statement are summarised versions of the main prospectus but carry lesser penalties for breach of the disclosure provisions than for a prospectus.

Prospectus [20.440] A full prospectus requires quite detailed information and is set a high standard for information provided within the document (s 711), with severe penalties for misinformation. A prospectus under s 710 must contain all relevant information that investors and their professional advisers would reasonably require in order to make an informed assessment of the information provided. This would include:  a description of the business and its important contracts;  financial information;  information about – – – – – –

the prospects of the company; risks; use of proceeds; the officers involved and their remuneration; major shareholders and their relationship with the company; tax; and

 disclosure of material aspects.

Short-form prospectus [20.450] A company may be given permission to issue a shorter, less detailed version of the prospectus which has been prepared and lodged with ASIC. Section 712 sets out the disclosure obligations or contents required in the short-form prospectus. A short-form prospectus is often used where an offer is made to specialists, eg, traders in securities, who are knowledgeable professionals in the finance field.

Profile statements [20.460] A profile statement is, similarly to a short-form prospectus, a shorter version of the lodged prospectus. Profile statements are not often used when offering securities since they are basically designed for the issue of a managed investment scheme: s 709(2). Section 715 sets out the disclosure obligations for a profile statement. The profile statement must:

chapter 20 Company Law

 identify the body making the offer;  outline the nature of the risks;  give details regarding the securities;  state that the prospectus is available; and  provide any other information as required: s 714.

Offer Information Statement (OIS) [20.470] A company can prepare an Offer Information Statement (OIS), which is not a prospectus, if the company is seeking to raise less than $10 million. The company offering the OIS needs to:  identify itself, its securities and its business;  explain how the funds raised will be used;  outline the nature of the risks;  provide details of securities; and  further state that the OIS has a lower level of disclosure than a prospectus and that investors should seek additional advice on the securities: s 715. A financial report must also be included in the OIS: s 715(2).

Misleading disclosure documents [20.480] Section 728 prohibits a person from offering securities under a disclosure document if it contains a misleading or deceptive statement, or omits information, forecasts or new information that might now exist. Under s 729 a person suffering loss or damage as a result of misleading information can recover from various parties listed in s 729 including the company, the directors and persons named in the disclosure document. Parties named in s 729 have a duty to inform investors and ASIC of any misleading statements that come to light. For prospectuses there is a due diligence defence that all proper inquiries were made as to the veracity of the prospectus issued: s 731(1), (2). Under s 732 there is a lower standard of liability for an OIS and a profile statement, that of having “a lack of knowledge” rather than having to make positive inquiries. Under s 733, any party issuing a disclosing document can claim the defence that they reasonably relied on a person who is not a director, employee or agent of the company issuing the disclosing document. ASIC can put a stop order in place if misleading information comes to light (s 739(1)), although there must be some provision to hear from any party who objects to the stop order.

Management and control Registered office [20.490] Every company must have a registered office and, in the case of a public company, that office must be open for at least three hours every day: ss 121, 142 – 145. A company must notify ASIC if their place of business is different from their registered office: s 146.

Directors and officers [20.500] Directors, officers and employees act as both agents and managers of the company. Their decisions will bind the company but also make the company responsible for any wrongdoing that occurs. The law applying to directors and officers is derived from the Corporations Act, various other statutes,

659

660

Introduction to Business Law in Australia

common law and equity. Directors, officers and, to a lesser extent, employees, form the management of the company. Managers seek to maximise the profits of the company, and in turn ensure good returns to the shareholders. While directors have responsibility for supervising company operations, the board of directors should provide checks and balances on the actions of directors — this is called corporate governance. The board of directors, at least in larger companies, should have a system of committees comprising both executive and non-executive directors who monitor different internal aspects of the company such as finance, risk, accounting and information flows, capital, and investments. The ASX also imposes certain standards on listed companies. “Director” is defined in s 9. Under this section a director is defined as one who has been appointed as a director or alternate director, or if not appointed acts as a director by giving directions or instructions which other directors are accustomed to follow. Such directors are sometimes referred to as shadow directors, though persons who merely give professional advice to other directors would not be included in this definition. Shadow directors might include a holding company which gives instructions and generally controls its subsidiaries, even though it could not be formally appointed as a director: Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290. An officer is also defined in s 9 as a director or secretary of the company or a person who makes, or participates in making, decisions that affect the whole or a substantial part of the business of the company or has the capacity to significantly affect the corporation’s financial standing, or where the directors act upon the instructions of such persons (with the exception of professional advisers). Officers as a group would include liquidators, receivers or any person holding some important decision-making position within the company, eg, a manager. It is important to distinguish between who is a director and who is an officer since specific duties apply to each position, and in some instances there are duties that may only apply to a director and not to an officer. All companies must have directors, with:  proprietary companies required to have at least one director (s 201A(1)); and  public companies required to have at least three directors: s 201A(2). The director:  must be over the age of 18 (s 201B);  must not be a disqualified person within the meaning of s 206B; and  may be appointed (or removed: ss 203C, 203D) by ordinary resolution at a general meeting: s 201G. The replaceable rule in s 198A states that the business of a company is to be managed by or under the direction of its directors, subject to the Corporations Act or the company’s constitution. A director’s primary duty is to the company itself and not to individual shareholders — the members cannot overrule the directors: see Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34. Similarly, in:

Percival v Wright [20.510] Percival v Wright [1902] 2 Ch 421. The directors of a company bought out some shareholders (after an independent valuation of their shares) in order to facilitate the sale of the company. The ultimate sale resulted in a higher price for remaining members; this was held not to be a breach of duty since there was no specific duty owed to individual shareholders.

chapter 20 Company Law

An exception to the rule (directors may have a duty to shareholders) [20.520] While directors have no specific duty to members, this rule may be modified where the company is very small, with only two or three members:

Brunninghausen v Glavanics [20.530] Brunninghausen v Glavanics (1999) 46 NSWLR 538. A family company had only two shareholders, who were also directors. The directors had argued and so when one director offered to buy out the other, that offer was accepted. The director purchasing the shares did not disclose he was secretly negotiating to sell the whole company for a significantly higher share price than that which he had just paid. On discovering the sale the ex-member sued for breach of fiduciary duty. The court in this case decided there was a fiduciary duty to the other director because the departing director was a family member in a company with only two shareholders. The remaining director had induced the other shareholder to sell by promising a fair price without the need to inspect the books of the company — all of which was to benefit himself to the detriment of the other shareholder. The court found that in special circumstances a director may have an independent duty to shareholders, according to the size of the company and any undertakings given. [20.540] The statutory duties of directors, officers and in some instances employees are set out in ss 180 – 184. These duties are assessed objectively, according to ordinary standards expected in the commercial world, the size of the company, and the position that the officer holds.  Directors and officers must exercise the degree of care and diligence a reasonable person would exercise if they were a director (s 180(1)) in accordance with the business judgment test in s 180(2):

AWA v Daniels [20.550] AWA v Daniels (1992) 7 ACSR 759. A company allowed an employee, who had made significant profits for the company from foreign currency trading, to make unauthorised borrowings which eventually led to the company losing some $50 million due to a lack of supervision of that trading. The company had contracted a firm of auditors to do the annual audit but this did not reveal these losses to the company. When the company finally discovered the amounts that had been lost they sued the auditors for negligence; the auditors in turn claimed the directors had not properly supervised their employee and had therefore contributed to the losses. The court decided that the auditors and the directors were both liable for the losses, though they exempted the non-executive directors on the grounds that it was for the executive directors to monitor the employees and to implement proper procedures in a large company.

[20.560]  Directors and officers must exercise their powers and discharge their duties in good faith in the best interests of the company (ie, the members as a whole) and for a proper purpose (s 181): see Ngurli Ltd v McCann (1953) 90 CLR 425, where an issue of shares designed to benefit only certain shareholders, rather than to raise capital, was held not to be for a proper purpose.

661

662

Introduction to Business Law in Australia

 Directors, officers and employees must not improperly use their position to gain an advantage for themselves or any other person to the detriment of the company: s 182.  Directors, officers and employees, whether current or former, must not make improper use of the company’s confidential or secret information for personal gain, or do anything to the detriment of the company (s 183):

Australian Securities and Investments Commission v Adler [20.570] Australian Securities and Investments Commission v Adler (2002) 168 FLR 253. (See the facts outlined at [20.390].) Adler, by allowing the Trust to buy technology shares from Adler Corporation without independent evaluation, and taking loans from the Trust without appropriate documentation, breached ss 180 – 184 whilst Adler Corporation breached ss 181(2), 182(2) and 183(2) and made Adler the subject of a s 1317E declaration. [20.580] If statutory duties are breached, ASIC, the DPP or the company can apply to the court under Pt 9.4B and the person involved in the contravention is liable to civil or criminal sanctions (the “civil penalty provisions”):

Australian Securities and Investments Commission v Adler [20.590] Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. In determining the penalty from the decision in Australian Securities and Investments Commission v Adler (2002) 168 FLR 253, Santow J was satisfied that Adler had knowingly breached his director’s duties and disqualified him from being a director for 20 years, imposed fines totalling $450,000 and ordered that he, along with the other defendants, pay compensation of nearly $8 million to HIH Insurance. [20.600] If a director fails to exercise their powers in good faith in the best interests of the company or for a proper purpose (s 184(1)), or they use their position dishonestly (s 184(2)), they may commit a criminal offence. A director (or anyone in possession of non-public, price-sensitive information about the shares of a company) is prohibited from “insider trading” (ss 1042A – 1042H), ie, from acting on information not generally available to the public: s 1043A. Listed public companies must now include a remuneration report as part of their director’s report (s 300A) and the report can be subject to questions at the annual general meeting: s 250S. Section 206B sets out a number of cases where a person is disqualified from being a director, including bankruptcy and contravention of a civil penalty provision: see, eg, Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [20.590].

Directors do not owe a duty to company outsiders [20.610] Directors are held not to have a duty to employees, eg, there is no duty to pay redundancies to employees at the expense of the shareholders: Parke v Daily News Ltd [1962] Ch 927. Directors do not owe individual duties to creditors, other than what they would normally owe: Spies v The Queen (2000)

chapter 20 Company Law

201 CLR 603. When making decisions, eg, to purchase shares, a director does not have to take into account the interests of creditors, although of course the director must not allow the company to trade while insolvent as they will be held personally liable: s 588G. Under ss 596A – 596AC, note that directors may be criminally liable if they do not ensure the preservation of employee benefits such as superannuation. Directors may have further statutory liabilities under, eg, work health and safety legislation, in ensuring the safety of workers in the company and, further, that workers do not suffer harassment or discrimination in the workplace.

Disclosure of interests [20.620] A director who has a material personal interest in a matter relating to the company must declare their interest (ss 191(1), 194) unless it falls within one of the exceptions under s 191(2). A director of a public company who has a material personal interest in a matter that is being considered at a board meeting must not vote on the matter or be present while it is being considered (s 195(1)), unless it falls within one of the exceptions under s 195(2).

Loans to directors [20.630] Subject to a number of exceptions (ss 212 – 216), a public company is prohibited from providing loans to a “related party”: s 228. These civil penalty provisions render the related party and anyone else involved as potentially subject to civil and criminal penalties:

Australian Securities and Investments Commission v Adler [20.640] Australian Securities and Investments Commission v Adler (2002) 168 FLR 253. (See the facts outlined at [20.390].) The payment by HIH Casualty to Pacific Eagle Equity of $10 million, which was later used to buy units in the Trust, was a “financial benefit” for Pacific Eagle, Adler Corporation and Adler that breached the Corporations Act.

Directors of insolvent companies [20.650] Directors are under a duty to prevent their company from trading:  whilst insolvent; or  if there are reasonable grounds for believing it is insolvent: s 588G. Breach of s 588G carries civil and criminal penalties, including the payment of an amount equal to the loss or damage: ss 588J, 588K, 588M. Directors have four alternative defences: 1.

where there are reasonable grounds to expect the company was solvent and would remain solvent (s 588H(2));

2.

where there was delegation of the company’s financial system to a competent and reliable person upon whom it was reasonable for the director to rely that the company was solvent and would remain solvent (s 588H(3));

3.

where the debts which led to the company becoming insolvent were incurred when the director was ill or absent from management for some other good reason (s 588H(4)); or

4.

where all reasonable steps were taken to prevent the company from incurring the debt: s 588H(5).

663

664

Introduction to Business Law in Australia

A lack of knowledge of insolvency does not prevent the liability of a director for insolvent trading.

Tourprint International Pty Ltd (in liq) v Bott [20.660] Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201. Bott became a director at a time when the company was insolvent, and when another director advised the company to alleviate its financial difficulties by introducing new investors. The court found that Bott was liable for insolvent trading. He did not properly investigate the solvency of the company and therefore could not claim to have reasonable grounds for expecting that the company was solvent. Directors have to take an active part in determining the solvency of a company.

Statewide Tobacco Services Ltd v Morley [20.670] Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405. Mrs Morley was a director of her family business but held the position in name only — she did not know anything about company operations and merely signed whatever was given to her. She was sued by creditors because the company, which had been taken over by her son after the death of her husband, had been trading while insolvent. The court found her liable and she was not permitted to rely on a defence of lack of involvement or knowledge of the company. Non-executive directors, even where they do not receive any remuneration, will still be liable for the insolvency of the company and for failing to monitor its managers. This remains the case even if those managers give assurances that the company is solvent.

Imposing penalties on directors [20.680] A director or officer who breaches their duties may be removed from office or prosecuted. Under common law this may lead to an account for profits, rescission of contracts, or the imposition of an injunction. However, where the officer has not done anything wrong they may be able to apply to a court for relief under s 1318, whereby the court may ratify what would otherwise be an improper action. Amendments to the Corporations Act allow for the imposition of civil penalties in place of, or as well as, criminal penalties. Civil penalties were introduced because they only require proof on the balance of probabilities, rather than the more onerous standard of beyond reasonable doubt for criminal offences. These civil penalties are mainly fines (pecuniary penalty orders up to $200,000) which are imposed by ASIC: s 1317G. Alternatively, compensation is payable to the company (s 1317H) or to a person if the breach is of a financial services provision: s 1317HA. Pecuniary penalty and compensation orders are obtained by ASIC applying to a court: s 1317E. A company (or person) may also apply for a compensation order against an officer or employee who has caused them financial loss under “financial services” penalties. Penalties are at the discretion of the court which will take into account the severity of the conduct, the damage done, the degree of dishonesty and other matters. Penalties are divided into units of monetary value which can change periodically. An officer of the company may also be disqualified under s 206C by a court, or on application by ASIC. Interestingly, there was a significant case where a court imposed penalties on a solicitor who aided and abetted the breach of an officer’s duty as a director, the director having acted dishonestly (s 79): Australian Securities and Investments Commission v Somerville (2009) 77 NSWLR 110.

chapter 20 Company Law

Meetings [20.690] Under the Corporations Act there are a number of meetings that directors or members of a company can hold. These meetings are called subject to the Act or the company’s constitution:  annual general meeting: a public company (but not a proprietary company) must hold this meeting within five months of the end of its financial year unless it has only one member: s 250N(2), (4). There must be an appropriate quorum to hold the meeting: s 249T. A minimum of two members is necessary for a quorum, though this requirement can be modified by the company’s constitution. Reasonable opportunity should be given to members to ask questions of senior managers: s 250S. Since 2004 there must be opportunity for a public company listed on the ASX to conduct a members’ vote on the company remuneration report (though the vote is not binding: s 250SA).  extraordinary general meetings (ie, any meeting other than the annual general meeting) may be called: – by the directors (s 249C); – at the request of at least 5% of voting members or 100 members entitled to vote at a general meeting: s 249D(1). The meeting must be held at a place that is reasonably convenient for the members: s 249R. If the directors fail to hold an extraordinary general meeting called in this manner, they will be personally liable to pay for a court-ordered meeting.  directors’ meetings are held by executive and non-executive directors and require reasonable notice: s 248C. Voting is carried out on a simple majority, with the chairman having the deciding vote. Resolutions can be put in writing to all directors who then vote on the resolution by signing either in favour or against: s 248A. The board acts as a collective rather than through a single director. Voting is normally on the basis of one director, one vote, though the chairman may have the casting vote: s 248G. Directors may delegate authority to another director, eg, the managing director: s 198D.

Voting and resolutions [20.700] Under s 198A members must have 21 days’ notice of resolutions (s 249H) or 28 days’ notice for ASX listed companies: s 249HA. Normally voting is on a one person, one vote basis: s 250E. Proxy votes allow for representatives to vote on behalf of another and the provision of proxy votes is mandatory for public companies: s 249X. A resolution may be:  ordinary, where the resolution is passed by a majority of members in person (or by proxy) and is sufficient for all general matters; or  special, where the resolution deals with more important matters (eg, modifying or repealing the constitution: s 136) and requires 21 days’ notice and then at least 75% of the votes at the meeting: ss 9, 249H. Voting is normally by a show of hands but a member can demand that a more formal vote be taken, called a poll: s 250L(1).

Other matters [20.710] Normally two sets of minute books are kept (s 251A(1)):  one for directors’ meetings; and  the other for meetings of shareholders. Financial records must detail and explain all transactions, the financial position and performance of the company, and enable the preparation and audit of financial statements: s 286. A financial report (s 292(1))

665

666

Introduction to Business Law in Australia

and directors’ report must be prepared for each financial year by all entities. Small proprietary companies are excepted from this requirement (s 292(1)), unless directed to fulfil it by the shareholders (s 293) or ASIC: s 294. The appointment and removal of auditors is governed by Pt 2M.4:  public companies must appoint an auditor (s 327);  large proprietary companies may be able to gain audit relief under s 313(6);  small proprietary companies generally do not need to appoint an auditor unless requested to do so by either ASIC or shareholders with at least 5% of the votes: ss 293(3)(c), 294. All companies are required to lodge an annual return with ASIC by 31 January each year, the contents of which are prescribed in s 348 for companies and s 349 for registered schemes. A “substantial” shareholder (ie, one who holds 5% of the voting shares or is prescribed by regulation) must give the company (and the ASX if it is a listed company) full particulars relating to the voting shares in which they have an interest.

Takeovers [20.720] The regulation of company takeovers is governed by ss 602 – 673 in Ch 6 of the Corporations Act. In summary, the objectives of Ch 6 are to ensure that the takeover targets:  are aware of the identity of a bidder;  have a reasonable time to consider the bidder’s proposal;  are given enough information to assess the merits of the proposal; and  have a reasonable and equal opportunity to participate in any benefits of the proposal: s 602. Some takeovers are exempt, eg, a creeping takeover where an offeror is purchasing only small amounts of shares, or where the takeover is a result of a merger or plan in order to rescue the company from insolvency. A person has a relevant interest in shares if they are the holder of securities, or have the power to exercise a right to vote attached to securities, or have power to dispose of securities: s 608(1). Takeover bids can be either:  off-market bids, which are generally conditional (ss 626 – 630); or  market bids, which are unconditional cash offers for all the remaining voting shares in the company. Both types of bid are intended to ensure that the target shareholders have detailed information from both the offeror and the directors of the target company before they make a decision whether or not to sell their shares. A Takeovers Panel has been established in place of the courts to provide prompt resolution of disputes arising during takeovers: Pt 6.10, Div 2.

Company receivers [20.730] The powers, duties and liabilities of company receivers are largely found in Pt 5.2. The person appointed as receiver under court order (s 1323), or by the secured creditors under a trust deed, must be a registered liquidator: s 418(1)(d).

chapter 20 Company Law

The effect of appointment [20.740] The appointment of a receiver does not affect the legal personality of the company or displace the board of directors but it does affect the ability of the directors to exercise their powers in relation to the company’s business or property, eg, when a circulating security interest crystallises. All company correspondence must also contain a statement that a receiver has been appointed: s 428.

Powers of a receiver [20.750] The contractual provisions attached to a debenture will usually identify the powers of a receiver, while court-appointed receivers will have the powers granted to them by the court. Both private and court-appointed receivers are to do all things necessary to attain the objectives for which the receiver was appointed: s 420(1). Additional powers are conferred by s 420(2). Where the company’s property is subject to a prior charge, a receiver may apply to the court for an order authorising the sale irrespective of the prior charge, although such an order will only be granted in limited circumstances: s 420B.

Duties of a receiver [20.760] Under the Corporations Act the duties of a receiver include:  notification of their appointment (s 429(2));  maintaining financial records, including a separate bank account (s 421);  preparing a report about the company’s affairs (s 421A);  reporting irregularities in the management of the company to ASIC (s 422);  taking reasonable care in the selling of assets at not less than market value (s 420A);  ascertaining the priority of payment of debts (s 433); and  ascertaining their own costs, expenses and fees: s 425. Failure by a receiver to carry out their duties faithfully may result in ASIC or the court (s 423) inquiring into their conduct and could lead to the removal of the receiver: s 434A.

Effect of winding up [20.770] A receiver of a company that is being wound up may carry on the company’s business if they obtain the approval of the court or the written approval of the company’s liquidator. They carry on the company’s business as an agent for the company and any debts incurred in carrying on the business are incurred in the course of receivership: s 420C. On winding up the receiver ceases to be an agent of the company, except for an express power of sale conferred on them by the debenture.

Liability of receivers [20.780] The Corporations Act provides that liability of a receiver depends on whether the appointment was:  by the court — the receiver is an agent of the court and is personally liable on contracts subject to their right to be indemnified out of the property covered by the debenture or mortgage; or  by the parties — generally the receiver is an agent of the parties that made the appointment and is not personally liable to third parties on any contracts made during the course of the receivership, unless they are debts incurred for goods and services: s 419(1).

667

668

Introduction to Business Law in Australia

A receiver is not personally liable for debts arising from contracts entered into by the company prior to their appointment which are completed during the receivership; they may repudiate such contracts without incurring personal liability.

Termination [20.790] Under the Corporations Act the appointment of a receiver may be terminated:  once the objectives of the appointment have been achieved;  by the debenture holder/s but not the company;  if a liquidator applies to the court for an order that a receiver or controller cease to act (s 434B);  by the court: ss 418A, 434A.

Arrangements, reconstructions and voluntary administrations [20.800] A company may, subject to member and court approval:  enter into a compromise or arrangement with its creditors (ss 411 – 412);  be reconstructed through the transfer of its assets to a new company; or  amalgamate with one or more companies through transfer of its assets to the new company: ss 413 – 414.

Voluntary administration [20.810] When a company gets into financial difficulties there is a prohibition on trading while insolvent, since under s 588G this will make the directors personally liable. The directors of the company might voluntarily choose to appoint an “external administrator”, or this may be imposed on them by the creditors who call up their security. If the directors move to voluntary administration this will give the company some breathing space from creditors’ claims, which must be postponed to give the administrator time to formulate a rescue plan that meets with the creditors’ and shareholders’ approval. The administrator may ultimately advise that the company be wound up or, alternatively, they may formulate a plan to save the assets of the company. The company may be put into receivership and eventually liquidated, although it may be in the interests of creditors to maximise the value of the company by having it managed out of insolvency, or perhaps for the manager to find a buyer or solvency solution. Part 5.3A provides for the appointment of an administrator with a view to bringing into existence a “deed of company arrangement” to restore the company to a sound financial position: ss 435A – 451D. This is an alternative to winding up. Voluntary administration begins with the appointment of a registered administrator (ss 448A – 448C) by:  the directors (s 436A(1)) (in which case this must take place before winding up commences: s 436A(2)); or  a liquidator or provisional liquidator (s 436B); or  a chargee (s 436C) and brings into effect a moratorium on claims against the company.

chapter 20 Company Law

Administration commences on the day of appointment (s 435C(1)) and the provisions of Pt 5.3A ensure that the voluntary administration is for a relatively short time in order to force a decision on the company’s future. The administrator, as the company’s agent, has extensive powers and total control over the management of the company: ss 437A, 437B. The administrator is personally liable for debts incurred in the course of the administration for services rendered, goods bought or property leased (ss 443A(1), 443B), although he or she is entitled to an indemnity out of the company’s property for these debts and their remuneration: s 443D. The directors must assist the administrator as much as they can, by delivering a report on the company’s business within seven days of his or her appointment and delivering the books as soon as practicable: ss 438B – 438C. The administrator must convene a creditors’ meeting within five business days of appointment (s 436E) to determine whether to appoint a committee of creditors and, if so, its composition: s 436E(1). At a second meeting of creditors the creditors may, under s 439C, decide:  to execute a deed of company arrangement (s 439C(a));  to end the administration (s 439C(b)); or  to liquidate: s 439C(c).

Deed of company arrangement [20.820] Where the creditors resolve to execute a deed of company arrangement under the Corporations Act the administrator of the deed must prepare the document, setting out its terms (s 444A(3)) and including certain matters required under the Act: s 444A(4). A deed of company arrangement binds all creditors of the company, the company, its officers and the administrator: ss 444D – 444H. A deed of company arrangement terminates when:  the court orders its termination under ss 445D and 445G;  the creditors pass a resolution to terminate the deed (s 445E); or  the deed specifies under what circumstances it is to terminate: s 445C. Where creditors resolve to terminate the deed, they may also resolve that the company be wound up in insolvency (a creditors’ voluntary winding up) and the administrator is deemed to have been appointed as liquidator: s 446A. The court has a general power under s 447A to make such orders as it thinks appropriate for a company in voluntary administration or which is subject to a deed of company arrangement.

Winding up [20.830] Under the Corporations Act the winding up process, carried out by a registered liquidator (ss 532, 1282) appointed either by the court (compulsory winding up: s 472) or creditors (voluntary winding up: s 495), brings a company to an end and requires compliance under Pt 5.6.

Winding up by the court [20.840] Winding up by the court, which commences on the day the order was made (s 513A), may occur:

669

670

Introduction to Business Law in Australia

 if the court is satisfied that the company is insolvent (ss 459A, 459P), ie, unable to pay its debts when they fall due (s 95A); or  on application by the company, a creditor, a contributory (a person liable to contribute to the assets of the company in the event of it being wound up), the liquidator or ASIC or for any of the grounds under s 461(1). A winding up order binds all creditors and contributories (s 471) and suspends any court actions against the company or enforcement processes except with the leave of the court: s 471B. A court may make an order staying a winding up and giving control back to the company at any time up until an order is made by the court that the company be deregistered, at which point the company ceases to exist: s 482.

