Law in Commerce [6 ed.] 0409342858, 9780409342857

Table of contents :
Full Title
Copyright
Preface
Table of Cases
Table of Statutes
Glossary
Table of Contents
CHAPTER 1 LAW AND THE AUSTRALIAN LEGAL SYSTEM
Objectives of this chapter
Introduction and outline of chapter
Why study business law?
What is meant by the rule of law?
Identifying the law
Sources of law: parliamentary law
A short history of government in Australia
Federalism: sharing power between parliaments
Changing the division of power between parliaments
Finding and referring to parliamentary law
The structure of parliaments in Australia
The process of creating parliamentary law
Administering the law: the doctrine of the separation of powers
Interpreting a statute: the role of the courts
Sources of law: case law (common law)
Distinction between common law systems and civil law systems
Doctrine of precedent (stare decisis)
Finding case law
Law reporting and the internet
Common law and equity
The process of extracting the law from a case
The primacy of parliamentary law over case law
An age of regulation
Private law and public law
Civil cases and criminal cases
Dispute resolution
Resolving disputes through the courts
A hypothetical case
Alternative dispute resolution
Law in commerce
Contracts
Torts and similar statutory obligations
Agency, partnerships, companies and trusts
Business, law and ethics
Introduction
The role of ethics in business
The psychology of ethical (or moral) behaviour
The importance of the workplace culture
Deciding what is the right or ethical thing to do
Developing an ethical culture in the firm
Risk management and the law
What is risk management?
What are the legal risks?
Strategies for dealing with legal risks
Compliance programs
Questions
CHAPTER 2 LIABILITY FOR DEFECTIVE PRODUCTS
Objectives of this chapter
Setting the scene: Could this happen in Australia?
Introduction and outline of chapter
Liability for negligence
History of the negligence action
Step 1: When is a duty of care owed?
Step 2: What standard of care is owed?
Step 3: Causation, remoteness of damage, amount of damages
Defences
Liability for another person’s acts
Class actions
Liability for safety defects under ACL Pt 3-5
What is the purpose of Pt 3-5?
What are the elements of a breach of Pt 3-5?
What is a ‘manufacturer’?
What is meant by the expressions ‘goods’ and ‘supply’?
What is the meaning of ‘safety defect’ in relation to goods?
Does Pt 3-5 compensate for all types of losses caused by a defective good?
Damage must be caused by the defective good
What are the defences under Pt 3-5?
Can a manufacturer exclude liability?
Other matters
Other product liability laws
Advice — Law in practice
Questions
CHAPTER 3 MISREPRESENTATION AND UNCONSCIONABLE CONDUCT: UPHOLDING THE BASIC NORMS OF COMMERCIAL CONDUCT
Objectives of this chapter
Setting the scene: Creative marketing or legal blunder?
Introduction and outline of chapter
Fraudulent misrepresentation
Step 1: Was the representation a false statement of fact?
Step 2: Did the representation induce the plaintiff to act in some way?
Step 3: Did the representor know the misrepresentation was false?
Step 4: Did the misrepresentation cause the plaintiff to suffer a loss?
Negligent misrepresentation
Step 1: When is a duty of care owed?
Step 2: What standard of care is owed?
Step 3: Remoteness of damage
Misleading or deceptive conduct
Outline of ACL s 18
Conduct of directors, employees and agents
Conduct must be ‘in trade or commerce’
When is conduct misleading or deceptive?
The role of exclusion clauses and disclaimers
Remedies for breach of s 18
Australian Securities and Investments Commission Act
Corporations Act
Unconscionable conduct
Unconscionable conduct as part of judge-made law
Unconscionable business transactions under the ACL
Other unfair conduct
Advice — Law in practice
Questions
CHAPTER 4 MAKING THE CONTRACT: OFFER AND ACCEPTANCE
Objectives of this chapter
Setting the scene: Pepsi loyalty rewards
Introduction and outline of chapter
The importance of contracts to business
What is a contract?
Standard of conduct expected when negotiating a contract
Does a contract have to be in writing?
The meaning of ‘intention’ in contract law
Contractual remedies
Termination of the contract
Damages
Specific performance
Injunction
Recovery of the contract price
Agreed damages clauses
Making the offer
Meaning of ‘offer’
An offer, or merely an indication of a present intention?
An offer or an invitation to treat?
Auctions: Who makes the offer?
Tenders: Who makes the offer?
Internet transactions: Who makes the offer?
An offer, or merely part of the negotiations?
The fate of the offer
Withdrawing the offer
Can an offer be revoked after acceptance?
Can an offer be revoked before acceptance?
Is it necessary to tell the offeree about the revocation?
Who must tell the offeree that the offer has been revoked?
Is it possible to revoke a unilateral offer?
Options: offers that cannot be revoked
Rejecting an offer
What is the effect of rejecting an offer?
Offeree’s conduct may indicate rejection
Counter offer amounts to a rejection
Asking for clarification of the terms of the offer is not a counter offer
Accepting the offer
Only the offeree may accept
Acceptance must be final and unqualified
Acceptance completes the contract
Acceptance must be communicated to the offeror
Communicating acceptance to a large company
Communicating acceptance over the internet
When is express communication of acceptance not necessary?
Acceptance and the postal acceptance rule
The method and timing of the acceptance
Can acceptance be communicated by someone other than the offeree?
Lapse of offer
Lapse of an offer due to the death of offeror or offeree
Lapse of an offer due to time
Lapse of an offer due to the failure of a condition precedent
The agreement must be ‘certain’
Is an ‘agreement to agree’ binding?
Is an ‘agreement to negotiate’ binding?
Is an agreement made ‘subject to contract’ binding?
Other conditional agreements
Overview of offer and acceptance
Advice — Law in practice
Questions
CHAPTER 5 MAKING THE CONTRACT: INTENTION AND CONSIDERATION
Objectives of this chapter
Setting the scene: Young love and ‘good’ intentions ….
Introduction and outline of chapter
Did the parties intend to contract?
Social or domestic agreements
Commercial agreements
Have the parties provided consideration?
What is a Deed?
Consideration is required in all simple contracts
What is consideration?
Examples of consideration
Only parties to the contract can sue for breach of contract
Consideration may not be past
Consideration may be of nominal value
Consideration must be sufficient
Illusory promises are not consideration
Settling disputes: giving up a legal claim may be consideration
Renegotiating contracts: new consideration necessary
Renegotiating contracts: merely promising to perform an existing contract is generally not good (valid) consideration
Terminating a contract by agreement
Renegotiating a debt: special problems
Is promising to perform a contractual duty owing to a third party good consideration?
Is performing a public duty good consideration?
Promissory estoppel
The rules of contract law can lead to unfair results
How did promissory estoppel develop?
Promissory estoppel and contract law
When is promissory estoppel important?
What are the elements of promissory estoppel?
The leading case: Waltons Stores (Interstate) Ltd v Maher
The remedy in cases of estoppel
Minors
Persons with mental disabilities; intoxicated persons
Agents
Partnerships
Corporations
Assignment of contractual rights
Advice — Law in practice
Questions
CHAPTER 6 EXPRESS TERMS OF THE CONTRACT
Objectives of this chapter
Setting the scene: A Faustian plot
Introduction and outline of chapter
Ascertaining the relevant evidence
The critical importance of the facts
How courts approach different types of evidence
Statements made after the contract is formed are not terms
The importance of a signed document
General rule: a person is bound by the contents of a document they sign
When is a person not bound by a document they signed?
Incorporating unsigned terms into the contract by notice
The reasonable notice test
What constitutes reasonable notice?
Incorporating ‘terms and conditions’ by notice
When are oral statements or representations binding?
The statement must be promissory in nature
Determining which oral statements are promissory: the reasonable bystander test
Applying the reasonable bystander test: some guidelines
Collateral contracts
Meaning of a term
Reasonable person test
Courts must interpret the words of the contract as written
Interpreting exemption clauses
What is an exemption clause?
What are the rules for interpreting exemption clauses?
Unenforceable contracts
In general
Unenforceable terms in standard form consumer contracts
Terms that involve an unreasonable restraint of trade
The importance of a term
Advice — Law in practice
Appendix: Sample of a written contract
Questions
CHAPTER 7 IMPLIED TERMS IN CONTRACTS
Objectives of this chapter
Setting the scene: The not-so-burglar-proof door
Introduction and outline of chapter
Implied terms of cooperation and good faith
Implied term of cooperation
Implied term of good faith
Terms implied into specific types of contracts
Contracts between professional persons and their clients
Contracts for work and materials
Other service contracts
Hire contracts
Employment contracts
Landlord/tenant
Terms implied as a matter of fact
Terms implied on the basis of a course of past dealings
Terms implied as a result of custom or trade usage
Terms implied in order to make the contract effective
Sales of goods contracts
Background to sale of goods legislation
Consumers have special protections under the Australian Consumer Law
What terms are implied by the sale of goods legislation?
Correspondence with description
Fitness for purpose
Merchantable quality
Correspondence with sample
Excluding, or limiting liability for breach of, the implied terms
Remedies
Other matters affecting sales of goods
Advice — Law in practice
Appendix: Comparative table of sale of goods legislation
Questions
CHAPTER 8 REMEDIES IN CONTRACT CASES
Objectives of this chapter
Setting the scene: The sensitive side of heavy metal
Introduction and outline of chapter
Terminating the contract
Termination by performance
Termination by agreement
Termination by a term of the contract
Termination by frustration
Termination for breach of a condition of the contract
Termination for serious breach of an intermediate term
Termination for repudiation
Termination for anticipatory breach
Termination: process and consequences
Recovery of the contract price
In general
Sale of goods
Damages
What is the purpose of damages?
Losses must be caused by a breach of the contract
Agreed damages
Plaintiff has a duty to mitigate losses
Damages must not be too remote: the rule in Hadley v Baxendale
Calculating the amount of damages
Contributory negligence
Specific performance
Injunction
Rectification of the contract
Restitution
Quantum meruit and partially performed contracts
Rescission
Introduction to rescission
Grounds for rescission in equity
The nature of rescission in equity
Statutory rescission
Advice — Law in practice
Questions
CHAPTER 9 CONSUMERS’ RIGHTS AND THE SUPPLY OF GOODS AND SERVICES
Objectives of this chapter
Setting the scene: A timely lesson
Introduction and outline of chapter
Consumers’ rights against the suppliers of goods
Introduction
Supply to a ‘consumer’
What are the statutory guarantees relating to the supply of goods?
When is a supply in trade or commerce?
Supply by way of sale by auction
Guarantee of acceptable quality
Guarantee of fitness for any disclosed purpose
Guarantee that goods correspond with description
Guarantee that goods correspond with sample
Guarantees may not be excluded
Liability may be limited in certain circumstances
Remedies for breach of statutory guarantees relating to goods
Retailers’ right of indemnity against the manufacturer
Consumers’ rights against the manufacturers of goods
The manufacturers’ obligations to the consumer
Defences available to the manufacturer
Manufacturer may repair or replace goods provided it has given an express warranty to that effect
Measuring the amount of damages
Consumers’ rights against the suppliers of services
Supply of services must be to a ‘consumer’
Supply must be in trade or commerce
Meaning of ‘services’
Services not covered by the ACL
Distinguishing services from sales of goods
What are the statutory guarantees relating to the supply of services?
Guarantees may not be excluded
Limiting liability
Terms that limit or exclude liability in recreational services contracts
Remedies for breach of statutory guarantees relating to services
Advice — Law in practice
Questions
CHAPTER 10 AGENCY
Objectives of this chapter
Setting the scene: Stuck with an unwanted contract
Introduction and outline of chapter
What is an agent?
What are the indicators of an agency relationship?
The functions of an agent
An agent may make contracts on behalf of the principal
An agent may receive moneys on behalf of the principal
An agent may pay moneys on behalf of the principal
An agent may make representations on behalf of the principal
An agent may receive representations on behalf of the principal
Some common commercial relationships and agency
Employer–employee
Independent contractor
Bailor–bailee
Supplier–buyer
Franchisor–franchisee
How is an agency created?
Agency may be created by express agreement
Agency may be created by implied agreement
Agency may be created by estoppel
Agency may be created in cases of necessity
Agency may be created by cohabitation
The agent’s authority
The agent’s actual authority
The agent’s ostensible authority
Principal may ratify agent’s unauthorised acts
Meaning of ratification
Rules applying to ratification
Who can sue whom?
When can the third party sue the principal?
When can the principal sue the third party?
When can the third party sue the agent?
The undisclosed principal rule
Duties of an agent
General duties
Fiduciary duties
Duties of the principal
Termination of agency
Advice — Law in practice
Questions
CHAPTER 11 PARTNERSHIPS
Objectives of this chapter
Setting the scene: Choose your partner carefully
Introduction and outline of chapter
Choosing the appropriate business structure
Types of business organisations
Factors that determine the choice of business organisation
Naming the business
Creation of a partnership
Are any formalities required to create a partnership?
Definition of a partnership
Carrying on business
Carrying on a business in common
Carrying on business in common with a view of profit
Partnerships are contractual relationships
Rules governing partners’ relationship with each other
The contract between the partners
Partnership Act 1958 (Vic)
Partners’ duties of good faith
Partnership property
What is partnership property?
What right does each partner have to the partnership property?
Liability of partners to third parties
Limited partnerships
Joint liability for a firm’s debts and obligations
Joint and several liability for wrongful acts
Joint and several liability for misapplication of money or property
Liability by holding out (estoppel)
Assignment of a partnership interest
Termination of a partnership
Termination by the partners
Termination by operation of law
Termination by supervening illegality
Termination by the courts
Partners remain jointly liable for debts even after dissolution of a partnership
Distribution of assets on dissolution
Advice — Law in practice
Appendix: Comparative table of Partnership Acts
Questions
CHAPTER 12 INTRODUCTION TO COMPANY LAW
Objectives of this chapter
Setting the scene: Understanding the nature of your debtors
Introduction and outline of chapter
Sources of companies
The nature of a company
The powers of a company
Types of companies: general classification
Types of companies which may be registered
Consequences of the principle of separate identity
Registering a company
Steps for registration of a company
The company’s constitution and rules
Implications of the certificate of registration
Managing a company
Comparison of companies and partnerships
How does a company create contracts?
How does a company sign a contract?
When is a company bound by the actions of its agents?
People having dealings with a company may make certain assumptions
When do the assumptions not apply?
Advice — Law in practice
Questions
CHAPTER 13 DUTIES OF COMPANY DIRECTORS AND OTHER OFFICERS
Objectives of this chapter
Setting the scene: Directorships can be a burdensome role
Introduction and outline of chapter
What are the functions of a director?
The source of directors’ duties
Duties also owed by officers
Reasonable care and diligence
The business judgment rule
Is any particular level of skill required of a director?
The level of attendance required
The importance of being informed
The role of reliance
The duty to act in good faith and for a proper purpose
The duty to act in good faith
Directors’ duty to exercise power for proper purposes
The duty not to misuse the position
Contracts with the company
The duty imposed on directors to disclose certain interests
The duty not to use information improperly
What kind of information must not be used?
The consequences of a breach of statutory duty
Civil consequences
Criminal consequences: s 184
Directors’ duties at common law
The insolvent trading rule
When is a company insolvent?
What remedies or sanctions may apply?
Defences to s 588G
Sections 588G and 588H in action
Complying with the rules of the company
Further statutory obligations
Who will sue the directors for a breach of duty?
Exceptions to the rule in Foss v Harbottle
A shareholder’s right to take personal action
Advice — Law in practice
Questions
CHAPTER 14 INTRODUCTION TO TRUSTS
Objectives of this chapter
Setting the scene: Conducting business through a trading trust
Introduction and outline of chapter
What is a trust?
Definition
The essential elements of a trust
Parties to the creation of an express trust
Duration of a trust
Trusts compared with other entities
Types of trusts
Discretionary trusts
Fixed trusts
Operation of a trading trust
Trustees’ powers
Express powers
Implied powers
Statutory powers
Trustees’ duties, rights and liabilities
Duty of prudence, diligence and honesty
Personal liability for debts
The right of indemnity
Insolvent trading by corporate trustee: directors’ liability
Beneficiaries’ rights and liabilities
Personal right of action against the trustee (‘right in personam’)
Proprietary right of action in respect of the trust property (‘right in rem’)
Beneficiaries’ liability to creditors
The position of creditors in regard to a trading trust
Termination of a trust
Advice — Law in practice
Questions
Index

Citation preview

Law in Commerce SIXTH EDITION

Brendan Sweeney LLB BCom (Melb), PhD (Mon) Adjunct Associate Professor, Department of Business Law and Taxation, Faculty of Business and Economics, Monash University

Jennifer O’Reilly LLB BSc, Dip Ed (Melb), LLM (Mon), EdD (Mon) Senior Lecturer, College of Law and Justice, Victoria University

Andrew Coleman BA, LLB, LLM (Mon), PhD (Melb) Senior Lecturer, Department of Business Law and Taxation, Faculty of Business and Economics, Monash University

LexisNexis Butterworths Australia 2016

AUSTRALIA

ARGENTINA AUSTRIA BRAZIL CANADA CHILE CHINA CZECH REPUBLIC FRANCE GERMANY HONG KONG HUNGARY INDIA ITALY JAPAN KOREA MALAYSIA NEW ZEALAND POLAND SINGAPORE SOUTH AFRICA SWITZERLAND TAIWAN UNITED KINGDOM USA

LexisNexis LexisNexis Butterworths 475–495 Victoria Avenue, Chatswood NSW 2067 On the internet at: www.lexisnexis.com.au LexisNexis Argentina, BUENOS AIRES LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA LexisNexis Latin America, SAO PAULO LexisNexis Canada, Markham, ONTARIO LexisNexis Chile, SANTIAGO LexisNexis China, BEIJING, SHANGHAI Nakladatelství Orac sro, PRAGUE LexisNexis SA, PARIS LexisNexis Germany, FRANKFURT LexisNexis Hong Kong, HONG KONG HVG-Orac, BUDAPEST LexisNexis, NEW DELHI Dott A Giuffrè Editore SpA, MILAN LexisNexis Japan KK, TOKYO LexisNexis, SEOUL LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR LexisNexis, WELLINGTON Wydawnictwo Prawnicze LexisNexis, WARSAW LexisNexis, SINGAPORE LexisNexis Butterworths, DURBAN Staempfli Verlag AG, BERNE LexisNexis, TAIWAN LexisNexis UK, LONDON, EDINBURGH LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO

National Library of Australia Cataloguing-in-Publication entry Author: Title: Edition: ISBN: Notes: Subjects: Other Authors/Contributors: Dewey Number:

Sweeney, Brendan. Law in Commerce. 6th edition. 9780409342857 (pbk). 9780409342864 (ebk). Includes index. Commercial Law — Australia. Contracts — Australia. O’Reilly, Jennifer N. Coleman, Andrew. 346.9407

© 2016 Reed International Books Australia Pty Limited trading as LexisNexis. 1st edition, 2001 (reprinted 2001 (thrice), 2002 (thrice) and 2003 (twice)); 2nd edition, 2003 (reprinted 2005 (twice), 2006 and 2007); 3rd edition, 2007 (reprinted 2008); 4th edition, 2010 (reprinted 2011 and 2012); 5th edition, 2013 (reprinted 2015). This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in HelveticaNeueLTStd, Archer, Lato, Gotham. Printed in China Visit LexisNexis Butterworths at www.lexisnexis.com.au

Preface Law in Commerce is designed for students studying business law as part of a business degree. Many business students will complete only one law subject. Consequently, the dilemma confronting the subject designer is determining what material to exclude. This book reflects the idiosyncratic choice of those who designed the basic commercial law subject at the Caulfield campus of Monash University. The book covers topics such as liability for defective goods and services, liability for misrepresentation and deception, contract liability and business structures. The laws discussed include negligence, contract, relevant parts of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)), agency, partnership and aspects of corporations law, including directors’ duties. Rather than attempt to cover every aspect of the relevant laws, the authors have attempted to highlight the more important commercial applications. The book is structured to bring out some of the basic concepts of legal method — concepts which, in a law school, would warrant a separate subject. For example, Chapter 2 addresses non-contractual liability in the production and distribution of goods and services. The chapter is designed not only to present the law of negligence and product liability, but also to demonstrate the common law in operation and contrast it with the statutory developments. A recent important statutory development has been the creation of the Australian Consumer Law (ACL). Numerous case summaries are presented to show the law in action. The text of many of the relevant statutory provisions has been reproduced on the basis that this is the best way to get students accustomed to interpreting statutes. The sixth edition of Law in Commerce incorporates recent case law and legislative changes. It also includes additional detail on the structure of the Australian legal system, plus an expanded guide to the rules of statutory interpretation. Understanding how courts interpret statutes has

become more important in view of the increasing role that legislation, such as the ACL, plays in protecting consumers. To reinforce the relevance of each topic and the impact of law on commercial transactions, this edition continues the use of a relevant scenario (actual or hypothetical) at the beginning of each chapter (Chapter 2 onwards). This may also encourage a problem-based learning approach by readers. We would like to acknowledge our gratitude to the many colleagues who have given valuable assistance in the preparation of this book, including Abe Herzberg, Andrew Field, Antoinette Sernia, Laura Schuwalow, Les Haberfield, Lynn Corcoran, Mark Bender, Mathews Thomas, Michael McNamara, Paul Sugden, Peter Irwin, Robin Edwards, Roger Gamble, Shelley Marshall, Tony Riordan and Wayne Gumley. Finally, we would like to thank Helen Eastwood for a brilliant job of editing, and Georgina Gordon, Pamela O’Neill, Emma Hutchinson and Geraldine Maclurcan of LexisNexis Butterworths for their invaluable assistance with this edition. We would also like to thank those who worked on the earlier editions. Without their efforts the book would not have been possible. The law is current to February 2016. Brendan Sweeney Jennifer O’Reilly Andrew Coleman

Table of Cases References are to paragraph numbers

A A Schroeder Music Publishing Co Ltd v Macauley [1974] 3 All ER 616; [1974] 1 WLR 1308 …. 8.45 ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 …. 3.16 Academy of Health & Fitness Pty Ltd v Power [1973] VR 254 …. 8.58, 8.59 Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) ATPR 41-269 …. 3.37 Action Paintball Games Pty Ltd v Barker [2013] NSWCA 128 …. 2.26 Addis v Gramophone Co Ltd [1909] AC 488 …. 8.26, 8.28 Adeels Palace Pty Ltd v Moubarak; Adeels Palace Pty Ltd v Bou Najem [2009] HCA 48 …. 2.31 Adelaide Chemical & Fertiliser Co Ltd v Carlyle (1940) 64 CLR 514 …. 2.22 Agar v Hyde (2000) 74 ALJR 1219 …. 2.17 AGC (Advances) Ltd v McWhirter (1977) 1 BPR 97,045 …. 4.20 Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309 …. 5.7 Alati v Kruger (1955) 94 CLR 216 …. 8.58, 8.59 Andrews Brothers (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17 …. 6.34 Argy v Blunts (1990) ATPR 41-015 …. 3.23 Ashington Piggeries Ltd v Christopher Hill Ltd [1971] 1 All ER 847 …. 7.19, 7.20 Ashton, In the Marriage of (1986) 11 Fam LR 457 …. 14.12 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 …. 8.9 Astley v Austrust Ltd [1999] HCA 6 …. 3.14, 7.4

Astvilla Pty Ltd v Director of Consumer Affairs Victoria [2006] VSC 289 …. 3.45 Atkinson v Hastings Deering (Qld) Pty Ltd (1985) ATPR 40-625 …. 7.22, 9.3 Attorney-General (Hong Kong) v Humphreys Estate (Queen’s Gardens) Ltd [1987] 2 WLR 343 …. 4.54, 5.39 Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582 …. 5.39 Australia & New Zealand Bank Ltd v Ateliers de Constructions Electriques de Charleroi (1966) 39 ALJR 414 …. 10.28 Australian & New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 …. 7.35 Australian Competition and Consumer Commission v Australian Medical Association Western Australia Branch Inc [2001] FCA 1471 …. 1.57 — v CG Berbatis Holdings Pty Ltd [2003] HCA 18 …. 3.44 — v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 …. 3.48 — v Glendale Chemical Products Pty Ltd (1998) ATPR 41-632 …. 2.50 — v Seal-A-Fridge Pty Ltd [2010] FCA 525 …. 3.47 — v Valve Corporation (No 3) [2016] FCA 196 …. 9.3 — v Woolworths Ltd [2016] FCA 44 …. 3.24 Australian European Finance Corp Ltd v Sheahan (1993) 60 SASR 187 …. 5.6 Australian Knitting Mills Ltd v Grant (1933) 50 CLR 387 …. 2.7, 7.26 Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479 …. 2.11 Australian Securities and Investments Commission v Hellicar [2012] HCA 17 …. 12.14, 13.9 — v Macdonald (No 12) [2009] NSWSC 714 …. 12.14 — v Plymin, Elliott & Harrison (No 1) [2003] VSC 123 …. 13.12, 13.33 — v — (No 2) [2003] VSC 230 …. 13.33 — v Soust [2010] FCA 68 …. 13.38 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 …. 4.15 AWB (International) Ltd v Tradesmen International (PVT) Ltd [2006]

VSCA 210 …. 6.30 Ayliffe v Murray (1740) 26 ER 433 …. 14.20

B B P Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1977) 52 ALJR 20 …. 7.13 B S Brown & Sons Ltd v Craiks Ltd [1970] 1 WLR 752 …. 7.27, 7.28 B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 97,011 …. 4.23 Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan & Co Ltd (1919) 26 CLR 410 …. 6.31 Balfour v Balfour [1919] 2 KB 571 …. 5.3 Balkin v Peck (1998) 43 NSWLR 706 …. 14.27 Ballas v Theophilos (No 2) (1957) 98 CLR 193 …. 4.49 Baltic Shipping Co (The Mikhail Lermontov) v Dillon (1991) 22 NSWLR 1 …. 6.15 — v — (1993) 176 CLR 344; 111 ALR 289 …. 8.35, 8.36, 8.41 Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 …. 5.6 Barclay v Penberthy [2012] HCA 40 …. 2.17 Barclays Bank v O’Brien [1993] QB 109 …. 3.44 Barratta v TPA Pty Ltd (Civil Claims) [2012] VCAT 679 …. 9.7 Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] 1 All ER 139 …. 14.20 — v Sidney Marcus Ltd [1965] 2 All ER 753 …. 7.22, 7.28 Barton v Armstrong [1976] AC 104 …. 8.46 Bateman v Slatyer (1987) ATPR 40-762 …. 3.27, 3.30, 3.38 Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 …. 3.13 Baulkham Hills Private Hospital v GR Securities (1986) 40 NSWLR 622 …. 4.38 BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSWCA 224 …. 5.42

Beale v Taylor [1967] 1 WLR 1193 …. 7.19, 9.9 Bedford Insurance Co Ltd v Instituto De Resseguros Do Brasil [1985] QB 966 …. 10.35 Bell Group Ltd v Herald & Weekly Times Ltd [1985] VR 613 …. 7.12, 10.26 Bettini v Gye [1874] All ER Rep 242; (1876) 1 QBD 183 …. 8.12 Bevanere Pty Ltd v Lubidineuse (1985) ATPR 40-565 …. 3.23 Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 1 WLR 1195 …. 4.21 Blomley v Ryan (1956) 99 CLR 362 …. 3.44, 8.45 Bolton Partners Ltd v Lambert (1889) 41 Ch D 295 …. 10.35 Bond Corporation Pty Ltd v Thiess Contractors (1987) ATPR 40-771 …. 3.23 Bot v Ristevski [1981] VR 120 …. 8.21 Boyd & Forrest v Glasgow and South Western Railway Co 1915 SC (HL) 20 …. 3.10 Brambles Holdings v Bathurst City Council [2001] NSWCA 61 …. 4.34 Breen v Williams [1996] HCA 57 …. 3.14, 7.4 Bressan v Squires [1974] 2 NSWLR 460 …. 4.45 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253 …. 12.26 Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841 …. 12.14 British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1974] 2 WLR 856 …. 7.11, 7.12 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 …. 4.43 Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 …. 2.17 Bryan v Maloney [1995] HCA 17 …. 7.5 BT v Oei [1999] NSWSC 1082 …. 2.13 Bunge Corporation New York v Tradax Exports SA Panama [1981] 1 WLR 711 …. 8.11 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 …. 7.3, 7.39 Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 …. 2.38 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA

60 …. 3.25, 3.30 Byrne & Co v Van Tienhoven & Co (1880) LR 5 CPD 342 …. 4.28

C Cadell v Palmer (1833) 6 ER 956 …. 14.8 Callisher v Bischoffsheim (1870) LR 5 QB 449 …. 5.23 Caltex Oil (Aust) Pty Ltd v Dredge Willemstad (1976) 136 CLR 529 …. 2.16, 2.17 Cammell Laird & Co Ltd v Manganese Bronze & Brass Co Ltd [1934] AC 402 …. 7.24 Candler v Crane, Christmas & Co [1951] 2 KB 164 …. 3.12 Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance) (1974) 131 CLR 321 …. 11.14, 11.21, 11.34 Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 …. 8.60 Cardiff Savings Bank, Re [1892] 2 Ch 100 …. 13.10 Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd (2004) ATPR 42-014 …. 2.47 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 …. 1.27, 4.15, 4.18, 4.19, 4.30, 4.43, 5.4, 5.14 Carminco Gold & Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd [2007] FCAFC 194 …. 10.42 Carpet Call Pty Ltd v Chan (1987) ATPR (Digest) ¶46-025 …. 9.8 Carter v Hyde (1923) 33 CLR 115 …. 4.48 Casey’s Patents, Re; Stewart v Casey [1892] 1 Ch 104 …. 5.19 Causer v Browne [1952] VLR 1 …. 6.15 Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 …. 8.15 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 …. 5.35 Chan v Zacharia (1984) 154 CLR 178 …. 11.28 Chapelton v Barry Urban District Council [1940] 1 KB 532 …. 6.15 Chapman v Hearse (1961) 106 CLR 112 …. 2.6 Chappel v Hart [1998] HCA 55 …. 2.31

Checker Taxicab Co Ltd v Stone [1930] NZLR 169 …. 11.16 China-Pacific SA v Food Corporation of India (The Winson) [1981] 3 All ER 688 …. 10.21 Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 …. 13.6 Clarke v Earl of Dunraven (The Satanita) [1897] AC 59 …. 4.3 Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 All ER 237; [1975] 1 WLR 61 …. 8.45 Club Italia (Geelong) Inc v Ritchie [2001] VSCA 180 …. 2.13 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 …. 4.53, 5.7 Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 …. 6.3, 6.31, 7.13, 8.6 Cole v Tillman [2015] FCA 1512 …. 14.22 Collen v Wright [1843–60] All ER Rep 146 …. 10.40, 10.41 Collins v Clarence Valley Council [2015] NSWCA 263 …. 2.26 — v Godefroy (1831) 109 ER 1040 …. 5.33 Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40782 …. 3.24 Colonial Ammunition Co v Reid (1900) 21 LR (NSW) 338 …. 4.15 Combulk Pty Ltd v TNT Management Pty Ltd (1993) 113 ALR 214 …. 10.33 Commercial Bank v Lakeman (1890) 7 WN (NSW) 40 …. 11.40 Commercial Bank of Australia v Amadio (1983) 57 ALJR 358 …. 3.44, 3.46, 8.45, 8.48 Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337 …. 3.8 Commissioner of State Revenue v EHL Burgess Properties Pty Ltd [2015] VSCA 269 …. 1.18 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 …. 8.34 — v Introvigne (1982) 150 CLR 258 …. 2.38 — v Verwayen (1990) 170 CLR 394 …. 5.43 Commonwealth Bank of Australia v Barker [2014] HCA 32 …. 1.24 — v TLI Management Pty Ltd [1990] VR 510 …. 5.6

Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226; [1986] HCA 14 …. 7.12, 10.26 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd [1985] HCA 13 …. 11.39, 11.42 Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd [1998] FCA 693 …. 7.6 Cottee v Franklins Self-Serve Pty Ltd (1995) Aust Contract Reports 90-060 …. 7.7 Couchman v Hill [1947] 1 KB 554 …. 6.17 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 …. 5.16 Cox v Hickman (1860) 11 ER 431 …. 11.18 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 7 ALR 527 …. 10.32 Crago v Multiquip Pty Ltd (1998) ATPR ¶41-620 …. 9.3 Cranleigh Precision Engineering Ltd v Bryant [1965] 1 WLR 1293 …. 13.20 Crawford v Mayne Nickless Ltd (1992) ASC ¶56-144 …. 9.32 Cummings v Claremont Petroleum NL (1992) 11 ACLC 125 …. 13.16 Cummings Engineering Holdings Pty Ltd, Re [2014] NSWSC 250 …. 13.16 Cundy v Lindsay (1878) 3 App Cas 459; [1874–80] All ER Rep 1149 …. 8.53 Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 …. 6.9

D D & C Builders Ltd v Rees [1965] 3 All ER 837 …. 5.29 D & H Bunny Pty Ltd v Atkins [1961] VR 31 …. 11.49 Dalton v Lawson Hill Estate Pty Ltd [2005] FCAFC 169 …. 3.32 Daniels v Anderson (1995) 37 NSWLR 438 …. 13.9 David Jones Ltd v Willis (1934) 52 CLR 110 …. 7.22, 9.8 Davies v Hodgson (1858) 25 Beav 177; 53 ER 604 …. 14.20 Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642 …. 6.35 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 …. 8.6 Davison v Vickery’s Motors Ltd (in liq) (1925) 37 CLR 1 …. 10.35

Dawson v Pacific Chase Investments (General) [2012] NSWCTTT 432 …. 9.8, 9.15 Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 …. 3.26, 3.37 Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 …. 13.10, 13.31 — v Tuza (1995) 31 SATR 261 …. 11.24 Derbyshire Building Co v Becker (1962) 107 CLR 663 …. 7.7 Derry v Peek (1889) 14 App Cas 337 …. 1.27, 3.2, 3.9 Dickinson v Dodds (1876) 2 Ch D 463 …. 4.29 Director of Consumer Affairs (Vic) v AAPT Ltd [2006] VCAT 1493 …. 6.40 Donoghue v Stevenson [1932] AC 562 …. 1.58, 2.3, 2.6, 2.7, 2.8, 2.11, 2.17, 2.48, 5.16 Dougan v Ley (1946) 71 CLR 142 …. 8.38 Dove v Banhams Patent Locks Ltd [1983] 1 WLR 1436 …. 2.10 Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1914–15] All ER Rep 333 …. 5.15 Dunton v Dunton (1892) 18 VLR 114 …. 5.22

E Eaglehill Ltd v J Needham Builders Ltd [1973] AC 992 …. 4.41 Eastwood v Kenyon (1840) 11 Ad & El 438 …. 5.13, 5.22 Elders Pastoral Ltd v Rutherfurd (1990) 3 NZBLC 99-201 …. 11.50 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 …. 6.30 Elliot v Australian Securities and Investments Commission (2004) 48 ACSR 621 …. 13.33 Ellul v Oakes [1972] 3 SASR 377 …. 6.22 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 …. 4.43 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 …. 6.5, 6.8, 6.24, 6.25 Ermogenous v Greek Orthodox Community of SA Inc (2002) 187 ALR 92

…. 5.3 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 71 ALJR 448 …. 3.16, 3.18, 3.50 Esanda Ltd v Burgess [1984] 2 NSWLR 139 …. 6.29 Esso Petroleum Co Ltd v Commissioners of Customs & Excise [1976] 1 All ER 117 …. 5.5, 5.13 — v Mardon [1976] 2 WLR 583 …. 3.14 Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 …. 11.12 — v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237 …. 5.3

F Fallas v Mourlas [2006] NSWCA 32 …. 2.27 Falvo v Australian Oztag Sports Association [2006] NSWCA 17 …. 2.27 Federal Commissioner of Taxation v Everett (1978) 21 ALR 625 …. 11.34 Felthouse v Bindley (1862) 11 CBNS 869; 142 ER 1037 …. 4.40 Fencott v Muller (1983) 152 CLR 570 …. 1.24 Ferguson v Federal Commissioner of Taxation (1979) 79 ATC 4261 …. 11.12 First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 …. 10.31 Fisher v Bell [1960] 3 All ER 731 …. 4.16, 4.17 — v Harrods [1966] 1 Lloyd’s Rep 500 …. 2.24 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 …. 14.22 Fletcher v Nextra Australia Pty Ltd [2015] FCAFC 52 …. 3.23 Flynn v Robin Thompson & Partners and Wallen, The Times, 14 March 2000 …. 11.60 Foakes v Beer [1881–5] All ER Rep 106 …. 5.28, 5.29, 5.30, 5.31, 5.34, 5.35 Fong v Cilli (1968) 11 FLR 495 …. 4.48 Foran v Wight (1989) 168 CLR 385 …. 8.10, 8.20 Forrest v Australian Securities and Investments Commission [2012] HCA 39 …. 13.7 Forwood Products v Gibbett [2002] FCA 298 …. 3.26

Foskett v McKeown [2000] 3 All ER 97 …. 14.26 Foss v Harbottle (1843) 2 Hare 461 …. 13.36, 13.37 Francis v South Sydney District Rugby League Football Club Ltd [2002] FCA 1306 …. 4.51, 5.22 Frank v Grosvenor Motor Auctions Pty Ltd [1960] VR 607 …. 7.26 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630 …. 10.29, 10.32, 10.33, 12.22, 12.27 Frost v The Aylesbury Dairy Company Ltd [1905] 1 KB 608 …. 7.24 Futuretronics International Pty Ltd v Gadzhis (1990) ATPR 41-049 …. 3.33

G Garcia v National Australia Bank [1998] HCA 48 …. 3.44 Gartside v Inland Revenue Commissioners [1968] AC 553 …. 14.12 Gates v Mutual Life Assurance Society Ltd (1986) 160 CLR 1 …. 3.33 Geddling v Marsh [1920] 1 KB 668 …. 7.28 General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41-274 …. 3.26 Gibson v Manchester City Council [1978] 1 WLR 520 …. 4.3 Gillfillan v ASIC [2012] NSWCA 370 …. 12.14 GIO v Marks (1998) ATPR 41-665 …. 3.33 Gipps v Gipps (1978) 1 NSWLR 454 …. 3.8 Glendale Chemical Products Pty Ltd v Australian Competition and Consumer Commission (1999) ATPR 41-672 …. 2.23, 2.50 Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 …. 3.27 Godley v Perry [1960] 1 All ER 36 …. 7.24, 7.26 Goldberg v Jenkins (1889) 15 VLR 36 …. 11.40 Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674 …. 4.10, 4.31 Goudberg v Herniman Associates Pty Ltd [2007] VSCA 12 …. 11.13 Gould v Vaggelas (1985) 157 CLR 215 …. 3.8, 3.31 GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 …. 5.8

Graham Barclay Oysters Pty Ltd v Ryan [2000] FCA 1099 …. 2.19, 2.39, 2.48, 3.26, 9.21 — v — [2002] HCA 54 …. 2.48 Grainger & Sons v Gough [1896] AC 325 …. 4.18, 4.19 Grant v Australian Knitting Mills Ltd [1936] AC 85 …. 2.3, 2.7, 2.17, 7.19, 7.24, 7.26, 7.28, 9.7 Great Lakes Shire Council v Dederer [2006] NSWCA 101 …. 2.26, 2.27 Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095 …. 3.14, 7.4 Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1 …. 13.20 Gregory v Philip Morris Ltd (1988) 80 ALR 455 …. 5.9 Griffiths v Peter Conway Ltd [1939] 1 All ER 685 …. 7.23 Groundhog Sales & Rentals Pty Ltd v Eastern Pearl Corp [2012] FCAFC 113 …. 7.32 Guides Australia Inc v McMartin [2006] NSWCA 20 …. 2.18

H H Beecham & Co Pty Ltd v Francis Howard & Co Pty Ltd [1921] VLR 428 …. 7.28 Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 …. 8.27, 8.29, 8.30, 8.31, 8.32, 8.33, 8.36 Hall v Busst (1960) 104 CLR 206 …. 4.51 Hallows v Lloyd (1888) 39 Ch D 686 …. 14.20 Hanel v O’Neill [2003] SASC 409 …. 14.22 Hardchrome Engineering Pty Ltd v Kambrook Distributing Pty Ltd [2000] VSC 359 …. 2.9, 6.4 Hardoon v Belilios [1901] AC 118 …. 14.27 Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1990] 1 All ER 737 …. 7.20 Harris v Bulldogs Rugby League Club [2006] NSWCA 53 …. 2.28 — v Digital Pulse Pty Ltd [2003] NSWCA 10 …. 14.25 — v Nickerson (1873) LR 8 QB 286 …. 4.15

Hartley v Ponsonby (1857) 119 ER 1471 …. 5.26 Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1985] 3 WLR 276 …. 4.21 Harvey v Facey [1893] AC 552 …. 4.14, 4.15 — v Harvey (1970) 120 CLR 529 …. 11.15, 11.33 Haseldine v Daw [1941] 2 KB 343 …. 2.10 Hawkins v Clayton (1988) 164 CLR 539; [1988] HCA 15 …. 3.14, 7.4, 7.13 Hawthorn Football Club Ltd v Harding [1988] VR 49 …. 4.52 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 …. 2.16, 3.9, 3.12, 3.17 Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1 …. 7.5 Helvetic Investment Corporation Pty Ltd v Knight (1984) 9 ACLR 773 …. 14.21 Hely-Hutchinson v Brayhead Ltd [1967] 3 All ER 98 …. 10.27, 10.29, 12.22 Henry Kendall & Sons v William Lillico & Sons Ltd [1968] 2 All ER 444 …. 7.11, 7.24, 7.32 Henville v Walker [2001] HCA 18 …. 3.27, 3.31 Heperu Pty Ltd v Morgan Brooks Pty Ltd (No 2) [2007] NSWSC 1438 …. 10.31 Hill v Tooth & Co Ltd (1998) ATPR 41-649 …. 3.32 Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749 …. 6.7, 6.15, 7.11 Hill (t/a R F Hill & Associates) v Van Erp (1997) 188 CLR 159 …. 2.16, 3.18 Hirachand Punamchand v Temple [1911–13] All ER Rep Ext 1597 …. 5.31 Hoenig v Isaacs [1952] 2 All ER 176 …. 8.3, 8.16, 8.23 Hoffman, Re; Ex parte Worrell v Schilling (1989) 85 ALR 145 …. 3.6 Hollis v Vabu Pty Ltd [2001] HCA 44 …. 2.37, 12.20 Holmes v Ashford [1950] 2 All ER 76 …. 2.23 — v Jones (1907) 4 CLR 1692 …. 3.8 HomeSec Finance Express Pty Ltd v Richardson [2012] NSWSC 1375 …. 10.20 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB

26 …. 8.14, 8.15 Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 …. 6.31, 7.10 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 …. 6.22, 7.13 Houghton v Arms [2006] HCA 59 …. 3.36 Howe v Teefy (1927) 27 SR (NSW) 301 …. 8.33 Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 …. 6.29 Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 …. 4.21, 5.42 Hulkes, Re; Powell v Hulkes (1886) 33 Ch D 552 …. 14.20 Hyde v Wrench (1840) 3 Beav 334; 49 ER 132 …. 4.32, 4.34, 4.38

I I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41 …. 3.27, 3.31 Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 …. 12.14 Insight Vacations Pty Ltd v Young [2011] HCA 16 …. 6.33 Insurance Commissioner v Joyce (1948) 77 CLR 39 …. 2.35 Intagro v ANZ Banking Group [2004] NSWSC 618 …. 14.22 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348 …. 6.16, 7.10 International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 …. 10.2, 10.15

J J C Williamson Ltd v Lukey (1931) 45 CLR 282 …. 8.38 J J Savage and Sons Pty Ltd v Blakney (1970) 119 CLR 435 …. 6.29 J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd (1985) 9 ACLR 593 …. 14.27 Jaensch v Coffey (1984) 155 CLR 549 …. 2.14 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) ATPR 41-186 …. 3.32 Jarvis v Swans Tours Ltd [1973] 1 QB 233 …. 8.36

Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 …. 5.37, 5.40 Jenkins v Bourke [2015] QDC 24 …. 10.42 Johnson Matthey Ltd v A C Rochester Overseas Corporation (1990) 23 NSWLR 190 …. 6.3 Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27 …. 2.17 Jones v Lipman [1962] 1 All ER 442 …. 12.14 Joyce v Morrissey [1998] TLR 707 …. 11.60

K Kabwand Pty Ltd & Ors v National Australia Bank Ltd [1989] ATPR 40950 …. 3.26 Kak Loui Chan v Zacharia [1984] HCA 36 …. 10.47, 10.48 Kakavas v Crown Melbourne Ltd [2013] HCA 25 …. 3.44 Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] 1 VR 538 …. 6.36 Keighley, Maxsted & Co v Durant [1900–3] All ER Rep 40 …. 10.35 Kelly v Caledonian Coal Co (1898) 19 LR (NSW) 1 …. 4.15 Kelner v Baxter (1866) LR 2 CP 174 …. 10.35, 10.38 Kemp v Burn (1863) 66 ER 740 …. 14.20 Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 …. 3.20 Kidderminster Corporation v Hardwick (1873) LR 9 Ex 13 …. 10.35 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215 …. 13.24 Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1988] 1 WLR 799 …. 5.6 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61 …. 8.15 Kondis v State Transport Authority (1986) 154 CLR 672 …. 2.38 Koufos v C Czarnikow Ltd [1969] 1 AC 350 …. 8.31 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 …. 3.7

L L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 …. 8.10 L Shaddock and Associates Pty Ltd v Parramatta City Council

(Shaddock’s case) (1981) 150 CLR 225; 55 ALJR 713 …. 3.11, 3.13, 3.18, 3.50 Lafranchi v Transport Accident Commission [2006] VSCA 81 …. 2.30 Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 …. 3.32 Langham v Connell Point Rovers Soccer Club Inc [2005] NSWCA 461 …. 2.28 Langridge v Levy (1837) 150 ER 863 …. 2.2 Laoulach v Ibrahim [2011] NSWCA 402 …. 2.27 Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 …. 4.31 Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661 …. 6.7 Lederberger v Mediterranean Olives Financial Pty Ltd [2012] VSCA 262 …. 11.41 Lee v Lee’s Air Farming Ltd [1961] AC 12 …. 12.14 Legione v Hateley (1983) 152 CLR 406 …. 5.39 L’Estrange v F Graucob Ltd [1934] 2 KB 394 …. 6.5, 6.8, 7.32 Lew Footwear Holdings Pty Ltd v Madden International Ltd [2014] VSC 320 …. 4.45 Lloyds Bank Ltd v Bundy [1974] 3 All ER 757; [1974] 3 WLR 501 …. 8.48 Lockhart v Osman [1981] VR 57 …. 3.6 Lormine Pty Ltd v Xuereb [2006] NSWCA 200 …. 2.26 Louinder v Leis (1982) 149 CLR 509 …. 8.13 Low v Bouverie [1891] 3 Ch 82 …. 14.20 Lumley v Gye (1853) 2 El & Bl 216 …. 8.38 — v Wagner [1843–60] All ER Rep 368 …. 4.11, 8.38, 8.39 Lyritzis v Westpac Banking Corporation (1994) ATPR 41-360 …. 3.26

M Macpherson & Kelly v Kevin J Prunty & Associates [1983] 1 VR 573 …. 3.14, 7.4 Madden v Seafolly Pty Ltd [2014] FCAFC 30 …. 3.23, 3.27 Makawe Pty Ltd v Randwick City Council [2009] NSWCA 412 …. 2.17 Malam v Graysonline, Rumbles Removals and Storage (General) [2012]

NSWCTTT 197 …. 6.40, 9.6 Mandelberg v Adams (1930) 31 SR (NSW) 50 …. 11.40 Manning v Federal Commissioner of Taxation (1928) 40 CLR 506 …. 14.20 March v Stramare Pty Ltd (1991) 171 CLR 506 …. 2.12, 2.31, 2.34, 2.47 Masters v Cameron (1954) 91 CLR 353 …. 4.38, 4.52, 4.54, 5.8 Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559 …. 6.13, 6.16 McCarthy v McIntyre [1999] FCA 784 …. 3.32 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 …. 8.21 McPhersons Ltd v Eaton [2005] NSWCA 435 …. 2.9 Medtel Pty Ltd v Courtney [2003] FCAFC 151 …. 9.21 Megevand, Re; Ex parte Delhasse (1878) 7 Ch D 511 …. 11.21, 11.24 Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 …. 11.42 Metalcorp Recyclers Pty Ltd v Metal Manufactures Ltd [2003] NSWCA 213 …. 3.26 Metrolink Victoria Pty Ltd v Inglis [2009] VSCA 227 …. 2.32 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 …. 13.33 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31 …. 3.26 Minchillo v Ford Motor Co of Australia [1995] 2 VR 594 …. 2.15 Ministry of Health v Simpson [1951] AC 251 …. 14.25 Minter v Mendies C480–95 [1996] QBT 42 …. 10.42 Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 …. 3.38 Mistmorn Pty Ltd (in liq) v Yasseen (1996) 14 ACLC 1387 …. 13.6 Mitchell v Pacific Dawn Pty Ltd [2003] QSC 86 …. 5.24, 5.26 Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 153 ALR 19; [1998] FCA 2058 …. 4.30, 5.39 Modbury Triangle Shopping Centre Pty Ltd v Anzil [2000] HCA 61 …. 2.6, 2.11, 2.13 Momentum Productions Pty Ltd v Lewarne [2009] FCAFC 30 …. 11.16

Montague Mining Pty Ltd v Peter L Gore [1998] FCA 1334 …. 2.25 Moorcock, The (1889) 14 PD 64 …. 7.3, 7.13 Moore v Woodforth [2009] NSWCA 9 …. 2.34, 2.35 Moore & Co Ltd and Landauer & Co, Re [1921] 2 KB 519 …. 7.19, 7.33 Morgan Crucible v Hill Samuel Bank [1991] 2 WLR 655 …. 3.16 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37 …. 6.30 Mount Isa Mines Ltd v Pusey (1971) 125 CLR 383 …. 2.32 Muir v City of Glasgow Bank and Liquidators (1879) 4 App Cas 337 …. 14.21 Mullenger v Dana Australia Pty Ltd [1998] VSCA 30 …. 13.26 Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 …. 4.51 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 …. 5.27 Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 …. 3.9, 3.13, 3.14, 3.17

N Nash v Inman [1908] 2 KB 1 …. 5.45 National Commercial Banking Corp of Australia Ltd v Batty [1986] HCA 21 …. 11.46 National Engineering Pty Ltd v Chilco Enterprises Pty Ltd [2001] NSWCA 291 …. 8.18 National Westminster Bank plc v Morgan [1985] 1 AC 686 …. 8.48 NCR Australia Pty Ltd v Credit Connection Pty Ltd [2004] NSWSC 1 …. 12.26 New England Agricultural Traders Pty Ltd v Adams (1994) ATPR 41-361 …. 3.24 New South Wales v Bujdoso (2005) 222 ALR 663 …. 2.13 New Zealand Shipping Co Ltd v A M Satterthwaite and Co Ltd (The Eurymedon) [1974] 2 WLR 865 …. 5.32 News Ltd v Australian Rugby Football League Ltd (1996) ATPR ¶41-521 …. 10.44

Nicholson v Hilldove Pty Ltd [2012] VSC 598 …. 12.27 Nissha Iwai Australia Ltd v Malaysian International Shipping Corporation (1989) 167 CLR 219 …. 6.36 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705 …. 8.46 Norton Australia Pty Ltd v Streets Ice Cream Pty Ltd (1969) 120 CLR 635 …. 2.23 Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981 …. 10.19 NRMA Ltd v Morgan [1999] NSWSC 407 …. 2.25, 3.19

O Oaktech Pty Ltd (t/a Eureka Garages & Sheds) v Legion Heights Pty Ltd (t/a A M Machinery) [2008] VSCA 145 …. 8.9 O’Brien v Smolonogov (1983) ATPR 40-418 …. 3.23 Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197 …. 6.4, 6.15 O’Dwyer v Leo Buring Pty Ltd [1966] WAR 67 …. 1.58, 2.20 Olley v Marlborough Court Ltd [1949] 1 All ER 127 …. 6.4 Oppenheimer, Re (1872) 3 VR (I, E & M) 20 …. 11.41 Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 …. 12.28 Oscar Chess Ltd v Williams [1957] 1 All ER 325 …. 6.22, 6.28 O’Sullivan v Management Agency & Music Ltd [1985] 3 All ER 351; [1984] 3 WLR 448 …. 8.47 Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound (No 1)) [1961] 1 All ER 404 …. 2.32 — v The Miller Steamship Co Pty Ltd (The Wagon Mound (No 2)) [1966] 2 All ER 709 …. 2.32

P Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 …. 10.31, 10.50 Paisley v Aitchison t/a Dean Cars (Civil Claims) [2012] VCAT 1483 …. 9.7,

9.15 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 …. 12.27 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) ATPR 40307 …. 3.25 Parker v South Eastern Railway Co (1877) 2 CPD 416 …. 6.13, 7.32 Partridge v Crittenden [1968] 2 All ER 421 …. 4.16, 4.19 Patten v Rudall (1881) 7 VLR (L) 148 …. 10.35 Patterson v Dolman [1908] VLR 354 …. 4.18 Pavey & Mathews Pty Ltd v Paul (1987) 162 CLR 221 …. 8.41 Payne v Cave (1789) 100 ER 502 …. 4.20 Peek v Gurney (1873) LR 6 HL 377 …. 3.8 Penny v Grand Central Car Park Pty Ltd [1965] VR 323 …. 6.15 Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd [2009] VSCA 161 …. 8.16 Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 …. 8.62 Perpetual Trustees Victoria Ltd v Ford [2008] NSWSC 29 …. 10.12 Perre v Apand Pty Ltd [1999] HCA 36 …. 2.17 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 …. 8.5 Petelin v Cullen (1975) 132 CLR 355 …. 8.54 Peters (WA) Ltd v Petersville Ltd [2001] HCA 45 …. 6.41 Petersen v Moloney (1951) 25 ALJR 566 …. 10.6, 10.8 Petrou v Hatzigerorgiou [1991] Aust Torts Reports 81-071 …. 11.1 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 …. 4.17 Photo Production Ltd v Securicor Transport Ltd [1980] 1 All ER 556 …. 6.33, 6.34, 6.36 Pinnel’s Case (1602) 77 ER 237 …. 5.28, 5.29 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467 …. 12.14 Plastyne Products Pty Ltd v Gall Engineering Co Pty Ltd (1988) NSW ConvR 55–376 …. 5.8

Plummer v Thomas [2002] NSWSC 1185 …. 11.19 Pole v Leask [1861–73] All ER Rep 535 …. 10.20 Polkinghorne v Holland & Whittington (1934) 51 CLR 143 …. 11.46 Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1978) 139 CLR 231 …. 5.32 Portuguese Consolidated Copper Mines Ltd, Re (1890) 45 Ch D 16 …. 10.35, 10.37 Potter v Customs and Excise Commissioners [1985] STC 45 …. 10.3, 10.16 Powell v Lee (1908) 99 LT 284 …. 4.47 Preist v Last [1903] 2 KB 148 …. 7.24 Proceedings Commissioner v Ali Hatem [1999] 1 NZLR 305 …. 11.46 Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Ltd [2012] FCAFC 31 …. 3.13

Q Queensland Wire Industries v Broken Hill Pty Co Ltd (1989) 167 CLR 177; [1989] HCA 6 …. 1.27

R R Lowe Lippman Figdor & Franck v AGC (Advances) Ltd (1992) 2 VR 671 …. 3.16, 3.18, 3.50 RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) ATPR 41-225 …. 3.27 Ramset Fasteners (Aust) Pty Ltd v Advanced Building Systems Ltd [1999] FCA 898 …. 3.26 Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109 …. 4.49 Rann v Hughes (1778) 101 ER 1014 …. 5.12, 5.13 Rasbora Ltd v JCL Marine [1977] 1 Lloyd’s Rep 645 …. 2.20 Read v Nerey Nominees Pty Ltd [1979] VR 47 …. 9.31 Redgrave v Hurd (1881) 20 Ch D 1 …. 3.8 Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) 5 BPR 11,106 …. 4.39 Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 ….

7.5, 8.27 Reid v Basson [2000] QSC 310 …. 2.25 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 …. 8.42 Richardson v Dean (1870) 4 SASR 7 …. 10.35 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 …. 8.28 Robinson v Harman [1843–60] All ER Rep 383; (1848) 1 Exch 850 …. 8.26 Rogers v Parish (Scarborough) Ltd [1987] 2 All ER 232 …. 7.28 — v Whitaker (1992) 175 CLR 479 …. 2.25, 3.19 Romeo v Conservation Commission of the Northern Territory (1998) 192 CLR 431 …. 2.19 Rooney v ABB Grain Ltd [2010] FCA 139 …. 7.2, 7.13, 8.15 Roscorla v Thomas (1842) 3 QB 234; 114 ER 496 …. 5.18, 5.19, 6.4 Rose and Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261 …. 5.4, 5.22 Ross v Allis-Chalmers Australia Pty Ltd (1980) 55 ALJR 8 …. 6.23, 6.28 Routledge v Grant (1828) 4 Bing 653; 130 ER 920 …. 4.27, 4.31 Rowland v Divall [1923] 2 KB 500 …. 8.41 Royal Bank of Scotland v Etridge (No 2) [2001] 3 WLR 1021 …. 3.44 Ruddock, Re (1879) 5 VLR 51 …. 11.16, 11.24

S Sachs v Miklos [1948] 1 All ER 67 …. 10.21 Saeed v Minister for Immigration and Citizenship [2010] HCA 23 …. 1.20 Said v Butt [1920] 3 KB 497 …. 10.42 Salomon v A Salomon & Co Ltd [1897] AC 22 …. 12.14, 12.28 Samaan bht Samaan v Kentucky Fried Chicken Pty Ltd [2012] NSWSC 381 …. 2.31 San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340 …. 3.15 Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18 …. 2.30 Schneider v Hoechst Schering Agrevo Pty Ltd [2001] FCA 102 …. 2.32 Searle v Wallbank [1947] AC 341 …. 1.31 Seiwa Australia Pty Ltd v Beard [2009] NSWCA 240 …. 11.40

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; ATPR 41-301 …. 3.33, 8.34 Service Station Association Ltd v Berg Bennett Associates Pty Ltd (1993) 117 ALR 393 …. 4.53 Shafron v ASIC [2012] HCA 18 …. 12.14 Shevill v Builders Licensing Board (1982) 149 CLR 620 …. 8.9 Shorten v Grafton District Golf Club [2000] NSWCA 58 …. 2.51 Sims & Co v Midland Railway Co [1913] 1 KB 103 …. 10.21 Skywest Aviation Pty Ltd v Commonwealth (1995) 126 FLR 61 …. 6.3 Smith v Anderson (1880) 15 Ch D 247 …. 11.14 — v Land and House Property Corporation (1884) 28 Ch D 7 …. 3.4 Smith & Fawcett Ltd, Re [1942] Ch 304 …. 13.14 Smythe v Thomas [2007] NSWSC 844 …. 4.10, 4.22 Sobey v Sobey [2016] VSCA 36 …. 11.33 Sofyer v Earlmaze Pty Ltd [2000] NSWSC 1068 …. 12.28 Solle v Butcher [1950] 1 KB 671 …. 8.51 Sopov v Kane Constructions Pty Ltd [2007] VSCA 257 …. 8.16 — v — (No 2) (2009) 24 VR 510 …. 8.42 South Australia v Clark (1996) 14 ACLC 1019 …. 13.6 Specialist Diagnostic Services Pty Ltd v Healthscope Pty Ltd [2012] VSCA 175 …. 7.3, 7.13, 7.39 Spencer v Harding (1870) LR 5 CP 561 …. 4.21 Spreag v Paeson Pty Ltd (1990) 94 ALR 679 …. 12.14 State Government Insurance Commission v Trigwell [1979] HCA 40 …. 1.31 State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 …. 6.8, 6.42 Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827 …. 13.11 Steele v Tardiani (1946) 72 CLR 386 …. 8.42 Stein, In the Marriage of (1986) 11 Fam LR 353 …. 14.12 Stekel v Ellice [1973] 1 All ER 465 …. 11.24

Stennett v Hancock and Peters [1939] 2 All ER 572 …. 2.10 Stevenson Jacques & Co v McLean (1880) 5 QBD 346 …. 4.35 Stilk v Myrick (1809) 170 ER 1168 …. 5.26, 5.27, 5.34 Strong v Woolworths Ltd [2012] HCA 5 …. 2.11, 2.31 Sumpter v Hedges [1898] 1 QB 673 …. 8.23, 8.42 Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 …. 12.28 Sutherland Shire Council v Heyman (1985) 157 CLR 424 …. 2.6 Sweeney v Boylan Nominees Pty Ltd [2006] HCA 19 …. 2.38 Sweetman v Bradfield Management Services Pty Ltd (1994) ATPR 41-290 …. 3.31, 3.32 Sydney Corporation v West (1965) 114 CLR 481 …. 6.15, 6.33, 6.37, 6.38

T Ta Ho Ma Pty Ltd v Allen (1999) 47 NSWLR 1 …. 3.14 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 …. 4.9, 8.26 Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) ATPR 40-303 …. 3.24 Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 …. 4.40, 4.44, 5.9 Tame v New South Wales; Annetts v Australian Stations Pty Ltd [2002] HCA 35 …. 2.14 Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 …. 8.6 — v Johnson (1983) 151 CLR 422 …. 6.11, 8.52, 8.53 — v Smith (1926) 38 CLR 48 …. 10.35 Tech Pacific Australia Pty Ltd v Air Pacific Ltd [1999] NSWCA 71 …. 3.29, 6.35 Teen Ranch Pty Ltd v Brown (1995) 38 AILR 5-036 …. 5.50 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 All ER 886 …. 7.25 Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd (No 1) (1979) 22 SASR 552 …. 11.14

Tepko Pty Ltd v Water Board (2001) 206 CLR 1 …. 3.14 Thomas v Southcorp Australia Pty Ltd [2004] VSC 34 …. 2.46 — v Thomas (1842) 2 QB 851 …. 5.20 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 …. 6.38 Thompson v L M & S Railway Co [1930] 1 KB 41 …. 6.18 Thornton v Shoe Lane Parking Ltd [1971] 1 All ER 686 …. 6.4 Tinyow v Lee [2006] NSWCA 80 …. 5.27 Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1 …. 3.27 Todd v Nicol [1957] SASR 72 …. 5.3 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 …. 6.5, 6.42, 7.32 Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 …. 3.48 Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 …. 13.33 Tower Cabinet Co Ltd v Ingram [1949] 1 All ER 1033 …. 11.50 Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 …. 4.51 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 …. 8.9 Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Company Australia Pty Ltd [2011] NSWSC 75 …. 6.7 Travel Compensation Fund v Robert Tambree [2005] HCA 2005 …. 3.32 Trenowden v Toyota Motor Corporation Australia Ltd and Toyota Motor Corporation (Japan) [2003] SASC 172 …. 2.20 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 …. 5.17 Turner v George Weston Foods Ltd Trading as Tip Top Bakeries [2007] NSWCA 67 …. 1.18 Turner, Kempson & Co Pty Ltd v Camm [1922] VLR 498 …. 4.34, 4.38

U Ulbrick v Laidlaw [1924] VLR 247 …. 4.20

Ultramares Corporation v Touche 255 NY Rep 170 (1931) …. 3.12 Unilan Holdings Pty Ltd v Kerin (1992) ATPR 41-169 …. 3.23 United Dominions Corp Ltd v Brian Pty Ltd [1985] HCA 49 …. 11.14, 11.28 United Petroleum Pty Ltd v Pentaco Oil (Aust) Pty Ltd [2016] FCA 118 …. 4.51, 5.43 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8 …. 4.51

V Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 …. 14.21 Vacwell Engineering Co v B D H Chemicals [1969] 3 All ER 1681 …. 2.23 Van Den Esschert v Chappell [1960] WAR 114 …. 6.8, 6.24, 6.25, 6.42 Varley v Whipp [1900] 1 QB 513 …. 7.19 Victoria v Bryar [1970] ALR 809 …. 2.13 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 1 All ER 997 …. 8.32 Victorian Alps Wine Co Pty Ltd v All Saints Estate Pty Ltd [2012] VSCA 81 …. 7.32 Voli v Inglewood Shire Council (1963) 110 CLR 74 …. 2.25, 7.4

W Wakim, Re; Ex parte McNally (1999) 198 CLR 511 …. 12.2 Walford v Miles [1992] 1 All ER 453 …. 4.53 Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1 …. 11.46 — v Wimborne (1976) 50 ALJR 446 …. 13.14 Wallis, Son & Wells v Pratt & Haynes [1911] AC 394 …. 6.34 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 …. 1.27, 1.37, 5.34, 5.37, 5.39, 5.41, 5.42 Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107 …. 4.45 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 …. 3.31 Warlow v Harrison (1859) 120 ER 925 …. 4.20 Warner v Elders Rural Finance Ltd (1993) ATPR 41-238 …. 3.26

Watson v Buckley, Osborne, Garnett & Co Ltd [1940] 1 All ER 174 …. 2.9 Watteau v Fenwick [1893] 1 QB 346 …. 10.26 Westpac Banking Corp v The Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 …. 3.26 Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR 40-940 …. 3.28 White v Australia & New Zealand Theatres Ltd (1943) 67 CLR 266 …. 8.9 — v Bluett (1853) 23 LJ Ex 36 …. 5.22 — v John Warwick & Co Ltd [1953] 2 All ER 1021 …. 6.35, 7.7 Whitehouse v Carlton Hotel Pty Ltd (1987) 5 ACLC 421 …. 13.15 Whitlock v Brew (1968) 118 CLR 445 …. 4.51 Wigan v Edwards (1973) 47 ALJR 586 …. 5.23, 5.29 Wilkinson v Katies Fashions Pty Ltd (1986) ATPR 40-721 …. 3.24 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 …. 5.27 Wilton v Farnworth (1948) 76 CLR 646 …. 6.5 Winterbottom v Wright (1842) 152 ER 402 …. 2.2 Winterton Constructions Pty Ltd v Hambros Australia Ltd [1992] FCA 582; (1993) ATPR 41-205 …. 3.26 Wolfe v Permanent Custodians Ltd [2012] VSC 275 …. 5.27 Woods v Multi-Sport Holdings Pty Ltd [2002] HCA 9 …. 2.19, 2.26 Woolcock St Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 …. 2.17 Wormell v RHM Agriculture (East) Ltd [1987] 1 WLR 1091 …. 7.28 Wyong Shire Council v Shirt (1980) 146 CLR 40 …. 2.18, 2.48

Y Yenidje Tobacco Co, Re [1916] 2 Ch 426 …. 11.58 Yerkey v Jones (1939) 63 CLR 649 …. 6.5 Yorke v Ross Lucas Pty Ltd (1983) ATPR 40-401 …. 3.25, 3.30 — v — (1985) ATPR 40-622 …. 3.30 Young v Lamb [2001] NSWCA 225 …. 11.40

Z Zhang v United Auctions (Home Building) [2013] NSWCTTT 6 …. 9.32

Zorba Structural Steel Company Pty Ltd v Watco Pty Ltd (1993) 115 FLR 206 …. 7.5

Table of Statutes References are to paragraph numbers

Commonwealth Acts Interpretation Act 1901 …. 1.21 s 15AA …. 1.21, 1.58 s 15AB …. 1.58 s 15AB(1)(b) …. 1.21 Australian Consumer Law …. 2.1, 2.40, 3.1, 3.21, 3.28, 3.33, 3.36, 3.40, 3.43, 3.46, 3.48, 3.49, 3.50, 5.42, 6.9, 6.40, 7.15, 8.61, 8.62, 9.1, 9.2, 9.3, 9.5, 9.6, 9.7, 9.8, 9.11, 9.12, 9.14, 9.21, 9.25, 9.26, 9.28, 9.32, 9.36, 9.38 Pt 3-3 …. 2.51 Pt 3-4 …. 2.51 Pt 3-5 …. 2.1, 2.40, 2.41, 2.42, 2.43, 2.44, 2.46, 2.47, 2.48, 2.49, 2.50, 2.51, 9.8 Pt 4-1 …. 3.40 Pt 5-4 Div 2 …. 2.15 s 2 …. 9.3, 9.6, 9.27 s 3 …. 9.3 s 3(1) …. 9.38 s 3(3) …. 9.25, 9.38 s 4 …. 3.28 s 4(1) …. 3.41 s 7 …. 2.43, 9.21 s 9 …. 2.45, 2.46, 2.50 s 9(2) …. 2.45 s 9(3) …. 2.45 s 18 …. 1.41, 3.21, 3.23, 3.24, 3.25, 3.26, 3.27, 3.28, 3.30, 3.31, 3.33, 3.37, 3.41, 3.50, 5.42, 5.43, 6.5, 10.40, 11.45 s 20 …. 3.45

s 21 …. 3.46 s 21(4)(b) …. 3.46 s 21(4)(c) …. 3.46 s 22 …. 3.48 s 23 …. 6.40 s 24 …. 6.40 s 25 …. 6.40 s 29 …. 1.34 s 39 …. 4.43 s 40 …. 4.43 s 51 …. 9.4 s 51AA …. 3.44 s 52 …. 9.4 s 53 …. 9.4 s 54 …. 9.4, 9.6, 9.7, 9.8, 9.38 ss 54–59 …. 9.5 s 55 …. 9.4, 9.6, 9.8, 9.38 s 56 …. 9.4, 9.9 s 57 …. 9.4, 9.10 s 58 …. 9.21 s 58(2) …. 9.22 s 59(2) …. 9.4 s 60 …. 9.30, 9.31 s 61 …. 9.30, 9.32 s 62 …. 9.30 s 64 …. 9.11, 9.12, 9.33 s 64A …. 9.11, 9.12 s 64A(1) …. 9.12, 9.13 s 64A(2) …. 9.13, 9.34 s 64A(3) …. 9.13 s 137B …. 3.35

s 138 …. 2.42, 2.48, 2.50 s 139 …. 2.42, 2.50 s 140 …. 2.42, 2.46, 2.50 s 141 …. 2.42, 2.46, 2.50 s 142 …. 2.48, 2.50 s 146 …. 2.46 s 147 …. 2.43 s 150 …. 2.49 s 151 …. 1.34 s 224 …. 3.49 s 232 …. 3.49 ss 232–234 …. 3.39 s 236 …. 3.31, 3.49 s 237 …. 3.49 s 243 …. 3.31, 3.37, 3.38 s 246 …. 3.49 s 247 …. 3.49 s 248 …. 3.49 s 260 …. 9.15 s 261 …. 9.18 s 262(2) …. 9.16 s 266 …. 9.19 s 268 …. 9.37 s 270 …. 9.38 s 271 …. 9.8 s 271(1) …. 9.21 s 271(2) …. 9.22 s 271(3) …. 9.21 s 271(5) …. 9.21 s 271(6) …. 9.23

s 272 …. 9.24 s 274 …. 9.20, 9.21 s 276 …. 9.21 s 276A …. 9.20, 9.21 Australian Securities and Investments Commission Act 2001 …. 3.21, 3.34, 3.35, 3.41, 3.43, 3.46, 3.50, 9.28 s 12BAA …. 3.41 s 12BAA(7) …. 3.41 s 12BAB(1) …. 3.41 s 12CB …. 3.46 s 12DA …. 3.41, 11.45 s 12DA(1) …. 3.41, 3.50 Business Names Registration Act 2011 …. 1.8, 1.11, 11.7 s 18 …. 11.7 Competition and Consumer Act 2010 …. 1.8, 1.10, 1.34 Pt IV …. 6.39 s 2 …. 1.21 s 139A …. 9.35 s 139B …. 3.22 Constitution …. 12.2 s 51(xxxvii) …. 11.7, 12.2 Copyright Act 1968 …. 1.7 Corporations Act 2001 …. 1.8, 1.9, 1.12, 1.58, 3.35, 3.42, 12.1, 12.2, 12.8, 12.9, 12.14, 12.16, 12.19, 12.24, 13.1, 13.3, 13.5, 13.24, 13.31, 13.35, 13.36, 13.37, 13.38, 14.14, 14.29 Ch 2E …. 13.18 s 9 …. 13.5, 13.6 s 95A(1) …. 13.26 s 112 …. 12.9 s 117 …. 12.15 s 117(2) …. 12.15

s 124(1) …. 1.12, 12.4, 12.5, 12.17 s 125 …. 12.20 s 126 …. 12.4, 12.22 s 127 …. 12.4, 12.21, 12.22 s 127(1) …. 12.21 s 127(2) …. 12.21 s 128 …. 12.23 s 128(1) …. 12.28 s 128(4) …. 12.23, 12.28 s 129 …. 12.21, 12.23, 12.28 s 129(1) …. 12.24 s 129(2) …. 12.21, 12.25, 12.27, 12.28 s 129(3) …. 12.21, 12.26, 12.27 s 129(4) …. 12.28 s 129(5) …. 12.21, 12.28 s 129(6) …. 12.21 s 140 …. 13.34 s 147 …. 12.15 s 152 …. 12.15 s 180 …. 13.4, 13.6, 13.7, 13.22 ss 180–183 …. 13.24 ss 180–184 …. 13.4, 13.5, 13.36 s 180(1) …. 13.6, 13.8, 13.24 s 180(2) …. 13.8, 13.24 s 181 …. 13.4, 13.13, 13.16, 13.22, 13.38 ss 181–183 …. 13.8 s 182 …. 13.4, 13.16, 13.22, 13.38 s 183 …. 13.4, 13.5, 13.19, 13.22 s 184 …. 13.4, 13.23 s 189 …. 13.12 s 191 …. 13.18

s 194 …. 13.18 s 197 …. 14.22, 14.28 s 232 …. 13.38 ss 232–234 …. 14.20 s 233(1)(a) …. 13.38 s 236 …. 13.37 s 237 …. 13.37 s 588 …. 14.28 s 588G …. 13.25, 13.27, 13.28, 13.33, 13.36, 13.38, 14.23 s 588G(1) …. 13.25 s 588G(2) …. 13.25 s 588G(3) …. 13.27 s 588H …. 13.28, 13.33, 14.23 s 588H(2) …. 13.29, 13.30, 13.33 s 588H(3) …. 13.30, 13.33 s 588H(4) …. 13.31, 13.33 s 588H(5) …. 13.32 s 588J(1) …. 13.33 s 588M …. 13.25, 13.27, 13.33 s 588R …. 13.27 s 601AD(1) …. 12.4 s 728 …. 3.42 s 1041B …. 3.42 s 1041H …. 3.42 s 1274(7A) …. 12.17 Electronic Transactions Act 1999 …. 4.42 Federal Court Act 1976 Pt IVA …. 2.39 Income Tax Assessment Act 1936 Pt III Div 6AA …. 14.12

Income Tax Rates Act 1986 s 13 …. 14.12 s 15 …. 14.12 Insurance Contracts Act 1984 …. 5.17 National Health Act 1953 s 67(4) …. 3.41 Personal Property Securities Act 2009 …. 13.24 Road Traffic Act 1985 …. 1.58 s 18 …. 1.58 Secret Commissions Act 1905 …. 10.47 Trade Practices Act 1974 …. 1.10, 3.1 Pt VA …. 2.40, 2.41 s 75AD …. 2.48, 2.50 s 75AK …. 2.48 s 75AK(1)(c) …. 2.48

Australian Capital Territory Civil Law (Wrongs) Act 2002 …. 2.4 Ch 2 …. 2.36 Pt 4.2 …. 2.18 s 45 …. 2.31 Electronic Transactions Act 2001 …. 4.42 Legislation Act 2001 …. 1.21 s 139 …. 1.21 Partnership Act 1963 …. 5.48, 11.8 Sale of Goods Act 1954 …. 4.20, 7.14 s 13 …. 4.51 s 34 …. 8.16 Trustee Act 1925 …. 14.5 s 14A(2)(a) …. 14.20

New South Wales Civil Liability Act 2002 …. 2.4 Pt 1A Div 2 …. 2.18 Pt 1A Div 4 …. 2.26 Pt 8 …. 2.36 s 5D …. 2.31 s 5I …. 2.29 s 5L …. 2.27 s 5M …. 2.26 s 5O …. 2.25, 3.19 s 5R …. 2.34 s 30 …. 2.14 Contracts Review Act 1980 …. 6.12, 8.62 s 4 …. 8.62 s 9(1) …. 8.62 s 9(2) …. 8.62 Electronic Transactions Act 2000 …. 4.42 Frustrated Contracts Act 1978 …. 8.6 Interpretation Act 1987 …. 1.21 s 33 …. 1.21, 1.58 s 34 …. 1.58 Married Persons (Equality of Status) Act 1996 s 7 …. 10.22 Minors (Property and Contracts) Act 1970 …. 5.45 Partnership Act 1892 …. 5.48, 11.8 s 5 …. 11.40 Restraints of Trade Act 1976 …. 6.41 Sale of Goods Act 1923 …. 7.14 s 13 …. 4.51 s 20 …. 4.20

s 33 …. 8.16 Trustee Act 1925 …. 14.5 s 14(2)(a) …. 14.20

Northern Territory Electronic Transactions Act 2000 …. 4.42 Interpretation Act …. 1.21 s 62A …. 1.21 Law of Property Act 2000 …. 5.17 Married Persons (Equality of Status) Act 1989 s 5 …. 10.22 Married Persons Property Act 1986 s 4 …. 10.22 Partnership Act 1891 …. 5.48, 11.8 Personal Injuries (Liabilities and Damages) Act 2003 Pt 2 …. 2.36 Sale of Goods Act 1972 …. 7.14 s 13 …. 4.51 s 33 …. 8.16 s 60 …. 4.20 Trustee Act …. 14.5 s 6(1)(a) …. 14.20

Queensland Acts Interpretation Act 1954 …. 1.21 s 14A …. 1.21 Civil Liability Act 2003 …. 2.4 Ch 2 Pt 1 Div 1 …. 2.18 Ch 2 Pt 3 …. 2.36 s 11 …. 2.31

s 14 …. 2.26 s 16 …. 2.29 s 19 …. 2.27 s 22 …. 2.25, 3.19 s 23 …. 2.34 Electronic Transactions Act 2001 …. 4.42 Partnership Act 1891 …. 5.48, 11.8 Property Law Act 1974 …. 5.17 Sale of Goods Act 1896 …. 7.14, 7.22 s 11 …. 4.51 s 32 …. 8.16 s 59 …. 4.20 Sale of Goods Act 1898 …. 9.3 Trusts Act 1973 …. 14.5 s 22(1)(a) …. 14.20

South Australia Acts Interpretation Act 1915 …. 1.21 s 22 …. 1.21 Civil Liability Act 1936 …. 2.4 Pt 6 Div 1 …. 2.18 s 34 …. 2.31 s 37 …. 2.26 s 39 …. 2.29 s 41 …. 2.25, 3.19 s 44 …. 2.34 s 53 …. 2.14 s 74 …. 2.36 Electronic Transactions Act 2000 …. 4.42 Frustrated Contracts Act 1988 …. 8.6

Law of Property Act 1936 s 104 …. 10.22 Partnership Act 1891 …. 5.48, 11.8 Sale of Goods Act 1895 …. 7.14 s 8 …. 4.51 s 30 …. 8.16 s 57 …. 4.20 Trustee Act 1936 …. 14.5 s 7(1)(a) …. 14.20

Tasmania Acts Interpretation Act 1931 …. 1.21 s 8A …. 1.21, 1.58 s 8B …. 1.58 Civil Liability Act 2002 …. 2.4 Pt 6 Div 2 …. 2.18 Pt 10 …. 2.36 s 13 …. 2.31 s 16 …. 2.26 s 20 …. 2.27 s 22 …. 2.25, 3.19 s 23 …. 2.34 s 32 …. 2.14 s 39 …. 2.26 Electronic Transactions Act 2000 …. 4.42 Partnership Act 1891 …. 5.48, 11.8 Sale of Goods Act 1896 …. 7.14 s 13 …. 4.51 s 35 …. 8.16 s 62 …. 4.20

Trustee Act 1898 …. 14.5 s 7(1)(a) …. 14.20

Victoria Electronic Transactions Act 2000 …. 4.42 Fair Trading Act 1999 …. 6.40 Frustrated Contracts Act 1959 …. 8.6 Gas Industry Act 1994 …. 2.17 Goods Act 1958 …. 7.14, 7.16, 7.33, 8.24 s 11 …. 8.51 s 12 …. 4.51, 8.6 s 13 …. 7.35 s 16(3) …. 7.33 s 17 …. 7.16 s 18 …. 7.16, 7.17 s 19(a) …. 7.16, 7.21 s 19(b) …. 7.16, 7.26 s 20 …. 7.16, 7.30 s 22 …. 7.38 s 23 …. 8.6 s 23 r 1 …. 7.38, 8.6 s 23 r 2 …. 7.38 s 25 …. 7.39, 8.6 s 27 …. 7.38 s 30 …. 7.38 s 31 …. 7.38 s 34 …. 7.36 s 36 …. 7.36 s 36(2) …. 7.36 s 37 …. 8.16

s 41 …. 7.37 s 41(2) …. 7.36 s 42 …. 7.37 s 55 …. 8.24 s 61 …. 7.32 s 64 …. 4.20 Interpretation of Legislation Act 1984 …. 1.21 s 35 …. 1.21 s 35(a) …. 1.58 s 35(b) …. 1.58 Partnership Act 1958 …. 5.48, 11.8, 11.9, 11.17, 11.24, 11.25, 11.27, 11.33, 11.36, 11.60 Pt 3 …. 11.36 s 3 …. 11.11 s 5 …. 11.17 s 5(1) …. 11.10 s 5(2) …. 11.10 s 6 …. 11.16, 11.17 s 6(1) …. 11.17 s 6(2) …. 11.17 s 6(3) …. 11.17 s 6(3)(a) …. 11.18 s 6(3)(a)–(e) …. 11.17 s 6(3)(b) …. 11.19 s 6(3)(c) …. 11.20 s 6(3)(d) …. 11.21 s 6(3)(e) …. 11.22 s 9 …. 11.39, 11.40, 11.42, 11.43 s 12 …. 11.43 s 13 …. 11.37, 11.38, 11.39 s 14 …. 11.44, 11.46

s 15 …. 11.48 s 16 …. 11.44, 11.47, 11.48 s 18 …. 11.49, 11.50 s 21(1) …. 11.52 s 21(2) …. 11.52 s 21(3) …. 11.52 s 23 …. 11.26 s 24 …. 11.33 s 25 …. 11.33 s 28 …. 11.27 s 29 …. 11.27 s 30 …. 11.55 s 32 …. 11.28, 11.29 s 33 …. 11.28, 11.30, 11.31 s 34 …. 11.28, 11.32 s 35 …. 11.53 s 36 …. 11.14, 11.55 s 37 …. 11.56 s 37(2) …. 11.56 s 38 …. 11.57 s 39 …. 11.58 s 40 …. 11.50 s 40(1) …. 11.50 s 40(2) …. 11.50 s 40(3) …. 11.50, 11.51 s 43 …. 11.60 s 48 …. 11.60 Perpetuities and Accumulations Act 1968 s 12 …. 14.8 Sale of Goods Act (Vienna Convention) Act 1987 …. 7.15 Trustee Act 1958 …. 14.5, 14.19, 14.20

s 5 …. 14.19 s 6 …. 14.20 s 6(1) …. 14.20 s 6(1)(a) …. 14.20 s 6(2) …. 14.20 s 7 …. 14.20 s 7(2) …. 14.20 s 7(2)(c) …. 14.20 s 18 …. 14.19 s 20 …. 14.19 s 23 …. 14.19 s 28 …. 14.19, 14.20 s 30 …. 14.20 Wrongs Act 1958 …. 1.58, 2.4 Pt VIA …. 2.36 Pt X Div 2 …. 2.18 s 51 …. 2.31 s 54 …. 2.26 s 55 …. 2.29 s 59 …. 2.25, 3.19 s 62 …. 2.34 s 73 …. 2.14

Western Australia Civil Liability Act 2002 …. 2.4 Pt 1A Div 2 …. 2.18 Pt 1D …. 2.36 s 5C …. 2.31 s 5H …. 2.27 s 5I …. 2.26

s 5K …. 2.34 s 5N …. 2.26 s 5P …. 2.29 s 5PB …. 2.25 s 5S …. 2.14 Directors’ Liability Act 1890 …. 3.9 Electronic Transactions Act 2003 …. 4.42 Interpretation Act 1984 …. 1.21 s 18 …. 1.21 Partnership Act 1895 …. 5.48, 11.8 Property Law Act 1969 …. 5.17 Sale of Goods Act 1895 …. 7.14 s 8 …. 4.51 s 30 …. 8.16 s 57 …. 4.20 Trustee Act 1962 …. 14.5 s 18(1)(a) …. 14.20

International United Nations Convention on International Sales of Goods …. 7.15

New Zealand Workers’ Compensation Act 1922 …. 12.14

United Kingdom Commonwealth of Australia Constitution Act 1900 (63 & 64 Vict ch 12) …. 1.5, 1.6, 1.7, 1.8, 1.9, 1.10, 1.11 s 51 …. 1.7 s 90 …. 1.7 s 109 …. 1.7

s 114 …. 1.7 s 115 …. 1.7 s 119 …. 1.7 s 128 …. 1.8 Pharmacy and Poisons Act 1953 s 18 …. 4.17 Protection of Birds Act 1954 …. 4.16 Sale of Goods Act 1893 …. 7.14

Glossary Note: Latin terms are shown italicised. ab initio from the beginning Act of Parliament a law passed or made by a parliament; also known as ‘legislation’, ‘statute’ or shortened to ‘Act’ anticipatory breach when one party to a contract advises the other party that they will be unable to properly perform some or all of their contractual promises appellant the party initiating the appeal bailee any person given possession (usually temporary) of property by another person (the bailor) without transferring ownership bailment where the owner of goods (the bailor) gives possession but not ownership of the goods to another person (the bailee) with instructions on what to do with the goods (terms of the bailment) bailor a person who gives possession of their party to another party (the bailee) without transferring ownership bona fide good faith caveat emptor let the buyer beware caveat venditor let the seller beware collateral contract a separate contract that is formed to run alongside another contract (the main contract) condition of a contract important term of the contract, the breach of which gives the right to terminate the contract consideration something done or given (or promised to be done or given) in return for a promise made damages monetary court order to compensate plaintiff for loss suffered for breach of contract, negligence, deceit, breach of s 18 Competition and Consumer Act, etc deceit the tort involving fraudulent misrepresentation — that is, a

deliberate falsehood which is intended to, and does, induce the victim to act in a particular way thereby causing the victim loss (see also fraud) Deed an agreement (or disposition) signed under seal defendant the person against whom a legal case is initiated; the defendant is sued by the plaintiff duress exertion of undue pressure (physical or financial) against another person election the decision to terminate the contract or to allow the contract to continue estoppel where the law stops a person from denying something (eg, the existence of a fact) exemption clause term in a contract excluding or limiting liability for certain breaches of contract express term term of a contract agreed by the parties (in contrast to an implied term) forbearance to sue promising not to take civil legal action (sue), where the promisor would otherwise have been entitled to sue franchisee a party who, under a contract, purchases from another party (the franchisor) the right to use the franchisor’s trademarks and logos in a particular business franchisor a party who, under a contract, sells to another party (the franchisee) the right to use the franchisor’s trademarks and logos in business fraud false representation about facts, which the representor did not honestly believe to be truthful frustration where some event occurs — which is neither contemplated nor caused by the parties — that makes it impossible to perform a contract good Samaritan a person who chooses to help another for no gain or reward holding out conduct or representation by a person creating a false belief (‘pretending’ or making a false representation); used in relation to the level of authority of an agent, partner or officer of a corporation

implied term a contractual term that was not expressly agreed by the parties, but which is implied into the contract by courts and/or by legislation (compare express term) injunction order by a court requiring a person to cease doing something inter alia among other things intermediate term term of a contract that may give rise to a right of termination for breach, depending on how serious the consequences are; also sometimes called ‘innominate term’ negligence the tort involving carelessness that causes loss, but only in situations where the careless person was under a legal duty to take care obiter dictum (plural: obiter dicta) spoken by the way; something said by a judge which does not form part of the ratio decidendi offeree the person to whom the offer to contract is made offeror the person who makes the offer to contract ostensible authority the appearance of authority parol evidence rule a rule of evidence that limits the circumstances in which a party to a contract is allowed to rely on verbal promises or statements to change a written contract plaintiff the party initiating the civil law suit; the plaintiff sues the defendant prima facie at first glance privity of contract a rule of contract law which provides that only a party to a contract can sue on that contract promisee the person to whom the promise is made promisor the person who makes the promise promissory estoppel an estoppel (see estoppel) that operates to prevent a person from denying the existence of a binding promise quantum meruit the amount merited or earned ratio decidendi the reason for deciding; the ratio decidendi is the core reason given by the judge for deciding as he or she did representation a statement made about facts

representee the person to whom a representation is made representor the person who makes a representation repudiation to reject the contract rescission (verb is ‘to rescind’) the act of bringing a contract to an end; the parties are restored as far as possible to the position they occupied immediately prior to the contract. A contract may be rescinded for misrepresentation, duress, undue influence, mistake or because it is an unconscionable bargain. respondent (1) the party against whom an appeal has been lodged; (2) in the Federal Court, the defendant restitutio in integrum restored fully; rescission will only be permitted if each party can be restored substantially to the position they occupied before the contract was made specific performance order of a court requiring a person to stop doing something termination (contract law) the act of ending a contract tort a civil wrong which gives the injured person the right to sue for damages; examples of torts include negligence, deceit, defamation and assault unconscionable conduct unfair or unjust conduct which arises where one person takes unfair advantage of another person’s special disability undue influence unfairly using a relationship of dominance or reliance to influence a weaker party vicarious liability refers to an employer being held responsible/liable for any harm caused by its employees who are acting within the scope of their employment (see Chapter 10 ‘Agency’ and also Chapter 2) void the expression used where a contract is of no legal effect void ab initio the contract is void from the very beginning (effectively never existed) voidable where the injured party has a choice to declare the contract ‘void’ — the contract has a legal effect (ie, ‘exists’) until the victim declares the contract to be void (distinguish from void ab initio) warranty term in a contract, the breach of which gives the innocent party

a right to sue for damages

Content Preface Table of Cases Table of Statutes Glossary

CHAPTER 1 LAW AND THE AUSTRALIAN LEGAL SYSTEM Objectives of this chapter Introduction and outline of chapter Why study business law? What is meant by the rule of law? Identifying the law Sources of law: parliamentary law A short history of government in Australia Federalism: sharing power between parliaments Changing the division of power between parliaments Finding and referring to parliamentary law The structure of parliaments in Australia The process of creating parliamentary law Administering the law: the doctrine of the separation of powers Interpreting a statute: the role of the courts Sources of law: case law (common law) Distinction between common law systems and civil law systems Doctrine of precedent (stare decisis) Finding case law Law reporting and the internet Common law and equity

The process of extracting the law from a case The primacy of parliamentary law over case law An age of regulation Private law and public law Civil cases and criminal cases Dispute resolution Resolving disputes through the courts A hypothetical case Alternative dispute resolution Law in commerce Contracts Torts and similar statutory obligations Agency, partnerships, companies and trusts Business, law and ethics Introduction The role of ethics in business The psychology of ethical (or moral) behaviour The importance of the workplace culture Deciding what is the right or ethical thing to do Developing an ethical culture in the firm Risk management and the law What is risk management? What are the legal risks? Strategies for dealing with legal risks Compliance programs Questions

CHAPTER 2 LIABILITY FOR DEFECTIVE PRODUCTS Objectives of this chapter Setting the scene: Could this happen in Australia?

Introduction and outline of chapter Liability for negligence History of the negligence action Step 1: When is a duty of care owed? Step 2: What standard of care is owed? Step 3: Causation, remoteness of damage, amount of damages Defences Liability for another person’s acts Class actions Liability for safety defects under ACL Pt 3-5 What is the purpose of Pt 3-5? What are the elements of a breach of Pt 3-5? What is a ‘manufacturer’? What is meant by the expressions ‘goods’ and ‘supply’? What is the meaning of ‘safety defect’ in relation to goods? Does Pt 3-5 compensate for all types of losses caused by a defective good? Damage must be caused by the defective good What are the defences under Pt 3-5? Can a manufacturer exclude liability? Other matters Other product liability laws Advice — Law in practice Questions

CHAPTER 3 MISREPRESENTATION AND UNCONSCIONABLE CONDUCT: UPHOLDING THE BASIC NORMS OF COMMERCIAL CONDUCT

Objectives of this chapter Setting the scene: Creative marketing or legal blunder? Introduction and outline of chapter Fraudulent misrepresentation Step 1: Was the representation a false statement of fact? Step 2: Did the representation induce the plaintiff to act in some way? Step 3: Did the representor know the misrepresentation was false? Step 4: Did the misrepresentation cause the plaintiff to suffer a loss? Negligent misrepresentation Step 1: When is a duty of care owed? Step 2: What standard of care is owed? Step 3: Remoteness of damage Misleading or deceptive conduct Outline of ACL s 18 Conduct of directors, employees and agents Conduct must be ‘in trade or commerce’ When is conduct misleading or deceptive? The role of exclusion clauses and disclaimers Remedies for breach of s 18 Australian Securities and Investments Commission Act Corporations Act Unconscionable conduct Unconscionable conduct as part of judge-made law Unconscionable business transactions under the ACL Other unfair conduct Advice — Law in practice

Questions

CHAPTER 4 MAKING THE CONTRACT: OFFER AND ACCEPTANCE Objectives of this chapter Setting the scene: Pepsi loyalty rewards Introduction and outline of chapter The importance of contracts to business What is a contract? Standard of conduct expected when negotiating a contract Does a contract have to be in writing? The meaning of ‘intention’ in contract law Contractual remedies Termination of the contract Damages Specific performance Injunction Recovery of the contract price Agreed damages clauses Making the offer Meaning of ‘offer’ An offer, or merely an indication of a present intention? An offer or an invitation to treat? Auctions: Who makes the offer? Tenders: Who makes the offer? Internet transactions: Who makes the offer? An offer, or merely part of the negotiations? The fate of the offer Withdrawing the offer

Can an offer be revoked after acceptance? Can an offer be revoked before acceptance? Is it necessary to tell the offeree about the revocation? Who must tell the offeree that the offer has been revoked? Is it possible to revoke a unilateral offer? Options: offers that cannot be revoked Rejecting an offer What is the effect of rejecting an offer? Offeree’s conduct may indicate rejection Counter offer amounts to a rejection Asking for clarification of the terms of the offer is not a counter offer Accepting the offer Only the offeree may accept Acceptance must be final and unqualified Acceptance completes the contract Acceptance must be communicated to the offeror Communicating acceptance to a large company Communicating acceptance over the internet When is express communication of acceptance not necessary? Acceptance and the postal acceptance rule The method and timing of the acceptance Can acceptance be communicated by someone other than the offeree? Lapse of offer Lapse of an offer due to the death of offeror or offeree Lapse of an offer due to time Lapse of an offer due to the failure of a condition precedent

The agreement must be ‘certain’ Is an ‘agreement to agree’ binding? Is an ‘agreement to negotiate’ binding? Is an agreement made ‘subject to contract’ binding? Other conditional agreements Overview of offer and acceptance Advice — Law in practice Questions

CHAPTER 5 MAKING THE CONTRACT: INTENTION AND CONSIDERATION Objectives of this chapter Setting the scene: Young love and ‘good’ intentions …. Introduction and outline of chapter Did the parties intend to contract? Social or domestic agreements Commercial agreements Have the parties provided consideration? What is a Deed? Consideration is required in all simple contracts What is consideration? Examples of consideration Only parties to the contract can sue for breach of contract Consideration may not be past Consideration may be of nominal value Consideration must be sufficient Illusory promises are not consideration Settling disputes: giving up a legal claim may be consideration Renegotiating contracts: new consideration necessary

Renegotiating contracts: merely promising to perform an existing contract is generally not good (valid) consideration Terminating a contract by agreement Renegotiating a debt: special problems Is promising to perform a contractual duty owing to a third party good consideration? Is performing a public duty good consideration? Promissory estoppel The rules of contract law can lead to unfair results How did promissory estoppel develop? Promissory estoppel and contract law When is promissory estoppel important? What are the elements of promissory estoppel? The leading case: Waltons Stores (Interstate) Ltd v Maher The remedy in cases of estoppel Minors Persons with mental disabilities; intoxicated persons Agents Partnerships Corporations Assignment of contractual rights Advice — Law in practice Questions

CHAPTER 6 EXPRESS TERMS OF THE CONTRACT Objectives of this chapter Setting the scene: A Faustian plot Introduction and outline of chapter Ascertaining the relevant evidence

The critical importance of the facts How courts approach different types of evidence Statements made after the contract is formed are not terms The importance of a signed document General rule: a person is bound by the contents of a document they sign When is a person not bound by a document they signed? Incorporating unsigned terms into the contract by notice The reasonable notice test What constitutes reasonable notice? Incorporating ‘terms and conditions’ by notice When are oral statements or representations binding? The statement must be promissory in nature Determining which oral statements are promissory: the reasonable bystander test Applying the reasonable bystander test: some guidelines Collateral contracts Meaning of a term Reasonable person test Courts must interpret the words of the contract as written Interpreting exemption clauses What is an exemption clause? What are the rules for interpreting exemption clauses? Unenforceable contracts In general Unenforceable terms in standard form consumer contracts Terms that involve an unreasonable restraint of trade

The importance of a term Advice — Law in practice Appendix: Sample of a written contract Questions

CHAPTER 7 IMPLIED TERMS IN CONTRACTS Objectives of this chapter Setting the scene: The not-so-burglar-proof door Introduction and outline of chapter Implied terms of cooperation and good faith Implied term of cooperation Implied term of good faith Terms implied into specific types of contracts Contracts between professional persons and their clients Contracts for work and materials Other service contracts Hire contracts Employment contracts Landlord/tenant Terms implied as a matter of fact Terms implied on the basis of a course of past dealings Terms implied as a result of custom or trade usage Terms implied in order to make the contract effective Sales of goods contracts Background to sale of goods legislation Consumers have special protections under the Australian Consumer Law What terms are implied by the sale of goods legislation? Correspondence with description

Fitness for purpose Merchantable quality Correspondence with sample Excluding, or limiting liability for breach of, the implied terms Remedies Other matters affecting sales of goods Advice — Law in practice Appendix: Comparative table of sale of goods legislation Questions

CHAPTER 8 REMEDIES IN CONTRACT CASES Objectives of this chapter Setting the scene: The sensitive side of heavy metal Introduction and outline of chapter Terminating the contract Termination by performance Termination by agreement Termination by a term of the contract Termination by frustration Termination for breach of a condition of the contract Termination for serious breach of an intermediate term Termination for repudiation Termination for anticipatory breach Termination: process and consequences Recovery of the contract price In general Sale of goods Damages What is the purpose of damages?

Losses must be caused by a breach of the contract Agreed damages Plaintiff has a duty to mitigate losses Damages must not be too remote: the rule in Hadley v Baxendale Calculating the amount of damages Contributory negligence Specific performance Injunction Rectification of the contract Restitution Quantum meruit and partially performed contracts Rescission Introduction to rescission Grounds for rescission in equity The nature of rescission in equity Statutory rescission Advice — Law in practice Questions

CHAPTER 9 CONSUMERS’ RIGHTS AND THE SUPPLY OF GOODS AND SERVICES Objectives of this chapter Setting the scene: A timely lesson Introduction and outline of chapter Consumers’ rights against the suppliers of goods Introduction Supply to a ‘consumer’ What are the statutory guarantees relating to the supply of goods? When is a supply in trade or commerce?

Supply by way of sale by auction Guarantee of acceptable quality Guarantee of fitness for any disclosed purpose Guarantee that goods correspond with description Guarantee that goods correspond with sample Guarantees may not be excluded Liability may be limited in certain circumstances Remedies for breach of statutory guarantees relating to goods Retailers’ right of indemnity against the manufacturer Consumers’ rights against the manufacturers of goods The manufacturers’ obligations to the consumer Defences available to the manufacturer Manufacturer may repair or replace goods provided it has given an express warranty to that effect Measuring the amount of damages Consumers’ rights against the suppliers of services Supply of services must be to a ‘consumer’ Supply must be in trade or commerce Meaning of ‘services’ Services not covered by the ACL Distinguishing services from sales of goods What are the statutory guarantees relating to the supply of services? Guarantees may not be excluded Limiting liability Terms that limit or exclude liability in recreational services contracts Remedies for breach of statutory guarantees relating to services Advice — Law in practice

Questions

CHAPTER 10 AGENCY Objectives of this chapter Setting the scene: Stuck with an unwanted contract Introduction and outline of chapter What is an agent? What are the indicators of an agency relationship? The functions of an agent An agent may make contracts on behalf of the principal An agent may receive moneys on behalf of the principal An agent may pay moneys on behalf of the principal An agent may make representations on behalf of the principal An agent may receive representations on behalf of the principal Some common commercial relationships and agency Employer–employee Independent contractor Bailor–bailee Supplier–buyer Franchisor–franchisee How is an agency created? Agency may be created by express agreement Agency may be created by implied agreement Agency may be created by estoppel Agency may be created in cases of necessity Agency may be created by cohabitation The agent’s authority

The agent’s actual authority The agent’s ostensible authority Principal may ratify agent’s unauthorised acts Meaning of ratification Rules applying to ratification Who can sue whom? When can the third party sue the principal? When can the principal sue the third party? When can the third party sue the agent? The undisclosed principal rule Duties of an agent General duties Fiduciary duties Duties of the principal Termination of agency Advice — Law in practice Questions

CHAPTER 11 PARTNERSHIPS Objectives of this chapter Setting the scene: Choose your partner carefully Introduction and outline of chapter Choosing the appropriate business structure Types of business organisations Factors that determine the choice of business organisation Naming the business Creation of a partnership Are any formalities required to create a partnership? Definition of a partnership Carrying on business

Carrying on a business in common Carrying on business in common with a view of profit Partnerships are contractual relationships Rules governing partners’ relationship with each other The contract between the partners Partnership Act 1958 (Vic) Partners’ duties of good faith Partnership property What is partnership property? What right does each partner have to the partnership property? Liability of partners to third parties Limited partnerships Joint liability for a firm’s debts and obligations Joint and several liability for wrongful acts Joint and several liability for misapplication of money or property Liability by holding out (estoppel) Assignment of a partnership interest Termination of a partnership Termination by the partners Termination by operation of law Termination by supervening illegality Termination by the courts Partners remain jointly liable for debts even after dissolution of a partnership Distribution of assets on dissolution Advice — Law in practice Appendix: Comparative table of Partnership Acts Questions

CHAPTER 12 INTRODUCTION TO COMPANY LAW Objectives of this chapter Setting the scene: Understanding the nature of your debtors Introduction and outline of chapter Sources of companies The nature of a company The powers of a company Types of companies: general classification Types of companies which may be registered Consequences of the principle of separate identity Registering a company Steps for registration of a company The company’s constitution and rules Implications of the certificate of registration Managing a company Comparison of companies and partnerships How does a company create contracts? How does a company sign a contract? When is a company bound by the actions of its agents? People having dealings with a company may make certain assumptions When do the assumptions not apply? Advice — Law in practice Questions

CHAPTER 13 DUTIES OF COMPANY DIRECTORS AND OTHER OFFICERS Objectives of this chapter Setting the scene: Directorships can be a burdensome

role Introduction and outline of chapter What are the functions of a director? The source of directors’ duties Duties also owed by officers Reasonable care and diligence The business judgment rule Is any particular level of skill required of a director? The level of attendance required The importance of being informed The role of reliance The duty to act in good faith and for a proper purpose The duty to act in good faith Directors’ duty to exercise power for proper purposes The duty not to misuse the position Contracts with the company The duty imposed on directors to disclose certain interests The duty not to use information improperly What kind of information must not be used? The consequences of a breach of statutory duty Civil consequences Criminal consequences: s 184 Directors’ duties at common law The insolvent trading rule When is a company insolvent? What remedies or sanctions may apply? Defences to s 588G Sections 588G and 588H in action Complying with the rules of the company Further statutory obligations

Who will sue the directors for a breach of duty? Exceptions to the rule in Foss v Harbottle A shareholder’s right to take personal action Advice — Law in practice Questions

CHAPTER 14 INTRODUCTION TO TRUSTS Objectives of this chapter Setting the scene: Conducting business through a trading trust Introduction and outline of chapter What is a trust? Definition The essential elements of a trust Parties to the creation of an express trust Duration of a trust Trusts compared with other entities Types of trusts Discretionary trusts Fixed trusts Operation of a trading trust Trustees’ powers Express powers Implied powers Statutory powers Trustees’ duties, rights and liabilities Duty of prudence, diligence and honesty Personal liability for debts The right of indemnity Insolvent trading by corporate trustee: directors’ liability

Beneficiaries’ rights and liabilities Personal right of action against the trustee (‘right in personam’) Proprietary right of action in respect of the trust property (‘right in rem’) Beneficiaries’ liability to creditors The position of creditors in regard to a trading trust Termination of a trust Advice — Law in practice Questions Index

[page 1]

CHAPTER 1

LAW AND THE AUSTRALIAN LEGAL SYSTEM

CONTENTS Objectives of this chapter Introduction and outline of chapter Why study business law? What is meant by the rule of law? Identifying the law

Sources of law: parliamentary law A short history of government in Australia Federalism: sharing power between parliaments Changing the division of power between parliaments Finding and referring to parliamentary law The structure of parliaments in Australia The process of creating parliamentary law Administering the law: the doctrine of the separation of powers Interpreting a statute: the role of the courts Sources of law: case law (common law) Distinction between common law systems and civil law systems Doctrine of precedent (stare decisis) Finding case law Law reporting and the internet [page 2] Common law and equity The process of extracting the law from a case The primacy of parliamentary law over case law An age of regulation Private law and public law Civil cases and criminal cases Dispute resolution Resolving disputes through the courts A hypothetical case Alternative dispute resolution Law in commerce Contracts

Torts and similar statutory obligations Agency, partnerships, companies and trusts Business, law and ethics Introduction The role of ethics in business The psychology of ethical (or moral) behaviour The importance of the workplace culture Deciding what is the right or ethical thing to do Developing an ethical culture in the firm Risk management and the law What is risk management? What are the legal risks? Strategies for dealing with legal risks Compliance programs Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to: understand the connection between law and business; explain certain key concepts that underpin our legal system, including: – the rule of law; – the distinction between statutory law and judge-made law; – how judge-made law is made; – the role of ethics in business; find relevant statutes and cases (in hard copy and on the internet); describe how a typical case might proceed through the court system;

understand the connection between business law and ethics; describe the major ethical theories and apply them in a business setting; and describe how legal factors should be included in a business’s risk management policy.

[page 3]

INTRODUCTION AND OUTLINE OF CHAPTER 1.1

The aim of this book is to introduce business students to some of the basic ideas of business law and to explain how business law impacts business decision-making. Of course, we cannot possibly cover every legal rule and there is no point in doing so. Rules, like most other things, change. What is important is the manner in which the law helps to shape how business is conducted and how commercial problems are solved. This chapter sets the scene by describing some of the basic concepts of commercial law: What is law? How are laws made? How does the court system work? Are there alternatives to the court system? What is the connection between law and ethics? How can legal considerations be built into a risk management strategy? We start with an explanation of why the study of business law is useful for business students.

WHY STUDY BUSINESS LAW? An understanding of business law can reduce the risks inherent in doing business.

1.2

The study of business involves learning about how to deal with risk and uncertainty. A producer — whether of a physical product

or a service — does not know for certain that their new product will be successful. No amount of forward planning (consumer surveys, prototype testing or financial analysis) can guarantee success. A new product may suddenly appear on the market that makes the producer’s product inferior or, worse, obsolete. This is the risk — what we might call the ‘competitive risk’ — that drives modern business. It is the risk that lies at the heart of market-driven, industrial and post-industrial commerce, and cannot be entirely removed without changing the system. Economics has shown that encouraging competitive risk is the way to improve the economic wellbeing of people. It encourages producers to constantly improve their products, prices and service. This then becomes the study of business: learning how to manage the competitive risk by applying new and appropriate techniques — production, management, accounting and marketing — to the supply of products or services. There are other risks, however, which, if not controlled, are a danger to the whole system of modern business. This is where the law becomes involved. The role of law is to ensure that the risks undertaken by businesses are competitive risks and not ‘systemic risks’; that is, risks that undermine and could ultimately destroy the system. When businesses invest capital in developing new products they accept the competitive risk, but they expect the competitive risk to operate within a reasonably well-defined field of acceptable conduct. The producer, for example, should not have to face the risk that competitors might succeed by making false statements about the benefits or attributes of their products. It is the role of the law to prevent this type of conduct; if the law fails to do this then the whole system is endangered because there will be few incentives to provide consumers with accurate information. Morally as well as economically, this is a bad outcome. Thus, the law provides a systemic framework within which the competitive risk is played out. The study of business law involves understanding this framework; that is, understanding how the law actually goes about

preventing systemic risks. There are many other examples of systemic risk; indeed, the list is limited only by the imagination of business people in constructing new ways to get an unfair advantage. Two other fundamental examples of systemic risk are: businesses producing products that cause harm, and businesses failing to honour their promises. For this reason we will examine product liability laws (which deal with harmful products) and contract law (which deals with promises). [page 4] Because businesses operate within this legal framework, business people must recognise that they are affected by the law. Many of their decisions will have legal as well as competitive consequences. Their actions or omissions may cause the business and/or the individual to become legally liable to clients, customers, third parties and, sometimes, to the state. Ultimately, the reason business people study the law is not so that they will be ready for their ‘day in court’: no one wants to go to court; it is generally time-consuming and costly; it is sometimes unpredictable and inefficient; and it is often an admission that factors other than good commercial sense are at play. The reason business people study business law is the same reason they constantly research their market, know their suppliers and analyse their competitors. It is about managing the risk of doing business. This notion of society operating within a defined legal framework is captured in the idea that we live under the rule of law.

WHAT IS MEANT BY THE RULE OF LAW? The rule of law means that citizens are governed by rules and not by the arbitrary decisions of some authority.

1.3

It is often said that we live under a rule of law, and that this is a good thing. But what is the rule of law? At its most basic level, the rule of law means the opposite of arbitrary government. Thus, the rule of law means that the laws of a country apply to everyone (including the government); that the laws apply equally; and that they are predictable. No one should be above the law. The laws should not discriminate in favour of one group of citizens. The law should not be arbitrary; at all times citizens should know (or have the means of knowing) whether their acts are lawful or not. The law must be fairly enforced; that is, everyone should have fair access to an independent judicial system. Many argue that this description is insufficient because it is basically procedural; it contains no requirement that the laws have any particular content — for example, laws to protect basic human rights, democratic political rights, property rights. This is an intuitively compelling argument. The problem is that there is no real agreement on what the content should be. When the rule of law is discussed it is necessary to recognise that it has more than one meaning. Discussions will be much more fruitful if the discussants first establish that they are talking about the same thing. Why is the rule of law important for business? Business is concerned about managing risks and uncertainty: the rule of law ensures a system of stable rules which enables businesses to plan for the future. It enables risks and uncertainty to be managed. Of course, the rule of law is not just a matter of importance for business; it is vital to a whole range of social interactions. It is vital for the wellbeing of society itself.

IDENTIFYING THE LAW 1.4

Humans, being social creatures, require rules to make society function properly. Rules are the sine qua non of social order, whether the society is complex or primitive. If you stop and consider it, rules are everywhere — social rules, family rules,

religious rules, club rules, sporting rules. While these rules may impose moral obligations on those who live under them and undoubtedly they influence how people behave and interact, they do not necessarily form part of the law. To be regarded as law, a rule must be enforceable by the state. [page 5] Therefore, for present purposes, it is sufficient to say that the law is any rule which a court of law will enforce. (Here, the state is represented by the courts of law.) These legal rules change from society to society and across time. For example, there was a time in most European states when the law mandated a person’s religious practices. In modern secular Europe, such a law would be regarded with horror. If the key to any rule being law is whether it is enforceable by the state, the obvious question is how does the state (the courts) recognise what rules to enforce? The answer lies in the history of the proposed rule. Where did it come from? How was it created? The courts apply or reject a suggested rule on the basis of its source. There are two sources which have the capacity to provide legally enforceable rules: parliament and the courts, as shown in Figure 1.1. Figure 1.1

Sources of law

SOURCES OF LAW: PARLIAMENTARY LAW 1.5

The historical development of parliament and parliamentary law in England and Australia is beyond the scope of an introductory discussion such as this. Suffice to say, the various Australian colonies adopted a parliamentary system based on the English system of responsible government (ie, government is responsible to an elected parliament). This system was also adopted by the Commonwealth of Australia Constitution Act 1900 (UK) which set up the Commonwealth of Australia, including the Commonwealth Parliament. At this stage, it may be useful to have some idea of the history of governance in Australia.

A short history of government in Australia 1.6

In 1788, the British sent a fleet of ships to colonise the area around what is now Sydney. The colony was called New South Wales. The country was largely treated as if it was uninhabited (terra nullius) and consequently the law of Great Britain became the law of New South Wales. Over the next 50 years, colonies were also established in Tasmania, Queensland, Victoria, South Australia and Western Australia. Each colony was administered ultimately from London and the law in each colony was British law. Figure 1.2 shows the states and territories of modern Australia. [page 6]

Figure 1.2

The states and territories of modern Australia

In the 1850s, the various colonies formed their own parliaments. However, these parliaments were still subject to Britain and their powers were restricted. The executive (the government) was still appointed by the British Government. Between 1850 and 1890, the colonies became more powerful economically, more complex politically and more sophisticated socially. This led to the granting of more local powers in the form of responsible government (ie, the executive was directly responsible to parliament). At the same time, there was a strong move from within the colonies to unite, which made a lot of sense: the colonists were almost exclusively from Britain and therefore spoke the same language and enjoyed the same culture; the laws were almost the same in each colony; and the systems of government were the same. In 1899, the colonies agreed to form a single nation under a federal system of government. This was approved by the British Parliament in 1900 when it passed the Commonwealth of Australia

Constitution Act 1900 (UK) (referred to in this chapter as the Constitution; see Figure 1.3). Each colony became a state with its own parliament which decided state law. Each colony handed over certain powers to a central parliament called the Commonwealth or Federal Parliament. These powers were either given exclusively to the Commonwealth or were shared with the Commonwealth. The Commonwealth Parliament is now located in Canberra, which is Australia’s capital city. [page 7] Figure 1.3

The preamble and commencement of the Commonwealth of Australia Constitution Act 1900 (UK)

COMMONWEALTH OF AUSTRALIA CONSTITUTION ACT (63 & 64 VICTORIA, CHAPTER 12) An Act to constitute the Commonwealth of Australia [9th July 1900] Whereas the people of New South Wales, Victoria, South Australia, Queensland, and Tasmania, humbly relying on the blessing of Almighty God, have agreed to unite in one indissoluble Federal Commonwealth under the Crown of the United Kingdom of Great Britain and Ireland, and under the Constitution hereby established: And whereas it is expedient to provide for the admission into the Commonwealth of other Australasian Colonies and possessions of the Queen: Be it therefore enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows: 1.

This Act may be cited as the Commonwealth of Short title Australia Constitution Act.

2.

The provisions of this Act referring to the Queen Act to extend shall extend to Her Majesty’s heirs and successors to the Queen’s in the sovereignty of the United Kingdom. successors

3.

It shall be lawful for the Queen, with the advice of Proclamation of the Privy Council, to declare by proclamation that, Commonwealth on and after a day therein appointed, not being later than one year after the passing of this Act, the people of New South Wales, Victoria, South Australia, Queensland, and Tasmania, and also, if her Majesty is satisfied that the people of Western Australia have agreed thereto, of Western Australia, shall be united in a Federal Commonwealth under the name of the Commonwealth of Australia. But the Queen may, at any time after the proclamation, appoint a Governor-General for the Commonwealth.

Federalism: sharing power between parliaments 1.7

In Australia, legislative power — the power to make binding laws — is divided between the Commonwealth Parliament and the various state parliaments. Neither the Commonwealth Parliament nor the various state parliaments have unfettered power. The relationship between the Commonwealth and the various states of Australia is governed by the provisions of the Constitution. [page 8] The relationship is called ‘federalism’. This means that the states retain all those powers that have not been specifically handed over to the Commonwealth Parliament. To put the matter another way, the Commonwealth Parliament may only make laws with respect to: those matters set out in the Constitution, primarily s 51; matters which are necessarily incidental to the matters set out in the Constitution; or

those matters which have been referred to the Commonwealth by the states. If the Commonwealth Parliament attempts to pass a law that is beyond its power, such a law is unconstitutional and of no effect. Certain areas of power are reserved to the Commonwealth Parliament exclusively (the exclusive powers) and any law passed by a state parliament that impinges on that exclusive power is unconstitutional and of no effect. For example, the Commonwealth Parliament has the exclusive rights to levy custom duties under s 90 of the Constitution. Other powers given exclusively to the Commonwealth include, for instance, the power to mint coins (s 115) and to regulate defence (ss 114 and 119). Powers not granted to the Commonwealth by the Constitution are called the residual powers and are vested in the states. Where a power is granted to the Commonwealth but not exclusively, that power is shared between the Commonwealth and the states. These are called concurrent powers. Section 51 of the Constitution sets out the concurrent powers of the Commonwealth. These powers encompass a broad spectrum of activities but by no means cover all possible activities. See .

The Commonwealth and the states may each make laws with respect to matters covered by these concurrent powers. If there is an inconsistency between a federal law and a state law, the federal law shall prevail to the extent of that inconsistency: Constitution s 109. When does an inconsistency exist? Broadly speaking, there are three approaches to determining the existence of an inconsistency within the meaning of s 109: Is it impossible to obey both laws (the ‘simultaneous obedience’ test)? If it is not possible to obey both laws then there is an inconsistency.

Does one law confer a right which the other purports to take away (the ‘conferred rights’ test)? If yes, then there is an inconsistency. Does the federal law cover the field in question (the ‘cover the field’ test)? If the federal law (properly interpreted) is intended to cover a particular field of activity then any state law purporting to cover the same field will be inconsistent with the federal law. The ‘cover the field’ test means that, in certain areas, the Commonwealth exercises de facto exclusive power in a practical (if not a legal) sense. For example, once the Commonwealth enacted the Copyright Act there was no scope for the states to produce their own copyright legislation. Any attempt to do so would probably fail under s 109. Figure 1.4 provides examples of the division of powers between the Commonwealth and the states. [page 9] Figure 1.4

Examples of the division of powers between the Commonwealth and the states

Exclusive legislative powers of the Commonwealth

Residual powers Concurrent legislative (exclusive legislative powers powers of the states)

Making laws with respect to: Making laws with respect to: Making laws with respect to: printing money taxation, other than state police, schools and custom and excise duties hospitals levying custom duties marriage and divorce state roads and public defence and external transport (within the state) relations trade and commerce utilities (electricity, water removal or amendment of the powers set out in s 51 supply) any existing of the Constitution. commonwealth law. housing The Commonwealth effectively prisons and community has exclusive power (as a result services of the exercise of its concurrent shop trading hours powers coupled with the removal or amendment of any existing state law.

operation of s 109) to make laws with respect to: copyright, patents and designs communications bankruptcy and insolvency immigration.

Changing the division of power between parliaments 1.8

Because of Australia’s federal system, there is a good deal of overlapping jurisdiction, which has resulted in numerous overlapping statutes. Business has been particularly critical of this aspect of Australian governance and, indeed, there is much to be said for streamlining business regulation. However, removing these examples of overlapping jurisdiction is not easy; ultimately, it is a matter of politics. Historically, it has proved very difficult to amend the Constitution; to do so requires a referendum in which a majority of people in a majority of states and a majority of people across the nation as a whole vote ‘yes’ (this is called a double majority): Constitution s 128.1 As a result, most examples of streamlining regulation have come about through a compromise between the Commonwealth and the states. Good examples of this are the Corporations Act 2001 (Cth), the consumer protection provisions of the Competition and Consumer Act 2010 (Cth) and the Business Names Registration Act 2011 (Cth).

Corporations Act 2001 (Cth) An example of the legislative complications that can arise out of 1.9 the federal system is company law. Most people would probably agree that it makes sense to have companies regulated by one set of rules throughout Australia. It would also, therefore, seem to make [page 10]

sense that one legislative body should have the necessary power to make such rules. Clearly, that body cannot be one of the states. For example, New South Wales does not have the power to make laws with respect to matters that occur in Victoria, and vice versa. Making corporations law and consumer law consistent throughout Australia has been a difficult constitutional issue.

The most rational solution is for the Commonwealth Parliament to have the authority. However, that parliament is constrained in its legislative activities by the Constitution, which gives the Commonwealth Parliament the power to make laws with respect to foreign corporations and trading or financial corporations formed within the limits of the Commonwealth. The High Court of Australia has held that that did not include the power to regulate the formation of companies, only their activities once they have been formed. In 2001, the Australian states and the Northern Territory agreed to refer their powers to regulate corporations to the Commonwealth Parliament, for an initial period of five years. This gave the Commonwealth Parliament the constitutional power needed to enact the Corporations Act 2001 (Cth). The referral of powers continues to operate today. An alternative way to increase the Commonwealth Parliament’s powers would have been to amend the Constitution; however, that requires a national referendum. National referenda have proven historically to be costly and unlikely to be successful in gaining the necessary approval from voters across Australia Competition and Consumer Act 2010 (Cth) 1.10 In 1974, the Commonwealth Parliament passed the Trade Practices Act 1974 (Cth) (now called the Competition and Consumer Act). The Act has had a significant impact on doing business in Australia. Some of the areas it critically affects include: advertising and promotional activities;

sales of goods to consumers; providing services to consumers; liability for defective products; price fixing and other anti-competitive agreements between competitors; and distribution of goods. The history of the Trade Practices Act highlights some of the constitutional difficulties associated with enacting valid legislation. The Constitution does not give the Commonwealth Parliament power to pass laws with respect to advertising, consumer protection, defective products or competition. Therefore, parliament had to use a mix of powers to ensure the legislation was valid. The Commonwealth Parliament has power to make laws with respect to trading, financial and foreign corporations, interstate and overseas trade, and postal, telegraphic and telephonic services. All these powers were used to give the Trade Practices Act the widest possible application. However, the Trade Practices Act could not catch all commercial activity. For example, it could not catch false advertising by a sole trader unless the sole trader used the radio, television or the internet as its advertising medium. Therefore, the states had to introduce similar laws. Unfortunately, these laws were not always the same. This meant that consumer protection in Australia became a jumble of federal and state laws, thus creating considerable confusion.2 In 2009, the Council of Australian Governments (COAG) agreed to implement a single Australian Consumer Law. This required extensive amendments to the Trade Practices Act as well as to state laws. The Trade Practices Act was also renamed the Competition and Consumer Act 2010 (Cth). [page 11] Business Names Registration Act 2011 (Cth)

1.11

Often, people carry on a business under a name that is different to the names of the business owners. This practice can make it difficult for customers to know whom to pursue if something goes wrong with the transaction. The solution for this has been to require business owners to register the business name, and for the public to be able to search that register to identify the names and contact details of business owners. For a long time, this function was carried out at a state and territory level; however, with many businesses operating in more than one Australian state or territory, the existence of so many different business names registers caused difficulties for government, business and customers. The obvious solution was to have a single, national, business names register for the whole of Australia. However, the Constitution does not give sufficient powers to the Commonwealth Parliament to cover the passing of laws on registration of business names — not just for companies but for all types of business structures. In 2011–12, the states and territories agreed to refer their powers to regulate business names and their registration, which gave the Commonwealth Parliament the constitutional powers needed to enact the Business Names Registration Act 2011 (Cth).

Finding and referring to parliamentary law 1.12

A law passed by a parliament, federal or state, is called an Act of Parliament. During the course of this book, we will deal with a number of Acts. Acts are also called statutes, and the body of law that comes from parliament is called statutory law or legislation. Since the evolution of the internet, it has been far easier to access statutes than in the past. The Commonwealth and most states and territories maintain very good websites devoted to providing information about legislative activity. Useful websites with links to online copies of legislation and other law-related matters are: Commonwealth Parliament ;

Commonwealth Attorney-General’s Department ; and Australasian Legal Information Institute . If an Act of Parliament is used as the source of a law, it should be referenced correctly, as shown in Figure 1.5. Figure 1.5

The correct way to reference an Act

The structure of parliaments in Australia 1.13

In Australia, parliaments are either unicameral (one house) or bicameral (two houses). Figure 1.6 shows the situation in the Commonwealth and in the states and territories. [page 12] Figure 1.6 Parliament

The structure of parliaments in Australia Lower house

Commonwealth Parliament House of Representatives Parliaments in New South Legislative Assembly Wales, South Australia, Tasmania, Victoria and Western Australia Parliaments in Queensland, Legislative Assembly Australian Capital Territory, and the Northern Territory

Upper house Senate Legislative Council

No upper house

In all jurisdictions, the government is formed by the political party able to command a majority in the lower house (the House of Representatives in the case of the Commonwealth, and the Legislative Assembly in the case of the states).

The process of creating parliamentary law 1.14

An Act of Parliament begins life as a Bill — that is, a draft of the proposed Act of Parliament. The Bill (normally drawn up by the Office of Parliamentary Counsel) is introduced to parliament and is generally accompanied by an explanatory memorandum that briefly outlines the purpose and main provisions of the Bill. A Bill may be introduced by the government (government Bill) or by a member of parliament (private member’s Bill). Bills may be introduced into either house of parliament, except for appropriation or money Bills (ie, Bills regarding government appropriation, expenditure or taxation), which generally can be initiated only in the lower house (the House of Representatives in the case of the Commonwealth, and the Legislative Assembly in the case of the states). In practice, most Bills originate in the lower house and are government Bills. Bills go through a similar process in each of the bicameral parliaments. First, the Bill and the explanatory memorandum are introduced to parliament (the First Reading). The proposer or mover of the Bill (usually a minister in the government) explains the purpose and scope of the Bill and a date is fixed for discussion and debate. This is where the Bill is debated in full. Many Bills are referred to a parliamentary committee for further discussion. Following discussion, parliament votes on whether the ‘Bill be now read a second time’ (Second Reading). If this is agreed, then the house has agreed to the Bill in principle. The proposer then moves that the Bill be read a third time (Third Reading). Generally there is no debate at this point. The Bill is then sent to the other house for consideration, where the same process is followed. Once agreed to by both houses, the Bill is sent for Royal Assent and is published in the Government Gazette. These are technical

requirements that must be adhered to if the Bill is to become a valid law as an Act of Parliament. Amendments to an Act of Parliament must follow the same procedure.

Administering the law: the doctrine of the separation of powers 1.15

While the various parliaments are the ultimate source of parliamentary law, they do not administer that law nor act as adjudicator. The administration is in the hands of the [page 13] executive (the government), and the courts adjudicate. This is called the doctrine of the separation of powers (Figure 1.7). Although responsibility for administration is in the hands of the executive, the executive is directly responsible to parliament. The members of the executive — the government — are members of parliament who are accountable to parliament. This is called responsible government and should be contrasted with the system in the United States where the only elected member of the executive is the President, who is neither a member of parliament nor accountable to it.

Figure 1.7

Separation of powers

Parliament does not have the time to debate and pass every rule that may affect our lives. It delegates much of the rule-making to other authorities. Thus, local councils have been given the power to pass rules affecting their local communities. However, the power of the local councils (and other statutory authorities) comes from parliament and may be withdrawn by parliament. The power must be exercised for the purposes of, and in the manner set out in, the Act of Parliament that created the power. The power may not be exceeded. If the statutory authority exceeds its power, or acts for an improper purpose or in an unauthorised manner, the courts have jurisdiction to declare such proceedings void.

Interpreting a statute: the role of the courts 1.16

While it is the role of parliament to create legislation, it is the role of the courts to interpret it.

Literal rule 1.17 The fundamental object of the court when interpreting legislation is to ascertain and give effect to the legislative intention of the parliament. The intention of parliament is to be found first and foremost in the words that parliament has used; that is, the words of the statute. Words are to be given their ordinary and natural

meaning. Thus, the courts will initially give a literal interpretation to the statute’s words. This is called the literal rule. In most cases, this will be all that is needed to interpret a statute. Golden rule 1.18 Where there is some ambiguity and using the normal meaning of the statute’s words would produce an absurd result, the courts may adopt an interpretation that avoids the absurdity and gives effect to the intention of parliament. This is called the golden rule and is used sparingly: any ambiguity ‘must be a very serious one before a court will be justified in using [page 14] it as a reason for rejecting what otherwise seems to be the correct construction of a statute. If courts act otherwise, they risk taking over the function of making policy choices which properly belongs to the legislature’.3 Mischief rule 1.19 Where there are two equally possible interpretations, the courts must accept the interpretation which promotes the purpose or object of the Act. This is called the mischief rule. It is an old rule but may in fact be part of the golden rule. Principle of legality 1.20 Where there is more than one possible interpretation of a statute, the court will favour the interpretation which will ‘avoid or minimise [the] encroachment upon rights and freedoms at common law’. In Saeed v Minister for Immigration and Citizenship [2010] HCA 23, the High Court described the operation of this principle of legality as follows (at [15]): The presumption that it is highly improbable that Parliament would overthrow fundamental principles or depart from the general system of law, without expressing

its intention with irresistible clearness derives from the principle of legality, which … ‘governs the relations between Parliament, the executive and the courts’.

Use of extrinsic materials in interpreting statutes 1.21 To aid interpretation, the courts may have resort to a number of extrinsic aids, such as any explanatory memorandum tabled in the parliament concerning the statute.4 For Commonwealth legislation, the Acts Interpretation Act 1901 (Cth) s 15AA applies:5 In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

Most modern statutes contain an ‘objects clause’ setting out the purpose of the legislation. For example, s 2 of the Competition and Consumer Act (2010) provides that: ‘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’. Extrinsic materials may be used, for example, to clarify ambiguous or obscure provisions in a statute.6 Rebuttable presumptions 1.22 A number of presumptions may also be applied by courts in interpreting legislation. These presumptions are rebuttable by clear evidence that the parliament intended otherwise. Some of the more commonly applied presumptions are: legislation does not override the common law or alter existing legal rights: see [1.20]; [page 15] parliament does not intend to interfere with the liberty of citizens; parliament does not intend to interfere with fundamental

rights; parliament does not intend to take away property rights without compensation; legislation is not intended to be retrospective; legislation is not intended to have extra-territorial application (beyond the geographical jurisdiction of the relevant parliament); and legislation is not intended to bind the Crown. Other interpretive devices 1.23 There are a number of interpretive devices used by the courts to understand a statute.7 These are simply canons of statutory interpretation and must be used very carefully. Ultimately, it is the intention of parliament as revealed in the statute that counts. The canons may amount to no more than the application of common sense. Ejusdem generis (‘of the same kind or nature’) — Where specific items are referred to in a statute followed by general words, the general words are limited to the same kind as the specific items. For example, a statute which states that it applies to ‘cars, motorbikes and other vehicles’ would apply also to a motor scooter but probably not to a motor-powered boat or an aircraft. Boats and aircraft are not of the same kind or nature as cars and motorbikes. Expressio unius est exclusio alterius — Where there is an express reference to one thing other things are excluded. For example, a statute which states, ‘No trucks or buses may use this road’, would not apply to cars, motorbikes or bicycles. However, care must be taken where the reference to one thing is simply meant as an illustration and not an exclusion of other things. For example, the expressio unius rule could not be applied to the following statutory provision, ‘No vehicles may use this road. This includes motorbikes’, in order to exclude cars, trucks, buses and so forth.

Noscitur a sociis (‘it is known by its associates’) — The meaning of a word or phrase may be gathered from the context in which it appears. This maxim, if it has any practical application at all, may mean no more than that a statutory provision must be understood within its overall context. Where the meaning is clear there is no room for the application of noscitur a sociis. This device is rarely relied upon. Generalia specialibus non derogant (the general cannot detract from the specific) — Where there is a conflict between general and specific provisions (usually within the same Act), the specific provision prevails.

SOURCES OF LAW: CASE LAW (COMMON LAW) 1.24

The other area from which we derive our law is the courts of law. Although parliament is supreme, it has chosen not to be the sole repository of law making. It has left intact much of what is called the common law (also called case law or judge-made law). The common law system is very much an English construct. It should be contrasted with most European countries which have felt the need to assert parliament’s role as the sole authority (civil law). [page 16]

Judges do make law, but there are strict constraints on what they can do. The main constraint is that they must adhere to the doctrine of precedent.

The common law may be defined as those legally enforceable rules that have been fashioned by the courts rather than by parliament. However, judges do not make rules ad hoc. If they did, the common law would long ago have been discarded. Rather, the process is largely one of adaptation and development. The law of negligence is a good example (see [2.2]–[2.3]) of how the courts

adapted and developed existing rules to handle new situations. In developing new rules, the courts must be mindful not to take the place of the legislature. This was emphasised by the High Court in Commonwealth Bank of Australia v Barker [2014] HCA 32: the court refused to imply a term of mutual trust and confidence into employment contracts, arguing that such a step involved policy considerations that must be left to parliament to resolve. Australian courts only decide law in the context of resolving a dispute. They do not make pronouncements about the law unless they are deciding a case. Even then (as a general rule) they decide only those legal points that are necessary to resolve the case before them. In Fencott v Muller (1983) 152 CLR 570 at [30] the High Court said: The unique and essential function of the judicial power is the quelling of … controversies by ascertainment of the facts, by application of the law and by exercise, where appropriate, of judicial discretion.

Distinction between common law systems and civil law systems 1.25

The common law operates in countries that were influenced in their development by England. Most other countries operate under a civil law system. This includes European countries such as France, Germany and Italy. Civil law, which owes much to Roman law, relies on statutory rules. These rules often appear in the form of a code, such as the Napoleonic Code. Judges merely interpret and apply the statutes and codes; judges do not create law. This is the key difference between civil law and common law. Common law and civil law Why did England develop a common law system? Two interrelated factors were of critical importance. First, from the time of the Norman Conquest in 1066, England developed a strong central government. This did not occur in other European countries until much later. France remained very much a collection of semiautonomous regions until at least the time of Napoleon. Germany only became a unified state in 1875. The unification of Italy also occurred in the

1870s, but was not finally completed until after the First World War. Second, the early English monarchs created king’s courts, which dispensed a common law throughout the realm. These courts quickly grew in popularity and, in time, largely replaced the host of feudal courts that had previously existed. No such centralised system of law enforcement occurred in France or was possible in Germany or Italy. Consequently, when the political upheavals arrived — the French Revolution and the unification movements in Germany and Italy — the newly formed political entities had no common law or common legal system to call upon. A civil law system was the only choice.

[page 17]

Doctrine of precedent (stare decisis) The doctrine of precedent is the cornerstone of the common law system.

1.26

The principle that unifies the common law and makes it workable is the doctrine of precedent, also known as stare decisis. This simply means that a decision of a higher court binds a lower court in the same hierarchy of courts. The doctrine of stare decisis, therefore, means that a decision of a higher court must be applied by lower courts in the same hierarchy if the case being heard involves the same issue and similar facts as those in the case previously decided by the higher court. Therefore, it is necessary to have some understanding of the various hierarchies within Australia. Figure 1.8 presents the general hierarchy of courts in Australian states and territories.

Figure 1.8

Hierarchy of courts in Australian states and territories

The courts in each state or territory have a roughly similar hierarchy, and the High Court is the highest judicial body in each. The Federal Court, created in 1976, has assumed a leading role in area of commercial and taxation law generally, and marketing law in particular. The Federal Court has an original jurisdiction (trials) and an appellate jurisdiction. The Family Court was established in 1975. Figure 1.9 presents the hierarchy of federal courts in Australia.

Figure 1.9

Hierarchy of federal courts in Australia

[page 18] Even though a court is only bound to follow the decisions of a higher court within its own jurisdiction, the decisions of courts in other jurisdictions will have persuasive authority. Particularly important in this regard are, of course, the decisions of other Australian courts and the decisions of the superior courts in the English hierarchy (see Figure 1.10). This is because the common law of Australia is derived from English common law.

Figure 1.10 Hierarchy of superior courts in England

In some areas of law, US decisions are now attracting greater attention than they received in the past. US decisions are not binding on Australian courts but they often have persuasive force.

Finding case law 1.27

The decisions of the courts are to be found in the various law reports. Not all cases are reported. The decisions of the County Court and the Magistrates Courts are not reported. In the superior courts, only those cases which are regarded as raising an interesting point of law are officially reported. Many more cases, however, are available to be read on the internet. When a previous case is referred to, it is given a citation which is a reference to the law report in which the case may be found. For example, Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 can be found in volume 1 of the Queen’s Bench Reports of 1893 beginning at page 256; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 can be found either in volume 164 of the Commonwealth Law Reports beginning at page 387 or in volume 76 of the Australian Law Reports beginning at page 513. Queensland Wire Industries v Broken Hill Pty Co Ltd was a decision of the High Court of Australia. The official citation appears in Figure 1.11. It has now become common to refer to

cases by what is called a neutral citation: Queensland Wire Industries v Broken Hill Pty Co Ltd [1989] HCA 6. It is neutral because it does not refer to any specific law report but rather to the court in which the decision was made. ‘HCA’ means the judgment came from the High Court of Australia. For the purpose of marketing law the decisions of the Federal Court are very important. ‘FCA’ is used to designate a decision by a single judge (whether on trial or an interlocutory proceeding). ‘FCAFC’ is used to designate an appeal decision of the Full Court of the Federal Court. [page 19] Figure 1.11 Referring to (citing) a case

Law reporting and the internet 1.28

Although the law reports remain the official source of what was said in a case, the internet is rapidly becoming a common medium of accessing cases. Australia has a number of websites devoted to law. A very useful site which reports most recent cases of consequence is the Australasian Legal Information Institute website: . The AustLII site also contains copies of Commonwealth and state legislation, and has

connections to useful websites around the world.

Common law and equity Historically there were common law courts and equity courts. Today, common law and equity rules are applied in the one court.

1.29

Case law (or judge-made law) is divided into two categories: 1. the common law; and 2. equity. Unfortunately, the expression ‘common law’ has a number of meanings, depending upon the context in which it is used. We have previously used it as a synonym for judge-made law to distinguish it from statutory law. We are now using it to describe one of the categories of case- or judge-made law in order to distinguish it from equity. In this latter regard, the common law is that body of law which was applied historically by the common law courts. The common law courts recognised only certain complaints (called ‘causes of action’) and granted only certain remedies. If a person’s complaint did not fit within one of the recognised causes of action, the court would not hear the matter. The common law courts, by and large, restricted themselves to granting damages (monetary compensation) as a remedy. The Court of Chancery (which developed in the 14th and 15th centuries out of the functions of the Lord Chancellor) stepped in and was prepared to provide relief in situations not recognised by the common law. The body of law applied by the Court of Chancery came to be called equity law. In time, equity became somewhat formalised, just as the common law had. Like the common law, equity adopted the practice of following previous decisions (precedents). This is probably necessary in a society that espouses the rule of law and eschews arbitrary proceedings. For a very brief and readable history of the growth of English courts see

the website . [page 20] Figure 1.12 Common law and equity

Equity developed around the common law rather than as a discrete and competing set of principles in its own right. Equity recognised new relationships which the common law would not recognise. For example, the common law would not recognise the relationship between trustee and beneficiary. The law relating to trusts is therefore a matter of equity. Trusts have continued to grow in importance, particularly in commerce. Equity also recognised that some complaints, which had previously gone unrecognised by the common law (eg, equitable fraud), were worthy of a remedy. Finally, equity provided new remedies, such as specific performance and injunctions. As a broad generalisation, we can say that whereas the common law is concerned with rules, equity is concerned with behaviour. For many years, the common law courts and the equity courts were entirely separate. A person wishing to bring a complaint to court had to choose between the common law and equity. An incorrect decision could leave the complainant with no remedy. This situation was rectified in the 19th century: in 1873, the administration of common law and equity was unified. A court is empowered to hear pleas based on either one or the other, or a combination. However, the two bodies of law remain otherwise

separate. To give some idea of their relationship to one another, we will briefly consider contract law. One of the great areas of common law is contract law. The rules that govern contract law were created by the common law courts. The main remedy employed by the common law courts for breach of contract was and is damages (ie, monetary compensation). Equity never tried to create its own system of contracts. Rather, equity acted to soften some of the harder edges of the common law rules. For example, the only action for fraud recognised by the common law courts required evidence of a fraudulent state of mind.8 This meant that many plaintiffs, despite having been misled into a contract, were denied a remedy because they could not establish the defendant’s fraudulent state of mind. Equity regarded this as being unfair and created the remedy of equitable rescission of the contract for innocent misrepresentation. The effect of rescission is to wipe out the contract.

The process of extracting the law from a case 1.30

We have seen that both common law and equity follow previous decisions. Courts in both jurisdictions are bound by the doctrine of precedent (stare decisis). However, if you look at any decision, you will find it contains comments which form the basis for the court’s decision, as well as comments which are not strictly essential for that decision. The former comments are called the ratio decidendi (reasons for deciding) and the latter are called obiter dicta (things said by the way). It is only the ratio decidendi which is binding. Obiter dicta has persuasive force only. Often it is difficult to say what the ratio decidendi of any decision was. For example, the High Court regularly sits with five members. The ultimate decision might be split three to two. Among the three (in the majority), each judge might have a different reason for [page 21]

deciding as he or she did. This makes it difficult to extract the ratio decidendi but it does give the court a fair degree of flexibility when a similar matter comes before the court again. A degree of flexibility also exists because no two cases are exactly the same. If the differences between the instant case and the precedent are material, the court in the instant case can distinguish the precedent case. This means that the ratio decidendi that was applied in the precedent case is inapplicable to the instant case because of the difference in facts. From time to time, you will hear a court say that a previous case should be restricted to its facts. This generally means that the court is not particularly impressed with the earlier decision, but is unwilling or unable to overrule it. It should be noted that both the High Court and the Supreme Court of the United Kingdom do not regard themselves as bound by their previous decisions. However, neither will lightly overrule itself.

THE PRIMACY OF PARLIAMENTARY LAW OVER CASE LAW Parliamentary law overrides any inconsistent judge-made law.

1.31

Where there is a question of conflict between parliamentary law and judge-made law, parliamentary law is always superior (provided, of course, that it is constitutionally valid). There was a time when parliament largely left judge-made law to develop in its own way — thus, the rules of contract and tort developed through a myriad of court judgments, with parliament having little to say on the issues. This attitude changed after the Second World War. More and more, parliament took a crucial role in determining the course of law, even in those areas originally regarded as the almost exclusive domain of judge-made law. Two examples taken from laws discussed in this book demonstrate this changed attitude.

First, in recent years, parliaments have involved themselves in the common law of negligence. During the 1990s, a debate arose over the costs of negligence. Negligence claims, so it was said, were becoming more common and the awards getting larger and larger. Insurance companies increased the price of insurance and, in some cases, refused to insure at all. Australia had, so it was said, an insurance crisis. The crisis affected all industries, but was particularly severe in industries such as health and leisure. Following an inquiry, all Australian parliaments decided to intervene and to enact negligence legislation. The legislation did not replace the common law as the source of an action in negligence but it did codify some of the important elements or principles of negligence. The legislation also put caps on the amounts that could be claimed. Thus, in two important respects parliament replaced the courts as the source of negligence law. The courts no longer have any discretion to develop these two areas of negligence according to common law principles. In fact, the intervention of parliament into the law of negligence is just one aspect of the overall concern that parliament has had with protecting consumers. Negligence as part of a wider legal framework to protect consumers against faulty products is discussed in Chapter 2. Second, parliament has largely taken over the protection of consumers. As society entered an age of mass distribution, the power in negotiating consumer contracts clearly resided with commercial sellers — not with consumers. Sellers used this power to prevent consumers from accessing many of the rights which might otherwise have flowed from having a contract. Thus, railway proprietors exempted themselves from liability for providing poor and unsafe services. Retailers could exempt themselves from the consequences of selling faulty products. The device used to limit liability was an exclusion or exemption term in the contract, usually contained in a ticket or a sign. Often, the consumer knew nothing about the clause. Even if they did

know, it would not matter — the consumer had no power to alter the terms. [page 22] Some judges made valiant attempts to protect the consumer by interpreting exclusion clauses in favour of the consumer and against the seller. However, the ability to protect the consumer within the confines of judge-made law was ultimately quite restricted. Real protection could come only from parliament. With the rise of the consumer movement as a political force, parliaments moved to provide protection for consumers through legislation. The latest example in this process in Australia is the enactment of the Australian Consumer Law. This is discussed in Chapter 8.

Cows on the road It is possible to catch a glimpse of the evolutionary processes of the law at work by examining how the rules relating to animals on the highway have changed or not changed over time. The old rule of English common law was that the owner of an animal owed no duty to highway users to prevent the animal from wandering or straying onto the highway. The rule dated from a time when there were very few fences and the fastest thing on the road was a horse. Despite the appearance of motor cars and the consequent increase in the potential for serious injuries, the old rule was reaffirmed in 1947 by the House of Lords in Searle v Wallbank.9 In 1979 the Australian High Court also applied the old rule in Trigwell’s case,10 which originated in South Australia. The court affirmed the old rule not because it believed that the rule was suitable for modern conditions, but because the court considered the rule so entrenched in the common law that any change should come from parliament. The South Australian Parliament duly changed the law, thus bringing it into line with New South Wales and Victoria which had already abolished the old common law rule. The rule has also been abolished by statute in England. The Queensland Parliament, however, did not abolish the rule, as Mr Smith

discovered when he attempted to sue a cattle farmer, Mr Williams, for damages. According to the court: At about 5.20 am on 17 April 2002 [Smith] was driving a loaded fuel tanker along the Kennedy Highway near the property occupied by [Williams]. As [Smith] was driving the tanker over a crest of the hill, he noticed a number of cattle on the highway. He swerved to avoid them. The tanker overturned and burst into flames, causing the plaintiff [Smith] severe injuries. Lawyers for Williams asked the court to strike out (deny) Smith’s claim on the basis that the old common law rule (as articulated in Searle v Wallbank and affirmed in Trigwell) prevailed and, therefore, Smith had no case. Smith tried to find a way around the rule. He argued that the rule did not apply if the property owner deliberately brought the animals onto the highway. Unfortunately for Smith, however, he failed to present evidence to support his contention. Therefore, his claim was dismissed. The next move is up to the Queensland Parliament. Should it abolish the rule? Possibly; however, to date it has resisted all requests to do so. Why? Almost certainly, the answer lies in the realm of politics, not law.

[page 23]

AN AGE OF REGULATION Law plays an important regulatory role in modern societies. There are all sorts of rules regulating where businesses can operate and how they operate.

1.32

There are many other examples of parliaments intervening to regulate social and economic life. In fact, the modern age is an age of regulation, reflecting the view that the state can improve the lives of its citizens by appropriate intervention in a wide range of social and economic activities. Regulatory intervention may take many forms (eg, industry assistance, export incentives) but, as we have just seen, one of the most important is through the use of legal rules. Legal rules to protect consumers against the superior bargaining power of sellers, and legal rules to ensure the viability of certain industries by capping their potential liability for

negligently caused harm, are but two examples. This trend towards the ever-increasing involvement of parliaments at the expense of the common law is likely to continue. Additionally, even most nonlegal forms of regulatory intervention require parliamentary approval through an Act of Parliament.

PRIVATE LAW AND PUBLIC LAW 1.33

Broadly speaking, private law involves disputes between citizens, and public law involves disputes between citizens and the state. The distinction, however, is often hazy. See Figure 1.13.

Figure 1.13 Private law and public law

[page 24]

CIVIL CASES AND CRIMINAL CASES 1.34

An important distinction is that between civil cases and criminal cases. The critical differences between the two are the level of proof required to establish an infringement of the law and the orders the court may make. Whereas a breach in a civil law case requires proof of the infringement on the balance of the

probabilities, in criminal cases the standard of proof required is beyond reasonable doubt. The criminal burden of proof is thus considerably higher. Criminal cases are also subject to more rigorous procedural rules than are civil cases and often require proof of a specified state of mind (usually intention or knowledge). This reflects the community’s view that a person should not be labelled a criminal and be exposed to criminal penalties unless his or her guilt is well and truly established. Where a case is brought by the state (acting through the relevant administrative authority), the action may be civil or criminal.11 This depends on the relevant statute. Where parliament elects to make infringement of a statutory provision a criminal offence, it will nominate the penalties that accompany such a breach: imprisonment and/or fines. Crimes such as murder, armed robbery and fraud attract long prison sentences. In many areas of business law, monetary penalties (fines) are much more common. Thus, breaches of s 151 of the Australian Consumer Law dealing with false or misleading representations (a part of the Competition and Consumer Act 2010 (Cth)) attract criminal penalties in the form of significant fines, but do not attract prison sentences. The fact that parliament empowers the courts to impose a fine for a breach does not necessarily mean that the case is a criminal case. Sometimes parliament will elect to impose what is called a civil penalty. This practice has become more and more popular in recent decades. A civil penalty may be a significant fine, but does not include imprisonment. Civil penalties are widely used in the Competition and Consumer Act. For example, s 29 of the Australian Consumer Law mirrors s 151 (discussed above) in all respects except that it makes liability civil not criminal. Thus, s 29 makes false or misleading representations a civil offence with fines equal to those imposed in a criminal case for a breach of s 151. The upshot of having a dual system of penalties is that Australian Competition and Consumer Commission (ACCC), which administers the Competition and Consumer Act (including

the Australian Consumer Law), must decide whether to initiate civil proceedings or refer the matter to the Commonwealth Director of Public Prosecutions (CDPP) for possible criminal proceedings.12 Generally speaking, criminal cases are reserved for the more egregious breaches of the law where the evidence of breach is clear. Why have a dual system of penalties? The major reason for the introduction of civil penalties is to ensure better compliance with the law. Making an infringement criminal introduces elements that complicate the object of compliance, such as higher standard of proof, special procedural rules and the stigma of labelling someone ‘a criminal’.13 A dual system thus satisfies both the need for maximising compliance (civil penalties) and the need to express the community’s displeasure at certain activities (criminal penalties). Where a case is between two private parties — that is, the state is not involved — the matter is a civil case. The remedies that a court may order are quite numerous, including monetary compensation (damages) and injunctions as well as a variety of other remedial orders. Cases involving contracts and torts are private actions. Therefore, the civil standard of proof applies. [page 25]

DISPUTE RESOLUTION 1.35

It is inevitable in any community that there will disputes, and often those disputes will have a legal aspect. Such disputes may be resolved in a variety of ways. The most common method is for the parties to negotiate a settlement between themselves. Where negotiation fails, the parties will have to resort to: 1. the courts (or a relevant tribunal); or 2. some alternative form of dispute resolution.

Resolving disputes through the courts 1.36

When two parties fall into dispute (eg, two pharmaceutical companies disputing a patent), one option is to take the dispute to court. Most of the laws discussed in this book are federal and most of the cases are heard in the Federal Court. One party (the applicant) files an application with the court, together with a statement setting out their claim. A copy is then served on the other party (the respondent). The respondent may then join issue. If the matter is not settled, it will go to trial before a single judge. The role of the trial is to determine the facts and then to apply the law to those facts to determine whether the applicant has made out his or her complaint. Both parties are entitled to examine or cross-examine witnesses. A party that considers the trial court has made an error of law may appeal. An appeal is not a rehearing of the dispute. The sole responsibility of the appeal court is to determine whether an error of law has been made. If a material error has occurred, the appeal court may (depending on the circumstances) make a new order or return the matter to the trial judge to be decided according to the proper law. In a limited number of situations, a party may be granted leave to appeal to the High Court against the decision of the Full Federal Court. There is no automatic right of appeal to the High Court.

A hypothetical case 1.37

Smith and Jones both live in Sydney. Smith thinks that Jones has wronged her in some way. She goes to her solicitor and seeks advice as to what can be done. The solicitor advises her that, as the law currently stands, she can bring an action against Jones. Smith must first decide what action to bring and in which court. If the matter involves a law falling within the jurisdiction of New South Wales, Smith will issue her proceedings in the appropriate New South Wales court. Let’s assume that the action is commenced in the Supreme Court of New South Wales at Sydney. This is done by issuing and serving on Jones a document called a Writ of

Summons. Normally the writ will be accompanied by a document setting out the claim, called the Statement of Claim. The case becomes known as Smith v Jones. Smith is the plaintiff and Jones is the defendant. (If the action had been commenced in the Federal Court of Australia, the document initiating the claim would have been called the Application. Smith would have been called the applicant and Jones the respondent. See Figure 1.14.) Figure 1.14 Names of parties to a trial in a federal court versus a state court

[page 26] Trial The trial is where the parties present their evidence. Each party has an opportunity to test the other party’s witnesses by cross-examination. As most civil cases these days do not involve a jury, the judge must then make findings of fact based on the evidence. The judge must decide which laws apply to the case. On the basis of the relevant law as applied to the facts, the judge then reaches a decision and makes the necessary orders.

Jones decides to defend the matter. Each party files various documents designed to narrow down the issues of fact in dispute. Despite attempts to settle the matter, it eventually comes to court. Usually, the lawyers conducting the case are barristers. The position of barristers varies slightly from state to state. However,

barristers can be regarded as specialists. They specialise in court work, whereas the solicitor has a much more general practice. Appeal An appeal court does not rehear the evidence. Its function is to determine whether the law has been correctly applied.