Voluntary winding up [20.850] Under the Corporations Act there are two forms of voluntary winding up initiated by special resolution of the company, which will have the effect of the company ceasing to carry on business except for what is necessary for winding up at the time of the passing of the resolution: 1.

A members’ voluntary winding up (ss 495, 496), initiated by special resolution (s 491) when the company is solvent and will be able to pay its debts within 12 months (s 494(1)); or

2.

A creditors’ voluntary winding up (ss 497 – 500), which arises as a result of a members’ voluntary winding up:  where the company does not lodge a declaration of solvency pursuant to s 494; or  the liquidator later forms an opinion that the company will be unable to pay its debts within 12 months, then the winding up proceeds as a creditors’ winding up: s 496(1).

Where there is a creditors’ voluntary winding up, no action can be proceeded with or commenced against the company after the resolution except by leave of the court: s 500. The existence of the company is not extinguished until deregistration occurs after the final meeting and the filing of final accounts: s 601AD.

Powers and duties of liquidators [20.860] Apart from the liquidator’s powers as an agent, in the case of either a voluntary (s 506) or compulsory winding up, a liquidator has the powers granted by s 477.

Other matters In every winding up, all debts payable by, and claims against, the company are admissible as proof against the company (s 553) and, except as otherwise provided, rank equally unless the property of the company is insufficient to meet them in full, in which case they are to be paid proportionately: s 555. A secured creditor does not need to prove the debt in a winding up and, on default, has the right to sell the secured asset. Unsecured creditors are subject to the pari passu principle (s 555) which provides for the distribution of the proceeds of assets to them on an equal basis, subject to certain priority payments, or proportionately if there are insufficient funds to meet them in full. Sections 556 – 564 rank the debts of particular classes of unsecured creditors in order of priority. The preferential creditors, whose debts are referred to as preferential debts, are ranked in priority if the company is insolvent and unable to pay unsecured creditors in full.

chapter 20 Company Law

Certain transactions (insolvent transactions: s 588FE) entered into before the commencement of the winding up may be declared voidable transactions (s 588FF) on application to the court by the liquidator unless it can be shown that:  the transaction was not an unfair loan to the company; or  a party to the transaction received no benefit or the benefit was received in good faith: s 588FG. Deregistration (under Pt 5A, s 9) may be:  voluntary on application by the company (s 601AA), a director, member or liquidator if: – – – –

all members agree; the company is not carrying on business; the company’s assets are worth less than $1,000; and the company has no outstanding liabilities;

 initiated by ASIC if: – it is satisfied that s 601AB(2) has been satisfied; – the court orders deregistration; or – three months have passed since the lodgment of a liquidator’s return: s 601AC. A deregistered company may be reinstated if:  ASIC is satisfied that it should never have been deregistered; or  the court orders reinstatement (s 601AH), in which case it is considered never to have ceased existence.

Guide to Problem Solving Questions based on this chapter will typically ask about:  Types of companies — What is the most appropriate form of company for a particular type of business? What is the difference between a small and a large proprietary company?  The constitution and powers of a company — Does a company need to have a constitution? What is the effect on a company of adopting the replaceable rules?  Members’ rights — What are the rights of members of a company?  Share capital — What are the different types of share capital? What are dividends, and when can they be paid? Can a company reduce its share capital?  Debentures — What are debentures? How are they secured?  Corporate financing — How does a company go about securing finance to undertake its contemplated activities? What is a prospectus and what has to be disclosed? What is the role of the Corporations Act 2001 (Cth) for misleading or deceptive statements or conduct in relation to a prospectus?  Directors — What are the duties and liabilities of directors?  Company receivers — When can a company receiver be appointed? What is the effect of appointment? What are the powers and duties of a receiver? What is the liability of a receiver?  Arrangements and reconstructions — What choices are available to a company to make arrangements between it and its creditors? What is the effect of voluntary administration?  Winding up — What are methods of winding up a company, and how do they differ? What are the effects of winding up?

671

672

Introduction to Business Law in Australia

Practice Questions Revision Questions 20.1

Identify four major differences between a public and a proprietary company.

20.2

What are the main features of a company?

20.3

What are the types of company that may be registered under the Corporations Act 2001?

20.4

Are replaceable rules replaceable? Discuss.

20.5

Are acts purporting to be done by the company, but which are outside the scope of the objects set out in its constitution, void or ultra vires? Discuss.

20.6

Dividends can be paid in any way that the directors choose. Discuss.

20.7

How does the Corporations Act regulate the issue of a prospectus? Discuss.

20.8

Outline the duties of the modern director.

20.9

Discuss the alternative to proceedings for winding up.

20.10 Describe the effect of winding up on a company. 20.11 Describe the modes by which a company may be wound up. 20.12 Explain how a company may be deregistered.

Problem Questions 20.13 Shaun is the owner of Film Makers, a small independent documentary-making business that has just been awarded a large grant by the Commonwealth government to make a documentary about Australia’s involvement in the Middle East in World War I. He is confident that he can handle the job but is still concerned that if something should go wrong he could be faced with unlimited liability. He knows his business is too small to become a public company but wants to find out what is the best option available to him. Advise Shaun. 20.14 Sugar Mills Pty Ltd was a sugar cane refinery. Its shareholders were Finch, who held 10,000 shares, Bright, who held 2,500 shares, and Moon, who held 500 shares. The three shareholders were also directors of the company. In a falling out among the three board members, Bright was voted off the board and replaced by the company’s solicitor. A partnership was established by Finch and an associate to sell the waste from the sugar mills as garden compost, which became very profitable. The company was excluded from any profits from the partnership even though the operations of the partnership were conducted on the company’s premises, used company labour and were run by the company’s manager. The company also resolved to allow the partnership the benefit of a lucrative licence for the carting of the sugar cane from farms to the company’s refinery. Advise Bright.

Answers to Practice Questions Revision Questions 20.1

[proprietary v public company] Proprietary company:  membership limited to 50 non-employees;  prohibition on share offering or borrowing from the public;

chapter 20 Company Law

 needs only one director;  company name must contain the word “Pty” or “Proprietary”;  depending on whether it is a small or a large proprietary company it may not have to appoint an auditor or lodge financial reports with ASIC;  not required to hold annual general meetings. Public company:  unlimited number of shareholders;  must have at least three directors;  may or may not be listed on the ASX;  must have a certain minimum issued capital;  must appoint an auditor and comply with strict reporting requirements to ASIC;  must hold annual general meetings. 20.2

[features of incorporation] Some of the main features that flow from incorporation include:  the liability of members is limited to the unpaid portion of their shareholding;  a member may transfer their interest in a company by simply transferring their shares;  permanent existence, as the company is a legal entity in its own right;  the ability to contract in its own name, sue and be sued.

20.3

[proprietary and public companies] Two types of company may be identified under the Corporations Act: (i)

proprietary companies (s 113) which may be limited by shares or unlimited with share capital; and

(ii)

public companies which may be limited by shares, limited by guarantee, unlimited with share capital, or a no liability company.

20.4

[replaceable rules] The “replaceable rules” govern the internal administration and management of the company. They are replaceable as they can be modified or displaced by the company’s constitution: s 135(2). A table of provisions that apply as replaceable rules can be found in s 141. However, it should be noted that in the case of one-person companies the replaceable rules do not apply: s 135(1). The Corporations Act has a number of rules that apply specifically to such companies: see, eg, ss 198E(1), 198E(2), 201F, 202C.

20.5

[abolition of the doctrine of ultra vires] The original principle was that acts which were done by the company but outside the objects set out in the memorandum of association were void as being beyond its powers, ie, ultra vires, and a nullity. The doctrine of ultra vires has now been abolished and the Corporations Act no longer requires a company to have an objects clause in its constitution. All companies have the legal capacity and powers of an individual: s 124(1). If a company has an objects clause, an act is not invalid merely because it is contrary to or beyond any of its objects: s 125(2). Furthermore, even if a company’s constitution contains an express restriction or prohibition on the exercise of any of its powers, the exercise of that power is not invalid merely because it is contrary to an express restriction or prohibition: s 125(1).

673

674

Introduction to Business Law in Australia

20.6

[dividends v profits] Dividends represent the division of the company’s profits amongst its shareholders: s 245T. If dividends are paid other than out of profits, it would amount to an unauthorised reduction of capital: s 245T. The profits must exist at the time fixed for payment of the dividend. The difficulty with the term “profits” is that it is not defined in the Corporations Act, which means that it is not restricted to trading or income profits but may include capital profits. As a result, the courts have preferred to leave the meaning of “profits” as a matter of internal management of a company. If a dividend is paid other than out of profits, it will not be invalid but directors may be subject to a civil penalty for a reduction of capital: s 256D.

20.7

[prospectus] The prospectus contains information regarding the financial affairs of the company and the nature of the security being offered to investors. Under the Corporations Act, a prospectus must contain certain information and disclosures for the benefit of investors, including:  for shares or debentures: the rights and liabilities attaching to the securities; and the assets and liabilities, financial position and performance, profits and losses and prospects of the company;  in the case of an offer to grant a legal or equitable interest in securities or an option over securities: the rights and liabilities attaching to the interest or option and the underlying securities; and the capacity of the offeror to deliver the underlying securities and the financial position of the offeror (s 710(1));  the terms and conditions of the offer (s 711(1));  disclosure of the interests of directors, proposed directors and promoters (s 711(2)) and their fees (s 711(3));  that no securities will be issued after the expiry date: s 711(6). If the person making the offer becomes aware that a disclosure document contains a misleading or deceptive statement, a material omission or a new circumstance that could adversely affect an investor, a supplementary or replacement document may be lodged: s 719. The Corporations Act provides that the person making the offer is liable for the loss or damage caused by misleading or deceptive statements or a new circumstance that is materially adverse from an investor’s view: s 728(3). If ASIC is satisfied that an offer of securities under a disclosure document would contravene s 728, it may order that no offers of the securities be made.

20.8

[directors’ duties] The duties of a director at common law include:  the duty of good faith and loyalty;  the exercise of their powers for their proper purpose;  the exercise of care and skill;  the duty to retain their discretion; and  the disclosure of potential conflicts of interest. The statutory duties of directors are contained in ss 180 – 184 and supplement the common law duties above. They include:  exercising their powers and discharging their duties with the degree of care and diligence that a reasonable person would exercise if they were a director in these circumstances (s 180(1)), based on the business judgment test (s 180(2));

chapter 20 Company Law

 exercising their powers and discharging their duties in good faith in the best interests of the company and for a proper purpose (s 181);  not making improper use of their position or information to gain advantage for themselves or someone else, or causing detriment to the company (ss 182, 183);  declaring any personal interests that relate to the affairs of the company (s 191);  ensuring that the prospectus complies with the Corporations Act (s 711);  ensuring that proper financial records are kept (s 826);  preventing the company from trading when it cannot pay its debts (s 588G);  ensuring dividends are paid out of profits: s 254T. 20.9

[voluntary winding up] When a company is unable to pay its debts as they become due, as an alternative to proceedings for winding up, the company may be placed under voluntary administration. The purpose is to maximise the chances of the company returning to profitability and continuing to exist, but if this is not possible, to ensure that the creditors and company members get a better return than would result from an immediate winding up.

20.10 [winding up] The winding up process is the method by which a company is brought to an end. The procedures and formalities are set out in Pt 5.6 and the company’s constitution or replaceable rules. The aim is to secure realisation of the company’s assets and their utilisation to pay the company’s debts. The commencement of the liquidation does not of itself terminate the company’s existence, as it still a legal entity, but its control is now vested in the liquidator rather than in the directors. Once the winding up process is completed the company may be deregistered, at which point in time the company ceases to exist: s 601AD. 20.11 [winding up] A company may be wound up by the court in insolvency upon application by the company, a creditor, a contributor, a director, a liquidator, ASIC or a prescribed agency. The court has to be satisfied that the company is actually insolvent (ss 459A, 459P), ie, unable to pay all of its debts as and when they become due and payable: s 95A. A company may be wound up on grounds other than insolvency, as set out in s 461: eg, the company has by special resolution resolved that it be wound up by the court; the company has not commenced business within a year of incorporation or has suspended business for a year; the company has no members. A company may also be wound up by way of a voluntary liquidation. This is initiated by a special resolution of the company that it be wound up voluntarily: ss 491, 513B. From the time of passing the resolution, the company must cease trading except for what is required for the winding up of the business: s 493. There are two types of voluntary winding up: (i)

a members’ voluntary winding up, where the directors consider that the company will be able to discharge its debts in full within 12 months from the commencement of the winding up and a written statement to this effect is lodged with ASIC; and

(ii)

a creditors’ voluntary winding up, where the directors do not declare that the company can pay its debts and cause a meeting of the creditors to be called at which the resolution for the voluntary winding up is to be proposed. No action can be proceeded with or commenced against the company after the passing of the resolution except by leave of the court.

675

676

Introduction to Business Law in Australia

20.12 [deregistration] There are two main methods of deregistration: (i)

voluntary, where application may be made by the company, a director, member or liquidator if:  all the members have agreed to the deregistration;  the company is not carrying on business;  the company’s assets are worth less than $1,000;  the company has paid all its fees and penalties under the Corporations Act;  the company has no outstanding liabilities; and  the company is not a party to any legal proceedings.

(ii)

initiated by ASIC, where:  the company’s return is at least six months late, the company has not lodged any other documents in the previous 18 months and ASIC has no reason to believe that the company is still trading; or  ASIC believes that the liquidator of the company is no longer acting, or that the company has been wound up and the liquidator’s return is at least six months late, or that the company has insufficient property to cover the costs of obtaining a court order for deregistration.

Problem Questions 20.13 [company form] Shaun should form a proprietary company. He can name himself as the sole shareholder and director under s 114. There are two types of proprietary company: (i)

a small proprietary company; and

(ii)

a large proprietary company: s 45A.

A company is a small proprietary company if it does not satisfy two of the following three requirements: (i)

it has a consolidated gross operating revenue of more than $25 million for the financial year;

(ii)

consolidated gross assets at the end of the financial year are worth more than $12.5 million;

(iii)

it has more than 50 employees at the end of the financial year: s 45A(2).

If the company qualifies as a small proprietary company, it will not be required to prepare formal accounts or have them audited. Shaun could incorporate as Film Makers Pty Ltd and register the name under the relevant Business Names Act in which State it is likely to do business. The company will be given an ACN and it will not require a constitution or replaceable rules. 20.14 [directors’ duties] Finch, as the person in control of the company, was conducting the affairs of the company in such a way as to benefit himself and others of his choice at the expense of Bright. The conduct was decreasing the value of the assets of the company. Finch’s conduct in the running of the company was oppressive and unfair to Bright, as no reasonable director would have acted in that way. In determining whether or not conduct is oppressive or unfair, a court will balance the conflicting

chapter 20 Company Law

interests of majority and minority shareholders by examining the background of the company and the reasonable expectations of its shareholders: s 232. See Re Bright Pine Mills Pty Ltd [1969] VR 1002.

Tutorial Questions Discussion Questions 20.15 What requirements must a proprietary company satisfy in order to be classified as a small proprietary company? 20.16 Must a company operating today have a memorandum and articles of association? Discuss. 20.17 Discuss the effect of the replaceable rules on a company and its members, bearing in mind that the rules constitute a contract. 20.18 A debenture can be fixed or floating. Discuss the difference between the two forms of security, explaining the difference between share capital and loan capital. 20.19 (a)

A director has a duty to avoid a conflict of interest. Explain what a conflict of interest is and how it may arise in the case of a director.

(b)

Explain why, as a general rule, only a company can bring an action against its director who is in breach of their duty.

20.20 Explain the effect of the appointment of a receiver on a company.

Problem Questions 20.21 An unlisted public company, Peters Co Ltd, owned land which was valued at a $2 million historical cost in its balance sheet. The directors were advised that the land was worth in excess of $65 million. Darvall, a substantial shareholder in the company, advised the board that he intended to make a takeover bid for the company, offering $10 per share. The board believed that in light of the value of the land, shareholders should be advised not to sell at that price. However, they feared that because shares were trading at 85 cents, shareholders would accept the bid. The company’s financial adviser suggested that the company should arrange for an alternative bid at a higher price and that it should develop the land. The board agreed and a scheme was proposed whereby the land would be sold to a wholly owned subsidiary of the company, which would enter into a joint venture with another company, Chase Finance. The managing director of Peters was involved in the negotiations with Chase and decided to make his own takeover bid, offering $12 per share. Chase agreed to finance his bid on favourable terms if the joint venture proceeded. He did not disclose details of the arrangement with Chase to the board, though directors suspected there was a secret arrangement with Chase. At the meeting, which the managing director did not attend, the directors approved the joint venture scheme with Chase. Advise Darvall. 20.22 Samuel and Harvey were two of the directors of Cape Town Holdings. Samuel was also a director of Australian Goldfields. They both owned shares in Australian Goldfields, Samuel holding his shares in his own right while Harvey held his shares as trustee under a will. On the initiative of Samuel, Cape Town’s board agreed to purchase the shares of Australian Goldfields. Both Samuel and Harvey absented themselves when the discussions about the purchase and the vote took place. After the purchase was finalised, the board discovered the interests of Samuel and Harvey and sought to

677

678

Introduction to Business Law in Australia

have the contract rescinded. Advise Cape Town Holdings’ board.

chapter 21

The Law of Trusts [21.10] Principles.............................................................................................................................................................. 680 [21.20] Terminology........................................................................................................................................................ 681 [21.30] Elements of an express trust .................................................................................................................... 681 [21.40] Trusts distinguished from other legal relationships ..................................................................... 681 [21.60] Classification and types of trusts............................................................................................................ 682 [21.110] Creation of trusts.......................................................................................................................................... 684 [21.200] Trust property ................................................................................................................................................ 686 [21.210] Appointment, duties and powers of trustees................................................................................ 686 [21.300] End of trusteeship ........................................................................................................................................ 689 [21.310] Rights of beneficiaries ............................................................................................................................... 689 [21.320] Termination of the trust............................................................................................................................ 689 [21.330] Fiduciary duties in commercial relationships................................................................................ 690

680

Introduction to Business Law in Australia

Extract from Davenport, S and Parker, D, Business and Law in Australia (2nd ed, LawBook Co., 2015), Chapter 29.

Aim By the end of this chapter you will be able to:  understand the basic concept of a trust and explain the role of the settlor, trustee and beneficiary;  list the essential elements of an express trust and explain each;  explain how express trusts differ from resulting and constructive trusts;  distinguish trusts from other legal relationships;  explain how a trust is created;  explain the appointment, duties and powers of trustees;  explain the rights and liabilities of trustees;  list the ways in which a trust may cease or be terminated;  list the rights of a beneficiary; and  explain when a fiduciary relationship may arise in a commercial transaction other than a trust.

Principles [21.10] Equitable obligations can add another dimension to commercial dealings. Whereas the parties to a contract are entitled to act in their own interests and according to the terms of their contract, equity, which is based in conscience, imposes a higher level of obligation on parties. Trustees and others subject to fiduciary duties must consider the other party’s interest ahead of their own. Trustees are fiduciaries but the duty may arise in other commercial situations as well. This chapter firstly considers the structure and types of trusts. This involves looking at the creation of trusts; the role of trustees; and the rights of beneficiaries of a trust. The circumstances in which a fiduciary duty may arise outside the trust relationship are also examined. Figure 21.1: The trust structure

chapter 21 The Law of Trusts

Terminology [21.20] Below are some of the key terms that you will encounter in this chapter:  Beneficiary: the person who benefits from the creation of the trust. They hold equitable (or beneficial) title.  Fiduciary: a person who must act in the best interests of another, called the principal. The fiduciary must avoid any conflict of interest and duty and may not earn unauthorised profits or commissions.  Settlor: the person who creates the trust, either by transferring property to trustees to be held on behalf of beneficiaries or by declaring themselves to be a trustee.  Trust: a trust is an equitable relationship whereby a person, as the legal owner (the trustee), has a personal obligation to deal with some specific property (the trust property) for the benefit of another person/s (the beneficiary/beneficiaries or cestui que trust), or for a specific purpose.  Trustee: the person in whom the trust property is vested and the legal owner; the person who generally will be required to manage and control the property.

Elements of an express trust [21.30] The essential element of a trust is the split of legal title (held by the trustee) from equitable title (held by the beneficiaries). A trust must have at least one trustee, one beneficiary and trust property. The trustee can also be a beneficiary of the trust, provided that the trustee is not the sole beneficiary. If the trustee is the sole beneficiary the trust will fail, as there is no separation of legal and beneficial ownership. The basic elements of an express trust are:  the settlor: the person creating the trust. Once the trust is properly created (constituted) the settlor may play no further role. Legal title and equitable obligations are then vested in the trustee;  the trustee/s: the person/s in whom the trust property is vested and the legal owner. Unless the trust is a bare trust (where the trustee’s only duty is to hold title to the trust property) the trustee will be the person who manages and controls the property. A person can declare themselves to be a trustee of their own property for the benefit of a third person, in which case they are both settlor and trustee;  the trust property: may be real (eg, land) or personal property including both tangible and intangible property such as choses in action (eg, shares and copyright);  the beneficiary: the person/s for whose benefit the trust is created and who may be a trustee but cannot be the sole beneficiary as there would be no equitable obligation to another person;  an obligation on the part of the trustee, enforceable in equity, to deal with the property for the benefit of the beneficiaries.

Trusts distinguished from other legal relationships [21.40] A trust relationship can be distinguished from:  Contract: unlike a contract, a trust does not have to arise as the result of an agreement; consideration is not necessary in its creation; a beneficiary may enforce it even though they may not be a party to the instrument which created it; the rights and obligations created by it are proprietary, not merely personal, although personal rights do also exist against the trustee; and the rights and obligations arising from it are only enforceable in equity. A trust may, however, be created by a contract and the two relationships may co-exist.

681

682

Introduction to Business Law in Australia

 Agency: while a trustee is a fiduciary of the beneficiaries and must act both for their benefit and personally, unlike an agency relationship, ownership in the trust property is vested in the trustee; a trustee who enters a contract on behalf of the trust does so as principal and is personally liable; a trust’s existence does not terminate on the death of a trustee or beneficiary; a trustee cannot be directed by a beneficiary to deal with trust property in any particular way, unless they are the sole beneficiary and fully entitled in which case they may “collapse” the trust.  Bailment: a bailment is created by the transfer of possession of personal property from the bailee to the bailor but no transfer of ownership of the property. The creation of a trust results in a split in the legal title (held by the trustee) and the equitable title (held by the beneficiary).  Debtor and creditor: the debt relationship is usually created by a contract under which title to money passes to the debtor, subject to the obligation to repay. Under a trust, beneficial title may be retained by the beneficiary even though legal title is held by another.

Barclays Bank v Quistclose Investments [21.50] In Barclays Bank v Quistclose Investments [1970] AC 567 Quistclose lent money to a company, Rolls Razor (RR) for the sole purpose of paying dividends to its shareholders. The money was paid into a separate account with Barclays. When RR went into liquidation prior to the dividend being paid, Barclays sought to use the money to reduce RR’s indebtedness to the bank. The House of Lords held that the money was subject to a trust. It was the mutual intention of Quistclose and RR that should the purpose of the trust fail (ie, the inability to pay the dividends) then the money would not become part of the general assets of RR but would be returned to the lender. The relationship was not only one of loan (contract), but also of trust.  Companies: unlike a company, a trust is not a separate legal entity with its own legal personality; the trust sues and is sued in the name of the trustee; trust property is held on trust for the objects or beneficiaries of the trust; a trust is not the full legal and beneficial owner of its property.  Trustees and executors: the trustee’s principal duty is to preserve the trust property for the benefit of the beneficiaries, and not to favour a beneficiary or a class of beneficiaries.

Classification and types of trusts [21.60] A trust can take a variety of forms, and may be classified according to how the trust is set up, how it operates, or what it is used for. Although the various types of trust fall under the same umbrella of obligations and the trustees are subject to similar equitable obligations there are some slight variations in how they are created.

Classifications [21.70] Classifications of trusts include:  Express trust: a trust may be created by express intention of the settlor, for example, “I give $100,000 to A on trust for B”. Declaration of an express trust may be oral, written or inferred from the conduct of the parties and surrounding circumstances. Some trusts, particularly those over land, must be created in writing. The intention of the settlor is crucial; if there is no intention to create a trust, none will come into existence irrespective of the words used (see, eg, Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178 below at [21.120]):

chapter 21 The Law of Trusts

 Implied trust: a trust implied or presumed by law from the particular circumstances that “this was the intention of the settlor”. This includes resulting trusts, where property reverts back to the settlor on failure of an express trust or where the purchase price of property is provided by someone other than the legal title holder; and constructive trusts, where it is unconscionable for a person to retain beneficial interest in property.  Constructive trust: a trust created by operation of law in circumstances where it would be inequitable or unconscionable for the legal owner of the property to retain it for their own benefit:

Baumgartner v Baumgartner [21.80] In Baumgartner v Baumgartner (1987) 164 CLR 137 a man asserted, after his relationship with a woman had failed, that property funded in part from pooled funds was exclusively his. It was held that a constructive trust had arisen as the exclusion of any interest of the woman to the property amounted to unconscionable conduct. The parties held the property proportionately in the amount that they had each contributed to its acquisition.

Ogilvie v Ryan [21.90] In Ogilvie v Ryan [1976] 2 NSWLR 504 O promised R that she could live in a house (that had been purchased in his name) rent free for life in return for nursing and housekeeping duties. He made no provision for her in his will and after his death O’s son sought possession of the house. It was held that although the verbal contract could not be enforced, a constructive trust had arisen based on the parties’ common intention that she was to have an equitable interest in the property.