Initially, Smith is successful. Jones is unhappy. Jones must now decide whether to appeal. However, to appeal from the trial division of the Supreme Court to the Court of Appeal, Jones must show there has been some error that entitles him to appeal. It is not sufficient grounds merely to disagree with the judge’s or jury’s finding. There must have been some error of law or, alternatively, that the decision was manifestly against the facts. Jones’s lawyers tell him that the law in issue in his case has often been criticised and that it may be possible to convince an appellate court that the law requires changing. The trial judge may have disagreed with the law but was obliged by the doctrine of stare decisis to follow it. Jones decides to take a chance and appeal. On appeal, the matter becomes Jones v Smith. Jones is called the appellant and Smith the respondent. (See Figure 1.15.) Most cases referred to in this book are appeal cases. Figure 1.15 Parties’ names in an appellate court

The primary function of the appellate court is to determine whether the trial judge applied the law correctly. The appellate court does not hear witnesses. It relies upon a transcript of the trial (ie, a word-by-word report). Only in very rare circumstances will

the appellate court reject the findings of fact made by the trial judge. Let’s assume that, after hearing argument from the appellant’s barrister and the respondent’s barrister, the Court of Appeal decides that the law is too well entrenched to overturn it. Jones loses again. The costs are now mounting very high. Jones has very few options left. He has no right per se to appeal to the High Court of Australia. These days, the High Court will only hear appeals that contain an important question of law. There is no longer any right to appeal to the Privy Council in Great Britain. Seeking leave to appeal to the High Court Jones decides to seek leave to appeal to the High Court on the basis that his case involves a question of law which ought to be reconsidered by the courts at the very highest level. The High Court justice who hears the application for leave to appeal agrees and the matter is set down for hearing before the High Court. As Jones has sought the appeal, the case is referred to as Jones v Smith. If the High Court agrees with Jones that the law is in need of change, it will allow Jones’s appeal. As the High Court has only looked at the matter from the point of view of one legal issue it may very well remit the matter back to the Supreme [page 27] Court with instructions to decide the matter on the basis of the law as expressed by the High Court. Hopefully, the matter will end there: either Smith or Jones is probably a pauper by now! Figure 1.16 Headnote to the report of Waltons Stores (Interstate Ltd) v Maher in volume 76 of the Australian Law Reports WALTONS STORES (INTERSTATE) LTD V MAHER and ANOTHER HIGH COURT OF AUSTRALIA

◀ The court

Mason CJ, Wilson, Brennan, Deane and Gaudron JJ ◀ The judges 7, 8 May 1987 — Canberra 19 February —1988 —Sydney Estoppel — Equitable — Conduct — Negotiations for lease — Mistaken assumption — Detriment — Failure to execute — Unconscionable conduct — (NSW) Conveyancing Act 1919 s 45A Waltons Stores (Interstate) Ltd (the appellant) negotiated for some months with Mr and Mrs Maher (the respondents) for the granting of a ◀ Summary of the lease over property owned by the respondents. It was envisaged that the facts respondents would erect a building on the land, and this would entail demolition of an existing building. On 7 November 1983, the respondents’ solicitors informed the appellants’ solicitors of the need to ‘conclude the agreement within the next day or two’ to enable completion of the building according to the times envisaged. Thereupon the appellants’ solicitors wrote to the respondents’ solicitors, enclosing the documents for the lease and stating that instructions had not at that time been obtained as to certain amendments to an earlier draft lease but that the respondents’ solicitors would be informed “tomorrow if any amendments were not agreed to”. The letter also requested a schedule of finishes to be annexed to the executed documents prior to exchange. Four days later, the documents, executed by the respondents and with a schedule of finishes annexed, were returned to the appellants’ solicitors for execution and exchange. The documents were never executed by the appellant and were returned to the respondents’ solicitors some months later with a letter stating the appellants’ intention not to proceed. By this stage the demolition work had been finished and the new building was 40 per cent complete. After the appellant refused to proceed with the transaction the respondents commenced proceedings in the Supreme Court of New South Wales, seeking a declaration that a binding agreement existed and specific performance of the lease, or alternatively damages. Kearney J gave judgment in favour of the respondents and damages in lieu of specific performance. An appeal to the Court of Appeal was dismissed. Held, per curiam: The appeal would be dismissed

[page 28] (i) Per Mason CJ, Wilson and Brennan JJ; Deane and Gaudron JJ contra: The respondents mistakenly assumed that exchange of contracts would take place as a matter of course. (ii) Per Mason CJ and Wilson J: Equity will come to the relief of a plaintiff who has acted to his de triment on the basis of a basic assumption in relation to which the other party to the transaction has played such a part in the adoption of the assumption that it would be

◀ Summary of the judgment

unconscionable conduct on the part of that other party to ignore the assumption. The appellants’ inaction, in all the circumstances, constituted clear encouragement of in ducement to the respondents to continue to act on the basis or the assumption which they made. It was unconscionable for it, knowing the respondents were exposing themselves to detriment by acting on the basis of a false assumption, to adopt a course of inaction which encouraged the respondents in the course they had adopted.

Alternative dispute resolution Going to court is not the only way to resolve a dispute. There are alternatives, such as mediation, conciliation and arbitration.

1.38

Assume that the parties in dispute have failed to negotiate a settlement but they do not want to involve themselves in litigation. What other options are open to them? They may decide to utilise alternative processes, such as mediation, conciliation and/or arbitration. These are collectively known as alternative dispute resolution methods, or ADR. Conciliation, mediation and arbitration all make use of an impartial outsider — that is, a third party independent of the parties in dispute — to aid in the resolution of the matter. In conciliation and mediation, the third party endeavours to facilitate the parties reaching an agreement about the dispute. The difference between mediation and conciliation is that a conciliator is more likely to take an active role by providing suggestions for an agreement or even providing a draft agreement for parties to consider, whereas a mediator’s role is more passive. In arbitration, the third party — called the arbitrator — hears the arguments of both parties before reaching a decision about the dispute. The decision is called an arbitral award and is legally binding on all parties. Of these ADR processes, the closest to litigation is arbitration. However, arbitrators are not judges — for example, an arbitrator’s experience might be in technical areas relevant to the dispute in

question. The parties jointly agree on which arbitrator or arbitrators will hear their dispute. Arbitration for commercial disputes is regulated by legislation, through a series of Commercial Arbitration Acts. It is quite common for commercial contracts to contain a compulsory arbitration clause. ADR is generally faster and cheaper than litigation, although the parties must pay for the venue and the costs of the mediator, conciliator or arbitrator. ADR processes are held in private, meaning that the evidence and the agreements or awards are not available to the general public.

LAW IN COMMERCE 1.39

One way of thinking about commercial or business law is to view it as the framework within which commercial relationships operate. Some of those relationships will be quite direct; others will be remote. Some will end up as contracts; others will not. The fundamental laws governing those relationships are covered in this book. [page 29]

Contracts 1.40

If people get together to pursue a common commercial goal, they need to understand the things they are obliged to do and the things the other parties are obliged to do. Without a reasonable degree of certainty as to reciprocal rights and obligations, commerce would find it more difficult and less efficient to operate. The risks would be much greater. Therefore, in one respect, contracts can be seen as a form of risk management. Having a contract is one way of taking the uncertainty out of the future. Of course, certainty is not the only requirement of commercial relationships. At least in the case of ongoing relationships, such as

dealerships and franchises, there is also a need for flexibility. Relationships must be able to evolve and change to meet new circumstances. If the law governing the relationship is too rigid, it will not stand the test of time. More and more, the community is demanding an additional element of fairness and good faith. This is not applicable just to consumer transactions but also to business-to-business transactions. Fairness in commercial relations is not just a matter of morality. It also makes good economic sense. Formation and maintenance of commercial relationships is likely to be cheaper and therefore more efficient where the relationship is built on mutual goodwill and fairness. Sharp practices can seem particularly childish if they cause the breakdown in a mutually beneficial relationship. The basis of the modern law of commercial relationships is very much the law of contract and, increasingly, those laws based on fairness, such as misrepresentation and unconscionable conduct. The fundamental nature of the law of contract to business and commerce is demonstrated in Figure 4.1.

Torts and similar statutory obligations 1.41

The law of torts is the other great area of common law. Whereas contract law is concerned with the notion that people should honour their promises, tort law is concerned with the notion that there are certain minimum standards of conduct expected of people. Thus, people should not make fraudulent or negligent representations which cause others to suffer a loss. Manufacturers should not make and distribute their products carelessly so that others are hurt as a result. This book examines torts of negligent and fraudulent misrepresentation as well as negligence in the production of goods and services. There are numerous other torts which are not discussed in this book, such as defamation, assault, passing off, trespass and conversion. There are also statutory laws which govern representations in business and the production of defective goods. The statutory laws

were not designed to replace the common law obligations. The two exist side by side. Thus, where there has been a misrepresentation which has caused damage and loss to a person, that person may be able to sue under the tort of fraud or negligent misrepresentation and under s 18 of the Australian Consumer Law (ACL). Section 18 of the ACL prohibits certain persons, in trade or commerce, from engaging in misleading or deceptive conduct.

Agency, partnerships, companies and trusts 1.42

In a simple world, everyone would conduct their own negotiations, be responsible for their own contracts, buy or sell their own goods and services. In a complex world, this is not possible. We must partly rely on others to conduct our business. It may be sufficient to operate as a sole trader and hire staff or appoint agents to handle business. On the other hand, it may be better to spread the commercial risk by [page 30] joining with others in a partnership. Partnerships have their benefits, but also create their own risks. Each partner is jointly liable for the partnership debts. Because of this, it may be more efficient to adopt a company structure. Companies solve many of the problems of partnership but give rise to their own risks. The further one is removed from the simple sole trader, the more tenuous becomes the control over the employment of one’s capital. Another alternative is for the business to become the property of a trading trust that is operated by a limited company as trustee, as this may allow the owner of the business limited liability and also the potential to divide income among family members or investors as beneficiaries of the trust. In any situation, the question facing the owner of capital is: What sort of structure most meets his or her needs and expectations? That is, should he or she operate as a sole trader, as

a partnership or as a company? Companies have become much more prevalent since the Second World War. There is a need to know the legal basis of companies. In this modern world of legal accountability, there is a special need to understand the role of a director — the responsibilities as well as the rights. Many are finding out, to their cost, that those responsibilities can be onerous. Whatever form of business entity is chosen, it is a fairly safe bet to say that there will be a need to act from time to time through the agency of some other person. Most likely that person will be an employee. Whenever a business entity acts through the agency of some other person, an agency relationship is created. The agency relationship gives rise to certain rights and duties which it is important to know about.

BUSINESS, LAW AND ETHICS Introduction 1.43

There are many occasions in business where it is important to ask not only whether the matter is lawful, but whether it is ethical. Law and ethics are interconnected but they are not identical. Just because a manager has not been found guilty in court of breaching some law does not mean that he or she has acted ethically. Acting ethically is important because it creates trust, and trust is necessary for us to be able to enjoy the benefits of community, including the benefits of business. Thinking about ethics raises difficult issues about the nature, content and development of morality. The issues might be difficult, but business people must confront them. The basic question posed by ethics is: What is the right thing to do in a given situation? This is a question not just for the individual but, critically in the commercial world, for the firm. The aim should be to develop not just personal morality, but corporate morality.

The role of ethics in business 1.44

Ethical questions arise in a host of business situations, large and small. One leading ethicist posed the following ethical questions as examples of ethics in business:14 Can we afford the cost of making this product safe? Can we afford to admit negligence even though we know that we did the wrong thing? Can we afford to let the company’s accounts show the real value of our assets? Can we afford to refuse to carry out a client’s instructions even when, in all good conscience, we believe to follow them would harm the community?

[page 31] Can we afford to resist paying bribes in order to secure a contract in a difficult overseas market? Can we afford to resist taking advantage of an unintended loophole in the law or a contract?

There are many books and websites devoted to business ethics. A good starting point is the website of the St James Ethics Centre, . See also Noel Preston, Understanding Ethics, 4th ed, Federation Press, Sydney, 2014; James Rachels and Stuart Rachels, The Elements of Moral Philosophy, 8th ed, McGraw Hill International Editions, Singapore, 2014. A work looking at corporate ethics is Marianne M Jennings, The Seven Signs of Ethical Collapse, St Martin’s Press, New York, 2006.

The psychology of ethical (or moral) behaviour 1.45

Acting morally requires more than just a knowledge of ethical theories. It requires a commitment to the practice of behaving morally. Moral behaviour involves four elements: sensitivity, judgment, motivation and courage. According to Donald Nicolson:15 [M]oral sensitivity enables individuals to recognise moral problems when they arise. … moral judgment enables individuals to identify the salient features of issues,

and to select and justify appropriate responses. … Moral motivation ensures that individuals want to put into effect the moral solution selected and elevate it over competing considerations like self-interest or institutional values. Without this component, individuals might know what morality requires but not in fact care. … But even if they care, individuals require the moral courage to be able to convert ethical thought and concern into ethical action by resisting temptations to compromise moral standards. Critical here are virtues of moral fibre, steadfastness, perseverance and backbone, or what psychologists call ego-strength.

Therefore, morality is something to be learned (most often by being experienced) and to be practised. It is learned and experienced in communal relationships (family, cohorts of friends, religious groups, the workplace). It is practised by developing moral courage or moral autonomy.

The importance of the workplace culture 1.46

Even a strong moral person will find it difficult to act ethically if the workplace is geared towards ignoring ethical problems. It takes a lot of moral courage to speak out if the consequences are severe, such as loss of job and other forms of retribution. Consequently, it is important to recognise that business ethics cannot be regarded as a matter just for the individual. It is a matter for the whole organisation. One business ethicist examined a number of US corporate collapses in which there were suggestions of unethical conduct on the part of management.16 Her purpose was to build up a picture of a corporation sliding into moral decay. What were the signs of this ethical collapse, and what could be done to avoid it? She isolated seven signs or indicators of possible ethical freefall and a set of antidotes to counter the slide. The seven signs are: 1. pressure to maintain targets (which are often unreasonable and unsustainable); 2. fear (to speak out) and silence (where there is a need to speak); [page 32]

3.

4. 5. 6.

7.

a bigger-than-life CEO (particularly where the next level of managers are much younger, and often in awe of the iconic CEO); a weak board of directors; conflicts of interest; innovation like no other — those involved in the super firm often develop a culture of hubris and risk-taking based on a belief that the normal rules do not apply to them; and goodness in some areas atoning for evil in others — philanthropy can be a cover for unethical conduct.

Deciding what is the right or ethical thing to do The various ethical theories include utilitarianism, deontic theories such as Kantianism, social contract theory and virtue ethics.

1.47

There is no single theory or methodology about how to proceed when answering the question, ‘What should I do?’. Indeed, ethicists are quite divided on the matter. We now take a brief look at the four main ethical theories: 1. 2. 3. 4.

utilitarianism; deontic theories, such as Kantianism; social contract theory; and virtue ethics.

Utilitarianism: assessing consequences 1.48 Utilitarianism is one of the dominant ethical systems of modern times. Utilitarians argue that a person should do whatever maximises utility; that is, whatever produces the greatest good (where ‘good’ is described as the satisfaction of each person’s individual preferences or desires).17 In making the assessment, everyone must be treated equally. A theory of ethics that depends on maximising the general good

is intuitively attractive. It sounds like a proper and rational basis for deciding how to act. However, there are significant problems: Most people cannot accept that the end always justifies the means. For example, how many people would accept that it is legitimate to torture the child of a terrorist so as to force the terrorist to reveal the location of a bomb planted in a public place? The consequences of doing so may be very beneficial (saving many innocent lives), but the means (torturing an innocent child) are completely repugnant. Utilitarianism appears to require an impossible level of altruism. We must never rate our own interests or those of our family or friends higher than the interests of strangers. While treating people impartially is widely regarded as an important virtue, most people find it difficult to live by this approach. Utilitarianism says nothing about spreading the ‘good’ equally or fairly or justly. As long as the ‘good’ overall is maximised, it does not matter whether some people receive most of the benefit and others actually lose out. Most people regard some level of justice and fairness as important. Deontic theories, such as Kantianism: theories that do not depend on consequences 1.49 Deontic theories of ethics rely on applying universal principles. According to deontic theories, a person should act according to specific rules; for example, ‘always honour your promises’, ‘never lie’. Under the deontic approach to moral judgment, ‘the end does not justify the means’. [page 33] How can we recognise these moral rules of conduct? The philosopher Immanuel Kant (1724–1804) argued that, in any

situation in which you have to determine how to act from a moral perspective, you should: 1. ask yourself what rule you would be following if you were to act in a particular way; and 2. then ask yourself whether you would be willing, as a rational person, for that rule to be universal (ie, followed by everyone at all times). If you are willing for the rule to be followed by everyone at all times, then you are morally obliged to follow it yourself. If not, then you are morally obliged not to follow it. Kant claimed that this rule was based on human reason. There are problems with Kantian ethics: The problem of uncertainty. It is difficult to formulate categorical rules. More often than not, as soon as a possible rule is put to the test, it proves unworkable; exceptions are required. For example, it is perfectly possible we might accept as a universal principle the following rule: ‘People should always honour their promises’. But, does this mean that a police officer, who falsely promises a kidnapper that he will go free provided he releases his hostage unharmed, is acting immorally? Clearly, not; sacrificing the hostage just to uphold the principle seems an unacceptable way of acting. For most people the rule requires exceptions.18 Therefore, we are left with rules that are so general as to be of little practical use, or rules that are bound by a bewildering and uncertain set of exceptions. The problem of ethical conflict. Where a number of universal rules exist, they are bound at some stage to come into conflict. In that case, which one do we choose? Modern moral philosophers have adapted Kant’s ideas to produce a more user-friendly system of ethics. For example, James Rachels argues that the key point is Kant’s rationality. A person must have moral reasons for doing or not doing something. These reasons must then be applied to other like-cases. The reasons must

be applied not just to others but to oneself. In other words, there must be consistency. Accordingly, ‘All that Kant’s basic idea requires is that when we violate a rule, we do so for a reason that we would be willing for anyone to accept, were they in our position’.19 Social contract theory 1.50 According to Thomas Hobbes (1588–1679), life in its natural state (without any social rules) would be ‘solitary, poor, nasty, brutish, and short’. The law of the jungle would prevail, not because people are inherently bad, but rather because of scarcity; the things that people need to survive are in short supply and thus individuals must compete to acquire those things. Everyone would have to look after his or her own interests. There would be no scope for any form of altruism (caring for others). To overcome this ‘state of nature’, people enter into a social contract. They agree to be bound by certain rules that are necessary for civilised life to exist. Thus, for example, they agree not to do harm to one another and to honour the agreements they make with each other. They agree to accept a government whose responsibility it is to enforce these rules. This is called the social contract. The social contract forms the basis not only of the political system but also of an ethical system. The rules that form the basis of the social contract must be followed or we will slip back into the jungle. Therefore, we have a moral obligation to comply with these [page 34] rules. On the other hand, anything that is not necessary to preserve the social contract is not a moral obligation. Social contract theory has been criticised on a number of grounds: Hobbes’ ‘natural state’ is based on an historical fiction; there

is no evidence that it ever existed. It provides no place in the system of ethics for those unable to take part in the contract. Thus, animals have no rights. Even more disturbingly, humans suffering from severe mental impairment fall outside the moral realm. They also have no rights. Not many people would accept this conclusion. A modern adaptation of social contract theory is the theory of John Rawls (1921–2002). Rawls was concerned that society be just (which he equated to being fair). Thus, the rules of society should not only be those necessary to preserve the social contract, but they should also be fair for all. We can recognise these rules of conduct by asking what rule would be selected by a rational person who was not aware of his or her status or position in society. As people are ignorant of their position in society they will not pick a rule that favours themselves. Virtue ethics ‘I found myself asking rhetorically: did anyone stand back and ask themselves the simple question — is this right?’ Hon Justice Neville Owen, HIH Royal Commission into the failure of HIH Insurance.

1.51

All three theories previously discussed have problems. A way around these problems might be to ignore the act and concentrate on the actor. The ancient Greeks approached the question of ethics by asking the question, ‘What qualities of character (virtues) make a good person?’. This approach is called virtue ethics. Virtue ethics asks the question, ‘What would be the approach or decision of a good person?’. Virtue ethics looks to the character of a person; the emphasis is on ‘being an ethical or moral person’ rather than on ‘doing the ethical or moral thing’ (although, of course, a person’s ethical character is necessarily judged by his or her behaviour). Therefore, unlike the other ethical systems, virtue ethics does not depend on externally determined duties.

An ethical person is a person who possesses certain ethical qualities and acts accordingly. Ethical qualities are not inherent but must be learned. Proponents of virtue ethics argue that the advantage of promoting the ethical person, in contrast to methods for determining the ethical way to act, is that it is a better fit for the psychology of moral behaviour. Moral motivation and moral courage come from being a moral person, but not necessarily from knowing the proper moral response. What are the ethical virtues? There is no short answer, but the list would include (among others) compassion, courage, generosity, integrity, honesty, loyalty, moderation, reasonableness, self-discipline, self-reliance and tolerance. The difficulty with virtue ethics is that it is not very good at resolving moral dilemmas. For example, most would say that the virtuous person avoids telling lies. The virtuous person also avoids harming others. How does the virtuous person act when telling the truth will inflict harm on another person? Combining theories 1.52 As all ethical theories have problems, a more instinctive system of ethics probably borrows something from each. Thus, we probably instinctively recognise that, while pursuing the general good (maximising people’s preferences) is often a desirable way to act, there are occasions where we must depart from this approach because the act requires us to do something that is not right. To develop the moral fibre to act according to our ethical beliefs [page 35] we need to learn to be an ethical or virtuous person. This is an ongoing process that starts with the family and becomes extremely important as we enter the corporate world.20

Developing an ethical culture in the firm

1.53

Ultimately, the important thing is to institutionalise ethical behaviour, to develop a corporate culture of behaving morally. This is not necessarily easy to achieve in light of the dominant corporate goal of maximising profits. An ethical culture is more likely to flourish where the business relies on a democratic workplace rather than one dominated by hierarchies. Merely having a set of core values and compliance training is not sufficient. Figure 1.17 provides indicators of an ethical workplace.

Figure 1.17 Indicators of an ethical workplace Less conducive to ethical workplace Top-down decision making Rule-dominated workplace Employees have little freedom of choice Loyalty to the organisation is top priority Culture of fear about job security, promotion Excessive emphasis on ‘need to know’ attitude to the dissemination of information

More conducive to ethical workplace Reliance on well-publicised standards of conduct rather than rules Bottom-up decision making with an emphasis on values and not just results Employees given scope to exercise freedom of choice Employee creativity encouraged Employees encouraged to speak their mind without fear of retribution

Reliance on legalistic, technical arguments to justify business conduct

There is no one right way to achieve a more ethical workplace. A combination of strategies is normally required.

RISK MANAGEMENT AND THE LAW 1.54

Litigation is stressful, expensive, time-consuming and unpredictable. As those who have participated in a legal action will attest, the court’s final judgment is far from certain — there is often

a significant risk involved whether one is suing or being sued. It makes good sense, therefore, that businesses include legal risks as part of their risk management strategy. [page 36]

What is risk management? Risk management means developing policies to deal with adverse consequences.

1.55

Risk management is defined in the latest Australian Standards as ‘coordinated activities to direct and control an organization with regard to risk’. Risk is defined as the ‘effect of uncertainty on objectives’.21 One of the key objectives of most companies is to produce a competitive profit — shareholders demand a competitive return on their investment. Shareholders also expect to make a return on their investment going forward. Thus, an important objective of any company must also be future viability. Risk management therefore should make allowance for any contingency that can impact on current and long-term profitability and viability. Identifying areas of risk is the first step. As resources are finite every business must make choices about how it deals with particular risks. It makes no sense to allocate significant resources to avoiding risks that are low impact and have a low likelihood of occurrence. A risk management policy must devote resources strategically to areas where they are needed — that is, areas where the potential impact on the business is significant and the likelihood of occurrence relatively high. The second step in a risk management policy is therefore to assess the nature of the risks (impact and probability of occurrence). Based on that assessment the third step is to determine the form and intensity of the business’s response to the risk.

What are the legal risks?

1.56

Businesses operate within a framework that is, in part, governed by legal rules and procedures. These legal rules and procedures contain risks — both external and internal to the firm. Externally, the risk is that the legal and regulatory climate will change. This may occur through changes in the substantive law or through changes in the powers and priorities of a regulatory authority. For example, in 2010, the Australian Government announced that it was radically altering the method by which mining companies would be assessed for taxation. This presented a significant change in the legal framework within which the mining companies operated. The response of the mining companies demonstrated their concern. Another example is the gradually increasing powers of the Australian Securities and Investments Commission (ASIC), expanded to encompass investments (1998), auditors (2004), consumer credit (2010) and supervision of Australian shares and futures market (2010). As each new area comes under ASIC’s control, businesses operating in that domain must adjust to the new regulatory system. Laws and legal regulation change over time, and the possibility of a changing legal framework carries risk for the businesses concerned. Internally, the risk is that the firm fails to comply with existing legal requirements and, as a result, suffers adverse consequences. The adverse consequences may be financial (eg, fines, compensating victims, paying lawyers, corrective advertising), reputational (bad publicity) or managerial (managers tied up dealing with legal disputes, dissatisfied workers).

Strategies for dealing with legal risks 1.57

There is a limit to which firms can manage the risk of significant changes in the external legal environment. Being aware that changes are likely to occur is the first obvious response — this kind of knowledge may come from a variety of sources, including industry associations.

[page 37] Taking a role in influencing the nature of the change is also an obvious response. Tactics might include participation in government and industry enquiries, submissions to parliament and encouraging an active industry association. A third response is to allow for legal changes in future planning. Obviously, the extent to which resources are allocated to this type of planning depends on the probability of a legal change occurring. Firms are in a much better position to manage internal legal risks. The most obvious legal risk is a court case. This may eventuate because the business has breached a contract, has injured someone through being careless or has broken a regulatory law. Legal actions may be brought by a range of different persons: regulatory authorities, clients, customers and even by employees. As with all risks, the strategy is to assess the risk, evaluate it and then deal with it. An essential part of the strategy must also be to avoid a repetition — therefore, implementing an ongoing monitoring process is vital.22 While it may not be possible to avoid all legal risks completely (mistakes will occur), it is possible to reduce the risk. The best way to do this is to implement a legal compliance program. Many businesses have already done so. Courts and regulators are also enthusiastic about the value of compliance programs. For example, the Federal Court often orders businesses found liable for misleading advertising or price fixing to implement a compliance program.23 The Australian Competition and Consumer Commission strongly recommends the use of compliance regimes.

Compliance programs Businesses need to consider whether they should have a legal compliance program.

1.58

What does a compliance program look like? The first thing needed

is a compliance officer with sufficient resources and power to change the way the firm acts if that is required. The second requirement is that the compliance officer know the legal risks. This means the compliance officer must know the law. For example, consider the topic of negligence, discussed in Chapter 2. Imagine a company that manufactures a health-food drink based on a new product, acai berries. What are the potential legal risks? First, the product itself may be harmful, or it may be harmful to certain groups, such as pregnant women or people with diabetes. What efforts has the business taken to ‘test’ the product to ensure it does not create health concerns? Second, what about the design of the bottle? Could the bottle actually injure someone who is trying to open it? If you think this is fanciful see O’Dwyer v Leo Buring Pty Ltd, in [2.20]. What could be done to prevent or at the very least minimise the chance of individual bottles being susceptible to tampering or becoming contaminated? In the case of Donoghue v Stevenson (see [2.3]), a woman fell ill after drinking ginger beer from a bottle contaminated by a dead snail. Think about all the monitoring and safety checks necessary just to prevent that from happening. Assessing what is an appropriate response to all this falls within the duties of a legal compliance team. A legal compliance officer also needs to consider the legal risks involved in the packaging, distribution and marketing of the firm’s product. Does the product packaging or the manner in which it is advertised breach the laws relating to false and misleading advertising? Does the label sufficiently warn people that the product should not be consumed if they suffer from diabetes? Once the particular legal risks have been identified, the task is to design and then to implement a strategy to deal with the risks. For example, the compliance officer may consider it necessary to investigate the methods used to store the raw products and ingredients used [page 38]

in the manufacture of the health drink. The officer may recommend policies that implement sampling or other forms of quality control as part of the manufacturing process. The officer may recommend that outside legal advice be sought on an advertising campaign. Finally, a risk management strategy must consider what to do if something untoward does happen. For example, how should the firm respond if a customer has consumed a bottle contaminated by a dead snail? How should the company respond to the victim? Should the company admit liability and immediately apologise? Or perhaps the business should investigate first — after all, the contamination may not have been due to the company’s actions. But, even if this is so, can it be proven? And how will the business’s actions be viewed by the broader community? What should be done to ensure that such events are not repeated? Legal risks are just one source of risk for firms doing business. As with other risk areas (market, finance, environment, data, communications), there are strategies to manage the risks.

[page 39]

QUESTIONS Question 1 Write short answers to the following questions. (a) What are the two main sources of law in Australia today? (b) What do we call the laws derived from each of those sources? (c) Where law from the two sources is inconsistent, which law will prevail? Why? (d) Explain the difference between ratio decidendi and obiter dictum. (e) Explain the difference between equity and common law. (f) Explain the difference between a binding court decision and a persuasive court decision.

Question 2 Explain the role of legal compliance officers. Are they a necessity or an extravagance? Does the size of the business matter when answering this question?

Question 3

Refer to the various state and national court hierarchies in Figures 1.8–1.10. (a) If a single judge of the New South Wales Supreme Court decided that ‘the meaning of a motor vehicle does not include a motorised wheel-chair which is manufactured and used solely for use by an injured or disabled person’, which courts would be bound by this decision? (i) Single judge of the High Court of Australia (ii) Full Court of the High Court of Australia (iii) Family Court of Australia (iv) Victorian Supreme Court (v) New South Wales District Court (vi) Magistrates Court in Queensland (b) What would your answer be to part (a) if the decision were made by: (i) the Full Court of the High Court of Australia? (ii) a magistrate in the Magistrates Court of Victoria? (iii) the Court of Appeal in the United Kingdom? (iv) the US Supreme Court?

Question 4 (a) When interpreting a section of the Wrongs Act 1958 (Vic) which legislation do you use? (i) ss 15AA and 15AB Acts Interpretation Act 1901 (Cth) (ii) s 35(a) and (b) Interpretation of Legislation Act 1984 (Vic) (iii) ss 8A and 8B Acts Interpretation Act 1931 (Tas) (iv) ss 33 and 34 Interpretation Act 1987 (NSW)

[page 40] (b) When interpreting a section of the Corporations Act 2001 (Cth) which legislation do you use? (i) ss 15AA and 15AB Acts Interpretation Act 1901 (Cth) (ii) s 35(a) and (b) Interpretation of Legislation Act 1984 (Vic) (iii) ss 8A and 8B Acts Interpretation Act 1931 (Tas) (iv) ss 33 and 34 Interpretation Act 1987 (NSW)

Question 5 Imagine a hypothetical statute in force in your jurisdiction, called the Road Traffic Act 1985. Section 18 reads: (1) It is an offence for any person to drive any vehicle on any footpath. (2) The penalty for breach of subsection (1) is 2 Penalty Units. (3) This section will not apply if the relevant Roads Authority or municipal council has specifically authorised the conduct in question either in writing or by way of posted signs. (a) Would s 18 Road Traffic Act 1985 apply to each of the following scenarios? (Give reasons for your answers.) (i) Venus was caught galloping a horse along a footpath. (ii) Michael was caught riding a motorbike on a footpath. (iii) Cassy was caught riding her tricycle on a footpath. (iv) Sekar’s grandmother was stopped driving her

motorised wheelchair on a footpath. (b) List any extra information you might need to answer part (a) fully, and why that information would be relevant. (c) How would you use the following hypothetical case in your answer to part (a)? In the decision of Smith v de Nova (2012) the High Court of Australia on hearing an appeal from the NSW Supreme Court confirmed that: ‘… the meaning of a motor vehicle does not include a motorised wheel-chair which is manufactured and used solely for use by an injured or disabled person’.

Question 6 APM Ltd is a car manufacturing company. At one time, the company dominated the market but, in recent years, it has been under enormous pressure from its competitors, particularly new and cheaper imports. Shareholders have been hostile about the company’s performance. A new CEO has been brought in with the task of ‘taking on’ and defeating the competition. The CEO was formerly very successful as CEO of a health services company. The new management team has taken the strategic decision to invest heavily in a new design that will address consumers’ demands. The design process has been pushed along at rapid pace. Nothing is to interfere with getting the new car to market. Managers down the line have rigid target and cost dates to meet. These are monitored continually by a special project team reporting regularly to the CEO. Managers who do not meet their targets can expect a ‘grilling’ from the CEO. Heather recently joined APM as a design engineer. After working on the design, Heather is convinced that the petrol tank is located too near the rear of the car. There is insufficient insulation to protect the petrol tank in the case

of a rear-end collision. There is a distinct possibility in such cases that the petrol tank will ignite and explode. Heather’s opinion is based on research that she conducted as part of her postgraduate studies. When Heather [page 41] reported her opinion to her immediate supervisor, she was told that she was exaggerating the risk, that many engineers had worked on the project and she was the first to express this opinion, that the car was cheaper than APM’s traditional models and therefore consumers had to expect a lower level of safety, and that in any event it was now too late to go back to the drawing board as the release of the car was already overdue and management had indicated that any further delays would not be tolerated. (a) Discuss this case from an ethical perspective. (b) What areas of business law do you think would be relevant? (Check this book’s table of contents for suggestions.) (c) Imagine you are the CEO of APM Ltd. What risk management strategies would you adopt to minimise APM’s exposure to possible legal action?

_________ 1 2 3 4

See . See Productivity Commission, Review of Australia’s Consumer Policy Framework, Report No 45, Commonwealth of Australia, Canberra, 2008. Turner v George Weston Foods Ltd Trading as Tip Top Bakeries [2007] NSWCA 67 at [59]; Commissioner of State Revenue v EHL Burgess Properties Pty Ltd [2015] VSCA 269 at [72]. Acts Interpretation Act 1901 (Cth); Legislation Act 2001 (ACT); Interpretation Act 1987 (NSW); Interpretation Act (NT); Acts Interpretation Act 1954 (Qld); Acts Interpretation

5

6 7 8 9 10 11

12

13

14

15 16 17 18 19 20

21

Act 1915 (SA); Acts Interpretation Act 1931 (Tas); Interpretation of Legislation Act 1984 (Vic); Interpretation Act 1984 (WA). For state legislation, an interpretation which promotes the purpose(s) of the legislation is also preferred to other possible interpretations. See Legislation Act 2001 (ACT) s 139; Interpretation Act 1987 (NSW) s 33; Interpretation Act (NT) s 62A; Acts Interpretation Act 1954 (Qld) s 14A; Acts Interpretation Act 1915 (SA) s 22; Acts Interpretation Act 1931 (Tas) s 8A; Interpretation of Legislation Act 1984 (Vic) s 35; Interpretation Act 1984 (WA) s 18. See, for example, Acts Interpretation Act 1901 (Cth) s 15AB(1)(b). The meaning of these Latin expressions may be found in any law dictionary. See, for example, P Osborn, A Concise Law Dictionary, Sweet & Maxwell, London, UK. The common law recognised damages for negligent misrepresentation for the first time in 1964. Searle v Wallbank [1947] AC 341. State Government Insurance Commission v Trigwell [1979] HCA 40. Most cases brought by the state (acting through the police) are criminal, whereas many cases initiated by the state (through the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission) are civil. In deciding whether to prosecute, the CDPP follows the Prosecution Policy of the Commonwealth: Guidelines for the Making of Decisions in the Prosecution Process, Commonwealth Director of Public Prosecutions, Canberra, 9 September 2014, available at: . A criminal conviction can have adverse consequences beyond the immediate penalty and the stigma attached to being ‘a criminal’. For example, visa applications often require the applicant to reveal whether he or she has ever been convicted of a criminal offence. The consequence might be refusal of a visa. S Longstaff, ‘Corporate Conscience’, 5 November 1997, available at . D Nicolson, ‘Making Lawyers Moral? Ethical Codes and Moral Character’ (2005) 25 Legal Studies 601, 608–9. M M Jennings, The Seven Signs of Ethical Collapse, St Martin’s Press, New York, 2006. Utilitarianism traces to the theories of Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1873). A modern utilitarian is the Australian ethicist, Peter Singer. Not, however, for Kant who regarded ‘not lying under any circumstances’ as a categorical imperative. J Rachels, The Elements of Moral Philosophy, 3rd ed, McGraw-Hill International Editions, Singapore, 1999, p 131. For an interesting compilation of examples of businesses making ‘virtuous decisions’, see V Giang, ‘7 Business Leaders Share How They Solved the Biggest Moral Dilemmas of their Careers’, . Standards Australia, ‘Risk Management — Principles and Guidelines’, AS/NZS ISO 31000:2009, 2.2 and 2.1 (based on ISO Guide 73:2009, definitions 2.1 and 1.1) respectively.

22 Standards Australia, ‘Risk Management — Principles and Guidelines’, AS/NZS ISO 31000:2009, 5.1–5.6. 23 For example, the court ordered the Western Australian branch of the Australian Medical Association (AMA) to implement and maintain a trade practices legal compliance program after finding that the AMA was guilty of price fixing and anti-competitive exclusionary conduct: Australian Competition and Consumer Commission (ACCC) v Australian Medical Association Western Australia Branch Inc [2001] FCA 1471.

[page 43]

CHAPTER 2

LIABILITY FOR DEFECTIVE PRODUCTS

CONTENTS Objectives of this chapter Setting the scene: Could this happen in Australia? Introduction and outline of chapter Liability for negligence History of the negligence action Step 1: When is a duty of care owed?

Step 2: What standard of care is owed? Step 3: Causation, remoteness of damage, amount of damages Defences Liability for another person’s acts Class actions Liability for safety defects under ACL Pt 3-5 What is the purpose of Pt 3-5? What are the elements of a breach of Pt 3-5? What is a ‘manufacturer’? What is meant by the expressions ‘goods’ and ‘supply’? What is the meaning of ‘safety defect’ in relation to goods? Does Pt 3-5 compensate for all types of losses caused by a defective good? [page 44] Damage must be caused by the defective good What are the defences under Pt 3-5? Can a manufacturer exclude liability? Other matters Other product liability laws Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to answer the following questions: What obligations does a manufacturer of products owe to

consumers and users of their products in respect of the safety of those goods? What obligations does an importer of products owe to consumers and users of the imported products in respect of the safety of those goods? In particular, you should be able to: describe and apply two key laws regulating the safety of products: – liability for negligence under the common law; – liability for safety defects in goods under the Australian Consumer Law; and explain the distinction between common law and statute law, using these two product liability laws as an example.

[page 45]

SETTING THE SCENE: COULD THIS HAPPEN IN AUSTRALIA? In 1992 a car drew up to the drive-through window of the McDonalds restaurant in Albuquerque, New Mexico. In the passenger seat was Stella Liebeck. She ordered a hot coffee, which was served in a Styrofoam cup with a plastic lid. The driver moved the car forward and then stopped so that Stella could add cream and sugar to the coffee. She balanced the cup between her knees to remove the lid. As she did so, the entire contents of the cup spilled into her lap. She suffered third-degree burns to 6 per cent of her body and spent eight days in hospital, during which time she had a number of skin grafts. She asked McDonalds for $20,000 in compensation. McDonalds refused. Bad mistake! The case went to court where Stella was awarded $200,000 compensation (reduced to $160,000 because Stella was 20 per cent responsible for the accident) and $480,000 in punitive damages. The judge described McDonalds’ conduct as reckless, callous and wilful. The $480,000 was light compared with the $2.7 million which the jury first awarded against McDonalds. Just like the United States, Australia has strong laws against negligence, but could this scenario be repeated in Australia?

INTRODUCTION AND OUTLINE OF CHAPTER 2.1

The 20th century saw the development of mass-produced and mass-marketed products. This inevitably gave rise to questions of liability: If someone is injured because of a product, who should pay for the damage? It would be unfair and inefficient to place all responsibility on the retailer. For example, in the case of defectively manufactured goods, the manufacturer ought to bear most of the risk — retailers have very little opportunity to detect defects in packaged goods.

Legislation refers to the laws made by parliament. Common law refers to case or judge-made law.

The issue for lawmakers has been to develop a rule or set of rules that balances the interests of all parties and the community. This is an ongoing process, the latest update of which is the Australian Consumer Law (ACL). Although the process has been simplified by the ACL, it is still a little mystifying to those not used to legal systems in general and to a mixed legislative and common law system (such as we have in Australia) in particular. Figure 2.1 gives an overview of the laws that affect the liability of manufacturers and retailers for defective products. There is a considerable amount of overlap between these laws. Whether any particular law applies to a given case depends on the facts of the case. This chapter examines the laws that, in the main, are concerned with safety defects that cause damage (refer to the two circles at the left-hand side of Figure 2.1). [page 46]

Figure 2.1

The actions that an injured person may bring against the manufacturer, distributor or retailer

The action for negligence is a common law action (although many of the rules have recently been updated by statute). The action under ACL Pt 3-5 is a statutory action. In Chapter 9 we discuss the obligations owed under the ACL by retailers and manufacturers for the quality and suitability of goods.

LIABILITY FOR NEGLIGENCE History of the negligence action Early days Torts are civil wrongs which give the injured person the right to sue for damages. Examples of torts include negligence, fraud, defamation, trespass and assault.

2.2

Negligence is a tort — that is, a civil wrong recognised by the courts which entitles the injured person to compensation (called damages). Other examples of torts are fraud, defamation, trespass, assault and nuisance.

During the 19th century, society and the law took a very robust approach to life. People were expected to look after their own interests. Generally speaking, it was not the role of society or of the law to step in and protect those who failed to protect themselves. When people were buying goods the dominant motto was caveat emptor (a Latin phrase meaning ‘let the buyer beware’). Thus, a buyer of a defective good who suffered a loss (either physical damage or personal injury) as a result of the defect could only sue the person who sold him or her the good. If that person was not the manufacturer then the manufacturer could not be sued.1 The only exception to this was where the product was dangerous and the manufacturer was aware of this fact. In such cases, the law regarded the manufacturer as being fraudulent.2 A dead snail and the development of the law of negligence The law of negligence is a good example of how judges develop the law case by case over time.

2.3

Gradually, it was perceived that perhaps the manufacturer should also be liable to consumers where the manufacturer was negligent.3 More and more products were pre-packaged, with very little scope for the retailer to intervene. The challenge was to develop a rule that would [page 47] be fair to both manufacturers and consumers. If the obligations imposed on manufacturers were too severe, manufacturers might stop producing many socially beneficial products. At this point, a dead snail entered the law. Donoghue v Stevenson (see below) is perhaps the most famous common law case of the 20th century. It is the foundation stone for the modern law of negligence.

Donoghue v Stevenson

[1932] AC 562 (House of Lords) Facts Stevenson manufactured soft drinks and sold them in dark, opaque glass bottles. Donoghue’s friend bought her a bottle of Stevenson’s ginger beer from a retailer. Donoghue drank some of the ginger beer before discovering the presence in the bottle of what appeared to be the decomposing remains of a snail. She suffered shock and gastroenteritis. Because Donoghue had not bought the drink herself, she could not sue the retailer for breach of contract. Instead, she sued Stevenson in the tort of negligence. Stevenson argued that he owed no duty to Donoghue because there was no contract between them. Issue Whether a manufacturer, such as Stevenson, owed a duty of care under the law to those injured by his products and, if so, under what circumstances. Decision The House of Lords decided (by a majority) that liability for negligence did not depend on contract. A manufacturer who sold a product, such as a sealed bottle of soft drink, in which there was no reasonable opportunity for intermediate examination owed a duty to consumers of the product to take reasonable care in its production because it was reasonably foreseeable that if such care was not taken, the consumer could be injured. Having determined that a manufacturer in the position of Stevenson owed a duty of care to a consumer such as Donoghue, the House of Lords remitted the matter to the lower court to decide whether Stevenson had actually failed to exercise reasonable care and whether his lack of care had caused Donoghue’s injuries. The appropriate standard of care will depend on the circumstances of each case. The case was eventually settled out of court for £100.

The principle from Donoghue v Stevenson was quickly adopted in Australia: Grant v Australian Knitting Mills Ltd (see [2.7]). In subsequent cases, the duty of care has been extended not only to manufacturers but also to repairers, designers, builders, engineers, car drivers, shop owners, employers, medical practitioners, accountants, lawyers, local governments, people playing sport and many others.

[page 48] A nervous insurance industry forces reforms to the law of negligence During the last years of the 20th century there was a growing 2.4 restlessness about the compensation (damages) being awarded for negligence. Some argued that the law had become over-protective. Insurance payouts, it was said, were increasing at an alarming rate. Inevitably this fuelled a rise in the cost of insurance. In some cases the cost of insurance became prohibitively high. There are three separate elements that must be proved in a negligence claim. Although the elements are separated for the purposes of a claim, they are conceptually interrelated.

In response, all Australian states and territories enacted legislation during the early years of this century dealing with liability for negligence.4 The main thrust of the legislation was to restrict the amount of damages (eg, by imposing caps). However, the legislation also dealt with the principles of negligence — for example, the general principles relating to the standard of care, causation and assumption of risk, and special principles relating to issues such as the standard of care for professional persons and the situation in relation to dangerous recreational activities. In the main, these provisions reflect common law principles, and the negligence cases that have been decided over the years remain relevant to any discussion on negligence. The action for damages for negligence remains a common law action. The elements of a negligence action Reasonable foreseeability means that a reasonable person would have foreseen the outcome. A reasonable person does not mean the average or typical person. The reasonable person is a hypothetical person who sees, hears and thinks clearly. The reasonable person plans ahead. The reasonable person appreciates risks and takes practical steps to minimise likely adverse consequences.

2.5

The action for negligence is an action for damages brought by a person (the plaintiff) who has been injured by the negligent actions of another (the defendant). There are three steps in establishing damages for negligence; see Figure 2.2. The plaintiff must establish all three steps. There are also a number of defences that the defendant may argue.

Figure 2.2

The three steps in establishing damages for negligence

Step 1 — The duty Did the defendant owe a duty to the plaintiff to take reasonable care to avoid the injury that occurred?

Step 2 — The breach Did the defendant fail to exercise the required standard of care?

Step 3 — The damage Were the plaintiff’s losses caused by the defendant’s negligence and were the losses reasonably foreseeable?

Step 1: When is a duty of care owed? 2.6

The House of Lords in Donoghue v Stevenson made it clear that, no matter how negligent a person is, that person (whether a manufacturer or otherwise) does not owe a duty of care to everyone. The test used to determine whether a duty of care exists was explained by Lord Atkin in Donoghue v Stevenson (at 580): You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be — persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.

Thus, reasonable foreseeability of injury is a necessary element

in any finding that a duty of care exists. [page 49] However, the courts have been careful to point out that the test for duty of care is not just one of reasonable foreseeability. After all, most injuries caused by someone’s carelessness are foreseeable.5 There must be something more. The reason the courts have stressed that a duty of care depends on more than just foreseeability is their concern that too wide a duty will expose the negligent party to damage claims far exceeding the gravity of the negligent act and thereby imposing a prohibitive cost on individuals. Moreover, the courts are cognisant of the need to draw the right balance between, on the one hand, deterring careless conduct by defendants and, on the other, requiring plaintiffs to exercise an appropriate measure of personal responsibility. Determining the existence of a duty of care is, therefore, a mechanism by which the growth of negligence may be controlled. For these reasons, the question of whether a duty is owed is said to be a question of law. It is to be decided by a judge, not by a jury. Potentially, losses arising from another’s negligence can occur in just about every area of human activity. Therefore, the law of negligence is not restricted to users of defective products. While this chapter is concerned essentially with the damage done by commercial products, it is useful to see the operation of negligence in a variety of contexts. Duty of care owed by manufacturers to consumers Since Donoghue v Stevenson the law has been clear: manufacturers 2.7 owe a duty to users of their products to take reasonable care to protect those users from injuries (to person or property) that are reasonably foreseeable. The principle from Donoghue v Stevenson was first applied in Australia in Grant v Australian Knitting Mills

Ltd (below) and has been applied many times since.

Grant v Australian Knitting Mills Ltd (1933) 50 CLR 387 (High Court); [1936] AC 85 (Privy Council) Facts Dr Grant suffered severe dermatitis after wearing some underwear manufactured by Australian Knitting Mills (AKM). The dermatitis was caused by the presence in the underwear of excess sulfites which are harmful to the skin. Sulfites were used as part of the manufacturing process but were meant to be washed out before that process was completed. Dr Grant did not wash the underwear before use. Dr Grant sued AKM for negligence. (Note: Dr Grant also sued the retailer for breach of contract.) Issue Did AKM owe a duty of care to Grant? Had AKM breached that duty (ie, been careless or negligent)? Decision The court decided: (1) AKM owed a duty to take reasonable care in the production of the underwear not to cause injury to Grant; (2) AKM had breached its duty; and (3) as this breach of duty caused Dr Grant’s loss, he was entitled to damages.

[page 50]

Be careful what you drink — strange things found in soft drinks Mrs Donoghue may have been repulsed by the remains of the dead snail, but considering some of the other amazing things found in soft drinks, perhaps she ought to count herself lucky. In the United States, the following items have somehow found their way into soft drinks: arsenic, kerosene, iodine, chlorine, caustic soda, acid and varnish; creatures such as spiders, flies, scorpions, worms, slugs, mice, rats, birds and snakes; and objects ranging from broken glass, pins, stones, matches, cigarettes, cigar butts and bandages to a contraceptive device and a suspender strap.

Duty of care owed by manufacturers to innocent bystanders Manufacturers also owe a duty in appropriate circumstances to 2.8 innocent bystanders. Thus, a manufacturer of a vehicle with faulty brakes would owe a duty not only to passengers in the faulty vehicle, but also to other road users and presumably to pedestrians, providing their injuries were reasonably foreseeable. All fall within the ambit of proximity mentioned by Lord Atkin in Donoghue v Stevenson. When is an injury (an event) reasonably foreseeable for the purposes of establishing a duty of care? First, it is not necessary that the precise injury (or event) be foreseeable. It is sufficient that the type of injury (or event) be foreseeable. Second, to be reasonably foreseeable, the injury (or event) must not be ‘fanciful’ or ‘far-fetched’. Duty of care owed by distributors of products Distributors, including retailers, may owe a duty to customers, end 2.9 users and bystanders injured by the products they sell (but do not manufacture).6 Whether a duty exists in any particular case depends on the facts of that case.

McPhersons Ltd v Eaton [2005] NSWCA 435 (New South Wales Court of Appeal) Facts McPhersons Ltd was a large hardware retail outlet which sold millboard containing asbestos. McPhersons purchased the millboard from the manufacturers. Mr Eaton was employed by a company which purchased the millboard to use in the construction of heater boxes used in air conditioning. Mr Eaton’s job required him to cut the millboard and work with the pieces. He died as a result of malignant mesothelioma (cancer) caused by exposure to asbestos dust and fibre. His widow sued McPhersons and others for damages for negligence. The Dust Diseases Tribunal held that McPhersons was liable for the damages suffered by Mr Eaton, on the basis that a vendor of retail goods owed a general duty

[page 51] of care to the public. According to the tribunal, McPhersons ‘ought to have known’ of the danger of asbestos and that it failed in its duty to warn its customers. McPhersons appealed. Issue Does a retailer owe a duty of care for products it sells and, if so, under what circumstances? Decision The New South Wales Court of Appeal held that a vendor does not automatically owe a duty of care to purchasers and end users in relation to the products its sells. Whether a duty of care exists (and the content of the duty) depends on the circumstances of the particular case, including factors such as the nature of the goods and the risk involved. In this case the issue is whether, at the time of the sale, a reasonable hardware retailer in the position of McPhersons should have known of the dangers of asbestos inhalation and that the cutting of millboard might release dangerous quantities of asbestos fibres into the atmosphere. The tribunal had failed to examine this issue properly and consequently the case was returned for retrial.

Duty of care owed by service providers 2.10 Repairers7 and installers8 are treated in the same way as manufacturers. In Stennett v Hancock and Peters [1939] 2 All ER 572, a repairer was liable to a pedestrian who was injured when a wheel came off a vehicle repaired by the defendant. The court held that the accident was due to the negligence of the defendant in the repair of the vehicle. Service providers generally owe a duty to take reasonable care not to cause foreseeable injury in providing the service. This applies to professional service providers, such as engineers, architects and doctors. Successful negligence claims against doctors and hospitals have contributed to the high cost of supplying medical services. This has led to the so-called liability insurance crisis. As a result of an inquiry set up to investigate the crisis, most Australian states have altered their liability laws to provide some protection for certain service providers. Other service providers (such as accountants, auditors and

others giving professional advice) present special problems because of the nature of the product they are supplying (advice or information). Negligent advice and negligent misstatements are discussed in Chapter 3. Duty of care owed by property owners 2.11 Does a retailer (or any other business operator) owe a duty to its customers (and other visitors) to take reasonable care to protect such persons from foreseeable harm? See also Strong v Woolworths Ltd, in [2.31]. [page 52]

Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479 (High Court) Facts Zaluzna entered a supermarket owned by Safeway. The day was rainy and the floor of the supermarket was covered with vinyl tiles. Owing to the number of customers that had entered the premises, the floor was wet and slippery. Zaluzna slipped and was severely injured. Zaluzna sued Safeway Stores for damages. Safeway argued that no duty of care was owed in the circumstances. Issue Does a retailer owe a duty to its customers to take reasonable care not to injure them when on the retailer’s premises? Decision The court held that the normal rules of negligence applied to the case of property owners and persons injured on the property. Safeway was operating a store. Zaluzna was a lawful customer. The relationship between Safeway and Zaluzna satisfied the neighbour test for duty set out in Donoghue v Stevenson. Therefore, Safeway owed a duty to Zaluzna ‘to take reasonable care to avoid a foreseeable risk of injury’ to Zaluzna. The matter was then sent back to the lower court to determine the issues of breach and damages.

Where the harm is caused by a failure to control the actions of

third parties, it will be difficult to establish a duty of care (see Modbury Triangle Shopping Centre Pty Ltd v Anzil, in [2.13]). Duty of care owed by road users 2.12 One of the most common usages of the tort of negligence has been in the case of road accidents. All road users owe a duty to take reasonable care not to cause foreseeable injury to other road users. This would include other motor vehicle drivers, their passengers and pedestrians. See, for example, March v Stramare Pty Ltd, in [2.31]. Because the damage done by road accidents is so socially significant, a number of states have replaced the law of negligence with special rules dealing with road accidents.9 Duty of care: failing to act 2.13 In general, there is no duty to act to protect another person from harm. For example, normally a person owes no duty to save another person from drowning. However, a duty may arise where there is a special relationship between the plaintiff and the defendant. For instance, a school owes a duty to its pupils to take positive steps to protect their safety.10 In BT v Oei [page 53] [1999] NSWSC 1082, the New South Wales Supreme Court held that a doctor had a duty to warn his or her patient’s sexual partner that the patient was HIV-positive, even though the partner was not a patient of the doctor. In New South Wales v Bujdoso (2005) 222 ALR 663, the High Court held that the operator of a prison owed a duty in certain circumstances to protect inmates from other prisoners. A person will generally not be held responsible for another’s illegal action.

Also, generally, there is no duty to control a person from

inflicting harm upon another person. The general rule may be displaced in special cases (eg, a parent has a duty to control his or her child) or in exceptional circumstances (eg, where the defendant is aware that harmful conduct is about to take place and the perpetrator of that harmful conduct is within the control of the defendant). Compare the following cases.

Modbury Triangle Shopping Centre Pty Ltd v Anzil [2000] HCA 61 (High Court) Facts Modbury owned a shopping centre (the Centre) in Adelaide. Anzil was employed as a manager by Focus Video which leased premises in the Centre. The Centre had a large outdoor area for car parking. The video shop faced the carpark. Nearby, there were all-hours automatic teller machines. There were four lighting towers, which were controlled by timing devices. The evidence was not entirely clear but it seems that the lights were timed to go off at 10 pm. After 10 pm, the carpark was dark (except for slight illumination from fluorescent lighting on the roof of the verandah facing the carpark). One Sunday night in July 1993, Anzil closed the video shop at around 10 pm. At around 10.30 pm he walked towards his car, which was parked in the carpark. The carpark lights were not on at the time and all the other shops had closed before 8 pm. Anzil was attacked by three unknown men, one armed with a baseball bat, and seriously injured. Anzil sued Modbury for damages for negligence. Anzil was successful at trial and on appeal to the South Australian Supreme Court. Modbury appealed to the High Court. Issue Does a property owner owe a duty of care to those injured on its property by the deliberate acts of third persons? Decision In general, there is no duty to control persons from inflicting harm upon others. This is particularly so where the harm arises from a criminal act. This general rule may be displaced where there is a ‘high degree of certainty’ that harm will follow from a lack of action. In this case, however, no such ‘high degree of certainty’ existed. Therefore, Modbury was not liable in damages to Anzil.

[page 54]

Club Italia (Geelong) Inc v Ritchie [2001] VSCA 180 (Victorian Court of Appeal) Facts Club Italia was conducting a debutante ball. Some of the patrons were drinking heavily and looking for trouble. A number of scuffles and minor fights broke out. One man, Holton, and his group seemed to be the source of most of the problems. Early in the night, the club called the police and two officers walked through the club. As the night progressed, Holton showed more and more signs of aggression, and more alcohol was consumed. Feuding between different factions broke out. Eventually, the situation deteriorated into a brawl with at least 30 people fighting on the dance floor. The police were called. One of the police officers was the plaintiff, Ritchie. The police were not told that the situation had deteriorated into a brawl. When they arrived they were attacked by drunken patrons and Ritchie was seriously injured. Ultimately, more police arrived and about four officers were taken to hospital. Ritchie sued the club for negligence. He argued that the club had a duty to take positive steps to protect him from harm. Issue Was this case governed by the decision in Modbury? Or were the circumstances sufficiently different that a duty of care should be imposed on Club Italia with respect to the police called onto the premises? Decision The Victorian Court of Appeal distinguished Modbury on the basis that, whereas in Modbury the owner of the shopping centre had no control over the actions of the three assailants in the carpark, the same could not be said for Club Italia in respect of Holton, the person who assaulted Ritchie and who was largely instrumental in causing the brawl. The court said (at [35]): Here the ruffian Holton could not properly be described as not under the control of the club. It did in fact fail lamentably to control him, and this is the only sense in which he was not under its control. He was allowed to misbehave, out of control, when he should have been kept under control by the Club, which had invited him on to its premises and allowed him to remain there for the purposes of its business (for present purposes) of conducting social functions on its licensed premises at which it sold liquor to the patrons. Ritchie was awarded damages.

Duty of care where the injury is psychological (mental harm) 2.14 Save in exceptional circumstances, a person is not liable, in negligence, for being a cause of distress, alarm, fear, anxiety, annoyance or despondency, without any resulting recognised psychiatric illness.11 Therefore, generally, a person cannot obtain damages for mere grief, sorrow, hurt and disappointment. [page 55] However, the courts recognise that there are certain types of psychiatric harm which, in appropriate circumstances, do warrant compensation. For example, psychiatric shock arising from fear for one’s life or for the life or safety of a close relative has long been regarded as compensable under the tort of negligence. How much further does the doctrine extend? Legislation now provides that a person claiming damages for mental harm (but no physical harm) arising from shock (eg, as a result of an accident) may only do so if (1) the person was present at the time of the accident, or (2) the person was a close relative of the person injured in the accident. The precise rule, however, differs from state to state.12

Jaensch v Coffey (1984) 155 CLR 549 (High Court) Facts Mr Coffey was seriously injured in a road accident caused by Jaensch. He was taken to hospital. Mrs Coffey did not witness the accident but she suffered psychiatric trauma (anxiety and depression) as a result, in part from seeing her husband in hospital and in part because of what she was told about his injuries and prognosis. She sued Jaensch for negligence. Issue Did Jaensch owe a duty of care to Mrs Coffey to avoid causing psychological

harm? Decision The court decided in favour of Mrs Coffey. In circumstances such as these, a duty of care may be owed although the plaintiff did not actually witness the accident.

The High Court examined the issue in the two following cases. These two cases were heard together because they raised similar issues of principle, although their facts were quite different.

Tame v New South Wales [2002] HCA 35 (High Court) Facts After a car accident, for which she was not to blame, Mrs Tame was required as usual to take a blood alcohol test. She had no alcohol in her system, but the police officer by mistake made a note that her reading was 0.14. This is a very high alcohol reading. The [page 56] mistake was discovered after a month and corrected. Nevertheless, Tame, concerned that people would think she was drunk at the time of the accident, developed a psychotic depressive state. She sued the police officer and the state of New South Wales. Issue Did the police officer owe a duty of care to Tame when informing her of the results of her blood alcohol test? Decision The High Court held that the police officer (and the state of New South Wales) did not owe a duty of care to Mrs Tame. A duty to protect a person from emotional disturbance and possible psychiatric illness was incompatible with a police officer’s duty to make a report of incidents and investigations. Further, 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 had quickly been rectified.

Annetts v Australian Stations Pty Ltd [2002] HCA 35 (High Court) Facts James Annetts was 16 when he went to work as a jackaroo on the defendant’s cattle station in Western Australia. James’ mother had been told by the defendant that James would be safe and ‘under constant supervision’. In fact, seven weeks after arriving at the defendant’s property, James was sent alone to work as caretaker at a remote property. Some time after that, the Annetts were informed by phone that James had disappeared. Five months later they were informed that a body had been discovered in the desert. Mr Annetts identified it as his son. James had died of dehydration, exhaustion and hypothermia after his car had become bogged. Both Mr and Mrs Annetts suffered psychiatric injury. They claimed damages against the defendant. Issue Did Australian Stations owe a duty of care to the Annetts not to cause mental pain and injury? Decision The High Court held that the defendant owed a duty of care to Mr and Mrs Annetts. The case was sent back to the lower court to determine breach and damages. In deciding that the defendant owed a duty of care to the Annetts to avoid inflicting mental injury, the court rejected the notions that the shock had to be sudden or that there had to be a close physical connection between the incident giving rise to the psychiatric injury and the suffering of the injury.

[page 57] Duty of care: the difficult issue of pure economic loss Pure economic loss occurs where the plaintiff suffers a loss but no physical injury or damage to their property.

2.15

In all cases examined so far, the plaintiff has suffered either physical damage to his or her property or personal injury. In such cases, it is clear that the plaintiff can claim economic loss directly attributable to the physical damage. For example, a person who

suffers injury from a defective product could claim loss of wages which result from the injury. A farmer whose crop was destroyed by someone negligently lighting a fire can claim loss of profits flowing from that negligence. But what if the plaintiff suffers no physical damage or injury? Does the defendant owe a duty of care in such circumstances? This is where common law negligence becomes conceptually very difficult, as illustrated in the following hypothetical situations. A buys an electrical heater. The heater has a defect which was not apparent at the time of purchase, but which has the capacity to inflict injury. A discovers the defect. Unfortunately, the retailer has gone bankrupt. So, A spends $50 to have the heater repaired. The fault in the equipment was due to negligent manufacturing by D. Does A have an action against D for damages (being $50)? A has not suffered any physical injury, so A’s loss is purely economic. The law of negligence has consistently rejected the notion that A has an action against D for the cost of the repair, even though it seems clear that D’s negligence was the cause of the $50 expenditure. The common law requires A to seek damages in contract, not the tort of negligence.13 A negligently injures B in a car accident. As a result, B is unable to work for a period of three months. B is an architect in partnership with C. Because of B’s injuries, the partnership has to hire an extra architect to do B’s work. The partnership thus suffers a loss as a direct result of A’s negligence. B can add her share of the loss of earnings to her claim because it is clearly consequential upon her physical injuries. Can C also claim for lost earnings? C has suffered no physical harm to person or property. C’s loss is purely economic. According to the law, A did not owe any duty of care to C. The reason for this is largely policy. It would be intolerable if A was liable for every loss consequent upon his or her negligent action. An oil company produces aviation fuel which it sells to retailers, who on-sell to the aviation industry. The aviation

industry comprises many small commercial airline firms. These firms service many other industries, such as the tourist industry. Owners of many tourist resorts are dependent on small commercial aircraft to transport their customers. The oil company distributes defective aviation fuel which grounds a significant number of small commercial aircraft. The small commercial airline firms incur large repair bills because of damage to their aircraft. They also lose a significant amount of profits. The tourist-resort owners lose a significant amount of trade and therefore profits. The airline firms have suffered a physical loss (damage to the aircraft). The resort owners, however, have suffered only economic loss (loss of customers). The small commercial airline firms can sue the oil company for their losses, but can the resort owners?

2.16

Development of the law Until 1963, the generally accepted view was that the defendant owed no duty for purely economic loss.14 The reason for the general rule was that the defendant could finish up owing a duty to an indeterminate number of persons for an indeterminate amount. The general rule was rejected in Hedley Byrne & Co Ltd v Heller & Partners Ltd (see [3.17]). In Hedley Byrne v Heller, the duty to take reasonable care was extended to cases where [page 58] a person suffered economic loss as a result of the defendant’s negligent misstatement. Negligent misstatement is discussed in Chapter 3. Should the same approach apply to negligent acts? The High Court addressed this question in the Caltex case (below).

Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad

(1976) 136 CLR 529 (High Court) Facts The operator of a dredge negligently damaged an oil pipeline belonging to Australian Oil Refining Pty Ltd. Caltex Oil relied on the pipeline to obtain its oil. Because it could not use the damaged pipeline, Caltex Oil suffered financial losses. Caltex Oil suffered no physical damage to its property. Its losses were purely economic. The dredge operator knew of the pipeline and knew that it was used for transporting oil to Caltex. Caltex sued for damages for negligence. Issue Did the dredge operator owe a duty of care to Caltex even though Caltex suffered no physical injury or loss but rather an economic loss? Decision The High Court held that the dredge operator was liable to Caltex Oil. The damages awarded to Caltex were the costs of using an alternative source of transport for the oil.

Hill (t/a R F Hill & Associates) v Van Erp (1997) 188 CLR 159 (High Court) Facts Hill was a solicitor in Queensland. She prepared a will for her client. The will was witnessed by the husband of a beneficiary under the will. The solicitor was aware of this. In Queensland, this made the will invalid. Because the will was invalid, the beneficiary’s legacy failed. The beneficiary’s losses were therefore purely economic. The beneficiary sued the solicitor for damages for negligence. Issue Did the solicitor owe a duty of care to the beneficiary even though the beneficiary suffered no physical injury or loss? Decision A majority of the High Court held the solicitor liable in negligence.

[page 59]

It is clear, therefore, that under Australian law, a defendant may owe a duty of care for pure economic loss. However, recognising the duty exists in theory is one thing; developing a test is something else. In many ways, Caltex and Hill v Van Erp were the easy cases. In both, the plaintiffs were the obvious direct sufferers of the defendants’ carelessness. In neither case were they part of a large class of potential plaintiffs. Compare the position of Caltex and Hill v Van Erp with the resort owners mentioned in the above hypothetical situation. As the class of potential plaintiffs becomes larger and more difficult to define, the problem of constructing an appropriate and useful test becomes more important. The difficulty is to produce a test that compensates the deserving but does not leave everyone open to indeterminate liability. There is also a recognition that, in the commercial world, doing economic harm to others is the order of the day. For example, it would be contrary to Australia’s economic philosophy to hold that competitors owe any duty not to inflict economic damage on each other. Therefore, the law must be careful to produce a test that does not make doing business impossible.

2.17

Perre v Apand and the duty to avoid pure economic loss Given Australia’s traditional reliance on agriculture, it is perhaps apt that the issue should come before the High Court in an agricultural context.

Perre v Apand Pty Ltd [1999] HCA 36 (High Court) Facts Perre grew and processed potatoes on his farm in South Australia. He sold the majority of the potatoes to Western Australia. Sparnon operated a potato farm near Perre’s. Sparnon grew potatoes from seed provided originally by Apand, the largest producer of potato crisps in Australia. Apand grew the seed in the Koo Wee Rup swamp area in Victoria — an area which Apand knew was generally unsuitable for the production of seed owing to the high risk of disease, including bacterial wilt. Apand also knew that the seed would be used

on Sparnon’s property and that any outbreak of disease could be particularly damaging to other producers within the vicinity. Sparnon’s potatoes were infected with bacterial wilt. Western Australian law prohibited the import of potatoes into Western Australia from any area infected by bacterial wilt. This meant that Perre could not export his potatoes to his main market in Western Australia. Perre claimed financial loss. As there was no evidence that Perre’s potatoes were affected by disease, the loss was purely economic. Both Sparnon and Perre sued Apand for negligence. The Federal Court held that Apand was liable to Sparnon but not to Perre. According to the Federal Court, even though it could be said that Apand’s activities resulted in Perre’s economic losses, Apand did not owe any duty of care to Perre. Perre appealed to the High Court. Issue Whether Apand owed a duty of care to Perre to avoid inflicting economic loss. [page 60] Decision The High Court decided in favour of Perre. First, the damage suffered by Perre was foreseeable: Apand knew that the producers in the vicinity of Sparnon’s property could be injured if the seed was faulty. Second, Perre was vulnerable: Perre was neither aware of Apand’s activities nor, in any event, able to protect his own interests. Therefore, in the circumstances, Apand owed a duty to Perre to take reasonable care not to injure Perre in the manner that occurred.

In pure economic loss cases, the courts examine a range of features to determine whether the defendant owed a duty of care to the plaintiff.

The judgments in Perre v Apand suggest that a number of factors have to be considered when determining whether a duty of care exists in the case of pure economic loss (‘the salient features test’). The first of these factors (reasonable foreseeability) is essential to any finding that a duty in negligence exists. The other factors must be weighed according to the circumstances of each individual case. At all times it should be borne in mind that the courts will tend

to be biased against finding a duty of care in a novel situation. Therefore, if the factors are not clearly in favour of a duty (in any given case), it is suggested that the courts will take the conservative line and reject the existence of a duty. Features examined by the courts in determining whether the defendant owed a duty of care to the plaintiff include the following: Whether the loss suffered by the plaintiff was reasonably foreseeable. As with negligence in all its various manifestations, reasonable foreseeability is a necessary element in establishing the existence of a duty, but it is not sufficient by itself. The nature of the relationship between the defendant and the plaintiff. The more proximate the relationship, the more likely a duty of care exists. Whether the plaintiff belonged to a determinate or an indeterminate class. If the plaintiff belonged to an indeterminate class, the courts will be reluctant to impose a duty of care for pure economic loss upon the defendant. The plaintiff belongs to an indeterminate class if the persons who make up the class (ie, the persons who could be damaged by the defendant’s actions) could not be identified. Compare Perre v Apand with the relationship that exists between potential share buyers and auditors. The class of potential share buyers is indeterminate. Therefore, the courts have been very reluctant to make any finding that an auditor owes a duty of care to every person who might buy shares in a company on the basis of the audit. Auditors are discussed in Chapter 3. The plaintiff’s vulnerability. Where, as in Perre v Apand, the plaintiff is totally reliant on the defendant acting responsibly, the courts will be more disposed to find a duty of care. See also the position of Caltex Oil in the Caltex case. These cases may be contrasted with Agar v Hyde (2000) 74 ALJR 1219, which involved physical injury rather than pure economic loss, but which nevertheless highlights the role that the

plaintiff’s vulnerability may play in determining whether a duty of care existed. In Agar v Hyde, two players claimed damages for injuries suffered while playing rugby. The substance of their claim was that the members of the International Rugby Football Board, which made and altered the rules under which rugby was played, owed a legal duty of care to all persons who played rugby in relation to the risk of injury. The High Court rejected this claim. One of the factors influencing the decision was the fact that players are free to participate or not. The players voluntarily assume the risk of injury. [page 61] The defendant’s knowledge of the plaintiff’s vulnerability. In Perre v Apand, the defendant was aware, or should have been aware, of the vulnerability of persons, such as the plaintiff, who grew potato crops in close proximity to the farm on which the defendant’s seed was used. Similarly, in the Caltex case, the dredge operators were aware that Caltex was reliant on the pipeline to receive its oil. Whether the defendant assumed responsibility for the risk being taken by the plaintiff. This is often extremely important in cases of negligent misstatement (see Chapter 3). However, while it may sometimes be relevant to cases of negligent acts, it is not essential to a finding that a duty of care existed. For example, in Caltex and Perre v Apand there was no evidence that the defendants had assumed responsibility for the consequences of their acts. In the next case, Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (see below), the defendant, Esso, expressly disclaimed any assumption of liability. In Johnson Tiles v Esso Australia, Gillard J examined the salient features of the case to determine whether a duty of care was owed to various claimants.

Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27 (Supreme Court of Victoria) Facts Esso has a natural gas plant at Longford in Victoria. Esso is the sole supplier of natural gas to Gascor, which is the sole distributor of gas in Victoria. The gas supply was governed by a series of contracts between Esso and Gascor (the distributor), Gascor and the gas retailers and the gas retailers and the customers. Under these contracts, Esso, Gascor and the retailers all in turn disclaimed any liability for economic loss arising from a failure to supply. The retailers were also protected against claims by customers for failure to supply gas by the provisions of the Gas Industry Act 1994 (Vic). In 1998, there was a huge explosion at the Longford plant which caused Melbourne to be without any gas supply for a number of weeks. The explosion was held to be due to the carelessness of Esso in maintaining its plant. As a result of the lack of gas supply, a number of gas customers (both business and private) and workers claimed they had suffered losses. In respect of losses, the business customers may be divided into two classes: (1) those who suffered physical damage to buildings as well as consequential losses, and (2) those who suffered no physical damage. The latter claimed economic losses, such as loss of profits (arising from an inability to meet demand because production had ceased). The private customer losses included the expenses of buying electrical appliances to replace gas appliances which could not be operated. These were purely economic losses. The employee losses, which were also purely economic, included loss of wages for persons who had been laid off as a result of the failure of gas supply. Thus, except for the customers who suffered some physical damage, most of the claims fell into the category of pure economic loss (ie, loss not resulting from any physical injury to the person or property). [page 62] Issue The first critical issue in each instance was whether Esso owed a duty of care to the respective plaintiffs. Decision Gillard J decided: A. Cases involving physical damage: Esso owed a duty of care to gas customers to avoid a stoppage of gas causing property damage. This case was indistinguishable from Donoghue v Stevenson and Grant v Australian Knitting Mills Ltd. B. Employees: Esso did not owe any duty to the employees who had been

C.

stood down. The class was indeterminate. Esso could not possibly know the number of workers likely to be affected. Business and private customers: Esso did not owe a duty of care to the business or private customers to avoid pure economic loss. This conclusion was based on an analysis of the relative weight of a number of factors. Factors favouring the plaintiffs included: The losses were reasonably foreseeable. Determinacy of the relevant class — the class, although large, was not indeterminate. Esso knew the number of its business and private gas customers. Esso could not defend itself on the grounds that its actions were a legitimate business activity. However, these factors were outweighed by others which pointed to the absence of a duty: Vulnerability: the customers were not vulnerable in the way the farmers were in Perre v Apand. They were not totally reliant on Esso. Gas supply interruptions were not completely unknown or unexpected. The business customers could, and many had, taken out back-up precautions or insurance. The private customers were inconvenienced but not reliant on Esso. Esso’s contracts showed that it had not assumed the risk for losses suffered as a result of a gas stoppage. Gillard J said (at [1347]): The gas customers are aware that there is no guarantee of uninterrupted supply, they know what steps can be taken to avoid or minimise the risk of harm to their particular business or interest and it is their choice as to what they should do. Gas customers are in a far better position than anyone else to assess their likely loss due to interruption of supply and if insurance is the preferred means of minimising the loss, they can take out insurance based upon a reasonable assessment of the likely harm and factor the expense of the premium into the price of their products or services. The contractual structure: all the supply contracts contained a term that the supplier would not be responsible for losses suffered as a result of a gas stoppage. The contractual framework was relevant and worked against the recognition of any duty to avoid pure economic loss. The legislative structure: the statutory framework did not impose a duty on Esso for pure economic loss. It would be inappropriate for the court to do so. This factor clearly favoured Esso.

[page 63] Negligence is based on fault. In other words, there must be evidence that the defendant was careless — that is, there must be evidence that a reasonable person would have acted differently in the same circumstances.

In Woolcock St Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, the High Court rejected an argument that a building engineer of a commercial building owed a duty of care for pure economic loss to subsequent owners of the property. A similar decision was reached in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36. In Makawe Pty Ltd v Randwick City Council [2009] NSWCA 412, the New South Wales Court of Appeal held that a local planning authority owed no duty to a person who acquired from a developer a building that had been approved by the authority. On the other hand, in Barclay v Penberthy [2012] HCA 40 the High Court held that a commercial pilot owed a duty of care to a commercial firm hiring the aircraft not to cause the firm economic loss by injuring the firm’s key employees. The pilot was aware of the commercial nature of the hire and the significance of the employees.

Step 2: What standard of care is owed? Balancing risks, consequences and costs Before deciding that a person has been negligent, it is important to ask what a reasonable person would have done in the situation.

2.18

Even if a duty of care is owed, it does not necessarily mean that the defendant is liable. The plaintiff must also prove that the defendant failed to exercise the proper standard of care. The proper standard of care is that which a reasonable person would exercise in the circumstances. The question to be asked is: What would a reasonable person, in the position of the defendant, do by

way of response to the risk? The principles to be applied by the courts when determining whether the defendant has failed to exercise the proper level of care are set out in statute. General principles15

(1) A person is not negligent in failing to take precautions against a risk of harm unless: (a) the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known); and (b) the risk was not insignificant; and (c) in the circumstances, a reasonable person in the person’s position would have taken those precautions. (2) In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (among other relevant things): (a) the probability that the harm would occur if care were not taken; (b) the likely seriousness of the harm; (c) the burden of taking precautions to avoid the risk of harm; (d) the social utility of the activity that creates the risk of harm.16 [page 64] Other principles In a proceeding relating to liability for negligence: (a) the burden of taking precautions to avoid a risk of harm includes the burden of taking precautions to avoid similar risks of harm for which the person may be responsible; and (b) the fact that a risk of harm could have been avoided by doing something in a different way does not of itself give rise to or affect liability for the way in which the thing was done; and (c) the subsequent taking of action that would (had the action been taken earlier) have avoided a risk of harm does not of itself give rise to or affect liability in respect of the risk and does not of itself constitute an admission of liability in connection with the risk.

These principles are consistent with common law principles. They require the courts, when considering how a reasonable person would have responded to the foreseeable risk, to balance risks, consequences and costs. As Mason J in Wyong Shire Council v Shirt (1980) 146 CLR 40 said (at 48): [This involves] consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have. It is only when these matters are balanced out that the tribunal of fact can confidently assert what is the standard of response to be ascribed to the reasonable man placed in the defendant’s position.

In other words, liability under the tort of negligence is not strict liability. The duty is to take reasonable care against reasonably foreseeable risks. Thus, a manufacturer, for example, will not be automatically liable for every defect in his or her product which injures users of the product. Applying the balancing test 2.19 The balancing test is well demonstrated in Graham Barclay Oysters Pty Ltd v Ryan (see [2.48]) and Woods v Multi-Sport Holdings Pty Ltd (see [2.26]). In the following case, the facts were fairly straightforward, but the court split on the issue of what the defendant should have done in light of a known risk. The case demonstrates how difficult it can be to determine what steps should be taken to mitigate a known risk. Which view do you prefer?

Romeo v Conservation Commission of the Northern Territory (1998) 192 CLR 431 (High Court) Facts The Conservation Commission was responsible for a popular scenic park in Darwin, known as Dripstone Park or Lion Park. The park contains cliffs which overlook Casuarina Beach some six or seven metres below. At the top of the cliffs there is a carpark surrounded

[page 65] by a low log fence. Between the carpark fence and the edge of the cliff there was an open space. Some low vegetation was growing along the cliff top. At the cliff face there was no fence, nor were there any warning signs. However, the edge of the cliff was clearly visible to any sober person. Romeo was a 16-year-old girl who unfortunately was not entirely sober one night in April 1997. She seriously injured herself when she fell off the cliff. There was very little evidence as to how the incident occurred. Romeo had no recollection. She sued the Conservation Commission for negligence. At trial and on appeal to the Supreme Court of the Northern Territory, she was unsuccessful. She appealed to the High Court. Issue Was a duty of care owed to Romeo? If so, had the duty been breached? Decision Most of the court held that a duty of care was owed. The issue was whether the Commission had failed to discharge that duty in this case. The possibility of someone falling off the cliff was foreseeable. However, the probability was not strong because the edge of the cliff was obvious. By a majority, the court rejected Romeo’s appeal. Brennan CJ said (at 447): To those who exercised reasonable care for their own safety, the cliff and its dangers were obvious. The Commission was under no duty to fence, light, erect warnings or take any other step to protect the public from those obvious dangers. According to Toohey and Gummow JJ (at 456): The respondent was under a general duty of care to take reasonable steps to prevent persons entering the Reserve from suffering injury. But the taking of such steps did not extend to fencing off an area of natural beauty where the presence of a cliff was obvious. In other words, there was no breach of the respondent’s duty of care in failing to erect a barrier at the cliff edge. Kirby J said (at 481): The perceived magnitude of risk, the remote possibility that an accident would occur, the expense, difficulty and inconvenience of alleviating conduct and the other proper priorities of the Commission confirm the conclusion that breach of the Commission’s duty of care to the appellant was not established. The Commission’s failure to provide protection against the risk that occurred was not unreasonable. Hayne J saw no reason to overturn the decision of the lower courts.

The minority saw the Commission’s responsibility in a different light. Gaudron J said (at 459): [It] seems to me unarguable that, having provided access and car parking facilities, there was a duty of care to provide fencing along the cliff top in the area near the car park, although not in areas not readily accessible from it. That duty was a duty to provide fencing of a kind that would prevent visitors from straying too near the cliff top … [page 66] McHugh J said (at 461): So what did reasonable care require the Commission to do to protect the plaintiff from the reasonably foreseeable risk that she might fall from the cliff top? First, the Commission had to consider the magnitude of the risk. In this case, there was a grave risk of injury. Death and quadriplegia were among the reasonably foreseeable consequences of a fall from the cliff top. Second, the Commission had to consider the probability of the risk occurring. In this case, the probability of a fall was very low. No previous accident had been reported. Nevertheless, the risk was not negligible or so remote that a reasonable person would reject it as unworthy of consideration. … Given the likely consequences of a fall from the cliff top, no reasonable public authority, careful of the safety of the users of the Reserve, would think it right to neglect taking steps to eliminate that risk. Reasonable care required some sort of barrier to prevent that risk occurring if it could be done with little expense and without coming into conflict with other responsibilities which the Commission might have. Consequently, by a majority, Romeo failed in her claim for damages.

Standard of care and the design of goods 2.20 In the following case, it was alleged that Leo Buring Pty Ltd, a winemaker, had been negligent in the design of a bottle for sparkling wine.

O’Dwyer v Leo Buring Pty Ltd [1966] WAR 67 (Supreme Court of Western Australia)

Facts Leo Buring produced sparkling wine. Instead of using a cork held in place by wire as in Champagne bottles, Buring used a screw-on metal cap and a plastic stopper. O’Dwyer was unfamiliar with the system. He unscrewed the metal cap and tried to pour out the wine. He was not aware of the plastic stopper. When the wine did not come out, he turned the bottle to an upright position. The plastic stopper ejected and hit him in the eye. There was no notice on the bottle ‘to open cautiously’. The plastic stopper had been in use by Leo Buring and other wine producers for about five years and about four million bottles were sold annually without any reported accidents. O’Dwyer sued for negligence. Did he succeed? Issue Leo Buring clearly owed a duty of care to O’Dwyer — the issue was whether it had breached that duty. Decision The mere fact that the industry generally followed the same procedure did not prove that conduct was not negligent. The test was whether a reasonable person would regard [page 67] the conduct as negligent. The court held that the design was negligent in that it was reasonably foreseeable that certain persons, being first-time users, would not be aware of the plastic stopper or the force at which it could be ejected from the bottle. It was reasonably foreseeable that this class of person could be injured by the stopper acting precisely in the manner intended by the manufacturer. O’Dwyer succeeded in his claim for damages.

O’Dwyer v Leo Buring Pty Ltd did not raise overly complex factual issues. However, this will not always be the case. Proving a producer has been negligent in its design choices (or its production choices) is often complex, risky and very costly. For example, the degree of care required in the design of a vehicle and its fittings is that which a reasonably prudent manufacturer would exercise in the circumstances.17 Producing evidence to establish a design fault in a vehicle could be prohibitive. The obligation to take reasonable care in the design of a product

includes a need to take care in choosing and installing any component parts.

Rasbora Ltd v JCL Marine [1977] 1 Lloyd’s Rep 645 (Queen’s Bench Division) Facts Atkinson (on behalf of Rasbora Ltd) contracted with JCL for JCL to build a power boat. JCL was in the business of boat-building. Upon completion, JCL handed the boat over to Atkinson. JCL was aware that Atkinson intended to take the boat to sea. The boat’s electrical system was defective, causing the boat to burn. (The court specifically found that the manufacturer of the component parts used in the system had not been negligent.) The boat was destroyed and Atkinson was injured. Atkinson sued JCL for negligence. (Rasbora also sued JCL, but for breach of contract.) Issue Had JCL breached the duty of care it owed to Atkinson? Decision When handing over the boat to Mr Atkinson, JCL knew that he and his friends were going to take the boat to sea. Moreover, JCL clearly appreciated that defective design or installation of the boat’s electric installations and circuits would be likely to result in an electrical fault and that such a fault could cause a fire. Therefore, JCL owed a duty of care to Atkinson to take reasonable care when designing and installing the electrical system. JCL had failed to take reasonable care and therefore had breached its duty. JCL was ordered to pay damages to Atkinson.

[page 68] In some cases, the plaintiff may not be able at the outset to determine whether the component-part manufacturer or the final manufacturer has been negligent. The component-part manufacturer may be innocent, as in Rasbora Ltd v JCL Marine. The final manufacturer may be innocent, as in the case where the defect in the component is latent and the final manufacturer had

no reasonable opportunity to discover the defect. Or the blame may have to be attributed to both parties. To avoid the possibility of suing the wrong party, the plaintiff will generally sue both parties together. The matter may then become a dispute between the component-part manufacturer and the final manufacturer. Standard of care and the production of goods 2.21 If the manufacturing process and the manufacturer’s system of checking and monitoring that process are reasonably designed to prevent foreseeable injury, the plaintiff will have considerable difficulty in proving negligence. The courts accept that manufacturers are entitled to use a sampling system to check for defects because the process of checking every product would be economically inefficient. However, it is not a defence for a negligent manufacturer to argue that the consumer ought to have checked for defects before using the product, if no reasonable person would have checked. Standard of care and the packaging of products 2.22 The manufacturer’s obligation to take reasonable care extends to the packaging. For instance, where a manufacturer is aware that a product is inherently dangerous, there is an obligation to take reasonable steps to ensure that the containers in which the product is stored and transported are reasonably adequate for the purpose.

Adelaide Chemical & Fertiliser Co Ltd v Carlyle (1940) 64 CLR 514 (High Court) Facts Adelaide Chemical & Fertiliser Co Ltd (AC&F) manufactured sulfuric acid which was sold in earthenware jars. The weight of each jar when filled was about 30 kg. Experiments (conducted for the purposes of the court case) showed that the filled jars, when tilted and allowed to fall some nine inches, invariably broke. Mr Carlyle’s employer purchased some jars of sulfuric acid from AC&F. Mr Carlyle was injured and subsequently died when one of the jars broke when he was handling it. His wife sued AC&F for negligence. AC&F

bought the jars from a reputable manufacturer. The cause of the accident was not entirely clear. Either the jar’s handle broke as the jar was being lifted or the jar slipped from Mr Carlyle’s grasp. Issue Is there a special standard of care owed in the case of inherently dangerous products? If not, what is the test for determining the standard of care? Had AC&F failed to exercise the level of care expected in the circumstances? Decision The High Court accepted that sulfuric acid was within the category of goods dangerous in themselves. However, this did not mean that strict liability applied. The test was [page 69] still negligence. The degree of care was that which a reasonably prudent person would exercise in the circumstances. AC&F was required to exercise all reasonable care to provide a vessel as durable and free from liability to break in the ordinary course of handling as was compatible with the conditions and exigencies of manufacture and trade. A very high degree of precaution was necessary in the case of an injurious chemical, such as sulfuric acid. The court held that AC&F was negligent in using the jars without any proper examination of their suitability for the purpose.

Standard of care and the proper labelling of products 2.23 In Norton Australia Pty Ltd v Streets Ice Cream Pty Ltd (1969) 120 CLR 635, the High Court held that it was necessary to take reasonable steps to bring known dangers to the attention of likely users. This can be done through proper labelling. Through careful labelling, manufacturers may significantly reduce their exposure in negligence. In Holmes v Ashford [1950] 2 All ER 76, a manufacturer was held not liable for the damage caused by hair dye to a person of sensitive skin where the hair dye was marketed with a warning that the product ought to be tested before use as it might be unsuitable for sensitive skin.18 Manufacturers should also take steps to warn against dangers that they ought to have known about. For example, where a

particular danger could have been discovered by a reading of the relevant literature contained in the manufacturer’s own library, the manufacturer owed a duty to warn against that danger.19 However, the law of negligence does not require manufacturers to be omniscient. The standard is reasonable care. Standard of care and the distributor/retailer 2.24 Distributors and retailers owe a duty of care to consumers. However, in the case of pre-packaged goods the distributor/retailer has no real opportunity to check for faults. Consequently, a retailer is not normally expected to examine goods for defects prior to sale. However, if the retailer is aware of a defect, the retailer would be expected to exercise reasonable care to avoid injuring the public. This could mean withdrawal of the product from sale. It might also mean that the retailer has to warn customers who have already bought the product. In Fisher v Harrods [1966] 1 Lloyd’s Rep 500, the fashionable London retailer, Harrods, was held to owe a duty of care to a person who used a cleaning product purchased at Harrods. Harrods knew the product was potentially dangerous to eyes. It also knew there had been problems with the bottle in which the product was sold. Harrods failed to make any appropriate investigations as to the competence of the manufacturer of the product; it failed to make a proper check of the bottles themselves; finally, it failed to warn against the possible dangers. In fact, the manufacturer was inexperienced, the manufacturing conditions primitive and the bottles inadequate. Therefore, in these circumstances, the court held that Harrods had breached its duty. The plaintiff was awarded damages. Generally, a retailer would be safe where it buys from reputable suppliers. [page 70]

Standard of care and the delivery of professional services 2.25 A plumber, a software systems consultant, a doctor or any other service provider owes a duty to take reasonable care when providing their services. The level of care is that reasonably to be expected of a person claiming to have those skills, including specialist skills.20 Generally speaking, a person providing professional services is to be taken to have exercised reasonable care if it is established that the person acted in a manner that (at the time the service was provided) was widely (but not necessarily universally) accepted in Australia by a significant number of respected practitioners in the field (‘peer professional opinion’) as competent professional practice in the circumstances.21 Although the courts will generally accept peer professional opinion, there are occasions where such an opinion may be regarded as unreasonable. The level of care expected is constantly evolving. Thus, in a well-educated society, it is not sufficient for medical practitioners to make unilateral decisions on behalf of their patients. Depending on the circumstances, a medical practitioner may be expected to warn a patient properly about the risks associated with a particular medical procedure: see Rogers v Whitaker (1992) 175 CLR 479. Standard of care and the delivery of recreational and other services 2.26 It is in the nature of people to engage in risky activities, for example, some sporting and recreational activities. It is also an unfortunate fact that people get injured from these activities. What level of care does the supplier of the facilities owe to users?

Woods v Multi-Sport Holdings Pty Ltd [2002] HCA 9 (High Court) Facts Woods was batting in a game of indoor cricket at a facility operated by MultiSport when he was hit in the eye by the ball. He suffered serious injury. MultiSport organised the game in which Woods was playing and provided the equipment used by the players. Woods regularly played outdoor cricket and

had played indoor cricket on one previous occasion. Multi-Sport did not supply helmets. Nor did it have any warning signs that indoor cricket was dangerous, or that patrons ran a risk of eye injury. Woods sued for negligence. The trial judge held that Multi-Sport owed Woods a duty of care to ‘take reasonable steps to avoid the risk of injury to players arising from the dangers involved in playing indoor cricket’. However, Multi-Sport had not breached that duty. Helmets were not normally worn during games. The Full Court of the Supreme Court of Western Australia dismissed Woods’ appeal. Woods then appealed to the High Court. The court was presented with quantitative evidence suggesting that eye injuries were a fairly common occurrence in indoor cricket. [page 71] Issue Had Multi-Sports been negligent either in (1) failing to provide helmets, or (2) failing to warn of the possible dangers? Decision By a bare majority, the court dismissed the appeal. The failure to provide a helmet was not an unreasonable thing in the circumstances — special helmets had not been designed for the game, helmets were not worn by players elsewhere, the rules of the game did not provide for helmets, and ‘the manner in which the game was played meant that there were considerations of convenience and safety that provided good reasons why such headgear was not worn’. Nor was the failure to give any warning unreasonable in the circumstances. The risks of the game were reasonably obvious. Woods made the choice to play.

In Woods v Multi-Sport Holdings, the court decided that the risks were obvious. Where a risk is obvious — that is, obvious to a reasonable person — the plaintiff is presumed to be aware of that risk.22 There is no duty to warn of obvious risks. Thus, people who go bungee jumping do not have to be told that one can get hurt bungee jumping. Diving nine metres from a bridge into a river presented an obvious risk of spinal damage, even to a 14-year-old; consequently, the local council was under no duty to warn of this obvious danger: Great Lakes Shire Council v Dederer [2006] NSWCA 101.23

On the other hand, the threat of being injured by a ‘rogue’ wave while out on a dolphin-watching cruise was not an obvious risk where the cruise was advertised to be in ‘calm ocean waters’.24 In such cases the supplier would do well to issue a risk warning. A defendant owes no duty of care for recreational activities where a risk warning has been given.25 Special rules relating to dangerous recreational activities 2.27 A defendant is not liable in negligence for harm suffered by a plaintiff as a result of the materialisation of an obvious risk of a dangerous recreational activity engaged in by the plaintiff.26 Recreational activity includes (a) any sport, (b) any pursuit or activity engaged in for enjoyment, relaxation or leisure, and (c) any pursuit or activity engaged in at a place (such as a beach, park or other public open space) where people ordinarily engage in sport or in any pursuit or activity for enjoyment, relaxation or leisure. A recreational activity is dangerous if it involves a significant risk of physical harm. A non-contact rugby game similar to touch rugby that is played on a local sporting field is not a dangerous recreational activity.27 Shooting kangaroos by spotlight, however, is a dangerous recreational activity.28 Diving off a bridge into a river is a dangerous recreational activity,29 but diving into deep blue water from a boat moored some 60 metres off the coast [page 72] is not a dangerous recreational activity.30 A dolphin-watching cruise (advertised by the defendant to be in calm ocean waters) was not a dangerous recreational activity.31 Standard of care and event operators 2.28 Event organisers and managers go to great lengths to attract crowds. Popular events include rock concerts, sporting contests and air shows where crowds gather to watch precision flying.

Sadly, sometimes matters do not go according to plan, and spectators get injured. Event managers need to be especially vigilant given the potentially dangerous nature of the entertainment at many of these events. Managers need to consider not only the event itself and the premises or buildings at which the event is being held,32 but also crowd control.

Harris v Bulldogs Rugby League Club [2006] NSWCA 53 (New South Wales Court of Appeal) Facts The Bulldogs Rugby League Club (Club) held rugby games at the Sydney Showground. Members of the crowd had released flares and fireworks at previous Club games although no one had been injured. On the night of the game in question, flares were set off before the game began, and again an hour later. Fireworks were also released. Eventually, Harris was struck in the left eye by a firework, and severely injured. He sued the Club for negligence. Issue The Club conceded that it owed Harris a duty of care. The issue was whether the Club had exercised a reasonable level of care to prevent injuries caused by unauthorised and illegal use of fireworks by members of the crowd (particularly as there had been past incidents). The Club argued that it had done all that was reasonable in the circumstances. Harris argued that the Club had failed to exercise reasonable care and should have taken additional measures including: (1) conducting body searches; (2) using bomb detection dogs; (3) employing more security guards; (4) reducing crowd density to enable offenders to be easily identified and dealt with; (5) making a public announcement by the Club’s CEO to calm the crowd; (6) and, finally, even stopping the game. Decision The New South Wales Court of Appeal held that the Club was not liable. The Club had satisfactory security arrangements, including bag searches outside the ground to detect illegal fireworks, and had carried out an adequate number of searches. It was not reasonable to expect security staff to conduct individual body searches. It was not reasonable to expect that bomb detection dogs would be employed — there were insufficient numbers available to be used at rugby games. Finally, it was not reasonable to expect the Club in the circumstances to stop the game. Therefore, the Club had satisfied its duty to exercise reasonable care.

[page 73] Inherent risks 2.29 Where a risk cannot be avoided by the exercise of reasonable care it is regarded as an inherent risk. The defendant is not liable in negligence where the plaintiff is injured as the result of the materialisation of an inherent risk.33 Unexplained accidents: the doctrine of res ipsa loquitur 2.30 Where there is no evidence establishing the cause of an accident and the accident is such that in the ordinary course of events it would not have happened if those who had the responsibility had used proper care, negligence is proved by the rule of res ipsa loquitur.34 This means that the event speaks for itself. For example, if two trains collide because they are travelling on the same track in opposite directions and there is no explanation as to why the accident occurred, a court is justified in accepting that the operator of the railway was negligent. In the ordinary course of events, two trains will only be on the same portion of track going in opposite directions if the railway operator has been careless. On the other hand, the rule of res ipsa loquitur did not apply in a case where a car inexplicably ran off the road. There were a number of plausible reasons why a car may run off a road and some of them did not involve negligence (eg, the driver suffering a blackout or the steering mechanism malfunctioning): see Lafranchi v Transport Accident Commission [2006] VSCA 81. Res ipsa loquitur merely assists the plaintiff in proving their case in appropriate circumstances. If there is evidence as to how the accident occurred, then res ipsa loquitur does not apply. Rather, in such cases the question is whether, upon the evidence that has been established, the defendant has breached the duty it owed to the plaintiff.

The rule of res ipsa loquitur may be of particular use to plaintiffs complaining about defective manufacturing. This is because the plaintiff will often have little knowledge of the manufacturing process. The rule indirectly forces the manufacturer to establish some positive evidence explaining the accident and discounting negligence. The rule has been applied where foreign substances have been found in foodstuffs and other proprietary products.

Step 3: Causation, remoteness of damage, amount of damages Causation 2.31 To obtain damages, the plaintiff must establish that the negligence caused the damage: 1. Courts must determine as a question of fact whether the defendant’s negligence was a necessary condition of the plaintiff’s loss (factual causation). This is called the ‘but for’ test (but for the defendant’s negligence the plaintiff would not have suffered loss). 2. Courts must also determine whether it is appropriate that the defendant be responsible for the plaintiff’s loss (scope of liability). This is largely a policy issue. 3. If the plaintiff cannot establish the ‘but for’ requirement, the defendant is liable only in exceptional circumstances.35 [page 74]

Adeels Palace Pty Ltd v Moubarak; Adeels Palace Pty Ltd v Bou Najem [2009] HCA 48 (High Court) Facts Adeels operated a reception and restaurant business. The business was

licensed to serve alcohol. There was a dance floor. On 31 December 2002 the restaurant was full of people celebrating the New Year. The dance floor was crowded. A dispute started when one woman complained that another had brushed her hand with a lighted cigarette. The clash of words rapidly turned into a brawl. Chairs, plates, bottles and punches were thrown. One man, who had been hit in the face, left and came back with a gun. Patrons described him as having blood on his face when he returned. He shot, first, Bou Najem (an innocent bystander who was trying to hide in the kitchen) and then Moubarak (who had apparently hit him). Moubarak and Bou Najem sued Adeels Palace for damages for negligence. They claimed that Adeels Palace was negligent in not providing any or any sufficient security during the function. Issue Did Adeels owe a duty of care to Moubarak and Bou Najem? If it did, had it breached that duty? If it had, did the breach cause the injuries suffered by the victims? The High Court decision revolved around the third question — that is, causation. Decision Adeels owed ‘a duty to take reasonable care to prevent injury to patrons from the violent, quarrelsome or disorderly conduct of other persons. … [I]t is a duty to take reasonable care in the conduct of activities on licensed premises, particularly with regard to allowing persons to enter or remain on those premises’ (at [26]). On the question of breach of duty, the court said that in determining what action a reasonable person would have taken, it is necessary to consider the matter prospectively and not in hindsight. Each case depends on its facts. Without deciding this matter the court turned to the issue of causation. The issue here was factual causation. It was necessary to apply a ‘but for’ test. Would the shootings have occurred if Adeels Palace had provided bouncers? There was no evidence to say that bouncers would have stopped a man with a gun who was looking for revenge. In fact, the evidence showed that the gunman was quite prepared to shoot — indeed, he shot Bou Najem who was an innocent bystander. If the plaintiff cannot prove the ‘but for’ test, damages will not be awarded unless the case is ‘exceptional’. The High Court said this case was not exceptional.

[page 75]

Strong v Woolworths Ltd [2012] HCA 5 (High Court)

Facts Mrs Strong was injured when she fell as a result of slipping on a greasy chip. The fall occurred in an area of a shopping centre called the sidewalk sales area, which was adjacent to the food court. The area was under the control of Woolworths (W). The sidewalk sales area had not been cleaned or inspected in the four-and-a-half hours between the time when the area was set up for the day’s trading and the time of Strong’s fall. W accepted that if the area had been inspected, the chip would have been removed. Strong sued for damages. W admitted that it owed a duty of care and that it had breached that duty by not inspecting and cleaning the sidewalk sales area every 20 minutes. However, W argued that as Strong could not prove when the chip was dropped, she could not prove that W’s negligence caused the fall. For example, if the chip had fallen 10 minutes before the accident, the accident would still have occurred even if W had a proper inspection system. W effectively said that the burden was on Strong to demonstrate when the chip was dropped and she had failed to do this. Issue Had Strong proved on the balance of probabilities that Woolworths’ negligence was a necessary condition (ie, factual cause) of her harm? Decision Neither party knew when the chip was dropped. Nor was there any evidence from which it could be inferred that the chip was more likely to have fallen at one time rather than another. In that case it was a question of probabilities. The probability was that the chip was not dropped within the 20 minutes before the accident (even though that was lunch time) but sometime in the four hours before that. Therefore, on the balance of probabilities, if W had a proper system of inspection in place, the chip would have been cleaned up and Strong would not have slipped and fallen. Mrs Strong was awarded damages.

Causation can often be a very difficult issue to resolve.36 For example, in March v Stramare Pty Ltd (see below), was the accident caused by the negligence of the fruit merchant in parking the truck in the middle of the road or by the negligence of the plaintiff in driving when severely affected by alcohol? Or was the cause of the accident a combination of the two factors? [page 76]

March v Stramare Pty Ltd (1991) 171 CLR 506 (High Court) Facts Stramare Pty Ltd operated a fruit and vegetable shop in Adelaide. One of its employees parked the firm’s truck in the middle of the road for the purpose of loading it with large wooden bins containing fruit and vegetables. The truck’s parking and hazard lights were on. Despite this, the trial judge found that the firm should have realised that in some circumstances the truck was a danger to other vehicles. March, who was fairly drunk at the time, ran into the back of the truck and was injured. He sued for damages for the firm’s negligence. At trial, Stramare was held to be negligent. However, the court determined that March had also been negligent and that liability should be apportioned. Responsibility for the accident was apportioned 30 per cent to Stramare and 70 per cent to March. On appeal, the Full Court of the South Australian Supreme Court held that, although Stramare had been negligent in parking the truck in the middle of the road, this had not been the cause of the accident; rather, it was the intoxicated state of March. Therefore, March could not recover any damages from Stramare. March appealed to the High Court. Issue Whether Stramare, by parking in the middle of the road, had been one of the causes of the accident. If so, how should responsibility be apportioned? Decision According to Mason CJ (at 519): [Stramare’s] 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 [March] acted. The purpose of imposing the common law duty on [Stramare] was to protect motorists from the very risk of injury that befell [March]. In these circumstances, [Stramare’s] negligence was a continuing cause of the accident. The chain of causation was not broken by a [‘new act’, that is, March’s negligence]. Nor was it terminated because the risk of injury was not foreseeable; on the contrary, it was plainly foreseeable. The court restored the trial judge’s decision; that is, 30 per cent/70 per cent apportionment.

Chappel v Hart [1998] HCA 55 (High Court)

Facts Dr Chappel was an ear, nose and throat specialist. Mrs Hart had a degenerative condition. Dr Chappel advised Mrs Hart to have an operation for her condition. Her condition was such that she would have required an operation at some time. Mrs Hart specifically [page 77] asked about the possibility that she would be left with a damaged voice. She made it clear to Dr Chappel that she did not want this to occur. Dr Chappel failed to properly warn Mrs Hart of the dangers of the operation. During the operation, her oesophagus was perforated and an infection set in. Despite remedial attempts, Mrs Hart was left with a severely damaged voice. She sued for negligence. There was no negligence in the performance of the operation. Rather, Mrs Hart argued that Dr Chappel had negligently failed to warn her adequately of the dangers and had thus deprived her of the chance to seek a second opinion and/or a more experienced surgeon. At trial, the court awarded Mrs Hart $172,000. Dr Chappel appealed on the ground that Mrs Hart had not established that his failure to properly warn her caused her losses. Issue Had Dr Chappel’s failure to properly warn Mrs Hart been one of the causes of her loss? Decision By a majority of three to two, the High Court decided that Dr Chappel’s negligence had caused damage to Mrs Hart. The appeal was dismissed.

Remoteness The test of reasonable foreseeability is relevant to: the existence of a duty of care; whether the duty has been breached; and whether the damage was too remote.

2.32

Not all losses resulting from the defendant’s failure to properly discharge the duty of care are recoverable by a plaintiff. The losses must not be too remote. This means that the damage must not only have been a direct consequence of the negligent act, but must also have been reasonably foreseeable. If a reasonable person,

having the knowledge and experience to be expected of, for example, a manufacturer of the product in question would have foreseen the kind, type or class (if not the extent) of damage that occurred, then the manufacturer is liable.37

Overseas Tankship (UK) Ltd v The Miller Steamship Co Pty Ltd (The Wagon Mound (No 2)) [1966] 2 All ER 709 (House of Lords) Facts Overseas Tankship (the charterer of the ship Wagon Mound) carelessly allowed a large quantity of furnace oil to spill into Sydney Harbour. The oil settled around a wharf at which were moored two vessels belonging to Miller Steamship. The oil caught fire when molten metal fell onto some cotton waste that was floating on the oil. The fire destroyed the ships and Miller Steamship sued for negligence. [page 78] Issue Should Overseas Tankship be liable to compensate Miller Steamship because of its negligence in allowing the oil to spill? Or, were Miller Steamship’s damages too remote? How is the test for remoteness applied? Decision The crew of the Wagon Mound were negligent in allowing the oil to spill. It was reasonably foreseeable to a ship’s engineer that the oil might catch fire. Even though this would require unusual circumstances, the ship’s engineer ought to have known that furnace oil on water had caught fire before. Once it is admitted that the possibility of fire was reasonably foreseeable, it is clear that the possibility of damage to ships in the vicinity of the oil spill was also reasonably foreseeable. The defendant was held liable in damages.

It is often difficult to categorise the loss suffered; that is, to determine the kind, type or class of loss. Yet this can be quite critical to the outcome of the reasonable foreseeability test.

Metrolink Victoria Pty Ltd v Inglis

[2009] VSCA 227 (Victorian Court of Appeal) Facts A car driven by Inglis crashed into a tram operated by Metrolink. The accident was due to Inglis’ negligence. It took some hours to free the tram and, as a result, a number of trams were delayed. Because of this delay Metrolink failed to meet some of the operational targets required under its franchise agreement with the Victorian government. The failure to meet the targets cost Metrolink some $7000. Inglis admitted negligence and paid for the repair of the tram, but refused to pay the extra amount ($7000) on the basis that it was too remote. Metrolink sued and lost. Metrolink then appealed. Issue Whether the loss of $7000 was too remote. Inglis argued that the loss should be understood (categorised) as a penalty imposed under the franchise agreement with the Victorian government and that the terms of the agreement could not be reasonably foreseen by motorists, such as Inglis. Metrolink, on the other hand, argued that the loss should be understood (categorised) as simply a loss of revenue caused by the delay of the trams and that this was reasonably foreseeable. Decision A majority of the court held that the loss should be categorised simply as a loss of revenue. It was reasonably foreseeable that crashing into a tram could lose the tram operator some revenue (eg, fares). Therefore, the loss was not too remote.

[page 79] Assessing damages 2.33 The courts calculate the amount of damages by considering the position that the injured party would have been in if the negligence had not occurred. For example, where the plaintiff suffers physical injury, the award of damages (monetary compensation) would include: (a) medical and hospital expenses; (b) loss of earnings, actual and potential; (c) loss of amenity or enjoyment of life; and (d) pain and suffering. In recent years, as a result of the so-called insurance crisis,

parliaments have stepped in and passed laws affecting the assessment of damages in a variety of circumstances. An in-depth analysis of these changes is beyond the scope of this book.

Defences Contributory negligence 2.34 Where the plaintiff has contributed to the losses he or she suffered, damages will be reduced to such extent as the court thinks just and equitable, having regard to the plaintiff’s share in the responsibility for the damage. The two questions to ask are: It is common for the courts to reduce the amount of the plaintiff’s damages because the plaintiff has contributed to the loss by his or her own carelessness.

Did the plaintiff’s conduct show a lack of care for his or her own safety? If so, did such conduct materially contribute to the occurrence of the accident?38 The same principles that are applicable in determining whether a person has been negligent also apply in determining whether the person who suffered harm has been contributorily negligent in failing to take precautions against the risk of that harm.39 In other words, the standard of care required of the person who suffered harm is that of a reasonable person in the position of that person; and the matter is to be determined on the basis of what that person knew or ought to have known at the time. The plaintiff assumed the risk 2.35 Contributory negligence results in an apportionment of blame and thus an apportionment of damages. If, however, the defendant can establish that the plaintiff voluntarily assumed responsibility for the risk,40 then the defendant is not liable at all.41 For example, assume that P knows that D has been drinking all afternoon at the football and has difficulty standing up. Despite this, P accepts an offer of a ride home on D’s motorcycle. On the way home, D loses

control of the motorcycle on a corner and crashes. P’s leg is broken in the crash. The evidence makes it clear that the only reason D lost control was because D was travelling too fast for that corner. Is D liable to pay compensation to P? D could argue that P’s knowledge of D’s state meant that P had voluntarily assumed the risk that occurred. This is a total defence. To prove the defence, D must establish three things: Defences reflect the concept of ‘individual autonomy’ — they attempt to balance the carelessness of the defendant with the plaintiff’s responsibility to look after him-or herself.

1. 2. 3.

P knew of the danger. P appreciated the risk of injury created by the danger. P voluntarily agreed to accept the risk. Where a risk is obvious, the plaintiff is presumed to be aware of and to have accepted the risk.42 [page 80]

Moore v Woodforth [2003] NSWCA 9 (New South Wales Court of Appeal) Facts Moore was snorkelling in the Swansea Channel at the entrance to Lake Macquarie. He was just inside the navigational channel, which is marked by buoys and frequently used by boats. There was evidence that it was also used by divers. Moore was hit by a power boat travelling at 12–15 knots. He suffered injuries to his legs and feet as he dived to avoid the boat. He sued Woodforth for negligence. Woodforth argued that he owed no duty to Moore as it was not foreseeable that a person would be snorkelling in the navigation channel. Alternatively, he argued that Moore had assumed the risk of injury and therefore this was a defence. Finally, he argued that even if he was liable, Moore had contributed to the accident and therefore the damages should be reduced. The trial judge found in favour of Moore but reduced his damages by 40 per cent for contributory negligence. Both parties appealed.

Issue Did the driver of the boat owe a duty of care to the snorkeler? Had the snorkeler voluntarily assumed the risk of injury? If a duty of care was owed and the snorkeler had not assumed the risk, should fault for the accident be apportioned? Decision The possibility that there were persons in the navigation channel was reasonably foreseeable. Woodforth owed a duty to Moore to exercise reasonable care not to injure him. The defence of voluntary assumption of risk was not proved. There was no evidence that Moore had agreed to accept the risk of being hit by a motor boat. In respect of the issue of contributory negligence, the court found that 40 per cent was reasonable. Moore was swimming face down in a navigation channel. He had taken almost no steps to protect himself when some simple steps were available. Therefore, he had shown a lack of care for his own safety, and that had contributed materially to the accident.

One method often used to shift the risk from the defendant to the plaintiff is a disclaimer or exclusion of liability notice. Thus it is quite common to see signs, such as ‘You ride at your own risk’, displayed at events where there is an inherent risk of injury. In general these notices will only be effective if the defendant has taken reasonable steps to bring the notice to the attention of the plaintiff. Good Samaritans and volunteers 2.36 Statutory protection is provided to ‘good Samaritans’ (eg, coming to the aid of accident victims) and to volunteers (eg, unpaid charity workers).43 This is done so that socially [page 81] beneficial activities are not discouraged. There are limitations to the protections. For example, generally the good Samaritan or volunteer must act in good faith.

Liability for another person’s acts Vicarious liability A person can sometimes be liable in negligence for the acts of another person.

2.37

Let’s assume that X has been employed by ABC Ltd as its chief product tester for five years. X is well qualified for the job. Despite this, X negligently failed to test a batch of product. As a result, P was injured. Is ABC Ltd liable for the injuries? The answer is clearly ‘yes’, but why? According to the law, an employer is liable for the actions of its employees where they are acting within the course or scope of their employment. This raises two questions: 1. Was X an employee of ABC? The evidence suggests that X was an employee: see Hollis v Vabu Pty Ltd (below). 2. Did X’s negligence occur in the course or scope of his or her employment? Or did it occur when X was on a frolic of his or her own? X was hired as product tester. The negligence, therefore, clearly fell within the scope of X’s employment. This example is fairly straightforward, but it is not always so easy to answer these questions. For example, an employer is not generally responsible for the tortious acts of independent contractors. Sometimes, it is difficult to determine whether a person is an employee or an independent contractor.

Hollis v Vabu Pty Ltd [2001] HCA 44 (High Court) Facts Hollis was knocked down and injured by a cyclist riding unlawfully and negligently on the footpath. The cyclist disappeared, but it was clear that he worked for Vabu (trading as Crisis Couriers). Hollis sued Vabu for his injuries. Vabu denied that it was responsible for the negligent acts of the courier. This argument rested on Vabu’s claim that the courier was not an employee, but rather an independent contractor. The facts revealed that: The couriers had to provide and maintain their own bicycles. The couriers were required to wear a Crisis Courier uniform supplied by

Vabu. The couriers were supplied with a two-way radio which remained the property of Vabu. Vabu set the fees to be paid. There was no negotiation. Vabu allocated the jobs. Couriers could not bid for individual jobs. Couriers could not refuse jobs. Vabu deducted insurance premiums from the couriers’ pay. Couriers were not paid sick leave or annual leave. No superannuation payments were deducted by Vabu. Issue Was the courier an employee or an independent contractor? [page 82] Decision The issue is whether on all the facts the bicycle couriers were operating their own businesses (independent contractors) or whether they were representing Vabu (and, therefore, were employees). The court held that the bicycle couriers were employees. The particular bicycle courier who knocked over Hollis was acting within the scope of his employment at the time. Therefore, Vabu was liable to Hollis.

Non-delegable duties 2.38 As mentioned in [2.37], an employer is not normally liable for foreseeable injury to a third person caused by the negligent acts of a suitably qualified and competent independent contractor: Sweeney v Boylan Nominees Pty Ltd [2006] HCA 19. In other words, generally, a person discharges his or her duty by hiring a qualified and competent contractor to act in his or her place. However, there are certain circumstances where the employer’s duty is not discharged merely by hiring a contractor. In these cases, the employer has an ongoing duty to ensure that the contractor does not act negligently. Thus, a hospital owes a duty to its patients to ensure that its contractors exercise reasonable care and skill to avoid foreseeable injuries to the patients. A school owes a similar duty to its students: Commonwealth v Introvigne (1982) 150 CLR 258. An employer owes a duty to its workers to

ensure that its independent contractors exercise reasonable care and skill not to cause the workers foreseeable injury.44 In each case, the plaintiff (the patient, the student, the worker) is in a position of special vulnerability or dependence. In such cases, the defendant’s duty is said to be non-delegable.

Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 (High Court) Facts Burnie Port Authority (BPA) owned a building which contained a number of refrigerated storage rooms. Three of these cold rooms were leased by General Jones (Jones) in which it stored frozen vegetables. BPA hired an independent contractor to undertake certain work for the purposes of extending the facility, including the installation of some more refrigerated rooms. As part of the installation process the contractor was required to do some welding. Stored in boxes nearby was some highly inflammable material which was to be used as insulation. If the material caught fire, it would be virtually impossible to contain the resulting conflagration. BPA was aware of the dangerous nature of the work and the materials. The contractor performed the welding in a careless manner. As a result, a fire started which consumed the building, including Jones’ three cold rooms. The contents of the cold rooms were destroyed. Jones sued BPA and the contractor for damages for negligence. Both were found liable. BPA appealed to the Supreme Court of Tasmania (unsuccessfully) and then to the High Court. [page 83] Issue Did BPA owe a duty to Jones to ensure that the contractor exercised reasonable care and skill in carrying out the work? Decision BPA was in control of the building. It authorised the contractor to carry out the dangerous work. Jones had no authority to stop the contractor. Therefore, Jones was in a position of special vulnerability and dependence vis-à-vis BPA. Therefore, BPA owed Jones a duty to ensure that the contractor exercised reasonable care to avoid inflicting foreseeable damage on Jones. In the circumstances, given the riskiness of the operation, BPA had failed to exercise the level of care required. Therefore, BPA was liable to Jones for damages for negligence.

Class actions Class actions have become more popular in Australia in recent years, but have been an important part of the law in the United States for many years.

2.39

Class actions have been common in the United States for a number of years. They are now available in Australia in certain jurisdictions. In the federal jurisdiction, class actions (referred to as representative proceedings) have been available since 1992. They are governed by the Federal Court Act 1976 (Cth) Pt IVA. A representative action requires at least seven complainants. Their claims must arise out of the same, or similar or related, circumstances. The claims must give rise to substantial common issues of law or fact. Graham Barclay Oysters Pty Ltd v Ryan (see [2.48]) was a representative proceeding.

LIABILITY FOR SAFETY DEFECTS UNDER ACL PT 3-5 The law of negligence has been criticised for providing neither a fair system of compensation nor a system of adequate deterrence.

2.40

In 2010 Australian parliaments introduced the Australian Consumer Law (ACL). Part 3-5 of the ACL imposes liability upon manufacturers for the safety of their products. Part 3-5 operates in addition to the tort of negligence. Thus, an injured person could sue for damages under both the tort of negligence and the ACL. However, the injured person is entitled to be compensated only once.45

What is the purpose of Pt 3-5? 2.41

The purpose of Pt 3-5 is to provide a scheme of compensation for persons injured by unsafe goods without the need to prove negligence on the part of the manufacturer.46 Part 3-5 is therefore a scheme of strict liability.

The idea of a strict liability regime is that it concentrates on the objective nature of the product rather than on the behaviour of the producer. Negligence, on the other hand, concentrates on the behaviour of the producer. The result of this concentration on behaviour is that proving negligence tends to be an expensive exercise for a plaintiff. This is especially so where the allegation involves a design or manufacturing defect. The plaintiff faces a costly and complex task in convincing a court that a manufacturer has been [page 84] negligent in its design choices or that its manufacturing processes have been carelessly set up or maintained. Gathering evidence to prove negligent manufacturing can be very expensive. One of the objectives of Pt 3-5 is to redistribute the burden of explaining an accident. The behaviour of the manufacturer becomes a matter of defence rather than an element of the cause of action. Whereas the law of negligence concentrates on the actions of the defendant, Pt 3-5 of the ACL concentrates on the nature of the product. For example: The law of negligence asks the question, ‘Did the defendant take reasonable steps to ensure the product was safe?’. Pt 3-5 ACL asks the question, ‘Was the product as safe as the community was entitled to expect?’.

What are the elements of a breach of Pt 3-5? 2.42

Part 3-5 provides that a manufacturer is liable to pay compensation if the manufacturer: supplies goods in trade or commerce; and the goods have a safety defect; and because of the safety defect:

a person suffers injury (s 138); another person suffers loss because of the first person’s injury (provided that the loss is not because of a business relationship between the two persons) (s 139); goods of a kind ordinarily acquired for personal, domestic or household use, other than the defective goods, are damaged or destroyed (s 140); or land, buildings or fixtures ordinarily acquired for personal use are damaged or destroyed (s 141). Section 138, reproduced below as an example, sets out liability in the case of the goods causing injury to an individual: 138 (1) A manufacturer of goods 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 safety defect. (2) The individual may recover, by action against the manufacturer, the amount of the loss or damage suffered by the individual. (3) If the individual dies because of the injuries, a law of a State or Territory about liability in respect of the death of individuals applies as if: (a) the action were an action under the law of the State or Territory for damages in respect of the injuries; and (b) the safety defect were the manufacturer’s wrongful act, neglect or default.

What is a ‘manufacturer’? An Act of Parliament will often have specific definitions for the expressions used in the Act. When reading an Act, this must always be borne in mind.

2.43

A firm buys a product in bulk and packages it for retail sale. It then puts its own label on the packages. Is the firm a manufacturer? Under Pt 3-5, the answer is ‘yes’. This is because a manufacturer is defined broadly to include a number of situations which would not normally be regarded as manufacturing: s 7. This is done to give consumers maximum protection against the distribution of unsafe

goods. A manufacturer includes: manufacturers, growers (eg, food products) and extractors (eg, mining companies); component-part manufacturers; importers, where the actual manufacturer is located overseas and has no place of business in Australia; assemblers; and [page 85] own branders (a firm that holds itself out as the manufacturer by putting its own label on a product or allows itself to be held out as the manufacturer). A supplier (eg, a retailer) who, having been requested to provide the name of the manufacturer or other supplier, fails to do so within 30 days, may also be regarded as the manufacturer: s 147.

What is meant by the expressions ‘goods’ and ‘supply’? 2.44

Can a person who is injured by faulty electricity sue under Pt 3-5 of the ACL? This depends on whether electricity is a good for the purposes of Pt 3-5. ‘Goods’ include: (a) ships, aircraft and other vehicles; (b) animals, including fish; (c) minerals, trees and crops; (d) gas and electricity; (e) computer software; (f) second-hand goods; and (g) any component part, or accessory, to goods. Can a person who is injured by a defective bicycle which has been hired out by the manufacturer sue the manufacturer under Pt 3-5? This will depend partly on whether hiring out a bicycle is supplying a bicycle. The ACL defines ‘supply’ to include supply by way of sale, exchange, lease or hire-purchase.

What is the meaning of ‘safety defect’ in relation to goods? 2.45

Under s 9 ACL, goods have a safety defect if their safety is not

such as persons generally are entitled to expect. Thus the test is based on objective community expectations and not on the subjective expectations of the person injured. In determining the extent of the safety of goods it is necessary to consider all the circumstances, including (s 9(2)): (a) the manner in which, and the purposes for which, the goods have been marketed; and (b) their packaging; and (c) the use of any mark in relation to them; and (d) any instructions for, any warnings in respect to, doing, or refraining from doing, anything with or in relation to them; and (e) what might reasonably be expected to be done with or in relation to them; and (f) the time when they were supplied by the manufacturer.

This list is probably not exclusive. Other factors that may be relevant in determining whether goods have a defect include: price; nature of the product; and community knowledge of the product; for example, the community expects and accepts a degree of risk with respect to the use of inherently dangerous goods, such as tobacco, guns and knives. Goods are not defective just because, after they were supplied by their manufacturer, safer goods of the same kind were supplied: s 9(3).

Does Pt 3-5 compensate for all types of losses caused by a defective good? 2.46

The various types of losses were set out in [2.42]. Not all losses are covered. For example, partner A could not claim against a manufacturer for losses suffered by the partnership as a result of partner B being injured by a defective good. Damage to commercial property is not covered, but damage to private property is: s 141.

[page 86]

Thomas v Southcorp Australia Pty Ltd [2004] VSC 34 (Supreme Court of Victoria) Facts Mr and Mrs Thomas installed a gas-operated, ducted ‘Vulcan’ heater in their house. The heater was installed by a licensed plumber. Less than a year after the installation, a fire occurred at the Thomas’ house, which caused substantial damage to the home and its contents. No one was at home at the time. The source of the fire was traced to the heater. The heater was automatically activated by a control system that was set to come on when the temperature fell below a certain level. The heater was also designed to switch off automatically once a certain temperature had been reached. The ‘cut-off’ switch in the Thomas’ heater failed. The heater continued to discharge hot air even though the cut-off temperature had been reached. As a consequence, the ducting ignited, causing the house to burn. Issue Was the heater defective? If so, for what losses was the manufacturer liable? Decision The heater was not as safe as the public was entitled to expect (s 9 ACL). The manufacturer of the heater was liable to the Thomases for damages to the house (now s 141) and damage to those household contents that were of a kind ordinarily acquired for personal, domestic or household use (now s 140).

Damage to the defective good itself is not covered. Damage to employees which is covered by workers’ compensation is not covered: s 146. The amount of damages that a plaintiff may be awarded for noneconomic loss (pain and suffering, loss of amenities of life, loss of expectation of life, disfigurement) and loss of earning capacity are now regulated by Pt 3-5. The maximum for non-economic loss is $250,000 (adjusted for inflation where 2004 is the base year). The maximum for loss of earnings is twice average gross weekly earnings.

Damage must be caused by the defective good

2.47

The only damage that is recoverable is damage that was caused by the defective product. This raises issues of causation. There seems to be no reason why the court would not adopt the same approach to Pt 3-5 as is applied to negligence. See Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd (2004) ATPR 42-014. On the issue of causation, see March v Stramare Pty Ltd, in [2.31]. Will the manufacturer be liable only for damage that is foreseeable, as in the tort of negligence, or will the manufacturer be liable for all damage that results as a direct consequence of the defect in the product? The matter has been left to the courts to decide, but has not yet been resolved. [page 87]

What are the defences under Pt 3-5? 2.48

The defences in s 142 include: The safety defect in the goods did not exist at the time of supply by the actual manufacturer. The safety defect in the goods existed only because of compliance with a mandatory standard applicable to the goods. The state of scientific or technical knowledge at the time when the goods were supplied by their actual manufacturer was not such as to enable the defect to be discovered. This is the development risks defence. The goods were comprised in other goods (eg, the finished goods) and the safety defect is attributable only to: the design of the other goods; the markings on or accompanying the other goods; or the instructions or warnings given by the manufacturer of the other goods.

Graham Barclay Oysters Pty Ltd v Ryan [2000] FCA 1099 (Federal Court) Facts A number of persons, including Ryan, contracted hepatitis A in early 1997 as a result of consuming oysters grown in Wallis Lake, New South Wales. The oysters were grown by Graham Barclay Oysters Pty Ltd (Barclay). It is well known that oysters are prone to viral infections and, therefore, all oysters go through a depuration process. It was known, however, that this process is not infallible. Nor is there any absolute test for determining the presence of the hepatitis A virus in any given oyster except ‘flesh testing’. Flesh testing, however, results in the destruction of the oyster. Consequently, only samples can be tested in this way. The problem with sample testing is that the absence of infection in a sample oyster does not guarantee that oysters grown nearby are not contaminated. It is also well known that the danger of viral infection increases after rainfall. Expert evidence established that it was not just good practice but an absolute necessity that, after rainfall, harvesting should cease until adequate testing had been done. Over the years there had been many heavy rainfalls in the Wallis Lake area, but there had never been an outbreak of viral infection in the oysters. In November 1996, the Wallis Lake area experienced heavy rainfall. Barclay suspended harvesting during November, but commenced again in December. Even though Barclay could not be sure that the oysters were free of infection, when they went back onto the market there was no warning to potential buyers that the oysters might be infected. Ryan (and others) consumed some of the oysters and became ill. By February it was clear that Wallis Lake oysters were contaminated, and harvesting was immediately shut down. Ryan sued Barclay for damages under a variety of claims [page 88] including: (1) breach of what is now s 138 ACL (then s 75AD of the Trade Practices Act); (2) breach of duty of care (negligence); and (3) misleading and deceptive conduct (see Chapter 3). Did he succeed? Issue Were the elements of each of the claims for damages made out? Decision Claim under s 75AD of the Trade Practices Act (now s 138 ACL) The Full Court of the Federal Court held that the oysters were defective

within the meaning of s 75AD, but that the state of scientific or technical knowledge at the time when the oysters were supplied by Barclay was not such as to enable the defect to be discovered: s 75AK(1)(c) (now s 142). The only method of detecting the virus in any particular oyster required the destruction of the oyster (‘flesh testing’). Therefore, it could not be said that scientific knowledge was such as to enable the virus to be detected within the meaning of s 75AK (now s 142). The claim for negligence Barclay admitted that it owed a duty of care to Ryan. The issue was whether it had breached that duty. At trial, the court concluded that, in selling oysters grown in waters known to be open to possibly undetectable viral contamination, and without any warning as to this danger, the Barclay companies had breached the duty of care they owed to oyster consumers. On appeal to the Full Court of the Federal Court, it was commented that warning consumers that the oysters could be contaminated was not a realistic solution. Rather, the options for Barclay were either to recommence supply or to shut down until further time had passed. Keifel J held (at [608]) that ‘the Barclays companies should not have supplied oysters for sale until a sufficient period had elapsed by which the risk of contamination could be regarded as acceptable or tests sufficiently indicated that to be the case’. Lee J expressed his opinion in similar terms. Consequently, a majority of the Federal Court held Barclay liable in negligence but on a different basis to the trial judge. Barclay then appealed to the High Court: Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54. By a bare majority (4–3), the High Court decided that Barclay had not been negligent. The duty of care owed by a manufacturer or producer to a consumer is a duty to take reasonable care to avoid injury to the consumer: Donoghue v Stevenson. Whether the actions of the manufacturer or producer are reasonable involves evaluating and weighing a number of competing considerations: Wyong Shire Council v Shirt. According to Gleeson CJ (at [55]): [page 89] The critical question for the [court] was whether, in the light of what was known about the nature and degree of the risk of contamination, that resumption of commercial activity was reasonable. In this case, McHugh J said (at [107]): [T]he reasonable producer would consider the magnitude of the risk of contamination, the degree of probability that such contamination might occur and cause harm to individuals and the expense, difficulty and inconvenience to the Barclay companies of taking the suggested alleviating action.

Giving a warning to customers was not really an option as no one was likely to buy the oysters under those circumstances. Therefore, the only options were to continue harvesting in December or to close down for a longer (unknown) period. Given the past history at Wallis Lake and the state of scientific knowledge, it was reasonable to start harvesting again in December. The three judges in the minority all commented that the issue of negligence against Barclay was essentially a question of fact which had already been decided by the Federal Court in favour of Ryan and consequently should not be overturned. Note Ryan also sued the local council and the state of New South Wales for negligence. The actions were dismissed on the basis that they owed no duty of care to Ryan.

Can a manufacturer exclude liability? 2.49

The provisions of Pt 3-5 may not be excluded or modified: s 150. Therefore, while anything written on the label may be taken into account in determining whether the goods are safe, a manufacturer cannot escape liability by simply using a disclaimer.

Other matters 2.50

Some of the other matters set out in Pt 3-5 include: The regulator (including the Australian Competition and Consumer Commission (ACCC)) has the power to bring representative actions. An action must be brought within three years after the time a person becomes aware, or ought reasonably to have become aware, of the alleged loss, the defect and the identity of the manufacturer. An action must be commenced within 10 years of the supply by the manufacturer of the goods. [page 90]

Glendale Chemical Products Pty Ltd v Australian Competition and Consumer Commission (1999) ATPR 41-672 (Federal Court) Facts Glendale packaged and distributed (but did not manufacture) a product called ‘Glendale Caustic Soda’. Caustic soda is an inherently dangerous substance to humans because of its corrosive effect on organic materials. When mixed with hot water, it produces a highly volatile and dangerous substance. Mr Barnes had a blocked drainpipe. He bought a packet of Glendale Caustic Soda. He read the label, then poured two jugs of hot water into the drain followed by the complete packet of caustic soda. Mr Barnes had been told by a friend to follow this procedure. The mixture quickly came to the boil and shot out of the drainpipe, hitting Mr Barnes and causing considerable damage. Mr Barnes sued for damages for negligence and damages pursuant to s 75AD of the Trade Practices Act 1974 (Cth) (now s 138 ACL). He claimed that Glendale had negligently failed to warn him of the danger that caused his damage. He also claimed that, for this reason, the good was defective. The label was described as follows (at 42,592): The middle panel of the label bears the name ‘Glendale’ and a logo. It identifies the product and warns that it is a poison, is not to be taken and is to be kept out of reach of children. This panel also bears the words ‘Read Safety Directions Before Opening’. The safety directions are set out in the left hand panel. They read ‘Avoid Contact with Eyes and Skin’. This panel also contains a prominent warning that the product is corrosive. First aid directions are given. There is this instruction for use: ‘Always wear rubber gloves and safety glasses when handling caustic soda. Aluminium or zinc covered (galvanised) utensils must not be used’. The right-hand panel contains directions about particular uses of the product: to make hard soap, to make soft soap, ‘general cleaning (drains, floors etc)’ and to remove old paint. In relation to general cleaning, the label instructs: ‘110 g dissolved in 2 litres of water makes a very effective cleaning liquid for the removal of grease from drain pipes, gully traps, concrete floors, barbeques, kitchen utensils and for cleaning toilets’. Nothing is said here, or elsewhere on the label, about the danger of putting caustic soda into hot water. At the foot of this panel are the words: ‘Packed by Glendale Chemical Products Pty Ltd’, with an address in Sydney. Issue Were the elements of the claims for damages made out?

Decision Negligence claim Mr Barnes succeeded in negligence and was awarded damages. Emmett J said: There was a foreseeable risk that a consumer of the Product might use it in the way in which Mr Barnes did. The direction did not say that the only way which the Product could [page 91] be used to clean drains was in solution as described. Further, the evidence … leads to the conclusion that when used in such a way the Product could boil up and erupt. The substance is inherently dangerous … … I consider that in those circumstances, there was a duty on Glendale as the supplier of the Product, to include in the label a warning as to the consequences of using the Product with hot water in a confined space such as a drain. That duty arises from the knowledge that the Product was being marketed for use in connection with cleaning drains and that there would be a reasonable possibility that there could be hot water in the drains. Glendale failed to discharge that duty. It follows that Mr Barnes is entitled to recover damages for the loss and damage suffered as a consequence of that breach of duty ((1998) ATPR 41-632 at 40,973)). Claim under s 75AD (now s 138) Glendale was to be regarded as the manufacturer because it was an own brander. Because of the failure to properly warn customers the product was defective, it did not matter that the product would have been safe if it had been used according to directions. The defect caused Mr Barnes’ loss because he would not have used it in the manner he did if the label had instructed him not to use hot water. Therefore, Barnes was entitled to damages under s 75AD (now s 138). The Full Court agreed with this on appeal.

Figure 2.3 summarises the liability of manufacturers and others under ACL Pt 3-5. Figure 2.4 provides a comparison of the liability of manufacturers under negligence and under ACL Pt 3-5.

OTHER PRODUCT LIABILITY LAWS 2.51

This chapter has dealt with two key laws regulating the safety and quality of products. These are not the only laws. There are a number of other laws, some of which are discussed in later chapters and some of which fall beyond the scope of an introductory text such as this: 1. Breach of statutory obligations in consumer contracts is discussed in Chapter 9. 2. Misleading and deceptive conduct is discussed in Chapter 3. 3. Regulators have power to proclaim mandatory product safety standards, to issue product warnings, to ban unsafe products and to recall unsafe products that have already been put into the distribution chain: see ACL Pts 3-3 and 3-4. These laws are an important element of product safety regulation. However, a full discussion of these laws is beyond the scope of this book. [page 92]

Figure 2.3

A chart of liability under ACL Pt 3-5

[page 93]

Figure 2.4

Comparing liability under negligence and ACL Pt 3-5

[page 94]

ADVICE — LAW IN PRACTICE

When manufacturing and distributing goods:

Businesses should take reasonable care to ensure that the product design, manufacturing processes and product literature are such that, in the ordinary course of events, customers and end-users will not be injured. If there are dangerous aspects to the product and these dangers are not obvious, the business should take careful steps to warn the public. Otherwise, businesses should ensure that their products are as safe as the community generally expects of products of that type. Being properly insured is generally a very good idea given the broad scope of potential liability for defective products.

[page 95]

QUESTIONS Question 1 (a) What must a person who has been injured by the conduct of another prove in order to obtain damages for negligence? (b) What must a person who has been injured by the conduct of another prove in order to obtain a remedy using Pt 3-5 of the Australian Consumer Law? (c) When suing an importer for goods which caused the plaintiff injury, which is likely to be more effective from the plaintiff’s perspective: the tort of negligence or Pt 3-5 of the Australian Consumer Law? (d) What test is used by the courts to determine the standard of care in the tort of negligence? Is this a useful test? (e) Explain what is meant by ‘obvious risk’ in recreational activities, and how it affects potential liability. List three recreational activities involving obvious risk. Give reasons for your answer, and ensure you refer to relevant cases in your answer.

Question 2

Acme Power Ltd operates power transmission lines from the generating plant to a number of towns. The transmission lines run across rural properties. The towns Acme services have no other source of supply. Dan operates a crop-dusting business. Being bored one day with the fairly routine flying required by crop dusting, Dan decided to fly under the power lines. Unfortunately, Dan didn’t make it. The collision brought down one of the lines, causing a total blackout for the township of Whyus. Nicole owns and operates the local cinema. Because of the lack of power Nicole is unable to open the cinema for two weeks. She claims that the loss of power cost her $10,000. Assuming you can prove a duty of care and that it has been breached: (a) Is Nicole’s loss of $10,000 caused by Dan’s breach of the duty of care (failure to exercise reasonable care)? (b) Is this claim too remote? (c) Which cases would you use to substantiate your answer?

Question 3 Billy, a child aged 10 years, was playing golf on the Albert Park golf course when he was attacked by a kangaroo. Kangaroos were commonly found on the golf course. Billy was attacked while searching for his lost ball, which was lying near several small Eastern Grey kangaroos. He thought kangaroos were harmless, but it was the breeding season. The golf course had recently asked permission to cull (kill a small percentage of) the kangaroos because the males became aggressive during the breeding season, especially towards children, and last year, 10 people, all children, had been attacked. There

was no sign or any warning that the kangaroos might be dangerous. [page 96] Which of the following is correct? (a) A duty of care was not owed because the attack was not reasonably foreseeable. (b) The defence volenti non fit injuria applies. (c) The standard of care was breached because the golf course failed to place a sign warning players of the risk of attack by kangaroos. This would have incurred a minimal cost. (d) Billy caused his own injury by walking towards the kangaroos. Please explain your answer. (Hint: See Shorten v Grafton District Golf Club [2000] NSWCA 58.)

Question 4 Siko Industries, an Indonesian firm, manufactures and exports electric knives to the Australian importers, Evasharp Pty Ltd. The most recent batch of knives lacked safety catches but the need for one was not apparent to a new user. Robert is a newly appointed chef at Sliding Rock University. The university has recently purchased an Evasharp knife for Robert’s use, but he has not used this type of knife before. When he switches it on, it starts cutting immediately and he is badly injured. Two of the staff nearby faint at the sight, one breaking her arm as she falls. Currently, the Australian Standards set for motorised knives requires some form of locking device in addition to the power on/off switch.

Discuss whether Evasharp is responsible for Robert’s injuries under Pt 3-5 of the Australian Consumer Law.

Question 5 Xmart Ltd is a nationally known Australian company which distributes household products direct to the public. It has been selling a dishwashing liquid, ‘KleenUp’, at a discount from the normal price with an advertisement that says: ‘Fantastic new product. Your dishes will love it!’. Kleen-Up is imported by Xmart (Imports) Pty Ltd, a subsidiary of Xmart Ltd, from the manufacturer in Bolivia. A customer, Mrs Smith, saw the Xmart catalogue and bought a pack of Kleen-Up. The packaging simply showed a picture of a bottle of Kleen-Up, held by a smiling gentleman wearing rubber gloves surrounded by a clean kitchen, full of sparkling dishes and appliance. Mrs Smith’s house help, Mrs Jones, developed a severe skin rash on the palms of her hands after using the product. Mrs Jones could not work for a week, which meant that, in addition to being unable to work for Mrs Smith, she was unable to play guitar in her band, which was booked to play at a local Spanish restaurant on the weekend. Her absence meant that the band missed out on earning $1000, and a free meal. Mrs Smith also had medical costs totalling $300 (appointments and medication). (a) Who could bring an action using Pt 3-5 ACL, and who would be the defendant(s)? What (if any) further information do you require (eg, whether Mrs Jones used rubber gloves or her bare hands; whether Kleen-Up satisfied any relevant Australian Standards)? (b) Would Mrs Jones be successful if she sued Xmart

Ltd under the tort of negligence? Discuss.

Question 6 Alice alighted the train at Wombat Park station at 11 pm. Alice didn’t read a notice on the platform that said: ‘Caution! Platform lights not working’. Alice also didn’t pay any attention [page 97] to the flimsy plastic tape that had been erected around a large hole in the platform; this was because it was too dark: no lights on the platform were working. Alice fell into the hole in the platform, breaking her ankle. To make matters worse, a group of local youths, seeing her lying there, robbed Alice. They took her backpack, which contained $300 cash, her mobile telephone and her laptop that contained important documents for her architecture business. Alice tried to stop the thieves, but one of them struck Alice in the head with an iron bar, knocking her unconscious. Alice lay on the platform until finally another passenger found her huddled against the wall of the station where she had bravely crawled, trying to reach the emergency call button. The call button did not work because it had been vandalised. A representative from South Eastern Railways Ltd, the organisation responsible for managing the train network, made the following public statement: South Eastern Railways regrets the terrible tragedy, but we were forced to make a tough economic decision to leave the station unmanned after 6 pm. However, we placed emergency call buttons at every station. South Eastern Railways Ltd believes it could do nothing more to protect its patrons. South Eastern

Railway cannot be held responsible for the actions of third parties.

(a) Advise Alice whether she would be successful if she sued South Eastern Railways in the tort of negligence, and explain the remedies she may obtain if successful. (b) Please refer to the public statement made by South Eastern Railways, above. Is this a sound risk management strategy or response? How would you devise a risk management strategy for South Eastern Railways to avoid potential legal liability, giving consideration to the facts contained here (including the fact that gangs are known to frequent the platform)? (c) Refer to the same facts but what could South Eastern Railways do if the reason why the call button failed is because of poor quality materials?

_________ 1 2 3

4

5

6 7 8 9

This view is generally attributed to Winterbottom v Wright (1842) 152 ER 402. Langridge v Levy (1837) 150 ER 863. During the 19th century, negligence cases were restricted to certain relationships; for example, a landowner who negligently caused injury to someone who had been invited on to the property. See Civil Law (Wrongs) Act 2002 (ACT); Civil Liability Act 2002 (NSW); Civil Liability Act 2003 (Qld); Civil Liability Act 1936 (SA); Civil Liability Act 2002 (Tas); Wrongs Act 1958 (Vic); Civil Liability Act 2002 (WA). Sutherland Shire Council v Heyman (1985) 157 CLR 424; Chapman v Hearse (1961) 106 CLR 112 at 115 per Dixon CJ; Modbury Triangle Shopping Centre Pty Ltd v Anzil (see [2.13]) at [99] per Hayne J. Watson v Buckley, Osborne, Garnett & Co Ltd [1940] 1 All ER 174; Hardchrome Engineering Pty Ltd v Kambrook Distributing Pty Ltd [2000] VSC 359. Haseldine v Daw [1941] 2 KB 343. Dove v Banhams Patent Locks Ltd [1983] 1 WLR 1436. Common law negligence claims have been severely curtailed in Victoria, Tasmania and the Northern Territory, all of which have a no fault system for compensation following road accidents.

10 Victoria v Bryar [1970] ALR 809. 11 Tame v New South Wales; Annetts v Australian Stations Pty Ltd [2002] HCA 35 at [7] per Gleeson CJ. 12 See Civil Liability Act 2002 (NSW) s 30; Civil Liability Act 1936 (SA) s 53; Civil Liability Act 2002 (Tas) s 32; Wrongs Act 1958 (Vic) s 73; Civil Liability Act 2002 (WA) s 5S. 13 See Minchillo v Ford Motor Co of Australia [1995] 2 VR 594, a case involving a defective prime mover. A, however, would probably have an action under ACL Pt 5-4 Div 2 (see Chapter 9). 14 Unless a contract existed or the defendant owed a fiduciary duty to the plaintiff. 15 Civil Law (Wrongs) Act 2002 (ACT) Pt 4.2 s 43; Civil Liability Act 2002 (NSW) Pt 1A Div 2 s 5B; Civil Liability Act 2003 (Qld) Ch 2 Pt 1 Div 1 ss 9–10; Civil Liability Act 1936 (SA) Pt 6 Div 1 s 32; Civil Liability Act 2002 (Tas) Pt 6 Div 2 s 11; Wrongs Act 1958 (Vic) Pt X Div 2 s 48; Civil Liability Act 2002 (WA) Pt 1A Div 2 s 5B. 16 For example, in Guides Australia Inc v McMartin [2006] NSWCA 20 at [122] the appellant argued that the judge had failed to consider the social utility of the Guides Movement in awarding damages against the Guides. The argument was rejected on the basis that there was nothing to suggest the trial judge had not considered this. 17 Trenowden v Toyota Motor Corporation Australia Ltd and Toyota Motor Corporation (Japan) [2003] SASC 172. 18 See also Glendale Chemical Products Pty Ltd v Australian Competition and Consumer Commission, in [2.50]. 19 Vacwell Engineering Co v B D H Chemicals [1969] 3 All ER 1681. 20 Voli v Inglewood Shire Council (1963) 110 CLR 74 (engineers); Montague Mining Pty Ltd v Peter L Gore [1998] FCA 1334 (solicitors); NRMA Ltd v Morgan [1999] NSWSC 407 (solicitors and barristers); Reid v Basson [2000] QSC 310 (surgeons). 21 Civil Liability Act 2002 (NSW) s 5O; Civil Liability Act 2003 (Qld) s 22; Civil Liability Act 1936 (SA) s 41; Civil Liability Act 2002 (Tas) s 22; Wrongs Act 1958 (Vic) s 59; Civil Liability Act 2002 (WA) s 5PB (health professionals only). 22 Civil Liability Act 2002 (NSW) Pt 1A Div 4; Civil Liability Act 2003 (Qld) s 14; Civil Liability Act 1936 (SA) s 37; Civil Liability Act 2002 (Tas) s 16; Wrongs Act 1958 (Vic) s 54; Civil Liability Act 2002 (WA) s 5N. 23 See also Collins v Clarence Valley Council [2015] NSWCA 263; Action Paintball Games Pty Ltd v Barker [2013] NSWCA 128. 24 Lormine Pty Ltd v Xuereb [2006] NSWCA 200. 25 Civil Liability Act 2002 (NSW) s 5M; Civil Liability Act 2002 (Tas) s 39; Civil Liability Act 2002 (WA) s 5I. 26 Civil Liability Act 2002 (NSW) s 5L; Civil Liability Act 2003 (Qld) s 19; Civil Liability Act 2002 (Tas) s 20; Civil Liability Act 2002 (WA) s 5H. 27 Falvo v Australian Oztag Sports Association [2006] NSWCA 17. 28 Fallas v Mourlas [2006] NSWCA 32. 29 Great Lakes Shire Council v Dederer [2006] NSWCA 101. 30 Laoulach v Ibrahim [2011] NSWCA 402. 31 Above. 32 In Langham v Connell Point Rovers Soccer Club Inc [2005] NSWCA 461; a spectator

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43

44 45 46

received $233,758 in damages after tripping over an unmarked, low-slung rope that was difficult to see in a dirt carpark and was obstructed by vehicles. Civil Liability Act 2002 (NSW) s 5I; Civil Liability Act 2003 (Qld) s 16; Civil Liability Act 1936 (SA) s 39; Wrongs Act 1958 (Vic) s 55; Civil Liability Act 2002 (WA) s 5P. Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18. Civil Law (Wrongs) Act 2002 (ACT) s 45; Civil Liability Act 2002 (NSW) s 5D; Civil Liability Act 2003 (Qld) s 11; Civil Liability Act 1936 (SA) s 34; Civil Liability Act 2002 (Tas) s 13; Wrongs Act 1958 (Vic) s 51; Civil Liability Act 2002 (WA) s 5C. See, for example, Samaan bht Samaan v Kentucky Fried Chicken Pty Ltd [2012] NSWSC 381. See Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound (No 1)) [1961] 1 All ER 404; Mount Isa Mines Ltd v Pusey (1971) 125 CLR 383; Schneider v Hoechst Schering Agrevo Pty Ltd [2001] FCA 102. See March v Stramare Pty Ltd, in [2.31]; Moore v Woodforth, in [2.35]. Civil Liability Act 2002 (NSW) s 5R; Civil Liability Act 2003 (Qld) s 23; Civil Liability Act 1936 (SA) s 44; Civil Liability Act 2002 (Tas) s 23; Wrongs Act 1958 (Vic) s 62; Civil Liability Act 2002 (WA) s 5K. The Latin phrase volenti non fit injuria is often used instead of the expression ‘voluntary assumption of risk’. See Insurance Commissioner v Joyce (1948) 77 CLR 39. Civil Liability Act 2002 (NSW) ss 5F, 5G; Civil Liability Act 2003 (Qld) ss 13, 14, 15; Civil Liability Act 1936 (SA) ss 36, 37, 38; Civil Liability Act 2002 (Tas) ss 15, 16, 17; Wrongs Act 1958 (Vic) ss 53, 54; Civil Liability Act 2002 (WA) ss 5F, 5H, 5N. Civil Law (Wrongs) Act 2002 (ACT) Ch 2; Civil Liability Act 2002 (NSW) Pt 8; Personal Injuries (Liabilities and Damages) Act 2003 (NT) Pt 2; Civil Liability Act 2003 (Qld) Ch 2 Pt 3 (volunteers); Civil Liability Act 1936 (SA) s 74 (good Samaritans); Civil Liability Act 2002 (Tas) Pt 10; Wrongs Act 1958 (Vic) Pt VIA; Civil Liability Act 2002 (WA) Pt 1D. See Kondis v State Transport Authority (1986) 154 CLR 672. Part 3-5 ACL replaced Pt VA of the Trade Practices Act 1974 (Cth). Part 3-5 ACL is based on Pt VA of the Trade Practices Act 1974 (Cth) which was introduced in the early 1990s.

[page 99]

CHAPTER 3

MISREPRESENTATION AND UNCONSCIONABLE CONDUCT: UPHOLDING THE BASIC NORMS OF COMMERCIAL CONDUCT

CONTENTS Objectives of this chapter Setting the scene: Creative marketing or legal blunder? Introduction and outline of chapter Fraudulent misrepresentation Step 1: Was the representation a false statement of fact? Step 2: Did the representation induce the plaintiff to act in some way? Step 3: Did the representor know the misrepresentation was false? Step 4: Did the misrepresentation cause the plaintiff to suffer a loss? Negligent misrepresentation Step 1: When is a duty of care owed? Step 2: What standard of care is owed? Step 3: Remoteness of damage Misleading or deceptive conduct Outline of ACL s 18 Conduct of directors, employees and agents Conduct must be ‘in trade or commerce’ When is conduct misleading or deceptive? [page 100] The role of exclusion clauses and disclaimers Remedies for breach of s 18 Australian Securities and Investments Commission Act Corporations Act Unconscionable conduct Unconscionable conduct as part of judge-made law Unconscionable business transactions under the ACL

Other unfair conduct Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to: describe and apply three key laws governing commercial misrepresentation: – liability for fraud; – liability for negligence; – liability under s 18 of the Australian Consumer Law (ACL) for misleading or deceptive conduct; and describe and apply key laws governing unconscionable or unfair business conduct.

[page 101]

SETTING THE SCENE: CREATIVE MARKETING OR LEGAL BLUNDER? What’s the harm in a little marketing exaggeration? Shouldn’t consumers expect a healthy degree of exaggeration in a highly competitive marketplace? An advertisement in the popular magazine New Idea asked readers to buy a ‘GOLDEN REPLICA OF 400 DAY CLOCK’. A 400-day clock is a 17th-century clock famous for its accurate timekeeping. According to the advertisement, buy one of these replicas and your ‘envious guests’ will ‘gaze with amazement and intrigue when the counter balances turn constantly as they have for countless years to keep perfect time on the original unique masterpieces of craftsmanship’. So, what did you get if you bought one of these replicas? According to the evidence that came out in court, you got a plastic and metal box which didn’t tell the time, but (in the words of one judge) ‘no doubt to the heightened amazement and intrigue of the abovementioned envious guests, played “Edelweiss”’. Do you think a court would find this to be a harmless bit of creative advertising or unlawful conduct?

INTRODUCTION AND OUTLINE OF CHAPTER

3.1

Until the consumer protection movement changed community attitudes, the law was quite tolerant of sharp commercial practices. In general, the law expected people to look after their own interests. Businesses were given a great deal of latitude in the manner in which they conducted themselves. Of course, certain conduct was prohibited — for example, criminal activities (such as assault and intimidation) were naturally not permitted. Fraud was also not permitted; however, fraud was quite narrowly defined and notoriously difficult to prove. Certain other blatantly unfair activities were also prohibited, such as taking advantage of the sick and dependent. Otherwise, commercial conduct was largely unregulated. This situation changed in the second half of the 20th century and continues to do so. The common law developed a rule of damages for negligent misrepresentation. This meant that commercial people had to take care not to hurt others by their careless representations or statements. Carelessness now had consequences (even where there was no contract). This was a significant intrusion upon the freedom of commercial parties. It imposed a standard of conduct that was much higher than in the past. Shortly after the common law accepted a rule of damages for negligent misrepresentation, the Australian Parliament introduced the Trade Practices Act 1974 (Cth). This contained provisions that prohibited misleading or deceptive conduct in trade or commerce. Although the provisions appeared in a part of the Act headed ‘Consumer Protection’, the courts held that the provisions applied to all conduct in trade or commerce, whether or not a consumer was involved. Thus, a company, such as BHP, could engage in misleading or deceptive conduct even in its dealings with another giant corporation. If it did so, there would be remedial consequences (damages, injunctions, other orders); and, in [page 102]

certain circumstances, there may even be criminal sanctions (fines). Because the law was primarily designed to protect consumers, the courts interpreted the rules broadly. Thus, the Trade Practices Act imposed on Australian businesses a standard of conduct that had not previously existed (or had existed in only a limited form). This has been continued under the Australian Consumer Law (ACL). Later, the Australian Parliament also extended the common law’s rather narrow notion of unconscionable conduct. At common law, unconscionable conduct was actionable only when it occurred during the forming of contracts. Parliament took the idea and applied it to a range of business dealings. The ACL has recently strengthened and expanded this trend. Now, if firms act in an unconscionable manner in the supply or acquisition of goods and services, they are liable to penalties, damages, injunctions and other orders. This chapter examines the rules on misrepresentation, misleading or deceptive conduct and unconscionable conduct. The objective is to develop a broad understanding of what is an acceptable manner of behaving when doing business in Australia. Of course, there are specific rules dealing with specific situations, but the rules discussed in this chapter apply in all situations. This chapter discusses these rules (standards of conduct) under the following headings: fraudulent misrepresentation; negligent misrepresentation; misleading or deceptive conduct; and unconscionable conduct.