Types of trusts [21.100] Types of trusts include:  Discretionary trust: the trustee has a discretion as to which beneficiaries receive a benefit, and the amount of such benefits. This is distinguished from a fixed trust, where the amount of benefit to which each beneficiary is entitled is ascertained in the trust instrument. Discretionary trusts are often used in a family setting to minimise tax liability.  Trading trust: a trust in which the trust property is used to operate a business, for example, as an alternative to a limited liability company. The trust itself can have limited liability via a limited liability corporate trustee.  Unit trust: a commercial trust in which the beneficiaries (or unit holders) own units of the trust property. The trust property usually consists of real estate, shares or other securities. A unit trust may also have limited liability where a limited liability corporate trustee is appointed. It is used as an investment medium by small investors, and often offers tax-minimisation benefits.  Testamentary trust: a trust created by a will.  Charitable trust: a trust for a charitable purpose. Charitable trusts are created for a purpose rather than a particular beneficiary. Charitable trusts must be for public benefit, such as education, religion, community benefit, and relief of poverty.

683

684

Introduction to Business Law in Australia

Creation of trusts Express trusts [21.110] An express trust may be created by transfer of ownership of property from the settlor to the trustee to hold on trust for the beneficiaries or by a declaration of trust by the settlor where the settlor declares themselves to hold the property on trust for a beneficiary. To be valid and enforceable the so-called “three certainties” must be present:  certainty of intention to create a trust must be shown. Intention can be express or implied from the circumstances in which the trust was established. There is no “magic” in the use of the word “trust” if that is not what was truly intended:  certainty of the subject matter of the trust, that is, it must be clear what property is to be the trust property. Any form of property, real or personal, tangible or intangible may be the subject matter of a trust;  certainty of objects: it must be possible to identify who the beneficiaries of the trust are. The test for certainty of beneficiaries depends upon whether the trust is fixed or discretionary. – For fixed trusts the test is that of list certainty; it must be possible to draw up a complete list of all the beneficiaries; – For discretionary trusts (where the trustees have a choice as to which of a class of beneficiaries they will benefit) the test is called criterion certainty and the test is whether it is possible to determine whether or not any particular person falls into the class of possible beneficiaries: A trust will fail unless all three certainties exist. In addition to ensuring satisfaction of the three certainties of intention, subject matter and objects, there must also be compliance with any formalities and statutory provisions, for example the requirement that certain trusts must be in writing.

Commissioner of Stamp Duties (Queensland) v Jolliffe [21.120] In Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178 J opened a bank account in the name of his wife with himself named as trustee. After his wife died intestate (ie, without leaving a will) he claimed no trust was intended. The High Court held that J had never intended that his wife should have the benefit of the money, nor had he meant to make a gift to her. Irrespective of the use of the word “trust”, none will arise contrary to the intention of the person who is alleged to have created it.

Re Baden's Deed Trusts: McPhail v Doulton [21.130] In Re Baden’s Deed Trusts: McPhail v Doulton [1970] 2 All ER 228 a settlement deed instructed trustees to apply the income of a fund for the benefit of “any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit”. The House of Lords held that it was not necessary to draw up in advance a full list of possible beneficiaries, only to be able to say whether or not any particular person fell within the class.

chapter 21 The Law of Trusts

Charitable trusts [21.140] Charitable trusts are a form of express trust, however, the test for certainty of beneficiary (object) is different. Charitable trusts must be formed for a charitable purpose, either:  Trusts for the relief of poverty (and this includes trusts that benefit the aged or sick);  Trusts for the advancement of education. Traditional educational institutions such as schools and universities will qualify; however, as long as it can be said that the knowledge imparted is worthwhile and for the public benefit an educational institution will have a valid charitable purpose;  Trusts for the advancement of religion. In order to fall under this head there must be: “first, belief in a supernatural Being, Thing or Principle; and second the acceptance of canons of conduct in order to give effect to that belief”: Church of the New Faith v Commissioner of Pay-roll Tax (Victoria) (1983) 154 CLR 120.  Trusts for other purposes beneficial to the community. A wide range of beneficial purposes will qualify including public works, funds to relieve the consequences of natural disasters, projects to assist indigenous people and the protection of animals.

Resulting trusts [21.150] In some cases it is presumed that a trust was intended. Most commonly this will be the case where:  an express trust fails or where the purpose of a trust has been carried out but there is still a surplus of funds in the account;  contributions have been made to the purchase price of property which are not reflected in the legal title. For example, A provides 100 per cent of the purchase price for a block of land but legal title is put into the name of B. In these cases it will be presumed that a trust was intended. In the first situation the trust fund will “result” back to the creator of the trust and in the second the property will be held by the legal title holder on trust for the person who provided the purchase price.

Nelson v Nelson [21.160] In Nelson v Nelson (1995) 184 CLR 538 a mother paid the purchase price for property which was put into the names of her son and daughter. A resulting trust arose in her favour.

Constructive trusts [21.170] Unlike express trusts, constructive trusts do not depend on the expressed intention of the settlor. A constructive trust will be imposed by a court of equity where it would be unconscionable for the legal owner to deny that someone else has acquired an interest in property.

685

686

Introduction to Business Law in Australia

A constructive trust may also be imposed where the court finds that this was the common intention of the parties:

Baumgartner v Baumgartner [21.180] In Baumgartner v Baumgartner (1987) 164 CLR 137 de facto partners pooled their financial resources but a house that they built was put into the name of only one of them. The High Court found that they had intended to share the title to the property in the proportions to which they had contributed, ie, 55% to the man and 45% to the woman. (Note that the division of property on the dissolution of a de facto relationship is now dealt with by statute.)

Joseph Saliba v Thomas Tarmo [21.190] In Joseph Saliba v Thomas Tarmo [2009] NSWSC 581, in gratitude for a great deal of personal assistance a homeowner said to Mr and Mrs S: “You are both so good to me. I am going to leave you half of this house in my will.” After this statement was made Mr and Mrs S continued their extensive assistance. After the homeowner died, without making a provision in her will the court found that there was a common intention that Mr and Mrs S should have a beneficial interest and that they had acted to their detriment on the basis of that common intention.

Trust property [21.200] A trust may be created over real or personal property or both. To avoid property being tied up for unduly long periods of time, there are two rules that apply:  the rule against perpetuities. Ownership of the subject matter of the trust must eventually vest; it cannot be held on trust indefinitely. All jurisdictions have enacted legislation which fixes the perpetuity period (the period in which property must vest) at 80 years after the date of the grant (eg, Perpetuities Act 1984 (NSW)). There is an exception to this in relation to trusts for charitable purposes;  in some States, there are rules against the accumulation of income for unduly lengthy periods.

Appointment, duties and powers of trustees Appointment [21.210] Any company or person may act as trustee if they are legally capable of holding title to property in their own right (in New South Wales the appointment of a minor as a trustee is void). Appointment can be by the settlor, the beneficiaries, a person with a power to appoint, or the court where it is expedient to do so.

Duties [21.220] The trustee’s primary duty is to carry out the terms of the trust. In addition, a trustee has a duty, enforceable by the beneficiaries:

chapter 21 The Law of Trusts

 to preserve trust property, including a duty to properly invest;  to exercise the degree of care of an ordinary prudent business person managing their own affairs:

Youyang Pty Ltd v Minter Ellison Morris Fletcher [21.230] Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484: As trustee, M was personally liable for losses caused by its breach of trust. M’s purchase of company shares without obtaining a bearer certificate was contrary to Y’s instructions and meant the trust’s moneys were unsecured, so when the company went into liquidation, Y lost the entire amount;  not to make a profit out of the trust or their position as trustee:

Williams v Barton [21.240] In Williams v Barton [1927] 2 Ch 9 one of the trustees under a will was employed by a sharebroker on terms that their salary should consist of a commission on business introduced; they arranged to have the testator’s securities valued, and the commission earned had to be refunded to the estate;

Boardman v Phipps [21.250] In Boardman v Phipps [1967] 2 AC 46 Boardman was a solicitor acting on behalf of a trust. He and one of the beneficiaries of the trust took over control of a company in which the trust held shares. He informed the beneficiaries and no objections were received until after the takeover was complete, and the value of the shares had greatly increased. One of the trust beneficiaries (Phipps) brought an action against Boardman for an account of the unauthorised profits he had made in his fiduciary capacity. Because it had not been possible to gain the informed consent of one of the beneficiaries (who was mentally incapable) it was found that Phipps had not been fully informed by Boardman as to the precise nature of his plans and an account of profits was ordered.  to keep accounts and produce them to beneficiaries when required;  to provide reasonable information to beneficiaries;  to act in person (or through an agent, when appropriate), rather than delegate;  to act impartially between the beneficiaries.

Enforcement of duties [21.260] Any beneficiary may apply to the court to compel the trustees to execute their duties. If the trustees are given a discretion, the court will only intervene when they refuse to exercise it (unless given an absolute discretion) or they are not exercising it bona fide.

687

688

Introduction to Business Law in Australia

Powers [21.270] In an express trust the most important source of a trustee’s powers will be the trust instrument. Most modern trust deeds contain wide powers to manage the trust property. The various State Trustee Acts also grant wide powers of investment and management to the trustee, for example, Trustee Act 1925 (NSW) s 14 allows a trustee to: (a)

invest trust funds in any form of investment, and

(b)

at any time vary any investment.

Other powers will generally include:  power of sale in limited circumstances;  power to mortgage the trust property (in some cases this may need to be sanctioned by the court or beneficiaries);  power to insure any trust property against loss or damage by fire, the premiums to be paid out of trust income;  power to lease trust property on reasonable terms, the onus being on the trustee and lessee to show it is reasonable;  power to carry on a business so far as is necessary for prompt realisation, although a trustee may be given authorisation under the trust instrument to do so. Queensland (Trusts Act 1973 (Qld) s 57) and Western Australia (Trustee Act 1962 (WA) s 55) give the trustee limited statutory power to conduct a business;  power to repair or improve the trust property, if the trustee has a power of management or the beneficiary is under a disability;  power to apply to the court for advice on administration of trust property;  power to pay a minor’s guardian income for the maintenance, education or benefit of a minor;  power to compromise or settle claims in good faith;  other powers set out in the trust instrument.

Rights [21.280] A trustee has the following rights:  right to remuneration, but only where allowed by the trust instrument, by the court, or by all the beneficiaries who are sui generis;  right to reimbursement for moneys properly paid in connection with the trust. If there are insufficient funds to reimburse the trustee against liabilities incurred in carrying out the trust, the beneficiaries are liable to indemnify the trustee;  right to settlement of account on completion of trustee duties and receipt of discharge from the beneficiaries;  right to indemnity by a beneficiary of full legal capacity who knowingly consents to a breach of trust, and from a co-trustee;  as a trustee is not obliged to take personal risks, he or she has a right to apply to the court for advice on the execution of the trust in the case of doubt or uncertainty in the execution of the trust.

chapter 21 The Law of Trusts

Liability [21.290] Trustees are liable for their own acts or defaults in administering the trust and will have to make good any losses suffered as a result of the breach. Liability may be for active or passive failures, but the court may excuse failures to fulfil the trustee’s duty where the trustee acted in good faith. Where two or more trustees are liable for a breach, each may be sued for the whole amount of the loss but as between themselves, they will share the burden equally.

End of trusteeship [21.300] A trusteeship can be brought to an end by:  Disclaimer: a person appointed trustee may disclaim the trust if he or she does not wish to become a trustee. Once the trustee has acted in a way that constitutes acceptance of the trusteeship, disclaimer is no longer possible and the trustee can only retire from the office.  Retirement: retirement can only be made under a power in the trust instrument, under statutory power, with the consent of all the beneficiaries who are sui generis, or by court order.  Removal: a trustee can be removed under a provision in the trust instrument, where the trustee remains out-of-State, or by the court in its inherent jurisdiction.  Termination: the trust may terminate by consent of all beneficiaries of full legal capacity, by conclusion of the trust, or where the trustee is removed, retires or dies.

Rights of beneficiaries [21.310] The rights of a beneficiary include:  right to end the trust where they are all of full age and between them hold the entire beneficial interest (known as the rule in Saunders v Vautier (1841) 49 ER 282);  rights conferred on them by the trust instrument;  right to view trust accounts and be informed about trust affairs;  right to compel performance of trust duties by the trustee;  right to restrain a breach of a trust by the trustee;  right to sue a trustee for breach of trust;  right to appoint and remove a trustee;  right to seek the court’s advice on issues concerning the administration of the trust. Where the trustee has improperly sold trust property and converted it into money which has been used to buy other property or gone into the trustee’s private bank account, the beneficiaries may be able to trace and recover the property (only if an innocent third party is not a purchaser, Ministry of Health v Simpson [1951] AC 251) or money.

Termination of the trust [21.320] A trust will terminate upon:  distribution of the trust assets to the beneficiaries in accordance with the trust instrument;  court order;

689

690

Introduction to Business Law in Australia

 direction of the beneficiaries, as long as they are all of full legal capacity;  sale of the trust property; or  revocation where the trust includes a power to revoke and terminate the trust.

Fiduciary duties in commercial relationships [21.330] The relationship of trustee and beneficiary is the archetypical situation of trust and confidence in which fiduciary duties will be imposed; however, every fiduciary relationship is not a trust. It is possible that this relationship will arise in other circumstances. Because a fiduciary will be held to a far higher standard of behaviour than that required of people in other legal relationships it is important to be able to identify when this might occur. There are also a number of reasons why parties in commercial disputes may try to claim that fiduciary duties are owed to them:  It will allow them to invoke equitable rules of tracing that will allow the pursuit of property and not just personal remedies; this may give them priority in the case of bankruptcy or insolvency.  It may be easier to claim compensation in equity rather than trying to satisfy common law rules for an award of damages.  The court is not bound by the same limitation periods for the commencement of an equitable action for breach of fiduciary duty.

When does the duty arise? [21.340] There are a number of established categories of relationships in which fiduciary obligations are assumed. These include:  Trustee and beneficiary  Solicitor and client  Agent and principal  Company director and the company (not the shareholders)  Partners to each other  Joint venturers in some situations

Hospital Products Ltd v United States Surgical Corporation [21.350] In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 4 Blackman, through his company HPL had been an agent for selling surgical instruments in Australia for USSC. HPL terminated its agreement with USSC and HPL and Blackman began to manufacture substantially identical instruments. USSC brought an action for, among other things, breach of fiduciary duty. In the High Court Mason J said that the critical feature of the fiduciary relationship is that “the fiduciary undertakes or agrees to act for or on behalf of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense”. In this case it was held that there was not a fiduciary relationship, the parties were commercial parties dealing at arm’s length and with legal advice.

chapter 21 The Law of Trusts

Compare this case with the following case:

United Dominions Corporation Ltd v Brian [21.360] United Dominions Corporation Ltd v Brian (1984) 157 CLR 1: Brian and another company made financial contributions to a joint venture to develop land in Brisbane as a shopping centre. In order to finance about 90 per cent of the venture SPL (the project manager) mortgaged the land on which the joint venture was to be conducted to UDC. This mortgage contained a collateralisation clause (unknown to Brian and the other joint venturer) under which all moneys owed by SPL to UDC were secured. This included money owed by SPL for other projects in which Brian took no part and about which he had no knowledge. The shopping centre was completed and this development made a substantial profit but UDC refused to return to Brian either the money he had originally contributed to the venture or any part of the profits. It was held that a fiduciary relationship existed and SPL was acting as agent and trustee.

John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd; Walker Corporation Pty Ltd v White City Tennis Club Ltd [21.370] In John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd; Walker Corporation Pty Ltd v White City Tennis Club Ltd [2010] HCA 19 JACS and WCT entered into a memorandum of understanding that they would purchase and develop land jointly. After initially negotiating to buy the land on behalf of the parties jointly, JACS exercised an option to buy the land solely on its own behalf. It was held at first instance (Young J) that JACS did not owe a fiduciary duty to the club, that the club was “not afflicted by any special vulnerability, it had not relied on JACS to protect its interests, those running it were experienced in business and advised by independent solicitors, and it had equality of bargaining power with JACS”. This was eventually upheld by the High Court.

The nature of the fiduciary duty [21.380] The fiduciary duty is not a positive one but rather is comprised of two negative obligations:  the duty to avoid conflict of interest, and  the duty not to make an unauthorised profit. These obligations are strictly imposed: Boardman v Phipps [1967] 2 AC 46 (see [21.250] above).

Pedersen v Larcombe [21.390] In Pedersen v Larcombe [2008] NSWSC 1362 the 85-year-old plaintiff retained the defendant, a real estate agent, to sell a property for him. The defendant made inquiries of two developers about how much they would pay for it and after they had made offers of $800,000 and $850,000 he offered to purchase it for $900,000. The plaintiff agreed and the property was sold to the defendant’s company. About a year later this company put it back on the market and granted an option to a third party to purchase it for $1.935 million, ie, an increase in a year of 120 per cent. The

691

692

Introduction to Business Law in Australia

plaintiff found out about the sale and successfully claimed breach of the agent’s fiduciary duty in preferring his own interest to that of his client.

Defence – full and informed consent [21.400] The fiduciary may defend an action for breach of duty by establishing that they acted with the full and informed consent of their principal.

Queensland Mines v Hudson [21.410] In Queensland Mines v Hudson (1978) 52 ALJR 399 Hudson was the managing director of Queensland Mines, a company formed to investigate the mining of uranium in Queensland. Whilst still in that position he negotiated mining licences to mine iron ore in Tasmania on behalf of another company with which he was associated. When both the company and his business partner declined to proceed, Hudson pursued the opportunity himself and made substantial profit. He was able to successfully argue that he had the full and informed consent of Queensland Mines to his actions since the company had, in its board meeting, been told about and declined to follow up on, the opportunity.

Guide to Problem Solving In trust problem situations, you will need to consider the following points:  whether a trust exists (ie, has it been fully constituted);  what type of trust it is;  whether there has been a breach of trust;  what rights the beneficiaries may have;  what actions the beneficiaries may be able to take. In deciding whether there has been a breach of fiduciary obligations look at:  whether the relationship exists; is it one of the established categories?  Has one of the two elements that make up the duty been breached?  If so, was the fiduciary acting with the full and informed consent of the principal Figure 21.2 will assist you in determining whether there has been a breach of trust.

chapter 21 The Law of Trusts

Figure 21.2: Breach of trust

Practice Questions Revision Questions 21.1

Can the sole beneficiary of a trust also act as the sole trustee? Explain.

21.2

Identify the settlor, trustee, beneficiary and trust property in the following situations: (a)

Peter gives his car to Mary “on trust” for Louise.

(b)

Joe leaves $2,000 to Bridget in his will, “to hold for the benefit of” his daughter Michelle until she turns 18.

(c)

Hung sets up a bank account in his own name, but calls the account “re: Jenni”.

(d)

Elizabeth transfers title in her beach house to her husband, Jake, for tax reasons. They agree, however, that their children are to have the benefit of ownership of the house.

(e)

Jacqui provides the purchase price for a home unit which she puts into her daughter’s name so that they can claim the first home owners bonus from the government.

21.3

Why are the beneficiaries of a discretionary trust less likely to take advantage of Saunders v Vautier (1841) 49 ER 282 than the beneficiaries of a fixed trust?

21.4

Jerry leaves a will which includes the following clause: “I give my house to Frances on trust for my children.” Jerry in fact owns four houses. Has Jerry established a valid trust? Why or why not?

21.5

Jamie signs a deed which provides: “I give my house in London to Anna to manage for the benefit of good Aussies in London.” Has Jamie established a valid trust? Why or why not?

21.6

Katherine makes a loan of $80,000 to her niece Samantha to be used solely for the purpose of upfront payment of the HECS for her degree in medicine. The money is in a separate bank account in Samantha’s name. Unfortunately, Samantha has dropped out of university and has incurred substantial debts on her credit card. She is likely to be declared bankrupt. Will Katherine be able to recover the money from the trustee in bankruptcy?

21.7

Harriet is a successful businessperson, and trustee of a number of trusts. She discovers that she is too busy to administer the trusts herself, and appoints her brother to take over her duties. Is Harriet acting in breach of trust? Why?

693

694

Introduction to Business Law in Australia

21.8

Would your answer be any different if she appointed her brother (who is an accountant) solely to manage the tax affairs of the trusts? Why?

21.9

Simone and Jane are the beneficiaries of a discretionary trust. They are upset because their trustee has not distributed any funds to them for over a year. What action might they take?

21.10 Veronica has recently been appointed trustee under the will of her ex-husband, to manage his property for the benefit of her estranged children. She is reluctant to accept the position as it brings up too many bad memories. What should Veronica do? 21.11 Lee made a $50,000 profit from his position as trustee. He immediately used the money to pay for an Impressionist painting at an auction. The beneficiaries are now seeking an account of profits from Lee, and are horrified to find that the money has been spent. Can they still get a remedy against Lee?

Answers to Practice Questions Revision Questions 21.1

[sole beneficiary versus sole trustee] No, the sole beneficiary and the sole trustee cannot be the same person. A trust is a legal arrangement in which the legal ownership and beneficial ownership are separate. Where the same person acts as both beneficiary and trustee, the legal and beneficial ownership merge and the arrangement no longer meets the definition of a trust. It is, however, possible for a trust to consist of a sole trustee who is one of a number of beneficiaries. In this case, there would still be a separation of the legal and beneficial ownership.

21.2

[elements of an express trust] (a)

Settlor: Peter; Trustee: Mary; Beneficiary: Louise; Trust property: Car

(b)

Settlor: Joe; Trustee: Bridget; Beneficiary: Michelle; Trust property: $2,000

(c)

Settlor: Hung; Trustee: Hung; Beneficiary: Jenni; Trust Property: the money in the bank account

(d)

Settlor: Elizabeth; Trustee: Jake; Beneficiary: Elizabeth and Jake’s children; Trust property: Beach house

(e)

Resulting trust: Trustee: daughter; Beneficiary: Jacqui

21.3

[the rule in Saunders v Vautier] Saunders v Vautier (1841) 49 ER 282 enables the beneficiaries to agree to terminate a trust where they are all of majority and together represent all the interests under the trust. In order to terminate the trust and remove the trustees, the beneficiaries must first agree on the distribution of the trust property. Under a fixed trust, each beneficiary’s rights are determined in the trust instrument. There is subsequently no question as to how much each beneficiary is entitled to on terminating the trust. Under a discretionary trust, however, the beneficiaries have no fixed rights, and will have to come to an agreement amongst themselves as to each beneficiary’s entitlement on termination. This is often difficult, as each beneficiary may think he or she will receive more under the exercise of the trustee’s discretion to distribute the trust property, and be unwilling to settle for the amount suggested by the co-beneficiaries.

21.4

[creation of a valid trust] A valid trust requires compliance with “the three certainties” and the formalities required for a testamentary disposition. Certainty of intention is present, as Jerry has made it clear that he intends

chapter 21 The Law of Trusts

to create a trust. Certainty of objects is also present, as Jerry’s children are the defined beneficiaries. The issue here is certainty of subject matter. The trustees are unable to clearly identify which of Jerry’s four houses was intended to be held on trust for his children. Jerry may have failed to establish a valid trust. 21.5

[creation of a valid trust] A valid trust requires compliance with “the three certainties” and any formalities required for the transfer of land (must be in writing, satisfied by the deed). Certainty of intention is present, as Jamie has made it clear that he intends to create a trust. Certainty of subject matter is also present, being Jamie’s house in London (assuming he has only one house in London). The issue here is certainty of objects, as it is uncertain who is to have the benefit of the trust. The trustees may not be able to ascertain those persons who are “good Aussies”, as the term is vague and there are no objective criteria by which to identify the beneficiaries. Jamie may have failed to establish a valid trust.

21.6

[Quistclose trust] The loan is made for a specific purpose and the money is being held separately. Katherine can argue that the relationships of debt (contract) and trust (a Quistclose trust) coexist. On the failure of the purpose of the loan (the payment of HECS) Katherine can argue that the money is now the subject of a trust in her favour. As such, she will not have to rank as an unsecured creditor if Samantha is declared bankrupt but may recover the money from the account.

21.7

[duties of a trustee] A trustee has a duty to act in person. This duty forbids delegation of a trustee’s powers, duties and discretions. By appointing her brother to manage all the affairs of the trust, it appears that Harriet has made a complete delegation of her powers. This is a breach of her duties as trustee.

21.8

[duties of a trustee] Unless forbidden by the trust instrument, a trustee may employ an agent to transact any business required to carry out the trust. Employing an accountant to manage the tax affairs of the trust is acting as an ordinary prudent business person would in managing their own affairs. There is no breach of trust on these facts.

21.9

[rights of the beneficiaries] Under a discretionary trust, the trustee may have a discretion as to whether they make any distribution at all. Alternatively, they may be required to make a distribution but have a discretion as to who and in what proportions it is made. In the first situation the beneficiaries have a mere hope, as opposed to a right, that the trustee will exercise his or her discretion to make a distribution in their favour (subject to the rules against perpetual accumulation of income). In the second situation the beneficiaries may compel the trustee to exercise their discretion but neither could compel a distribution in their favour. If they are over 18, Simone and Jane may ask the trustee to provide them with information as to any rights they may have under the trust instrument, and the trustee has a duty to comply with such a request. As the sole beneficiaries, Simone and Jane may also agree to conclude the trust and release the trustee from his or her obligations under Saunders v Vautier (1841) 49 ER 282 and Sir Moses Montefiore Jewish Home v Howell & Co (No 7) Pty Ltd (1984) 2 NSWLR 406 (which applies to discretionary trusts). In order to do so, Simone and Jane must agree on how to distribute the trust property between themselves.

21.10 [disclaimer by trustee] Veronica may disclaim the trust and refuse to act as trustee. While a deed is advisable for evidentiary reasons, she may make her disclaimer verbally or by conduct. However, this must be done before

695

696

Introduction to Business Law in Australia

she takes any action which shows acceptance of it. If she does not disclaim within a reasonable time after her appointment, or does an act in relation to the trust property, this may suggest that she has accepted the position. 21.11 [remedies of the beneficiaries] A trustee has a duty not to make a profit out of the trust. If a trustee does make a profit out of his or her position, he or she must account for the profit to the trust: Scott v Scott [1921] P 107; Boardman v Phipps [1967] 2 AC 46. The beneficiaries have a right to sue the trustee for such breach of trust and claim any profits from the breach. Lee’s improper use of trust funds, and his subsequent conversion of his profit into other property does not prevent the beneficiaries from “tracing” the property. In this case it is clear that the painting was bought with profits made from the trust property, so the beneficiaries will be entitled to the painting as a remedy for Lee’s breach of trust.