FRAUDULENT MISREPRESENTATION Representor: the person who makes the representation. Representee: the person to whom the representation is made.

3.2

Fraudulent misrepresentation (also called deceit) is a tort. This means that the party who has been fraudulently deceived can sue for damages. With the growth of negligence and, more importantly, misleading or deceptive conduct, fraud has become less important in the regulation of commercial practices. The major difficulty with fraud is satisfying the test for intent laid down in Derry v Peek (1889) 14 App Cas 337 (see [3.9]). Figure 3.1 demonstrates what is necessary to establish fraudulent misrepresentation (the tort of deceit). [page 103]

Figure 3.1

Elements of fraudulent misrepresentation

Step 1: Was the representation a false statement of fact? 3.3

In all cases involving misrepresentation, the starting point is to identify the alleged misrepresentation. Most often it will be an express statement. However, this is not necessary. A misrepresentation may be made by conduct. Only after isolating the alleged misrepresentation is it possible to analyse whether it is a false statement of fact.

Statement of fact or merely an opinion?

3.4

Whether a statement is one of fact will often depend on the circumstances in which it is made. [page 104]

Smith v Land and House Property Corporation (1884) 28 Ch D 7 (UK Court of Appeal) Facts During negotiations for the sale of a hotel, Smith (the vendor) told the purchaser that the hotel was ‘let to Mr Frederick Fleck (a most desirable tenant)’. Mr Fleck was, in fact, a very slow payer who had constantly to be pressured to pay the rent. Land and House Property Corp relied partly on Smith’s representation in deciding to agree to purchase the hotel. When it discovered the truth, the purchaser refused to proceed with the sale. Smith brought an action to force the purchasers to proceed (an action for specific performance). The purchaser was entitled to get out of the contract if it was induced into the contract by fraud. The purchaser argued that Smith’s representation about the tenant was fraudulent. Smith argued it was not fraudulent because it was only an opinion. Issue Was the representation made by Smith about the tenant Fleck a statement of fact or merely an opinion? Decision Bowen LJ said (at 15): [I]f the Facts are not equally known to both sides, then a statement of opinion by the one who knows the Facts best involves very often a statement of a material fact, for he impliedly states that he knows Facts which justify his opinion. In the circumstances of this case, Smith knew the facts about Fleck, whereas the buyer did not. No reasonable person, aware of such facts, could have held the opinion that Fleck was a desirable tenant. Therefore, Smith’s statement about Fleck was a false statement of fact. As Smith knew the statement to be false it was fraud. As the fraud induced the purchaser into the contract, the purchaser was entitled to refuse to proceed with the sale.

Statement of fact or a mere puff? The law has always permitted the seller a certain licence in puffing 3.5 its own goods. Expressions such as ‘best in the world’ and ‘finest quality’ are usually not representations of fact but rather selfevident exaggerations. Silence as a statement of fact An opinion may amount to a statement of fact in appropriate circumstances. Silence may also amount to a statement of fact in appropriate circumstances.

3.6

Normally, mere silence will not constitute a statement of fact. A party to a contract is generally under no duty to disclose to the other party matters relevant to the contract. However, this rule is subject to the following exceptions: Half-truth. To advertise that a named and famous singer would appear at a concert and then to produce an unknown person who just happens to have the same name would be a misrepresentation. The statement is literally true but conveys another meaning which [page 105] is untrue. The vendor of a business who told the purchaser that he was ‘in financial difficulty’, but omitted to add that he had been made bankrupt the preceding month, had engaged in deceit: Re Hoffman; Ex parte Worrell v Schilling (1989) 85 ALR 145. Altered circumstances. Where a representation, although being true at the time of telling, has to the knowledge of the representor ceased to be true, it will amount to a misrepresentation if the representor does not mention this fact.

Lockhart v Osman [1981] VR 57 (Supreme Court of Victoria) Facts The vendor described certain cattle advertised for sale as being ‘in excellent condition, suitable for breeding’. Following the advertisement, but before the sale, the herd from which the cattle were to be drawn suffered an outbreak of a virulent disease called brucellosis. The vendor failed to mention this to the buyer or to make any proper tests as to whether the cattle to be sold were infected. The buyer sought damages for fraudulent misrepresentation (and breach of contract). Issue Was the vendor’s statement a fraudulent misrepresentation? Decision The court held the vendor’s failure to speak amounted to misrepresentation (a false statement of fact). At best, the failure was reckless and therefore amounted to fraud. (The seller was also found to be in breach of contract.)

Was the representation false? Occasionally, there may be difficulty in determining whether a 3.7 misrepresentation is false. For example, the representor may make a statement which is literally true but which conveys a false message to the reasonable representee. Such a representation would be regarded as false.

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 (High Court) Facts The vendor of a commercial property produced a lease which showed the amount of rent the tenant was paying. The amount of the rent was important to the purchaser. The vendor did not reveal that there was another agreement between the vendor and the tenant under which the tenant had received a rent-free period of three months and also the equivalent of a year’s free rental to outfit and stock the premises. [page 106]

Issue Although the amount of rent shown in the lease was technically correct, was it a fraudulent misrepresentation to omit any mention of the second agreement? Decision The court held that a reasonable representee would consider such silence to be a fraudulent misrepresentation. The vendor’s failure to speak amounted to misrepresentation.

Step 2: Did the representation induce the plaintiff to act in some way? 3.8

The representation must induce the innocent party to act in a particular way (eg, to enter into a contract) and it must be reasonable for the innocent party to rely on the representation. The representation need not be the main inducement. It is sufficient that it was one of the factors, among many, that attracted the representee to act in the way he or she did. If the representee did not rely on the representation, there can be no action for misrepresentation.

Holmes v Jones (1907) 4 CLR 1692 (High Court) Facts This case involved the sale of a pastoral property and business in Queensland. Holmes (the vendor) overstated the number of cattle in a letter to the purchasers. The purchasers sent their agent out to check the property and he was given the correct numbers by the property manager. The purchasers brought a court action against the vendors based on the misrepresentation. Issue Did the evidence reveal that the buyer relied on the vendor’s misrepresentation? Decision The court rejected an action brought on the basis of misrepresentation because the purchasers had not relied upon the misrepresentation; they had relied on the report of their agent.

There is no obligation on a representee to check whether a representation is true.

Once the representation has been made, the representee may rely on it without making any further investigation. The representee is under no duty to investigate the truth of a representation. It is not a defence to fraud to argue that the plaintiff would have known the truth if he or she had exercised reasonable care or diligence.1 [page 107]

Redgrave v Hurd (1881) 20 Ch D 1 (UK Court of Appeal) Facts This case involved the sale of a legal practice. The vendor stated that receipts were about £300 to £400 per year. Summaries of account only showed an annual taking of about £200 in each of the previous three years. The purchaser asked where the rest of the receipts came from. The vendor claimed they came from ‘other business’ and then produced some diaries and a daybook which were said to confirm this. The purchaser, perhaps somewhat carelessly, just glanced at the documentation without analysing it. The documents would have revealed that takings from ‘other business’ amounted to only £5 per annum. The purchaser went ahead with the contract but sued for misrepresentation when he discovered the truth. The vendor argued that, as the purchaser had been careless in not examining the documentation, he could not rely on the misrepresentation. Issue Did the purchaser have an obligation to investigate the truth of the vendor’s statement? Decision The Court of Appeal decided in favour of the purchaser. Provided the representation was material in the sense of being likely to induce the purchaser to enter into the contract, the courts will infer that it did induce the

representee to enter into the contract unless the representor can show that the representee knew the representation was false or did not rely upon it. There was no obligation on the purchaser to investigate the vendor’s claim even if the evidence was readily available.

A person may not sue on a fraudulent misrepresentation that was not directed at him or her and was not intended to induce him or her into acting on the misrepresentation.

Peek v Gurney (1873) LR 6 HL 377 (House of Lords) Facts The misrepresentation was contained in a document (called a prospectus) which was intended to induce persons to subscribe for shares in a company. The plaintiff did not subscribe for shares from the company but, rather, purchased his shares on the open market some six months later. The vendor argued that the plaintiff could not rely [page 108] on the document because he was not one of the persons to whom the document was directed. Issue Was the vendor correct in its assertion that only those to whom the misrepresentation is directed can sue for fraudulent misrepresentation? Decision The House of Lords held that the plaintiff did not fall within the class of persons to whom the prospectus was directed (ie, persons who subscribed for shares) and, therefore, he was unable to rely on any representations made in the prospectus.

Peek v Gurney has been applied many times in Australia. However, the fraudulent representation does not have to be communicated directly to the plaintiff, provided that it is communicated to another person with the intention that it will be

passed on to the plaintiff or a class of persons which includes the plaintiff. See, for example, Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337.

Step 3: Did the representor know the misrepresentation was false? Fraud is a serious allegation to make against a person. The courts have always insisted that it be clearly proved. The difficult element has been proving intent — that is, that the defendant knew the representation was false.

3.9

To constitute fraud, there must be more than negligence. The defendant must have intended the false representation, or at least been reckless as to its truth: Derry v Peek (1889) 14 App Cas 337 (see the ‘Law in context’ feature below). The test for the third element of fraud is a subjective one and often difficult to prove. For the difference between negligence and recklessness, consider the following: 1. Vincent is the owner of a business which has just been put on the market for sale. Vincent tells a prospective purchaser that the overall gross profit margin is about 25 per cent. Vincent is a salesperson at heart, with a bad head for figures and even less understanding of what the figures mean. At the time he makes the statement, he believes that was the figure given to him by his accountant. In fact, the true figure for the gross profit margin is 15 per cent. 2. Vincent is the owner of a business which has just been put on the market for sale. Vincent tells a prospective purchaser that the overall gross profit margin is about 25 per cent. Vincent remembers that he discussed a number of matters with his accountant and, at some stage, the figure of 25 per cent was mentioned. However, he cannot remember what it was in connection with. It might have been gross profit margin. He tells the purchaser without bothering to check.

In the first case, Vincent has been careless but not fraudulent. He believed his representation. In the second case, Vincent has been more than careless. He has been reckless. He had no real belief in his representation. [page 109]

Developing new laws: the limitations of the common law — trams and fraud Great Britain in the 19th century was a time of great change. The Industrial Revolution had taught society how to exploit the technological innovations of the age by mobilising capital in new and innovative ways. The core business structure for these ventures was the joint stock company. Many of these ventures were highly risky. While the successful investor stood to make staggering profits (much greater than for traditional forms of investment), there was no guarantee that the venture would be successful. Most investors rely heavily on the information supplied to them by the people who promote investment companies. Consequently, it is important that the information used to attract investors be accurate. This is not just a matter of protecting the wealth of the actual investors involved; if economic resources are misdirected because of misinformation, the whole community suffers. One of the core advances of the industrial age was the commercialisation of steam power. This revolutionised many industries, including the transport industry. Trains significantly reduced the risk and cost of moving people and goods over what were then regarded as large distances. In the wake of the remarkable success of trains, there were proposals to replace horse-driven trams with steam-powered trams. Trains and trams are key elements of public infrastructure. They raise many issues of vital importance to the public. Therefore, it is generally accepted that the government ought to play some role in their development. So it was in Great Britain. By Act of Parliament (passed in 1870), no person could operate a tram company without the approval of parliament. Each approval took the form of an Act of Parliament. The Act approving the formation of a tram company invariably required the company to obtain further approval from the Board of Trade and the relevant local authorities. The Board of Trade had responsibility for ensuring that all tram proposals adequately protected the public. In 1882, the Plymouth, Devonport and District Tramways Company was created by Act of Parliament. The Act permitted the company to operate a

tram system using steam power in Plymouth and Devonport subject to further approval from the Board of Trade. The company submitted an application to the board for the necessary approval. Before approval was granted the directors — the chairman of whom was William Derry — issued a prospectus inviting members of the public to invest in the company. The prospectus contained this statement: ‘The company has the right to use steam or mechanical power instead of horses’. Sir Henry Peek invested £4000 in 400 shares in the company. This was a lot of money in the 1880s. The Board of Trade subsequently refused to approve the use of steam power and, in 1885, the company was wound up. The investors lost their investment. Sir Henry decided to sue the directors for the misleading information contained in the prospectus. He issued common law proceedings claiming damages for deceit (fraud). The following facts of the case were determined at trial: (1) the statement in the prospectus was misleading; (2) the statement induced Sir Henry to buy the shares; and (3) in making the statement, the directors had been careless (ie, negligent), but they had not been dishonest. The key issue was one of law and may be stated in the following way: As a matter of law, what did Sir Henry have to prove to win his case in deceit? Was it enough for Sir Henry to prove the directors had been careless, or did he have to prove a dishonest intent? [page 110] The Court of Appeal held that a person could be liable for damages for deceit if they had been careless even if there was no evidence of dishonesty. Therefore, Sir Henry was entitled to damages. This looked like a sensible decision. It seems reasonable to require company directors to check the details of prospectuses carefully before issuing them. After all, the directors are generally in a far better position to ascertain the truth of a matter than are prospective investors. Derry and the other directors appealed to the House of Lords. All their Lordships agreed that to obtain damages for misrepresentation it was necessary to prove that Derry and the others knew the representation was false or were reckless as to its truth. Negligence was not enough. According to their Lordships this had been the common law position for many years. One of the Law Lords was so convinced of this that he did not even think it was necessary to cite a case in support. Lord Herschell, on the other hand, cited a whole list of cases which he said settled the matter. Their Lordships were aware their decision might cause problems. They all stressed the importance of company promoters and directors being diligent about the information they gave to the investing public. Lord Herschell even went so far as to say that investors (like Sir Henry) should have a cause of action. However, in his opinion, it was not up to the courts to change the common law: ‘If it is to be done, the legislature must intervene …’.

The decision of the House of Lords was widely criticised, both by the public and by the legal profession. Many thought it was clearly wrong. Parliament was so concerned that, in the following year, it passed the Directors’ Liability Act 1890 (UK). This Act made promoters and directors liable for carelessly supplying false information to investors. The common law, however, remained unchanged for nearly 75 years. Only in 1964, in the Hedley Byrne case (see [3.17]), did the House of Lords accept that the common law recognised an action for damages for careless or negligent misrepresentation. Australia followed the position in the United Kingdom. Damages for negligent misrepresentation was only recognised in Australia in Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556.

Step 4: Did the misrepresentation cause the plaintiff to suffer a loss? 3.10

A plaintiff claiming compensation must establish a causal connection between the fraud and the loss. If a causal connection is established, the defendant generally cannot rely on a disclaimer to exclude liability for fraud. It would be wrong to allow a person to take advantage of their own deceit: Boyd & Forrest v Glasgow and South Western Railway Co 1915 SC (HL) 20.

NEGLIGENT MISREPRESENTATION 3.11

Negligent misrepresentation or misstatement is part of the tort of negligence. It has been growing in importance, especially for professional advisers. As shown in Figure 3.2, the three steps in establishing damages for negligent misrepresentation are the same as for other types of negligence. [page 111]

Figure 3.2

Elements of negligent misrepresentation

L Shaddock and Associates Pty Ltd v Parramatta City Council (1981) 55 ALJR 713 (High Court) Facts Shaddock and Associates Pty Ltd was a land developer interested in buying certain land in Parramatta. It enquired of the Parramatta Council whether there were any proposals for road widening which might affect the property. The council replied in the negative. Shaddock purchased the land. In fact, the council had a proposal to acquire compulsorily up to one third of the land for road-widening purposes. The plaintiff (Shaddock) was unable to sue for breach of contract and so sued for the tort of negligent misstatement. Issue Shaddock argued that the council owed it a duty to take reasonable care in

responding to Shaddock’s enquiry. The council denied that it owed any duty at all to Shaddock. Who was correct? If Shaddock was correct, had the council breached its duty? Decision The High Court held that the council owed a duty of care to the plaintiff. It further held that the council had breached its duty and was therefore liable to compensate the plaintiff.

[page 112]

Step 1: When is a duty of care owed? 3.12

Until 1963, the courts restricted negligence to acts, such as manufacturing a product or building a bridge or driving a car. They consistently rejected the idea that a duty of care was owed for mere representations. The primary reason for this was a fear of imposing an intolerable burden on business. It was said that if negligence was extended to cover mere representations, it would expose professional and business persons to liability ‘in an indeterminate amount for an indeterminate time to an indeterminate class’.2 The view was that damages for misrepresentations should only be available if the representation was part of a contract, or if fraud was involved. This view was criticised3 and was eventually overturned by the House of Lords in Hedley Byrne v Heller (see [3.17]). Since Hedley Byrne v Heller, there is no doubt that negligence applies to words as well as to acts.

A duty of care can be owed when giving advice or supplying information 3.13 The action for negligent misrepresentation applies to both the giving of advice4 and the supply of information.5 In Shaddock’s case (see [3.11]), Mason J approved the test applied by Barwick CJ in Mutual Life and Citizens’ Assurance Co

Ltd v Evatt (1968) 122 CLR 556 (MLC v Evatt) concerning the existence of a duty of care. Mason J said (at 723): [W]henever a person gives information or advice to another upon a serious matter in circumstances where the speaker realises, or ought to realise, that he is being trusted 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 act on the information or advice, the speaker comes under a duty to exercise reasonable care in the provision of the information or advice he chooses to give.

The representee must reasonably rely on the advice or information 3.14 It is critical not only that the plaintiff relied on the defendant’s advice or information, but also that the reliance was reasonable in all the circumstances. For example, in Ta Ho Ma Pty Ltd v Allen (1999) 47 NSWLR 1, it was held that it was not reasonable for the plaintiff to rely on a property valuation nine months after it had first been supplied, without making further inquiries. Despite suggestions to the contrary by the Privy Council in MLC v Evatt, it is not necessary to prove that the defendant had a special skill in giving the advice or information that was provided. Of course, whether the defendant had special skill is still relevant to determining whether the plaintiff’s reliance was reasonable, but it is not a necessary element of negligent misrepresentation. [page 113] Where a misrepresentation is made in the lead-up to a contract, the representee may have an action not only for negligent misrepresentation but also for breach of contract and misleading or deceptive conduct.

Tepko Pty Ltd v Water Board (2001) 206 CLR 1 (High Court) Facts Tepko owned some rural land which it wished to subdivide. To further the scheme, Tepko borrowed money from its bank on security of its land and

business assets. To have the land subdivided Tepko was required to connect the land to the local water supply. The Water Board would do this only if it involved no cost to the board. Tepko sought an estimate of the cost but the board refused to supply it, first, because it was under no statutory obligation to do so, and, second, because it was concerned about setting a precedent. By 1985 the bank was threatening to put Tepko into receivership for nonpayment of interest. The bank would postpone receivership proceedings only if Tepko produced evidence that the subdivision would proceed, and this in turn depended on obtaining an acceptable estimate as to the likely costs of connecting to the water supply. Eventually, under pressure from Tepko, the board reluctantly supplied a costing of $2.5 million to connect. This was considerably more than the bank was expecting and so the bank proceeded with the receivership. In fact, the board’s estimate was about three times higher than the actual cost. At no stage was the board aware that the estimate was required by the bank, nor was the board aware that the bank was threatening receivership. Supplying an initial costing that was on the high side of a rough estimate was a common practice. Tepko’s professional advisers should have been aware of this. However, it was unlikely that the bank was aware of the practice. Tepko sued the Water Board for negligence. Issue Whether the Water Board owed a duty of care to Tepko in providing the estimate. Decision The decision demonstrates the sharp divisions that often result when the law of negligence is applied to factual situations. The High Court split 4–3 on the issue of duty of care. The majority held that the board owed no duty of care to Tepko. Two factors seemed critical to their decision. First, the board did not know, and there was no reason why it should have suspected, that the estimate would be relied on by a bank to make such an important decision (ie, whether to place Tepko into receivership). Second, in all the circumstances it was not reasonable for Tepko to rely on the rough estimate; the board was reluctant to provide the estimate, the estimate was never intended to be anything but a rough, provisional figure, and Tepko had expert advisers. The minority, on the other hand, took a very different view. First, the board knew that Tepko would rely to some extent on the information. It knew that the inquiry was a serious matter. It was not necessary that the board know the precise use to which the information was to be put. Second, Tepko’s reliance was reasonable. There was no issue of an indeterminate number of plaintiffs. Tepko could not avoid dealing with the board (which was in the position of a monopolist). Once the board decided to supply the estimate, it was irrelevant that it was reluctant to do so.

[page 114] During pre-contractual negotiations, the parties may owe a duty of care to one another.

Esso Petroleum Co Ltd v Mardon [1976] 2 WLR 583 (UK Court of Appeal) Facts Mardon had taken the lease of a petrol station from Esso after Esso had stated that the garage would be selling 200,000 gallons of petrol in three years. In fact, the garage never sold more than 70,000 gallons despite the best efforts of Mardon. Esso had based its prediction on plans which had been altered at the insistence of the local planning authority. Esso had failed to revise its estimate in the light of this development. Esso sued for breach of the lease. Mardon counter-claimed for negligent misrepresentation and/or breach of contract (warranty). Issue Did Esso owe a duty of care to Mardon in making pre-contractual representations? Decision Mardon succeeded on both claims. The prediction made by Esso was a term of the contract and therefore Mardon could sue for breach of contract. There was a special relationship between Esso and Mardon which meant that Esso owed a duty of care to Mardon when advising about future petrol sales. Esso had been negligent in giving that advice, Mardon had reasonably relied on it and therefore Mardon could sue for damages in tort for negligence.

This means that professional advisers, such as lawyers, accountants and engineers, owe a duty to take reasonable care in providing services to their clients in both contract and tort.6 The spectre of indeterminacy: the example of auditors 3.15 In the cases considered so far, the person giving advice or information has done so at the request of the plaintiff. What happens where the advice or information is not provided at the request of the plaintiff? San Sebastian Pty Ltd v The Minister

(1986) 162 CLR 340 established that a duty of care could be owed in these circumstances. However, a precise description of the factors that will give rise to the duty has proved elusive. To illustrate the problem and the court’s approach to finding a solution, it is instructive to consider the position of the auditor. [page 115] Figure 3.3

Auditors and the duty of care

The question whether the law of negligent misrepresentation should apply fully to auditors has presented the courts with a problem that has serious business implications. The solution depends more on policy considerations than on purely legal ones.

An auditor’s job is to scrutinise the accounts of a company and decide whether the accounts are a true and fair reflection of the company’s financial position. The audit report is relied upon by the directors of the company to make decisions for the company. This is the primary purpose of the audit. Yet the audit is a public document and is relied upon by others, including shareholders, investors and lenders such as banks.

3.16

Because the auditor has a contract with the company itself, the auditor owes a contractual duty to exercise reasonable care in preparing the audit.7 The auditor will also owe a duty of care in tort to the company. In contrast, the shareholders, investors and lenders do not have a contract with the auditor. Therefore, no duty is owed to these groups in contract law. They will have to sue in tort. In order to succeed, the shareholder, investor or lender will first have to establish that the auditor owed them a duty of care. It is not enough simply to prove that the auditor was careless or negligent. The cases demonstrate that it will not be easy to establish a duty of care. The leading Australian case is Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Esanda); see below.

Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 71 ALJR 448 (High Court) Facts Peat Marwick Hungerfords (PMH) was the auditor for a company called Excel Finance Corporation Ltd (Excel). As auditors, PMH certified the accounts of Excel for the year ending June 1989. Esanda was a finance company which made loans to a number of [page 116] companies associated with Excel. As security for the repayment of these loans, Esanda accepted guarantees from Excel. Esanda claimed that its decision to be involved in the loans was due in part to its reliance on the audited accounts of Excel. There was no suggestion that the audit had been done specially for Esanda. Esanda claimed that the audit had been done negligently. Esanda sued for negligence. PMH argued that it owed no duty of care to Esanda. Issue Did PMH owe a duty of care to Esanda in auditing Excel’s accounts? Decision The High Court held that PMH owed no duty of care to Esanda.

Unfortunately, the judgments do not establish a single test for determining the existence of a duty of care. All justices rejected the idea that a duty could exist based simply on reasonable foreseeability. The fact that the auditors were aware their audits would be relied upon was not sufficient to establish a duty of care. Nor was it sufficient that the plaintiffs had actually relied on the audits. Dawson J expressed the view that the reasonableness of the reliance was the key in these cases. One of the ways to establish reasonable reliance is to show that the auditors’ intention was to induce the plaintiff to act on the advice or information. However, Esanda had failed to plead inducement or anything else that would establish reasonable reliance. Toohey and Gaudron JJ held that a duty could not exist unless there was an assumption of responsibility by the defendant or reasonable reliance by the plaintiff. At the very least, reasonable reliance probably required knowledge by the defendant that the plaintiff would act on the advice or information in the way that it had acted, without further inquiry. There was no evidence of this. Esanda’s reliance was not reasonable. McHugh J provided the most definite statement of a test. He said (at 466): [T]he position in Australia to date with respect to liability for pure economic loss caused by negligent misstatement is that, absent a statement to a particular person in response to a particular request for information or advice or an assumption of responsibility to the plaintiff for that statement, it will be difficult to establish the requisite duty of care unless there is an intention to induce the recipient of the information or advice, or a class to which the recipient belongs, to act or refrain from acting on it. Mere knowledge by a defendant that the information or advice will be communicated to the plaintiff is not enough.

Ultimately, the issue of duty seems to rest on the reasonableness of the plaintiff’s reliance. The problem is that it is not yet clear what reasonableness entails. Certainly, McHugh J appears to have preferred the view that reasonable reliance in cases such as the auditor cases will probably only exist if the audit or financial reports were prepared for the purpose of inducing the representee (or a class of persons to which the representee belonged) to act in a particular way. [page 117]

R Lowe Lippman Figdor & Franck v AGC (Advances) Ltd (1992) 2 VR 671 (Supreme Court of Victoria) Facts AGC (Advances) Ltd was a finance company and the main creditor of Lyvetta Pty Ltd. Lowe Lippman were auditors to Lyvetta. Lyvetta requested an increase in its borrowings from AGC. During discussions between Lyvetta and AGC, Lyvetta said that the profit for the past year was about $100,000. Before making the advances, AGC wished to examine an audited copy of Lyvetta’s financial reports. An officer of AGC phoned the auditor and requested the audited accounts ‘for review purposes’. The officer also asked the auditor whether the profit figure was $100,000 as stated by Lyvetta. The auditor replied that the profit would be a lesser sum than that but declined to disclose the actual figure. The accounts disclosed a profit of $23,955. AGC decided to increase Lyvetta’s loan facility. In fact, the accounts were carelessly produced and should have shown a loss of over $200,000. Lyvetta went into liquidation. AGC sued for the tort of negligence (negligent misrepresentation). The negligent misrepresentation was said to lie in the audited reports. Issue Did Lowe Lippman owe a duty of care to AGC in providing the audited accounts? Decision The Supreme Court decided in favour of the auditors on the basis that: 1. the only representation made by the auditors was the signed accounts; 2. there was no evidence that the purpose (or one of the purposes) of the auditors in making the representation was to induce AGC (or a class of persons to which AGC belonged) to act on the representation; and 3. the fact that the auditors knew or ought to have known that AGC was likely to rely on the representation (audited reports) was not sufficient to impute an intention to induce. This decision was approved by McHugh J of the High Court in Esanda, above.

A duty may be owed where the accounts were prepared or audited especially for the plaintiff. In Morgan Crucible v Hill Samuel Bank [1991] 2 WLR 655, the UK Court of Appeal held that, although there was no general duty owed by financial advisers to a

target company to safeguard the interests of potential bidders in a contested takeover, there may be a duty of care owing where the bidder is known and the financial advisers ‘make express representations with a view to influencing the conduct of the bidder’. In ABN AMRO Bank NV v Bathurst Regional Council (see below), the court was asked to apply the law of negligent misrepresentation to Standard & Poor’s ratings of financial products. [page 118]

ABN Amro Bank NV & Ors v Bathurst Regional Council [2014] FCAFC 65 (Full Court of the Federal Court) Facts In 2006, ABN Amro Bank NV (ABN) invented a specialty financial product called a CPDO (‘a complex, highly leveraged credit derivative’). One version of the product was specially designed to be marketed to Australian investors and was referred to as the Rembrandt Notes (the Notes). The Rembrandt Notes were rated by Standard & Poor’s rating agency (S&P) as AAA, which is the highest rating for a financial product and indicates that the product is a good investment. S&P knew that the rating was to be used in the marketing of the Notes. S&P did not know the precise identity of the ultimate investors but it knew the characteristics of the class of investor to which the Notes would be marketed. It also knew the size of the Notes to be issued and the level of minimum subscription — this meant it knew the approximate number of investors. It also knew the maturity date of the Notes (10 years). On the basis of the AAA rating, ABN sold the Notes to Local Government Financial Services Pty Ltd (LGFS), which then sold the product as a good investment to 13 local councils throughout New South Wales (including Bathurst Council). The councils invested in the Notes and suffered significant losses when the global financial crisis hit. The councils sued S&P (and ABN) for negligence (and misleading or deceptive conduct), arguing that the AAA

rating created an entirely misleading impression about the creditworthiness of the CPDO. At trial, Bathurst and the other councils were successful. In relation to S&P, the trial judge found that S&P owed a duty of care to the councils and that it had breached that duty in carelessly issuing a AAA rating. S&P appealed. Issue In the negligence case against S&P Had S&P breached its duty of care? S&P argued that even if it was careless in rating the CPDOs (the Rembrandt Notes), it did not owe a duty to the councils because (1) S&P did not know the identity of the ultimate investor councils (ie, liability was indeterminate), and (2) the councils were not vulnerable (ie, reliance by the councils on S&P’s rating was not reasonable). Decision Whether S&P had been negligent The Full Court of the Federal Court upheld the trial judge’s decision that S&P owed a duty of care to investors such as the local councils and that that duty had been breached. The duty of care was owed because (1) the class (if not the precise identity) of investors and the amount of potential liability were known to S&P, (2) S&P knew that the investors would rely on the S&P rating (indeed S&P’s whole business existence depended on [page 119] investors relying on its rating system), and (3) given the complexity of the product it was reasonable for the investors to rely on the AAA rating. Both S&P and ABN were held to have breached the duty of care they owed to the councils. They were also held to have engaged in misleading or deceptive conduct. They were ordered to pay damages.

How do disclaimers affect the duty of care? 3.17 It is clear from the cases that, in appropriate circumstances, a representor may remove a duty of care by using a suitable disclaimer. This is, in fact, what happened in Hedley Byrne v Heller (see below).

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (House of Lords)

Facts Hedley Byrne was an advertising agency. Before agreeing to perform work for one of its clients (Easipower Ltd), Hedley Byrne asked its bank to get a reference from Easipower’s bank as to Easipower’s financial security. Easipower’s bank was Heller & Partners Ltd. Heller & Partners Ltd gave the required reference in a letter which was headed: Confidential. For your private use and without responsibility on the part of the bank or its officials. Hedley Byrne relied on the reference and lost a considerable amount of money when Easipower went into liquidation. Hedley Byrne sued Heller & Partners Ltd for negligence. The bank argued in its defence that it owed no duty to Hedley Byrne to take care in giving its answer. Issue Did Heller & Partners owe a duty of care to Hedley Byrne in providing the credit reference? Decision The House of Lords held that a person giving advice could owe a duty of care to the recipient to take reasonable care in providing that advice if a special relationship existed between the two parties. However, no special relationship existed because Heller & Partners (the bank) had provided the advice under cover of a disclaimer (ie, a disclaimer of responsibility). Therefore, Hedley Byrne did not succeed.

Disclaimers are an important risk management tool. They are particularly important for those in the business of providing information or advice. They are also widely used in all forms of advertising and promotional activities.

In Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556, Barwick CJ suggested that, as the imposition of a duty of care was a matter of law, a disclaimer may not work in all cases. However, provided the disclaimer is appropriately worded, in most cases it would be difficult to establish that the plaintiff’s reliance was reasonable. An appropriate disclaimer makes reliance unreasonable. [page 120]

Summing up the duty of care 3.18 It seems there is no simple definition of the circumstances that will give rise to a duty of care when providing information or advice. In assessing whether a duty to take care exists the courts will have regard to a variety of matters. In all cases, however, it is essential to establish that the plaintiff relied on the defendant’s advice or information and that the reliance was reasonable. Factors that may be relevant (depending on the circumstances) in determining whether the representor owed a duty of care to the plaintiff include: whether the plaintiff requested the advice or information (see Shaddock’s case, in [3.11]) and whether the defendant’s response amounted to an assumption of responsibility for the risk being taken by the plaintiff (see the comment of McHugh J in Esanda, in [3.16], regarding the effect of an assumption of responsibility); where there is neither a request nor a clear assumption of responsibility by the defendant, the duty of care will be much more difficult to establish. The factors to consider include: whether the defendant was aware that the plaintiff in particular (or an identifiable class to which the plaintiff belonged) was likely to rely on the defendant’s advice or information without making further inquiry; whether it was reasonable for the plaintiff to rely on the defendant’s advice or information without making further inquiry; whether the advice or information was accompanied by any disclaimer of responsibility, and what that disclaimer said; whether the defendant intended the plaintiff (or the class to which the plaintiff belonged) to act on the advice or information (see McHugh J in Esanda, in [3.16], and R Lowe Lippman Figdor & Franck v AGC (Advances) Ltd, in [3.16]).

A duty of care is more likely to exist where those likely to be injured are clearly ascertainable. For example, a duty of care was found to exist in Hill v Van Erp (see [2.16]). One of the critical differences between the auditor cases and Hill v Van Erp is that, in the latter, it was possible to foresee the range of beneficiaries who could suffer. A finding that the solicitor owed a duty of care was not going to expose the solicitor to liability ‘in an indeterminate amount for an indeterminate time to an indeterminate class’ of persons. Hill v Van Erp could have considerable implications for accountants and other financial advisers (perhaps even bankers) who regularly advise people how to structure their business affairs, knowing that such structuring could, and is probably meant to, affect the position of third parties (eg, spouses and children). Should the advice be negligently given, it may be that such third parties could sue the adviser for negligence.

Step 2: What standard of care is owed? 3.19

Generally speaking, a person providing professional services is to be taken to have exercised reasonable care if it is established that the person acted in a manner that (at the time the service was provided) was widely (but not necessarily universally) accepted in Australia by a significant number of respected practitioners in the field (peer professional opinion) as competent professional practice in the circumstances.8 Although the courts will generally accept peer professional opinion, there are occasions where such an opinion may be regarded as unreasonable. An accountant would therefore be expected to be aware of legislative developments in such fields as income tax and company law. A doctor or lawyer professing to be a specialist [page 121] in a particular field must exercise the level of care, skill and

diligence appropriate to a member of such a profession having such specialist expertise: Rogers v Whitaker (1992) 175 CLR 479; NRMA Ltd v Morgan [1999] NSWSC 407.

Step 3: Remoteness of damage 3.20

If a duty of care was owed to the plaintiff and the necessary standard of care has been breached, the defendant will be liable to the plaintiff for all damage caused by the breach, provided that such damage was not too remote. Losses that were not caused by the negligent act cannot be claimed. For example, even if a lender could establish that the borrower’s auditors owed a duty of care to the lender and that the auditors had been negligent in discharging that duty, the lender would not receive damages unless the lender could show that it would not have made the loan if it had known the truth.

Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 (High Court) Facts Kenny & Good (K & G) were real estate valuers. They were asked by the Macquarie Bank (the lender) to value a residential property. A term of the valuation agreement required the property to be a ‘suitable security for investment of trust funds to the extent of 65 per cent of [the] valuation for a term of 3–5 years’. K & G valued the property at $5.5 million. The proper value was probably about $4 million. In 1990, Macquarie lent the borrower $3.575 million based on 65 per cent of the valuation. Macquarie insured the loan with MGICA. Property values dropped because of a recession. On 7 June 1991, the borrower defaulted on the loan. Macquarie took possession of the property in 1992 and sold it for $2.65 million. Macquarie claimed and was paid nearly $2 million by MGICA under the insurance policy. MGICA sued K & G for damages for negligence. Issue Had the valuers (K & G) been negligent? If so, what was the amount that the plaintiff (MGICA) could claim under the tort of negligence? Decision The valuers had been negligent. The amount of damages was the amount of

loss suffered by making the loan. But for the negligent valuation (the representation) MGICA would not have agreed to insure the loan.

Damage is too remote if the defendant could not reasonably foresee that his or her actions or representations would cause the loss that actually occurs. For instance, if a plaintiff suffers two types of loss as a result of the defendant’s negligence, but only one type of loss was reasonably foreseeable, then the defendant will be liable for only one type of loss. Imagine that A (accountant) advises B (not a client) that he should not sell his shares in XYZ Ltd. The advice is given in circumstances that give rise to a duty of care. A gives the [page 122] advice negligently. B relies on the advice. At the time of giving the advice, the shares are being traded at $1 per share. Shortly thereafter it is announced that XYZ Ltd is going into liquidation and all trade in the shares is suspended. As a result, B loses his whole investment in XYZ Ltd, amounting to $250,000. B argues that his loss is much greater because if he had been advised correctly he would have sold his XYZ shares and invested the money in UVW Ltd, which has doubled in price. A was not aware that B was contemplating investing in UVW. B would have an action for the loss of $250,000 because A ought to have realised that if he did not give his advice carefully B would stand to lose by not selling the shares. However, it is doubtful that A could have reasonably foreseen that B would have invested in a company whose shares have doubled in value.

MISLEADING OR DECEPTIVE CONDUCT

Outline of ACL s 18 ACL s 18 has become an extremely important part of commercial law. It is relevant not only to business negotiations but also to advertising regulation and the protection of intellectual property.

3.21

The Australian Consumer Law (ACL) was introduced in 2010. One of the key provisions of the ACL is a prohibition on people in business engaging in misleading or deceptive conduct. Misleading or deceptive conduct includes misrepresentations. The ACL s 18 provides: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

A court may grant an injunction or award damages for misleading or deceptive conduct. In certain circumstances, misleading or deceptive conduct may attract civil and criminal penalties (see [3.40]). Contrast the elements of ACL s 18 with negligent misrepresentation. Whereas negligence concentrates on the actions of the representor (ie, was the representor negligent?), s 18 concentrates solely on the nature of the representation itself (ie, was the representation misleading?).

The scope of s 18 is very broad.9 Even though the primary function of s 18 is to protect consumers, it covers all representations made in trade or commerce, whether made in an advertisement directed at a wide television audience or made as part of pre-contractual negotiations to only one party. The only exception is where the representation refers to certain financial services. This is dealt with under the Australian Securities and Investments Commission Act 2001 (Cth) (see [3.41]). Figure 3.4 shows the essential elements of an action for damages for a breach of s 18.

Figure 3.4

Elements of a breach of ACL s 18

[page 123]

Conduct of directors, employees and agents 3.22

A significant number of businesses in Australia are owned and operated by corporations. A corporation, of course, is not a real person; it is a legal entity. A corporation can only act through its directors, its employees (including its managers) and its agents. This raises the question: When is a corporation liable for the misleading or deceptive conduct of these individuals? More generally, as the vast majority of firms in Australia (whether companies or not) rely on employees and agents, when will the firm be liable for the acts of its employees and agents? A firm is responsible for the conduct of its directors, employees and agents where they are acting within the scope of their actual or apparent authority.10 The notion of actual or apparent authority is discussed in Chapter 10. The firm is also responsible for the conduct of any person who acts at the direction or with the consent or agreement of the firm’s directors, employees or agents where

the giving of the direction, consent or agreement is within the actual or apparent authority of the director, employee or agent.

Conduct must be ‘in trade or commerce’ 3.23

The ACL s 18 applies only where the misleading or deceptive conduct occurs in trade or commerce. The following representations would be in trade or commerce: product claims (‘Made in Australia’, product endorsements or price claims); statements made during the course of a sale of a business;11 statements made during the course of any business negotiations; statements made by a real estate agent during the sale of a house;12 comments made by one designer about a rival’s product appearing on a personal Facebook page;13 comments appearing on a competitor’s online blog;14 and advice given by a professional person.15 The following representations would not be in trade or commerce: the contents of a political speech;16 statements made by an owner during the private sale of a house.17

When is conduct misleading or deceptive? What kinds of conduct can be misleading or deceptive? 3.24 A breach of s 18 must involve conduct that is misleading or deceptive or is likely to mislead or deceive. Any conduct that is capable of conveying a false representation18 or of leading a person into error19 is capable of being misleading or deceptive. The most obvious conduct capable of being misleading or deceptive is a false, express statement of fact, such as ‘This

[page 124] is a 2005 Ferrari’ when, in fact, it is a 1990 Toyota. One of the most common usages of s 18 has been in false advertising cases. A misrepresentation does not have to be an express statement of fact. It may be inferred from the conduct of the representor or from the surrounding circumstances. For example, Woolworths accepted that it had engaged in misleading or deceptive conduct in relation to a number of its house brand products, including a deep fryer. Woolworths knew that the deep fryer was unsafe and yet did not issue a product recall or advise the relevant authority (Australian Competition and Consumer Commission) that the product had caused injuries to consumers. This amounted to misleading or deceptive conduct: see Australian Competition and Consumer Commission v Woolworths Ltd [2016] FCA 44. A misrepresentation may be conveyed by a half-truth, an opinion, a prediction or even by silence.

Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40-782 (Federal Court) Facts Collins Marrickville (CM) purchased a restaurant from Henjo Investments. CM was induced to enter into the contract partly as a result of a belief that the restaurant had a certain seating capacity. CM formed this belief as a result of visiting the restaurant and noting the number of tables and chairs. In fact, the restaurant was exceeding the seating capacity set by both the liquor licence and the council permit. CM’s solicitor failed to make proper inquiries which would have disclosed the breaches. CM claimed misleading or deceptive conduct. The seller denied any misrepresentation. Issue Was the seller’s conduct misleading or deceptive within the meaning of the statute? Decision It was held that the seller’s conduct in exceeding its seating capacity was a

representation that the restaurant was authorised to seat that many persons. The seller should have spoken out. As the seller had remained silent, its conduct amounted to misleading or deceptive conduct.

The Collins Marrickville case (above) is an example of a halftruth (see also [3.6]). This could be very relevant to accountants and other professional advisers who may be tempted to gloss over some of the inadequacies of their client’s position out of loyalty to the client or a desire to retain the client, or in the belief that ‘all will come right in the end’. For example, an accountant who conveys the impression to his or her client’s suppliers that the client is solvent when that is not the case runs the risk of becoming liable for any of the client’s debts resulting from the representation.20 [page 125] Does s 18 require proof of fraud or negligence? 3.25 It is not necessary to prove fraud or negligence in order to get an award of damages for a breach of s 18. Concepts such as intent and negligence are irrelevant under s 18. Contrast this with the position at common law where the plaintiff cannot get damages for a purely innocent misrepresentation unless it was a term of a contract. A firm may be liable for damages under the ACL where it has acted honestly and reasonably.21

Yorke v Ross Lucas Pty Ltd (1983) ATPR 40-401 (Federal Court) Facts Yorke purchased a business partly on the basis of turnover figures provided by the vendor, Treasureway Stores Pty Ltd. The figures were given by the vendor to his agent, Ross Lucas Pty Ltd, who passed them on to Yorke. The figures were incorrect. Yorke sued the agent, Ross Lucas Pty Ltd, and the vendor, Treasureways Ltd, for damages for misleading or deceptive conduct.

Issue Had the agent engaged in misleading conduct when it innocently passed on to the buyer the vendor’s incorrect turnover figures? Decision The court held that, even though the agent, Ross Lucas Pty Ltd, was not aware, and had no reason to suspect, that the information was inaccurate, the agent had engaged in misleading or deceptive conduct.

On the basis of Yorke v Ross Lucas Pty Ltd, an accountant who passes to a third party a statement of accounts prepared on the basis of facts supplied by the client could be engaging in misleading or deceptive conduct if the accounts prove to be incorrect. However, if it is clear on the facts as a whole that the representor is not the source of the information and has, either expressly or impliedly, disclaimed responsibility for it, the representor will not be liable.22 For instance, the agent in Yorke probably would not have been liable if it had said, ‘I got these figures from the owner. I don’t know if they are accurate. I am merely passing them on for what they are worth’. Silence as misleading conduct: reasonable expectation test 3.26 Silence is one of the most difficult aspects of misleading or deceptive conduct. In commercial negotiations there is no general duty to reveal information to the other party.23 However, if the circumstances are unusual, it may be misleading to remain silent. Failure to disclose information would amount to misleading or deceptive conduct where the circumstances were such that ordinary members of the class to which the conduct was directed would reasonably expect the other party to divulge that information. [page 126]

Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 (Federal Court) Facts Ramensky purchased a home unit off the plan in Noosa Heads, Queensland from Demagogue Pty Ltd. At the time Ramensky viewed the land, the only vehicle access to the property was by an unmade driveway. Unknown to Ramensky, the driveway was in fact across public land and no road licence had been granted although an application had been made. The plans did not reveal that the driveway was other than a normal driveway to be found in such a development. Neither the vendor, Demagogue, nor the vendor’s agent informed Ramensky of the true situation. Ramensky sued for misleading or deceptive conduct and sought an order to have the contract declared void. Demagogue cross-claimed for an order for specific performance and damages for breach of contract. Issue Was the vendor’s conduct in not informing Ramensky about the driveway misleading? Decision The court held that the need to obtain a road licence in order to get a vehicle onto the property was an unusual and unexpected circumstance. Ramensky was led to believe by Demagogue’s conduct, including silence, that there was nothing unusual about access to the property. This was false. The contract was declared void and Demagogue ordered to repay the deposit.24

However, care must be taken in applying the reasonable expectation test. The courts have regularly made it clear that ‘ “superior smartness in dealing” or hardness or obliquity in the bargaining process remain part of the armoury of commercial intercourse and do not infringe the requirements of s [18]’.25 The dilemma of ‘to speak or not to speak’ in a commercial situation is well illustrated by the following case.

General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41-274 (Federal Court)

Facts Telstra produced the Yellow Pages phone book. Telstra had existing contracts with two printers to print the Yellow Pages. The plaintiff was also a printer. It contacted Telstra and indicated that it was keen to tender for part of the printing contract when the existing contracts terminated. Telstra informed the plaintiff that its name would be added to any list of prospective tenderers. As a result, the plaintiff incurred extra expenses. Telstra did [page 127] not tell the plaintiff that it had already decided to negotiate with the existing printers and not to call for tenders. Telstra awarded the contracts to the existing printers. The plaintiff claimed misleading or deceptive conduct and sought an order that the printing contracts be set aside. At first instance, Wilcox J held that Telstra had engaged in misleading or deceptive conduct. According to his Honour, while it was literally true to say that the plaintiff would be added to ‘any’ list of tenderers, this was apt to convey the untrue representation that Telstra intended calling for tenders. The matter was then appealed to the Full Court of the Federal Court. Issue Had Telstra engaged in misleading or deceptive conduct by not disclosing the fact that it had decided to negotiate with the existing printers and would not call for tenders? Decision The Full Court of the Federal Court decided in favour of Telstra. The negotiations between Telstra and the plaintiff were normal arm’s length commercial negotiations. As such, Telstra was under no obligation to disclose confidential matters to the plaintiff, provided that it did not actually mislead the plaintiff. According to Davies and Einfeld JJ (at [45]): [I]n in the ordinary course of commercial dealings, a certain degree of ‘puffing’ or exaggeration is to be expected. Indeed, puffery is part of the ordinary stuff of commerce. So also is a certain degree of ‘put-off’, evasion or obfuscation by commercial people seeking to resist disclosing information which is confidential.

The conduct complained about was Telstra’s continuing nondisclosure of matters which it was entitled in the circumstances to keep secret. The court did point out, however, that Telstra walked a

fine line between the commercially acceptable and misleading or deceptive conduct. If the plaintiff had made it known that it was acquiring special printing facilities in reliance on Telstra’s statement that it would be on the tender list, it may be that Telstra would have been obliged to point out the true state of affairs. However, as it was, Telstra said or did nothing which would have encouraged or misled the plaintiff to act to its detriment. Some further cases serve to illustrate the application of this rule: In Ramset Fasteners (Aust) Pty Ltd v Advanced Building Systems Ltd, the court held that a failure by Ramset to warn its customers that use in a particular way of the products it was selling might constitute an infringement of another party’s patent rights constituted misleading or deceptive conduct.26 In Forwood Products v Gibbett, the court held that it was misleading to fail to warn a buyer of wood shavings that the shavings were toxic for fish when the seller knew the shavings were to be used to package crayfish.27 On the other hand, in Ryan v Great Lakes Council and Graham Barclay Oysters Pty Ltd (see [2.48]) the court rejected the proposition that the sale of oysters without any warning of possible viral contamination amounted to an implied representation that they were uncontaminated. [page 128]

Metalcorp Recyclers Pty Ltd v Metal Manufactures Ltd [2003] NSWCA 213 (New South Wales Court of Appeal) Facts Metalcorp sold some scrap copper to Metal Manufactures (MM). Metalcorp and MM regularly did business together. Under their normal arrangements,

the copper was quarantined until all disputes as to its quality were settled. On this occasion, and unknown to Metalcorp, the copper had been stolen from Western Mining Corporation (WMC). WMC informed MM that the copper might be stolen. MM failed to mention this to Metalcorp during a telephone conversation. Metalcorp, believing the sale was satisfactory, paid its supplier. WMC then contacted MM and confirmed that the copper was stolen. MM refused to pay Metalcorp. Metalcorp could not get its money back from its supplier. Metalcorp sued MM for misleading or deceptive conduct. Issue Had MM engaged in misleading or deceptive conduct by remaining silent? Decision Having regard to the course of normal dealings between the parties, by remaining silent during the telephone conversation MM had conveyed the impression to Metalcorp that it had accepted the copper and intended to pay. This was misleading. Metalcorp acted on it by paying its supplier. Metalcorp was entitled to damages.

The reasonable expectations rule has been relevant to a number of banking cases. The issue is when and to whom should a bank reveal information in its possession. A bank manager who told a customer that a bank cheque was ‘as good as cash’ had engaged in misleading conduct because he failed to add that the bank could dishonour a forged, counterfeit, lost or stolen cheque.28 There is less expectation of disclosure where a bank is dealing with a third party (non-customer). Thus, it has been held that there was no reasonable expectation that a bank would disclose to a third party who was purchasing a business from one of the bank’s customers that the business was unprofitable and that, in fact, the customer owed the bank money in respect of it.29 Nor was there a reasonable expectation that a merchant bank would disclose the financial affairs of a developer borrowing from the bank to a builder entering into a contract with the developer.30 Opinions and s 18 3.27 Giving an opinion which turns out to be wrong will not normally amount to misleading or deceptive conduct.31 However, there are three exceptions:32

1. 2.

If the opinion was not genuinely held, it is a breach of s 18 — the person lied. An opinion given by an expert may be treated as a statement of fact and not an opinion. [page 129]

3.

Even if a person gives an opinion honestly, it may still be a breach of s 18 if the opinion was unsupported by the facts: see I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41 (property valuer); Henville v Walker [2001] HCA 18; Madden v Seafolly Pty Ltd (below).

RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) ATPR 41-225 (Federal Court) Facts FAI was in the business of providing insurance, including professional indemnity insurance. FAI produced an insurance package for architects. RAIA were insurance brokers for the Royal Australian Institute of Architects (the Institute). The Institute asked RAIA to carry out an appraisal of FAI’s policy. RAIA came to the conclusion that much of FAI’s insurance cover was illusory. FAI was upset by this conclusion and issued proceedings for misleading or deceptive conduct. Issue Was RAIA’s report (that the FAI policy was illusory) misleading or deceptive? Was RAIA correct in arguing that it was merely an opinion? Decision The Federal Court held that the appraisal was misleading. Although it was an expression of opinion, RAIA held itself out as an expert in the field and, therefore, the appraisal also conveyed a representation that the opinion was based upon reasonable grounds, which it was not.

Madden v Seafolly Pty Ltd [2014] FCAFC 30 Facts Both Madden and Seafolly are swimwear designers. On Madden’s Facebook pages (business and personal) and in emails she sent to various industry and media personnel, she suggested that Seafolly had copied her designs. She also suggested that Seafolly had acquired photographs of the Madden designs in an underhanded manner. The Facebook page showed pictures of the Madden designs and the allegedly copied Seafolly designs. In fact, the Seafolly designs had been released prior to the Madden designs, although this fact was covered up in the Facebook posting. Seafolly argued that Madden had engaged in misleading or deceptive conduct in trade or commerce. Madden argued (among other things) that the comments were merely her opinion and, in any event, were not made in trade or commerce. [page 130] Issue Was Madden’s Facebook entry merely an opinion or was it misleading or deceptive conduct? Was the Facebook entry made in trade or commerce? Decision Ordinary reasonable members of the class of persons to which the comments were disseminated would regard the comments as being more than a statement of opinion. The comments were made in trade and commerce. Madden ‘alleged that Seafolly had engaged in conduct which was improper to the detriment of her own business. She thereby sought to influence the attitudes of customers and potential customers of Seafolly. In these circumstances, her statements were made “in trade or commerce” ’. Although Madden’s comments did not affect Seafolly’s sales and profitability, Seafolly was entitled to damages ($20,000) for harm done to its reputation. Note Seafolly responded to Madden’s comments by publishing a denial (a press release) in which it accused Madden of knowingly making a false claim. The court held that Madden had not knowingly made the false claim. Therefore, Seafolly had also engaged in misleading or deceptive conduct and Madden was entitled to damages as a result.

Promises, predictions and s 18

3.28

Generally speaking, broken promises or predictions — that is, representations that go to a future matter — are not actionable unless they are part of a contract. However, there are exceptions. For example, a promise made by a person who has no intention of carrying it out will be a misrepresentation. In fact, it is fraud. An unqualified promise by a person may be misleading conduct if the facts suggest that the promise was unlikely to be fulfilled.

Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR 40-940 (Federal Court) Facts Wheeler Grace & Pierucci Pty Ltd (WGP) carried on business as a financial consultant and investment adviser. WGP was hired to sell units in a mining company trust. WGP knew that the mining company was struggling and that any investment would be highly speculative. WGP invited members of the public to attend a seminar at which WGP explained the investment. The units were being offered at 1 cent plus a premium of $499.99. WGP asserted that the premium would be returned after six months. At no time did WGP explain the difficulties the mining company was having. Wright, after making some investigations on his own behalf, purchased units in the trust. The mining venture failed and Wright lost a significant amount of money. Wright sued WGP for misleading or deceptive conduct. [page 131] Issue Had WGP engaged in misleading or deceptive conduct? What was the relevant conduct? Decision The court decided in favour of Wright. Given the difficulties that the mining company was experiencing, the statement that the premium would be returned after six months was misleading without some sort of qualification. Lee J held that WGP had engaged in conduct that was misleading or deceptive in that it had made an unqualified statement that premiums paid would be returned within a few months when an objective view of the facts disclosed that no such statement could be made without an appropriate qualification.

The ACL has taken the scope of misrepresentation beyond the common law by putting the onus upon the person making a promise or prediction to prove that he or she had reasonable grounds for making it (s 4): 4 (1) If: (a) a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and (b) the person does not have reasonable grounds for making the representation; the representation shall be taken to be misleading. (2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter by: (a) a party to the proceeding; or (b) any other person; the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.

The effect of s 4 is to create a presumption of misleading or deceptive conduct (ie, breach of s 18) wherever a promise or prediction does not eventuate. Mere puffs 3.29 Expressions such as ‘best in the world’ and ‘finest quality’ are usually not regarded as misleading and deceptive conduct.33 However, each case will depend on its own circumstances.

The role of exclusion clauses and disclaimers 3.30

The use of exclusion clauses34 or disclaimers is fairly widespread. They work reasonably well against contract terms, negligence and innocent misrepresentation. However, they are arguably not so effective against s 18. Merely to bury an exclusion clause in a written document (especially a standard form document) will not necessarily exonerate a representor. [page 132]

Bateman v Slatyer (1987) ATPR 40-762 (Federal Court) Facts This case involved the sale of a franchise. The franchisor persuaded Bateman to acquire a franchise by providing unrealistically inflated profit and cash flow projections and by making statements relating to the suitability of the franchise location, the likelihood that the mortgage would be repaid in 12 months and that the franchise business was a flourishing business. In the circumstances, these projections and predictions were misleading. The franchise rapidly lost money and Bateman sued for misleading or deceptive conduct. Slatyer relied on a disclaimer in the contract. The disclaimer took the form of an acknowledgment by the franchisee that she had not been induced to enter into the contract by any representations other than those included in the contract. Issue Did the disclaimer in the contract negate the misleading nature of the comments made by franchisor in negotiating the franchise? Decision The court found misleading or deceptive conduct. In the circumstances, the disclaimer was not effective against the misleading or deceptive conduct. Bateman was awarded damages.

A professional person providing advice which is likely to be used in arriving at commercial decisions ought to ensure that any necessary disclaimers are prominently attached to the advice or report. See Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60. It may not be sufficient to include the disclaimer in a separate letter to the client if the professional person was aware that the advice or report was going to be shown to a third party. A person passing on information should be careful to disclaim any responsibility for its accuracy.35 There is a wide variety of remedies available where there has been a breach of s 18. These include: damages; injunction; and

order cancelling or varying the terms of a contract.

Remedies for breach of s 18 Damages are only awarded if the misrepresentation caused the loss 3.31 The court may award damages for a breach of s 18.36 The loss claimed must have been caused by the misleading or deceptive conduct. It is up to the applicant to prove the causal connection. As with negligence, causation is to be approached in a ‘practical or common sense’ way: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514. However, the misleading or deceptive conduct does not have to be the only cause of the loss. It is sufficient if it is one of the causes: I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; Gould v Vaggelas (1985) 157 CLR 215; Henville v Walker [2001] HCA 52. [page 133]

Sweetman v Bradfield Management Services Pty Ltd (1994) ATPR 41-290 (Federal Court) Facts An accountant recommended an investment scheme to Sweetman and his partner as a way of minimising tax. The scheme required a considerable amount of money to be invested. The information provided by the accountant suggested that he had used his experience and his qualifications in assessing the viability of the scheme. In fact, he had made no independent investigation but had relied on the forecasts of the scheme’s promoter. Sweetman and his partner invested in the scheme and lost heavily. They sued for damages for misleading or deceptive conduct and damages for negligence in tort. Issue Was the accountant’s conduct misleading or deceptive under the ACL? If so, what damages was Sweetman entitled to? Decision

The court found that the accountant had engaged in misleading or deceptive conduct in that he had given the impression that he had investigated the scheme when he had not done so. However, the court refused to award damages for the breach because it was not satisfied on the evidence that Sweetman and his partner would have acted in any different manner if they had known that the accountant had not conducted any investigations. The evidence suggested that they would have been prepared to take the risk. In other words, the losses were not caused by the misleading conduct. (Interestingly, Lee J held that the accountant was negligent and awarded damages for negligence. The negligent conduct was broader under common law than just the misleading statement.)

The role of reliance in proving causation 3.32 There are cases where it is not necessary or possible to prove reliance. For example, reliance is not necessary where the applicant argues that he or she has lost sales because of the representor’s false advertising.37 Clearly, in such cases the applicant does not rely on the deceptive conduct (although consumers do). In most other cases, however, causation will be established by showing that the applicant relied on the deceptive conduct. Thus, other than the false marketing cases mentioned above, generally speaking, if the representee did not rely on the representor’s deceptive conduct, that conduct could not have been the cause of the loss: see Sweetman v Bradfield Management (in [3.31]); Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458. The issue of reliance becomes very important where the representor makes a representation to party A, who then passes it on to party B, who acts on it to his or her detriment. For example, an accountant prepares financial statements for company A, which [page 134] are passed on to B, who decides to buy A’s business on the basis of the accounts. The accounts are incorrect. Can B sue the accountant

for damages for misleading and deceptive conduct? If the accounts were produced specifically to be shown to B, B can bring an action for misleading and deceptive conduct: Travel Compensation Fund v Robert Tambree [2005] HCA 2005. The same applies where the accounts were produced to be shown to a defined class of persons. However, if the accounts were produced for the use of A and the accountant had never heard of B and was unaware that the accounts were to be used in this manner, the position may be different. The cause of B’s loss is not the conduct of the accountants: Hill v Tooth & Co Ltd (1998) ATPR 41-649.

Dalton v Lawson Hill Estate Pty Ltd [2005] FCAFC 169 (Federal Court) Facts Dalton, a water-drilling contractor, was hired to dig a bore on a vineyard owned by Mr and Mrs Grace. Dalton told Mrs Grace that the estimated water flow from the bore was 1800 litres per hour (LPH). On the invoice he wrote ‘1800 GPH’. GPH means ‘gallons per hour’. In fact, 1800 LPH equates to 400 GPH. During negotiations for the sale of the property, the Graces showed the prospective purchasers Dalton’s invoice. Partly on the basis of the invoice the purchaser agreed to buy the property. Dalton was not aware of any plans to sell the property. He was not aware that prospective purchasers were to be shown the invoice. After the sale, the purchasers sued the Graces and Dalton for damages for misleading or deceptive conduct. Issue Had the Graces and/or Dalton engaged in misleading or deceptive conduct? Were they liable for damages? Was Dalton correct in arguing that even if his action in writing ‘GPH’ instead of ‘LPH’ was misleading, it did not cause the purchaser to suffer a loss? Decision The Graces were liable for damages for misleading or deceptive conduct. However, Dalton was not liable. The purchaser’s loss was caused by the action of the Graces in deciding to show the invoice, not by the action of Dalton (who was not aware that the invoice would be used for the purposes of selling the property).

Calculation of damages

3.33

Calculation of damages under the ACL is slightly different to the calculation of damages under contract law and tort law: In contract law, the aim of an award of damages is to put the innocent party in the position he or she would have been in if the contract had been carried out properly (‘expectation losses’). Under tort law, the aim of damages is to put the innocent party in the position he or she would have been in if the tort (eg, the misrepresentation) had not occurred (‘reliance losses’).38 [page 135] Damages under the ACL are calculated by determining the position the representee is actually in and the position the representee would have been in but for the breach of s 18: see GIO v Marks (1998) ATPR 41-665. In most cases, this will be the same as the calculation of damages for tort. In many cases, the amount of damages will be the same whether in contract or in tort or for breach of s 18. However, there are cases where the difference is significant.39 Damages can include the loss of commercial opportunity.40

Capping liability 3.34 As with damages awarded for negligence there are now caps placed on the amount of damages available against professionals. Damages against professionals for misleading or deceptive conduct may be capped by the states in the same way that they cap damages for state law. This also applies to misleading or deceptive conduct under the Australian Securities and Investments Commission Act 2001 (Cth) (see [3.41]) and the Corporations Act 2001 (Cth) (see [3.42]).

Apportioning liability 3.35 As with damages awarded for negligence there is provision for apportionment of damages on account of contributory negligence. Section 137B of the ACL provides for calculation of damages on the basis of proportionate liability except where the defendant intended to mislead or fraudulently misled the plaintiff. This also applies to misleading or deceptive conduct under the Australian Securities and Investments Commission Act 2001 (Cth) (see [3.41]) and the Corporations Act 2001 (Cth) (see [3.42]). Damages may be awarded against company’s employees or agents 3.36 One of the big advantages of the ACL is that the court may award damages against any person involved in the breach. Thus, directors, executive officers and employees may be directly liable for their misleading or deceptive conduct: see Houghton v Arms [2006] HCA 59. This should be contrasted with the action for breach of contract, in which the innocent party can get damages only against a party to the contract. Declaration that the contract is void 3.37 The court may declare a contract wholly or partly void under the ACL s 243 for a breach of s 18 (see Demagogue Pty Ltd v Ramensky, in [3.26]).

Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) ATPR 41-269 (Federal Court) Facts Accounting Systems agreed to assign (sell) the copyright in certain computer programs to a well-known commercial publishing house, CCH (Australia) Ltd. The written agreement contained a warranty that Accounting Systems owned the copyright in the program and had a right to sell it. The management of Accounting Systems believed [page 136]

this to be the case. In fact, the court held that the program had been developed from, and was a reproduction of, a program owned by another corporation. Therefore, Accounting Systems did not have the copyright and the warranty was untrue. CCH claimed that this was misleading or deceptive conduct. Issue Had Accounting Systems engaged in misleading or deceptive conduct? If so, what remedies were available? Decision The court agreed with CCH that the conduct of Accounting Systems was misleading. The court declared the contract void from the beginning (see ACL s 243). The court also awarded damages.

Varying the terms of the contract 3.38 The court may vary the terms of the contract under s 243. This occurred in Bateman v Slatyer (see [3.30]) where the court ordered the franchise agreement to be varied so as to cancel all future payments still owing by the franchisee. The court also ordered damages.

Mr Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 (Federal Court) Facts The respondent shopping-centre owner, Centrepoint, made statements to the applicant that the centre would open on a particular day, that it would contain two restaurants and that the first floor would be a high-class boutique area. All statements proved to be untrue. Issue Was the conduct of Centrepoint misleading or deceptive? If so, what remedy was available? Decision The court found misleading or deceptive conduct and varied the rent that the tenant was required to pay.

Injunctions 3.39 The court has power to order an injunction under the ACL ss 232– 234. This power is particularly important in the area of false advertising. [page 137] Penalties for misrepresentations 3.40 The ACL makes certain misrepresentations in commerce liable to civil or criminal penalties.41 This means that business people can be ordered to pay a fine for making misrepresentations in trade or commerce. A company may be fined up to $1.1 million and a person up to $220,000. As an alternative to a court-ordered penalty, the Australian Competition and Consumer Commission may issue an infringement notice. The fines under an infringement notice are: in the case of a listed company, $66,000; in the case of a non-listed company, $6600; and in the case of a person, $1320.

Australian Securities and Investments Commission Act 3.41

The Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) contains a provision that imitates the ACL s 18. In all respects, the rules relating to s 12DA of the ASIC Act are the same as for the ACL s 18: 12DA (1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. Under s 12BAB(1) of the ASIC Act, a person provides a financial service if they: (a) provide financial product advice;

(b) (c) (d) (e) (f) (g)

deal in a financial product; make a market for a financial product; operate a registered scheme; provide a custodial or depository service; operate a financial market or clearing and settlement facility; provide a service that is otherwise supplied in relation to a financial product; or (h) engage in conduct of a kind prescribed in relevant regulations.42 A financial product is defined in s 12BAA as being a facility by or through which people commonly: (a) make a financial investment; (b) manage financial risk; and/or (c) make non-cash payments. Some examples of items normally considered to be financial products are listed in s 12BAA(7): (a) a security; (b) an interest in a managed investment; (c) a derivative; (d) a contract of insurance (except health insurance or insurance provided as part of a health insurance business as defined by s 67(4) of the National Health Act 1953 (Cth)); or insurance provided by the state or the Northern Territory; (e) a life policy or a sinking fund policy, within the meaning of the Life Insurance Act 1995 (Cth); [page 138] (f)

a beneficial interest in superannuation funds (as defined by s 10 of the Superannuation Industry (Supervision) Act 1993 (Cth));

(g) an RSA (retirement savings account) within the meaning of the Retirement Savings Accounts Act 1997 (Cth); (h) any deposit-taking facility made available by an authorised deposit-taking institution (within the meaning of the Banking Act 1959 (Cth)) in the course of its banking business (within the meaning of that Act); (i) a debenture, stock or bond issued or proposed to be issued by a government; (j) a foreign exchange contract; (k) a credit facility (within the meaning of the regulations); or (l) anything declared by the regulations to be a financial product for the purposes of ASIC Act s 12BAA(7).

Corporations Act 3.42

The Corporations Act 2001 (Cth) also contains provisions prohibiting misleading or deceptive conduct in relation to disclosure documents (s 728), market manipulation (s 1041B) or financial products or services (s 1041H).

Unconscionable conduct means unfair or unjust conduct. Normally, unconscionable conduct arises where one person takes unfair advantage of another person’s special disability.

UNCONSCIONABLE CONDUCT 3.43

Even where there is no misrepresentation, business conduct may be attacked on the grounds that it is unconscionable. ‘Unconscionable’ is difficult to define with any precision but generally means unfair, unscrupulous or unjust. There is a rule against unconscionable conduct under (1) judge-made law (case law), and (2) statute (ACL and the ASIC Act).

Unconscionable conduct as part of judge-made law The scope of the rule

3.44

An unconscionable transaction occurs where one of the parties to the transaction was especially vulnerable and the other party knew and took unfair advantage of that vulnerability. The following case exemplifies the scope of protection against unconscionable conduct available at common law.

Commercial Bank of Australia v Amadio (1983) 57 ALJR 358 (High Court) Facts Mr and Mrs Amadio were the plaintiffs in this case. They had given a mortgage over their property to the bank to secure their son’s overdraft with the bank. The Amadios were quite elderly and of Italian descent. They understood little English. When they signed the guarantee and mortgage, the Amadios thought their son’s business was quite successful. [page 139] This was untrue. The business was insolvent and the bank manager was aware of this. The Amadios also thought that their liability under the guarantee was limited to $50,000 and that it would last only six months. In fact, the guarantee was unlimited in amount and time. The Amadios obtained no independent legal advice, but relied on the rather domineering influence of their son. The bank manager was aware of the son’s influence over his parents and should also have been aware that the Amadios did not really understand the contents of the guarantee. The bank manager did not advise the Amadios to obtain independent advice. The son’s business eventually collapsed, and the bank sought to enforce the guarantee and mortgage. The Amadios asked the court to set the guarantee aside on the grounds of unconscionability. Issue Should the contract be set aside on the basis that the transaction was unconscionable? Decision A court has the power to set aside agreements in circumstances where: a party to the transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them; and the special disability was sufficiently evident to the stronger party to

make it unfair to procure or accept the weaker party’s assent to the transaction. The Amadios were under a special disability by virtue of their age, their lack of English and lack of knowledge of the contents of the guarantee. This put them in an unequal position vis-à-vis the bank. The bank manager was sufficiently aware that the Amadios were under a special disability, but failed to satisfy himself that the transaction was properly explained to them. Under these circumstances, the agreement was not enforceable.

It is critical that where one party is clearly under a special disability, that party be advised to seek relevant, independent advice. The bank in Amadio should have insisted that Mr and Mrs Amadio seek independent legal and accounting advice. This is now common and proper practice for banks in these types of situations.43 The need for independent advice, however, is not limited to banks; it applies to all transactions that are characterised by an imbalance of power giving rise to special disability: see Blomley v Ryan, in [8.45]. Compare the following case with the Amadio case. [page 140]

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18 (High Court) Facts Berbatis operated a shopping centre in Perth. The commercial tenants had taken legal action against Berbatis regarding the shopping-centre charges and outgoings. One of the tenants, Roberts, wanted to sell her business. She could only do this if she obtained a renewal of her lease. Berbatis told Roberts that her lease would only be renewed if she withdrew from the legal action. Roberts was forced to agree. (Roberts had no legal right to a new lease. Berbatis had made no prior representations that a new lease would be granted.) The Australian Competition and Consumer Commission (ACCC) brought an action against Berbatis for a breach of s 51AA of the ACL, alleging

that Berbatis had engaged in unconscionable conduct. The trial judge decided in favour of the ACCC, but this was overturned on appeal to the Full Federal Court. The ACCC appealed to the High Court. Issue Had Berbatis engaged in unconscionable conduct in ‘convincing’ Roberts to withdraw from the legal action? Decision The High Court found in favour of Berbatis. Applying the principles from Amadio’s case, there was insufficient evidence to warrant a finding that the tenant was in a position of special disadvantage or disability with respect to the landlord.

In Kakavas v Crown Melbourne Limited [2013] HCA 25, the High Court rejected an argument that the plaintiff (who had lost some $20 million at Crown Casino in Melbourne) was under a special disability as a result of his pathological gambling habit. According to the court he was able to make rational decisions to refrain from gambling altogether had he chosen to do so. He was certainly able to choose to refrain from gambling with Crown. Remedies 3.45 Originally, the only remedy available for unconscionable conduct was rescission of the contract (see Chapter 8). This meant that the court could declare the contract dissolved on such terms as the court thought fair. There was no provision for awarding damages. However, this was changed in 1992. Section 20 of the ACL means that the courts can now award damages for unconscionable conduct. [page 141]

Astvilla Pty Ltd v Director of Consumer Affairs Victoria [2006] VSC 289 (Supreme Court of Victoria)

Facts Ms Brown — a single mother with young children, living on a single parent’s pension in a rented house in Melbourne — wanted to buy a cheap house in the country. She had never bought or owned a property previously. She was attracted by an advertisement for a house (for $26,000) in a country town in Victoria. The seller was a property company. When Ms Brown went to view the house she was told that it had been sold. Ms Brown was then taken to a property in another town which she liked. She was told that the price ($55,000) was very reasonable. She was also told that, as the property was in high demand, she must make up her mind immediately. Fearing that she might miss out, Ms Brown agreed to buy the house. Subsequently, the story emerged that the house had been on the market for many years. The property company had orally agreed to buy it only days before Ms Brown was shown the house. The price the company agreed to pay was $25,000. This was also the value put on the property by an independent valuer. Ms Brown complained to the Director of Consumer Affairs. The director sued the property company for misleading or deceptive conduct and unconscionable conduct. Issue Had Astvilla engaged in misleading or deceptive conduct and/or unconscionable conduct? Decision The statements made by the salesperson about the house — reasonably priced and in-demand — were misleading. Because of her circumstances and because of the misleading information Ms Brown was under a special disability. The company and its salesperson had taken advantage of that disability. Ms Brown was therefore entitled to damages. She was awarded $36,000 plus costs.

Unconscionable business transactions under the ACL 3.46

Both the consumer protection movement and, later, the small business lobby pressured governments to strengthen the laws against unconscionable conduct. The ACL now contains provisions covering unconscionable transactions, whether between two businesses or between a business and a consumer: s 21 ACL. Section 21 does not apply where the complaining party is a listed public company. Cases such as Amadio, above, could now be decided under the ACL.44

Section 21 prohibits a person, in trade or commerce, in connection with the supply or acquisition of goods or services, from engaging in unconscionable conduct.45 Section 21 is [page 142] not limited by the common law cases. Thus, s 21 is broad enough to catch unconscionable business schemes aimed at a class of persons (and not just an individual). It is not necessary to prove that any particular person suffered a disadvantage: s 21(4)(b). In determining whether conduct is unconscionable, the court may consider not only the bargaining position of the parties but also the terms of any contract and the manner in which the contract is carried out: s 21(4)(c). What does ‘unconscionable conduct’ mean? 3.47 It is notoriously difficult to summarise precisely what ‘unconscionable’ means. In Australian Competition and Consumer Commission v Seal-A-Fridge Pty Ltd [2010] FCA 525, Logan J said (at [16]) that: … the expression [unconscionable] requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment … Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would ordinarily need to be a deliberate (in the sense of intentional) act or at least a reckless act.

In other words, unconscionable conduct is conduct that has an unethical character about it, something that is morally tainted. This will often involve an intention to act unfairly or wilful blindness (recklessness). Factors that indicate an unconscionable transaction 3.48 ‘The range of conduct [that may amount to unconscionable conduct] is wide and can include bullying and thuggish behaviour,

undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct.’46 Section 22 sets out a long list of factors to be taken into account in determining whether the conduct is unconscionable. These factors include the following: What was the relative strength of the bargaining powers of the parties?47 Were the conditions imposed on the buyer reasonably necessary for the protection of the legitimate interests of the supplier? Was the buyer able to understand any documents used? How large was the type used? How complex was the language used? Was any undue influence or pressure exerted on, or were any unfair tactics used against, the buyer? The term ‘undue influence’ has a clear judicial meaning and usually arises where a person relies on the guidance or advice of another person who may well benefit from the transaction and who is aware of that reliance. Was the amount paid for the goods or services higher or were the circumstances under which they could be acquired more onerous when compared to the terms offered by other suppliers?48 [page 143]

Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405

Facts Coles operates one of the largest supermarket chains in Australia. Coles acquired its products from a variety of sources, ranging from large multinational suppliers to small local producers and wholesale distributors. Coles developed a rebate scheme to be employed in its dealings with some of its smallest and least powerful suppliers. For these suppliers, Coles represented a significant proportion of their total sales. Under the scheme Coles deducted a rebate from each supplier. The rebate was said to reflect the cost of providing certain data sharing and other benefits to the supplier. In fact, Coles had done virtually no costing analysis. Rather, the rebates were calculated to achieve a certain level of profitability for Coles. Suppliers were given no option but to accept or suffer commercial consequences (such as Coles threatening not to promote or to stock the supplier’s product). Coles also imposed penalties for late or short delivery that were not provided for in its contracts with the suppliers. The ACCC took action against Coles for unconscionable conduct under the ACL. Issues Did the conduct of Coles amount to unconscionable conduct? Decision Coles pleaded guilty to unconscionable conduct and was fined.