Tutorial Questions Discussion Questions 21.12 Classify the following trusts:  Ruth gives her brother $100,000 for the benefit of his children.  Josh leaves his wife his beach house in his will.  Sarah purchases a house with her own money, but puts it in the name of her business associate.  Maria leaves $20,000 to trustees for the purpose of educating children in the Italian language and cooking. 21.13 What is the major benefit of appointing a corporation to act as trustee? 21.14 Betty uses $100,000 to set up a trust “to promote ballroom dancing”. Is this a valid trust? Why or why not?

Problem Questions 21.15 Rebekah would like to leave all her property to her children. She is concerned, however, that if they are too young they may spend their inheritance recklessly. On the other hand, she wishes to ensure that they have a good education, are well-clothed and well-fed, and have enough money to engage in their favourite sporting activities. Advise Rebekah. 21.16 Oliver promised Annie that if she gave up her flat and came to cook and clean for him he would give her a 20 per cent share of the property. She gave up the lease on her flat and has been performing domestic duties for Oliver for the last 10 years. Oliver is now planning to sell the house but he has never put the 20 per cent into her name. Advise Annie as to whether she can make Oliver keep his promise. 21.17 Jonathan is the trustee of a trust with significant assets. As trustee, he is often approached with investment opportunities for the trust. One such opportunity is for an investment share in a diamond mine in South Africa. Jonathan thinks this sounds like a very promising venture, and invests $20,000 of his own money in the mine. The mine strikes it lucky, and Jonathan makes a profit of over $2,000,000. Advise the beneficiaries.

chapter 21 The Law of Trusts

21.18 The terms of Bob’s will require Andrew, the appointed trustee, to sell off all of Bob’s rural real estate and use the proceeds to purchase investment property in the city to provide income to Bob’s wife. In doing so, Andrew incurs the following costs:  stamp duty of $10,000 for the sale of land;  legal fees of $3,000 for conveyance of the property;  travelling costs of $400 when inspecting investment properties; and  telephone bill of $100 for calls to Andrew’s wife while travelling. Advise Andrew as to whether he can claim any reimbursement for the above.

Please see the Business and Commercial Law mentor module at http://www.thomsonreuters.com.au/ mentor for multiple choice questions and answers.

697

Index A Aboriginal and Torres Strait Islanders customary law system [1.30] dispossession of [1.50] inhabitation of Australia [1.30] terra nullius issue [1.50] Acceptance communication of electronic communications, [3.10] counter-offer, [3.10] definition, [3.10] postal acceptance rule (PAR), [3.10] prima facie, meaning, [3.10] Accord and satisfaction [11.180] Account of profits copyright infringement, [17.1140], [17.1150], [17.1160], [17.1170] patent infringement, [17.2120] Acts Interpretation Acts — see Statutory interpretation Acts — see Statutes Administrative Appeals Tribunal, [1.50] Administrative law [1.720] Administrative Appeals Board, [1.50] appeal options, [1.50] judicial review, [1.50] review of decisions, [1.50] Adversarial system common law, [1.20] definition, [1.20] Advertising adverse publicity orders [15.1010] bait advertising [15.780] case example [15.750] penalties [15.760] invitation to treat or offer [3.30] case example [3.90] misleading or deceptive conduct [15.110] disclosure of terms [15.140] injunctions [15.140] offer and acceptance [3.70], [3.170] Carbolic Smoke Ball case [3.180] Pepsi case [3.190]-[3.200] unfair practices [15.810]–[15.880] adverse publicity orders [15.1210] bait advertising [15.740]-[15.760] defences [15.930] Agency agent — see Agent authority of agent — see Agent

cohabitation, arising from [18.150] case example [18.190] company directors as liability, [20.210]–[20.240] contracts [18.10] privity of contract [10.70] contractual capacity [18.40] creation of agency [18.90] estoppel [18.130] express creation [18.100]-[18.120] holding out [18.130] operation of law [18.150]-[18.190] ratification [18.140] definition, [19.20] express creation [18.90] contracts under seal [18.100] verbal offer [18.120] written appointment [18.110] fiduciary duty, [21.40] necessity [18.150], [18.160] examples [18.170], [18.180] other relationships, distinction [18.30] overview [18.10] privity of contract [10.70] ratification [18.140], [18.265] case example [18.330] revocation of authority [18.720] agents’ rights [18.720] third party rights [18.710.] termination of agency [18.680.] agreement [18.710.] bankruptcy [18.770.], [18.780.] completion of agency [18.690.] death [18.750] impossibility of performance [18.700] insanity [18.760] performance, by [18.690] renunciation by agent [18.790] revocation of authority [18.720]-[18.740.] trust, distinguished, [21.40] Agents actual authority [18.210] express authority [18.220] implied authority [18.230]-[18.235] apparent authority [18.240] basis of authority [18.290] case example [18.250] reliance by third party [18.240], [18.290] auctioneers [18.850] authority of agent [18.200] actual authority [18.210]-[18.320]

apparent authority [18.240]-[18.310] breach of warranty [18.600] revocation of authority [18.720]-[18.740] unauthorised acts [18.650]-[18.670] bankruptcy [18.770] brokers [18.810] capacity to act as [18.40] care and skill [18.440] failure to exercise [18.440], [18.450] classification of agents [18.50] general agents [18.70] special agents [18.60] universal agents [18.80] commissions [18.470], [18.490] company directors as liability, [20.210]–[20.240] death of agent [18.750] definition [18.10], [19.20] directors [18.830] care and skill [18.440] duties [18.340], [18.460] act in person [18.360] care and skill [18.440] follow principal’s instructions [18.350] full disclosure of interests [18.400] good faith [17.370]-[19.390] secret profits [18.410], [18.420] employees, as [18.30]-[18.35] factors [18.800] general agents [18.50], [18.70] good faith [18.370] case example [18.380] conflict of interests [18.370], [18.390] indemnity [18.500] independent contractors, as [18.30]-[18.35] insanity [18.760] insurance — see Insurance agents and employees liability [18.520] breach of authority [18.600] misrepresentations [18.610] principal, to [18.530] third parties [18.540]-[18.590], [18.610] wrongful acts [18.620]-[18.670] lien [18.510] mercantile agents [18.800] minors [18.40] partners [18.820], [19.690] real estate agents [18.840] commissions [18.490]

700

Introduction to Business Law in Australia Agents — cont statutory regulation [18.850] reimbursement of expenses [18.500] remuneration [18.470] effective cause of sale [18.480] renunciation of agency [18.790] rights of agents [18.470]-[18.510] indemnity [18.500] lien [18.510] reimbursement of expenses [18.500] remuneration [18.470] revocation of authority [18.740] special agents [18.50], [18.60] statutory regulation [18.850] third parties, liability to [18.540] existence of principal disclosed [18.570] misrepresentations [18.610] name of principal disclosed [18.550]-[18.560] undisclosed principal [18.580]-[18.590] trustees, distinction [18.35] types of agents [18.800]-[18.840] universal agents [18.50], [18.80] wrongful acts [18.620], [18.630] fraudulent misrepresentation [18.640], [18.640] negligence [18.670] unauthorised acts [18.650]-[18.670] Agreements — see also Anti-competitive agreements — see also Contracts certainty [3.610] case examples [3.620]-[3.640] charitable activities [4.110], [4.120] commercial agreements [4.140] express exclusion of intention [4.180]-[4.210] form of agreement [4.160], [4.170] government policy proposals [4.225], [4.227] intention to create legal relations [4.140]-[4.227] letters of comfort [4.220], [4.222] sale of business [4.160], [4.170] contracts, and [2.20], [2.40], [2.60], [4.10] definition [2.10] domestic agreements [4.20] de facto relationships [4.50] family agreements [4.70]-[4.80] husband and wife [4.30], [4.40], [4.50], [4.60] family agreements [4.70]-[4.80] husband and wife [4.30], [4.40] breakdown of marriage [4.50], [4.60] commercial matters [4.50] partnership agreement [19.510], [19.520] goodwill [19.660] religious or spiritual work [4.125], [4.130]

social agreements [2.60], [4.20], [4.70], [4.90] charitable activities [4.110]-[4.120] lottery participation [4.90], [4.100] Airspace landowner’s rights, [16.300]–[16.330] nuisance, [16.330] trespass, [16.310]–[16.330] Alternative dispute resolution (ADR) conciliation, [1.550] independent expert appraisal, [1.550] mediation, [1.550] negotiation, [1.550] overview, [1.550] Anti-competitive agreements overview [8.570] restraint of trade, and [8.570], [8.580] Anton Piller orders, [17.1250] Appeal Administrative Appeals Board, [1.50] administrative law decisions, [1.50] appellant, [1.20] appellate court, [1.20] court hierarchy, [1.410] respondent, [1.20] Assault definition, [14.10] tort of, [14.10] trespass, form of, [14.10] ASIC — see Australian Securities and Investments Commission Assignment definition, [19.20] Assignment copyright, [17.1030], [17.1040] Australian Performing Rights Association, [17.390] future copyright, [17.1090] trade marks, [17.2510] Assignment of contracts assignee [10.150] definition [10.10] assignor [10.150] definition [10.10] bankruptcy [10.240] choses in action [10.170] definition [10.10] equitable assignments [10.190]-[10.210] notice of assignment [10.180] statutory provisions [10.170], [10.180] deceased persons [10.230] definition [10.150] equitable assignments [10.190], [10.210] equitable chose in action [10.210] legal chose in action [10.200]

liabilities under contract [10.160] deceased persons [10.230] novation [10.10], [10.160] operation of law [10.220] bankruptcy [10.240] deceased persons [10.230] personal service contracts [10.250] overview [10.20], [10.140] personal service contracts [10.250] rights under contract [10.170], [10.180] Auction Auction sales bid as offer [3.10] consumer guarantees [15.1410] definition [3.10] invitations to treat or offer [3.100] case example [3.130] online auctions [3.130]-[3.140] Auctioneers licensing [18.850] statutory regulation [18.850] Auditing and Assurance Standards Board (AUASB), [20.30] Auditors appointment by company, [20.180], [20.710] negligent misstatement [14.400] duty of care [14.410] reasonable reliance [14.420] Australia Aboriginal and Torres Strait Islander inhabitation [1.30] European colonisation [1.40] legal system [1.60] pre-European history [1.30] reception of law [1.60], [1.440] settled or conquered, whether [1.50] terra nullius issue [1.50] Australian Accounting Standards Board (AASB), [20.30] Australian Capital Territory small claims tribunals [1.680] Supreme Court [1.610] Australian colonies reception of English law [1.60], [1.440] Australian Competition and Consumer Commission (ACCC) functions [1.660] overview [1.660] powers [1.660] Australian Competition Tribunal ASIC and, [20.30] membership [1.660] overview [1.660] Australian constitutional system case law, [1.100] implied powers, [1.100]

B Index Australian constitutional system — cont legislative powers, [1.100] concurrent powers of State and Commonwealth, [1.100] residual powers, [1.100] separation of powers, [1.20], [1.110] Australian Consumer Law consumer guarantees [15.20], [15.1240]-[15.1270] acceptable quality [15.1310]-[15.1330] auction sales [15.1410] consumer, meaning [15.1290] correspondence with description [15.1370] demonstration models [15.1380] exclusion of guarantees [15.1430] express warranties [15.1400] fitness for disclosed purpose [15.1340] limitation of liability [15.1430] manufacturers’ liability [15.1450], [15.1560], [15.1570] provision of services [15.1420] remedies for non-compliance [15.1440] repairs [15.1390] spare parts [15.1390] supply, definition [15.1280] supply by sample [15.1380] supply of goods [15.1260] supply of services [15.1270] title of goods [15.1300] contravention of provisions [15.880] aiding or abetting [15.1050] corporate liability [15.900] criminal penalties [15.890] defences [15.910]-[15.940] liability of persons involved [15.1060]-[15.1080] pecuniary penalties [15.940]-[15.980] defective goods — see Defective goods duress actions under [7.570] enforcement provisions [15.40], [15.1160] adverse publicity orders [15.1020] disqualification orders [15.1220], [15.1230] non-punitive orders [15.1200] public warning notices [15.1190] substantiation notices [15.1180] undertakings [15.1170] false or misleading representations [7.500], [15.470] corporate liability [15.900] country of origin [15.560], [15.570], [15.920] goods or services [7.500], [15.500]-[15.550] profitability of business activities [15.610]-[15.620] sale or grant of land [7.500], [15.580]-[15.600] implied terms [9.670] legislative framework [15.30]

misleading or deceptive conduct — see Misleading or deceptive conduct objectives [15.20] overview [15.20]-[13.40] product safety [13.1600] reforms introduced by [15.20] remedies [15.880] compensation orders [15.1110], [15.1130] criminal penalties [15.890] damages [15.1010]-[15.1090] injunctions [15.990]-[15.1000] non-party consumers [15.1120], [15.1130] other orders [15.1100]-[15.1150] pecuniary penalties [15.940]-[15.980] void contracts [15.1140], [15.1150] States and Territories [15.30] unconscionable conduct [7.730], [15.40], [15.430] in connection with goods or services [15.390]-[15.430] remedies for contravention [15.440] small business, protection of [15.420]-[15.430] unwritten law, within [15.340]-[15.380] unfair contract terms [15.40], [15.450] effect of terms [15.450] examples [15.470] standard form contracts [15.480] unfair, meaning [15.460] unfair practices — see Unfair practices Australian legal system adversarial system, [1.20] features, [1.10] nature of law, [1.10] Australian Performing Rights Association, [17.390] Australian Prudential Regulatory Authority (APRA) ASIC and, [20.30] Australian Securities and Investments Commission (ASIC) ASIC, definition, [20.20] associated bodies, [20.30] co-operation with other agencies, [20.30] legislation, [20.30] powers and functions, [20.30] Australian Securities Exchange ASIC and, [20.30] listed companies, [20.160] continuous disclosure, [20.430] corporate governance, [20.500] directors’ remuneration report, [20.600] Principles of Good Corporate Governance, [20.500]

B Bailments nature of bailments [16.830] overview [16.830] trust distinguished, [21.40] Bailor and bailee innkeepers — see Innkeepers legal relationship [16.820] Bait advertising case example [15.750] overview [15.740] penalties [15.760] Banker and customer undue influence [7.630] Bankruptcy agents [18.770] assignment of contracts [10.240] company member, [20.250] partnerships [19.1070] principal [18.780] termination of agency [18.770], [18.780] termination of contract [11.680] Bankrupts contractual capacity [6.190] role of, [1.550] Barristers overview [1.820] Battery definition, [14.10] tort of, [14.10] trespass, form of, [14.10] Beneficiary charitable trust, [21.140] definition, [21.20], [21.30] distribution of assets to, effect, [21.320] recovering property, [21.30] rights, [21.30] Berne Convention, [17.1550] Breach of confidence definition, [14.10] tort of, [14.10] Breach of contract conditions [9.240], [9.280], [11.350], [12.30] election to terminate [12.30] damages [12.20], [12.50], [12.300] adequacy of damages [12.410], [12.420] chance or opportunity [12.210], [12.220] disappointment or distress [12.230]-[12.280] exemplary damages [12.320] general principles [12.60] measure of damages [12.70]-[12.100] mitigation of loss [12.170]-[12.200]

701

702

Introduction to Business Law in Australia Breach of contract — cont nominal damages [12.310] penalty or liquidated damages [12.325]-[12.400] quantifying loss [12.210], [12.220] remoteness of damage [12.110]-[12.160] termination for breach [12.30] defendant, definition, [2.10] definition, [2.10], [11.20] essential terms [11.340] inducement to breach [10.20], [10.120] justified interference [10.120], [10.130] innominate terms [9.280], [11.360] case example [9.290], [11.370] misrepresentation [7.300] overview [11.260] plaintiff, definition, [2.10] procuring, [14.10] professional services [14.40] remedies [12.20], [12.40] availability of remedies [12.30] damages [12.50]-[12.400] injunctions [12.470] nature of breach [12.30] specific performance [12.410]-[12.460] termination for breach [12.30] repudiation definition, [2.10], [6.10] repudiation of contract [11.260], [11.270], [11.180], [12.30] anticipatory breach [11.280], [11.290] conduct amounting to [11.300]-[11.320] effect of repudiation [11.330] restitution — see Restitution specific performance [12.410] adequacy of damages [12.410], [12.420] termination for breach [11.20], [11.260] conditions [9.240], [9.260], [11.350], [12.30] innominate terms [9.280], [9.290], [11.360], [11.370] remedies [12.30] repudiation of contract [11.270]-[11.330], [12.30] terminology, [12.10] torts, and [14.40] warranties [9.240], [9.280], [11.350] Brokers [18.810] Business efficacy definition, [9.10] implied terms to give, [9.10] Business organisations choice of, [19.30] companies — see Companies comparison of [19.120]-[19.200] dissolution, [19.20] distinguishing features [19.100]

forms of [19.100] franchises — see Franchises incorporated associations [19.190] joint ventures — see Joint ventures names [19.110] overview [19.100] partnerships — see Partnerships sole trader, [19.40] sole traders — see Sole traders terminology, [19.20] trust — see Trust unincorporated association, [19.50]

C Cases — see Citation of cases — see Common law Catalogues invitation to treat or offer [3.70] Champerty [8.280] definition, [8.10] Character merchandising passing off, [17.2600] case examples, [17.2610]-[17.2630] Charitable activities enforceability of agreements [4.110], [4.120] Chattels definition, [14.10] Choses in action assignment [10.110] equitable assignments [10.190]-[10.210] notice of assignment [10.180] statutory provisions [10.170], [10.180] definition, [10.10], [16.40], [16.50], [20.20] equitable chose in action [10.210] legal chose in action [10.200] personal property, [16.50] Choses in possession definition, [16.40], [16.50] personal property, as, [16.50] Citation of cases electronic form [1.490] medium-neutral citations [1.490] overview [1.470] parties [1.480] volume number [1.480] year [1.480] Civil law classification, [1.540] code system, [1.410] common law distinguished, [1.410] court proceedings, [1.550] criminal law, distinction [1.730] defendant, [1.20] definition, [1.20], [1.540] jurisdiction of courts, [1.550] overview [1.730]

plaintiff, [1.20] standard of proof, [1.540] system, [1.20], [1.410] Civil proceedings commencement of proceedings [1.750] discovery [1.770] interrogatories [1.760] overview [1.750] parties [1.750] pleadings [1.750] pre-trial proceedings [1.760] standard of proof [1.790] statement of claim [1.750] trial procedure [1.780] writs [1.750] Codes of conduct franchising, [17.2790] Cohabitation agency arising from [18.150] case example [18.190] Collateral contracts consistency with main contract [9.180], [9.190] definition, [9.10] intention of parties [9.200], [9.210], [9.220] overview [9.170] Commencement of proceedings civil matters, [1.550] criminal matters, [1.550] Commercial agreements intention to create legal relations [4.140] express exclusion [4.180]-[4.210] form of agreement [4.160], [4.170] government policy proposals [4.225], [4.227] letters of comfort [4.220], [4.222] sale of business [4.160], [4.170] Commercial arbitration overview, [1.550] Commercial law nature of, [1.10] Commissions — see Tribunals or commissions Common law civil law distinguished, [1.410] court hierarchy, [1.410] definition, [1.20], [1.410] doctrine of precedent [1.500] case examples [1.51045]-[1.520] English legal procedure, [1.410] equity, and [1.20], [1.410], [1.430] distinction [1.400], [1.430] Judicature system [1.430] historical background [1.420], [1.430] Judicature system [1.430] reception of English law [1.60], [1.440]

C Index Common law — cont law reports [1.510] meaning [1.400] overview [1.400] partnerships [19.210] precedent, use of, [1.410] source of law, as [1.60], [1.150], [1.400], [1.410]–[1.550] statutory interpretation [1.330] golden rule [1.350] literal rule [1.340] mischief rule [1.360] statutory law, and [1.400] system, [1.410] Commonwealth Parliament imperial acts, and [1.440] legislative powers intellectual property, [17.20] making of statutes [1.170] resolution of deadlocks [1.170] Companies Auditors and Liquidators Disciplinary Board (CALDB), [20.30] Companies/corporations address, displaying notice of, [20.180] amalgamation, [20.800] annual general meeting, [20.690] public companies, [20.180], [20.690] annual return, [20.710] arrangement with creditors, [20.800] deed of company arrangement, [20.820] ASIC associated bodies, [20.30] definition, [20.20] legislation, [20.30] notification of changes to, [20.180] powers and functions, [20.30] assumptions of persons dealing with, [20.210]–[20.240] authority, [20.210] properly appointed officers, [20.210], [20.220] signature of documents, [20.210], [20.240] auditor, appointment of, [20.180], [20.710] — see also Business ethics business names [19.110] categories of, [20.140] compromise with creditors, [20.800] constitution, [20.190] choice of replaceable rules or, [20.190] contract with/between members, [20.250]–[20.270] definition, [20.20] modification or repeal, [20.190] standing to enforce, [20.190] contracts capacity, [20.130] pre-registration, [20.20], [20.165] contractual capacity [6.160]

corporate governance, [20.500] ASX Principles, [20.500] Corporate Law Economic Reform Program (CLERP), [20.40] corporation, definition, [6.10], [20.10] Corporations Act 2001 (Cth), [20.10], [20.30] background, [20.40] replaceable rules in, [20.190] right to injunction against contravention, [20.280] criminal liability, [20.130] deed of company arrangement, [20.820] definition, [20.10], [20.20] deregistration, [20.860] reinstatement after, [20.860] directors — see Directors dividends, [20.360] definition, [20.20] directors’ power to determine, [20.360] profits, payment out of, [20.360] right to pay, [20.190] right to receive, [20.280] execution of documents, [20.240] meaning, [20.20] false or misleading representations [15.900] financial records, [20.180], [20.710] financial report, [20.710] members’ right to, [20.280] preparation of, [20.710] foreign companies, [20.180] guarantee company, [20.160] constitution, [20.190] high regulation, [20.130] incorporation, [20.180] internal management, [20.190] constitution or replaceable rules, [20.190] law regulating, [20.10], [20.30] legal entity, as [6.160], [19.100] legal personality, [20.10], [20.50]–[20.80] listed companies, [20.160] continuous disclosure, [20.430] corporate governance, [20.500] management and control, [20.490]–[20.680] directors — see Company directors meetings, [20.690]–[20.710] annual general meeting, [20.690] auditors, appointment of, [20.710] directors, [20.690] extraordinary general meeting, [20.690] minute books, [20.710] proxies, [20.700] quorum, [20.690] resolutions, [20.700] right to attend, [20.280] right to call, [20.280] voting, [20.700] members — see Company members

national law cross-vesting legislation, [20.40] development of, [20.40] no liability company, [20.160] constitution, [20.190] mining, restricted to, [20.160], [20.190] offer of securities — see Company fundraising officers, [20.500] definition, [20.20], [20.500] directors — see Company directors liability as agents, [20.210]–[20.240] secretary, appointment of, [20.180] signature of documents, [20.210], [20.240] one-person companies, [20.150] replaceable rules applicable, [20.190] overview [19.170], [19.200] partnership required to register as, [20.180] partnerships, distinction [19.180] perpetual existence, [20.130] phoenix companies, [20.20], [20.40] piercing the corporate veil, [20.90]–[20.130] pre-incorporation, [20.165] pre-registration contracts, [20.20], [20.165] principles, [20.10] promoters, [20.165] proprietary (private) companies, [20.150] categories of, [20.140] choice of public or, [20.140] definition, [20.20] directors, number of, [20.500] number of members, [20.150] requirements, [20.150] small or large, [20.150] unlimited, [20.140] public companies, [20.160] annual general meeting, [20.180], [20.690] categories of, [20.140] choice of private or, [20.140] directors, number of, [20.500] disadvantages, [20.160] guarantee company, [20.160] listed, [20.160] no liability company, [20.160] related party transactions, [20.630] public officer, appointment of, [20.180] receiver — see Company receivers reconstruction, [20.800] register of members, [20.250], [20.310] registered office, [20.490] registration, [20.180] application for, [20.180] contracts prior to, [20.165] definition, [20.20]

703

704

Introduction to Business Law in Australia Companies/corporations — cont incorporation on, [20.180] process, [20.170], [20.180] requirement for, [20.180] requirements after, [20.180] regulatory agencies, [20.30] reinstatement of deregistered company, [20.860] replaceable rules, [20.190] choice of constitution or, [20.190] contractual effect, [20.250] Corporations Act, in, [20.190] definition, [20.20] one-person companies, [20.190] secretary, appointment of, [20.180] securities offers — see Company fundraising separate legal entity, [20.10], [20.50]–[20.80] criminal liability, [20.130] features glowing from, [20.130] piercing corporate veil, [20.90]–[20.130] share capital reduction, [20.370]–[20.400] shareholders — see Company members shares — see Shares suing and being sued, [20.130] takeovers, [20.720] taxation, [20.130] terminology, [20.20] transfer of interests, [20.130] trusts, distinguished, [21.40] types, [20.140]–[20.160] ultra vires acts, [20.20], [20.200] unfair practices contraventions [15.900] unlimited company, [20.140] unregistered, [20.165] voluntary administration, [20.810] winding up — see Winding up Company constitution changes to, [20.190], [20.290] altering members’ rights, [20.290] best interests of members, [20.290] members’ approval, [20.290] removal of members’ rights, [20.290] choice of replaceable rules or, [20.190] contract with/between members, [20.250]–[20.270] definition, [20.20] enforcement, [20.190] modification or repeal, [20.190] rights attaching to shares, setting out, [20.340] alteration of, [20.290], [20.340] standing to enforce, [20.190] transfer of shares, restriction on, [20.190], [20.270] Company directors agents, as, [20.210] liability, [20.210]–[20.240] appointment of, [20.500]

one-person company, [20.190] assumptions of persons dealing with company, [20.210] authority, [20.210] properly appointed, [20.210] signature of documents, [20.210], [20.240] board, [20.500], [20.690] meetings, [20.690] breach of duties, [20.850]–[20.600] aiding and abetting, [20.680] civil penalties, [20.650], [20.680] civil penalty provisions, [20.580] compensation, [20.590] criminal offence, [20.600] criminal penalties, [20.650], [20.680] fines, [20.590], [20.680] penalties, [20.680] corporate governance, [20.500] criminal liability, [20.130] criminal offences, [20.600] decisions binding company, [20.500] director, definition, [20.20], [20.500] disclosure of interests, [20.620] disqualified, not to be, [20.500] dividends, power to determine, [20.360] duties best interests of company, [20.560], [20.600] breach of, [20.550]–[20.600], [20.680] care and diligence, [20.540], [20.550] company, to, [20.500] criminal offence where breach of, [20.600] disclosure of interests, [20.620] fiduciary, [20.530], [21.340] good faith, [20.560], [20.600] individual members, whether owed to, [20.500]–[20.530] insolvent trading, preventing, [20.610], [20.650] objective assessment, [20.540] outsiders, not owed to, [20.610] penalties for breach, [20.680] primary duty to company, [20.500], [20.510] proper purpose, [20.560], [20.600] proper use of information, [20.560], [20.570] proper use of position, [20.560], [20.600] shareholders, to, [20.520]–[20.600] small company, [20.520], [20.530] statutory, [20.540] work health and safety legislation, under, [20.610] excessive payments, restrictions on, [20.40] execution of documents, [20.240] fiduciary duty, [20.530], [21.340] “guilty mind”, [20.130] insider trading prohibition, [20.620]

insolvent company, [20.650]–[20.670] defences to liability, [20.650]–[20.670] duty to prevent trading, [20.610], [20.650] liability for debts, [20.90] liability for insolvent trading, [20.610] preservation of employee benefits, [20.610] insolvent transactions, liability for, [20.90], [20.860] liability as agents, [20.210]–[20.240] listed companies corporate governance standards, [20.500] remuneration report, [20.600] loans to, [20.630], [20.640] meetings, [20.690] members cannot overrule, [20.500], [20.510] members’ right to appoint, [20.280] number required, [20.500] one director/shareholder companies, [20.150] replaceable rules, [20.190] qualifications, [20.500] related party transactions, [20.630], [20.640] remuneration listed company report, [20.600] one-person company, [20.190] prospectus, information in, [20.440] requirements for, [20.500] signature of documents, [20.210], [20.240] Company fundraising disclosing document, [20.430] choice of type, [20.430] clear, concise and effective, [20.430] definition, [20.20] exemptions, [20.430] misleading, [20.480] listed companies, [20.430] continuous disclosure, [20.430] misleading and deceptive offers, [20.310] misleading documents, [20.480] due diligence defence, [20.480] offer information statement (OIS), [20.430], [20.470] offer of securities, [20.430] profile statement, [20.430], [20.460] prospectus, [20.440] definition, [20.20] full, [20.430], [20.440] information required, [20.440] short-form, [20.430], [20.450] types, [20.430] Company members company as separate legal entity, [20.50]–[20.80] constitution changes to, [20.290]

C Index Company members — cont contract, as, [20.250]–[20.270] right to enforce, [20.280] death of, [20.250], [20.310] definition, [20.20], [20.250] directors, right to appoint, [20.280] dividends, right to receive, [20.280] effect of membership, [20.250] end of membership, [20.250], [20.310] guarantee company, [20.250] limited liability, [20.130] meetings right to attend, [20.280] right to call, [20.280] minority shareholder remedies, [20.320] one director/shareholder companies, [20.150] replaceable rules, [20.190] oppression, [20.20] remedies, [20.320], [20.330] proof of membership, [20.250] proprietary company, number of, [20.150] purchase of shares, [20.430] register of correction, [20.350] transfer of shares, registration, [20.350] remedies of, [20.320]–[20.330] rights of, [20.280] statutory derivative action, [20.20], [20.320] Company receivers appointment, [20.740] directors, effect on, [20.740] duties, [20.730], [20.760] effect of appointment, [20.740] failure to carry out duties, [20.760] liability of, [20.780] powers, [20.730], [20.750] receiver, definition, [20.20] registered liquidator as, [20.730] termination of receivership, [20.790] winding up, effect, [20.770] Competitions or lotteries enforceability of agreements [4.90], [4.100] express exclusion of intention [4.200], [4.210] Computer programs copyright, [17.150] parallel importation, [17.550] patents, [17.1850] Conciliation, [1.550] Condition precedent definition, [7.10], [11.10] Condition subsequent definition, [2.10], [7.10], [11.10] termination of contract, [11.20] Conditions breach of conditions [9.210], [9.280], [11.350], [12.30]

election to terminate [12.30] conditions precedent [11.210] courts’ approach [11.240] existence of subject matter [7.140] formation of contract [11.210], [11.230] performance of obligations [11.210], [11.220], [11.240] conditions subsequent [11.250] contract, of, [2.10], [9.10] definition, [2.10], [9.10], [11.10], [12.10] implied — see Implied conditions innominate terms, and [9.280], [11.360] case example [9.290], [11.370] option to terminate, [2.10] overview [9.240], [11.200], [11.270] precedent — see Condition precedent subsequent — see Condition subsequent warranties, distinction [9.240], [11.350] case examples [9.250]-[9.270] intention of parties [9.280] warranty distinguished, [2.10] Confidential information contracts, [17.2720] elements of action, [17.2720] employee obligations, [17.2750] post-employment, [17.2750], [17.2760] nature of action, [17.2700] overview, [17.10], [17.2700], [17.2710] public interest defence, [17.2730] remedies, [17.2740] trade secrets, [17.2700] types of information, [17.2700] Conflict of interest directors’ duty to avoid, [20.620] fiduciary duties and, [21.380] Consent lack of genuine consent, [2.10] meaning, [2.10] misrepresentation — see Misrepresentation mistake — see Mistake unconscionable conduct — see Unconscionable conduct void or voidable contract, [2.10] Consideration adequacy [5.60], [5.70] contract, element of, [2.10] contracts under seal [5.300] deed not requiring, [2.10], [5.10] definition [2.10], [5.10], [5.50] essential rules [5.60]-[5.250] executed or executory [5.110] executed, definition, [5.10] executory, definition, [5.10] existing obligations [5.180] contractual obligations [5.210] legal duties [5.190] public duties [5.200]

substituted performance [5.220]-[5.250] forbearance, [5.10] definition, [5.10] future definition, [5.10] illusory, not to be [5.80]-[5.100] legal action, refraining from [5.160], [5.170] meaning [5.50] overview [5.20], [5.30] past consideration [5.110], [5.120] definition, [5.10] exception to rule [5.130], [5.140] practical benefit test [5.260] case example [5.270], [5.290] problem with reasoning [5.280] present definition, [5.10] promisee definition, [5.10] promisor definition, [5.10] sufficiency [5.60], [5.70] valuable consideration [2.60] Co-ownership land, [16.170] joint tenancy, [16.180]-[16.210], [16.230], [16.240] tenancy in common, [16.220], [16.230], [16.240] termination of co-ownership, [16.230] joint tenancy, [16.180] concurrent interests, [16.240] right of survivorship, [16.200] severance, [16.210] termination of co-ownership, [16.230] unities of tenancy, [16.190] personal property, [16.780] tenancy in common, [16.220] concurrent interests, [16.240] termination of co-ownership, [16.230] Conspiracy definition, [14.10] tort of, [14.10] Constitution amendment [1.140] constitutional law [1.710] corporations power High Court appellate jurisdiction [1.570] legislative powers intellectual property, [17.20] making of statutes [1.170] Constructive trust creation, [21.70]–[21.90], [21.170]–[21.190] express trust, distinguished, [21.170] Consumer contracts — see also Credit contracts — see also Defective goods guarantees [15.20], [15.1240]-[15.1270]

705

706

Introduction to Business Law in Australia Consumer contracts — cont acceptable quality [15.1310]-[15.1330] auction sales [15.1410] consumer, meaning [15.1290] correspondence with description [15.1370] demonstration models [15.1380] exclusion of guarantees [15.1430] express warranties [15.1400] fitness for disclosed purpose [15.1340]-[15.1360] limitation of liability [15.1430] manufacturers’ liability [15.1450], [15.1560], [15.1570] provision of services [15.1420] remedies for non-compliance [15.1440] repairs [15.1390] spare parts [15.1390] supply, definition [15.1280] supply by sample [15.1380] supply of goods [15.1260] supply of services [15.1270] title of goods [15.1300] unfair terms [15.40], [15.540] effect of terms [15.450] examples [15.470] standard form contracts [15.480] unfair, meaning [15.460] Consumer credit unjust transactions [7.740] Consumer guarantees — see Consumer contracts Consumer protection — see Australian Consumer Law Contract law evolution of [2.30] overview [1.710], [2.20] scope of law [2.20] terminology, [2.10] torts, and [14.40] Contracts acceptance — see Offer and acceptance agency [18.10] privity of contract [10.70] agreements [2.20], [2.40], [2.50], [2.60] assignment — see Assignment of contracts bankrupts [6.190] bilateral contracts [2.110] breach — see Breach of contract capacity to contract — see Contractual capacity charitable activities [4.110], [4.120] classification of contracts [2.50] bilateral contracts [2.110] contracts under seal [2.90] express contracts [2.100] implied contracts [2.100] simple contracts [2.80] unenforceable contracts [2.120] unilateral contracts [2.110]

valid contracts [2.120] void contracts [2.120] voidable contracts [2.120] clauses, [2.10] collateral contracts [9.170] consistency with main contract [9.180], [9.190] intention of parties [9.200], [9.210], [9.220] companies capacity, [20.130] pre-registration contracts, [20.20], [20.165] competitions or lotteries [4.90], [4.100] express exclusion of intention [4.200], [4.210] conditions, [2.10] confidential information, [17.2720] consent to contract [7.20] consideration — see Consideration contents of contract — see Terms of contract contracts under seal [2.90], [5.300] consideration, and [5.300] creation of agency [18.170], [18.190] merger of contract [11.690] requirements [5.300] simple contracts, differences [5.40] corporations [6.160] credit — see Credit contracts deed poll, [2.10] definition [2.40], [2.50] domestic agreements [4.20] de facto relationships [4.50] family agreements [4.70]-[4.80] husband and wife [4.30], [4.40], [4.50], [4.60] duress — see Duress duty of honesty [9.710] employment — see Employment contracts “entire agreement” clause [9.230] essential elements [2.60] valuable consideration [2.60] express contracts [2.100] example [2.130] formalities [5.410] memorandum [5.470] non-compliance with, [2.10] written requirement [5.410]-[5.460] frustration — see Frustration of contract guarantees — see Guarantees honesty [9.720] illegal contracts — see Illegal contracts implied contracts [2.100], [5.30] insurance — see Insurance contracts intention to create legal relations [2.60], [4.10] charitable activities [4.110]-[4.120] commercial agreements [4.140]-[4.227]

competitions or lotteries [4.90], [4.100], [4.200], [4.210] domestic agreements [4.20], [4.30]-[4.80] express exclusion of intention [4.180]-[4.210] family agreements [4.70]-[4.80] government policy proposals [4.225], [4.227] husband and wife [4.30], [4.40], [4.50], [4.60] letters of comfort [4.220], [4.222] religious or spiritual work [4.125], [4.130] sale of business [4.160], [4.170] social agreements [4.20], [4.70], [4.90]-[4.130] test to determine [4.10] interpretation of contract [9.20] online contracting [9.590] parol evidence rule [9.40]-[9.100] written contracts [9.30]-[9.100] legality of object [8.20] liquidated damages clause, [2.10] lotteries or competitions [4.90], [4.100] express exclusion of intention [4.200], [4.210] memorandum [5.470] merger clause [9.230] minors [6.40] contracts for necessaries [6.50] contracts of service [6.60]-[6.100] misrepresentation [6.150] ratification of contract [6.130] repudiation of contract [6.120] void contracts [6.140] voidable contracts [6.110]-[6.130] misrepresentation — see Misrepresentation mistake — see Mistake non-compliance with formalities, [2.10] offer — see Offer and acceptance oral contracts [5.30], [5.410] collateral contracts [9.170] parol evidence rule [9.40] collateral verbal agreements [9.70], [9.100] exceptions [9.40]-[9.100] part performance [2.10], [5.480] acts referable to contract [5.510] case examples [5.490], [5.500] personal services contracts [10.250] privity of contract [10.20], [10.30] agency relationship [10.70] case examples [10.40], [10.60] courts’ adherence [10.100] exceptions to doctrine [10.70]-[10.110] general principle [10.30]-[10.60] insurance contracts [10.80]-[10.100] property law [10.110] trust relationship [10.70] profit à prendre [5.450] rectification — see Rectification

C Index Contracts — cont religious or spiritual work [4.125], [4.130] representations in definition, [9.10] repudiation, [2.10] repudiation — see Repudiation of contract rights and liabilities [10.20] sale of goods — see Sale of goods sale of land — see Sale of land simple contracts [2.80], [5.10], [5.30], [5.410] contracts under seal, differences [5.40] merger of contract [11.690] social agreements [2.60], [4.20], [4.90] charitable activities [4.110]-[4.120] lottery participation [4.90], [4.100] religious or spiritual work [4.125], [4.130] termination — see Termination of contract trust, distinguished, [21.40] unconscionable contracts — see Unconscionable contracts undue influence — see Undue influence unenforceable contracts [2.120] unilateral contracts [2.110] valid contracts [2.120] void contracts — see Void contracts voidable contracts [2.120] economic duress [7.550] intoxicated persons [6.170] mentally incapacitated [6.170] minors [6.110]-[6.130] unilateral mistake [7.40], [7.130], [7.160]-[7.230] warranties, [2.10] written contracts [9.30] collateral contracts [9.170] online contracting [9.590] parol evidence rule [9.40]-[9.100] variation of contract [11.190] written/writing requirement [2.10], [5.30], [5.410] effect of non-compliance [5.480] examples of statutes [5.420] guarantees [5.460] Instruments Acts, [2.10] sale of land contracts [5.450] Statute of Frauds [2.10], [5.430], [5.440], [5.450], [5.460] Contracts under seal consideration, and [5.300] creation of agency [18.90], [18.100] overview [2.90], [5.300] requirements [5.300] simple contracts, differences [5.40] termination of contract merger of contract [11.690] Contractual capacity agency [18.40]

bankrupts [6.190] corporations [6.160], [20.130] definition, [6.10] Crown definition, [6.10] intoxicated persons [6.170] lack of capacity, [2.10] lack of capacity, [2.10] meaning, [2.10] mentally incapacitated person, [2.10] minors, [2.10] married women [6.180] mentally incapacitated persons [6.170] lack of capacity, [2.10] minors [6.30] contracts for necessaries [6.50] contracts of service [6.60]-[6.100] misrepresentation [6.150] ratification of contract [6.130] repudiation of contract [6.120] valid contracts [6.40]-[6.100] void contracts [6.140] voidable contracts [6.110]-[6.130] overview [6.20] unsound mind, [2.10] Contra proferentum rule exclusion clause, [9.10] Contributory negligence damages, and [12.290], [15.1510] definition, [14.10] manufacturers’ liability [15.1510] overview [14.670], [14.680] pleading defence [14.680] statutory provisions [14.680] Conversion copyright infringement, [17.1220], [17.1230] definition, [14.10] strict liability, [14.10] tort of, [14.10] Co-operative definition, [19.20] Co-ownership partnership, distinction [19.160] Copyright Acts of Parliament, [17.700] Anton Piller orders, [17.1250] artistic works, [17.180] commissioned works, [17.300] definition, [17.180] drawings, [17.180] duration of copyright, [17.730] exceptions to infringement, [17.690] exclusive rights, [17.310] novelty, [17.1890] published editions, [17.980] resale royalty rights, [17.1540] three-dimensional reproduction, [17.350] work of artistic craftsmanship, [17.190], [17.200]

assignment, [17.1030], [17.1040] Australian Performing Rights Association, [17.390] future copyright, [17.1090] authorising infringement, [17.430] case example, [17.440] connection requirement, [17.450] matters taken into account, [17.450] authors, [17.240] exceptions, [17.250] moral rights, [17.1420]-[17.1530] resale royalty rights, [17.1540] carriage service providers, [17.1260] categories, [17.30], [17.40] cinematograph films, [17.750], [17.830] computer games, [17.840] duration of copyright, [17.890] exclusive rights, [17.860] ownership of copyright, [17.870] subsistence of copyright, [17.850] compilations, [17.100] telephone directories, [17.110], [17.140] television program schedules, [17.120], [17.130] computer programs, [17.150] parallel importation, [17.550] Conventions, Berne and UCC, [17.1550] criminal offences, [17.1330] performers’ rights, [17.1400] damages, [17.1120], [17.1130] additional damages, [17.1180]-[17.1210] conversion or detention, [17.1220], [17.1230] defences, [17.590] fair dealing, [17.600]-[17.640], [17.1010] innocent infringement, [17.1140], [17.1150], [17.1230] definition, [17.10] designs, and, [17.1710], [17.1770] applied industrially, meaning, [17.1750] corresponding design, meaning, [17.1730] exceptions, [17.1760] registered corresponding designs, [17.1720], [17.1730] standards, [17.1600] unregistered corresponding designs, [17.1740], [17.1750] dramatic works, [17.160] duration of copyright, [17.720] published editions, [17.980] duration of copyright, [17.720] artistic works, [17.730] cinematographic films, [17.890] joint authorship, [17.740] sound recordings, [17.820] television and sound broadcasts, [17.970] educational copying, [17.670] broadcast programs, [17.660] photocopying, [17.670]

707

708

Introduction to Business Law in Australia Copyright — cont employees, [17.260] exclusive rights, [17.310] adaptations, [17.410] cinematograph films, [17.860] commercial rental, [17.420] communication to the public, [17.400] publication, [17.360] public performance, [17.370], [17.380] reproduction in a material form, [17.320]-[17.350] sound recordings, [17.780] television and sound broadcasts, [17.920]-[17.940] exemptions from infringement, [17.2115] fair dealing, [17.600], [17.610] audio-visual items, [17.1010] case examples, [17.610], [17.630], [17.640] meaning, [17.600], [17.620] research or study, [17.650] format-shifting, [17.680] sound recordings, [17.810] franchise agreement, disclosure, [17.2790] Franchising Code of Conduct, [17.2790] future copyright, [17.1090] ideas, and, [17.210], [17.220] formulated expression, distinction, [17.230] importing infringing articles, [17.460], [17.470] knowledge of importer, [17.470], [17.480] parallel importation, [17.490]-[17.560], [17.1000] published editions, [17.990] incorporeal right, [17.40] independent contractors, [17.260] journalists, [17.290] infringement, [17.430] authorising infringement, [17.430]-[17.450] carriage service providers, [17.1260] damages, [17.1210] importing infringing articles, [17.460], [17.470]-[17.560] remedy, [17.1160] sale of infringing articles, [17.460], [17.570], [17.580], [17.2400] secondary infringements, [17.460] statutory defences, [17.590]-[17.640], [17.1010] statutory exceptions, [17.650]-[17.700], [17.810], [17.960], [17.1020] international protection, [17.1550] TRIPS agreement, [17.1560] internet service providers, [17.1260] journalists, [17.270], [17.280] newspaper proprietors, [17.260], [17.290]

judgments or orders, [17.700] judicial proceedings, acts for, [17.1020] legislation, [17.20] licences, [17.1050] exclusive licences, [17.1060] implied licences, [17.1070], [17.1080] musical works, [17.710] sound recordings, [17.800] literary works, [17.90] compilations, [17.100]-[17.140] computer programs, [17.150] definition, [17.90], [17.100], [17.150] duration of copyright, [17.720] published editions, [17.980] moral rights — see Moral rights musical works, [17.170] Australian Performing Rights Association, [17.390] duration of copyright, [17.720] licences for manufacture, [17.710] public performance, [17.370], [17.380] published editions, [17.980] nature of copyright, [17.30], [17.40] overview, [17.10], [17.30] ownership, [17.240] author, meaning, [17.240] cinematographic films, [17.870] commissioned artistic works, [17.300] employees, [17.260] independent contractors, [17.260], [17.290] journalists, [17.270]-[17.290] sound recordings, [17.790] statutory exceptions, [17.250]-[17.300] television and sound broadcasts, [17.950] parallel importation, [17.490], [17.500] books, [17.520] computer software, [17.550] electronic items, [17.560] labelling or packaging, [17.530], [17.540] relaxation of restrictions, [17.510]-[17.560] sound recordings, [17.1000] Patents Act 1990, [17.1780] biological processes, [17.1840] computer programs, [17.1850] extensions, [17.2040] performers’ protection, [17.1340] consent to use, [17.1380] duration of protection, [17.1390] extension of rights, [17.1410] moral rights, [17.1410] offences, [17.1400] performance, meaning, [17.1350] remedies, [17.1370] unauthorised use, [17.1360], [17.1370] public domain, definition, [17.10] public performance, [17.370]

Australian Performing Rights Association, [17.390] case example, [17.380] published editions, [17.750], [17.980] infringing copies, [17.990] remedies for infringement, [17.1100] access to encoded broadcasts, [17.1320] account of profits, [17.1140], [17.1150], [17.1160], [17.1170] anti-circumvention provisions, [17.1290] conversion or detention, [17.1220], [17.1230] damages, [17.1120], [17.1130], [17.1180]-[17.1210], [17.1220] delivery up, [17.1240] electronic rights management information, [17.1310] injunctions, [17.1110] interlocutory injunctions, [17.2120] moral rights, [17.1510], [17.1520] performers’ rights, [17.1370] reproduction in a material form, [17.320] digitised form, [17.340] films, [17.330] sound recordings, [17.330] substantial reproduction, [17.320] three-dimensional form, [17.350] resale royalty rights, [17.1540] research or study, [17.650] sale of infringing articles, [17.460], [17.570] proof of knowledge, [17.580] published editions, [17.990] sound recordings, [17.750], [17.760] duration of copyright, [17.820] exclusive rights, [17.780] format-shifting, [17.810] licences, [17.800] ownership of copyright, [17.790] parallel importation, [17.1000] reproduction in material form, [17.330] subsistence of copyright, [17.770] subject matter, [17.40] subject matter other than works, [17.40], [17.750] categories, [17.750] technological protection measures, [17.1270] access to encoded broadcasts, [17.1320] anti-circumvention provisions, [17.1270]-[17.1290] civil remedies, [17.1290], [17.1310] electronic rights management information, [17.1300], [17.1310] exceptions, [17.1280] television and sound broadcasts, [17.750], [17.900] duration of copyright, [17.970]

D Index Copyright — cont exception to infringement, [17.960] exclusive rights, [17.920]-[17.940] ownership of copyright, [17.950] subsistence of copyright, [17.910] time-shifting, [17.960] trade mark, case, [17.2245] registration opposed, [17.2345] remedy, [17.2455] works, [17.40], [17.50] artistic works, [17.180]-[17.200] author, [17.240] dramatic works, [17.160] literary works, [17.90]-[17.200] musical works, [17.170] original work, meaning, [17.80] published works, [17.70] unpublished, [17.60] Corporations — see Companies Corporations and Markets Advisory Committee (CAMAC), [20.30] Counter-offer definition, [3.10] Country of origin [15.560], [13.690] case example [15.570] County courts [1.620] Court proceedings alternatives to, [1.550] appearance, [1.550] civil matters, [1.550] commencement of, [1.550] criminal matters, [1.550] lawyers, role of, [1.550] pre-trial procedures, [1.550] trial, [1.550] Courts appellate court, [1.20] Drug Court (Vic), [1.550] first instance, of, [1.20] hierarchy, [1.410] jurisdiction, [1.550] Koori Court (Vic), [1.550] proceedings, [1.550] superior, [1.20] precedent, creating, [1.410] Court system — see also Citation of cases cross-vesting of jurisdiction [1.700] doctrine of precedent, and [1.500] case examples [1.510]-[1.520] obiter dicta [1.530] ratio decidendi [1.530] Federal Circuit Court [1.590] Federal Court [1.580] cross-vesting of jurisdiction [1.700] federal tribunals or commissions [1.640], [1.650] Australian Competition and Consumer Commission [1.660] Australian Competition Tribunal [1.660]

hierarchy of courts [1.500] doctrine of precedent [1.500], [1.530] federal courts [1.560]-[1.590], [1.700] federal tribunals or commissions [1.640], [1.650], [1.660] State courts [1.600]-[1.630], [1.640], [1.670], [1.690], [1.700] State tribunals [1.640], [1.670], [1.680], [1.690] High Court [1.500], [1.570] appellate jurisdiction [1.570] State courts [1.600], [1.640] County Courts [1.620] cross-vesting of jurisdiction [1.700] District Courts [1.620] Local Courts [1.630] Magistrates Courts [1.630] specialist courts [1.640], [1.670], [1.690] Supreme Courts [1.610] State tribunals [1.640], [1.670], [1.690] small claims tribunals [1.680] Covenants — see Anti-competitive agreements Credit cards unfair practices [15.780] Credit contracts unjust transactions [7.740] Criminal law civil law, distinction [1.730] classification, [1.540] court proceedings, [1.550] definition, [1.20], [1.540] overview [1.710], [1.730], [14.30] standard of proof, [1.540] Criminal liability companies, [20.130] tortious liability, and [14.30] Criminal offences classification of offences [1.740] indictable offences [1.740] summary offences [1.740] copyright infringement [17.1330] performers’ rights, [17.1400] indictable offences [1.740] summary offences [1.740] Criminal penalties unfair practices contraventions [15.890] Criminal proceedings overview [1.740] standard of proof [1.540], [1.740], [1.790] Cross-examination civil proceedings [1.780]

Cross-vesting of jurisdiction [1.700] Crown definition, [6.10] land, minerals, right to, [22.230]