Remedies and sanctions under the ACL 3.49 Where a business engages in unconscionable conduct it may be subject to a wide range of remedies and sanctions, including: damages (s 236); injunctions (s 232); compensation and other orders (s 237) — for example, the court may declare a contract void or vary the terms of a contract; order requiring a business to establish a compliance or education program (s 246); adverse publicity order (s 247); and order disqualifying a person from managing a company (s 248). A court may also order pecuniary penalties for unconscionable conduct (s 224). In the case of a corporation, the penalty is a fine

not exceeding $1.1 million, and in the case of a person, a fine not exceeding $220,000. As an alternative to a court-ordered pecuniary penalty, the ACCC may issue an infringement notice. The fines under an infringement notice are: in the case of a listed company, $66,000; in the case of a non-listed company, $6600; and in the case of a person, $1320. [page 144]

OTHER UNFAIR CONDUCT 3.50

Aside from misrepresentation and unconscionable conduct, there is a range of specific activities which are regarded by the law as unfair and unlawful. Many of these laws are to be found in the ACL and include laws against bait advertising, harassment, referral selling, inertia selling and pyramid selling. There are also laws governing door-to-door sales, telemarketing and spam. A discussion of these laws is beyond the scope of this book.

ADVICE — LAW IN PRACTICE When dealing with suppliers, customers or others (and particularly when you are negotiating contracts), you should heed the following advice: Fraud You must not make any statements that you know are false or which you have no belief in. Disclaimers cannot relieve liability for fraud. Negligence

Reasonable care must be taken to check accuracy before making statements or giving advice. Disclaimers are a very useful device. ACL s 18 Any statements you make must be accurate. It is no defence to argue that you took all reasonable care. You should not make any predictions or promises (matters going to a future event) unless you have reasonable grounds for doing so. Disclaimers, particularly ones buried deep in a document, are unlikely to relieve you from liability. Unconscionable conduct Although maximising profits might be an aim for the business, conduct that is unfair to the other party may lead to damages or other remedies and sanctions against your business.

[page 145]

QUESTIONS Question 1 (a) Describe the three causes of action for misrepresentation, and also any differences between these causes of action. (b) In cases of misrepresentation, is it easier to argue negligence or statutory misrepresentation (s 18 ACL) or fraud? Explain your answer. (c) How would you state the basic rule applied by Mason J to decide Shaddock’s case (see [3.11])? (d) What is the main difficulty when attempting to establish fraud? (e) What is the difference between the duty of care test used in Shaddock’s case (see [3.11]) and the test used for auditors as expressed in Esanda’s case (see [3.16]) or Lippman’s case (see [3.16])? (f) How effective are disclaimers in protecting advisers from: (i) a claim of fraud? (ii) a claim of negligent advice? (iii) a claim based on s 18 ACL?

Question 2

Assume that you are a legal compliance officer working in a firm (partnership) of auditors. You have been asked to make a presentation at the next staff meeting to discuss strategies regarding the firm’s potential legal liability. Your tasks include: (1) explaining the potential legal risks the firm might face; (2) providing advice to assist the firm avoid, or limit, its liability to both its clients and to any third parties that may rely upon the firm’s audits. Create a detailed outline of your presentation, considering both negligence and misleading or deceptive conduct.

Question 3 Andrew receives in his mailbox a brochure from his accountant, Finches & Son, in which the accountants recommend Andrew to buy shares in Prime Mining Ltd, a mining company. In their expert opinion, the company’s shares will triple in value due to the increased demand for uranium from overseas buyers. Andrew gives the brochure to his neighbour, Xavier, who invests $10,000 in Prime Mining Ltd. The day after Xavier invested his money, the value of Prime Mining Ltd’s shares dropped by half. It appears that all other investment brokers had been warning their clients not to touch Prime Mining Ltd shares because Prime Mining Ltd was having significant debt problems. [page 146] Which of the following statements is most accurate? Please explain your answer. (a) Xavier cannot sue Finches & Son because accountants usually do not provide financial advice.

(b) Xavier cannot sue Finches & Son because it was not reasonable for Xavier to rely on the brochure. (c) Xavier can sue Finches & Son because their expert opinion breached s 12DA(1) of the Australian Securities and investments Commission Act 2001 (Cth). (d) None of the above.

Question 4 V Pty Ltd owned a small business which it wished to sell. P was in the market to buy such a business. During negotiations, V informed P that the local council was proposing to build a new carpark which was expected to attract a substantial number of new shoppers to the area. In fact, the council had no such plans. A carpark had never even been discussed by the council. P decided to buy the business. The main reason for P’s decision was the healthy state of the business’s accounts (which were accurate). However, P was also persuaded by the potential for increased trade suggested by the carpark proposal. P made no inquiries with the local council. A simple phone call would have established that there were no plans to build a carpark. P has been operating the business for six months and has just discovered the truth about the carpark. P wants to keep the business, but feels that a premium was paid based on the information about the carpark. Consider the likely success if P sued V for each of the following causes of action: (a) fraud (deceit); (b) breach of s 18 ACL; (c) negligent misstatement.

Question 5 Donald is a financial adviser with Australian Bank. One day as he walks to work, his neighbour, Patricia, who wants to retire, asks him for some advice on superannuation, in particular whether Prime Investa Services Ltd is a ‘good’ investment. Donald is unsure of the status of Prime Investa Services Ltd, and is unhappy with providing free information outside of work. So he tells Patricia that everything should be all right if she only invests some but not all of her money. Patricia retires and invests 75 per cent of her superannuation pay out into Prime Investa Services Ltd. She also tells her sister Jenny, ‘My neighbour, who is an investment adviser, says Prime Investa Services Ltd are a solid investment’. Three weeks later, the Prime Investa Services Ltd assets are frozen, pending an investigation. All investors are told that they have probably lost their investments. Advise Patricia and Jenny of their legal rights against Donald for negligence and/or misleading or deceptive conduct.

Question 6 Anderson Beauchamps Chatterwicks (ABC) is an accounting firm specialising in small businesses. Geartrain Pty Ltd runs a small business which manufactures engine parts for cars. Geartrain Pty Ltd hires ABC to act as its accountants and to prepare its taxation returns. [page 147] Geartrain Pty Ltd and ABC discuss the possibility of expanding Geartrain’s business. ABC advises that if the profit

and loss statement reveals a substantial profit for the past year Geartrain ought to expand and to fund the expansion by raising a loan from its bank. ABC makes a mistake in preparing Geartrain’s profit and loss statement. Expenses are understated by $75,000 and trading stock overstated by $30,000. The financial statements are sent to Geartrain by mail. Believing the financial statements to be accurate, Geartrain Pty Ltd decides to expand the business. The expansion is to be funded by a loan from the Regional Bank. The bank requests a copy of the financial statements. Geartrain Pty Ltd requests ABC to forward such copies directly to the Regional Bank. On the basis of the financial statements, the bank lends $100,000 to Geartrain Pty Ltd. The expansion is unsuccessful and Geartrain Pty Ltd’s business fails. Geartrain Pty Ltd maintains that it would not have expanded if it had known that the profit was overstated by $105,000. The Regional Bank maintains that it would not have lent $100,000 if it had known the true profit figure, although it does not deny that it might have made a smaller loan. (a) Advise ABC of its potential liability for misrepresentation under the common law. (b) Advise ABC of its potential liability for misleading or deceptive conduct under the ACL or ASIC Act. (c) If you were a legal compliance officer working for ABC, what advice would you give for developing a strategy to minimise legal risks and avoid repetitions of similar problems in the future?

_________ 1 2 3

Gould v Vaggelas (1985) 157 CLR 215 (High Court); Gipps v Gipps (1978) 1 NSWLR 454 (New South Wales Court of Appeal). See Ultramares Corporation v Touche (1931) 255 NY Rep 170. Candler v Crane, Christmas & Co [1951] 2 KB 164 per Denning LJ (dissenting).

4

5 6

7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

See Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556; Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Ltd [2012] FCAFC 31; BC201201462 (land and property valuers); Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 (Standard & Poor’s financial rating agency). L Shaddock and Associates v Parramatta City Council (Shaddock’s case) (1981) 150 CLR 225. Astley v Austrust Ltd [1999] HCA 6; Hawkins v Clayton (1988) 164 CLR 539; Macpherson & Kelly v Kevin J Prunty & Associates [1983] 1 VR 573 (solicitors); Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095 (engineers); Breen v Williams [1996] HCA 49 (doctors). See implied terms of the contract in Chapter 7. See Civil Liability Act 2002 (NSW) s 5O; Civil Liability Act 2003 (Qld) s 22; Civil Liability Act 1936 (SA) s 41; Civil Liability Act 2002 (Tas) s 22; Wrongs Act 1958 (Vic) s 59. The ACL contains a wide range of provisions dealing with specific types of misrepresentation and other forms of unacceptable conduct. There is also a wide range of penalties. In respect of corporations, the rule is contained in s 139B of the Competition and Consumer Act 2010 (Cth). Bevanere Pty Ltd v Lubidineuse (1985) ATPR 40-565. Argy v Blunts (1990) ATPR 41-015. Madden v Seafolly Pty Ltd [2014] FCAFC 30. Fletcher v Nextra Australia Pty Ltd [2015] FCAFC 52. See Bond Corporation Pty Ltd v Thiess Contractors (1987) ATPR 40-771 for a case involving a consulting engineer. Unilan Holdings Pty Ltd v Kerin (1992) ATPR 41-169. O’Brien v Smolonogov (1983) ATPR 40-418. Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) ATPR 40-303. Wilkinson v Katies Fashions Pty Ltd (1986) ATPR 40-721. New England Agricultural Traders Pty Ltd v Adams (1994) ATPR 41-361. Gibbs C J in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) ATPR 40-307. Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 (see [3.30]). Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited [2010] HCA 31. There are some exceptions which are not relevant for present purposes. See also Warner v Elders Rural Finance Ltd (1993) ATPR 41-238; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1993) ATPR 41-205 per Hill J. Westpac Banking Corp v The Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 at [479]; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31. Ramset Fasteners (Aust) Pty Ltd v Advanced Building Systems Ltd [1999] FCA 898. Forwood Products v Gibbett [2002] FCA 298. Lyritzis v Westpac Banking Corporation (1994) ATPR 41-360. Kabwand Pty Ltd & Ors v National Australia Bank Ltd [1989] ATPR 40-950. Winterton Constructions Pty Ltd v Hambros Australia Ltd [1992] FCA 582.

31 Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82; Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1. 32 Bateman v Slatyer, in [3.30]. 33 See Tech Pacific Australia Pty Ltd v Air Pacific Ltd [1999] NSWCA 71 (‘[Our] aim is to provide the highest possible service’). 34 Exclusion clauses are terms found in a contract whereby one party tries to restrict or limit its liability. See Chapter 6. 35 See Yorke v Ross Lucas Pty Ltd (1983) ATPR 40-401; (1985) ATPR 40-622 (appeal). 36 ACL ss 236 and 243. 37 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) ATPR 41-186. See also McCarthy v McIntyre [1999] FCA 784. 38 See Gates v Mutual Life Assurance Society Ltd (1986) 160 CLR 1. 39 See Futuretronics International Pty Ltd v Gadzhis (1990) ATPR 41-049. 40 See Sellars v Adelaide Petroleum NL (1994) ATPR 41-301. 41 See ACL Pt 4-1. 42 ‘Financial service’ has the same meaning in the ACL s 4(1). 43 Garcia v National Australia Bank [1998] HCA 48; Barclays Bank v O’Brien [1993] QB 109; Royal Bank of Scotland v Etridge (No 2) [2001] 3 WLR 1021. 44 Or the ASIC Act equivalent (depending on whether the matter involves a financial service or not). See the ASIC Act s 12CB. 45 A listed public company, however, cannot bring an action under s 21 of the ACL. 46 Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [291]. 47 Remember that, in certain cases, it may be the buyer imposing unconscionable conditions on the supplier, as in Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (discussed below). 48 For a full list of the criteria, see ACL s 22.

[page 149]

CHAPTER 4

MAKING THE CONTRACT: OFFER AND ACCEPTANCE

CONTENTS Objectives of this chapter Setting the scene: Pepsi loyalty rewards Introduction and outline of chapter The importance of contracts to business What is a contract? Standard of conduct expected when negotiating a contract

Does a contract have to be in writing? The meaning of ‘intention’ in contract law Contractual remedies Termination of the contract Damages Specific performance Injunction Recovery of the contract price Agreed damages clauses [page 150]

Making the offer Meaning of ‘offer’ An offer, or merely an indication of a present intention? An offer or an invitation to treat? Auctions: Who makes the offer? Tenders: Who makes the offer? Internet transactions: Who makes the offer? An offer, or merely part of the negotiations? The fate of the offer Withdrawing the offer Can an offer be revoked after acceptance? Can an offer be revoked before acceptance? Is it necessary to tell the offeree about the revocation? Who must tell the offeree that the offer has been revoked? Is it possible to revoke a unilateral offer? Options: offers that cannot be revoked Rejecting an offer What is the effect of rejecting an offer?

Offeree’s conduct may indicate rejection Counter offer amounts to a rejection Asking for clarification of the terms of the offer is not a counter offer Accepting the offer Only the offeree may accept Acceptance must be final and unqualified Acceptance completes the contract Acceptance must be communicated to the offeror Communicating acceptance to a large company Communicating acceptance over the internet When is express communication of acceptance not necessary? Acceptance and the postal acceptance rule The method and timing of the acceptance Can acceptance be communicated by someone other than the offeree? Lapse of offer Lapse of an offer due to the death of offeror or offeree Lapse of an offer due to time Lapse of an offer due to the failure of a condition precedent The agreement must be ‘certain’ Is an ‘agreement to agree’ binding? Is an ‘agreement to negotiate’ binding? Is an agreement made ‘subject to contract’ binding? Other conditional agreements Overview of offer and acceptance Advice — Law in practice Questions [page 151]

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to: understand how the courts determine whether the first requirement of a contract (the agreement) exists; and in particular, explain and apply the rules used by the courts to ascertain whether a contract exists, including: – the nature of an offer and how it is distinguished from an invitation to treat; – how and when offers may be withdrawn; and – the nature and effect of acceptance of an offer.

[page 152]

SETTING THE SCENE: PEPSI LOYALTY REWARDS This was a promotional campaign for Pepsi Cola offering consumers the chance to swap Pepsi points for reward items. The TV campaign included the following images and text: Image of a teenager at home wearing a T-shirt with Pepsi logo — subtitle reads TSHIRT 75 PEPSI POINTS. Shot of teenager wearing leather jacket and putting on sunglasses — subtitle reads LEATHER JACKET 1450 PEPSI POINTS followed by SHADES 175 PEPSI POINTS. A voiceover saying, ‘Introducing the new Pepsi Stuff catalogue’ as the camera focuses on the cover of the catalogue. Scene moves to schoolyard. A strong updraft precedes the arrival of a teenager in the Harrier jump jet. Teenager gets out, saying, ‘Sure beats the bus’. Subtitle reads HARRIER FIGHTER 7,000,000 PEPSI POINTS. The ad finishes with the comment, ‘Drink Pepsi — Get Stuff’. A young man by the name of Leonard was much taken by the ad. He decided he wanted a Harrier fighter jet. The Pepsi catalogue contained lots of products (eg, jacket tattoos for 15 Pepsi points — ‘Sew ’em on your jacket, not your arm’), but no

word about a Harrier jet. The order form also did not refer to a Harrier jet. Undeterred, our hero sent off his order form together with the required points. Not surprisingly, Pepsi rejected the proposal — the Harrier jet was just an advertising joke, and wasn’t part of the Pepsi Stuff collection.1 So Mr Leonard sued for breach of contract. He claimed the ad amounted to an offer to supply a Harrier jet and that he had accepted the offer. What were his chances of succeeding? 2

INTRODUCTION AND OUTLINE OF CHAPTER The importance of contracts to business 4.1

Business is largely about forging relationships of one type or another. The producer of goods must find a distributor. The retailer must find customers. Most firms need to use service providers from time to time, such as bankers, accountants, lawyers, repairers and consultants (see Figure 4.1). These relationships give rise to legal rights and obligations. The main law determining these legal rights and obligations is the law of contract. [page 153]

Figure 4.1

4.2

Types of commercial contracts

When analysing contracts it is useful to bear in mind the following three questions: 1. Does a contract exist? See Chapters 4 and 5.

2. 3.

What does the contract say and has it been breached? See Chapters 6 and 7. What remedies are available to the innocent party? See Chapter 8.

What is a contract? 4.3

A contract is essentially an agreement between two or more persons which will be enforced by a court of law. A contract may be entirely in writing, entirely oral or partly written and partly oral. In ascertaining whether a contract exists, the law has traditionally used a methodology which requires the plaintiff to establish four essential elements. See Figure 4.2. [page 154]

Figure 4.2

The four essential elements of a contract

The essence of a contract is that the parties make their own rules — contract law simply provides a framework that enables this to occur.

This chapter deals with the rules relating to offer and acceptance. The issues of intention to create legal relations and consideration are dealt with in Chapter 5. The methodology of determining whether a contract exists by means of offer and acceptance is not free of criticism.3 For example, the methodology can appear inadequate when analysing transactions such as taking a bus ride, buying a plane ticket or

obtaining a cup of coffee from a vending machine. Who makes the offer — is it the person catching the bus or is it the bus company? Is it the person putting money in the vending machine or the owner of the vending machine? Nor is the methodology always easy to apply, especially in complex, ongoing relationships. Indeed, sometimes a contract may exist even though the parties have not directly communicated with one another. Competitors in a yacht race were held to have contracted with one another in regard to the rules of the race, even though the competitors had not dealt with one another, but rather had dealt separately with the yacht club running the race: see Clarke v Earl of Dunraven (The Satanita) [1897] AC 59.

Standard of conduct expected when negotiating a contract 4.4

Negotiating a contract is not just a matter of applying the rules of offer and acceptance. It is also important to remember that the law demands a certain standard of conduct from the [page 155] negotiating parties. Although a person is generally free to negotiate the best possible deal they can get, they must not engage in conduct that is: fraudulent (see Chapter 3); misleading (see Chapter 3); or unconscionable (see Chapter 3).

Does a contract have to be in writing? 4.5

With a few notable exceptions (eg, contracts for the sale of land and contracts of guarantee)4 there is no requirement that a contract be in writing. An oral agreement is enforceable in the same way as a written agreement. The major advantage of a written contract over an oral contract is one of proof. It is easier to

prove the existence of a contract if it is in writing. It is also easier to prove what the contract says.

The meaning of ‘intention’ in contract law 4.6

A large part of contract law revolves around ascertaining the intention of the parties or of one of the parties. As a concept, intention is capable of two constructions: 1. To ascertain subjective intention is to examine a person’s state of mind. 2. To ascertain objective intention is to ignore the person’s state of mind and to look purely at what that person said and did. On the basis of what a person said and did (within any given context), it is possible to conclude that any reasonable person saying and doing the same things, within that same context, must have had a particular intention. This is called the reasonable person test. Generally, the courts are concerned only with objective intention; that is, determining what the parties must have meant rather than what each of them actually meant. This means the parties’ intentions are judged by their actions and words, rather than by their thoughts.

CONTRACTUAL REMEDIES The main remedies for breach of contract are: termination; and damages. There are other remedies, including: specific performance; and injunctions.

4.7

Remedies are fully discussed in Chapter 8. The purpose of this introduction is to give a brief overview of the remedies which are

available in appropriate circumstances. The most important are termination of the contract and damages.

Termination of the contract 4.8

Generally, the remedy of termination of the contract is available only for serious breaches of contract. As a general rule, the courts prefer to conserve contracts rather than to have them end prematurely. It is not necessary to get a court order to terminate a contract. If the appropriate circumstances exist, the innocent party can give notice of termination. However, care must be taken in exercising this remedy. If a person terminates a contract improperly, that person will be in breach of contract. A similar remedy is rescission of the contract, discussed in [8.43].

Damages 4.9

Damages is the most common remedy awarded by the common law. The purpose of damages for breach of contract is to give the innocent party monetary compensation for [page 156] the loss of contractual benefits. For example, Alice has contracted to buy a painting for the bargain price of $1000. The market price is estimated by experts to be $2000. If the seller refuses to go through with the deal, the monetary loss suffered by Alice is $1000 (being the difference between the price she had agreed to pay and the market price). See Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (in [8.26]). Of course, Alice may argue that no amount of money could compensate her for the loss of the unique painting. To Alice, damages are not an appropriate remedy. In that case, Alice may consider asking the court for an order of specific performance.

Specific performance 4.10

Specific performance is an order by the court requiring a party to the contract to honour his or her contractual obligations: Goldsborough Mort & Co Ltd v Quinn (see [4.31]). Specific performance has a number of rules attaching to it which effectively restrict its operation in the main to sales of land or other specialty contracts. For example, if an owner of land entered into a contract to sell the land and later refused to proceed with the sale, a court would order the owner to sign and produce all documents necessary to transfer the land to the buyer. The court would not make such an order if the sale involved a television. Instead, the court would grant damages. If the contract involved a sale of goods, the court would order specific performance only if it involved some unique article, such as a painting or, as in Smythe v Thomas (see [4.22]), a rare, vintage aircraft. The courts will never make an order for the performance of a contract which requires a person to perform some personal service. For example, a court would never order a tennis player to play a tournament which he or she had contracted to play. The organiser of the tennis tournament would have to rely on damages. Of course, the court might order the tennis player not to play anywhere else during the tournament. This type of order is called an injunction.

Injunction 4.11

Injunction is most commonly an order by the court requiring a person to stop doing something. In the context of contract law, a court may order a person to stop acting in breach of the contract. An injunction, like specific performance, is an equitable remedy and will be granted only where the court is convinced that it is necessary and fair in the circumstances. For an example of a case in which the court refused to order specific performance but did grant an injunction, see Lumley v Wagner (in [8.38]).

Recovery of the contract price

4.12

Where a sum of money has become due under a contract but has not been paid, the person to whom the money is owed may sue for recovery of that sum (see [8.23]).

Agreed damages clauses 4.13

The contract itself may make provision for the damages to be paid in the case of breach. This is called an agreed or liquidated damages clause. This is a useful and efficient device in that it enables the parties to agree upon a value for various contractual obligations and it saves conducting an expensive court examination into the quantum of damages. The parties, however, have to be careful that the agreed damages clause is not a disguised penalty clause (see [8.28]). [page 157]

MAKING THE OFFER Meaning of ‘offer’ The person is the offer making the offer. The offeree is the person to whom the offer is made.

4.14

A contract exists where an offer has been accepted and good consideration provided. The first step, therefore, is to understand what is meant by an offer (refer Figure 4.3).

Figure 4.3

The offer

‘Offer’ has a special meaning in contract law. An offer exists

where one person indicates to another a willingness to enter into a binding agreement on certain terms.

‘Offer’ is a term widely used by the community. It is also a term that has a specific meaning in contract law. The common meaning and the legal meaning do not always coincide. At law, an ‘offer may be described as the indication by one person to another of his willingness to enter into a contract with him on certain terms’.5 That is, an offer exists only where a reasonable person would conclude on the facts that the person was willing to be bound in a court of law. Would a reasonable person conclude that an offer had been made in the following circumstances? (Please note that while many of these case are quite old, they are still used as they establish important rules that are equally as valid today as when they were decided.)

Harvey v Facey [1893] AC 552 (Privy Council) Facts The case involved a dispute over a property called Bumper Hall Pen. The property was owned by Facey. Harvey wanted to buy it. Harvey telegrammed Facey in the following way: Will you sell us Bumper Hall Pen? Telegraph lowest cash price … Facey replied: Lowest price for Bumper Hall Pen £900. Harvey then responded: We agree to buy Bumper Hall Pen for the sum of £900 asked by you. Please send us your title deed in order that we may get early possession. Facey refused to proceed with the sale and Harvey sued for breach of contract. Harvey argued that Facey’s reply constituted an offer which Harvey had then accepted. Issue Was Facey’s reply an offer to sell Bumper Hall Pen to Harvey for £900?

[page 158] Decision The Privy Council rejected this argument. Faceywas merely supplying factual information as requested. It is clear that this was not an offer to sell. In fact, the only offer was made by Harvey.

In understanding the concept of offer it is necessary to distinguish between: making an offer and merely indicating a possible course of future conduct; making an offer and making an invitation to treat; and making an offer and conduct that is merely part of the negotiations.

An offer, or merely an indication of a present intention? 4.15

In Harvey v Facey (see [4.14]), the property owner was merely indicating that if he did decide to sell, the minimum price would be £900. It was merely a statement of future possibility. No reasonable person would interpret it as an offer. No reasonable person would believe that Facey intended to enter into an agreement, particularly a legally binding agreement. (Note: Although he won the case, Facey could have avoided the misunderstanding by adding ‘without prejudice’ to his communication. This would have put the matter beyond dispute.)

Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 (High Court) Facts In 1946, the government announced that it would pay subsidies for wool purchased for Australian manufacturing. Australian Woollen Mills (AWM) purchased substantial quantities of wool and claimed the subsidy. When the government refused to pay, AWM sued for breach of contract.

Issue Was the government’s announcement about the payment of a subsidy an offer for the purposes of contract law? Decision There was no contract. The government had merely issued a statement of policy with respect to a proposed subsidy scheme for the wool industry. There was no intention to make an offer.6

[page 159]

Harris v Nickerson (1873) LR 8 QB 286 (Court of Queen’s Bench) Facts An auction, which had been advertised to be conducted on a particular day, was cancelled. Nickerson, who had travelled a considerable distance to attend the auction, sued for damages for breach of contract. To succeed, Nickerson had to establish that the advertisement was an offer to conduct an auction which Nickerson had accepted by attending. Did he succeed? Issue Did the announcement of an auction amount to an offer to conduct the auction? Decision There was no contract. Advertising an auction was not an offer, but a statement of present intention.

Kelly v Caledonian Coal Co (1898) 19 LR (NSW) 1 (Supreme Court of New South Wales) Facts Kelly planned to tender for the supply of coal to a government department.7 Prior to lodging the tender, Kelly held discussions with the Caledonian Coal Company. The parties agreed on a price at which Caledonian would supply

coal to Kelly if his tender should be successful. Caledonian confirmed the prices by letter which also stated, ‘These prices refer to this contract alone. Payment by [promissory note] due at a month from shipment’. Kelly was the successful tenderer. When Kelly tried to place an order with Caledonian, Caledonian refused to supply the coal. Kelly sued Caledonian for breach of contract. Issue Was Caledonian’s letter setting out the prices an offer? Did a contract exist? Who made the offer? What was it? (Read the next section, ‘An offer or an invitation to treat?’.) Decision No contract existed. Caledonian’s letter setting out the prices was not an offer, but a statement of its future intentions. As Caledonian had not made an offer to Kelly, it was under no obligation to supply the coal.

[page 160] Standing offers (under which a supplier offers to sell certain goods or services as and when needed) are treated in a similar fashion. The nature of a standing offer is demonstrated in the following case.

Colonial Ammunition Co v Reid (1900) 21 LR (NSW) 338 (Supreme Court of New South Wales) Facts Colonial had an agreement with the New South Wales Government under which Colonial agreed to supply ammunition in such quantities as might from time to time be required by the government. After a time, the government switched its purchases to other suppliers who were able to supply a new type of ammunition. Colonial sued for breach of contract. Issue Was there a contract between Colonial and the NSW Government to supply coal whenever Colonial needed it? Decision

The court held that no contract existed for the future supply of ammunition. It was merely a standing offer which was converted into a contract every time the government placed an order. However, there was no obligation on the government to place an order.

An offer or an invitation to treat? Care must be taken to distinguish between an offer and an invitation to treat.

4.16

Not all proposals are offers. Some are merely invitations to treat. The distinction between an offer and an invitation to treat is important in a number of circumstances, including retail pricing, advertising, auctions and tenders. If Andrew offers to sell his car to Brenda for $1000 and Brenda accepts, Andrew cannot change his mind and sell his car to Carl for $1250 without being liable to Brenda for breach of their agreement. Andrew and Brenda have clearly made a contract. However, if we change the facts slightly, the position is not so clear. Andrew places an advertisement in the classified section of a newspaper offering to sell his car for $1000 or near offer. Brenda responds to Andrew’s advertisement by visiting Andrew and stating that she accepts. Before Andrew is able to reply in any way, Carl telephones Andrew and offers $1250. Andrew accepts Carl’s offer. Does Brenda have an action against Andrew for breach of contract? At first glance, it appears that Andrew has made an offer and Brenda has accepted, as was the case in our first example. However, if we look at case law, it seems that Andrew has not made an offer at all.

Partridge v Crittenden [1968] 2 All ER 421 (Queen’s Bench Division) Facts Partridge placed an advertisement in a magazine which read in part: ‘Bramblefinch cocks, bramblefinch hens, 25s each.’ (A bramblefinch is a type

of bird.) Partridge was charged with ‘offering’ a protected bird for sale contrary to the Protection of Birds Act 1954 (UK). [page 161] Issue Was the advertisement an ‘offer’ to sell the birds? Decision The charge was dismissed on the basis that Partridge had not ‘offered’ the birds for sale. His advertisement was not an offer, but an invitation to treat.8

An invitation to treat may also be called an invitation to negotiate. It is an invitation to others to make an offer. The court decided as a matter of law that Partridge was asking people to make him an offer. Retail store displays: Who makes the offer? 4.17 By displaying goods for sale with the price attached, is a retailer making an offer or inviting the public to treat?

Fisher v Bell [1960] 3 All ER 731 (Queen’s Bench Division) Facts By an Act of Parliament, it was an offence to ‘offer’ for sale any offensive weapon. Flick-knives were listed as offensive weapons. The defendant was charged pursuant to the Act with displaying a flick-knife in his shop window, with the price tag clearly attached. Issue Was displaying of the flick-knife in the shop window (with price tag) an offer? What defence do you think was argued on behalf of the defendant? Decision The charge was dismissed on the basis that no ‘offer’ for sale had been proved. The display of an item in a shop window with the price attached was not an offer to sell, but merely an invitation to treat.

Advertising or displaying goods for sale is generally not an offer.

If the display of goods in a retailer’s window is merely an invitation to treat, what about goods displayed on a supermarket shelf? Is the supermarket owner making an offer to sell the goods at the marked price, or merely inviting customers to make it an offer? [page 162]

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 (UK Court of Appeal) Facts Section 18 of the Pharmacy and Poisons Act 1953 (UK) provided that it was unlawful for a person to sell certain drugs unless the sale was made ‘by, or under the supervision of, a registered pharmacist’. The defendant (Boots Cash Chemists) operated a chemist shop on a selfservice basis. Customers selected their intended purchases and then took them to the checkout points located near the exits to the store. A pharmacist supervised the operation at the checkout. His job included preventing the removal of drugs from the shop. Boots was charged with a breach of s 18. Thus, the case was not a contract dispute. However, the main issue involved contractual principles. Issue When was the contract made — when the customer selected the items from the shelves or at the checkout point? Was the offer made by the retailer in displaying the items for sale, or by the customer when presenting the goods at the checkout point? Decision The Court of Appeal unanimously decided that the offer was made by the customer when presenting the items at the checkout counter. The display of goods amounted to no more than an invitation to treat.

Consequently, in most circumstances, the retailer does not make an offer by displaying goods for sale, even where the goods are marked with a price. Catalogues: Who makes the offer? Price catalogues are normally not offers.

4.18

In normal circumstances, a trader does not make an offer by advertising goods for sale through a catalogue. The same principles would probably apply to a website on the internet. Compare the following case with perhaps the most famous of all advertising cases, Carlill v Carbolic Smoke Ball Co (in [4.19]).

Grainger & Sons v Gough [1896] AC 325 (House of Lords) Facts Grainger & Sons operated a business selling wine. A price catalogue was distributed to consumers. [page 163] Issue Had Grainger & Sons made an offer by circulating the price catalogue? Or was it merely an invitation to treat? Decision The House of Lords was in no doubt that it was an invitation to treat. Lord Herschell rationalised the matter in the following way (at 334): [The] transmission of such a price list does not amount to an offer to supply an unlimited quantity of the wine described at the price named, so that as soon as an order is given there is a binding contract to supply that quantity. If it were so, the merchant might find himself involved in any number of contractual obligations to supply wine of a particular description which he would be quite unable to carry out, his stock of wine of that description being necessarily limited.

Price advertising is normally not an offer to sell at that price.

The distinction between an offer and an invitation to treat lies in the objective intention of the person making the offer or invitation to treat. If the shopkeeper, the internet retailer or the person advertising in the newspaper is making an offer, he or she would be bound by any person who accepted the offer. To return to our earlier example in [4.16], if Brenda and Carl accepted Andrew’s offer before he had the opportunity to withdraw it, Andrew would have made two contracts to sell the one car. Clearly, no reasonable person would intend such a situation. Therefore, the law does not regard Andrew as having made an offer. Rather, Andrew has invited others to treat (ie, negotiate). A similar rationale applies to the shopkeeper in the situations described above. It does not matter that Andrew or the shopkeeper has not fully considered the matter and indeed believe that they are making an offer. While it is possible for the offeror to be caught with two contracts to sell the one item, it would only be in unusual circumstances.9 Advertisements: Who makes the offer? This chapter deals with advertisements only in so far as they relate to the law of contract. There are other laws — particularly in the Australian Consumer Law — which affect advertising of goods and services.

4.19

An advertisement placed in the media may amount to an offer or to an invitation to treat. It depends on the circumstances. For example, a large department store advertises in the newspaper that it is having a monstrous clearance sale. A number of items are shown with the sale price marked. Is the department store making an offer or is it inviting customers to treat? This would not amount to an offer. It is similar to previous cases (see Partridge v Crittenden, in [4.16]; Grainger & Sons v Gough, in [4.18]). But an advertisement could be an offer: in one of the more celebrated cases in English law, the English Court of Appeal in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 rejected an

argument that the advertisement placed by the Carbolic Smoke Ball Company was only an invitation to treat or a mere advertising puff (see the ‘Law in context’ feature, below). [page 164]

The Carbolic Smoke Ball Co case: how the smoke ball affected the law of contract From 1889 to 1893 an influenza epidemic swept through Europe, killing both rich and poor in a very democratic fashion. In England, Prince Albert Victor, the grandson of Queen Victoria and second in line to the throne, caught the disease and within two weeks was dead. A few days later Emily Carlill also caught the disease, but unlike the Prince, she survived. At the Carbolic Smoke Ball Company there were probably a few who harboured secret regrets about Emily’s fate; for Emily, having recovered, sued the company. On what basis did she sue? Before catching influenza Emily had been persuaded by the company’s seductive advertising to try its Carbolic Smoke Ball. A smoke ball was a rubber ball — containing carbolic acid — with a tube attached. The tube was inserted in the user’s nose and the ball squeezed. The aim was to make the nose run. In this way, the influenza was supposedly flushed out. The advertisement promised readers that if they used the smoke ball, they would not catch influenza. The advertisement went further and promised readers (in large print) a reward of £100 if they did catch influenza. To convince the public of its sincerity the company prominently claimed that it had deposited £1000 with the Alliance Bank. When Emily caught influenza she asked for her ‘reward’ of £100. The company flatly refused. If she wanted the money, Emily had no option but to sue. Emily Carlill won her case because the court was able to apply traditional contract principles. In many ways, this was just luck. Indeed, Emily Carlill would never have sued if the reward had not been so huge: £100 was a lot of money in 1892. The deposit of £1000 with the Alliance Bank made it difficult for the company to argue that the advertisement was just a mere advertising

puff; it was clearly an offer. If the company had shown a little less hubris, it might well have escaped liability. Emily was lucky. Generally the 19th century was not a good time for consumers; in the main, the law lagged behind the technical and commercial innovations that characterised the age. At the time of Carlill’s case, there was little control over the sale of medicines. This was no doubt due in part to the veil of ignorance that surrounded many medical conditions, but it was also due in part to the spirit of the times. The notion that it was the role of government to police socially detrimental activities (other than traditional crimes) was largely unknown. Thus, there were also few controls over advertising. Even though it lost the case, the Carbolic Smoke Ball Company did not change its questionable activities; it merely rearranged its advertisement to make it almost impossible to collect the reward (which it then arrogantly increased to £200, although the £1000 deposited with the Alliance Bank was never seen again). It would take another 50 years or more before society accepted the need for effective restrictions on misleading advertising. Today, the Carbolic Smoke Ball Company’s advertising would never survive the British or Australian consumer protection laws.

[page 165]

Auctions: Who makes the offer? 4.20

It seems fairly clear that in the case of a standard auction with a reserve price, the bidder makes the offer, which the auctioneer is then at liberty either to accept or reject. Auctions for the sale of goods, whether with or without reserve, are covered by the provisions of an Act of Parliament. For example, in Victoria, the Goods Act 1958 s 64 provides that an auction for the sale of goods is complete upon the fall of the auctioneer’s hammer (or by some other customary manner) and that, until that time, any bid may be retracted.10 There is some doubt as to the position of unreserved auctions in other cases, such as a sale of land. There are decisions going each way.11 Considering the large number of auctions, why has this matter remained unresolved for such a long period? The problem can be, and is, overcome by the auctioneer announcing at the commencement of the auction the terms upon which the auction is

to be conducted. Any person who then makes a bid therefore enters into a separate contract with the auctioneer to abide by the auctioneer’s rules. Thus, a properly conducted auction should not be exposed to the costly risk of unresolved legal issues.

Tenders: Who makes the offer? 4.21

Suppose a land developer calls upon builders to submit (tender) their prices for erecting a building in accordance with the architect’s specifications. In such circumstances, it is generally the builder who makes the offer, not the developer. That is, the tenderer makes the offer, not the person calling for tenders: Spencer v Harding (1870) LR 5 CP 561. Because the offer is made by the tenderer, the body calling for the tenders is free to choose whichever tender it wishes. It is not bound to accept the lowest tender. In fact, it is not bound to accept any of the tenders, although in most cases it must at least give proper consideration to each tender.12

Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 (Federal Court) Facts The Civil Aviation Authority (CAA) invited Thomson Radar Australia Corporation and Hughes Aircraft Systems to tender for the contract to supply an advanced air traffic system for Australia. The CAA sent a Request for Tenders to Thomson and to Hughes, setting out the terms of the tender process, including: the criteria by which the tenders would be judged; a promise by the CAA that it would not discuss price with either of the tenderers once the tenders were submitted; and a requirement that alterations to tenders would not be permitted. [page 166] Contrary to these terms, the CAA discussed tender prices with Thomson and allowed Thomson to alter its tender. The tender was awarded to

Thomson. Hughes complained that the CAA was contractually bound to follow the Request for Tenders procedure. The CAA argued that the Request for Tenders was merely an invitation to treat and there was no obligation to comply with it. Issue Was the Request for Tenders an offer or an invitation to treat? Decision Finn J in the Federal Court held that a reasonable person would have concluded that the CAA intended to be bound by the procedures set out in the Request for Tenders. Therefore, the Request for Tenders was an offer. Once Hughes had submitted a tender in accordance with the Request for Tenders a contract existed. (Finn J called this a ‘process contract’.) The CAA had breached that contract.

The lesson for those (such as government departments) who are involved regularly in calling for tenders is that the tender document must be carefully drawn and complied with. If the facts make it clear that the person calling for the tenders intended that the lowest tender would be accepted, the courts are prepared to give effect to that intention and hold that an offer has been made to accept the lowest tender.13

Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1985] 3 WLR 276 (House of Lords) Facts Royal Trust, the owner of a parcel of shares, engaged in negotiations to sell the shares. Eventually, Royal Trust sought sealed bids from two possible buyers. In calling for the bids, Royal Trust advised the bidders as follows: We confirm that if any offer made by you is the highest offer received by us we will bind ourselves to accept such an offer. Harvela bid $2.175 million. Outerbridge bid $2.1 million or ‘$101,000 in excess of any other offer whichever is the higher’. The seller accepted Outerbridge’s bid. Harvela sued for breach of contract. Issues

Was there a contract between Harvela and Royal Trust? If so, had Royal Trust breached the contract? To succeed, Harvela had to show (1) that an offer was made by the seller [page 167] in calling for the bids, and (2) that it was a term of the offer that the seller agreed to be bound by the highest bid. The case is complicated by the form of Outerbridge’s bid. Was the Outerbridge form of bidding an acceptable form? How did the court handle it? Decision The House of Lords held that, in the circumstances, the seller had made the offer, not the bidders. Harvela had accepted the offer by being the highest bidder. Outerbridge’s bid of ‘$101,000 more than any other bidder’ did not comply with the implied terms of the offer that each tender must be for a definite amount. Royal Trust was ordered to transfer the shares to Harvela.

Internet transactions: Who makes the offer? Internet transactions follow the normal rules of offer and acceptance.

4.22

The fastest-growing type of sale is over the internet. This applies not only to consumer sales but also to business-to-business sales. The growth of online auction sites, such as eBay, means that many online transactions are now consumer to consumer.

Smythe v Thomas [2007] NSWSC 844 (NSW Supreme Court) Facts Thomas and Smythe were registered e-Bay users. Thomas listed an aircraft for sale on eBay’s online ‘auction’ site with a reserve price (minimum bid) of $150,000. The auction was to remain open for 10 days. Smythe bid $150,000 and was successful. Thomas refused to proceed with the deal, arguing that the listing on e-Bay was an invitation to treat. Smythe argued that it was an offer which he had accepted by being the successful bidder. Issue Was the listing an offer or merely an invitation to treat? This was critical in

determining whether there was a contract. If there was a contract, was specific performance available? Decision There was a contract between Thomas and Smythe. According to the court, listing the aircraft for sale on eBay’s auction site at a minimum price was an offer to any ‘bidder who: (a) bid within the specified time period; (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 his bid to which the seller had not previously indicated his willingness to consent’ (at [39]). As the aircraft was a ‘vintage and unusual item’, specific performance was ordered.

Where a business advertises its products on the internet and invites buyers to transact over the internet, who makes the offer — the seller or the buyer? The normal rules would apply and thus, in the majority of cases (if not all), the buyer would make the offer. [page 168] To avoid any disputes over where the contract is made and which law applies to the contract, most sellers stipulate the law to be applied (as well as other important terms). These are automatically included in the offer (and thus the contract) when the customer sends his or her order — the order cannot be sent without ticking the box that refers to the ‘Terms and Conditions’. When a transaction is conducted using an online site, such as eBay, at least three contracts come into existence — a contract between the seller and the buyer, a contract between the seller and eBay and a contract between the buyer and eBay.

An offer, or merely part of the negotiations? 4.23

Where negotiations are complex, an offer will not arise merely because the parties have reached agreement on one aspect of the deal. In large commercial dealings — for example, the sale of industrial property or the sale of a complex business — the parties often operate under the implied understanding that the deal will not be binding until the parties actually sign a formally drawn contract. The reason for this is that there are a huge number of matters to be discussed and settled. Each new matter may require reconsideration of previous negotiations. In other words, the deal may be fashioned and refashioned on a number of occasions before becoming final, and the parties accept this. In such situations the courts would be reluctant to construct a contract out of the correspondence between the parties.14

THE FATE OF THE OFFER 4.24

An offer may suffer any of a number of fates (see Figure 4.4). [page 169]

Figure 4.4 The fate of the offer

WITHDRAWING THE OFFER To revoke an offer means to withdraw or cancel an offer.

4.25

An offer can be withdrawn but the withdrawal (or revocation) is subject to a number of rules: Once an offer has been accepted it cannot be revoked; however, it may be revoked any time before acceptance. Revocation must be communicated to the offeree; otherwise, it is ineffective. The communication of revocation does not have to be made by the offeror personally. Special problems exist with unilateral offers. Certain offers (called options) may not be revoked.

Can an offer be revoked after acceptance?

4.26

A contract is made when an offer is accepted (provided intention and consideration are satisfied). Once accepted, the offer cannot be revoked. Any refusal to carry out the terms of the offer would be a breach of contract. For example, Albert offers to sell his car to Bess for $5000. Albert agrees to leave the offer open for five days. Before the five days have passed, Bess accepts the offer. Before the car or any money has changed hands, Albert gets another offer from Clarissa. If Albert sells the car to Clarissa, where does this leave Bess? Albert has made an offer which he now wishes to revoke. However, it is too late — the offer has been accepted and the contract already exists. It is irrelevant that no money has changed hands. If Albert refuses to sell his car to Bess, he will have breached the contract.

Can an offer be revoked before acceptance? 4.27

The general rule is that an offeror may revoke an offer at any time prior to the offer being accepted even if the offeror has promised not to revoke it. [page 170]

Routledge v Grant (1828) 4 Bing 653; 130 ER 920 (Court of Common Pleas) Facts Grant offered to buy Routledge’s house and said that he would keep his offer open for six weeks. Before the expiration of six weeks and before Routledge had accepted, Grant wrote a letter to Routledge withdrawing his offer. This caused Routledge some problems as he had bought another house believing that his would be sold. Routledge sued Grant for breach of contract, arguing that Grant could not withdraw his offer before the promised six weeks had expired. Issue Was Grant entitled to withdraw his offer even though he had promised to

keep it open for six weeks? Decision The court rejected Routledge’s case and held that an offeror was entitled to revoke an offer at any time before it was accepted.

The rule that an offer may be revoked prior to acceptance is subject to the proviso that the offeror has not granted the offeree an option (see [4.31]).

Is it necessary to tell the offeree about the revocation? 4.28

The rule is that an offer is not withdrawn until the revocation has actually been communicated to the offeree. This means that if an offeror has a change of mind and wants to retract the offer, he or she must take some active steps to let the offeree know that the offer is withdrawn; otherwise, the offer stands.

Byrne & Co v Van Tienhoven & Co (1880) LR 5 CPD 342 (Court of Common Pleas) Was there a contract in the following circumstances involving trade between Britain and the United States? Facts The chronology is as follows:

1 October: 8 October:

The offeror in London sent an offer by post to the offeree in New York. No response had been received by 8 October and so the offeror sent another letter revoking the offer. [page 171]

11 October:

The original offer was received by the offeree in New York, who immediately cabled an acceptance.

20 October:

The letter of revocation was received by the offeree in New York.

Issue If the offer was revoked on the 8th October, there was no contract. If it was not revoked on the 8th, there was a contract. Therefore, the issue was whether the offer was revoked on the 8th October by posting a letter of revocation. Decision There was a contract. While the offeror has the right to revoke an offer prior to acceptance, revocation is not effective until it is received by the offeree. This occurred on 20 October, well after acceptance had been cabled. The court rejected a submission that the postal acceptance rule applied to the revocation of an offer. For the postal acceptance rule, see [4.44].

Who must tell the offeree that the offer has been revoked? 4.29

Revocation of the offer must be communicated to the offeree. However, the revocation does not necessarily have to be communicated by the offeror in person. It is sufficient if the offeree learns of the revocation in some reasonably reliable manner: Dickinson v Dodds (1876) 2 Ch D 463. What amounts to a reasonably reliable manner will depend on the circumstances of each case. The question is whether, in the circumstances, a reasonable person in the position of the offeree would conclude that the offer had been withdrawn.

Is it possible to revoke a unilateral offer? 4.30

Unilateral offers are different to other offers. Where the offer involves a unilateral promise, such as in Carlill v Carbolic Smoke Ball Co (see [4.19]), and the offeree has acted on the promise, the offeror will normally be prevented from withdrawing the offer until the offeree has had a reasonable opportunity to complete.15 Thus, once Mrs Carlill had commenced using the smoke balls in response to the company’s advertisement, the company would not have been permitted to revoke the offer prior to Mrs Carlill completing the course of medication in accordance with the advertisement.

Options: offers that cannot be revoked An option is effectively a contract to keep an offer open — the offer cannot be revoked.

4.31

In contract law, the only way to ensure that an offer cannot be revoked prior to acceptance is to make sure that it amounts to an option. Although there is some debate as to the true nature of an option,16 it is effectively a separately enforceable obligation. An option exists where the offeree has given something of value to keep the offer open. If in Routledge v Grant (see [4.27]), the parties had agreed that Routledge would pay a sum of money in return for Grant’s promise to keep the offer open for six weeks, this would have been an enforceable promise. [page 172]

Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674 (High Court) Facts Quinn granted the appellant an option in the following terms: I, Quinn, in consideration of the sum of five shillings paid to me hereby grant to Goldsborough Mort & Co Ltd the right to purchase the whole freehold lands within one week from this date at the price of £1 10s per acre, calculated on a freehold basis, and subject to the usual terms and conditions of sale relating to such lands, and upon the exercise of this option I agree to transfer the whole of the said lands to Goldsborough Mort & Co Ltd or its nominee. Before the time expired for acceptance of the offer, Quinn purported to withdraw the offer. Despite this, Goldsborough Mort accepted the offer and when Quinn refused to transfer the land, the company sued for specific performance. Issue How did the option affect Quinn’s attempt to withdraw the offer? Decision

The High Court held that, as consideration (five shillings) had been given for the promise to keep the offer open for one week, the offer could not be withdrawn. An option given for value is not revocable. As this was a contract for the sale of land, the court ordered specific performance of the contract.

Options are very common in certain types of contracts, such as leases.

The option must be exercised strictly in accordance with its terms. Thus, if the option has to be exercised within five days, it cannot be accepted on the sixth day.

REJECTING AN OFFER What is the effect of rejecting an offer? 4.32

An offer may be rejected expressly or by implication. The importance of rejecting an offer is that the offer is terminated on rejection and cannot subsequently be accepted (see Hyde v Wrench, in [4.34]). There should be no problems about an express rejection. For example, X offers to sell her car to B who says that he does not want it. B has expressly rejected X’s offer. An offer may also be rejected implicitly, either by the offeree’s conduct or by the offeree making a counter offer.

Offeree’s conduct may indicate rejection 4.33

An offer is rejected by the offeree doing something that is inconsistent with an intention to accept. For example, XYZ Ltd offered Mei Ling $200,000 per year plus stock options to be its chief executive officer. Mei Ling joins ABC Ltd instead. The act of joining ABC Ltd is clearly inconsistent with an intention to join XYZ Ltd. The offer made by XYZ Ltd would terminate. [page 173]

Counter offer amounts to a rejection A counter offer simply means that the existing offer has been rejected and a new offer made. Put simply, contract negotiations are often just a series of counter offers.

4.34

An offer is rejected by the offeree making a counter offer. See Hyde v Wrench, below.

Hyde v Wrench (1840) 3 Beav 334; 49 ER 132 (Rolls Court) Facts Wrench offered to sell his property to Hyde for £1000. Hyde countered with an offer to buy for £950. This was not acceptable to Wrench and so Hyde wrote to him offering to buy at the former amount of £1000. Wrench did not reply and subsequently refused to transfer the land to Hyde. At no stage had Wrench actually withdrawn his offer to sell for £1000. Issue What was the effect on the transaction of the counter offer to buy the property for £950? Decision The court held that Wrench was under no obligation to sell. His offer had been rejected by Hyde’s counter offer and an offer, once rejected, cannot be accepted. In fact, Hyde’s final communication was an offer to buy for £1000 and this had never been accepted by Wrench.

It is not necessary that a counter offer be as obvious as the one in Hyde v Wrench. Any material alteration of the terms of the offer will be a counter offer. It is therefore necessary to be careful when restating the original offer as part of the purported acceptance.

Turner, Kempson & Co Pty Ltd v Camm [1922] VLR 498 (Supreme Court of Victoria) Facts Turner Kempson (TK) offered to supply:

15 tons of raspberry pulp made from whole fruit and of first class quality for sale at £45 per ton net. Pulp to be delivered to Camm’s store, Melbourne. Price to be paid in cash 7 days. Camm accepted as follows: Fifteen tons raspberry pulp good merchantable condition made from finest season’s fruit. Price £45 net per ton delivered in store. Terms, cash 7 days after date of delivery. Delivery, to be made free to store in three lots of 5 tons each, approximately 10 days between each delivery. Claims, any loss, if any, arising from faulty packing in unclean tins to be allowed for by the seller, provided they are claimed for not later than 14 days from date of final delivery. [page 174] TK refused to deliver. Camm sought damages for breach of contract, arguing that TK had made an offer which he had accepted. TK denied there was a contract. TK argued that Camm’s ‘acceptance’ added new terms to the offer — that is, a warranty as to the fruit quality and the terms of delivery — and was really a counter offer. Issue Was Camm’s ‘acceptance’ really a counter offer? Decision The court found for Turner Kempson. Camm’s ‘acceptance’ was not really an acceptance because he had changed the terms of TK’s offer. Irvine CJ said that Camm had effectively stated: We have pleasure in accepting your offer, by which we mean what is set out in the contract note enclosed herewith. That is what we accept. Therefore, Camm had made a counter offer which had not been accepted.

The rule that an offer is rejected by a counter offer is not to be applied mechanically. A party may complain about an offer, without necessarily rejecting it. This occurred in Brambles Holdings v Bathurst City Council [2001] NSWCA 61. In response to a letter of offer setting out the fees for the disposal of liquid waste, Brambles ‘expressed dissatisfaction with the offer … and set out [Brambles’] argument for higher fees but [this] did not amount to a

rejection’ (at [158]). Brambles’ subsequent conduct clearly indicated that it had accepted the offer and that a contract existed.

Asking for clarification of the terms of the offer is not a counter offer 4.35

What happens if the offer is incomplete in one or more inessential terms and the offeree seeks clarification and suggests appropriate terms? For example, Alice offers to sell her car to Aphrodite for $5000, to be paid on handing over the car. Aphrodite asks Alice if she can pay by personal cheque. Is this adding a new term to the offer (a counter offer)? Or is Aphrodite merely seeking clarification of the terms of the offer before deciding whether to accept? A request to clarify the terms is not a counter offer: Stevenson Jacques & Co v McLean (1880) 5 QBD 346. A reasonable person test is used to determine whether an offeree’s response ought to be regarded as a counter offer or as a mere request for clarification. To apply the test, it is necessary to examine all the circumstances, including the subject matter of the deal, the contents of the offer and the form of the offeree’s response.

ACCEPTING THE OFFER The contract is made once the offer is accepted.

4.36

If an offer has not been withdrawn or rejected it may be accepted. Acceptance of the offer by the offeree creates the agreement. Again, there are a number of rules to be applied: Only the offeree may accept the offer. Acceptance must be final and unqualified. Acceptance must be communicated to the offeror, unless one of the exceptions applies. [page 175]

Only the offeree may accept 4.37

Vera offers to sell her car to Betty. Thelma overhears the offer and decides that it is a good deal. She sends a fax to Vera, saying: ‘I accept your offer for the sale of your car. I will come and collect it next week’. Is there a contract between Vera and Thelma? No — only the offeree (Betty) can accept the offer. In that case, how would we describe Thelma’s actions? Thelma is making an offer to purchase the car from Vera. If Vera accepts, she will have to make sure she revokes her offer to Betty. Otherwise, Vera could find herself with two contracts of sale and only one car. In that case, who would have the right to the car? That would depend on which contract was made first. If the contract with Thelma was made first, Thelma would probably have a right to the car and Betty would have to accept damages.

Acceptance must be final and unqualified Problems arise when the parties use words that are unclear or ambiguous. The issue is whether the parties really intended to make an enforceable agreement or not.

4.38

The offeree must intend to be bound by the agreement. For example, A offers to sell her personal computer to B for $1000. B says: ‘The price seems right. I accept but I’ll let you know for sure tomorrow’. Has B accepted? The best explanation of the facts would suggest that while B has agreed in principle, he wants more time to think about it. This is not acceptance because B is reserving the right to change his mind. Acceptance must be unqualified: Masters v Cameron (see below). In the same way, if the offeree made his or her acceptance ‘subject to being approved by my solicitors’, there would be no contract because the offeree is reserving the right to change the terms. What if the offeree made the acceptance subject to contract or subject to formal contract? Is this an unqualified acceptance or is

the offeree saying, ‘I agree so far but I may want to have some further negotiations’?

Masters v Cameron (1954) 91 CLR 353 (High Court) Facts Cameron owned a farm which Masters was interested in buying. Masters signed a memorandum of agreement prepared by a real estate agent which contained this term: [This] agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my (Cameron’s) solicitors on the above terms and conditions … The memorandum covered all the essential terms of such a sale. The sale price was £17,500. An amount of £1750 was paid by Masters to the agent. This was described as a deposit. Masters suffered financial difficulties and refused to proceed. The High Court had to determine whether a contract existed, and who was entitled to the £1750. If a contract existed, Cameron was entitled to claim the deposit. If no contract existed, Masters could get the deposit back. Issue What did the memorandum mean? Had the parties agreed to be bound to a contract, or was the ‘acceptance’ not sufficiently final? [page 176] Decision The High Court said that there were three possibilities in a case like this: 1. There is a contract which is immediately binding, and one of the terms is that formal documentation will be prepared. 2. There is a contract but nothing can happen until a formal document is prepared (condition precedent). 3. There is no contract. The High Court said that normally an arrangement made ‘subject to contract’ is presumed not to be a contract. To accept ‘subject to contract’ was normally not a final and unqualified acceptance. There was no evidence in this case to displace the general rule. As there was no contract, the deposit belonged to Masters.

It has been suggested that a fourth possibility exists in appropriate circumstances, namely that there is a contract which is immediately binding but that the parties expect to make a replacement contract containing (mutually agreed) additional terms. See Baulkham Hills Private Hospital v GR Securities (1986) 40 NSWLR 622. Naturally, the offeree must accept the terms specified by the offeror. Any alteration of those terms will amount to a counter offer (see Hyde v Wrench, in [4.34]).17

The battle of the forms What happens where two parties send documents to one another containing contradictory terms? This often occurs because each party has a list of terms and conditions (probably drawn up by their lawyer) which are automatically attached to all their documentation. Each party just assumes that their terms and conditions will apply. The parties proceed as if they have a contract and indeed they do. But if and when a dispute arises it may become necessary to determine (in this ‘battle of the forms’) just whose terms and conditions actually apply. A contract cannot have contradictory terms — one party must be right and one wrong. Hopefully, good sense will apply and the parties will find some compromise. But if they are unable to do so, the law will have to come up with some solution. This is where the rules of offer and acceptance become important. It follows logically that, in many situations, the last party to send a form has a decided advantage. However, remember that the rules of offer and acceptance are a device for ascertaining what the parties intended.

Acceptance completes the contract 4.39

Once acceptance has occurred, the contract is normally complete and any correspondence after that will be irrelevant. [page 177]

Reese Bros Plastics Ltd v Hamon-Sobelco

Australia Pty Ltd (1988) 5 BPR 11,106 (New South Wales Court of Appeal) Facts Hamon-Sobelco placed an order which contained certain terms. Reese Bros Plastics replied by fax as follows: ‘Will confirm order on our official confirmation sheets, over next few days. Please accept this as our confirmation in meantime’. The confirmation which followed contained certain conditions which differed in a number of respects from HamonSobelco’s order. Issue Had Harmon-Sobelco’s offer been accepted by the fax? If so, what was the effect of the confirmation fax (which changed some of the terms)? Decision The court held that Hamon-Sobelco’s offer had been accepted by the fax and therefore the subsequent confirmation containing new terms was irrelevant.

Acceptance must be communicated to the offeror 4.40

Suppose Alex sends a letter to Bill offering to sell his computer for $1000. When Bill gets the letter, he thinks to himself, ‘That sounds like a good idea. I’ll definitely take Alex up on that offer’. The next day, Bill gets a telex from Alex: ‘Sorry. Sold the computer to someone else’. Bill is bitterly disappointed. Can he sue for breach of contract? No — making a mental decision to accept is not sufficient. The offeree must communicate the acceptance to the offeror: Felthouse v Bindley (1862) 11 CBNS 869; 142 ER 1037. The contract is not made until acceptance has been communicated to the offeror: Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93. As a general rule, silence does not amount to acceptance. Certainly, the offeror cannot force acceptance upon the offeree. In Felthouse v Bindley, Felthouse sent a letter to his nephew offering to buy a particular horse. The letter of offer said that if Felthouse did not hear from his nephew, he would consider

the horse his for £30 15s. The court held that the nephew’s silence could not be regarded as acceptance in these circumstances.

Communicating acceptance to a large company 4.41

Where the acceptance is received by a large company, the question arises whether the contract is made at the time the acceptance is first received at the offeror’s office (the mail room or the fax machine), at the time the acceptance falls into the hands of the person within the company responsible for that matter, or at some other time. Ultimately, it depends on the intention of the parties, but it seems that if the parties have not referred to the matter, acceptance occurs when the relevant letter or other communication is opened ‘in the ordinary course of business or would have been so opened if the ordinary course were followed’.18 In other words, it is the recipient’s responsibility to arrange for prompt [page 178] and efficient distribution of messages within the office and the company generally. If the acceptance is received in the middle of the night, the contract is probably not made until the office opens for business the next morning.

Communicating acceptance over the internet 4.42

The Electronic Transactions Act 1999 (Cth) contains rules to determine when and where an electronic communication (such as email) is sent and received. Similar legislation has been passed in all states and territories, so that the rules apply equally throughout Australia.19 Subject to any agreement between the parties to the contrary, an electronic communication is received when it enters an information system20 which is designated by the addressee as the system for the receipt of electronic communications or, if no

system is designated, when it comes to the attention of the addressee. Subject to any agreement between the parties to the contrary, an electronic communication is taken to have been sent from the sender’s place of business and to have been received at the addressee’s place of business.

When is express communication of acceptance not necessary? 4.43

There are five possible exceptions to the rule that acceptance must be communicated: Where the parties have dealt regularly with one another in the past, it may be reasonable to conclude on the basis of those past dealings that a contract exists even though the offeree has not formally accepted. Where the offeror and the offeree are in the same industry, and custom within that industry suggests that formal acceptance is not necessary, a contract may exist even though the offeree has not communicated acceptance. Acceptance may be indicated by conduct.21 In the case of unilateral contracts, such as in Carlill v Carbolic Smoke Ball Co (see [4.19]), it is not necessary for the offeree to advise the offeror of acceptance. The postal acceptance rule.

Acceptance and the postal acceptance rule 4.44

Actual communication of acceptance is not necessary where the offeror has accepted the ordinary post as the means of communication between the parties: Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93. Acceptance may be express or implied. In such cases, acceptance occurs when the letter is posted, even if the letter is lost in the post. Of course, the letter must be properly addressed and stamped. However, the rule does not apply to communications by email or the internet (see [4.42]). Nor will it apply where the mode of

communication can be said to be instantaneous (eg, face-to-face and telephone conversations, communications by fax). [page 179] The postal acceptance rule is often misunderstood. It does not apply just because the acceptance is posted. There must be more.

4.45

In the world of 21st-century communications it is somewhat surprising that the postal acceptance rule still exists. It should be used sparingly and only where there is clear, unequivocal evidence that the offeror has accepted the post as the method of acceptance;22 for example, where the offer states ‘send your answer by mail’. In Bressan v Squires [1974] 2 NSWLR 460, the relevant document said: ‘This option may be exercised by you by notice in writing addressed to me at any time on or before 20 December, 1972’. The New South Wales Supreme Court held that the postal acceptance rule did not apply in these circumstances.

The method and timing of the acceptance 4.46

The method of acceptance must conform with the offeror’s requirements. The basis of this rule is simply that the offeror sets not only the terms of the offer, but also the method and time of acceptance. Thus, if the offeror prescribes a particular manner of acceptance as the only manner of acceptance, the offeree must comply. If, however, the offeror stipulates a particular method of acceptance but does not stipulate it as the only method of acceptance, the rule is that the offeree may choose any method of acceptance, provided it is just as advantageous to the offeror as the nominated method. Normally, the method of acceptance will not cause problems. An offeror will generally be more concerned with the time of acceptance than the method. Many offers will state a time by which the offer must be accepted. The offeree must conform with

that time. If the offer is silent as to the method and timing of acceptance, the offeree may do whatever is appropriate in the circumstances. For example, if the offer is made by fax this will usually imply that a fairly quick response is required. Thus, the offeree could choose to telephone the acceptance, fax it, send a letter by courier or even post it (although the postal acceptance rule would then not apply).

Can acceptance be communicated by someone other than the offeree? 4.47

Acceptance must be communicated, but does this mean that the acceptance must be communicated by the offeree in person? For example, could a third person notify the offeror that the offer had been accepted? This is a fairly regular occurrence in business where dealings are more often than not left to employees or other agents. Provided the third person has actual authority to communicate acceptance, or reasonably appears to have such authority, the acceptance is valid.23 Otherwise, the acceptance is not valid: see Powell v Lee (1908) 99 LT 284.

LAPSE OF OFFER Lapse of an offer due to the death of offeror or offeree When an offer lapses, it ceases to exist. It cannot be accepted.

4.48

The general rule is that the death of either the offeror or the offeree terminates an offer: Fong v Cilli (1968) 11 FLR 495. The result would differ if an option was involved (see [4.31]) and the offer did not involve personal skill or service by the deceased: Carter v Hyde (1923) 33 CLR 115. [page 180]

Lapse of an offer due to time 4.49

If A offers to sell his car to B, such offer to remain open until midnight on Friday next, B cannot accept on Saturday morning. The offer lapsed at midnight. If the offer stated that acceptance was expected by return mail, the offer would remain open for as long as it would take, in the normal course of events, for return mail to reach the offeror. Where no time limit is mentioned, the offer remains open for a reasonable time: Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109; Ballas v Theophilos (No 2) (1957) 98 CLR 193. What constitutes a reasonable time will depend on the circumstances of each case, including: the method by which the offer has been made (an offer made by telegram may demand a quicker response than one made by ordinary mail); the nature of the transaction (an offer for the sale of a book would presumably demand a faster reply than one for the sale of a house); the terms of the contract as a whole; the actions of the parties between the making of the offer and the purported acceptance; and finally any evidence that the offeror has intimated an appropriate timeframe.

Lapse of an offer due to the failure of a condition precedent 4.50

An offeror may make an offer conditional on the happening of a particular event. If that condition is not satisfied, the offer lapses and cannot be accepted. For example, Jane might offer to sell her car to Bill for $10,000 provided she goes overseas. If she does not go overseas, the offer lapses.

THE AGREEMENT MUST BE ‘CERTAIN’ 4.51

The general rule is that in order for an agreement to be binding, it

must be sufficiently certain in all its essential elements; otherwise, it is of no effect. In other words, there is no agreement. An agreement may be unenforceable because it contains unclear, ambiguous or contradictory terms, or because it is incomplete. Generally, the courts require certainty as to (1) the parties, (2) the subject matter of the contract and (3) the price.24 The modern trend is to uphold contracts where possible, particularly commercial agreements.25 Unclear, ambiguous or contradictory terms may be settled by applying an objective test.26 Sometimes, however, it is not possible to construct a contract. In Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1, the parties agreed that Robertson would supply a certain amount of wheat to Mushroom Composters for a period of four years. However, the parties did not fix the price with any certainty. Nor did they fix a method by which the price could be fixed. Because of this the court held that there was no contract. [page 181]

Whitlock v Brew (1968) 118 CLR 445 (High Court) Facts By a contract for sale of land, Whitlock agreed to sell certain land to Brew. Clause 5 of the contract provided that Brew would immediately lease part of the land to the Shell Company of Australia upon such terms as commonly govern such a lease. Brew brought an action against Whitlock to regain his deposit, which had been forfeited. To get his deposit back, Brew had to show that cl 5 was invalid for uncertainty. If that was the case, the whole contract would fail. Issue Did the failure of the parties to set out the terms of cl 5 in detail mean that the whole contract failed due to uncertainty? Decision The High Court held that the agreement failed for uncertainty. There was no

evidence regarding the common terms governing such a lease. How long was the lease to last? How much rent was to be paid? According to a majority of the High Court, cl 5 was uncertain in that it neither specified the period for which the contemplated lease should be granted or the rent which should be payable, nor provided a means for the determination of these matters.

In United Petroleum Pty Ltd v Pentaco Oil (Aust) Pty Ltd [2016] FCA 118, a commercial lease (for a number of petrol stations) was unenforceable because there was no agreement as to the starting date of the lease. The starting date was held to be an essential term. Certainty is often an issue in option cases. The reason for this is that options are often worded in very brief terms. This means they are often unclear. In Francis v South Sydney District Rugby League Football Club Ltd [2002] FCA 1306, a football player argued that he had accepted an option from the South Sydney club for a playing contract. The option was said to be on ‘such terms as [the player] was prepared to agree to’ (at [232(b)]. The court held that an option in these words would be void for uncertainty because, among other things, there was no requirement for the player to act reasonably, and there was no mechanism for resolving differences. Where there is clearly a contract for a sale of goods but the parties have not discussed the price (nor an agreed method to fix the price) the parties are taken to have agreed that the buyer will pay a reasonable price.27 [page 182]

Is an ‘agreement to agree’ binding? 4.52

The courts will not uphold an agreement by which the parties agreed to fix the contract price (or any other essential term) at some future date. An agreement to agree is not binding because it is uncertain.28 However, if the parties provide a mechanism for fixing the price in the event that they are unable to agree, such an

agreement will be enforceable. For example, in Hawthorn Football Club Ltd v Harding [1988] VR 49, an option, the terms of which were to be agreed by the parties and in default of agreement fixed by an arbitrator, was held to be valid.

Is an ‘agreement to negotiate’ binding? 4.53

The House of Lords has decided that an agreement to negotiate in good faith was unenforceable.29 Despite some comments to the contrary,30 this is probably the position in Australia.31

Is an agreement made ‘subject to contract’ binding? 4.54

In Masters v Cameron (see [4.38]) the High Court made it clear that, as a general rule, an agreement made ‘subject to contract’ was presumed not to be a contract.32 This presumption may be displaced by evidence suggesting that the parties did intend to be bound. However, at least in the case of sales of land, it is not easy to displace the presumption.33

Other conditional agreements 4.55

While ‘subject to contract’ clauses are generally regarded as not creating contractual relations, other types of ‘subject to …’ clauses (‘subject to finance’ and ‘subject to buyer’s approval’) are more likely to be regarded as conditions precedent. For example, if Angela sells her business to Bob for $100,000 ‘subject to Bob arranging finance’, there is a contract between Angela and Bob. All aspects of the contract (ie, performance of the contract) depend upon Bob arranging finance. Bob must act honestly and reasonably. However, if Bob, acting honestly and reasonably, cannot arrange finance, the contract will not proceed further. [page 183]

OVERVIEW OF OFFER AND ACCEPTANCE

4.56

Figure 4.5 reflects the principal rules of offer and acceptance and the manner in which these rules determine the existence of a contract.

Figure 4.5

The rules of offer and acceptance

[page 184]

ADVICE — LAW IN PRACTICE When negotiating a contract you should be aware of the following matters: If no agreement is made, then no contract exists. The existence of an agreement is determined by an objective test, not by asking whether anyone actually intended to make an agreement. An agreement involves an offer and an acceptance. At first glance, some things look like an offer (and are even called ‘offers’), but are really only invitations to treat (ie, invitations to make an offer). Prominent examples are advertisements, price catalogues and when an auctioneer starts an auction by calling for bids. An offer can be revoked at any time, unless it is in the form of an option or has already been accepted. If you intend to accept an offer, do not change the terms or add new terms because that amounts to a counter offer — and you are then dependent on the other person accepting your offer. If you intend to accept an offer, you should communicate that acceptance to the offeror. Remember that a binding agreement will exist only if there is reasonable certainty as to its essential terms. At the very least, you should ensure that there is agreement as to the subject of the contract, the parties and the price.

[page 185]

QUESTIONS Question 1 (a) Using cases as examples, explain the difference between an offer, an invitation to treat and an indication of present intention. (b) Explain the different rules applying to the communication of acceptance. Are they consistent? Is there any role for the postal acceptance rule today in view of the use of telephones, facsimile machines and, more importantly, internet, email, Instagram and Facebook? (c) What is a ‘condition precedent’? How does it affect the formation of a contract? (d) Maria wished to purchase a boat. Knowing that José wished to sell his boat she wrote to him a letter which contained the following: ‘I will give you $12,000 for your boat. If I don’t hear from you by 5.00 pm next Saturday, I will take it that the boat is mine’. Maria does not hear from José by the stated time and date. What is her contractual position in relation to the boat?

Question 2 Annie saw the following advertisement in a shop window:

Today’s Special Offer: AC/DC CDs $2.99 each.

Annie went into the shop and said she would take five. The shopkeeper said: ‘That’s $64.95, thank you’. When Annie pointed out that the sign in the window said ‘$2.99’ the shopkeeper said that his assistant must have made a mistake — the price was $12.99 each. (a) Is there a contract? Use cases to support your answer. (b) Imagine you are a legal compliance officer. Would you advise the shopkeeper to change the advertisement? If so, what advice would you give?

Question 3 ABC Ltd owns a block of city real estate and wishes to develop it by putting up a new office building. After discussions with a number of builders, ABC finally decides to make the selection by calling for tenders from X Ltd, Y Ltd and Z Ltd, all major construction firms. ABC advises all parties that tenders must be received at ABC’s office by 5 pm Friday 13 April and that the contract will be awarded to the lowest valid tender. X Ltd tenders to complete the work for $25 million. Y Ltd tenders to complete the work for ‘$26 million or $100,000 less than the lowest bidder, whichever is the lower amount’. Z Ltd posts its tender at 4.55 pm on Friday 13 April. The tender is not received until Monday 16 April. Z Ltd tenders to complete the work for $24 million. Whose tender (if any) must ABC accept? Please explain your answer. (a) ABC must accept X’s tender. (b) ABC must accept Y’s tender.

[page 186] (c) ABC must accept Z’s tender. (d) ABC does not have to accept any tender.

Question 4 Please read the scenario below and then answer the question that follows. On 1 October Thomas Engineering Ltd sent a letter to Yasmin Repairers Pty Ltd (YR), offering to sell specified machine parts for $50,000 to be delivered on 1 November on ‘our normal terms and conditions, a copy of which is attached’. According to the terms and conditions, YR was to bear the risk of damage during shipment. On 3 October YR replied, ‘Your offer accepted on the terms listed on our attached Order Form’. The terms in the Order Form stated that insurance to cover possible damage during delivery was the responsibility of the shipper (ie, Thomas Engineering). Thomas Engineering did not read these terms. On 6 October Thomas Engineering sent a letter back to YR, stating: ‘Your order confirmed as per the details discussed, and will be despatched in 7 days’. YR received the goods and kept them. Some of the goods were damaged during shipment. Neither Thomas Engineering nor YR insured the goods, each believing that it was the other’s responsibility. Who has to bear the losses suffered during shipment? Explain your answer.

Question 5 Nick wishes to sell his Playstation as he has no use for it

anymore, so he advertises it for sale for $100. Hannah phones and says she will buy it at that price. Nick says he has changed his mind about selling, but thinks that he will charge $120 for it if he decides to sell. Hannah then offers $110, but Nick says he needs to think about it. At the football game the next day, Nick offers Paul the Playstation for $115. When Paul says no, Nick says he will keep the offer open to Paul for seven days in exchange for a lift to the football next week. Paul agrees to this. A day later, Nick is suddenly in need of cash and phones Hannah, saying that he accepts Hannah’s offer of $110. Hannah says she has changed her mind and doesn’t want to buy the Playstation. Analyse each of these communications, and advise Nick, Hannah and Paul of their individual contractual liabilities.

Question 6 Please read the scenario below and then answer the questions that follow. Daniel owned a rare Harley Davidson motorcycle that he loved to ride. However, he was migrating to Thailand and so decided to sell it. One weekend he placed flyers advertising the motorcycle for $30,000 in the mailboxes of every residence in the Caulfield area, as well as on his Facebook page. Peter read the flyer after work the next day. He really wanted the motorcycle, but wanted to check a few matters with Daniel first. So he telephoned Daniel on 3 November and said: ‘Mate, I’m interested in this bike of yours, but can you go lower?’ Daniel replied: ‘Look, there is no way I would go any lower than $29,000 — take it or leave it.’ Peter said he would think about it so Daniel hung up. The next day Peter sent an email: ‘Daniel, please understand the delivery costs will be about $1000, then there is insurance of about $2500, and I have to register it with the

government — that’s at least another $500 — so how about you sell it to me for, say, $25,000?’ [page 187] Daniel replied by email that the bike was registered for another eight months, equivalent in value to $700, and that it included several expensive custom parts. If he took the parts off he might sell it for $25,000, but another buyer had offered him $29,000. Fearing a trick, Peter replied by email: ‘Ok, you sell it to them instead.’ Several days went by and Daniel had not been able to sell his motorcycle. So he wrote an email to Peter, saying: ‘I’d like to accept your previous offer of $25,000, provided you pay by cash or direct debit into my bank account. I am leaving for Thailand in 7 days but I will be back after one month. If I don’t hear from you by then I’ll assume you don’t want it.’ He supplied his bank account details. Peter received and read the email but didn’t answer it, thinking this would just build the pressure on Daniel and force him to lower the price. Three weeks later, at the next motorcycle club meeting, Peter noticed one of the other members was riding a motorcycle that looked exactly like the one Daniel had offered to sell. Peter asked the member and, sure enough, he was told that it was Daniel’s bike, and the member was just taking it for a ‘test run’ but he liked it and was going to pay Daniel $28,000 ‘pretty soon’. Peter panicked and, when he got home, rang Daniel to say he accepted Daniel’s offer. Daniel replied: ‘Sorry, mate, another bloke’s interested and he’s offering $28,000.’ Peter got angry and said: ‘That’s not fair! But I tell you what, I’ll offer you $29,000.’ Daniel replied: ‘Look, I’m still in Thailand — let’s sort it out when I get back.’ Peter replied: ‘I’ll

pay you $2000 as a deposit right now, ok?’ Daniel replied: ‘For goodness’ sake, just wait will you?’ Peter ignored him and paid the $2000 by direct debit into Daniel’s bank account and sent another email the next day, as follows: ‘Mate, I’ve deposited the money as agreed. Look forward to catching up with you on your return.’ Daniel returned from Thailand a week later and noticed the deposit in his bank account. Is there a legally binding contract between Peter and Daniel in relation to the motorcycle? What should Daniel do with the deposit?