D Damages assessment of damages [12.80] measure of damages [12.70]-[12.100] mitigation of loss [12.170]-[12.200] remoteness of damage [12.110]-[12.160] breach of contract [12.20], [12.50], [12.300] adequacy of damages [12.410], [12.330] chance or opportunity [12.210], [12.220] disappointment or distress [12.230]-[12.280] exemplary damages [12.290] measure of damages [12.70]-[12.100] mitigation of loss [12.170]-[12.200] nominal damages [12.310] penalty or liquidated damages [12.325]-[12.400] quantifying loss [12.210], [12.220] remoteness of damage [12.110]-[12.160] termination for breach [12.30] contributory negligence [12.290], [14.680] manufacturers’ liability [15.1530] copyright infringement [17.1120], [17.1330] additional damages, [17.1180]-[17.1210] conversion or detention, [17.1220], [17.1230] definition, [2.10], [12.10] design infringement, [17.1670] disappointment or distress [12.230], [12.240] exception to rule [12.250]-[12.280] exemplary damages [12.320] definition, [12.10] unfair practices [15.1050] fraudulent misrepresentation [7.410] innocent misrepresentation [7.460], [7.470] liquidated damages — see penalty or liquidated damages clause, [2.10] definition, [12.10] penalty, not to be, [12.10] manufacturers’ liability [15.1510] misleading or deceptive conduct [15.1020] mitigation of loss [12.170]

709

710

Introduction to Business Law in Australia Damages — cont case example [12.180] definition, [12.10] onus of proof [12.157] reasonable actions [12.190], [12.200] negligence contributory negligence [12.290], [15.1510], [14.680] negligent misrepresentation [7.510] nominal damages [12.310] definition, [12.10] ordinary damages [12.10], [12.300] patent infringement, [17.2120] penalty or liquidated damages [12.325] definition, [12.10] difficulties in determining [12.330], [12.340] event triggered by [12.350] forfeiture of deposits [12.390]-[12.400] liquidated damages not to be, [12.10] mere disproportions [12.380] principals’ liability [15.640] quantum definition, [12.10] remoteness of damage [12.110] case examples [12.120]-[12.160] definition, [12.10] terminology, [12.10] unfair practices [15.1010] analogies with tort [15.1020] assessment of damages [15.1020], [15.1030], [15.1040] commercial advantage 15.1040] exemplary damages [15.1040] liability of persons involved [15.1050]-[15.1080] limitation of actions [15.1090] unliquidated damages definition, [12.10] Damnum absque injuria, [14.10] Death agency [18.750] assignment of contracts [10.230] frustration of contract [11.430] partners goodwill [19.660] Debentures circulating security interests, [20.410] definition, [20.20], [20.410] duties of company issuing, [20.410] issue of, [20.410] loan capital, raising, [20.410] mortgage debentures, [20.410] Personal Property Securities Act, [20.410] trustee for debenture holders, [20.410] unsecured debentures, [20.410] Debit cards unfair practices [15.780]

Debtor debtor and creditor relationship trust, distinguished, [21.40] Debts — see Choses in action Deceit definition, [14.10] elements of tort, [14.10] tort of, [14.10] Deeds — see Contracts under seal consideration not required, [2.10], [5.10] deed poll, [2.10] definition, [2.10], [5.10] escrow, [2.10] indenture, [2.10]

contributory negligence [14.680] liability of ratings agency [14.700], [14.710] voluntary assumption of risk [14.690] non est factum [7.240]-[7.270] trade marks, [17.2410] similar goods, [17.2410], [17.2420] statutory defences, [17.2410] importers, and [17.2425] unregistered marks, [17.2430] unfair practices [15.910] actions beyond control [15.930] case example [15.920] innocent publication [15.930] reasonable precaution [15.930]

Defamation definition, [14.10] libel, [14.10] slander, [14.10] tort of, [14.10]

Defendant contract enforced against, [2.10] definition, [1.20], [2.10]

Defective goods consumer guarantees [15.1560] affected person, definition [15.1560] non-compliance [15.1450], [15.1560], [15.1570] manufacturers’ liability [15.40], [15.1450], [15.1460] contributory negligence [15.1510] defences [15.1500] exclusion of provisions [15.1530] extent of liability [15.1460] extent of safety [15.1470] goods, definition [15.1480] limitation period [15.1520] manufacturer, definition [15.1490] non-compliance with guarantees [15.1450], [15.1560], [15.1570] representative actions [15.1550] requirements [15.1460] safety defect, definition [15.1470] work-related injuries [15.1540] product safety [15.1600] suppliers [15.1450], [15.1570] indemnity by manufacturer [15.1570] limitation of liability [15.1580], [15.1590]

Delegated legislation Governor-General [1.390] overview [1.390] validity of legislation [1.390]

Defences confidential information, [17.2730] copyright, [17.590] fair dealing, [17.600]-[17.640], [17.1010] innocent infringer, [17.1140], [17.1150] moral rights, [17.1490] defective goods [15.1500] designs, [17.1690] false or misleading representations [15.920] moral rights, [17.1490] negligence [14.670]

Definitions — see Words and phrases

Deregistration of company ASIC initiated, [20.860] reinstatement after, [20.860] voluntary, [20.860] winding up, on, [20.860] Description correspondence with consumer contracts [15.1370] Designs copyright, and, [17.1710], [17.1770] applied industrially, meaning, [17.1750] corresponding design, meaning, [17.1730] exceptions, [17.1760] registered corresponding designs, [17.1720], [17.1730] unregistered corresponding designs, [17.1740], [17.1750] damages, [17.1670] definition, [17.10], [17.1580] duration of registration, [17.1680] exclusive rights, [17.1640] infringement, [17.1650] proceedings, [17.1650] remedies, [17.1670] substantially similar impression, [17.1660] legislation, [17.1570] new and distinctive designs, [17.1600] determining, [17.1600] overview, [17.10], [17.1570] ownership of design, [17.1610] exclusive rights, [17.1640] prior art base definition, [17.10] priority date, [17.1630] publication of design, [17.1700]

E Index Designs — cont registrable designs, [17.1600] registration, [17.1570], [17.1590] duration of registration, [17.1680] procedure, [17.1620] publication alternative, [17.1700] remedies, [17.1670] spare parts, [17.1690] right of repair defence, [17.1690]

reasonable person standard [14.440]-[14.460] reasonableness of response [14.560] remoteness of damage [14.630]-[14.660] statutory provisions [14.470] utility of defendant’s conduct [14.570] Donoghue v Stevenson [14.90] negligence [14.80], [14.100] breach of duty [14.70], [14.430]-[14.660] liability for omissions [14.200]-[14.250] mental harm [14.170]-[14.190] negligent misstatement [14.300]-[14.420] neighbour principle [14.100] novel situations [14.110] overriding obligations [14.130] policy considerations [14.120] positive infliction of harm [14.150], [14.160] public authorities [14.240], [14.250] pure economic loss [14.260]-[14.290] negligent misstatement [14.300] auditors [14.410] third party scenarios [14.400]-[14.420] two party scenarios [14.300]-[14.390] volunteering advice or information [14.380] public authorities [14.240], [14.250] risk breach of duty [14.490]-[14.500], [14.540]-[14.560] burden of eliminating risk [14.540]-[14.560] probability of injury [14.490], [14.500] voluntary assumption of risk [14.690]

Detinue copyright infringement, [17.1220], [17.1230] delivery up, [17.1240] definition, [14.10] tort of, [14.10] Directors agents, as [18.830] Disclosure directors, personal interests, [20.620] insurance contracts — see Insurance contracts Discovery overview [1.770] Dispute resolution alternatives dispute resolution, [1.550] commercial arbitration, [1.550] conciliation, [1.550] independent expert appraisal, [1.550] law providing procedure for, [1.10] mediation, [1.550] negotiation, [1.550] District courts [1.620] Dividends definition, [20.20] directors’ power to determine, [20.360] profits, payment out of, [20.360] right to pay, [20.190] right to receive, [20.280] rules governing payment, [20.360] Doctrine of precedent — see Precedent

E

Duress Australian Consumer Law, actions under [7.570] contracts made under [7.520] definition, [7.10] economic duress [7.550] examples [7.560], [7.570] overview [7.520], [7.530] threat of prosecution [7.540]

Economic loss — see Negligence

Duty of care breach of duty [14.70], [14.430] burden of eliminating risk [14.540]-[14.560] causation [14.585] factors in determining [14.470], [14.480] gravity of harm [14.420] probability of risk of injury [14.490], [14.500]

Electronic commerce Electronic Transactions Act 1999 (Cth), [16.10] importance to economy, [16.10] legislation governing, [16.10] principles, [16.10] State Electronic Transaction Acts, [16.10] Electronic transactions/communications acceptance of offer by [3.10], [3.580] case example [3.590] statutory reform [3.600] contract formation through, acceptance of offer, [3.10] definition, [3.10] Electronic Transactions Act 1999 (Cth) e-commerce regulated by, [16.10]

Emblements tenant’s fixtures, [22.310] Employees independent contractors, distinction [18.30]-[18.35] unfair practices contraventions [15.900] workers’ compensation — see Workers’ compensation Employer vicarious liability, [19.20] act outside scope of employment, [21.950] Employment misleading conduct [15.680] Employment contracts restraint of trade clauses [8.410], [8.420] definition, [8.10] fairness of bargain [8.510], [8.520] reasonableness of restraint [8.430]-[8.480], [8.510] release from contract [8.490], [8.500] subsequent unlawful conduct [8.530] time for determination [8.530] Enacted law definition, [1.20] Ending contract terminology, [11.10] Equitable estoppel — see Promissory estoppel Equity — see also Rectification — see also Restitution assignments [10.190], [10.210] equitable chose in action [10.210] legal chose in action [10.200] common law, and [1.20], [1.410], [1.430] distinction [1.400], [1.430] Judicature system [1.430] Court of Chancery, [1.410] definition, [1.20] historical background [1.420], [1.430] Judicature system [1.430] Escrow deed, type of, [2.10] definition, [2.10] Estate agents — see Real estate agents Estoppel — see also Promissory estoppel creation of agency [18.130] definition, [2.10], [5.10] Ethics — see Business ethics Evidence civil proceedings [1.780] extrinsic, [9.10] interpretation of contracts, [9.10]

711

712

Introduction to Business Law in Australia Evidence — cont parol evidence rule, [9.10] prima facie, meaning, [19.20] Exclusion/exemption clauses acts outside contract [9.530]-[9.580] ambiguities [9.490]-[9.510] contra proferentum rule [9.490] definition, [2.10] exclusion clause, [2.10] exemption clause, [2.10] function [9.310], [9.320] interpretation of contra proferentum rule, [9.10] misrepresentation [9.460] misleading or deceptive conduct [15.300], [15.310] negligence, liability [9.520] overview [9.300] part of contract, as [9.320] intention of parties [9.470] notice to other party [9.380]-[9.460] signed document [9.330]-[9.370] strict interpretation [9.490]-[9.510] Executive definition, [1.110] separation of powers, [1.20], [1.110] Executor trustee, distinguished, [21.50] Express terms — see Terms of contract Express trust — see also Trust classification, [21.70] constructive trust, distinguished, [21.170] creation, [21.110]–[21.130] declaration, [21.70] meaning, [21.30] Extrinsic evidence definition, [9.10] interpretation of contracts, [9.10]

F False imprisonment definition, [14.10] tort of, [14.10] False or misleading representations corporate liability [15.900] country of origin [15.560] case example [15.1180] defences [15.920] franchising [15.610], [15.620], [17.2800] goods and services [7.500], [15.500] case examples [15.510]-[15.540] penalties for contravention [15.550] overview [3.40], [15.470] profitability of business activities [15.610] franchise schemes [15.610], [15.620] reasonable grounds [15.630]-[15.650]

sale or grant of land [7.500], [15.580] application of provision [15.580], [15.590] requirements [15.600] Family agreements [4.70]-[4.80] Federal Circuit Court jurisdiction [1.590] overview [1.590] Federal Court of Australia appellate jurisdiction [1.580] jurisdiction [1.580] cross-vesting of jurisdiction [1.700] overview [1.580] Federal Parliament — see Commonwealth Parliament Fee simple, [16.40] Fiduciary duties agents, [21.340], [21.350] breach of conflict of interest, [21.380], [21.390] defence, [21.400], [21.410] limitation period, [21.330] unauthorised profit, [21.380] categories of relationships, [21.340]–[21.370] commercial relationships, in, [21.330] company directors, [20.530], [21.340] compensation for breach, [21.330] conflict of interest, [21.380], [21.390] fiduciary, meaning, [13.05], [21.20] full and informed consent, [21.400], [21.410] joint venturers, [21.340], [21.360], [21.370] limitation period, [21.330] nature of, [21.380], [21.390] partners, [26.210], [26.260] tracing, [21.330] trustees, [13.70], [21.10]–[21.30], [21.330] unauthorised profit, [21.380]

determining if chattels have become, [22.250]–[16.500] improving enjoyment of land, [22.250], [22.290] increasing value of land, [22.260] object of annexation, [22.250] presumption where attached, [22.250] real property includes, [16.50] severance, [16.40] tenants’ fixtures, [22.310] emblements, [22.310] property of landlord, becoming, [22.310] removal of, [22.310] Forbearance to sue forbearance, definition, [5.10] Four corners rule definition, [9.10] interpretation of contract, [9.10] Franchises definition, [19.20], [17.10] false or misleading representations [15.460], [15.620] restraint of trade clauses and [8.540] case examples [8.550], [8.560] Franchising advantages, [17.2770] code of conduct, [17.2790] false or misleading representations [17.2800] franchise agreement, [17.2780] intellectual property, and, [17.2770] misleading or deceptive conduct, [17.2800] overview, [17.10], [17.2770] types of arrangements, [17.2770] unconscionable conduct, [17.2800]

Fiduciary relationship illegal contracts [8.650] partnerships [19.550] dissolution of partnership [19.550], [19.560] misapplication of property [19.580] prospective partners [19.570]

Fraudulent misrepresentation agents’ liability [18.640] elements [7.330] belief in falsity [7.360] falsity [7.350] inducement to contract [7.380], [7.390] intended to be acted upon [7.370] knowledge of falsity [7.360] resulting in damage [7.400] statement of fact [7.340] overview [7.300], [7.330] principals’ liability [18.640] remedies [7.410], [7.470] damages [7.410] rescission [7.410], [7.480]-[7.490]

Financial Reporting Council (FRC), [20.30]

Freedom of Information review of decisions, [1.50]

Fitness for purpose consumer contracts [15.1340] case example [15.1360] disclosed purpose, meaning [15.1370]

Freehold estates fee simple, [16.150] future interests, [16.150] life estates, [16.150] overview, [16.150]

Fixtures definition, [16.40], [22.250] degree of annexation, [22.250]

Frustration of contract application of doctrine [11.410] case example [11.390]

I Index Frustration of contract — cont changes not amounting to [11.530] case examples [11.540]-[11.580] common objective unattainable [11.460] case examples [11.470]-[11.480] death or illness [11.430] definition, [11.10] destruction of subject matter [11.440] case example [11.450] effect of frustration [11.630]-[11.660] frustrating event, [2.10] government intervention [11.490], [11.500] limitations on [11.590]-[11.610] overview [11.20], [11.380] radically different performance [11.510], [11.520] recovery of money [11.630] requirements for [11.400] supervening illegality [11.420]

G Gifts personal property, [16.750] unfair practices [15.690] Good faith agent’s duties [18.370] case example [18.380] conflict of interests [18.370], [18.390] duty of directors, [20.560], [20.600] trustees, [21.270], [21.290] implied terms of contract [9.700] case example [9.710] Goods — see also Defective goods — see also Sale of goods country of origin representations [15.560] case example [15.570] defences [15.920] Goods and Services Tax (GST) business organisation choice, [19.30] sole trader, registration for, [19.40] Goodwill definition [8.10], [19.20], [19.650] overview [19.650] partnerships [19.650] death or retirement of partner [19.660] Government enforceability of agreements [4.225] case example [4.227] Governor-General delegated legislation [1.390] Guarantee company, [20.160] constitution, [20.190] not-for-profit, [20.160] Guarantees company limited by, [20.160] definition [5.250]

indemnities, distinction [5.460] unjust transactions [7.740] written requirement [5.460]

H Harassment and coercion supply of goods [15.870] High Court, [1.20] appellate jurisdiction [1.570] special leave [1.570] binding precedents [1.500] doctrine of precedent [1.500] case examples [1.510]-[1.520] law reports [1.450] overview [1.570] previous decisions [1.520] Husband and wife — see also Married women enforceability of agreements [4.30], [4.40] breakdown of marriage [4.50], [4.60] commercial matters [4.50] undue influence [7.590]

I Illegal contracts — see also Void contracts administration of justice, prejudicial [8.230] champerty [8.280] maintenance of suit [8.280] stifling a prosecution [8.240]-[8.260] categories of contracts [8.20] champerty meaning, [8.10] commission of crime, tort or fraud [8.200] common law [8.20], [8.180] public policy grounds [8.190]-[8.330] consequences of illegality [8.600] recovery of money [8.620]-[8.650] related transactions [8.660] severance [8.690] void contracts [8.610] illegality of object, [2.10] meaning, [2.10] in pari delicto meaning, [8.10] overview [8.20], [8.590] public life, corruption [8.290] case examples [8.300], [8.310] public safety, prejudicial [8.320] recovery of money [8.620] exceptions [8.630]-[8.650] fiduciary relationships [8.650] substantial performance [8.650] related transactions [8.660] restraint of trade meaning, [8.10] revenue, defrauding [8.330] severance [8.690] severance of illegal part/s

definition, [8.10] sexual immorality, promoting [8.210], [8.220] statute, by [8.20], [8.30] express prohibition [8.40], [8.50] formation of contract [8.120], [8.130] implied prohibition [8.60]-[8.110] interpretation [8.80] misleading or deceptive conduct [8.110] performance of contract [8.120], [8.140]-[8.150] public policy objectives [8.70], [8.80], [8.100] void contracts [8.170] terminology, [8.10] void ab initio, [8.10] meaning, [8.10] Implied conditions [9.690] Implied terms business efficacy [9.610], [9.620] nature of implied term [9.640], [9.650] necessity of term [9.660] test to determine [9.640] to give [9.10] custom or trade usage [9.600], [9.680] definition, [2.10] good faith, to act in [9.700] overview [9.600] specific types of contract [9.610], [9.670] statute, by [9.600], [9.690] Incorporated associations [19.190] definition, [19.20] Incorporated partnership definition, [19.20] Indefeasibility of title definition, [16.40] Torrens title land, [22.90] Indemnity guarantees, distinction [5.460] overview [5.460] trustee’s right to, [21.280] Indenture definition, [2.10] Independent contractors agents, as [18.30]-[18.35] copyright ownership, [17.260] journalists, [17.290] employees, distinction [18.30] Independent expert appraisal overview, [1.550] Industry codes of conduct franchising, [17.2790] Injunctions breach of contract [12.470] copyright infringement, [17.1110]

713

714

Introduction to Business Law in Australia Injunctions — cont definition, [2.10], [12.10] misleading or deceptive conduct [15.140] overview [12.470] unfair practices [15.990] applicants for injunctions [15.1000] Injuria sine damno, [14.10] Innocent misrepresentation examples [7.430]-[7.450] overview [7.300], [7.420] remedies [7.460] damages [7.470] equitable remedies [7.470] rescission [7.470], [7.480]-[7.490] Insider trading prohibition, [20.620]

Internet service providers copyright infringement, [17.1260] Interpretation of contract — see also Statutory interpretation contra proferentum definition, [9.10] exclusion clause, [9.10] exclusion/exemption clause [9.490] acts outside contract [9.530]–[9.580] contra proferentum rule, [9.10] extrinsic evidence definition, [9.10] four corners rule, [9.10] parol evidence rule, [9.10] representations definition, [9.10] Interrogatories [1.760]

Insolvent company compromise or arrangement with creditors, [20.800] deed of company arrangement, [20.820] directors defences to liability, [20.650]–[20.670] duty to prevent trading, [20.610], [20.650] liability for debts, [20.90] liability for insolvent trading, [20.610] preservation of employee benefits, [20.610] insolvent transactions, [20.860] directors’ liability, [20.90], [20.610] voidable transactions, [20.860] voluntary administration, [20.810] winding up — see Winding up

Intimidation definition, [14.10] tort of, [14.10]

Instruments Acts definition, [2.10] writing requirement for contracts, [2.10]

J

Insurance contracts privity of contract [10.80]-[10.100] Intellectual property franchising, and, [17.2770] overview, [17.10] public domain, definition, [17.10] Intention to create legal relations definition, [2.10] intention to contract, [2.10] International Organisation of Securities Commissions (IOSC), [20.30] International agreements copyright protection, [17.1550] TRIPS agreement, [17.1560] patents, [17.2170] sales contracts — see International sales contracts trade marks, [17.2550]

Intoxicated persons contractual capacity [6.170] lack of, [2.10] Invitations to treat advertisements [3.70] case example [3.90] auction sales [3.100] case example [3.130] catalogues [3.70] definition, [3.10] offer, distinction [3.40]-[3.160] case examples [3.50]-[3.60] shop displays [3.70] case example [3.80] tenders [3.150] case example [3.160]

Joint tenancy concurrent interests, [16.240] overview, [16.180] right of survivorship, [16.200] severance, [16.210] termination of co-ownership, [16.230] unities of tenancy, [16.190] Joint ventures business structure [19.140, [19.150], [19.160] definition, [19.20] fiduciary duties, [21.340], [21.360], [21.370] overview [19.140] partnerships, and [19.140]-[19.160] Journalists copyright ownership, [17.270], [17.280] newspaper proprietor, [17.260], [17.290]

Judge-made law — see Common law Judicial review administrative law decisions, [1.50] appeal options, [1.50] Judiciary definition, [1.110] separation of powers, [1.20], [1.110] Jurisdiction cross-vesting of jurisdiction [1.700] Federal Circuit Court [1.590] Federal Court [1.580] cross-vesting of jurisdiction [1.700] High Court [1.570] State courts County Courts [1.620] cross-vesting of jurisdiction [1.700] District Courts [1.620] Local Courts [1.630] Magistrates Courts [1.630] Supreme Courts [1.610] void contracts [8.350]

L Land co-ownership, [16.170] joint tenancy, [16.180]-[16.210], [16.230], [16.240] tenancy in common, [16.220], [16.230], [16.240] termination, [16.230] estates in land, [16.140] concurrent interests, [16.240] freehold estates, [16.150] leasehold estates, [16.160] fixtures, [16.830] interests in land, [16.130] concurrent interests, [16.240] co-ownership, [16.170]-[16.240] estates in land, [16.140]-[16.160], [16.240] joint tenancy, [16.180] concurrent interests, [16.240] right of survivorship, [16.200] severance, [16.210] termination of co-ownership, [16.230] unities of tenancy, [16.190] leases — see Leases nature of land, [16.110] overview, [16.110] sale of land — see Sale of land Law Australia, reception into [1.60] business and, [1.10] civil law [1.730] classification of law [1.540], [1.710] civil law [1.730] criminal law [1.730] procedural law [1.720] substantive law [1.720] common law — see Common law contract — see Contract law

M Index Law — cont criminal law — see Criminal law dispute resolution procedure, [1.10] nature of, [1.10] private law [1.710] procedural law [1.720] public law [1.710] rule of, [1.20] sources of law [1.60]–[1.550] common law [1.400] primary and secondary [1.150] statute law [1.160] substantive law [1.720] terminology, [1.20] Law reports citation of cases [1.470] parties [1.480] volume number [1.480] year [1.480] definition, [1.20] form of a report [1.520] citation of cases [1.470], [1.480] overview [1.450] Lease definition, [16.40] tenant fixtures, [22.310] Leasehold estates, [16.160] Legal profession barristers [1.820] solicitors, distinction [1.820] overview [1.800] solicitors [1.810] barristers, distinction [1.820] undue influence [7.590] Legal system — see Constitution — see Court system — see Federal system Legislation — see Delegated legislation — see Statutes Legislature — see Commonwealth Parliament — see States and Territories constitutional power to make laws, [1.100] definition, [1.110] separation of powers, [1.20], [1.110] Letters of comfort [4.220] case example [4.222] Liens agents’ right [18.510] overview, [16.790], [16.800] possessory liens, [16.790] general liens, [16.800] particular liens, [16.810] Life estate, [16.40] Life tenants, [16.150] Limitation of actions definition, [12.10] manufacturers’ liability [15.1520]

unfair practices [15.1090] Limited companies — see Companies Limited partnership definition, [19.20] Liquidated damages clause, [2.10] definition, [12.10] penalty, not to be, [12.10] Loans — see Consumer credit Local Courts [1.630] Lotteries or competitions enforceability of agreements [4.90], [4.100] express exclusion of intention [4.200], [4.210]

M Magistrates Courts [1.630] Maintenance of suit [8.280] Managed investment schemes definition, [20.20], [20.420] disclosing document, [20.420] responsible entity, [20.420] securities, as, [20.430] Manufacturers’ liability consumer guarantees [15.1560] affected person, definition [15.1560] non-compliance [15.1450], [15.1560], [15.1570] manufacturer, definition [15.1490] overview [15.40], [15.1450] personal injuries [15.1450] safety defects in goods [15.1450], [15.1460] contributory negligence [15.1510] defences [15.1500] exclusion of provisions [15.1530] extent of liability [15.1460] extent of safety [15.1470] goods, definition [15.1480] limitation period [15.1520] manufacturer, definition [15.1490] representative actions [15.1550] requirements [15.1460] safety defect, definition [15.1470] work-related injuries [15.1540] sellers of defective goods [15.1450], [15.1570] indemnity by manufacturer [15.1570] limitation of liability [15.1580], [15.1590] Manufacturing process misleading conduct [15.700] Marriage void contracts [8.360] Married women contractual capacity [6.200]

Mediation overview, [1.550] Mentally incapacitated persons agency [18.760] contractual capacity [6.170] lack of, [2.10] Mercantile agents definition [18.800] overview [18.800] Minors contracts for necessaries [6.50] necessaries, definition [6.50] contracts of service [6.40] beneficial requirement [6.100] case example [6.70] detrimental to minors’ interests [6.80], [6.90] contractual capacity [6.30] lack of, [2.10] misrepresentation, and [6.150] valid contracts [6.40]-[6.100] void contracts [6.140] voidable contracts [6.110]-[6.130] contractual liability [6.40] contracts for necessaries [6.50] contracts of service [6.60]-[6.100] misrepresentation, and [6.150] tort, and [6.150] definition, [6.10] misrepresentation [6.150] necessaries station in life, according to, [6.10] valid contracts and, [6.40] overview [6.30] partners [19.240], [19.260] ratification of contract [6.130] repudiation of contract [6.120] void contracts [6.140] voidable contracts [6.110] binding unless repudiated [6.120] not binding unless ratified [6.130] Misleading or deceptive conduct advertising [15.80] disclosure of terms [15.140] injunctions [15.140] agents’ liability [18.610] conduct, meaning of [15.230] conduct constituting [15.80]-[15.130] same product names [15.140]-[15.180] country of origin [15.560] case example [15.570] illegal contracts [8.110] “in trade or commerce”, meaning [15.70] information providers [15.320] injunctions [15.140] franchising [17.2800] misrepresentations [7.510], [15.190] case examples [15.200]-[15.220] exclusion clauses [15.300], [15.310] news media exemption [15.320] overview [15.60] remedies [15.890] damages [15.1020], [15.1050]

715

716

Introduction to Business Law in Australia Misleading or deceptive conduct — cont injunctions [15.140] pecuniary penalties [15.940]-[15.980] same product names [15.140], [15.170] case examples [15.150], [15.160], [15.180] scope of prohibitions [15.60] silence as [13.170A]-[15.280] Misrepresentation agents’ liability [18.610] definition, [2.10], [7.10] exclusion clauses [9.460] fraudulent — see Fraudulent misrepresentation innocent — see Innocent misrepresentation lack of genuine consent, [2.10] minors’ liability [6.150] misleading or deceptive conduct [7.500], [15.190] case examples [15.200]-[15.220] exclusion clauses [15.300], [15.310] negligent — see Negligent misrepresentation overview [7.300] pre-contractual negotiations [15.190] case examples [15.200]-[15.220] exclusion clauses [15.300], [15.310] silence [15 .280] strict liability [15.290] principals’ liability [18.610] remedies [7.300] Australian Consumer Law [7.500] representations [7.300] terms of contract, distinction [7.300] terms of contract [7.300]

unilateral mistake [7.20], [7.40], [7.130], [7.160], [7.170] as to a fundamental term [7.210]-[7.220] as to identity [7.180]-[7.200] as to nature of document signed [7.475]-[7.270] definition, [7.20] effect on contract [7.40], [7.230] written terms [7.230] Moral rights application of rights, [17.1530] attribution of authorship, [17.1450] false attribution, [17.1460] beneficiaries of protection, [17.1440] buildings, [17.1500] consent provisions, [17.1480] defences, [17.1490] duration of rights, [17.1530] integrity of authorship, [17.1470] nature of rights, [17.1430] overview, [17.1420] performers, [17.1410] remedies for infringement, [17.1510], [17.1520] Mortgages mortgage debentures, [20.410] unjust transactions [7.740] Mutual mistake, [7.20]

N Native title [1.70]-[1.90] Natural justice administrative law decisions, [1.50] definition, [1.20]

Mistake contracts, and [7.20], [7.30]

Necessaries station in life definition, [6.10] valid contracts and, [6.40]

Mistake of fact common mistake [7.20], [7.50] attributes of subject matter [7.70], [7.80] case example [7.60] condition precedent [7.140] definition, [7.20] existence of fundamental fact [7.140] existence of subject matter [7.90], [7.100], [7.140] legislation, principle in [7.70] rectification [7.290] effect on contract [7.40] lack of genuine consent, [2.10] mutual mistake [7.20], [7.110], [7.150] case example [7.120] definition, [7.20] nature of document signed [7.240] non est factum defence [7.240]-[7.270] rectification [7.20], [7.280]

Negligence breach of duty [14.70], [14.430] burden of eliminating risk [14.540]-[14.560] causation [14.585]-[14.620] factors in determining [14.470], [14.480] gravity of harm [14.510]-[14.530] probability of risk of injury [14.490], [14.500] reasonable person standard [14.440]-[14.460] reasonableness of response [14.560] remoteness of damage [14.630]-[14.660] statutory provisions [14.470] utility of defendant’s conduct [14.570] causation [14.585]-[14.620] “but for” test [14.585], [14.600] novus actus interveniens, [14.10] civil liability reform [14.60]

contributory negligence [14.670], [14.680] damages, and [12.290], [15.1510], [14.680] manufacturers’ liability [15.1510] pleading defence [14.680] statutory provisions [14.680] damages contributory negligence [12.290], [15.1510], [14.680] defences [14.670] contributory negligence [14.680] torts of strict liability [14.720], [14.730] vicarious liability [14.740]-[14.770] voluntary assumption of risk [14.690] definition, [14.10] Donoghue v Stevenson [14.90] duty of care [14.80], [14.55] breach of duty [14.70], [14.430]-[14.660] liability for omissions [14.200]-[14.250] mental harm [14.170]-[14.190] negligent misstatement [14.300]-[14.420] neighbour principle [14.100] novel situations [14.110] overriding obligations [14.130] policy considerations [14.120] positive infliction of harm [14.150], [14.160] public authorities [14.240], [14.250] pure economic loss [14.260]-[14.290] exclusion clauses [9.520] frolic definition, [14.10] liability [14.100] reasonable foreseeability test [14.100] medical negligence [14.600]-[14.620] nervous shock [14.170] case examples [14.180], [14.190] novus actus interveniens, [14.10] omissions, liability for [14.200] failure to warn [14.210] intoxicated driving [14.220] public authorities [14.240], [14.250] reliance and dependence [14.200] overview [14.50]-[14.70], [14.100] principals’ liability [18.670] professional negligence [14.40] peer professional opinion test [14.580] public authorities [14.240], [14.250] pure economic loss [14.260] case examples [14.270]-[14.290] negligent misstatement [14.300]-[14.420] reasonable foreseeability [14.100], [14.290], [14.630]-[14.660] remoteness of damage [14.630]

P Index Negligence — cont reasonable foreseeability [14.630]-[14.660] standard of care [14.580] tort of, [14.10] torts of strict liability [14.720] case example [14.730] vicarious liability [14.740]-[14.770] voluntary assumption of risk [14.690] volenti non fit injuria, [14.10] Negligent misrepresentation advice or information [7.510] agents’ liability [18.610] overview [7.300], [7.510] principals’ liability [18.610] Negligent misstatement auditors [14.400], [14.410] reasonable reliance [14.420] duty of care [14.300] auditors [14.410] third party scenarios [14.400]-[14.420] two party scenarios [14.300]-[14.390] volunteering advice or information [14.380] foreign currency loans [14.390] overview [14.300] special relationship [14.330] Negotiable instruments bills of exchange — see Bills of exchange Negotiation overview, [1.550] New South Wales District Courts [1.620] Local Courts [1.630] restraint of trade [8.680] small claims tribunals [1.680] Supreme Court [1.610] News media misleading or deceptive conduct [15.1370] No liability company, [20.160] constitution, [20.190] mining, restricted to, [20.160], [20.190] Non est factum [7.240]-[7.270] Northern Territory small claims tribunals [1.680] Supreme Court [1.610] Novation [10.160] definition, [10.10], [19.20] Nuisance airspace, interference with, [16.330] definition, [14.10] private nuisance, [14.10] definition, [14.10] public nuisance, [14.10] definition, [14.10]

O

communication of acceptance [3.370], [3.510], [3.520] conditions of offer [3.440]-[3.470] conduct [3.380] electronic or instantaneous communications [3.580], [3.590] performance of act [3.440] revocation [3.490] silence as acceptance [3.390], [3.400] time for acceptance [3.500] unconditional acceptance [3.440], [3.450] unilateral contracts, right to communication waived by offeror [3.430] who can make [3.480] silence as acceptance [3.390], [3.400] statements supplying information, distinction [3.40] tenders, [3.10] unconditional acceptance [3.440] case example [3.440]

Obiter dicta/Obiter dictum [1.530] definition, [1.20], [1.410] precedent, doctrine of, [1.410] Offer and acceptance advertisements [3.70], [3.170] Carbolic Smoke Ball case [3.180] Pepsi case [3.190]-[3.200] auction bid as, [3.10] certainty [3.610] case examples [3.620]-[3.640] communication of acceptance [3.370], [3.510] method of communication [3.370], [3.510], [3.520] unilateral contracts, waiver of offeror’s right [3.430] communication of offer [3.210] counter-offer, [3.10] definition, [3.10] electronic or instantaneous communications [3.580] case example [3.590] statutory reform [3.600] invitations to treat, distinction [3.40] advertisements [3.70] auction sales [3.100] case examples [3.50]-[3.60] catalogues [3.70] definition, [3.10] online auctions [3.130]-[3.140] shop displays [3.70] tenders [3.150] lapse of offer [3.290] case example [3.300] death of party [3.159A] request for information [3.310]-[3.320] nature of acceptance [3.330] nature of offer [3.30] offeree definition, [3.10] offeror, [3.10] definition, [3.10] overview [2.60], [3.20] persons to whom offer made [3.170] world at large [3.170], [3.180] postal acceptance rule [3.530] case examples [3.540]-[3.560] exclusion of rule [3.530] revocation of offer [3.570] prima facie, meaning, [3.10] reject, meaning, [3.10] revocation of acceptance [3.490] revocation of offer [3.230] communication to offeree [3.250]-[3.270] definition, [3.10] method of communication [3.270] options [3.230], [3.240] postal acceptance rule [3.570] time specification in offer [3.230] unilateral offers [3.280] rules as to acceptance [3.370]-[3.580] awareness of offer [3.410], [3.420]

Offer information statement (OIS), [20.430], [20.470] Ombudsman review of executive decisions, [1.50] Option to terminate definition, [2.10] Ownership — see also Co-ownership found articles [16.610] course of employment [16.700], [16.710] on land [16.680]-[16.690] personal property, [16.720] acquisition of ownership, [16.730]-[16.770] possession, distinction [16.500] case examples, [16.510] found articles, [16.610]-[16.710]

P Parallel importation copyright, [17.490], [17.500] relaxation of restrictions, [17.510] books, [17.520] computer software, [17.550] electronic items, [17.560] labels or packaging, [17.530], [17.540] sound recordings, [17.1000] Parol evidence rule exceptions [9.40]-[9.100] collateral verbal agreements [9.70], [9.100] definition, [9.10] four corners rule, [9.10] interpretation of contract, [9.10] overview [9.40] Part performance acts referable to contract [5.510] case examples [5.490], [5.500]

717

718

Introduction to Business Law in Australia Part performance — cont definition, [2.10] overview [5.480] Partners — see also Partnership holding out as, [19.20] liability of joint and several, [19.20] number of, [20.180] Partnerships — see also Partners agent, partner as [18.820], [19.680] authority of partners [19.680] actual authority [19.690] apparent authority [19.710] implied authority [19.700] winding up [19.1010], [19.1020] bankruptcy [19.1070] business names [19.110] capacity to be partner [19.240] minors [19.260] persons of unsound mind [19.250] change in firm [19.600] revocation of guarantee [19.600] characteristics [19.160], [19.180] common law [19.210] companies, distinction [19.180] company requirement to register as, [20.180] continuing guarantees [19.600] co-ownership, distinction [19.160] death of partner goodwill [19.660] liability [19.860] profit sharing [19.1040] definition [19.20], [19.280] carrying on a business [19.290]-[19.360] in common [19.370]-[19.390] with a view to profit [19.400] dissolution [19.970] court order [19.1000] definition, [19.20] fiduciary obligations, and [19.550], [19.560] final settlement of accounts [19.1060] notice of dissolution [19.850], [19.860], [19.870] operation of law [19.980] partners, by [19.990] partnership property [19.1030] profit sharing [19.1040], [19.1050] retirement of partner [19.590], [19.840], [19.850], [19.860] existence of partnership [19.410]-[19,420] case examples [19.440]-[19.500] expulsion of partner [19.530] fiduciary obligations [19.550] dissolution of partnership [19.550], [19.560] misapplication of property [19.580] prospective partners [19.570] firm name [19.270] fixed term [19.610]

continuance after expiration [19.610] formation of partnership [19.220] goodwill [19.650] death or retirement of partner [19.660] holding out as partner [19.880] incorporated, [19.20] incorporated limited partnerships [19.1000] joint ventures [19.140]-[19.160] legal relationship [19.210] legal status [19.100] legislation [19.210], [19.530] liability of partners [19.720] case examples [19.760]-[19.810] deceased partners [19.860] holding out as partner [19.880] incoming partners [19.830] joint liability [19.820] retiring partners [19.840], [19.850], [19.860] third parties [19.720] wrongful acts [19.880]-[19.960] limited partnerships [19.210], [19.980] advantages [19.980] definition, [19.20] incidents [19.990] incorporated limited partnerships [19.1000] minors [19.240], [19.260] nature of [19.280] carrying on a business [19.290]-[19.360] in common [19.370]-[19.390] with a view to profit [19.400] new partners [19.830] novation definition, [19.20] number of partners [19.230] overview [19.130], [19.200], [19.210] partnership agreement [19.510], [19.520], [19.530] goodwill [19.660] partnership property [19.620] case example [19.630] charging partner’s share [19.670] dissolution of partnership [19.260] goodwill [19.650], [19.660] nature of partner’s interest [19.640] private debts of partners [19.670] persons of unsound mind [19.240], [19.250] profit sharing outgoing partners [19.1040], [19.1050] relationship of partners [19.510] expulsion of partner [19.530] fiduciary obligation [19.550] implied terms [19.520] legislation [19.530], [19.540] partnership agreement [19.520], [19.530], [19.660] retirement of partners [19.590] goodwill [19.660]

liability [19.840], [19.850], [19.860] notice of retirement [19.840], [19.860] third parties [19.680] liability to in contract [19.720] wrongful acts [19.880] misapplication of money [19.910], [19.920] misapplication of trust money [19.940]-[19.960] ordinary course of business [19.880], [19.900] Passing off character merchandising, [17.2600] case examples, [17.2610]-[17.2630] definition, [14.10], [17.10] elements of action, [17.2560] examples, [17.2570]-[17.2590] overview, [17.2560] remedies, [17.2680] trade marks, [17.2690] tort of, [14.10] well-known persons, connection to, [17.2640]-[17.2670] Passing off Patents acceptance, [17.2010] computer programs, [17.1850] damages, [17.2120] definition, [17.10] employee inventions, [17.2150] university academics, [17.2150], [17.2160] examination, [17.2000] innovation patents, [17.2060] re-examination, [17.2030] exclusive rights, [17.2100] foreign patents, [17.2170] infringement, [17.2110] innovation patents, [17.2070] remedies, [17.2120] innovation patents, [17.1790], [17.2050] certification for infringement, [17.2070] examination, [17.2060] standard patents, differences, [17.2060]-[17.2090] term of patent, [17.2090] validity requirements, [17.2080] inventive step requirement, [17.1900] application of test, [17.1900] legislation, [17.1780] manner of manufacture, [17.1820] medical treatment methods, [17.1830] microbiological processes, [17.1840] nature of patents, [17.1790] novelty requirement, [17.1870] assessment of novelty, [17.1890] prior art base, [17.1880] reverse infringement test, [17.1890] opposition to grant, [17.2020]

P Index Patents — cont overview, [17.10], [17.1780], [17.1790] plant varieties, [17.1860] prior art base definition, [17.10] procedure for obtaining, [17.1930] acceptance and publication, [17.2010] applicants, [17.1930] applications, [17.1940], [17.1970] examination, [17.2000] priority date, [17.1990] provisional applications, [17.1940], [17.1960], [17.1990] specifications, [17.1950]-[17.1980], [17.1990] publication, [17.2010] Register of Patents, [17.2140] remedies, [17.2120] revocation of patent, [17.2130] secret use, [17.1920] specifications, [17.1950] complete, [17.1970], [17.1980], [17.1990] priority date, [17.1990] provisional, [17.1960], [17.1990] springboarding, [17.10] standard patents, [17.1790] grant of patent, [17.2040] innovation patents, differences, [17.2060]-[17.2090] opposition to grant, [17.2020] term of patent, [17.2040] subject matter, [17.1800] threshold requirement, [17.1810] types of patents, [17.1790] usefulness of invention, [17.1910] Payment unfair practices [15.770] acceptance without intention to supply [15.770] unauthorised entries or advertisements [15.810] unsolicited goods [15.800], [15.810] Personal injuries manufacturers’ liability [15.1450] Personal property acquisition of ownership, [16.730] abandoned property, [16.770] gift, [16.750] purchase, [16.740] wills or intestacy, [16.760] chose in possession, [16.40], [16.50] co-ownership, [16.780] definition, [16.50], [20.410] intangible, [22.10], [16.50] ownership, [16.720] acquisition of ownership, [16.730]-[16.770] possession, [16.740] real property distinguished, [22.10], [16.50]

different rules, [16.50] securities legislation [16.820] tangible, [22.10], [16.50] Personal property securities circulating security interests, [20.20], [20.410] debentures, [20.410] non-circulating security interests, [20.410] personal property, definition, [20.410] Personal Property Securities Act 2009 (Cth) Corporations Act amendments, [20.410] priorities under, [20.410] Personal Property Securities Register definition, [20.20] priorities, [20.410] security interests, [20.410] circulating, [20.20], [20.410] non-circulating, [20.410] perfection, [20.410] unperfected, [20.410] Personal service contracts assignment of contracts [10.250] specific performance [12.430] Phoenix companies definition, [20.20] investigation of directors, [20.40] Plaintiff definition, [1.20], [2.10] Possession found articles, [16.610] course of employment, [16.700], [16.710] in or attached to land, [16.620]-[16.670] on land, [16.680]-[16.690] ownership, distinction, [16.500] case examples, [16.510]-[16.520] found articles, [16.610]-[16.710] personal property, [16.720] Postal acceptance rule (PAR) case examples [3.540]-[3.560] definition, [3.10] exclusion of rule [3.530] overview [3.530] revocation of offer [3.570] Precedent common law system, [1.410] court hierarchy, and [1.410], [1.500] definition, [1.20], [1.50] doctrine of, [1.410] High Court [1.500] obiter dicta [1.20], [1.410], [1.530] overview [1.500] case examples [1.510]-[1.520] ratio decidendi [1.20], [1.410], [1.530] States and Territories [1.500] superior courts creating, [1.410]

Pre-contractual negotiations misrepresentations [15.190] case examples [15.200]-[15.220] exclusion clauses [15.300], [15.310] silence [13.170A]-[15.280] strict liability [15.290] Price unfair practices [15.830] case example [15.840] penalty [15.850] Principal — see also Agents bankruptcy [18.780] capacity to act as [18.40] death of principal [18.750] insanity [18.760] liability for agent [18.610] misrepresentations [18.610] wrongful acts [18.620]-[18.670] liability of agent to [18.530] overview [18.10] revocation of agency [18.720] agents’ rights [18.740] third party rights [18.730] vicarious liability [18.610] wrongful acts [18.620], [18.630] damages [18.640] fraudulent misrepresentation [18.640] negligence [18.670] unauthorised acts of agent [18.650]-[18.670] Privacy business organisation choice, [19.30] Private companies — see Proprietary companies Private law [1.710] classification, [1.540] definition, [1.20], [1.540] Privity of contract agency relationship [10.70] exceptions to doctrine [10.70]-[10.110] general principle [10.30], [10.50] case examples [10.40], [10.60] insurance contracts [10.80]-[10.100] meaning, [10.10] overview [10.20], [10.30] property law [10.110] terminology, [10.10] trust relationship [10.70] Prizes unfair practices [15.690] Procedural law [1.720] classification, [1.540] definition, [1.20], [1.540] Product safety defences [15.1600] overview [15.1600] recall of goods [15.1600] Professional negligence breach of contract, and [14.40]

719

720

Introduction to Business Law in Australia Professional negligence — cont peer professional opinion test [14.580]

administration of justice, prejudicial [8.230]-[8.280] commission of crime, tort or fraud [8.200] public life, corruption [8.290]-[8.310] public safety, prejudicial [8.320] revenue, defrauding [8.330] sexual immorality, promoting [8.210], [8.220] statute, by [8.80], [8.90], [8.100] restraint of trade [8.680] void contracts [8.180], [8.340] ousting jurisdiction [8.350] restraint of trade [8.370]-[8.580] status of marriage, prejudicial [8.360]

Promise promisee, definition, [5.10] promisor, definition, [5.10] Promissory estoppel definition, [5.10] effect of operation [5.310]-[5.320] overview [5.20], [5.310]2 remedies that may be granted [5.390], [5.400] unconscionable conduct [5.360] case examples [5.370], [5.380] Waltons Stores v Maher [5.350] Promoters, [20.165] Property categories of, [22.10] chose in possession, [16.40], [16.50] definition, [6.10] found articles, [16.610] course of employment, [16.700], [16.710] in or attached to land, [16.620]-[16.670] on land, [16.680]-[16.690] intangible, [22.10], [16.50] meaning, [16.20] partnership property [19.620] case example [19.630] dissolution of partnership [19.1030] goodwill [19.650], [19.660] nature of partner’s interest [19.640] private debts of partners [19.670] ownership and possession, distinction, [16.60] case examples, [16.70]-[16.90] found articles, [16.610]-[16.710] principles, [22.10] proprietary rights, [16.20] tangible, [22.10], [16.50] terminology, [16.40] Prospectus definition, [20.20] full, [20.430], [20.440] information required, [20.440] misleading, [20.480] due diligence defence, [20.480] short-form, [20.430], [20.450] types, [20.430] Public authorities duty of care [14.240], [14.250] negligence [14.240], [14.250] Public companies — see Companies Public law [1.710] classification, [1.540] definition, [1.20], [1.540] Public policy illegal contracts [8.180], [8.190]

Puff/puffery definition, [7.10], [9.10] Pyramid selling [15.820]

Q Queensland District Courts [1.620] Magistrates Courts [1.630] small claims tribunals [1.680] Supreme Court [1.610] Quistclose trust, [21.50]

R Ratification definition, [6.10] Ratio decidendi [1.530] definition, [1.20] precedent, doctrine of, [1.410] Real estate agents commissions [18.490], [18.500] duty to inform [18.460] overview [18.840] statutory regulation [18.850] Real property airspace, [16.300]–[16.330] corporeal rights, [16.50] Crown land minerals, right to, [22.230] definition, [16.50] encumbrance definition, [16.40] fee simple, [16.40] incorporeal rights, [16.50] interests in land fee simple, [16.40] lease, [16.40] life estate, [16.40] landowner’s rights, scope of airspace, [16.300]–[16.330] beneath surface, [22.210]–[22.230] minerals, [22.230] water, [22.240] life estate, [16.40] minerals, right to, [22.230]

personal property different rules, [16.50] distinguished, [22.10], [16.50] strata title, [16.40] tenures, [16.40] title to land, [22.50] old system title, [16.40] water, [22.240] Rectification common mistake [7.280] definition, [7.10] Referral selling [15.860] Religious or spiritual work enforceability of agreements [4.125], [4.130] Remedies breach of contract [12.20], [12.40] damages [12.50]-[12.400] injunctions [12.470] nature of breach [12.30] specific performance [12.410]-[12.460] termination for breach [12.30] confidential information, [17.2740] copyright infringement, [17.1100] access to encoded broadcasts, [17.1320] account of profits, [17.1140], [17.1150], [17.1160], [17.1170] anti-circumvention provisions, [17.1290] conversion or detention, [17.1220], [17.1230] damages, [17.1120], [17.1130], [17.1180]-[17.1210], [17.1220] delivery up, [17.1240] electronic rights management information, [17.1310] injunctions, [17.1110] moral rights, [17.1510], [17.1520] performers’ rights, [17.1370] consumer guarantees [15.1440] damages — see Damages design infringement, [17.1670] fraudulent misrepresentation [7.410], [7.470] damages [7.410] rescission [7.410], [7.480]-[7.490] innocent misrepresentation [7.460] damages [7.470] equitable remedies [7.470] rescission [7.470], [7.480]-[7.490] misleading or deceptive conduct [15.890] damages [15.1020], [15.1050] injunctions [15.140] pecuniary penalties [15.940]-[15.980] misrepresentation [7.300] Australian Consumer Law [7.500] difference between representations and terms [7.310], [7.320] moral rights, [17.1510], [17.1520] passing off, [17.2680]

S Index Remedies — cont trade marks, [17.2690] patent infringement, [17.2120] recovery, quantum meruit, [12.530] restitution — see Restitution sale of goods, specific performance [12.410], [12.420] specific performance — see Specific performance torts [14.20] trade marks, [17.2450] passing off, [17.2690] unconscionable conduct [15.440], [15.890] pecuniary penalties [15.940]-[15.980] unfair practices [15.880] compensation orders [15.1110], [15.1130] criminal penalties [15.890] damages [15.1010]-[15.1090] injunctions [15.990] non-party consumers [15.1120], [15.1130] other orders [15.1100]-[15.1150] pecuniary penalties [15.940]-[15.980] void contracts [15.1140], [15.1150] Representations — see also Misrepresentation definition, [9.10] representations [7.300] terms of contract, distinction [7.310], [7.320], [9.130]-[9.160] Repudiation of contract anticipatory breach [11.280] case example [11.290] conduct amounting to [11.300] case examples [11.310], [11.320] definition, [2.10], [6.10] effect of repudiation [11.330] minors’ contracts [6.120] overview [11.260], [11.270] Rescission of contract case example [7.490] common law, [6.10] definition, [6.10], [11.10] equity, [6.10] fraudulent misrepresentation [7.410], [7.480] innocent misrepresentation [7.470], [7.480] rescind, meaning, [6.10], [11.10] Respondent definition, [1.20] Restitution basis of restitution [12.490] case examples [12.500], [12.510] meaning, [12.10] nature of action [12.480] overview [12.20], [12.480] quantum meruit definition, [12.10]

reasonable remuneration quantum meruit, [12.10] requirements [12.520] unjust enrichment [12.490] Restraint of trade categories of contracts [8.370] court’s considerations [8.370] definition [8.10], [8.370] employment contracts [8.410], [8.420] fairness of bargain [8.510], [8.520] reasonableness of restraint [8.430]-[8.480], [8.510] release from contract [8.490], [8.500] subsequent unlawful conduct [8.530] time for determination [8.530] excluded transactions [8.580] franchise agreements, after [8.540] case examples [8.550], [8.560] overview [8.370], [8.570] sale of business contracts case examples [8.380], [8.390], [8.400] severance, and [8.680] statutory prohibitions, and [8.570], [8.580] Resulting trust creation of, [21.150], [21.160] Risk duty of care breach of duty [14.490]-[14.500], [14.540]-[14.560] burden of eliminating risk [14.540]-[14.560] probability of injury [14.490], [14.500] voluntary assumption of risk [14.690] Rule of law definition, [1.20] doctrine of, [1.50] separation of powers as part of, [1.50]