_________ 1 2 3 4 5 6 7 8

9 10

11

12

13 14 15

A Harrier fighter jet is estimated to cost US$30–50 million. See YouTube video at . See Lord Denning MR in Gibson v Manchester City Council [1978] 1 WLR 520 at 523–4. The rules vary from state to state. J Carter and D Harland, Contract Law in Australia, Butterworths, Sydney, 1996, [207]. Compare this case with Carlill v Carbolic Smoke Ball Co, in [4.19]. For a discussion of tenders, see [4.21]. Note: In this case and in Fisher v Bell (see [4.17]), the court interpreted the word ‘offer’ in the relevant statute in a technical manner based on the language of contract law. This will not always be the case. For example, in a consumer protection statute the court may give a broader interpretation to ‘offer’, based on an everyday understanding of the word. See Patterson v Dolman [1908] VLR 354. See the Sale of Goods Act 1954 (ACT); Sale of Goods Act 1923 (NSW) s 20; Sale of Goods Act 1972 (NT) s 60; Sale of Goods Act 1896 (Qld) s 59; Sale of Goods Act 1895 (SA) s 57; Sale of Goods Act 1896 (Tas) s 62; Sale of Goods Act 1895 (WA) s 57. Warlow v Harrison (1859) 120 ER 925; Ulbrick v Laidlaw [1924] VLR 247 (auctioneer makes the offer); Payne v Cave (1789) 100 ER 502; AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454 (where the court was convinced that even where the auction is without reserve, it is still the bidder who makes the offer). In Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 1 WLR 1195, the court held that the call for tenders created an obligation to give proper consideration to each tender. This was suggested in Spencer v Harding (1870) LR 5 CP 561. See B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147. This view was challenged by the Federal Court in Mobil Oil Australia Ltd v Lyndel

16 17 18 19

20 21

22 23 24 25 26 27

28 29 30

31 32 33

Nominees Pty Ltd (1998) 153 ALR 198. The debate centres around whether an option is an irrevocable offer or a conditional contract. See Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57. See also Turner, Kempson & Co Pty Ltd v Camm, in [4.34]. See Eaglehill Ltd v J Needham Builders Ltd [1973] AC 992 at 1011. See, for example, the Electronic Transactions Act 1999 (Cth); Electronic Transactions Act 2001 (ACT); Electronic Transactions Act 2000 (NSW); Electronic Transactions Act 2000 (NT); Electronic Transactions Act 2001 (Qld); Electronic Transactions Act 2000 (SA); Electronic Transactions Act 2000 (Tas); Electronic Transactions Act 2000 (Vic); Electronic Transactions Act 2003 (WA). ‘Information system’ means a system for generating, sending, receiving, storing or otherwise processing electronic communications. Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523; Brogden v Metropolitan Railway Co (1877) 2 App Cas 666. In Australia, there are laws that govern the use of inertia selling (claiming payment for delivery of unordered or unsolicited goods): see the Australian Consumer Law ss 39 and 40. See Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107; Lew Footwear Holdings Pty Ltd v Madden International Ltd [2014] VSC 320. See Chapter 10. See Hall v Busst (1960) 104 CLR 206 (sale of land). Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106. Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8. Sale of Goods Act 1954 (ACT) s 13; Sale of Goods Act 1923 (NSW) s 13; Sale of Goods Act 1972 (NT) s 13; Sale of Goods Act 1896 (Qld) s 11; Sale of Goods Act 1895 (SA) s 8; Sale of Goods Act 1896 (Tas) s 13; Goods Act 1958 (Vic) s 12; Sale of Goods Act 1895 (WA) s 8. See Masters v Cameron, in [4.38]. See Walford v Miles [1992] 1 All ER 453. Kirby P in the New South Wales Court of Appeal considered that it might be possible to have an agreement to negotiate in good faith provided there was consideration for the promise: Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1. See Service Station Association Ltd v Berg Bennett Associates Pty Ltd (1993) 117 ALR 393. This was applied by the Privy Council in Attorney-General (Hong Kong) v Humphreys Estate (Queen’s Gardens) Ltd [1987] 2 WLR 343. See Masters v Cameron, in [4.38].

[page 189]

CHAPTER 5

MAKING THE CONTRACT: INTENTION AND CONSIDERATION

CONTENTS Objectives of this chapter Setting the scene: Young love and ‘good’ intentions … Introduction and outline of chapter Did the parties intend to contract?

Social or domestic agreements Commercial agreements Have the parties provided consideration? What is a Deed? Consideration is required in all simple contracts What is consideration? Examples of consideration Only parties to the contract can sue for breach of contract Consideration may not be past Consideration may be of nominal value Consideration must be sufficient Illusory promises are not consideration Settling disputes: giving up a legal claim may be consideration Renegotiating contracts: new consideration necessary [page 190] Renegotiating contracts: merely promising to perform an existing contract is generally not good (valid) consideration Terminating a contract by agreement Renegotiating a debt: special problems Is promising to perform a contractual duty owing to a third party good consideration? Is performing a public duty good consideration? Promissory estoppel The rules of contract law can lead to unfair results How did promissory estoppel develop? Promissory estoppel and contract law When is promissory estoppel important? What are the elements of promissory estoppel? The leading case: Waltons Stores (Interstate) Ltd v Maher

The remedy in cases of estoppel Minors Persons with mental disabilities; intoxicated persons Agents Partnerships Corporations Assignment of contractual rights Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should understand the final two elements required to make a contract. In particular, you should be able to: describe how the courts distinguish between a contract and a non-binding agreement or arrangement; explain the difference between simple contracts and formal contracts, including deeds; explain the importance of consideration, and distinguish between things that amount to consideration for the purposes of contract law and things that do not; and describe the circumstances in which the courts will enforce an agreement even though all the elements of a contract (particularly consideration) are not present.

[page 191]

SETTING THE SCENE: YOUNG LOVE AND ‘GOOD’ INTENTIONS … A 21-year-old, poverty-stricken boy was dreaming of a bigger and better life for himself and his girlfriend, also 21. He promised to support her forever if he ‘made it big’. Did he ever make it big! That young 21-year-old became the famous rapper, 50 Cent, estimated in 2008 to be worth $50 million. His ex-girlfriend, Shaniqua Tompkins, who is also the mother of his son, reminded him of his promise in a most public way by suing him for half of his massive fortune. 50 Cent or ‘Fiddy’ scoffed at such a claim and said that anything he ever said to Shaniqua was ‘nothing more than pillow talk and romantic declarations of love’. He added, ‘If I ever intended to make that kind of commitment to [Tompkins], then I would have married her’. What happened next?

INTRODUCTION AND OUTLINE OF CHAPTER 5.1

In Chapter 4 we saw that the law of contract is built on an agreement. We examined how the law uses the model of offer and acceptance to decide whether the necessary agreement exists. However, not all agreements are contracts. Two other elements are necessary for the creation of a contract. First, the parties must intend to contract. Second, each party must provide something of

value (called ‘consideration’). Therefore, this chapter examines: intention to contract; and consideration. Finally, the chapter also looks briefly at the parties to the contract.

DID THE PARTIES INTEND TO CONTRACT? The courts use the reasonable person test to decide whether the parties intended to contract: Taylor v Johnson (1983) 151 CLR 422.

5.2

Fred agrees with his wife, Wilma, that he will do the dishes this week if Wilma does them next week. When Wilma refuses to carry out her part of the bargain can Fred sue his wife for breach of contract? Most people would instinctively say ‘no’. An agreement certainly exists. So does consideration. What then is missing? The law accepts that this type of agreement is generally not a contract because the parties clearly did not intend their bargain to be enforceable in a court of law. They did not intend to contract. At most, their agreement was intended to be morally binding. Therefore, it is essential to the creation of a contract that the parties intend their agreement to be binding in the sense of being enforceable by a court. In most instances, the parties will make no express reference to this requirement. Therefore, the courts must construe the intention of the parties by using the objective test: After considering all the relevant circumstances, would a reasonable person conclude that the parties had intended to contract? In applying this test the courts sometimes draw a distinction between agreements that are clearly of a social or domestic character and agreements that are of a commercial character. [page 192]

Social or domestic agreements 5.3

If an agreement is really just a social or domestic arrangement, the courts are generally reluctant to interfere. The view is that the parties really did not intend to make a contract.

Balfour v Balfour [1919] 2 KB 571 (UK Court of Appeal) Facts Mr Balfour promised to pay his wife £30 per month. The promise was made because Mr Balfour had to return to Ceylon where he was employed, whereas his wife was compelled to remain in England for medical reasons. The couple later separated. Mrs Balfour claimed £30 per month. Issue The parties had an agreement, but did they intend that agreement to be binding (ie, a contract)? Decision The Court of Appeal acknowledged that an agreement existed but held that the parties had not intended it to be legally binding. Generally, domestic arrangements of this type were not intended to finish up in court.

Courts are reluctant to interfere in social or domestic arrangements unless that was the clear intention of the parties.

Of course, a social or domestic arrangement will be a contract if the creation of a legally binding agreement was the intention of the parties. The ultimate question is always whether a reasonable person would have concluded that the arrangement was contractual: Ermogenous v Greek Orthodox Community of SA Inc (2002) 187 ALR 92. The court will look not only at the agreement between the parties, but also at the circumstances surrounding the agreement, the effect of the agreement on the parties and the manner in which the parties have conducted themselves subsequent to the agreement. The fact that the parties are related is just one circumstance to take into account: Evans v Secretary,

Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237.

Todd v Nicol [1957] SASR 72 (Supreme Court of South Australia) Facts Mrs Nicol resided in South Australia. She wrote to her sister-in-law and niece (the Todds), who lived in Scotland, inviting them to come and live with her in Australia. She promised them free accommodation in her house for the rest of their lives or until the niece got married. She also promised she would alter her will so that after she died, the house would become theirs. On this basis Mrs Todd quit her job, sold her furniture and moved with [page 193] her daughter from Scotland to South Australia. Later an argument developed and Mrs Nicol told the Todds to leave her house. The Todds argued that they had a contractual right to stay. Issue Did the family arrangement amount to a contract? Decision The court had no doubt that it was a contract. Factors which influenced the court were the cost of the journey, the lack of any condition covering a possible return and the fact that, if this was not an enforceable agreement, the plaintiffs would have been largely subject to what was no more than the whim of the defendant.

Commercial agreements The courts normally try to enforce commercial agreements.

5.4

Courts generally prefer to enforce commercial arrangements (see Carlill v Carbolic Smoke Ball Co, in [4.19]), where the court rejected the company’s argument that the promise was a mere puff intended to be binding in honour only. If, however, there is clear

evidence that the parties did not intend a contract, the arrangement will not be binding. Clear words are needed to ensure that a commercial agreement is not binding. If one of the parties alleges that a commercial agreement was not intended to be a contract, the onus of proving such intention will be upon that party. Any party not wishing a commercial agreement to be legally enforceable should state this clearly.

Rose and Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261 (UK Court of Appeal) Facts Crompton, an English company, agreed with Rose and Frank that the latter would be appointed an exclusive distributor of Crompton’s paper tissue products. The agreement included the following (at 262): This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge themselves with the fullest confidence, based on past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation. Rose and Frank eventually sued Crompton for breach of contract. Issue Was there a contract? [page 194] Decision The Court of Appeal accepted that the parties’ intention not to create legal relations had been made abundantly clear. Therefore, there was no contract.

In Rose and Frank v Crompton, the parties made it clear that

they did not intend to create legal relations. This should be contrasted with attempts to oust the jurisdiction of the courts. It is not permitted to include in a contract a clause that purports to exclude the jurisdiction of the courts. Intention can be an issue in the following types of cases: trade promotions; letters of comfort or support; Heads of Agreement/Letters of Intent; agreements ‘subject to contract’; and agreements made ‘without prejudice’. Trade promotions Businesses often run promotional campaigns, including 5.5 competitions. Generally speaking, the business does not want to create a contract with every person who enters or claims to have entered the competition. Therefore, trade promotion entry forms often contain explicit advice that entry into the competition does not create a contractually binding relationship.

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 (House of Lords) Facts This involved a trade promotion by Esso Petroleum. Esso produced coins depicting the members of England’s 1970 World Cup soccer team. Each motorist who purchased four gallons of Esso petrol received a ‘free’ coin. Advertisements for the promotion described the coins as ‘Free from Esso’ and ‘One free coin with every four gallons’. Customs and Excise argued that Esso should pay tax on the coins as they were produced ‘for sale’. In other words, Customs argued that the coins were supplied by Esso as part of a contract with motorists. Esso, on the other hand, argued the coins were not sold as part of any contract but, rather, were given away. Issue

Was there a contract between Esso and each motorist who purchased at least four gallons of fuel to supply one of the coins? Decision A majority of the House of Lords held that a contract for the supply of the coins existed. Everyone who purchased four gallons of Esso petrol had a contractual right to claim a [page 195] ‘free’ coin. That is, Esso and the motorist who bought four gallons intended to create legal relations. Although the coins had little intrinsic value and Esso used words such as ‘free’ and ‘gift’, this was not sufficient to rebut the presumption of enforceability.

Letters of comfort or support The meaning of a letter of comfort should be apparent from 5.6 reading the Kleinwort Benson case, below. Letters of comfort are provided where the provider does not wish to give a formal guarantee. Letters of support are similar. The problematic nature of a letter of comfort or support is that one party wants it to be binding and the other does not.

Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1988] 1 WLR 799 (UK Court of Appeal) Facts MMC Metals Ltd (MMC) was a wholly owned subsidiary of the defendant, Malaysia Mining (MM). Kleinwort Benson granted a loan facility to MMC of £10 million. The defendant (MM) refused to give a formal guarantee, but wrote to Kleinwort Benson in the following terms: We hereby confirm that we know and approve of the facilities … granted to MMC. It is our policy to ensure that the business of MMC Metals Ltd is at all times in a position to meet its liabilities to you under the above arrangements.

The tin market collapsed in 1985, and so did MMC. Kleinwort Benson sued the defendant when the latter refused to repay MMC’s outstanding loan. The situation is represented diagrammatically in Figure 5.1. Figure 5.1

Relationship between Kleinwort Benson and Malaysia Mining Corporation

At first instance, Hirst J held that the letter was part of a commercial transaction and was binding. The defendant had not demonstrated that it did not intend to be bound [page 196] and, therefore, was bound by the undertaking given to Kleinwort Benson. The defendant appealed. Issue Would a reasonable person have believed that Malaysia Mining intended to be bound by the letter of comfort? Decision The Court of Appeal allowed the appeal. The court held that the letter was merely a representation as to the defendant’s existing policy and not a promise about future conduct. Therefore, it imposed a moral obligation on Malaysia Mining but not a legal one.

In the main, Kleinwort Benson has been followed in Australia. Thus, a letter of comfort was held not to be binding in the Victorian case of Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VR 510 and in the South Australian case of Australian European Finance Corp Ltd v Sheahan (1993) 60

SASR 187. There is no readily apparent reason why, as a matter of policy, a letter of comfort should be binding. Banks are powerful enough to look after their own interests. Bankers should be aware that, generally speaking, the standard letter of comfort is unlikely to be binding. However, not all judges have adopted this approach: see, for example, Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502. Heads of Agreement and Letters of Intent Heads of Agreement and Letters of Intent are widely used in commerce. Their significance should be understood.

5.7

The problem of intention may arise when a document is titled ‘Heads of Agreement’ or where an exchange of correspondence is referred to as ‘Letters of Intent’. The fundamental question is whether the parties intended to be bound by their document. This will depend on the circumstances of the case.

Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309 (New South Wales Court of Appeal) Facts The court was required to determine the status of a document headed ‘Terms of Agreement’ and signed by the parties, but containing the expression ‘proposed agreement’ and other clauses which cast doubt on the parties’ intention to be legally bound. One of the clauses stated: Appropriate conditions in the annexed form of contract of sale of business, together with any additional terms and conditions recommended by the parties’ legal advisers shall apply. There were certain oral statements by the parties that suggested that the document was intended to stand as an immediately binding contract. Issue Did the parties intend the signed document to be binding (ie, a contract)?

[page 197] Decision The New South Wales Court of Appeal unanimously held that a contract existed. Hope JA reached his decision solely on the basis of the document. Mahoney and McHugh JJA considered it permissible to take into account the conversations between the parties in deciding what the parties intended. As McHugh JA said (at 337): The intention to create a legally binding contract although a matter to be proved objectively, may, nevertheless, in my opinion, be proved by what the parties said and did as well as by what they wrote. The intention may be proved in that way even in a case where the document is intended to comprise all the terms of their bargain. This is because the intention to be bound is a jural act separate and distinct from the terms of their bargain.

Contrast the above case with Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd, below.

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 (New South Wales Court of Appeal) Facts The parties had a number of discussions concerning a mining joint venture. They signed a document called a ‘Heads of Agreement’. The document contained the following term: This document will serve to record the terms and conditions subject to and upon which Coal Cliff Collieries, Sijehama and Bulli Main agree to associate themselves in an unincorporated Joint Venture … The parties will forthwith proceed in good faith to consult together upon the formulation of a more comprehensive and detailed joint venture agreement (and any associated Agreements) which when approved and executed will take the place of these heads of agreement, but the action of the parties in so consulting and in negotiating on fresh or additional terms shall not in the meantime in any way prejudice the full and binding effect of what is not agreed. Issue

Whether the Heads of Agreement document created a contract. Decision The New South Wales Court of Appeal held that no contract was created between the parties.

Agreements ‘subject to contract’ Sometimes, parties specifically state that their agreement is 5.8 subject to a contract that is to be created later. Generally speaking, the courts regard agreements made ‘subject to contract’ as not binding (see Masters v Cameron, in [4.38]). Masters v Cameron, however, was a contract for the sale of land and the presumption may not be so strong in the case of other commercial contracts. Contrast the following case with Masters v Cameron. [page 198]

Plastyne Products Pty Ltd v Gall Engineering Co Pty Ltd (1988) NSW ConvR 55–376 (Supreme Court of New South Wales) Facts The buyer sent a letter to the seller in which the buyer stated that it was prepared to pay $350,000. The letter asked the seller to sign the letter as an indication of the seller’s formal acceptance. The letter concluded: ‘Upon receipt of your signed acceptance, we shall instruct our solicitors to draw up a formal contract’. Issue Whether this correspondence created a contract. Decision This was held to indicate a clear intention to contract. The case fell within the first type of case referred to in Masters v Cameron.

In GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, the New South Wales Court of Appeal decided that an agreement expressed to be a ‘legally binding agreement in principle’ showed an intention to be bound. Agreements made ‘without prejudice’ Sometimes, the parties will use expressions such as ‘without 5.9 prejudice’. What is the effect of such expressions? Again, it is a question of intention. In Gregory v Philip Morris Ltd (1988) 80 ALR 455, the court was of the opinion that an offer made ‘without prejudice’ was not legally binding. In Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93, the High Court reached the opposite conclusion. It depends on the facts.

HAVE THE PARTIES PROVIDED CONSIDERATION? 5.10

Enforceable agreements may be divided into two types: 1. deeds (contracts under seal), which do not require consideration; and 2. simple contracts, which do require consideration.

What is a Deed? A Deed is an agreement (or disposition) signed under seal.

5.11

Generally speaking, if there is no consideration, then an agreement (or a promise) will only be enforceable if it is in the form of a deed. Therefore, a gift which is to take place in the future must be in the form of a deed to be enforceable. What does a deed look like? A deed has a special attestation (signing or execution) clause. The essential feature is that the attestation clause must state that the maker of the deed signs, seals and delivers the document. Figure 5.2 presents an example of a deed. [page 199]

Figure 5.2

An example of a deed

Executed as a Deed Signed, Sealed and Delivered By Joe X this 7th day of April 2016 in the presence of: (Witness)

Consideration is required in all simple contracts 5.12

The majority of contracts are simple contracts, and all simple contracts require consideration. There is no special form for a simple contract. A simple contract may be: totally oral; totally written; or partly oral and partly written. Every simple contract must be supported by consideration. This has been a rule of the common law since Rann v Hughes (1778) 101 ER 1014 settled the matter in the late-18th century. If an agreement, not in the form of a deed, is not supported by consideration, then no remedy will lie in contract law. The common law will not enforce a gratuitous or bare promise. In certain circumstances, however, a promisee may still obtain a remedy, despite the lack of consideration, through the equitable doctrine of estoppel. Estoppel is discussed in [5.34]–[5.43].

What is consideration? Consideration is essentially a simple idea — both parties to a contract must provide something of value. The value provided by each party, however, does not have to be equal.

5.13

If Allan offers to give his car to Belle and Belle accepts, there is an agreement between Allan and Belle but it is not a contract because

Belle has not provided anything in return for Allan’s promise. Belle has not provided any consideration. Allan’s offer is a gratuitous or bare promise. If, however, Allan offers to sell his car to Belle for $1000 and Belle accepts, there is a contract between the parties because Belle has provided good consideration. The consideration is Belle’s promise to pay the $1000. Consideration is thus a relatively simple idea — both parties to a contract must provide something of value in return for the promise made to them. This is summed up in the expression ‘consideration must be sufficient’. See Figure 5.3. Figure 5.3

Elements of consideration

If Allan offers to sell his car to Belle for $500 plus Belle’s promise to mow Allan’s lawn every week for six months and Belle accepts, there is a contract. Belle’s consideration is [page 200] her promise to pay the $500 plus her promise to mow the lawn. Equally, if Allan promises to give his car to Belle in return for Belle mowing Allan’s lawn for six months, there is a contract because Belle’s promise to mow the lawn is good consideration. Consideration does not have to be in the form of a payment or promise to pay money. If Allan agrees to sell his business to Belle for $300,000, payable by an immediate deposit of 10 per cent and the balance in 30 days, Belle’s consideration is the promise to pay $30,000 immediately

and the balance in 30 days. If Vera agrees to sell her priceless collection of Abba records for $10 and a cream cake, the consideration is the promise to provide both the $10 and the cream cake (see Esso Petroleum Ltd v Commissioners of Customs & Excise, in [5.5]). Development of consideration Contract law, as we know it today, is not ancient law. The idea of contract law as an enforceable agreement or bargain requiring valuable consideration did not take hold until relatively late in the development of English common law. Before the development of contract law, a promise would only be binding if it was in a deed; if it satisfied the rigid requirements of an action for an unpaid debt; or, in certain cases, if the promise had been carried out in a faulty way. Promises to do something in the future were generally not binding. This was unsatisfactory in a society becoming increasingly commercial. When Chancery (the equity court) decided to intervene to uphold promises, it did so on the basis of conscience: a person was bound in conscience and equity by their promises if the circumstances were such as to impose a moral obligation on them. The common law courts, however, developed a different approach: a promise was only binding in the common law courts if there was valuable consideration. Consideration could be a benefit to the person making the promise, or a detriment to the promisee. Lord Mansfield (1705–1793), one of the greatest of all common law chief justices, attempted to steer the common law towards the equity position. In his opinion, what made the promise binding was the promisor’s intention to be bound, not the consideration. Evidence of consideration was simply evidence of the promisor’s intention to be bound. Lord Mansfield’s view accords with the law in most civil law countries: citizens are bound to honour their serious promises. Alternatively, Lord Mansfield argued that if consideration was required, then a moral obligation, such as ‘love and affection’, was sufficient. Despite his considerable influence, Lord Mansfield failed on both counts. In Rann v Hughes (see [5.12]) the House of Lords confirmed that consideration was necessary. In Eastwood v Kenyon (1840) 11 Ad & El 438, the court said that moral obligation was not sufficient consideration for a simple contract. This remains the law today.

Examples of consideration The promisor is the person who makes the promise. The promisee is the person to whom the promise is made.

5.14

Consideration may be: a promise to do something: in this case, consideration is said to be executor (ie, the consideration has not yet been performed); a promise not to do something: as in the previous point, consideration is said to be executory; doing something: an example is the case of Carlill v Carbolic Smoke Ball Co (see [4.19]) — Mrs Carlill provided consideration by following the instructions set out in the advertisement; or refraining from doing something (‘I’ll give you $10 if you stop singing’). [page 201] Consideration may be: a benefit flowing to the promisor (‘I’ll paint your house if you pay me $1000’); a benefit flowing to a third person at the promisor’s direction (‘I’ll paint your house if you pay $1000 to TP’); or a detriment to the promisee.

Only parties to the contract can sue for breach of contract Only a promisee may sue on the contract 5.15 Alice promises to pay $500 to Barry if Barry will build a garage for Clive. Barry agrees, but then fails to do the job (see Figure 5.4). Can Clive sue Barry for breach of contract?

Figure 5.4

Only a promisee may sue on the contract

The answer is ‘no’. Only Alice can sue Barry. Even though the benefit of Barry’s promise will flow to Clive, Clive was not a promisee. See Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1914–15] All ER Rep 333. Promisees may be joint Where a promise is made to two or more persons jointly they are called joint promisees.

5.16

If the promise is made by the promisor to two or more persons jointly, only one of those persons need provide consideration: Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 (High Court). This is called the privity of contract rule. The rule of privity of contract leads to some unfortunate situations. It is the reason why Mrs Donoghue had to sue for the tort of negligence: Donoghue v Stevenson (see [2.3]). For example, A promises B and C jointly that A will give his car to B and C if B agrees to mow A’s lawn for a year. B agrees to mow the lawn. Both B and C are parties to the contract, even though only B was required to provide any consideration (promised to mow the lawn). C could sue A for breach of contract. B and C are said to be joint promisees: A promises B and C. Contrast this situation: A promises B that he will give his car to B and C jointly if B agrees to mow A’s lawn for a year. B agrees. This time, B and C are not joint promisees and C could not sue on the contract. C is not a party to the contract, even though the contract was made partly for C’s benefit: A promises B only.

Exceptions to the privity of contract rule Privity of contract is a rule which provides that only a party

to a contract can sue on that contract.

5.17

The privity of contract rule has been criticised. It is subject to a number of exceptions: The rule has been abrogated by statute in the Northern Territory, Queensland and Western Australia.1 The rule does not apply to contracts of insurance provided the intention of the contract was to benefit a third person: Insurance Contracts Act 1984 (Cth) and see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd, below. [page 202]

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 (High Court) Facts Blue Circle Southern Cement Ltd took out an insurance contract with Trident Insurance. Among other things, the contract covered Blue Circle, its contractors and subcontractors against injuries to members of the public. Blue Circle hired McNiece Bros to carry out some construction work. During the work, a member of the public was injured and McNiece was forced to pay compensation. McNiece claimed under the insurance contract on the basis that it was one of Blue Circle’s contractors. Trident Insurance argued that McNiece was not a party to the contract and therefore could not sue on the contract. Issue Could McNiece sue on the contract even though it was not a party to the contract? Are insurance contracts an exception to the general rule of privity of contract? Decision Because the contract was intended to cover persons such as McNiece, it was entitled to sue on the contract despite the fact that it was not a party to that contract and had not provided any consideration.

Where one of the parties to the contract is acting as agent for some other person, that other person (‘the principal’) can enforce the contract (see Chapter 10). Exemption clauses may be made specifically for the benefit of a third party. Sometimes, one of the parties to the contract will hold the contractual benefits on trust for a third person (‘the beneficiary’). The beneficiary can enforce the contract. In appropriate circumstances, contractual benefits can be assigned (‘transferred’) to another person (‘the assignee’). The assignee can enforce the contract.

Consideration may not be past 5.18

The underlying notion of contract law is that a promise must be paid for. The payment (‘consideration’) may be the doing of or refraining from doing an act, or the promise of either, but it cannot be an act or forbearance that took place before the promisor’s promise to which it refers.

Roscorla v Thomas (1842) 114 ER 496; 3 QB 234 (Queen’s Bench Division) Facts The plaintiff purchased a horse from the defendant for £30. After the sale, the plaintiff sought an assurance that the horse was sound and free from vice. This assurance was given by the defendant. In fact, the horse was alleged to be ‘very vicious, restive, ungovernable and ferocious’. The plaintiff sued for breach of contract. [page 203] Issue There was a contract for sale of the horse, but was the assurance about the horse a term of that contract? If not, was there any consideration for the promise that the horse was sound and free from vice?

Decision The action failed because the assurance was given after the contract for the sale of the horse was completed and was unsupported by any fresh consideration.

The lesson from cases such as Roscorla v Thomas is that any warranties must be sought and given prior to the making of the contract. Once the contract is made, it is too late unless fresh consideration is provided. An exception to Roscorla v Thomas 5.19 How far should the rule in Roscorla v Thomas be taken? For example, A requests some help from B in setting up a business. B is a small business consultant. There is no personal relationship between A and B. No amount of remuneration is discussed by A and B. After B gives the advice, A promises to pay B $1000. Later, A discovers that most small business consultants would have done the work for $750. Is A bound by the promise to pay $1000? Could A pay $750 instead? Is this a case of past consideration? Could B sue for $1000? It is possible to understand B’s case by considering what would have happened if A had not made the promise to pay $1000. Would B have been entitled to claim some remuneration? It is probable that there was an implied understanding that B would be compensated in some way. (It is quite common for service providers to be hired without any discussion of price until after the service has been provided.) A court would probably have implied a promise that B was to be paid a reasonable amount. If the market price was $750, that would probably have been the amount fixed. However, this became unnecessary as A fixed an amount (by promising to pay $1000) which was acceptable to B. The promise of this fixed amount then related back to the request to perform the services and was part of a single transaction.

Re Casey’s Patents; Stewart v Casey

[1892] 1 Ch 104 (UK Court of Appeal) Facts Stewart and Carlton (S & C) were the joint owners of the patent rights in an invention. This means that they had the monopoly rights to exploit the invention. S & C arranged for Casey to undertake certain marketing activities to promote the invention. No fee was discussed. After Casey had carried out these activities and incurred expenses, S & C wrote to Casey: In consideration of your services as the practical manager in working our patents, we hereby agree to give you one-third share of the patents. Casey claimed he owned a one-third interest in the patents. S & C claimed Casey had no rights in relation to the patents. Issue Who owned the patent rights? Had Casey provided any consideration for the promise of one third of the shares? [page 204] Decision The court found in favour of Casey. It was reasonable to assume that the parties expected Casey to be paid for the work he did for S & C. Their promise to give Casey a one-third share of the patents was clearly made in relation to that work. S & C’s promise simply fixed the amount of payment; it was not past consideration.

Consideration may be of nominal value 5.20

Consideration must be of a type recognised by the law (consideration must be sufficient) but it does not have to be equal in value to the promisor’s promise. It does not have to be adequate. A promise to pay nominal rental of £1 per year (a figure well below the true rental) was held to be good consideration in Thomas v Thomas (1842) 2 QB 851. If you happen to be offered a Rolls Royce for $10 — snap it up! A promise to pay $10 for a Rolls Royce is good consideration in the eyes of the law. There are logical reasons why the courts will not enquire as to whether consideration is adequate. First, the very nature of

contract law is to let the parties make their own bargain. Second, the courts are not the proper mechanism for valuing promises. Third, the scope for disputed agreements would be so great that it would use up valuable court time.

Consideration must be sufficient 5.21

Consideration does not have to be adequate (compared to the value of the promise) but it must be sufficient (see Figure 5.5). There are a number of matters which the courts do not regard as good or sufficient consideration. Past consideration is one example. A number of other examples will be briefly examined. These are best understood by analysing cases as it is difficult to formulate any meaningful general rule.

Figure 5.5

What is sufficient consideration?

[page 205]

Illusory promises are not consideration 5.22

The courts have generally rejected as unenforceable promises made ‘in consideration of natural love and affection’ (Eastwood v Kenyon (1840) 11 Ad & El 438), or a promise made in return for a son’s promise not to bore his father (White v Bluett (1853) 23 LJ Ex 36). Such promises are regarded as too uncertain or illusory to be consideration. However, the decisions are not entirely consistent.

Dunton v Dunton (1892) 18 VLR 114 (Supreme Court of Victoria) Facts Mr Dunton agreed to pay his divorced wife a monthly sum provided that she conduct herself ‘with sobriety, and in a respectable, orderly and virtuous manner’. Mrs Dunton sued when her ex-husband refused to pay. Issue Did Mrs Dunton provide consideration for Mr Dunton’s promise to pay her a monthly amount? Decision The majority (Higinbotham CJ and Williams J) held that Mrs Dunton had provided consideration. Her promise constituted a thing of value in that she had agreed to give up a legal right to act in a manner that was neither respectable, orderly nor virtuous. Hood J (dissenting) held that the promise made by Mrs Dunton was too uncertain and illusory to constitute consideration.

Another example of illusory consideration is where the promisee agrees to be bound in honour only,2 or where the provisions of the agreement are so wide that the promisee has not really agreed to be bound by anything: Francis v South Sydney District Rugby League Football Club Ltd [2002] FCA 1306 (see [4.51]).

Settling disputes: giving up a legal claim may be consideration 5.23

The following is a common business scenario. X, a retailer,

complains that the goods delivered by S (the supplier) were slightly damaged. As a result, the retailer refuses to pay the full contract price of $1000. The supplier agrees to accept a lower price ($750) to settle the matter. Is this a binding agreement? What consideration has X provided for S’s promise to accept $750 instead of the invoice amount of $1000? On the facts, it seems certain that X believed it had a claim based on the fact that the goods were damaged. In other words, X had a claim for S’s breach of contract — delivering damaged goods.3 X has impliedly given up this claim in return for S’s promise to accept the [page 206] lower amount. This is called forbearance to sue. Forbearance to sue is good consideration in appropriate circumstances. Essentially, the parties have agreed to a compromise of their dispute. The courts will uphold such a compromise. The same principle applies where the promise has already commenced legal proceedings and agrees to a compromise settlement of the legal suit.

Wigan v Edwards (1973) 47 ALJR 586 (High Court) Facts Mr and Mrs Edwards signed a contract to purchase a house owned and built by Wigan. Some days before settlement, they gave Wigan a list of faults which had to be fixed before they would proceed with the contract. Wigan promised in writing to remedy the listed faults and to repair any major defects appearing within five years. The Edwardses completed the purchase and paid the price. Wigan failed to carry out his promise and the Edwardses sued for breach of this promise. Wigan claimed there was no consideration as the Edwardses were already obligated to complete the contract.

Issue Did Mr and Mrs Edwards provide any consideration for Wigan’s promise? Decision The High Court held that the Edwardses believed (perhaps incorrectly) that the defects in the house gave them the right to refuse to proceed with the purchase. This was a legal claim. By agreeing to settle the dispute in return for Wigan’s promise, they impliedly gave up this right. Therefore, they had provided good consideration.

It is not necessary to prove that the promisee’s legal claim would have succeeded. For example, in Wigan v Edwards, the Edwardses probably did not have a right to terminate the contract — they probably only had a right to damages. It is sufficient for the promisee to prove that: the claim was reasonable in itself, and not vexatious or frivolous; the promisee had an honest belief that the claim had a reasonable chance of success; and the promisee had not concealed any facts which might affect the validity of the claim.4

Renegotiating contracts: new consideration necessary Commercial contracts are constantly being renegotiated. By far the majority of these renegotiations will be binding. Occasionally, however, problems may arise because one party has not provided any consideration. In these cases, the renegotiation is not binding. These problems can be avoided by putting the renegotiated agreement in the form of a deed.

5.24

Consider this situation. X and Bill have a contract under which Bill is to build a garage for X for $10,000. Halfway through the construction, Bill demands an extra $2000. X promises to pay the extra $2000, but insists that the garage be completed one week earlier than the

[page 207] contract date. The garage is finished one week earlier. X pays $10,000 but refuses to pay the extra $2000, claiming that the early completion date was not worth $2000. Can Bill claim the extra $2000? The answer is ‘yes’. By agreeing to finish the garage one week earlier than the contract date, Bill has provided consideration for X’s promise to pay an extra $2000.

Mitchell v Pacific Dawn Pty Ltd [2003] QSC 86 (Supreme Court of Queensland) Facts A property owner (Pacific Dawn) entered into a building contract with a builder, Mitchell. Under the contract Pacific was to pay a certain sum to Mitchell upon completion of the building, subject to a retention amount of 8 per cent (in case of defects). On completion, Pacific failed to pay the amount owing. Instead, Pacific, which had clearly made mistakes in its estimates, deliberately set out to force Mitchell to renegotiate the contract. Mitchell was in a difficult position. He owed money to his subcontractors. He could not afford to get a reputation for not paying. Therefore, he agreed to a new deal under which he was paid about $300,000 less than the original contract. The only other change to the contract was that the retention amount was reduced from 8 per cent to 2.5 per cent. Having accepted the lesser amount, Mitchell sued for the balance. Pacific argued as a defence that the original contract had been replaced by the new contract. Mitchell argued that either (1) there was no consideration for the new deal and, therefore, it was not contractually binding, or (2) even if the new deal was a contract, it had been extracted under duress, and therefore was not binding. Issue Did Pacific provide consideration for Mitchell’s promise to accept a lesser sum? Decision The new deal was a contract. The reduction in the retention amount meant that Pacific had provided consideration for Mitchell’s promise to accept a lesser sum. Note: The parties settled the issue of duress. (On duress, see [8.46].)

Renegotiating contracts: merely promising to perform an existing contract is generally not good (valid) consideration 5.25

Compare the following situation with the situation in [5.24]. X and Bill have a contract under which Bill is to build a garage for X for $10,000. Halfway through the construction, Bill demands an extra $2000. Worried that Bill may not finish the job on time (or at all), X promises to pay the extra $2000. Once the garage is built, X pays $10,000 but refuses to pay the extra $2000. Bill wants to know if he has the right to claim that $2000. To answer this, it is necessary to consider the traditional view and the possible effects of some recent cases. [page 208]

The traditional view 5.26 The traditional view (see Stilk v Myrick in the ‘Law in context’ feature, below) is that a promise by Bill to perform a contractual duty already owing by Bill to X, will not be valid consideration unless Bill provides something in addition to the existing duty, as in Mitchell v Pacific Dawn Pty Ltd, above. Thus, Bill could claim the extra $2000 in the first scenario, in [5.24], but could not claim it in the second scenario, in [5.25]. In the first case, Bill has provided something extra, being the promise to complete the garage one week early. It is irrelevant that this is not worth $2000 as consideration does not have to be adequate (see [5.20]).

Applying the rules of law Similar facts/critical differences The common law develops through cases. Thus, the rules of law emerge from, and are dependent on, the facts of individual cases. The important thing is to understand which facts are critical to the rule. Change the facts slightly but

critically and the rule changes. Contrast these two cases, which are based on similar facts. Stilk v Myrick (1809) 170 ER 1168 (King’s Bench Division) Stilk signed on as a seaman for a voyage from London to the Baltic and back. The rate of pay was set at £5 per month. During the voyage, two of the 11 crew deserted. The captain tried but failed to find replacements. The captain promised the remaining crew that they could have the wages of the two deserters. After the voyage, the captain refused to pay. Stilk sued for breach of contract. Decision The captain’s promise was not supported by consideration. Stilk was already under a contractual duty to provide his services in sailing the ship, including the extra duties required in an emergency such as this. Therefore, Stilk was not entitled to the money. (The court was also concerned as a matter of public policy not to create incentives for sailors to ‘blackmail’ captains into paying more money.) Hartley v Ponsonby (1857) 119 ER 1471 (King’s Bench Division) Hartley signed on as a seaman for a voyage from England to Australia and the Pacific for a period of three years. Pay was set at £3 per month. In Australia, 17 of the 36 crew deserted. Of the remaining 19 crew only four or five were able seamen. Despite this, the captain (Ponsonby) wished to sail to Bombay and so he promised Hartley and a number of others £40 each if they assisted in taking the ship to Bombay with the crew of 19. Later the captain refused to pay. Hartley sued for breach of contract. Hartley claimed that the promise to pay £40 was a contractual promise. Captain Ponsonby argued that Hartley had not provided consideration. The jury found as a matter of fact that it was unreasonable and unsafe to proceed to Bombay with so few crew. Thus, the court was faced with a similar fact situation to that in Stilk v Myrick, but did the rule in Stilk v Myrick apply? Decision The situation in this case went beyond the services for which Hartley had originally contracted. No doubt Hartley was obliged to help out in a normal emergency such as [page 209] in Stilk v Myrick. However, this was not a normal emergency. The ship was dangerously short-handed for a trip to Bombay. Hartley’s promise to work under these conditions was something that went beyond his original contractual obligations.

Implications No doubt many business people would be surprised at the implications of the rule in Stilk v Myrick. It means that, in many cases, a renegotiated or modified contract will not be enforceable because one of the parties has not undertaken to do anything in addition to the original contract. The wise move would be to include any modifications or variations in a deed or to ensure that some extra consideration is supplied. Failing that, the doctrine of promissory estoppel (see [5.34]) may sometimes be useful.

A modern development? 5.27 Recent decisions have thrown some doubt on the scope of the rule in Stilk v Myrick. Williams v Roffey Bros & Nicholls (Contractors) Ltd may be seen as an example of how the courts try to enforce commercial arrangements where possible.

Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (UK Court of Appeal) Facts Roffey entered into a contract with Williams. Under the contract, Williams agreed to provide carpentry work on a block of 27 flats Roffey was refurbishing. Williams agreed to complete the work for a total of £20,000. After getting into financial difficulties Williams realised that he had underquoted for the work. Roffey agreed to pay an extra £575 per flat. Upon completion of a further eight flats Roffey refused to pay the extra amount. Williams sued for the extra amount. Roffey argued there was no consideration to make the promise binding. Issue Did Williams provide consideration for Roffey’s promise to pay the extra amount? Decision The court held that a promise to perform an existing contractual duty could amount to consideration if it conveyed a practical benefit to the promisor (or avoided a detriment that might otherwise have resulted from the failure to perform) and there was no element of duress. The court decided that there was a practical benefit to Roffey in that Williams kept working, thus saving Roffey (1) the time and trouble of finding another carpenter, and (2) the

contractual losses that would have been incurred if Roffey did not complete the renovation on time. Therefore, Roffey was ordered to pay Williams the agreed extras.

[page 210] This exception to the rule in Stilk v Myrick has been applied in a limited number of cases: see Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723; Tinyow v Lee [2006] NSWCA 80; Wolfe v Permanent Custodians Limited [2012] VSC 275. However, the precise scope of the exception remains unclear.

Terminating a contract by agreement 5.28

Suppose that A and B have a contract by which A agrees to sell a business to B for $100,000. Sometime later they mutually agree to cancel the contract. Can B change his or her mind and insist on performance of the contract? The answer is ‘no’; but why? The reason is that the agreement to cancel the sale of business contract is a contract itself. Under this second contract, B has promised to discharge A from his or her obligations to sell the business under the first contract in consideration for A’s promise not to claim the sale price.

Renegotiating a debt: special problems Rule in Pinnel’s Case and Foakes v Beer 5.29 Imagine that Dave owes Constance $1000 for goods sold and delivered at Dave’s request. He is under a contractual duty to pay $1000. The debt is presently due and owing. Dave approaches Constance and offers to pay $500 in full and final satisfaction. He explains that recent economic circumstances have hit him hard and this is all he can afford. Reluctantly Constance agrees. Dave pays the $500. Can Constance sue Dave for the balance?

If the arrangement had been included in a deed it would have been binding. If there is no deed then Dave has a problem. Constance has impliedly promised not to sue for the balance, but has Dave given any consideration for that promise? If the goods had been faulty or there had been some other dispute between Dave and Constance, Dave could have argued that his consideration was giving up a legal claim as in Wigan v Edwards (see [5.23]). However, there is no evidence of a dispute. In the absence of any dispute, the only thing that could possibly be consideration was the promise to pay $500. Yet Dave was already under a contractual duty to pay $1000 to Constance. The performance of less than an obligation already owing could not, therefore, be sufficient consideration. Has Dave provided something? On the facts given, the answer must be in the negative.

Pinnel’s Case (1602) 77 ER 237 (Court of Common Pleas) Facts Pinnel was owed £8 10s. The debt was due for repayment on 11 November 1600. By agreement, Pinnel accepted £5 2s 6d in full and final satisfaction on 1 October 1600. Having received £5 2s 6d, Pinnel sued for the balance. Issue Did the debtor provide consideration for Pinnel’s promise to accept the lesser amount in full and final satisfaction of the entire debt? [page 211] Decision The debtor had provided something extra. The debt of £8 10s was due to be paid on 11 November 1600. The amount of £5 2s 6d was repaid by agreement on 1 October in full satisfaction. As the parties agreed that the debt was to be repaid prior to the due date this amounted to something extra.

In Foakes v Beer, below, the House of Lords refused to overrule the principle from Pinnel’s Case.

Foakes v Beer [1881–5] All ER Rep 106 (House of Lords) Facts Mrs Beer obtained a court judgment against Dr Foakes for £2090 19s. Dr Foakes was unable to pay the amount immediately. The parties therefore entered into a written agreement whereby, in consideration of Dr Foakes paying £500 immediately and the balance of £1590 19s in annual instalments of £300, Mrs Beer would not take any legal proceedings on the judgment or claim the interest that would otherwise be due her. (A judgment normally attracts interest.) Dr Foakes paid as per the agreement. After Dr Foakes had completed the payments Mrs Beer claimed the interest. Dr Foakes argued that the agreement precluded any requirement to pay interest. Mrs Beer argued that the agreement was unenforceable as Foakes had not provided any consideration. Dr Foakes argued that the court should apply a rule that accorded with commercial practice and enforce the agreement. Issue Did Foakes provide any consideration for Beer’s promise to accept the judgment debt in interest-free instalments? Decision The House of Lords held that payment of a part of a debt (without something extra as in Pinnel’s Case) does not discharge the debtor’s obligation to pay the full debt. Therefore, the court found in favour of Mrs Beer.

The debtor can protect himself or herself by entering into a deed of release. A deed does not require consideration.

The rule in Foakes v Beer — that payment of a part of a debt (without something extra as in Pinnel’s Case) does not discharge the debtor’s obligation to pay the full debt — can lead to some strange results. For example, Deirdre owes Con $100. If she pays $75 in full settlement by agreement with Con, Con could still sue for the remaining $25, even though he had promised not to. But the situation would have been different if Deirdre had given Con a $15

bottle of whisky in full settlement. Con would not be able to sue Deirdre for the $100 or any part thereof. The rule in Foakes v Beer has no application except where money is involved. In one case, the defendant attempted to use this as a possible loophole [page 212] by claiming that payment by cheque meant that Foakes v Beer did not apply. The court rejected the argument and held that there was no difference between cash and a cheque.5 Deed of release The use of formalities to create binding obligations is a fairly common characteristic in the early development of legal systems. For example, in early Roman law a contract had to comply with a fairly strict form of question and answer to be binding. In medieval English law the deed satisfied this need for formality, and was the basic instrument for creating enforceable rights and obligations. As the foundation for legal obligations, the deed is much older than consideration. To this day, a debtor seeking relief from a debt can (and should) protect himself or herself against the rule in Foakes v Beer by insisting on the execution (by the creditor) of a deed of release.

Exceptions to Foakes v Beer: compositions with creditors 5.30 Consider the following situation: Des owes $50 to Carrie and $50 to Carla. He is unable to pay. At a meeting of all three parties, Des offers to pay $25 to Carrie in full and final satisfaction and $25 to Carla in full and final satisfaction. Carrie and Carla agree. This is called a ‘composition with creditors’. Des pays the two lots of $25. Can Carrie sue Des for the other $25? The rule in Foakes v Beer would say ‘yes’. However, for reasons that are not entirely clear, the courts have accepted that this is an exception to the rule in Foakes v Beer. Therefore, Carrie cannot sue for the other $25. Exceptions to Foakes v Beer: part payment by a third party

5.31

Imagine that Deirdre owes Carl $1000. She is unable to pay. Deirdre’s father offers to pay Carl $500 in full and final satisfaction of his daughter’s debt. Carl agrees, and $500 is paid. Can Carl sue Deirdre for the balance? When faced with a similar situation, the English Court of Appeal in Hirachand Punamchand v Temple [1911–13] All ER Rep Ext 1597 held that the debtor could not recover the balance. To allow the debtor to recover the balance would amount to a fraud on the third party. To allow Carl to recover the $500 from Deirdre would amount to a fraud on Deirdre’s father.

Is promising to perform a contractual duty owing to a third party good consideration? 5.32

In contrast to the previous rule, a promise to perform a contractual duty, already owing by the promisee to a third party, will be good consideration. The distinction between this rule and the previous rule is that, in this situation, the prior contractual duty is not owed to the promisor, but rather to a third party. For example, X is contractually bound to Y to paint Y’s house. X refuses to carry out the contract for some reason. Z promises X $250 if he will honour his obligation. After he paints Y’s house, can X claim the $250 from Z? Can Z refuse to pay on the basis that X has not provided any consideration? The answer to this question would appear to be that X has a right to the $250. Such a rule has been accepted by the Privy Council6 and by the majority of the High Court of Australia.7 [page 213]

Is performing a public duty good consideration? 5.33

X has been subpoenaed to appear in court. A subpoena is a court order and must be obeyed. Y promises X that he will give him $100

to comply with the subpoena. X appears and gives evidence in court but Y refuses to pay. Is Y obliged to pay X the $100? The answer is ‘no’. The only possible consideration supplied by X is the appearance at court. However, X already owes this as a public duty because of the subpoena. Promising to perform a public duty already owing is not good consideration: Collins v Godefroy (1831) 109 ER 1040.

PROMISSORY ESTOPPEL The rules of contract law can lead to unfair results Estoppel is a doctrine based on fairness. A person who represents that a certain situation exists should not be allowed at a later date to deny the truth of that representation. This has long been part of the law. Promissory estoppel is an extension of that basic idea. It is different in that it deals with promises about the future whereas the original estoppel dealt with representations of existing fact.

5.34

A strict application of the rules of contract formation, including the rules in Stilk v Myrick and Foakes v Beer, can obviously lead to unfairness: for example, see Waltons Stores (Interstate) Ltd v Maher, in [5.41]. Consider another example: Denise owes Con the sum of $10,000 for goods sold and delivered. Owing to a recession, she is unable to pay. She tells Con that she can only pay $5000. Otherwise, she will have to close down the business and take up a job that has been offered to her. Con, who is keen to keep Denise’s business operating, therefore agrees to accept $5000 in full and final satisfaction. As a result, Denise continues in the business, incurring new expenses. Can Con change his mind and claim the other $5000? In appropriate circumstances, Denise might claim that she provided consideration in the form of a promise not to close the business. If, however, this failed, the rule in Foakes v Beer would presumably apply. If Denise was required to pay the other $5000 she might legitimately complain that if it were not for Con’s

promise, she would not have incurred new expenses and would probably have taken a financially secure, salaried position. Should Con be allowed to go back on his promise? The doctrine of promissory estoppel might provide some assistance to Denise.

How did promissory estoppel develop? 5.35

In order to prevent this type of unfairness, the courts in their equitable jurisdiction have intervened to provide the promisee with a remedy in certain circumstances. This is called equitable or promissory estoppel. Other types of estoppel also exist. The essence of an estoppel is that the courts will stop a person from denying something. Thus, common law estoppel is used in appropriate circumstances to prevent a person from denying an assumption of fact which he or she has represented to another person and upon which that other person has relied (see [6.8]). Equitable or promissory estoppel deals not with assumptions of fact, but with representations or promises as to future matters. For example, ‘I promise not to sue you if you pay half the debt you currently owe me’. Common law estoppel has been acknowledged for a long time. Promissory estoppel is more recent.

Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (King’s Bench Division) Facts In 1937, the plaintiff leased a block of flats in London to the defendant for £2500 per year. In 1940, the plaintiff agreed to reduce the rent to £1250 because the defendant was unable [page 214] to let many of the flats due to the Second World War. By 1945, the flats were fully let and the plaintiff claimed the full rent again. The plaintiff did not try to claim the back rent. Issue

Was the plaintiff contractually bound to accept the lower rent indefinitely, or was it entitled to revert to the original rent when the war was over and the occupancy problem had ended? Decision The plaintiff was entitled to return to the original agreement. There was no contract preventing this. The plaintiff did not try to claim the back rent. If it had, Denning LJ would have rejected such a claim. In his Honour’s opinion, the plaintiff would have been estopped from claiming the back rent.

Upon what basis would Denning LJ have prevented the owner from claiming the back rent? The promise to accept a lower rent (and, therefore, impliedly to forego any claim to the balance) was not a contractual promise because the lessee had not given any consideration for it. In fact, it is similar to the situation in Foakes v Beer. The lessee had actually promised to provide less than that which it was contractually obliged to provide. In other words, the lessee was contractually obliged to pay £2500 and had promised to pay £1250. Nor was it a case of common law estoppel. The owner’s representation was a promise as to a future matter and not a representation as to an existing fact. Nevertheless, Denning LJ maintained that equity would stop the owner from going back on its promise. The doctrine of promissory estoppel has now been clearly accepted by the High Court of Australia. The prevailing view appears to be that common law estoppel and promissory estoppel are two sides of the one coin.

Promissory estoppel and contract law 5.36

The doctrine obviously provides a significant addition to the law of contract. It is not part of the law of contract, but it performs a complementary function. It is an equitable rule by which a promisee can enforce another’s promise. However, promissory estoppel does not make the law of contract or the doctrine of consideration obsolete. The courts are very careful to restrict the operation of promissory estoppel. It is still far

better to ensure that one’s rights are protected by a valid contract than to rely on promissory estoppel.

When is promissory estoppel important? 5.37

Various forms of estoppel have long been recognised by the law. For example, in a contract case, the doctrine of estoppel will apply where one of the parties to a contract, having promised not to rely on a term contained in the contract, reneges on that promise and seeks to enforce its contractual rights. The court will stop the party from so reneging: see [6.8]. There is a growing acceptance that, in special circumstances, estoppel can apply to enforce a promise not included in a contract. If the promise is part of a contract, there is no need to resort to promissory estoppel. It is in those situations where it is not possible [page 215] to prove that the promise is part of a contract that promissory estoppel has a part to play. For example: where no consideration exists, particularly in the context of renegotiated agreements (see Je Maintiendrai Pty Ltd v Quaglia (Quaglia’s case), in [5.40]); and where the formalities of making a contract have not been satisfied (see Waltons Stores (Interstate) Ltd v Maher, in [5.41]).

What are the elements of promissory estoppel? 5.38

The courts will not allow a person (‘promisor’) to renege on his or her representation or promise where it would be unconscionable to do so. What does ‘unconscionable’ mean? Basically, unconscionable means ‘unfair’ or ‘inequitable’. This reflects the fact that promissory estoppel is a creation of equity. In fact,

promissory estoppel is often called ‘equitable estoppel’. There are five requirements to establish promissory estoppel (see Figure 5.6). Figure 5.6

The elements of promissory estoppel

[page 216] The promisor’s responsibility for the promisee’s assumption 5.39 The promisor’s representation or other conduct must be sufficiently precise and unqualified before the promisee is entitled to assume that a particular legal relationship existed or would exist. Thus, a speech by a Mobil Oil executive at a franchisees’ conference floating the idea of an extra three-year franchise for all franchisees who attained certain standards of marketing excellence was held to be too general in nature to support promissory estoppel: Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd [1998] FCA 205.

Legione v Hateley (1983) 152 CLR 406 (High Court) Facts This case involved a sale of land. The contract provided that the vendor could terminate the sale if the purchaser had not completed the purchase by the due date. The purchaser had some difficulty raising the necessary finance by the due date. The day before the due date, the purchaser spoke by telephone to a legal secretary in the office of the vendor’s solicitor. The purchaser advised that finance would be available in seven days. The secretary commented to the effect that, ‘I think that’ll be all right but I’ll have to get instructions’. Three days later, the vendor terminated the sale. The purchaser argued, inter alia, that the words of the secretary were sufficient to give rise to a promissory estoppel. In other words, the purchaser argued that the vendor should be estopped from exercising his right to terminate because of the representation made by the legal secretary. The matter went to the High Court. Issue Did promissory estoppel apply in these circumstances to prevent the vendor from exercising his right to terminate? Decision The High Court accepted that promissory estoppel could apply in situations like this. However, for promissory estoppel to apply, the promisor’s representation, whether express or implied, must be clear and unequivocal. The secretary’s words were not sufficiently clear or unequivocal to activate

promissory estoppel. (The purchaser was nevertheless successful in arguing another equitable doctrine, relief against forfeiture.)

The promisee would not be entitled to make any assumptions about the existence of a contract where an agreement is made ‘subject to contract’.8 Remember that courts have generally regarded agreements made ‘subject to contract’ as not binding (see [4.38]). Promissory estoppel cannot be used to make them binding Silence in pre-contractual negotiations may operate as an estoppel (Waltons Stores (Interstate) Ltd v Maher, (see [5.41]), but the circumstances must be somewhat unusual. Either the promisor must be under a duty to speak, or the circumstances must be such that the promisee is entitled reasonably to expect [page 217] the promisor to reveal the true facts. Normally, the law does not require disclosure by either party to a contract. This is particularly true where the parties are involved in commercial negotiations: Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582. Why is detrimental reliance important? 5.40 It is extremely important to understand the meaning of detriment. Mere failure by the promisor to carry out the promise will not in itself amount to a detriment. The promisee must show that he or she acted in reliance on the promise and that, as a result of so acting, has put himself or herself in a position where he or she will suffer a material disadvantage if the promisor reneges on the promise.

Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 (Supreme Court of South

Australia) Facts Quaglia leased a shop in a shopping complex from the plaintiff for three years at $278 per month rental. Quaglia experienced difficulties paying the rent and the lessor agreed to accept a lower amount. For 18 months, Quaglia was allowed to pay only $240 per month. When Quaglia finally decided to call it quits, the lessor sued for the arrears. Quaglia claimed that the doctrine of promissory estoppel ought to apply to prevent the lessor from going back on its implied promise not to demand the balance of the rent. Issue Did promissory estoppel apply in these circumstances? If promissory estoppel was to apply then there had to be some detriment suffered by Quaglia. What was the detriment? Decision The court narrowly found a detriment, not in the requirement to pay the arrears of rent, but in the fact that Quaglia would have to pay it in a lump sum rather than in instalments as required by the lease. The requirement to pay the arrears could not in itself be a detriment. After all, this is what the tenant had originally contracted to do.

Do you think the fact that Quaglia had to pay back rent in a lump sum amounted to a detriment? After all, Quaglia had the use of the money in the meantime. Would the situation have been different if the lessor had allowed Quaglia to pay off the arrears in instalments? If Quaglia were able to pay in instalments it is difficult to see any detriment. In fact, the appeal decision in this case was very close. One judge refused to apply promissory estoppel. Another thought that promissory estoppel definitely applied. The Chief Justice was not entirely convinced as to the merits of Quaglia’s argument (‘The evidence as to detriment is sparse’) but was not prepared to upset the decision of the trial judge who heard all the evidence and decided in favour of Quaglia.

The leading case: Waltons Stores (Interstate) Ltd v Maher 5.41

The most significant commercial case on promissory estoppel has been Waltons Stores (Interstate) Ltd v Maher (see below).

[page 218]

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (High Court) Facts Maher owned a property with a building on it. He entered into negotiations with Waltons Stores, a retailing chain, to lease the land to Waltons, tear down the old building and erect a new building to Waltons’ specifications. In October 1983, a draft agreement was forwarded to Maher’s solicitor. A number of amendments were discussed. Maher’s solicitor informed Waltons’ solicitor that the old part of the building on the property had been torn down but that Maher did not want to tear down the rest until he was sure there would be no problems with the agreement. Waltons’ solicitors were also told that construction of the new building had to begin as soon as possible if the completion date was to be attained. Waltons’ solicitors sent an amended agreement to Maher’s solicitor, accompanied by the following letter: [W]e have not yet obtained our client’s specific instructions to each amendment requested, but we believe that approval will be forthcoming. We shall let you know tomorrow if any amendments are not agreed to. Waltons did not make any objections. A few days later (11 November), Maher’s solicitor sent a copy of the amended agreement signed by Maher to Waltons’ solicitors by way of exchange. Waltons never forwarded its part of the agreement. Maher commenced to tear down the remainder of the old building and construct the new. Waltons was aware of this. Waltons did not sign its part of the amended agreement. It was still considering its options and told its solicitors to go slow. The solicitors told Waltons that it was not bound as it had not exchanged its part of the amended agreement. When Waltons refused to proceed with the deal, Maher sued for breach of contract. Issue Did promissory estoppel apply in these circumstances? If so, how would it apply? What promise would Waltons be stopped from reneging on? Decision A majority of the High Court applied the doctrine of promissory estoppel. The elements of promissory estoppel were listed by Brennan J (at 428–9): In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal

relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that presumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. [page 219] The majority held that Waltons had led Maher to believe that the agreements would be exchanged. Maher had acted to his detriment on that belief. Waltons was aware that Maher was so acting. In these circumstances, it would be unconscionable (unfair) to allow Waltons to renege on its implied promise that the contract would be exchanged. The court treated the matter as if there was a contract between the parties and awarded damages to Maher.

What lessons should we learn from Waltons Stores (Interstate) Ltd v Maher? 5.42 It seems that there is a growing tendency for the courts to expect commercial parties to act with a reasonable level of fairness towards one another. It is not sufficient to follow the letter of the law if the spirit is being abused. There is nothing intrinsically wrong with Waltons attempting to keep their commercial options open. However, it is wrong when, as in Waltons Stores v Maher, Waltons had led Maher to understand that the contract would proceed. It would have been different if Waltons and Maher had still been in a state of negotiation. If Waltons had made it clear to Maher that no contract would exist until the documents had been executed and exchanged, Maher would have had no complaint. For another example of the courts demanding commercial fairness, see Hughes Aircraft Systems International v Airservices Australia, in [4.21]. In circumstances similar to Waltons Stores v Maher, the New South Wales Court of Appeal recently rejected an argument based

on promissory estoppel. It did so because, in contrast to Waltons Stores v Maher, it was clear in the circumstances that the potential lessee (Aldi) had not agreed to be bound until and unless Aldi’s board of directors voted to approve the lease. As this had not happened, there was no scope for promissory estoppel to apply: see BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSWCA 224. The judicial tendency to expect greater fairness is in keeping with parliamentary sentiment. Statutory provisions, such as Australian Consumer Law (ACL) s 18 and the unconscionable conduct rules of the ACL (see Chapter 3), undoubtedly require a higher level of commercial probity than existed in the past.

The remedy in cases of estoppel 5.43

Because estoppel is an equitable doctrine, the court will frame the remedy on the basis of the minimum order required to remove the detriment: Commonwealth v Verwayen (1990) 170 CLR 394. This means that the promisee’s remedy will not necessarily be the same as it would have been for breach of contract if a contract had existed. It is not the function of promissory estoppel to enforce contractual promises, although this may occur in appropriate cases. Sometimes adequate compensation to remove the detriment will be the appropriate remedy. Sometimes the appropriate remedy will be an injunction.

United Petroleum Pty Ltd v Pentaco Oil (Aust) Pty Ltd [2016] FCA 118 Facts Pentaco (P) and United (U) entered into a contract whereby U agreed to supply petroleum products to P’s seven petrol stations. The agreement contained a provision that U would [page 220]

have first right of refusal regarding any sale or disposal of the seven petrol stations. Unbeknown to U, P did not own any of these petrol stations. Instead, they were owned directly or indirectly by the directors of P. The directors failed to disclose this to U. U argued that the directors should be estopped (during the period of the supply agreement) from offering the petrol stations to anyone before offering them to U. Issue Had Pentaco made representations that United had relied upon to their detriment? Alternatively, was this failure to inform (silence) misleading? Facts The court held that the elements of promissory estoppel were established: false representations were made by the directors to U, and U reasonably relied on those representations to its potential detriment. The court held that the directors should be estopped from denying the truth of these representations. To achieve this, the court granted an injunction preventing the directors from disposing of the petrol stations during the term of the supply agreement unless they complied with the right of first refusal granted to U under the supply agreement. The directors were also held to have engaged in misleading or deceptive conduct in breach of s 18 of the ACL. U reasonably relied on the misleading or deceptive conduct. The appropriate remedy was an injunction in the same terms as the one granted under promissory estoppel.

Parties to the contract 5.44 The general rule is that only a party to the contract can sue on the contract. This matter has already been discussed in [5.15].

Minors 5.45

Some care must be exercised when dealing with minors. A minor is anyone under the age of 18 years. In all states except New South Wales, a contract with a minor for sale of goods is not enforceable unless the goods sold are necessaries.9 Necessaries are goods or services suitable to the condition in life of the minor and, in the case of goods, suitable to the particular minor’s actual requirements at the time of the sale and delivery.

Nash v Inman

[1908] 2 KB 1 (UK Court of Appeal) Facts A minor purchased a number of fancy waistcoats from a tailor, then refused to pay. The tailor sued to recover the contract price. [page 221] Issue As the buyer was a minor, the issue was whether the contract was a contract for the purchase of necessaries. Decision Even if a waistcoat could be described as a necessary, in this case the minor already had an adequate number of waistcoats and, therefore, the contract was not a contract for necessaries. The minor was not legally bound by the agreement.

The minor must pay a ‘reasonable price’ for any necessaries bought. This is not necessarily the contract price. If the contract is not for necessaries, it is generally voidable. This means that the seller will not be able to sue for the contract price (and possibly not be able to recover the goods). Generally, the minor may ratify the contract on reaching age 18, but this will require some positive act on the minor’s part. The situation is different in New South Wales where the Minors (Property and Contracts) Act 1970 presumes that all contracts for the benefit of the minor are binding, provided the minor does not lack the necessary understanding because of his or her youth.

Persons with mental disabilities; intoxicated persons 5.46

A person who has a mental disability or is intoxicated by alcohol or other drugs may be able to escape from a contract provided: the person was so incapacitated at the time of making the contract that he or she could not understand the nature of the transaction; and

the other contracting party was aware, or ought to have been aware, that the person was so incapacitated. As with minors, a person who has a mental disability or is intoxicated will have to pay a reasonable price for necessaries.

Agents 5.47

An agent is able to make a contract that binds his or her principal, provided the agent was acting within actual or ostensible authority. This is the main function of an agent (see Chapter 10).

Partnerships 5.48

One partner is able to make a contract that binds all the other partners, provided the requirements of the relevant Partnership Act are satisfied. As with agents, the partner must be acting within actual authority or ostensible authority (see Chapter 11).

Corporations 5.49

A contract with a corporation will be binding, provided the person who entered into the contract for the corporation had actual authority or ostensible authority to make that contract. This is discussed in Chapter 12. [page 222]

Assignment of contractual rights 5.50

In certain circumstances, contractual rights may be assigned to a third person, who may then enforce those rights. The procedure for assignment of rights and the enforcement thereof can be quite complex and is beyond the scope of an introductory discussion such as this.

ADVICE — LAW IN PRACTICE When dealing with suppliers, customers or others (and particularly when you are negotiating contracts) you should remember the following matters: An agreement is not binding just because you think it is binding. You must consider the circumstances objectively: Would a reasonable person say that the agreement was binding? Deeds do not agreements do.

need

consideration,

but

other

The value of the consideration is unimportant, but there are some things that the courts just do not regard as consideration: –

‘love and affection’ is not consideration;

–

being released from a debt without providing anything extra in return is not consideration. In these circumstances, make sure you obtain a signed deed of release.

Sometimes the courts will hold a person to their promise even though there is no contract. This is called promissory estoppel. It applies only in limited circumstances, and it is very risky to rely on it. If you are providing goods or services on credit, check that the client does not lack legal capacity to enter into a binding contract. In other words, be careful about giving credit to children.

[page 223]

QUESTIONS Question 1 Are the following statements true or false? (a) Consideration must be present in every simple contract. (b) Consideration must be in the form of money. (c) A mother agrees to transfer her house to her son in consideration of ‘love and affection’. This is good consideration. (d) Letters of comfort are legally binding as contracts. (e) A Deed is a promise under seal and does not require consideration. (f) Contracts formed during drinking hours at the local bar are not presumed to be legally binding. (g) Silence does not normally amount to acceptance of an offer. (h) Consideration must always be money. (i) Peter offered Paul and Mary $5000 if they landscaped his front garden. The landscaping was carried out entirely by Paul (Mary being away on holiday at the time). Peter is entitled to refuse to pay for the landscaping.

Question 2 (a) X Ltd is a manufacturer of confectionery. X runs a competition, the prize for which is a week-long visit to a Swiss chocolate factory. Contestants must send in three wrappers from one of X’s products. Contestants must also say in 100 words or less why they think X’s chocolates are best. The entry form contains the following clause: It is a condition of this competition that nothing herein or anything done in relation hereto shall give rise to any legal relationship, rights, duties or consequences whatsoever or be legally enforceable, but such be binding in honour only.

Connie is a contestant; she sent in her entry form together with the three empty wrappers as required. However, X Ltd lost a number of entries, including Connie’s, prior to the judging. Does Connie have a legally enforceable contract with X Ltd? (b) Bob worked as a volunteer at a children’s camp organised by his local church. He received free accommodation and food, as well as use of the camp facilities, but was not paid a wage. In return, Bob was expected to supervise the children’s outdoor activities, such as canoeing, bushwalking and obstacle-course crossings. While canoeing, Bob injured his head when the canoe capsized close to shore; he required some ongoing medical care. He wanted to claim workers’ compensation to recover his costs. However, he could only do so if there was a valid and legally enforceable contract of employment between him and his church. Does Bob have a legally enforceable contract with his local church? (See Teen Ranch Pty Ltd v Brown (1995) 38 AILR 5-036.)

[page 224]

Question 3 Jeff and Kitty are students finishing their accounting degree and are good friends. In order to pay his tuition fees, Jeff runs ‘Jeff’s Amazing Nosh Pty Ltd’, a company selling hot food and drinks from a small van. Kitty offers to help him by preparing homemade dim sum and pork buns (from her mother’s famous recipes). Jeff says he cannot pay her although he promises Kitty that if she provides him with enough pork buns and dim sum to last the summer, he will buy her the gold necklace she saw in Chadstone (worth $3000). Kitty jokes with Jeff that if he doesn’t buy her the necklace she will take him to court and Jeff just laughs. In the next six months, Kitty works 20 hours a week cooking for Jeff’s business. Discuss each of the following alternatives. Please explain your answer. (a) There is no contract because Kitty has not provided any consideration. (b) There is a contract because Kitty has provided consideration. (c) There is a contract because the agreement has a ‘commercial flavour’. (d) There is no contract because Kitty and Jeff are friends.

Question 4 Xanadu Pty Ltd had several outstanding debts, including: $10,000 owing to Betty; $5000 owing to Charlie. The following events occurred about which Xanadu Pty Ltd

seeks your advice: (a) Yeah Pty Ltd, a company that has connections with Xanadu Pty Ltd, pays Betty the sum of $8500 on the understanding that Betty will not make any claims against Xanadu Pty Ltd for the balance of the $10,000 debt. Later, Betty is suffering severe financial hardship and decides to claim the balance of the debt owing by Xanadu Pty Ltd. (b) Charlie agrees to accept a ticket in Powerball Lottery as settlement of the Xanadu Pty Ltd debt. (The cost of the ticket is $100.) Later, Charlie thinks that the ticket was not sufficient and wants repayment of the $5000. What would your answer be if Charlie had agreed to accept half the original $5000 debt plus the ticket in full satisfaction of Xanadu Pty Ltd’s debt?

Question 5 Albert is a builder. Bea is the owner of a block of land upon which she intends to build a house. Albert and Bea enter into a contract for Albert to build a house for $275,000. The contract contains no provision for the price to increase in line with price rises in materials. The price of materials rises significantly. Albert wants an extra $10,000 to continue. Bea agrees and Albert builds the house. Does Bea have to pay the extra $10,000? What, if any, further information do you require?

Question 6 Gary is the owner of a scallop boat. In 2010, Gary leased the vessel to his cousin, Sam, for 10 years at an annual rental of $10,000. In 2012, it became apparent that scallop numbers were declining and Sam soon realised that he would be

unable to meet the annual rental charge unless the catch improved. He approached Gary and advised him of his fishing and financial difficulties. He also complained that the engine in the scallop boat was not as powerful as [page 225] he had been led to believe. Gary denied that he had ever made any promises or statements about the engine power. However, he said that he was prepared to halve the annual rental until the catch improved and, accordingly, the rental charge was reduced to $5000. Gary signed a document to this effect. In 2015, the catch improved to such an extent that Sam is able to resume paying $10,000 a year. Gary was delighted and advised Sam that not only did he have to pay $10,000 a year until 2020, but also the $15,000 forgone by Gary in the previous three years. Advise Sam whether he must pay the $15,000 claimed by Gary.

_________ 1 2 3

4 5 6 7

See Law of Property Act 2000 (NT); Property Law Act 1974 (Qld); Property Law Act 1969 (WA). Rose and Frank Co v J R Crompton & Bros Ltd (see [5.4]). The supplier has a responsibility to deliver goods that correspond with the description by which they were sold, that are of merchantable quality and fit for any specific purpose made known by the buyer at the time of sale (see Chapter 8). Wigan v Edwards (1973) 47 ALJR 586; Callisher v Bischoffsheim (1870) LR 5 QB 449. D & C Builders Ltd v Rees [1965] 3 All ER 837. See New Zealand Shipping Co Ltd v A M Satterthwaite and Co Ltd (The Eurymedon) [1974] 2 WLR 865. See Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1978) 139 CLR 231.

8 9

Attorney-General (Hong Kong) v Humphreys Estate (Queen’s Gardens) Ltd [1987] 2 WLR 343. There are a limited number of contracts not for necessaries which are also enforceable but which may be repudiated by the minor, either during the minority or within a reasonable time of turning 18 years. These contracts include sales and leases of land, sales of shares and partnership agreements.

[page 227]

CHAPTER 6

EXPRESS TERMS OF THE CONTRACT

CONTENTS Objectives of this chapter Setting the scene: A Faustian plot Introduction and outline of chapter Ascertaining the relevant evidence The critical importance of the facts How courts approach different types of evidence Statements made after the contract is formed are not terms

The importance of a signed document General rule: a person is bound by the contents of a document they sign When is a person not bound by a document they signed? Incorporating unsigned terms into the contract by notice The reasonable notice test What constitutes reasonable notice? Incorporating ‘terms and conditions’ by notice When are oral statements or representations binding? The statement must be promissory in nature [page 228] Determining which oral statements are promissory: the reasonable bystander test Applying the reasonable bystander test: some guidelines Collateral contracts Meaning of a term Reasonable person test Courts must interpret the words of the contract as written Interpreting exemption clauses What is an exemption clause? What are the rules for interpreting exemption clauses? Unenforceable contracts In general Unenforceable terms in standard form consumer contracts Terms that involve an unreasonable restraint of trade The importance of a term Advice — Law in practice

Appendix: Sample of a written contract Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should know how the courts work out and apply the express terms of the contract. In particular, you should be able to describe: when signed documents become terms of the contract; when unsigned documents become terms of the contract; when oral representations become terms; how the courts interpret the meaning of contractual terms, including exemption clauses; and which terms the courts will not enforce.

[page 229]

SETTING THE SCENE: A FAUSTIAN PLOT In April 2010, GameStation, a UK-based games retailer, revealed that it ‘owned’ the souls of approximately 7500 customers. This was news to the customers, so how did it come about? Everyone who bought a GameStation product online on 1 April had, as usual, to click on the button agreeing to accept GameStation’s standard terms and conditions. One of the terms — the Immortal Soul Clause — provided that the buyer agreed to sell their soul to GameStation. Eighty-eight per cent of customers didn’t read the terms and conditions and just clicked the button. With a touch of wry humour, GameStation executives have since assured all customers that they would not be enforcing the Immortal Soul Clause. The 12 per cent who did bother to read the clause and clicked a button opting out of the Immortal Soul Clause were rewarded for their diligence with a £5 gift voucher. GameStation explained that they did the whole thing to show how few people read online terms and conditions. Reading the fine print sometimes pays off in surprising ways.

INTRODUCTION AND OUTLINE OF CHAPTER

6.1

Chapters 4 and 5 dealt with some of the problems experienced in the making of a contract. Chapters 6 and 7 deal with the problem of what the contract says; that is, what the terms of the contract are. The terms may be express or implied. This chapter is concerned with express terms (see Figure 6.1). Implied terms are discussed in Chapter 7.

Figure 6.1

Terms of the contract

[page 230] During the period leading up to the actual formation of the contract, the parties may make many statements or representations, some of which are intended to form part of the contract and others which are not. These statements or representations may take the form of assertions of fact or promises or opinions. Some may be oral and others in writing; some may be in a document and others in some other written form; some may be signed and others not. The question is: Which become terms?

Once the terms have been worked out, it is necessary to determine what they mean. This is a very common form of contract dispute. It is also important to understand when the law will not enforce a term. An important example of this is the enacted unfair terms in standard form consumer contracts. If there has been a breach of contract, the innocent party needs to know what remedies are available. This sometimes requires distinguishing between the terms that allow the innocent party to terminate the contract and other terms which allow only damages to be claimed. Figure 6.2 shows the steps in identifying a contract’s express terms. Figure 6.2

The three basic tests for establishing the express terms of a contract

What are the facts? What did the parties say and do? This forms the evidentiary base from which the terms are determined.

1. Was anything signed? Signed documents are normally binding. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd

2. Is there any unsigned writing which has been incorporated into the contract? Reasonable notice test: see Parker v Sth Eastern Railway.

3. Are there any oral representations which the parties intended to be terms? Reasonable bystander test: see Oscar Chess v Williams.