S Sale of goods — see also Supply of goods or services conditions implied conditions [9.690] factors [18.800] mercantile agents [18.800] remedies for breach specific performance [12.410], [12.420] specific performance [12.410] adequacy of damages [12.420] Sale of land acts referable to contract [5.510] false or misleading representations [7.500], [15.580]

application of provision [15.580], [15.590] requirements [15.600] overview [5.450] part performance [5.480]-[5.510] specific performance [12.410] written requirement [5.450] Securities — see Shares Security interests liens, [16.790] general liens, [16.790] particular liens, [16.800] possessory liens, [16.790]-[16.810] overview, [16.820] personal property security interests — see Personal property security interests Separation of powers definition, [1.20] doctrine of, [1.110] executive, [1.110] judiciary, [1.110] legislature, [1.110] overlap between powers, [1.50] rule of law, part of, [1.50] Services — see Supply of goods or services Severance definition, [8.10] illegal contracts [8.690] restraint of trade [8.680] void contracts [8.670], [8.680] Sexual immorality contracts promoting [8.210], [8.220] Share buy-backs capital reduction by, [20.380]–[20.400] contravention of Act, [20.390], [20.400] employee share scheme, [20.400] equal access scheme, [20.400] financial assistance, [20.390] improper purposes, [20.380] material prejudice, [20.390] minimum holding buy-backs, [20.400] on-market buy-backs, [20.400] permitted, [20.380], [20.390] selective buy-backs, [20.400] Share capital reduction, [20.370]–[20.400] contravention of Act, [20.390], [20.400] financial assistance to acquire shares, [20.390] return of capital, [20.370] share buy-backs, [20.380]–[20.400] Shares allotment, [20.340]

721

722

Introduction to Business Law in Australia Shares — cont alteration of rights, [20.290], [20.340] consent of members, [20.340] members’ remedies, [20.320], [20.330] right to object to, [20.280] buy-backs, [20.380]–[20.400] definition, [20.20], [20.340] financial assistance to acquire, [20.390] founders’/deferred shares, [20.340] fully/partly paid, [20.340] issue of, [20.335], [20.340] allotment distinguished, [20.340] nature of, [20.340] ordinary shares, [20.340] preference shares, [20.340] register, [20.350] correction of defects, [20.350] establishing, [20.180] registration of company, issue on, [20.180] right to confiscate, [20.190] rights attaching to, [20.340] alteration of, [20.290], [20.340] constitution setting out, [20.340] short selling restrictions, [20.40] transfer of, [20.350] constitution regulating, [20.190], [20.270], [20.350] end of membership, [20.250] proper instrument, [20.350] refusal to register, [20.350] types, [20.340] Simple contract definition, [5.10] Small claims tribunals [1.680] Sole traders business name registration, [19.40] characteristics, [19.40] definition, [19.20], [19.40] GST, registration for, [19.40] legal status [19.100] overview [19.120], [19.200] taxation, [19.30] Solicitors barristers, distinction [1.820] overview [1.810] role of, [1.550] undue influence [7.590] Sources of law, [1.60] common law, [1.410]–[1.550] South Australia District Courts [1.620] Local Courts [1.630] small claims tribunals [1.680] Supreme Court [1.610] Spare parts right of repair defence, [17.1690] Specific performance adequacy of damages [12.410], [12.420]

definition, [2.10], [12.10] equitable remedy, [12.10] mutual availability [12.460] overview [12.410] personal services contracts [12.430] sale of goods contracts [12.410] adequacy of damages [12.420] sale of land contracts [12.410] supervision of contract [12.440], [12.450] Standard of proof balance of probabilities, [1.540] beyond reasonable doubt, [1.540] civil law, [1.540] civil proceedings [1.790] criminal law, [1.540] criminal proceedings [1.740], [1.790] Stare decisis — see Precedent State courts County Courts [1.620] cross-vesting of jurisdiction [1.700] District Courts [1.620] doctrine of precedent [1.500] case examples [1.510]-[1.520] Local Courts [1.630] Magistrates Courts [1.630] overview [1.600] specialist courts or tribunals [1.640], [1.670], [1.690] small claims tribunals [1.680] Supreme Courts [1.610] State parliaments legislative powers, [1.100] States and Territories consumer protection [15.30] courts — see State courts Imperial Acts, and [1.440] law reports [1.450] Statute of Frauds 1677 definition, [2.10] writing requirement for contracts, [2.10] Statutes/Statute law — see also Delegated legislation Act, definition, [1.20] Australian colonies [1.440] common law, and [1.400] constitutional power to make, [1.100] concurrent powers of State and Commonwealth, [1.100] residual powers, [1.100] definition, [1.20] source of law, [1.60] Statutory authorities — see Public authorities Statutory interpretation Acts Interpretation Acts [1.300] extrinsic materials [1.320], [1.360] purposive approach [1.310], [1.340], [1.360] common law rules [1.330]

golden rule [1.350] literal rule [1.340] mischief rule [1.360] extrinsic materials [1.320], [1.360] explanatory memorandum [1.320] second reading speeches [1.320] golden rule [1.350] literal rule [1.340] maxims of interpretation [1.370] mischief rule [1.360] overview [1.290] presumptions [1.380] purposive approach [1.310] Strata title definition, [16.40] Strict liability definition, [14.10] torts, [14.10] Subordinate legislation — see Delegated legislation Substantive law [1.720] classification, [1.540] definition, [1.20], [1.540] Superior court court hierarchy, [1.410] definition, [1.20] jurisdiction, [1.550] precedent, creating, [1.410] Supervening event definition, [11.10] Suppliers defective goods [15.1450], [15.1570] indemnity by manufacturer [15.1570] limitation of liability [15.1580], [15.1590] Supply of goods or services acceptable quality [15.1310] meaning [15.1320] services [15.1320], [15.1330] auction sales [15.1410] consumer guarantees [15.20], [15.1240]-[15.1270] consumer, meaning [15.1290] correspondence with description [15.1370] demonstration models [15.1390] exclusion of guarantees [15.1430] express warranties [[15.1400]] fitness for disclosed purpose [15.1340] limitation of liability [15.1430] provision of services [15.1420] remedies for non-compliance [15.1440] repairs [15.1390] spare parts [15.1390] supply by sample [15.1380] supply, definition [15.1280] title of goods [15.1300] false or misleading representations [7.500], [15.500] case examples [13.510]-[15.540]

T Index Supply of goods or services — cont penalties for contravention [15.550] fitness for disclosed purpose [15.1340] case example [15.1360] disclosed purpose, meaning [15.1360] product safety [15.1600] provision of services [15.1420] supply, definition [15.1280] unconscionable conduct [15.390] court’s considerations [15.390] remedies for contravention [15.440] small business, protection of [15.420]-[15.430] unconscionable, meaning [15.390], [15.400] unfair contract terms [15.40], [15.560] effect of terms [15.560] examples [15.470] standard form contracts [15.480] unfair, meaning [15.460] unfair practices — see Unfair practices Supreme Courts [1.20] jurisdiction [1.610] overview [1.610] Survivorship joint tenancy, [16.200] Syndicate definition, [19.20]

T Takeovers, [20.720] Takeovers Panel, [20.30] Tasmania Magistrates Courts [1.630] small claims tribunals [1.680] Supreme Court [1.610] Taxation business organisation choice, [19.30] companies, [20.130] sole trader, [19.30] GST, registration for, [19.40] Television and sound broadcasts copyright, [17.750], [17.900] duration, [17.970] exception to infringement, [17.960] exclusive rights, [17.920]-[17.940] ownership, [17.950] subsistence of copyright, [17.910] time-shifting, [17.960] Tenancy in common concurrent interests, [16.240] overview, [16.220] termination of co-ownership, [16.230]

Tenant fixtures, [22.310] Tenders advertisement calling for, [3.10] definition, [3.10] invitation to treat or offer [3.150] case example [3.160] invitation for offers, [3.10] Termination of contract agreement between parties [11.20] cancellation of contract [11.150], [11.160]-[11.180] contingent conditions [11.200]-[11.250] express power to terminate [11.130] implied right to terminate [11.140] subsequent agreement [11.150]-[11.190] substituted agreement [11.190] breach of contract [11.20], [11.260] conditions [9.240], [9.260], [11.350], [12.30] essential terms [11.340], [11.350] innominate terms [9.280], [9.290], [11.360], [11.370] remedies [12.30] repudiation of contract [11.270]-[11.330], [12.30] cancellation of contract [11.150] accord and satisfaction [11.180] mutual termination [11.160] release [11.170] contingent conditions [11.200] conditions precedent [11.210]-[11.240] conditions subsequent [11.20], [11.250] contracts under seal merger of contract [11.690] frustration — see Frustration of contract operation of law [11.20], [11.670] bankruptcy [11.680] merger of contract [11.690] option to terminate, [2.10] overview [11.20] performance, by [11.20], [11.30] case example [11.40] entire and divisible contracts [11.50] partial performance [11.100] substantial performance [11.90] time for performance [11.120] repudiation of contract [11.260], [11.270], [12.30] anticipatory breach [11.280], [11.290] conduct amounting to [11.300]-[11.320] effect of repudiation [11.330] substituted agreement [11.190] Terms of contract clauses, [2.10] collateral contracts [9.170]

consistency with main contract [9.180], [9.190] intention of parties [9.200], [9.210], [9.220] conditions [9.240], [11.350] breach of condition [9.240], [9.280], [11.350] misrepresentation, and [7.300] warranties, distinction [9.240]-[9.280], [11.350] determining terms [9.130]-[9.160] intention of parties [9.130] essential terms [9.30], [11.340] exclusion clauses [9.300] acts outside contract [9.530]-[9.580] ambiguities [9.490]-[9.510] misrepresentation [9.460] negligence, liability [9.250] part of contract, as [9.320] strict interpretation [9.490]-[9.510] express terms [9.30] collateral contracts [9.170]-[9.220] conditions [9.240]-[9.280] online contracting [9.590] parol evidence rule [9.40]-[9.100] warranties [9.240]-[9.280] implied terms [9.600] business efficacy [9.10], [9.610], [9.620]-[9.660] custom or trade usage [9.680] definition, [2.10] good faith, to act in [9.700], [9.710] sale of goods [9.690] specific types of contract [9.610], [9.670] statute, by [9.690] use “best endeavours” [9.700], [9.710] intermediate/innominate terms [9.280], [11.10], [11.360] case example [9.290], [11.370] misrepresentation [7.300] online contracting [9.590] overview [9.20], [9.30] parol evidence rule [9.40] collateral verbal agreements [9.70], [9.100] exceptions [9.40]-[9.100] representations, distinction [7.310], [7.320], [9.130]-[9.160] sale of goods implied conditions [9.690] terminology, [9.10] warranties [9.240], [11.350] breach of warranty [9.240], [9.280], [11.350] conditions, distinction [9.240]-[9.280], [11.350] Title to land forms of, [22.50] indefeasibility of title, [16.40] old system title definition, [16.40] strata title, [16.40]

723

724

Introduction to Business Law in Australia Torrens title certificate of title definition, [16.40], [16.270] definition, [16.40] folio of the register definition, [16.40] indefeasibility of title, [22.90] definition, [16.40] overview, [16.270] register folios, [16.40] registered proprietor definition, [16.40] indefeasible title, [22.90] registration indefeasibility of title on, [22.90] registration of instruments, [16.270] unregistered interests, [16.270] Torts actionable per se per se, meaning, [14.10] aim of law [14.20] breach of contract procuring, [14.10] conspiracy, [14.10] contract law, and [14.40] inducement to breach [10.120], [10.130] minors’ liability [6.150] criminal liability, and [14.30] damnum absque injuria, [14.10] deceit, [14.10] defamation, [14.10] definition, [6.10] detinue, [14.10] false imprisonment, [14.10] injuria sine damno, [14.10] intimidation, [14.10] liability in [14.30] minors’ liability [6.150] negligence — see Negligence overview [1.710], [14.20], [14.30] procuring breach of contract, [14.10] remedies [14.20] strict liability [14.10], [14.720] case example [14.730] tortfeasor, definition, [14.10] ubi jus, ibi remedium, [14.10] unfair practices, and [13.1020] vicarious liability — see Vicarious liability definition, [14.10] Trade marks assignment, [17.2510] authorised users, [17.2460] certification marks, [17.2470], [17.2490] collective marks, [17.2470], [17.2480] deceptively similar marks, [17.2400] unregistered marks, [17.2430] defences, [17.2410] similar goods, [17.2410], [17.2420] unregistered marks, [17.2430] defensive marks, [17.2470], [17.2500]

definition, [17.10], [17.2190], [17.2370] exclusive rights, [17.2200] graphical representation, [17.2230] false representation, [17.2330] imported infringing goods, [17.2530] infringement, [17.2380] deceptively similar, [17.2400] functional shape, [17.2380], [17.2390] imported goods, [17.2530] remedies, [17.2450], [17.2690] statutory defences, [17.2410]-[17.2430] substantially identical, [17.2400] interests in marks, [17.2520] international agreements, [17.2550] nature of trade marks, [17.2180] offences, [17.2540] opposition to registration, [17.2280] defective applications, [17.2340] false geographical indication, [17.2330] grounds for opposition, [17.2290] ownership of mark, [17.2300] similar marks, [17.2320] use of mark, [17.2310] overview, [17.10], [17.2180] register, [17.2350] rectification, [17.2360] removal for non-use, [17.2370] registrable marks, [17.2190] registration, [17.2350] applications, [17.2210], [17.2340] rejection of applications, [17.2220]-[17.2270] opposition to registration, [17.2280]-[17.2340] term of registration, [17.2350] rejection of applications, [17.2220], [17.2270] confusion or deception, [17.2250] distinguishing goods or services, [17.2240] graphical representation, [17.2230] substantially identical marks, [17.2260] remedies, [17.2450] passing off, [17.2690] substantially identical marks, [17.2260], [17.2400] unregistered marks, [17.2430] Trade Practices Act — see Australian Consumer Law Trespass airspace, [16.310]–[16.330] beneath land, [22.220] chattels, to conversion, [14.10] detinue, [14.10] definition, [14.10] person, to assault, [14.10] battery, [14.10] false imprisonment, [14.10] tort of, [14.10]

Trials civil proceedings [1.780] Tribunals or commissions federal [1.650], [1.660] overview [1.640] State tribunals [1.670] small claims tribunals [1.680] TRIPS Agreement, [17.1560] Trust accumulation of income, rule against, [21.200] agency, distinguished, [21.40] bailment distinguished, [21.40] beneficiary, [21.20], [21.30] charitable trust, [21.140] distribution of assets to, effect, [21.320] recovering property, [21.30] rights, [21.30] breach of beneficiary rights, [21.30] liability, [21.230] certainty criterion, [21.120] express trust, [21.110]–[21.130] fixed trust, [21.120] intention, [21.110] list, [21.120] objects, [21.120] subject matter, [21.120] test of, [21.120] charitable trust, [21.100], [21.140] categories, [21.140] charitable purpose, meaning, [21.140] classifications, [21.60]–[21.90] company, distinguished, [21.50] compliance with formalities, [21.130] constructive trust, [21.70]–[21.90], [21.170]–[21.190] contract, distinguished, [21.40] creation, [21.110]–[21.190] charitable trust, [21.140] constructive trust, [21.70]–[21.90], [21.170]–[21.190] express trust, [21.110]–[21.130] resulting trust, [21.150], [21.160] debtor and creditor, distinguished, [21.40] definition, [19.20] discretionary trust, [21.100] express trust, [21.30], [21.70] creation, [21.110]–[21.130] fiduciary, [21.20] duties, [21.10], [21.30], [21.330] implied trust, [21.70] intention, [21.70]–[21.90], [21.120] certainty, [21.110] express, [21.110] implied, [21.110] legal relationship, [21.40], [21.50] meaning, [21.20] objects, certainty of, [21.120] perpetuities, rule against, [21.200] principles, [21.10]

U Index Trust — cont property, [21.20], [21.30], [21.200] accumulation of income, [21.200] certainty of, [21.120] forms, [21.120] recovery by beneficiary, [21.30] rule against perpetuities, [21.200] sale of, effect, [21.320] title, effect on, [21.40] trustee powers relating to, [21.270] Quistclose, [21.50] resulting trust, [21.150], [21.160] revocation of, [21.320] settlor, [21.20], [21.30] structure, [21.10] subject matter, certainty of, [21.120] superannuation funds, [21.10] termination of, [21.320] terminology, [21.20] testamentary trust, [21.100] trading trust, [21.100] trustee — see Trustee trust law, [1.710] types, [21.60], [21.100] unit trust, [21.100] Trustees accounts, [21.250] agents, distinction [18.35] appointment, [21.210] definition, [21.20] delegation of duties, [21.250] disclaimer of trust, [21.300] duties, [21.220]–[21.250] enforcement, [21.260] ending trusteeship, [21.300] executor, distinguished, [21.50] express trust, [21.30] good faith, acting in, [21.270], [21.290] impartiality, [21.250] indemnity, right to, [21.280] liability, [21.230], [21.290] powers, [21.270] profiting from trust, [21.230] removal, [21.300] remuneration, [21.280] retirement, [21.300] rights, [21.280] termination of trusteeship, [21.300]

U Ubi jus, ibi remedium, [14.10] Unconscionable conduct franchising, [17.2800] in connection with goods and services [15.290] case examples [15.400], [15.410] court’s considerations [15.290] remedies for contravention [15.440] small business, protection of [15.420]-[15.430] unconscionable, meaning [15.390] lack of genuine consent, [2.10] overview [7.730], [15.40], [15.330]

unconscionable, meaning, [5.10], [7.10] unwritten law, within [15.340] application of provisions [15.360] case examples [15.350]-[15.370] meaning [15.340] remedies for contravention [15.440] Unconscionable contracts Amadio’s case [7.660], [7.670] Australian Consumer Law [7.730], [15.340], [15.380] case examples [7.690]-[7.720] National Credit Code [7.740] overview [7.650] special disadvantage [7.660], [7.670] application of principle [7.680] circumstances [7.680] Undue influence banker and customer [7.630] case examples [7.600], [7.620], [7.630] definition, [7.10] effect [7.640] husband and wife [7.590] overview [7.590] special relationships [7.590] absence of relationship [7.610] Unenacted law, [1.20] Unenforceable contract definition, [2.10] Unfair contract terms effect of terms [15.450] examples [15.470] overview [15.40], [15.450] standard form contracts [15.480] unfair, meaning [15.460] Unfair practices — see also False or misleading representations — see also Misleading or deceptive conduct — see also Unconscionable conduct bait advertising [13.530] case example [15.750] penalties [15.760] contravention of provisions [15.880] aiding or abetting [15.1060] corporate liability [15.900] criminal penalties [15.890] defences [15.910]-[15.930] liability of persons involved [15.1060]-[15.1080] pecuniary penalties [15.940]-[15.980] damages [15.1010] analogies with tort [15.1020] assessment of damages [15.1020], [15.1030], [15.1040] commercial advantage [15.1050] exemplary damages [15.1020] liability of persons involved [15.1060]-[15.1080] limitation of actions [15.1090] defences [15.910]

actions beyond control [15.930] case example [15.920] innocent publication [15.930] reasonable precaution [15.930] enforcement provisions [15.1160] adverse publicity orders [15.1210] disqualification orders [15.1220], [15.1230] non-punitive orders [15.1200] public warning notices [15.1190] substantiation notices [15.1180] undertakings [15.1170] gifts, prizes or rebates [15.690] harassment and coercion [15.870] injunctions [15.990] applicants for injunctions [15.1000] misleading conduct [15.670] employment conditions [15.680] nature of services [15.710]-[15.730] nature or manufacturing [15.700] overview [13.40], [15.670] payment [15.770] acceptance without intention to supply [15.770] unauthorised entries or advertisements [15.810] unsolicited goods [15.800] pricing of goods [15.830] case example [15.840] penalty [15.850] pyramid selling [15.820] referral selling [15.460] remedies [15.880] compensation orders [15.1110], [15.1130] criminal penalties [15.890] damages [15.1010]-[15.1090] injunctions [15.990] non-party consumers [15.1120], [15.1130] other orders [15.1100]-[15.1150] pecuniary penalties [15.940]-[15.980] void contracts [15.1140], [15.1150] unsolicited credit or debit cards [15.780] unsolicited goods [15.800] recipient’s liability for payment [13.410] Unincorporated association characteristics, [19.50] definition, [19.20], [19.50] not-for-profit, [19.50] personal liability of committee, [19.50] Unit trust, [21.100] Universal Copyright Convention, [17.1550] Unjust enrichment [12.490] Unsound mind contractual capacity lack of, [2.10]

725

726

Introduction to Business Law in Australia

V

Voluntary administration, [20.810]

Vendor definition, [8.10]

Voluntary assumption of risk [14.690] volenti non fit injuria, [14.10]

Vicarious liability definition, [19.20], [14.10] employer, [19.20] act outside scope of employment, [21.950] principal’s liability [18.610] relationship of employer and employee [14.740]-[14.650] Victoria County Courts [1.620] Court of Appeal [1.610] Magistrates Courts [1.630] minors’ contracts [6.140] small claims tribunals [1.680] Void contracts — see also Illegal contracts common law, at [8.180], [8.340] ousting jurisdiction [8.350] restraint of trade [8.370]-[8.580] status of marriage, prejudicial [8.360] consequences [8.590] severance [8.670], [8.680] definition, [2.10], [6.10], [8.10] fraudulent misrepresentation [7.410] illegal contracts [8.170], [8.610] related transactions [8.660] void ab initio, [8.10] lack of genuine consent, [2.10] minors [6.140] mistake of fact [7.40] ousting jurisdiction [8.350] overview [2.120], [8.20], [8.590] recovery of money [8.700], [8.710] restraint of trade [8.370], [8.570] categories of contracts [8.370] employment contracts [8.410]-[8.530] excluded transactions [8.580] franchise agreements, after [8.540]-[8.560] sale of business [8.380]-[8.400] severance, and [8.680] statutory prohibitions, and [8.570], [8.580] severance of void part/s[8.670], [8.680] definition, [8.10] restraint of trade [8.680] status of marriage, prejudicial [8.360] statute, by [8.170] unfair practices [15.1140], [15.1120] void ab initio definition, [6.10], [8.10] illegal contract, [8.10] Voidable contract definition, [2.10], [6.10], [8.10] lack of genuine consent, [2.10]

W Warranties breach of warranty [9.240], [9.280], [11.350] conditions, distinction [2.10], [9.240], [11.350] case examples [9.250], [9.270] intention of parties [9.280] consumer contracts [15.1400] definition, [2.10], [9.10], [11.10] innominate terms, and [11.360] case example [9.290], [11.370] overview [9.240], [11.350] Water landowner’s rights, [22.240] Western Australia District Courts [1.620] Magistrates Courts [1.630] small claims tribunals [1.680] Supreme Court [1.610] Wife — see Husband and wife — see Married women Wills or intestacy acquisition of personal property, [16.760] Winding up company receiver effect on, [20.770] registered liquidator, must be, [20.730] compulsory, [20.830], [20.840] Corporations Act, under, [20.730] court, by, [20.830], [20.840] creditors’ voluntary, [20.850] deregistration, [20.860] insolvent company, [20.840] insolvent transactions, [20.860] directors’ liability, [20.90], [20.610] liquidator definition, [20.20] powers and duties, [20.860] registered, [20.830] members’ voluntary, [20.850] order for, [20.840] overview, [20.830] priority of debts, [20.860] proof of debts, [20.860] secured creditors, [20.860] unsecured creditors, [20.860] voidable transactions, [20.860] voluntary, [20.830], [20.850] Witnesses civil proceedings [1.780]

Words and phrases acceptable quality [15.1320] affected person [15.1560] agent [18.10] applied industrially, [17.1750] artistic work, [17.180] assignee [10.150] assignment of contract [10.150] assignor [10.150] broker [18.810] cinematograph film, [17.830] common law [1.400] condition [11.350] conduct [15.230] consideration [5.50] consumer [15.1290] contract [2.40], [2.50] copyright, [17.30] corresponding design, [17.1730] design, [17.1580] disclosed purpose [15.1430] dramatic work, [17.160] drawing, [17.180] fair dealing, [17.600], [17.620] general agent [18.70] goods [15.1480] goodwill [19.650] guarantee [5.460] in trade or commerce [13.70] injunction [12.470] involved [15.1060], [15.1080] joint venture [19.140] lien, [16.790] literary work, [17.90], [17.100], [17.150] manufacturer [15.1490] mercantile agents [18.800] misleading or deceptive conduct [15.80] necessaries [6.50] partnership [19.280] prior art base, [17.1880] property, [16.20] restitution [12.480] restraint of trade [8.370] safety defect [15.1470] sole trader [16.20] sound broadcast, [17.900] sound recording, [17.760] special agent [18.60] standard form contract [15.480] supply [15.1280] television broadcast, [17.900] trade mark, [17.2190], [17.2370] unconscionable [15.390], [15.400] unfair [15.460] universal agent [18.80] unjust [7.740] unjust enrichment [12.490] warranty [11.350] Workers’ compensation manufacturers’ liability [15.1540] World Trade Organization TRIPS Agreement, [17.1560]