ASCERTAINING THE RELEVANT EVIDENCE The critical importance of the facts The essence of contract is that the parties create their own rights and obligations. Therefore, having a clear understanding of the facts is generally central to resolving contract disputes. The fundamental question is: What did the parties agree to?

6.2

The rationale of contract law is that the parties are largely entitled to work out their own deal. Only occasionally does the law impose terms on the parties. Because the parties are largely free to determine the terms of their contract, when a dispute arises, the facts of the case become all important. Sorting out the facts to ascertain what the parties really agreed upon is the first and most significant task of solving a contract dispute. There is much to be said for keeping good contemporary records of all contract negotiations. [page 231]

How courts approach different types of evidence The parol evidence presumption means that it is difficult to convince a court to add to, vary or contradict a written contract.

6.3

Let’s assume that A and B negotiate an agreement. Following negotiations, their lawyers draw up a contract which is scrutinised by both parties and, after making any necessary amendments, signed. The signed document is clear on its face and contains all terms appropriate to the transaction. This is a common commercial occurrence. How do the courts react if one of the parties later argues that the written contract is wrong or not complete? No one should be surprised to learn that the courts are

suspicious of such arguments. It would add significantly to the cost of doing business if formal contracts could easily be challenged in this way. To avoid uncertainty, the courts presume that written formal contracts, which appear on their face to be a complete record of the agreement between the parties, contain the whole agreement between the parties. The courts are reluctant to permit one of the parties to ‘subtract from, add to, vary or contradict the language of the written instrument’.1 This is called the parol evidence rule or presumption.2 However, this is only a presumption. If the court is convinced that the written document is incomplete or is otherwise an incorrect record of the parties’ transaction, the court will not apply the presumption. It is fair to say that the presumption is not always consistently applied by courts. Some judges are more prepared than others to go beyond the written document.3 This uncertainty makes it important that business people take care when drawing up and signing documents.

STATEMENTS MADE AFTER THE CONTRACT IS FORMED ARE NOT TERMS 6.4

It is fundamental to the concept of contract as an agreement that a party cannot be bound by statements, promises or representations made after the contract has been formed unless fresh consideration is provided: Roscorla v Thomas (see [5.18]). When is a contract formed? This depends on the rules of acceptance: see, for example, Oceanic Sun Line Special Shipping Co Inc v Fay, in [6.15]. A seller of packaged products cannot rely on a clause that is contained within the sealed packaging unless it is brought to the buyer’s attention prior to sale: Hardchrome Engineering v Kambrook [2000] VSC 359.

Post-contractual representations and promises will not be binding without fresh consideration. This is an important point to remember when negotiating contracts.

Thornton v Shoe Lane Parking Ltd [1971] 1 All ER 686 (UK Court of Appeal) Facts Thornton took his car to a carpark operated by the defendant. He had never been to the carpark before. Outside was a sign which read: ‘All cars parked at owner’s risk’. The ticket was issued by an automatic machine. The ticket stated that it was issued subject to conditions displayed on the premises. Inside the carpark were further signs referring customers to the conditions displayed. The conditions included an exemption clause. The exemption clause excluded the carpark from liability not only for damage to the car but also for personal damage to customers. [page 232] Thornton suffered personal injuries for which the carpark was held to be 50 per cent responsible. Shoe Lane Parking argued that it was protected by the exemption clause. Thornton argued the exemption clause was ineffective because it was not a term of the contract. Issue Was the notice excluding the carpark proprietor from liability a term of the contract? Decision The court held that it was not a term. The contents of the ticket were irrelevant, as the contract was made prior to the ticket being issued via the vending machine. The offer was made by the carpark proprietor and was accepted by Thornton by putting the money in the vending machine.

Olley v Marlborough Court Ltd [1949] 1 All ER 127 (UK Court of Appeal) Facts The Olleys booked into the Marlborough Court Hotel. They paid a week’s board. When they got to their room, they noticed a sign on the door which said: The proprietors will not hold themselves responsible for articles lost or

stolen unless handed to the manageress for safe custody. Mrs Olley’s furs were stolen as a result of the carelessness of the hotel staff. Mrs Olley sued for damages. Normally, the hotel would owe an obligation to guests not to be careless. In this case, the hotel argued that because of the sign they could not be held responsible. The sign, however, would only be effective if it was a term of the contract between the Olleys and the hotel. Issue Was the sign on the door a term of the contract? Decision The hotel could only rely on the exclusion clause if it was a term of the contract. When was the contract made? The court held that it was made at the reception desk before the Olleys went up to their room. Therefore, the exclusion clause could not be a term.

The decision in Olley v Marlborough Court might have been different if the Olleys had visited the hotel on a number of previous occasions. In such circumstances, it would be open to the court to find that the Olleys ought to have been aware of the sign on the back of the door, even if they had not actually read it. [page 233] Past dealings can be important in incorporating terms into commercial contracts where the parties deal with one another on a regular and consistent basis (see [7.11]). However, the courts are generally reluctant to adopt this course in the case of exemption clauses. Therefore, any party wishing to enforce an exclusion clause would be advised to take steps to incorporate the exclusion clause prior to the making of the contract. The best way to ensure that the exclusion clause is a term is to include the clause in a signed contract.

THE IMPORTANCE OF A SIGNED DOCUMENT

General rule: a person is bound by the contents of a document they sign 6.5

As a broad general rule, a person who signs a document that has a contractual appearance about it, is bound by the contents of the document. This applies even though they did not read the document. Although there are some exceptions to this rule, it must be remembered that the fact that a person has signed a document is strong evidence that that person has agreed to be bound by it. This general rule has been accepted by the High Court in Yerkey v Jones (1939) 63 CLR 649; Wilton v Farnworth (1948) 76 CLR 646; and in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, below.

L’Estrange v F Graucob Ltd [1934] 2 KB 394 (UK Court of Appeal) Facts Mrs L’Estrange bought an automatic cigarette machine from the defendant, Graucob Ltd. She signed a document, called a ‘Sales Agreement’, without reading it. Within a few days, the machine jammed and stopped working altogether. Mrs L’Estrange brought an action for breach of contract. The sales agreement contained an exemption clause ‘in regrettably small print but quite legible’. The clause read as follows: This agreement contains all the terms and conditions under which I agree to purchase the machine specified above and any express or implied condition, statement or warranty, statutory or otherwise, not stated herein is hereby excluded. Graucob Ltd had not taken any steps to bring the clause to the attention of Mrs L’Estrange. Neither, however, had it misrepresented the terms. Mrs L’Estrange was aware of the nature of the document she signed in the sense that she must have been aware that the document was contractual in nature. Mrs L’Estrange alleged that there was a breach of an implied term that the machine would be fit for the purpose for which it had been bought. Graucob Ltd argued that it was protected by the exemption clause. Issue Was Mrs L’Estrange bound by the exemption clause in the sales agreement even though she had not read the clause?

[page 234] Decision The court held that Mrs L’Estrange had signed the agreement and therefore was bound by it. The exemption clause excluded implied terms and therefore Mrs L’Estrange could not rely on one.

L’Estrange v Graucob was approved by the High Court of Australia in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, below. The general rule is that a person is bound by the contents of a document they sign. While there are exceptions, it is risky to sign without being fully aware of what the document contains.

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 (High Court) Facts Toll operated a storage and cartage business called Finemores (F). Alphapharm imported and distributed pharmaceutical products, including Fluvirin. Richard Thomson (RT), which was acting as agent for Alphapharm, sought a quotation from F for the storage and transport of Fluvirin. F sent their quotation under cover of a letter which required RT to sign an Application for Credit and a Freight Rate Schedule. RT attended F’s office and signed an Application for Credit. Immediately above the place for signing were the words, ‘Please read “Conditions of Contract” (Overleaf) prior to signing’. RT signed without reading the ‘Conditions of Contract’. RT was not pressured in any way. There was no evidence of any misrepresentation. In fact, the court said (at [39]): [RT] signed a document which invited him to read the terms and conditions on the reverse before signing. He was not rushed or tricked into signing the document. He chose to sign it without reading it. He could have read it had he wished. Finemores did not set out to conceal from him the terms and conditions on the document, or to encourage him not to read them. Finemores had no way of knowing that he did not read the document. No case of mistake or non est factum is advanced. The ‘Conditions of Contract’ contained an exclusion clause which provided that under no circumstances would F be liable for ‘any loss, injury or damage’ arising out of a whole range of possible events ‘whether in contract, tort

(including without limitation, negligence or breach of statutory duty) or otherwise’. The Fluvirin was ruined when F negligently allowed the temperature at which it was stored to drop below the minimum allowed. Alphapharm sued F for negligence. F relied upon the exclusion clause in the Application for Credit. Alphapharm argued that the exclusion clause did not apply because it was not a term of the contract. At trial and on appeal to the New South Wales Court of Appeal it was held that, as F had not done all that was reasonably necessary to bring the exemption clause to the attention of RT, F could not rely on the clause despite the fact that the Credit Application had been signed. F appealed to the High Court. [page 235] Issue The High Court had to decide whether: (a) Alphapharm was bound by the exemption clause because it had signed the Application for Credit; or (b) Alphapharm was not bound by the exemption clause because F had not taken all reasonable steps to bring the clause to the attention of Alphapharm. Decision The High Court decided that Alphapharm was bound by the exemption clause. According to the court (at [57]): The general rule, which applies in the present case, is that where there is no suggested vitiating element [eg, misrepresentation or duress], and no claim for equitable or statutory relief [eg, breach of s 18 of the Australian Consumer Law], a person who signs a document which is known by that person to contain contractual terms, and to affect legal relations, is bound by those terms, and it is immaterial that the person has not read the document. Thus, the court applied the rule in L’Estrange v Graucob. There was no need for F to establish that it had taken reasonable steps to bring the clause to RT’s attention. (The High Court found that the New South Wales Court of Appeal had applied the wrong test.)

When is a person not bound by a document they signed? 6.6

There are a number of exceptions to the general rule that a person is bound by the contents of any document he or she signs.

The document did not appear to be contractual A person is not bound by his or her signature if no reasonable 6.7 person would have realised the document they signed was a contract. For example, a celebrity hurriedly signing a paper on a public occasion believing it to be for an autograph hunter would not be bound if the paper purported to be a contract for the sale of the celebrity’s house. A signed receipt, docket or other document which contained contractual terms may not be binding if the circumstances were such that the signer could claim, ‘I had no way of knowing that the thing I signed contained a contractual clause. No reasonable person would have scrutinised the document for contractual terms’. In Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661, a patron at a go-cart racing track was required to sign a form on entering the park. He was given neither time nor opportunity to read the form. The form was headed, ‘To Help With Our Advertising …’. In fact, the form contained a clause exempting the race track proprietors from liability (ie, an exemption clause). The court accepted that the patron’s signature was not binding in these circumstances. [page 236]

D J Hill and Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749 (Supreme Court of Victoria) Facts D J Hill & Co Pty Ltd (Hill) hired a cartage contractor (Wright) to carry some valuable machinery. The machinery was damaged in transit due to the negligence of Wright. The negotiations were conducted entirely by telephone. When the machinery was delivered, one of Hill’s employees signed a form which contained an exemption clause. The exemption clause excluded liability for damage ‘caused by any acts, defaults, or negligence of the carrier or otherwise, howsoever’. The employee did not read the form.

Hill and Wright had been involved in at least 10 similar dealings within the space of eight months immediately prior to this event. In each case, an employee had signed a similar form. However, no one had ever read the form or was aware that it contained the exemption clause, even though a number of Hill’s employees knew the form contained terms of some type. Hill sued for damages for breach of contract. Wright relied on the exemption clause. Issue Was the exemption clause a term of the contract? Decision The court found in favour of Hill. The contract was made before the form containing the exemption clause was presented. Therefore, the contents of the form could only be a term on the basis of a course of past dealings between the parties. On all past occasions, the procedure had been the same. There was no reason why Hill or its employees would regard the form as anything but a delivery docket and that when they signed it, all they were doing was acknowledging delivery. Therefore, the exemption clause was not a term.4

Estoppel: sometimes an oral promise will override a term in a signed document In L’Estrange v Graucob Ltd (see [6.5]), if the vendor had promised 6.8 Mrs L’Estrange specifically that it would not rely on the relevant clause, then Mrs L’Estrange would probably not have been bound. It would be unconscionable to allow people to renege on such promises: see [5.37]. However, it is often difficult to convince a court that estoppel should be applied. If a party promises not to rely on a term, there should be no reason why the term cannot be removed from the document before signing. An oral statement may be enforceable as a term in a written agreement if the written agreement is silent regarding the topic discussed in the oral statement (see Van Den Esschert v Chappell, in [6.24]). Again, however, it may be very difficult to convince a court of the necessary factual basis for this claim. Certainly, it is very unwise to sign a document knowing that it is contrary to some oral arrangement. Thus, in Equuscorp Pty Ltd v Glengallan Investments

Pty Ltd [2004] HCA 55, the High Court refused to allow an oral promise made just before signing a written contract to overrule the clear terms of the signed document. [page 237]

State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 (Supreme Court of New South Wales) Facts Heath and State Rail reached an understanding that, for five years, Heath would have the right to erect advertising billboards on certain land owned by State Rail. State Rail presented its standard contract to Heath for signing. One of the terms of the standard contract gave State Rail the right to terminate the contract at any time, provided it gave one month’s notice (‘the termination term’). Prior to signing the contract, Heath expressed concern about the termination term, claiming that it was contrary to their oral understanding. The employee of State Rail assured Heath that Heath had five years, but that it would be very difficult to have any part of the standard contract changed. Heath then signed the contract. Issue Was the termination term binding on Heath? Or, did the oral assurance to the contrary negate the termination term? Decision Heath was made aware that State Rail would probably not change its standard contract. Knowing this, Heath went ahead and signed. Therefore, the term in question was binding. It was not displaced by any oral agreement to the contrary.

Misrepresentation (misleading or deceptive conduct) A person should not benefit from their own misleading or 6.9 deceptive conduct. Where a person has misrepresented the

contents of the signed document, that person will not be able to rely on the contents that have been misrepresented. The misrepresentation does not have to be deliberate; it may be quite innocent. This rule has been considerably strengthened by the rules against misleading or deceptive conduct in business — the courts have power under the Australian Consumer Law (ACL) to vary the terms of a contract (see [3.38]).

Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 (UK Court of Appeal) Facts Mrs Curtis took a wedding dress to the defendant drycleaner. When requested to sign a document which was called a ‘receipt’, Mrs Curtis asked why her signature was required. According to Mrs Curtis, ‘the assistant said I was to accept any responsibility for damage to beads and sequins. I did not read it all before I signed it’. The dress was damaged by the defendant, and Mrs Curtis sued for damages for breach of contract. [page 238] The defendant sought to rely on the signed ‘receipt’, which contained the following clause: This or these articles is accepted on condition that the company is not liable for any damage howsoever arising, or delay. Mrs Curtis argued that the assistant’s response led her to believe that any exemption clause referred only to the beads and sequins, and not to the dress material. Issue Could Chemical Cleaning rely on the exemption clause even though its shop assistant had misrepresented the nature of the clause? Decision The Court of Appeal agreed with Mrs Curtis. Although the assistant had acted innocently, a false impression had been created which prevented the cleaners from relying on the exclusion clause except in so far as damage to the beads and sequins was involved.

Condition precedent 6.10 The signed document will not be binding if the parties have made it subject to a condition precedent. For example, A and B sign a contract for the sale of A’s holiday house. However, before signing, the parties had orally agreed that the deal would go ahead only if A was sent overseas in her job. The sale contract was conditional on the happening of another event, that is, A being sent overseas. If A is not sent overseas, the sale of the holiday house is not binding. Of course, it is not always easy to prove the existence of a verbal agreement. A much wiser course would be for parties to add the condition precedent into the written agreement prior to signing it. The document does not accurately record the agreement 6.11 A court may refuse to enforce a signed contract as written where there has obviously been a mistake made in recording the terms and one party is unfairly trying to take advantage of that mistake.5 Equitable doctrines 6.12 There are a limited number of situations in which the courts will not enforce a contract (including a written contract) because it would be inequitable (unfair) to do so. In each case, the courts will set the contract aside because one party is unfairly taking advantage of the other party.6 These situations include unconscionable conduct (see [3.43]), duress, undue influence and unilateral mistake (see Chapter 8).

INCORPORATING UNSIGNED TERMS INTO THE CONTRACT BY NOTICE The reasonable notice test Unsigned documents or notices only become part of the contract if reasonable notice of their existence and contents has been given to the other party.

6.13

Fred attends a wine auction. He does not collect a catalogue, although they were freely available. At the beginning of the auction, the auctioneer says that the auction, and each [page 239] sale, is conducted subject to the ‘terms and conditions set out in the catalogue’. Fred makes a successful bid. Are the terms and conditions set out in the catalogue incorporated into Fred’s contract? This was clearly the auctioneer’s intention. More importantly, the auctioneer has made this reasonably clear to prospective buyers. Generally, a court will incorporate such terms into the contract because the auctioneer has, in the circumstances, given reasonable notice of the terms to prospective bidders. The parties must be taken to have contracted on the basis of the catalogue. If reasonable notice has been given, it does not matter whether the other party read the clause or not: Parker v South Eastern Railway Co (1877) 2 CPD 416. It is fairly common for a commercial party, particularly a supplier, to include in its correspondence references to its ‘standard terms and conditions’. Often, these standard terms and conditions are never produced or asked for. Whether they become terms of the contract will depend, first, on the rules of offer and acceptance (particularly counter offers) and, second, on reasonable notice. In Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559, a supplier (Maxitherm) made its offer ‘subject to standard terms and conditions’. Pacific Dunlop accepted the offer (even though it had never seen and did not ask to see the ‘standard terms and conditions’). These terms were held to be part of the contract even though they had never been forwarded to Pacific Dunlop. Pacific Dunlop had been given reasonable notice of their existence and must be taken to have agreed to them.

What constitutes reasonable notice? 6.14

Reasonable notice is a question of fact. Thus, in determining whether reasonable notice has been given, it is necessary to look at all the facts, including: whether the document containing the term was contractual in nature; whether the term sought to be incorporated was unusual for that type of contract; and whether the parties discussed the matter. As each case depends on its own facts, it is up to the person seeking to incorporate the unsigned term to convince the court that all reasonable steps have been taken.

Is the document contractual in nature? 6.15 Would a reasonable person expect the document to contain terms and conditions? Or would it be regarded as merely a docket to be filed away unread, or a receipt similar to that in Hill v Wright (see [6.7])? For example, are the terms and conditions set out in a sales or advertising brochure likely to be binding?

Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197 (High Court) Facts Fay made a booking in New South Wales for a cruise of the Greek Islands on a Greek vessel owned and operated by Oceanic Sun Line (O S Line). Before deciding to take the cruise, Fay was shown a brochure which stated that the cruise was governed by the terms and conditions printed on the passenger ticket, which could be inspected [page 240] at any O S Line office. Fay did not read this. In any event, the New South Wales office of O S Line did not have any tickets. Fay paid the non-refundable

fare and received an ‘exchange order’. The exchange order was exchanged in Greece for a ticket. The ticket, issued in Greece, stated that the Greek courts would have exclusive jurisdiction over any legal action against the ship owner. Fay was injured on the cruise and sued the owner in New South Wales. The owner argued that it was a condition of the contract that the case be brought in Greece. Issue Were the terms printed on the ticket issued in Greece a part of the contract — that is, had O S Line given Fay reasonable notice of the existence of the term relating to the Greek courts having jurisdiction? Decision The High Court held that the contract was made in New South Wales when the non-refundable fare was paid and an exchange order issued. The references in the brochure did not amount to reasonable notice because the brochure was not a document which could reasonably be regarded as contractual in nature. Therefore, the clause concerning the Greek courts was not a term of the contract.

The nature of the document is an important issue for exemption clauses. It is not sufficient merely to include an exemption clause in an unsigned document where the document could not reasonably be supposed to contain contractual terms; for example, in a drycleaner’s receipt,7 a travel brochure promoting a cruise,8 a ticket handed to customers hiring a deckchair at the beach9 or a delivery docket.10 It may not be sufficient to include an exemption clause in a carpark ticket.11 Notice of the exemption clause does not have to be in a document or a ticket. For example, in Penny v Grand Central Car Park Pty Ltd [1965] VR 323, notice (of the exemption clause) placed at the carpark entrance was held to be sufficient. Is the term unusual? 6.16 If the unsigned term is particularly unusual, extra notice will have to be given. This is often critically important in the case of exemption clauses. It is significant that in Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd (see [6.13]), there were no unusual terms in the ‘standard terms and conditions’.

[page 241]

Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348 (UK Court of Appeal) Facts Interfoto operated a business hiring out photographic transparencies. Stiletto, an advertising agency, wished to hire some transparencies for use in a presentation to its client. Over the phone, Stiletto enquired whether Interfoto had any transparencies depicting the 1950s which could be used for this purpose. The staff member at Interfoto said that she would investigate the matter. Later the same day Interfoto delivered 47 transparencies to Stiletto, together with a delivery note which contained a number of conditions printed across the foot of the note. One of the conditions imposed an over-holding fee of £5 per day. Most other picture libraries charged £3.50 per week. Stiletto returned the transparencies late and Interfoto sued for the over-holding fee at the rate of £5 per day. Stiletto argued that the condition (£5 per day) contained in the delivery note was not a term of the contract. Issues When was the contract made — during the telephone call or later? If the contract was made when the transparencies were delivered together with the delivery note, had Interfoto given Stiletto reasonable notice of the existence of the over-holding fee contained in the delivery note? Decision The Court of Appeal held that the contract was not formed until the transparencies and the delivery note had been delivered, and Stiletto retained the goods without making any objection to the conditions on the note. However, this did not mean that all the conditions contained in the note were terms of the contract. Dillon LJ said (at 352): [I]f one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party. As nothing whatsoever had been done to draw the defendant’s attention to the over-holding condition, and as the condition was so wholly different to normal industry practice, the condition could not be regarded as a term of the contract. Interfoto was entitled to a fee based on the industry norm (£3.50 per week). This was an implied term of the contract. (Implied terms are discussed in Chapter 7.)

Were there any conflicting statements or promises? 6.17 Even if sufficient notice has been given, the incorporation of unsigned terms may be subject to any oral statement to the contrary. [page 242]

Couchman v Hill [1947] 1 KB 554 (UK Court of Appeal) Facts Couchman attended a cattle auction at which he purchased a heifer. The auction catalogue described the heifer as ‘unserved’. Prior to making his successful bid, Couchman sought assurance that the animal was indeed unserved. Both the owner and the auctioneer gave the necessary assurance. In fact, the heifer was in calf and later died as a result of the strain of carrying a calf while too young. The auction catalogue also contained the following disclaimer: All lots must be taken subject to all faults or errors of description (if any), and no compensation will be paid for the same. The catalogue also stated that the seller did not guarantee the accuracy of the information contained in the catalogue. Couchman sued for breach of contract. The trial judge found for the seller on the basis of the terms in the catalogue. Couchman appealed, arguing that the oral representation was not subject to the contents of the catalogue. Issue Did the parties intend to contract on the basis that the oral representation was a warranty not subject to the disclaimers in the catalogue? Decision The Court of Appeal found in favour of Couchman. The intention of the parties was to contract on the basis of the oral representation and not on the basis of the conditions set out in the catalogue. Therefore, the oral representation was intended to be a warranty (term of the contract) and prevailed over the written terms.

Incorporating ‘terms and conditions’ by notice The ticket cases 6.18 Take the example of a train ride. The relationship between the passenger and the railway company is one of contract. In return for the customer’s payment of the appropriate fee, the railway company agrees to transport the customer along a designated route for a particular distance. These are the essential express terms of the contract. But are they the only express terms? Probably the customer was issued with a ticket. The ticket may very well have contained a statement to the following effect: ‘This ticket is issued subject to the railway company’s terms and conditions’. These ‘terms and conditions’ may be displayed at each ticket office, or at selected stations. The question is whether they were in fact terms of the contract. Did the railway company achieve its objective of making them terms? The test is whether, in the [page 243] circumstances, the railway company has given reasonable notice of the ‘terms and conditions’ to the customer. In cases such as the purchase of a train ticket, the court would probably hold that sufficient notice has been given. Thus, in Thompson v L M & S Railway Co [1930] 1 KB 41 an exemption clause referred to on a train ticket was held to be sufficient notice. It is common to find terms, particularly exemption clauses, in all types of tickets and receipts. Internet transactions 6.19 Alexis wants to buy some goods from BStore online. She goes to the BStore website, selects the items she wishes to buy, puts them in the virtual shopping cart and proceeds to the online checkout,

where she must supply her personal details, including credit card details. She then submits her order. The website then requires Alexis to click a button that reads, ‘I confirm that I have read and understood the Terms & Conditions’. If Alexis does not click the button, the sale will not proceed. The effect of clicking this button is to incorporate the BStore ‘terms and conditions’ into the contract. One of the terms, for example, might say that the sale is subject to the laws of Victoria, Australia.

WHEN ARE ORAL STATEMENTS OR REPRESENTATIONS BINDING? 6.20

There is no rule which says an oral statement cannot become a term. (‘Statement’ is here used as a generic expression to cover promises, opinions and statements of fact.) Many contracts are wholly oral. Take, for example, a purchase of fruit made at a market. It is unlikely that any part of the deal between the fruit seller and the buyer will be written down, let alone signed. Yet the deal is still a contract. This leads to the obvious question: How do the courts determine which oral statements are terms? The courts examine the facts to determine whether the statement or representation was promissory in nature.

The statement must be promissory in nature 6.21

Only those statements which are promissory become terms. All other statements are regarded as mere representations. For example, Alex is considering buying a car from Kylie. Alex is not a particularly decisive person and it takes him four weeks to make up his mind to buy the vehicle. During this time, he inspects the car on a number of occasions. It is later established Kylie made the following statements: ‘This is the best little car of its type in the world.’ ‘The car has never been involved in an accident.’ ‘The engine will be perfectly good for another 100,000

kilometres.’ ‘If you buy the car, I will arrange for the first two services to be free.’ The first statement is mere puffery (a self-evident exaggeration) and not binding. The second statement is one of fact; the third is most likely an opinion; and the fourth is a promise to do something in the future. Are any or all of these statements terms of the contract for the sale of the car? If they are not terms, Alex will have to rely on the law of misrepresentation, should the representations prove to be incorrect. See Figure 6.3. [page 244] Figure 6.3

Possible alternatives for representations

DETERMINING WHICH ORAL STATEMENTS ARE PROMISSORY: THE REASONABLE BYSTANDER TEST 6.22

In any dispute over the construction of the contract, the court is

trying to work out what terms the parties must be taken to have agreed upon. The test is objective. The actual intention of either party is irrelevant. How would a reasonable person view the situation? Which statements and representations would a reasonable bystander, aware of the circumstances of the case, regard as promissory (ie, contractually binding)? In Oscar Chess Ltd v Williams (see [6.28]), Denning LJ articulated a test which has been affirmed by the High Court on a number of occasions. He said (at 328): The question whether a warranty term was intended depends upon the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty [that is, a term] was intended, that will suffice.

A statement does not have to be in the form of a promise to be promissory. It is not necessary for the representor to have said, ‘I promise that this car has never been in an accident’. Similarly, a statement is not promissory just because the other party relied upon it. It is not sufficient for the plaintiff to argue, ‘I relied on that statement and so it must be a term’. The ultimate question is whether the person making the statement is to be taken to have warranted its accuracy; that is, promised to make it good: Ellul v Oakes [1972] 3 SASR 377.

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 (High Court) Facts United States Surgical Corp (USSC) was an American corporation which made surgical stapling instruments used by hospitals. It appointed Blackman (who later set up Hospital Products Ltd (HPL)) as its Australian distributor. Blackman had previously been the distributor for USSC in New York. [page 245]

At a meeting in a New York restaurant, when he was making his pitch to be appointed sole Australian distributor, Blackman had told USSC that he was more capable than the existing distributor of building up Australian sales and that, while he may in the future distribute other non-competing products, he would ensure that it did not interfere with the promotion of USSC’s product. Shortly after arriving in Australia and taking over the distributorship, Blackman cancelled the contract, arranged for his own stapling instruments (copied from USSC) to be manufactured, and grabbed USSC’s customers. USSC sued on a number of grounds, including breach of contract. USSC argued that the representations made by Blackman at the New York restaurant were terms of the contract and that Blackman’s activities amounted to a breach of contract. Issue Were the oral representations made at the restaurant terms of the contract? If so, had they been breached? Decision The court held that the comments made at the restaurant were intended to be promissory (ie, terms of the contract). Effectively, Blackman had promised that he would devote his ‘best efforts’ to building up sales of the USSC product and that he would not deal in a competing product. He (and HPL) had breached those promises.

Applying the reasonable bystander test: some guidelines 6.23

There are a number of factual matters which the courts look to as a guide in determining whether a representation was intended to be promissory. None of these factors, taken alone, should be regarded as conclusive: see, for example, Ross v Allis-Chalmers Australia Pty Ltd, in [6.28]. Was the representation included in a written document? When in the negotiations was the representation made? Did the representation sound promissory? How objectively important is the representation to the overall deal? Did either of the parties have special knowledge about the subject matter of the representation? The whole issue of whether a statement is promissory is largely

a question of common sense. Was there a written document? If the parties orally agree to amend the written contract, they should amend the written document also. Otherwise, the risk is that the courts will apply the parol evidence assumption.

6.24

If the statement was included in any written document drawn up by the parties this is good evidence that the parties were treating the statement as sufficiently important to be a term. Alternatively, if the statement is left out of the document, this suggests that the parties did not intend it to be contractually binding. Where the parties apparently reduce the whole of their deal to a formal document, it will often be difficult to convince a court that an oral statement should be added to the [page 246] written terms. This is the effect of the so-called parol evidence rule (see [6.3]). Where the oral statement is in conflict with the clear terms of the written document, the courts will favour the written document: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55. However, where there is no conflict the courts are sometimes prepared to regard the contract as partly written and partly oral — that is, an oral representation can be added to the written terms if the evidence suggests that this is what the parties intended.

Van Den Esschert v Chappell [1960] WAR 114 (Supreme Court of Western Australia) Facts

Van Den Esschert agreed to sell a house to Chappell. The contract was drawn up, but immediately before signing, Chappell asked whether there were any white ants in the house. V said, ‘No, no, no, if there had been any I would have taken steps to eradicate them’. Chappell then signed the written contract. The written contract made no mention of white ants. After Chappell took possession, she found that the house was infested with white ants. It cost her £60 to eradicate them. Chappell sued for damages for breach of contract (the warranty regarding the white ants). Van Den Esschert argued that the contract was in writing and that the oral assurance regarding the white ants was not a term of the contract. Issue Was Van Den Esschert’s oral assurance about the white ants a term of the contract? Decision Wolff CJ in the Western Australian Supreme Court, having referred to the importance of white ant infestation in Western Australia, held that (at 116): … when (as in this case) the prospective purchaser immediately before signing a contract makes a specific request to be informed about that matter and gets an affirmative answer such as the purchaser got in this case it was intended to be made a part and parcel of the contract and was to be regarded as a term. It was important that the written document had already been prepared and the oral statement was made immediately prior to the signing of the document in circumstances where it was reasonably clear that the representee would not have signed without receiving the necessary assurance.

The written document should be drawn in such a way that it accurately reflects the deal between the parties. Any necessary amendments can always be made to the document before signing. These can be made in pen and signed or initialled by all parties. Prevention is much cheaper and more certain than the litigation cure. How much time lapsed between statement and contract? 6.25 The vendor of a motor car tells the purchaser that the car has always been kept in a garage. Without knowing further facts, it would be impossible to characterise such a statement as

[page 247] a term or a mere representation. If the statement was made only once in the early days of negotiation before the parties had really settled down to fashion their deal, it is doubtful that it would be regarded as a term. On the other hand, if the statement was made as the final inducement, it might very well be a term (see Van Den Esschert v Chappell, in [6.24]), but probably not if the oral term conflicts with the written document: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55. How important was the statement to the deal as a whole? 6.26 This can only be judged in its context. For example, a statement that a painting is by a famous painter would ordinarily be a matter of some importance in the sale of a work of fine art. However, it may not be so where the buyer is known to both parties to be in a better position to judge the authenticity of a painting. The expert buyer would probably make his or her own judgment if he or she felt more competent than the seller. Of course, it is completely irrelevant that one party regarded the statement as extremely important if a reasonable person would not regard it in that light. What words were used? 6.27 The more precise the language, the more likely it is to be promissory. For example, a statement such as, ‘I’m not really sure but I think it’s a 1995 model Toyota’, probably lacks sufficient precision to be construed as a term. Did either party have special knowledge? 6.28 It may be important that one of the parties has special knowledge not possessed by the other.

Oscar Chess Ltd v Williams

[1957] 1 All ER 325 (UK Court of Appeal) Facts In 1955, Williams sold a Morris car to Oscar Chess Ltd. The registration book showed that the car was first registered in 1948. In fact, the registration book had been tampered with and the car was actually a 1939 model. Williams was unaware of this. During negotiations for the sale, Williams said that it was a 1948 model. However, it was clear that he obtained this information from the registration book. The age of the car was of considerable importance. Oscar Chess Ltd was a car dealer. Williams traded in the Morris for a new Hillman. The trade-in value was totally dependent on the age of the Morris. The tradein value of a 1939 model was £175, while the trade-in value of a 1948 model was £290. The difference of £115 was quite significant in 1955. When Oscar Chess Ltd discovered the truth, it sued for breach of contract. Who won? Issue Was the oral representation that the car was a 1948 model a warranty (term of the contract) or a mere representation? Decision Denning LJ was influenced by the fact that it was clear to both parties that Williams had no personal knowledge of the year of manufacture. He relied on the registration book, [page 248] which had been tampered with by some other person without the knowledge of Williams. He held that the statement was a mere representation. Hodson LJ also held it was a mere representation. Morris LJ (dissenting) was influenced by the fact that the representation was definite and unqualified. He also stressed the importance of the statement to the overall deal.

In deciding whether an oral statement or representation is promissory, the courts will look at the full range of facts.

Ross v Allis-Chalmers Australia Pty Ltd (1980) 55 ALJR 8 (High Court) Facts

Ross (the plaintiff) was negotiating the purchase of a new harvester from the agent of Allis-Chalmers Australia Pty Ltd. He selected the machine he wanted, but made it clear to the agent that he depended on its ability to harvest 120–130 acres per day. The agent said he thought that was too optimistic. Under pressure, he stated that he thought the machine would harvest about 90 acres. He pointed out that this estimate was based on his own experience with his own machine on his own farm. Ross bought the harvester. When it became clear that the machine could not harvest 90 acres per day on Ross’s property, he sued the defendant for, inter alia, breach of contract. Who won? Issue Was the oral statement (‘harvest 90 acres’) a warranty? Decision The court decided that the agent’s statement was not a warranty (ie, it was not contractual). It was merely a statement of opinion which, in the circumstances, was not intended to be promissory. Whether an estimate as to future performance is a term will often depend on the language in which it is couched as well as the representor’s apparent skill or knowledge in the area.

Although the buyer in Ross v Allis-Chalmers Australia Pty Ltd was unsuccessful, the case ought to demonstrate the need for sales staff and agents to be realistic in their appraisals of a product’s performance characteristics. Otherwise, the seller could be sued for breach of contract because the sales staff are agents for the seller.12

COLLATERAL CONTRACTS A collateral contract operates in conjunction with a main contract.

6.29

Imagine V and P are negotiating the sale of a business. As an inducement to get P to buy the business, V promises to pay for P and her partner to have a week’s holiday in [page 249]

Singapore. A formal contract of sale of the business is then drawn up and signed. The formal contract makes no mention of the holiday in Singapore. The facts indicate that the oral promise of the Singapore holiday was contractual (reasonable bystander test). The oral promise would not be regarded as part of the sale of business contract but as collateral to it. There are, in fact, two contracts: one for the sale of the business, and a second contract (collateral contract) containing the promise about the holiday. In return for V’s promise of the Singapore holiday, P provided consideration — her agreement to enter the business purchase contract. See Figure 6.4. Figure 6.4 Consideration in the collateral contract

Not every representation forms a collateral contract. To be a collateral contract, a representation: must be promissory: J J Savage and Sons Pty Ltd v Blakney (see below); and must not contradict the main contract: Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133. Collateral contracts can be avoided by inserting into the contract an appropriate exemption clause denying that any collateral contract exists. For example, in Esanda Ltd v Burgess

[1984] 2 NSWLR 139, the court refused to find a collateral contract because the contract had the following clause: ‘The written document contains the whole agreement between the parties and any collateral warranty is hereby negatived’. Another clause often appearing in written contracts is: ‘The parties acknowledge that the only statements, representations and warranties made by the parties are such as are expressly set out in this agreement’.

J J Savage and Sons Pty Ltd v Blakney (1970) 119 CLR 435 (High Court) Facts Blakney entered into a contract with Savage and Sons to purchase a cabin cruiser fitted with a ‘single 4/53 series GM diesel marine engine’. During negotiations, Savage and Sons commented on the merits of various possible engines. In a letter to Blakney, Savage had ‘estimated’ the speed of the boat fitted with a 4/53 series GM diesel marine engine to be 15 miles per hour. [page 250] In fact, the boat proved to have a top speed of 12 miles per hour (mph). Blakney sued for breach of collateral contract, arguing that he would not have entered into the main contract without the statement as to the estimated speed. The Full Court of the Victorian Supreme Court agreed with Blakney. Savage appealed to the High Court. Issue Was the representation (estimated speed of 15 mph) a collateral contract? Decision The High Court found in favour of Savage. A statement or representation is not a collateral contract merely because it is one of the factors that induces the plaintiff into the contract. The statement or representation must be promissory. In this case, when Blakney received Savage’s letter, he had three courses open to him: he could have required the attainment of the speed to be inserted as a term of the contract; or he could have sought a promise (whether expressed as an assurance, guarantee, promise or otherwise) that the boat would attain the speed as

a prerequisite to his ordering the boat (collateral contract); or he could have relied on his own judgment based on Savage’s opinion. The High Court held that Blakney had adopted the third option. He accepted Savage’s estimate of what the boat would do under the power of the 4/53 GM diesel engine as sufficient to found his own judgment as to the powering of the vessel. Therefore, the representation given by Savage was not a term of any contract.

Of course, a collateral contract may involve three parties. For example, A is induced to buy a new car from B (the retailer) on the basis of the manufacturer’s promise of a 12-month warranty. In this situation, there are two contracts between three parties. See Figure 6.5. Figure 6.5

Collateral contract in a three-party situation

[page 251]

MEANING OF A TERM Reasonable person test 6.30

One of the most common sources of dispute in contract cases is over the meaning of the terms. The courts use an objective test to

determine what the parties meant: see Electricity Generation Corporation v Woodside Energy Ltd & Ors [2014] HCA 7; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37. In a commercial context, this would mean examining what a reasonable business person ‘would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract’: Mount Bruce Mining v Wright Prospecting at [47].

AWB (International) Ltd v Tradesmen International (PVT) Ltd [2006] VSCA 210 (Victorian Court of Appeal) Facts Tradesmen International entered into a contract to buy Australian wheat from AWB. Under the contract, AWB was to deliver the wheat to one of two ports in Pakistan, at the option of Tradesmen. The shipment delivered by AWB was rejected by the Pakistani authorities. As a result AWB shipped the wheat to Indonesia. The agreement between AWB and Tradesmen contained an arbitration clause in the following terms: Any notice of arbitration or other claim alleging a dispute must be made in writing and the claimants arbitrator appointed within six (6) months of the vessels [sic] arrival at the final port of discharge, otherwise the claim shall be deemed to be waived and no proceedings whatsoever whether by way of arbitration or litigation shall be commenced. Tradesmen gave notice of dispute under the arbitration clause. The notice was given more than six months after the ship’s arrival in the port in Pakistan, but within six months of its arrival in Indonesia. Was the notice of dispute effective? Issue The issue in question was how to interpret the expression ‘final port of discharge’ in the arbitration clause. Did it mean one of the two ports in Pakistan or did it mean the actual port of discharge (in this case, in Indonesia)? Decision

This was a commercial contract. The question, therefore, was: In the light of the circumstances prevailing at the time the contract was made, how would a reasonable business person understand the term? The purpose of the clause was to ensure that AWB had fairly prompt notice of any claim against it. Therefore, the ‘final port of discharge’ referred to one of the ports in Pakistan, not to the actual port of discharge.

[page 252]

Courts must interpret the words of the contract as written 6.31

The courts must determine the meaning of the contract from the words of the document and not otherwise, unless the words are ambiguous: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (see [7.13]).

Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 (High Court) Facts RCA hired certain sound equipment to Hope. Hope refused to pay because the equipment was not new. Nowhere in the hire agreement (which was in writing) was it stated that the equipment had to be new. Hope, however, argued that the court ought to allow parol evidence to show that the equipment referred to in the agreement meant ‘new’ equipment. The written agreement included a term stating that the written document contained the entire agreement between the parties and that there was no other understanding, warranty or representation (express or implied) that extended, defined or otherwise related to the equipment or the agreement in general. Issue Should the court accept external evidence to explain what was meant by the expression ‘equipment’ in the hire contract? Decision The High Court decided in favour of RCA. There was no ambiguity in the agreement and parol evidence should not be allowed to vary its ordinary meaning. The High Court also refused to accept an implied term, as this

would conflict with the express written term that the document contained the entire agreement between the parties. (Implied terms are discussed in Chapter 7.)

Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan & Co Ltd (1919) 26 CLR 410 (High Court) Facts Nathan was the holder of a number of patents, including the patent to manufacture a product called Glaxo. Nathan entered into a written agreement with Bacchus Marsh to the following effect: Whereas [Nathan] is the owner of certain letters patent for certain inventions and processes of manufacture … [Nathan] shall sell and [Bacchus Marsh] shall purchase the said letters patent. [page 253] The agreement did not specify the patents. Bacchus Marsh argued that the patents included the patent for Glaxo. Nathan argued that Glaxo was not included. There was a latent ambiguity because the document did not make it clear which patents were included. Issue Should the court accept external evidence to explain what was meant by the expression ‘certain letters patent’ in the agreement? Decision The court permitted Nathan to introduce evidence of the negotiations between the parties, including some correspondence, which showed that the Glaxo patent was not included.

The lesson from this case is clear — it is essential to make sure that the express terms clearly convey their intended meaning.

INTERPRETING EXEMPTION CLAUSES

What is an exemption clause? Exemption clauses are very common in commercial agreements. The parties’ contractual obligations cannot be fully understood until the effect of any exemption clause has been considered.

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Generally speaking, with the exception of consumer contracts, the parties are free to assume whatever contractual obligations they wish. This means that they are free to exclude, restrict or limit the consequences of breaching those obligations. This is done by including in the contract an exemption clause. Exemption clauses include clauses which exclude liability (exclusion clauses) and clauses which limit liability (limitation clauses). The same rules apply to both types of exemption clauses. See Figure 6.6.

Figure 6.6 Examples of exemption clauses

The first thing to note is that the courts have traditionally looked upon exemption clauses with some degree of hostility. Many of the rules developed by the courts were [page 254]

designed to protect consumers and, consequently, there is a distinct bias against the party seeking to rely on the exemption clause. This bias is much less noticeable in commercial contracts where the parties are of roughly equal bargaining power. In examining an exemption clause, there are two basic questions to be asked: 1.

2.

Is the exemption clause a term of the contract? The rules governing incorporation of exemption terms into a contract are essentially the same as for all terms and were discussed earlier in the chapter (see [6.5]–[6.9]). What does the exemption clause mean?

What are the rules for interpreting exemption clauses? The general rule As a general rule, exemption clauses are to be understood according to their natural and ordinary meaning.

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The courts try to give effect to the parties’ intentions as expressed in the words of the contract. An exemption clause is construed by looking at the contract as a whole, including the exemption clause, and interpreting it according to the natural and ordinary meaning of the words used: Sydney Corporation v West, in [6.37]; Photo Production Ltd v Securicor Transport Ltd, in [6.36].

Insight Vacations Pty Ltd v Young [2011] HCA 16 (High Court) Facts Mrs Young bought a European holiday tour package from Insight Vacations Pty Ltd (Insight). The contract contained the following exemption clause: Where the passenger occupies a motorcoach seat fitted with a safety belt, neither the Operators nor their agents or cooperating 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. While travelling by coach from Prague to Budapest, Mrs Young got out of her seat to get something from a bag she had stowed in the overhead luggage shelf. The coach was designed for long-distance travel with a lavatory at the back of the coach. The coach braked suddenly. Mrs Young fell backwards and suffered injury. She sued Insight. Insight relied on the exemption clause. Issue The High Court decided that, as this was a consumer transaction, the exemption clause could not apply (see Chapter 9 on consumer transactions). Nevertheless, the court considered the meaning of the exemption clause. Decision The court commented that the clause should be given its ordinary meaning. The court said (at [3] of the decision): [page 255] If the introductory words of the exemption clause had omitted the word “seat”, it might have been possible to say that the exemption clause applied to any occasion when the passenger was aboard (or “occupie[d]”) a motorcoach fitted with seat belts, regardless of whether and why the passenger got out of the seat. But that is not how the clause was cast. The words “occupies a motorcoach seat” should be understood as meaning sitting in the seat and able to wear the safety belt. Mrs Young was not sitting in her seat when she fell. The exemption clause did not apply.

There are, however, a number of rules which act as guidelines in applying the general rule. These are discussed below under the following headings. ambiguity rule; negligence rule; presumption that the exemption clause does not apply to fundamental breaches of the contract; four corners rule; and deviation rule. The ambiguity rule

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This rule states that any ambiguities in the exemption clause will be resolved against the person seeking to rely on the exemption clause and in favour of the other party. As Lord Wilberforce said in Photo Production Ltd v Securicor Transport Ltd (see [6.36]) (at 564): [In] order to escape from the consequences of one’s own wrongdoing, or that of one’s servant, clear words are necessary.

An exemption clause that excludes liability for breach of warranty will not be sufficient to protect against liability for breach of condition: Wallis, Son & Wells v Pratt & Haynes [1911] AC 394. The word ‘warranty’ can have two meanings. As a matter of law, it means a term of a contract, the breach of which will entitle the innocent party to damages but not to termination. However, commercial people tend to use the word ‘warranty’ to mean any contractual promise. Where the word appears in an exemption clause, the courts have been prepared to interpret it according to its narrower legal meaning. By analogy, an exclusion clause that ‘excluded liability for breach of express condition or warranty’ would not cover breach of an implied term and vice versa: see Andrews Brothers (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17. The negligence rule 6.35 If a person wishes to exclude liability for his or her own negligence, the exclusion clause must do so clearly. For instance, Claude operates a business as a carrier of goods. Claude’s standard contract contains a general exemption clause excluding Claude from liability for damage to, or loss of, any goods. A consignment of goods is totally destroyed because of Claude’s careless driving. When sued, Claude argues the exemption clause as a defence. A carrier of goods normally has a strict obligation to deliver the goods and an obligation to take reasonable care of them. These obligations are not the same. The obligation to deliver the goods is a strict one: it is not a defence for the carrier to argue that it has not been negligent. On the other hand, the second

obligation — to take reasonable care of the goods — is based on negligence: it is clearly a defence for the carrier to argue that it has not been negligent. A court would probably interpret Claude’s exemption clause to cover [page 256] the strict obligation to deliver the goods, but not the obligation to take reasonable care. To cover the latter obligation, Claude’s exemption clause should have made it clear that liability for negligence was also excluded. The rule applied by the courts is as follows: liability for negligence may be expressly or implicitly excluded; but if the words of the exclusion clause could reasonably be applied to protect against some ground of liability other than negligence, then negligence will not be covered.

White v John Warwick & Co Ltd [1953] 2 All ER 1021 (UK Court of Appeal) Facts White, a newsagent, hired a tricycle from Warwick, to be used in delivering newspapers. A bolt securing the seat was rusted and caused the seat to slip forward while White was riding it. White was thrown off the bike and suffered a knee injury. He sued Warwick for breach of contract and the tort of negligence. The contract of hire contained the following exemption clause: Nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired. Although only one accident occurred, Warwick owed a duty to White in both contract and tort. Warwick was under an implied contractual duty to ensure that the tricycle was maintained in proper working condition and was fit for the purpose for which it had been hired. It was not. Therefore, Warwick was in breach of contract. Warwick also owed a duty under the tort of

negligence to take reasonable care to ensure that the tricycle did not injure White. As Warwick had not exercised the proper amount of care, White could sue for damages for negligence. Warwick relied upon the exemption clause as its defence. Issue Did the exemption clause protect Warwick? Decision It was held that where there are two possible claims for damages, one of them being for negligence, the exemption clause will not cover the negligence claim unless that is the clear intention of the parties. The court held that the exemption clause did not relieve Warwick from its liability under the tort of negligence.

In White v John Warwick & Co Ltd, the defendants should have used an exemption clause which read something like the following: Nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired, whether such liability arises from negligence or otherwise.

[page 257] This would have protected the defendant. Alternatively, the clause could have read: Nothing in this agreement shall render the owners liable to the riders of the machine hired for any personal injuries of whatever kind or howsoever caused.

It has been held that clauses such as ‘all loss however caused’ are sufficient to cover negligence. In Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642, the High Court of Australia held that clauses saying that the car was ‘garaged at owner’s risk’ and that the carpark would ‘not be responsible for loss or damage of any description’ were sufficient to cover negligence falling within the reasonable contemplation of the parties. In Tech Pacific Australia Pty Ltd v Air Pacific Ltd [1999]

NSWCA 71, a freight forwarder argued successfully that the following clause was sufficient to protect it against liability for negligently losing some of its customer’s goods: The Company shall not be under any liability for any loss or damage … to or failure to forward, misforwarding and delay in forwarding or misdelivery, non-delivery or delay in delivery of any goods received by it or any consequential loss arising therefrom howsoever such loss, damage or consequential loss is caused, whether arising through misconduct, negligence of the Company or otherwise …

Presumption against fundamental breach A fundamental breach is a breach that undermines the fundamental purpose of the agreement.

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In construing the exemption clause, the courts will presume that the parties did not intend to exempt liability for breach of the fundamental terms or obligations of the contract. This is only a presumption and may be rebutted by clear words. Although it is possible to exclude liability for breach of fundamental obligations, it would take a fairly remarkable exemption clause to permit a person, contractually obligated to deliver a car, to get away with delivering a horse. In Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] 1 VR 538, a clause that provided that the carrier ‘shall not in any circumstances whatsoever be liable for any loss or delay or damage to the goods … howsoever caused’ (at 538) did not protect a carrier who deliberately gave the goods away contrary to the contract. Nevertheless, a properly drafted exemption clause may exempt a party from liability for breach of the most fundamental obligations,13 provided it is not prohibited by statute. For example, in the next case, the security company was not prepared to be liable for the deliberately wrongful actions of its own employees unless it could be shown that the company itself was at fault in some way.

Photo Production Ltd v Securicor Transport Ltd [1980] 1 All ER 556 (House of Lords)

Facts Photo Production engaged Securicor to provide a night patrol at its factory. The contract provided: Under no circumstances shall the company [Securicor] be responsible for any injurious act or default by any employee of the company unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the company as his employer. [page 258] One night, Musgrove, Securicor’s employee on duty, deliberately started a fire. In the words of Lord Denning MR (at 149): [H]e lit a match and threw it on to a cardboard box. It burst into flames. He says that he only meant it to be a very small fire and intended to put it out within a minute or two. But it got beyond his control. He was terrified and dialled 999 for the fire brigade. He tried to stop it spreading. He lost his glasses and false teeth. His right hand and arm were burnt … [He] was afterwards charged with arson … and was sentenced to three years’ imprisonment. It was not one of Musgrove’s better nights. It was not particularly good for Photo Production either. Its factory was substantially damaged. Photo Production sued Securicor for damages. Issue Did the exemption clause protect Securicor? Decision The House of Lords held that, because of the existence of the exemption clause, Securicor could only be liable if the act of its employee could have been foreseen by Securicor and avoided by the exercise of due diligence. The exemption clause was unambiguous and clearly meant to cover situations such as the one that had occurred. Securicor could not have anticipated Musgrove’s arson and therefore was protected by the clause.

The four corners rule 6.37 In construing an exemption clause, the courts will presume that the clause was intended to cover only the matters contained within the four corners of the contract. This simply means that unless the

exemption clause specifically refers to other matters, the courts will apply an exemption clause only to events falling within the four corners of the contract. Whether an event falls within the four corners of the contract will depend on the reasonable person test. Would a reasonable person, aware of the terms of the contract, conclude that the parties must have had the relevant event in mind in drawing up their contract? A good example of the four corners presumption is Sydney Corporation v West, below. This case shows the limitations of using broadly worded exemption clauses.

Sydney Corporation v West (1965) 114 CLR 481 (High Court) Facts Sydney Corporation (SC) owned and operated a carpark. West took his car to the carpark and was handed a ticket by an attendant as he entered the carpark in a stream of traffic. He did not read the ticket. The ticket contained an exclusion clause. There was no notice at the entrance alerting drivers to the existence of the exclusion clause. West had, however, used the carpark on numerous occasions and knew that the ticket contained writing, although he had never read it. The ticket read as follows: [page 259] Parking Conditions The Council does not accept any responsibility for the loss or damage to any vehicle, or for loss or damage to any vehicle or thing in or upon any vehicle or for any injury to any person however such loss, damage or injury may arise or be caused. Important This ticket must be presented for time stamping and payment before taking delivery of the vehicle. A thief, using the name Robinson, tricked the carpark attendant into issuing a duplicate ticket, which was then used to remove West’s car. The car was later discovered in a damaged condition. West sued for breach of contract. SC owed a contractual duty to West to take reasonable care of the car. It is

not difficult to see that SC’s employee had not taken reasonable care. The employee’s action, however, went beyond carelessness. It amounted to an unauthorised act. The contract clearly contemplated that the car would be released upon presentation of the ticket and not otherwise. The issue, therefore, was whether the exclusion clause covered SC against the unauthorised act. Issue Did the exemption clause protect SC? Decision The exclusion clause on the ticket was a term of the contract. Therefore, the clause had to be interpreted in the light of the contract as a whole. When SC and West agreed that SC would not be liable for loss, injury or damage, ‘however such loss, damage or injury may arise or be caused’, they must have been referring to loss likely to arise out of the storage of the car, as, for example, where an attendant accidentally damaged a car while parking it. There is no evidence they intended the clause to cover other losses — for example, if SC deliberately destroyed the car or deliberately gave the car away. SC’s exclusion clause, according to Barwick CJ and Taylor J (at 489): … contemplates that, in the performance of the council’s obligations under the contract of bailment, some loss or damage may be caused by reason of its servants’ negligence, but it does not contemplate or provide an excuse for negligence on the part of the council’s servants in doing something which is neither authorised nor permitted to do by the terms of the contract. Therefore, the exclusion clause did not cover SC’s unauthorised act and West was entitled to damages.

The deviation rule: an application of the four corners rule 6.38 The principle from Sydney Corporation v West has general application, but is particularly apposite to bailment contracts. A similar presumption is found in the deviation rule. Unless clearly stated otherwise, an exemption term in a contract of carriage will not excuse the carrier from liability where the carrier deviates from the authorised route: Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353.

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UNENFORCEABLE CONTRACTS In general 6.39

Some contracts are unenforceable because they are contrary to law. For example, an unauthorised gambling contract is void by statute. The Competition and Consumer Act 2010 (Cth) Pt IV prohibits price-fixing contracts; resale price maintenance contracts; and contracts containing unlawful boycotts, unlawful mergers and unlawful exclusive dealing arrangements. A contract to commit a crime is illegal at common law, as are the following contracts: contracts for an immoral purpose; contracts to oust the jurisdiction of the courts; contracts tending to promote corruption in public life; and contracts prejudicial to the safety of the state. In some cases, the law declares a term to be unenforceable without necessarily making the whole contract void. This chapter discusses two types of unenforceable terms: (1) unfair terms in standard form consumer contracts, and (2) terms that amount to an unreasonable restraint of trade.

Unenforceable terms in standard form consumer contracts Many consumer contracts are standard form contracts — the consumer has no say in formulating the terms. The contract is presented to the consumer on a ‘take it or leave it’ basis.

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The Australian Consumer Law (ACL) provides that unfair terms contained in standard form contracts with consumers are void: s 23. A consumer contract is a contract for the supply of goods or services to a person who acquires the goods or services

predominantly for personal, domestic or household use or consumption. A standard form contract is one where the terms are nominated by one party and the other party is essentially forced to take the contract or leave it — that is, a contract where one party (the consumer) has no real power to change the terms of the contract. Many consumer contracts fall into this category. The Australian Competition and Consumer Commission gives the following examples in its guide to unfair contract terms: telecommunications, domestic building, gyms, motor vehicles, travel and utilities.14 A term is unfair if: (a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and (b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and (c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on (s 24). In determining whether a term is unfair the courts may take into account the extent to which the term is transparent; that is: Was the term in plain language? Was it clear and legible? Was it readily available? The ACL sets out a non-exhaustive list of 14 examples of terms that could be unfair: see s 25. In Malam v Graysonline, Rumbles Removals and Storage (General) [2012] [page 261] NSWCTTT 197, an exemption clause buried in an online ‘auction’ contract was held to be unfair because it unfairly favoured the seller.

Only the unfair term itself is void; the remainder of the contract remains binding unless it cannot exist without the unfair term. The ACL also provides the relevant Minister the power to prescribe terms as unfair terms. The ACL provision dealing with unfair terms is based on the Fair Trading Act 1999 (Vic), which had been operating for a few years. The following case was decided under the Victorian law.

Director of Consumer Affairs (Vic) v AAPT Ltd [2006] VCAT 1493 (Victorian Civil and Administrative Tribunal) Facts AAPT sells mobile telephone services. Its customer contract contained a number of terms that the Director of Consumer Affairs regarded as unfair under the Fair Trading Act 1999 (Vic). These terms included: AAPT had the right to vary the contract at any time in any way for any reason. AAPT could suspend the service at any time for a variety of reasons (including technical difficulties), but the customer remained liable for fees during the suspension. Following suspension of the service for any reason AAPT may charge the customer a reconnection fee. Issue Were the terms unfair within the meaning of the Act? Decision The terms were unfair, and were therefore void under the Fair Trading Act.

Terms that involve an unreasonable restraint of trade 6.41

A contractual term which amounts to an unreasonable restraint of trade is void at law. This reflects the community attitude that citizens should be free to ply their trade. All restraints of trade are unlawful unless they are reasonable as between the parties and in

the public interest. A restraint of trade will be reasonable if it is no wider than is reasonably necessary to protect the legitimate interests of the party relying on it. Restraint clauses are used in many situations, including sale of business agreements, employment contracts and joint venture contracts. The courts will strike out an invalid restraint of trade clause, but not necessarily the whole contract. In New South Wales, the Restraints of Trade Act 1976 enables the court to enforce a restraint clause to the extent that it is not invalid. However, this does not apply in other states. [page 262]

Peters (WA) Ltd v Petersville Ltd [2001] HCA 45 (High Court) Facts Petersville sold its Western Australian operation to Peters (WA). As part of the deal, Petersville also granted Peters (WA) an exclusive licence to make and distribute ice-cream under the ‘Pauls’ trade name in Western Australia for 15 years, with an option for a further 15 years. As a term of the agreement, Petersville promised not to sell, supply or distribute ice-cream or frozen confections to any person in Western Australia, or to any person anywhere if the ice-cream or frozen confection is ultimately intended for sale, supply or distribution in Western Australia. It also promised not to carry on directly or indirectly the business of manufacturing or distributing ice-cream or frozen confections in Western Australia. Issue Was the restraint of trade clause unlawful? Decision The High Court held that the restraint was unlawful. As far as the sale was concerned, 15 years was too long a restraint period to be reasonable. As far as the licence to use the trade mark ‘Pauls’ was concerned, the restraint was not restricted to ‘Pauls’ but covered all ice-cream or frozen confections sold under any name. This went beyond being reasonably necessary to protect the legitimate interests of Peters (WA). It could not be described as ‘necessary and incidental to the licence’.

THE IMPORTANCE OF A TERM Contract terms may be: conditions; warranties; or intermediate terms.

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Not all terms carry the same importance. Common sense tells us that we ought to distinguish between the terms that form the core of the agreement and other, less important, terms (see Figure 6.7). Therefore, once it has been determined that a statement is a term of the contract, it is sometimes necessary to decide whether it is a condition or a warranty (or something in between). Generally, a breach of a condition will entitle the innocent party to terminate the contract and sue for damages, whereas a breach of warranty will only give a right to sue for damages. Some terms are regarded as intermediate terms. An intermediate term may be treated as a condition or a warranty depending on the seriousness of the breach. This is discussed more fully in Chapter 9. [page 263]

Figure 6.7

The consequences of breaching various terms

ADVICE — LAW IN PRACTICE When negotiating a contract, you should bear in mind the following points: You cannot add terms after the contract is made. Therefore, be prepared. Know what you want from the negotiation, including what obligations you want the other party to assume. Do not indicate final agreement until you are happy with the situation. Be careful what you say when negotiating a contract. Oral representations can become terms of the contract. Alternatively, you could be liable for misleading or deceptive conduct (see Chapter 3). It is useful to keep a contemporary record noting the important elements of a negotiation. If the contract is written, you should ensure that all matters of importance to you are included in the document, including any representations made by the other party. Make a check list of relevant items before you begin negotiating, and make amendments as circumstances change. You should not sign until you are happy that the document reflects what you agreed to. A typed document can always be amended by hand; both parties should sign the amendment. An exemption clause is a useful way of restricting your obligations. If you are going to rely on an exemption clause in an unsigned document, remember that you must give the other party reasonable notice of the exemption clause.

Your exemption clause must be carefully written. If it is too broad, it may be invalid or given a restricted meaning. Carefully consider whether there are any circumstances in which you want the contract to end. Make sure the contract states this clearly. Be aware of the other party’s rights should the contract fail. Business is about managing the risks. Contract failure is a risk. Check your insurance.

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APPENDIX: SAMPLE OF A WRITTEN CONTRACT Figure 6.8 Sample of a written contract

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QUESTIONS Question 1 Write short answers to the following questions, using relevant cases, and provide examples where appropriate. (a) What is the distinction between a ‘term’ and a ‘mere

(b) (c)

(d)

(e)

representation’? What effect does this distinction have on remedies? Explain the significance of Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (see [6.5]). What is the reasonable bystander test? Does this test contradict the rule from Toll’s case, as discussed in part (b)? How influential are specific factors from the context, such as the timing of the statement, in which a statement is made? Compare the following cases: State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (see [6.8]) and Van Den Esschert v Chappell (see [6.24]). What did the court decide in each case? Explain any differences. What is meant by an ‘unfair term’ or an ‘unenforceable term’? Aren’t parties free to include any term they wish in the contract? Please explain, with examples.

Question 2 (a) Ellen’s car broke down on her way to work in downtown Melbourne. She telephoned her local garage, Victoria Motors, who agreed to send out Bert, a mechanic, to repair the car. Bert told Ellen that the car could not be repaired at the roadside but would have to be towed to the garage. Ellen agreed to this. Bert winched up Ellen’s car in order to tow it to the garage, but a worn clip on the towing gear being used by Bert slipped open, allowing the car to fall. The car’s suspension was severely damaged in the fall. Displayed on the back of the towing vehicle was a notice: All towing takes place at customer’s risk. Victoria Motors and their employees accept no liability for any damage, injury, or consequential loss, whatsoever caused, while a car is being towed.

Did Victoria Motors provide reasonable notice of the exemption clause? Can it be part of the contract with Ellen? (b) In 1999, Jim bought the business ‘Harry’s Hardware’ from its owner, Harry Henderson. The business is conducted from premises in Caulfield (Melbourne). The contract of sale contains a term which prevents Harry from setting up another hardware business ‘anywhere in the State of Victoria for a period of 10 years’. Harry now wishes to establish a new hardware business in a large country town in Victoria. Advise Jim.

Question 3 Xavier has been told by his employer that he is to be sent overseas to work for 12 months. Xavier agrees to rent his flat to Bernadette for $100 per week while he is away. A lease is drawn up in the usual form. (These residential leases are fairly common and can be obtained from any real estate agent.) Prior to filling out the lease, Xavier tells Bernadette that while he is 95 per cent certain of going overseas there may be a last-minute change of plans, in [page 266] which case the lease is to have no effect. Bernadette agrees. Xavier and Bernadette sign the lease, which makes no mention of the fact that the deal is not to go ahead if Xavier is not sent overseas. Xavier is not sent overseas. Bernadette demands that she be given possession of the flat. Xavier denies that he is obliged to do so. Which of the following option(s) is (are) correct? (There

may be more than one!) Please consider all options and explain your choice(s). (a) Bernadette is entitled to possession of the flat because of the operation of the parol evidence presumption. (b) Xavier is entitled to possession of the flat because his oral statement represented the true intentions of the parties. (c) Bernadette is entitled to the flat because this is not a partly oral partly written contract. (d) Bernadette is entitled to the flat because of the decision in State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (see [6.8]). (e) Xavier is entitled to the flat because of the decision in Van Den Esschert v Chappell (see [6.24]).

Question 4 In May 2016, Chun decided that she wanted to move out of downtown Melbourne and live near the beach. She inspected one property that looked ‘right’, a two-storey house in Frankston. As she was inspecting the property, she noted some watermarks on the basement floor. When Chun asked the owner whether there were any ‘problems’ with the structure of the house, the owner told her, ‘Look, not only have I lived in this place for 7 years but I also built the place. So you can trust me when I tell you the house is perfectly sound.’ Chun said, ‘Are you completely sure? You know it rains a lot in winter, and I hear the salt air can rust metal fittings.’ The owner merely nodded and then said, ‘Get it checked if you like.’ Chun thought about getting a professional opinion from a plumber or builder, but signed a contract of sale immediately. She moved into the house and, to her annoyance, there was flooding in her basement after every

heavy rainfall. What made her angry was that her neighbours told her that the basement of the house always flooded in winter because there was a crack in the basement wall. Assuming there was nothing written in the contract of sale about the structure of the building nor about flooding, does the contract contain any express terms regarding these matters?

Question 5 Fred was very unfit and so decided to join the YbFit Fitness Club Pty Ltd. He chose YbFit because of their advertising brochures and posters, which claimed their staff were qualified according to Australia Fitness Standards, and YbFit complied with the Australian Fitness Industry Code of Practice. Furthermore, many of the trainers who worked at YbFit had won individual awards, such as ‘Best New Personal Trainer 2015’. Other trainers were retired athletes who had won world championships. After reading the brochure, Fred was confident that this was the gym for him. Fred went to the front desk and asked about membership costs. The receptionist told him: ‘Membership costs are $200 per month, and all members have to pay for 12 months in advance as a form of security. Just check the Membership Application Form — you’ll see all the terms and conditions listed there’. Then Fred signed a written document called a [page 267] ‘Membership Application Form’ without reading it. In the membership application form there is a clause that stated that:

YbFit had the right at any time to vary the monthly fees; YbFit had the right to close the gym at any time to perform maintenance. Members would be liable for their fees during such closures. At the front desk of the club, there was a small sign that said: ‘Members cannot get a refund on their ANNUAL MEMBERSHIP fee even if they decide to quit the club before the end of the year’. This was not stated in the membership application form, and is unusual. Normally (as proven by other gyms’ membership contracts), provided the member gives one month’s notice, a full refund is made. Fred did not read the sign at the front desk. (a) What are the terms of Fred’s contract with YbFit Fitness Club Pty Ltd? (b) Imagine you are the legal compliance manager with YbFit. (i) What advice would you give YbFit regarding the above facts? (ii) How could you improve YbFit’s method of forming contracts? (iii) How would you advise YbFit as to ways it could minimise legal problems regarding membership contracts in the future?

Question 6 All Best Clothing (ABC) Ltd operates a chain of retail stores throughout the metropolitan area. ABC has used Jim’s Cartage for many years to transfer goods from one store to another. The agreed procedure is always the same. ABC telephones Jim and gives him the collection point and the destination. Jim picks up the goods. An employee of ABC and Jim fill in and sign a collection docket (see

below). ABC keeps the duplicate. Jim takes the goods directly to the drop-off point and has the docket countersigned by another employee of ABC. At 12.30 pm on 5 June, Jim collects a quantity of expensive goods from one of ABC’s shops. The usual procedure on collection is followed. The docket is filled in, signed and a duplicate is kept by ABC. Jim’s Cartage Sir John Monash Drive, Caulfield Collection Docket Date: ____________________________ Pick-up address: ___________________ __________________________________ Destination: ______________________ Goods: ___________________________ __________________________________ __________________________________ Consignor’s signature: _____________ Jim’s signature: ___________________ See Over

This docket is an acknowledgment that the goods were delivered to the consignee in reasonable condition. Consignor must arrange own insurance. Under no circumstances is Jim’s Cartage to be regarded as a common carrier. Jim’s Cartage will use best endeavours to ensure goods delivered safely. Jim’s Cartage does not accept any responsibility for any loss or damage to any

goods carried pursuant to this contract however such loss or damage may arise or be caused whether by negligence or otherwise.

[page 268] As it is nearly lunch time, Jim decides to have lunch before delivering the goods. He goes a number of kilometres out of his way to collect a friend. Together, they then go to a hotel which has a great counter lunch. Jim parks on a steep hill. Unfortunately, Jim hasn’t checked his brakes lately. They slip and the vehicle rolls down the hill, hitting a number of obstacles on the way. The goods belonging to ABC are totally destroyed. ABC maintains that Jim must pay for the goods. Jim denies liability on the basis of the terms on the back of the Collection Docket. (a) Who is the consignor and who is the consignee? (b) Advise ABC whether Jim’s Cartage is responsible for the destruction of the goods. (c) What would your answer be to part (b) if you knew that Jim is a bailee and, as such, there is an implied term in the bailment contract that Jim must take reasonable care to deliver the goods in an undamaged state? (d) If you were a legal compliance officer working with ABC Ltd, what changes (if any) would you recommend to its procedures and documentation?

_________ 1

2 3 4 5 6 7 8 9 10 11 12 13 14

Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 337 (para 11) per Mason J. This rule was applied in Johnson Matthey Ltd v A C Rochester Overseas Corporation (1990) 23 NSWLR 190 at 194. ‘Parol’ means oral, but it is clear that the presumption applies to written material as well. See the discussion by Miles CJ in Skywest Aviation Pty Ltd v Commonwealth (1995) 126 FLR 61. See, for example, Tranquility Pools & Spas Pty Limited v Huntsman Chemical Company Australia Pty Limited [2011] NSWSC 75. See Taylor v Johnson, in [8.52]. In New South Wales the contract may also be subject to the provisions of the Contracts Review Act 1980 (NSW). Causer v Browne [1952] VLR 1. Oceanic Sun Line Special Shipping Co Inc v Fay (in [6.15]); Baltic Shipping Co v Dillon (1991) 22 NSWLR 1. Chapelton v Barry Urban District Council [1940] 1 KB 532. D J Hill & Co Pty Ltd v Walter H Wright Pty Ltd, in [6.7]. Sydney Corporation v West, in [6.37]. It is also an offence under the Australian Consumer Law to misrepresent a product’s performance characteristics. Nissha Iwai Australia Ltd v Malaysian International Shipping Corporation (1989) 167 CLR 219. Australian Competition and Consumer Commission, Unfair Contract Terms: A Guide for Businesses and Legal Practitioners, Commonwealth of Australia, Canberra, 22 April 2016.

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CHAPTER 7

IMPLIED TERMS IN CONTRACTS

CONTENTS Objectives of this chapter Setting the scene: The not-so-burglar-proof door Introduction and outline of chapter Implied terms of cooperation and good faith Implied term of cooperation Implied term of good faith Terms implied into specific types of contracts

Contracts between professional persons and their clients Contracts for work and materials Other service contracts Hire contracts Employment contracts Landlord/tenant Terms implied as a matter of fact Terms implied on the basis of a course of past dealings Terms implied as a result of custom or trade usage Terms implied in order to make the contract effective [page 270]

Sales of goods contracts Background to sale of goods legislation Consumers have special protections under the Australian Consumer Law What terms are implied by the sale of goods legislation? Correspondence with description Fitness for purpose Merchantable quality Correspondence with sample Excluding, or limiting liability for breach of, the implied terms Remedies Other matters affecting sales of goods Advice — Law in practice Appendix: Comparative table of sale of goods legislation Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should know: when and how the courts fill in gaps in contracts; and how parliament has intervened in contracts for the sale of goods. In particular, you should be able to: describe and apply the rules used by the courts to imply terms into a contract: – of a certain kind; – on the basis of past dealings; – on the basis of trade usage; – to make the contract effective; and describe the terms implied into contracts for the sale of goods.

[page 271]

SETTING THE SCENE: THE NOT-SO-BURGLAR-PROOF DOOR A retailer of men’s wear was required for insurance purposes to install a burglar-proof rear door for its new premises in Double Bay, Sydney. The retailer contracted with a company that agreed to supply a door as follows: REAR SINGLE DOOR: Supply, fit and hang core door to suit opening, steel sheet outside area, fit Rivers 4 Point Non-break-out Locking System, operated

by key from inside, hinge stops, etc. Transfer latch from existing door to this door.

Soon after the door was installed thieves broke into the store and stole a lot of stock. The thieves had not entered the premises by breaking down the door; instead, they had simply removed the door from the wooden door jambs. In fact, the door was precisely as required by the express terms of the contract. The retailer wanted compensation and the burglars were not volunteering. What could the retailer do? To find out what happened see Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd, in [7.5].

INTRODUCTION AND OUTLINE OF CHAPTER 7.1

Chapter 6 discussed express terms — that is, terms to which the parties have agreed. This chapter looks at terms which have not been agreed between the parties, but which are implied into the contract. Implied terms may be categorised as follows (see Figure 7.1): implied terms of cooperation and good faith; implied terms in certain types of contracts; terms implied as a matter of fact: based on a course of past dealings between the parties; based on custom or trade usage; to make the contract effective; and terms implied by statute into contracts for the sale of goods. [page 272]

Figure 7.1

Terms implied by courts and by statute

IMPLIED TERMS OF COOPERATION AND GOOD FAITH Implied term of cooperation 7.2

In all contracts, unless the parties expressly or by implication agree otherwise, there is an implied term that each party will do that which is reasonably necessary to enable the other party to have the benefit of the contract (the ‘cooperation term’). See Rooney v ABB Grain Ltd, in [8.15].

Implied term of good faith

An implied term of good faith is important in long-term, relational contracts, such as the arrangements between a franchisor and a franchisee.

7.3

Traditional contract theory is largely based on the notion of a oneoff transaction, such as the sale of a motor vehicle. Many contracts, however, do not fit this model. These contracts are more concerned with establishing ongoing relations (hence the name ‘relational contracts’). Franchising is a good example. Ideally, the franchise arrangement will last for many years to the mutual benefit of the franchisor and the franchisee. It is not possible in a contract written at the beginning of the franchise to allow for all possible circumstances that may arise over the years. By necessity, the parties must, to a certain extent, rely on the goodwill of each other. To cater for the special needs of relational contracts the common law is currently in the process of recognising an implied duty of good faith (as well as the implied duty to cooperate). See Burger King Corp v Hungry Jack’s Pty Ltd, below. Whether the duty applies to all contracts is disputed. Certainly, it is difficult to see that a duty of good faith will have much impact on a contract for the sale of a good or a contract for [page 273] the provision of a one-off service. Its real significance lies in respect of relational contracts. Instead of a general duty of good faith it may be that the implication of a good faith term in relational contracts can be justified on the basis of making the contract effective: see The Moorcock, in [7.13]; Specialist Diagnostic Services Pty Ltd v Healthscope Pty Ltd, in [7.13]. The duty of good faith will apply both to the performance of obligations under the contract and to the exercise of contractual rights. But, what does a duty of good faith mean? It cannot be a breach

of good faith to pursue one’s legitimate rights.

Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 (New South Wales Court of Appeal) Facts Burger King (BK) is a US firm which operates a worldwide chain of fast-food outlets. In 1973, BK entered into an agreement with Hungry Jack’s (HJ) by which HJ obtained the exclusive right to develop the Burger King franchise in Australia. The operation was governed by an agreement called the Development Agreement. By the agreement, HJ was required to develop at least four new Burger King restaurants every year. Before opening any new restaurant it had to obtain operational, financial and legal approval from BK. An obligation of good faith does not mean that the one party must put the other party’s interest ahead of his or her own interests. In the early 1990s, BK wanted to become involved in the Australian operation itself. It entered into negotiations with Shell to open outlets at Shell service stations. At first, HJ was involved in the discussions. However, in 1994, BK and Shell secretly excluded HJ and entered into their own agreement. BK then refused to approve HJ’s new restaurants. Because HJ had not opened four new restaurants, BK then terminated the agreement with HJ. HJ sued BK, arguing that it had breached the implied term of good faith. HJ succeeded at trial and BK appealed to the New South Wales Court of Appeal. Issue Did BK owe an implied contractual duty of good faith to HJ? If so, had the duty been breached? Decision The court held that BK had breached its implied obligation of good faith when it withheld approval for the new restaurants. Its actions were not directed at furthering its legitimate rights under the agreement with HJ. Rather, its actions were designed to frustrate the agreement and to enable it to take the Australian market for itself.

TERMS IMPLIED INTO SPECIFIC TYPES OF

CONTRACTS Contracts between professional persons and their clients A common implied term in service contracts is that the service be carried out with reasonable care and skill.

7.4

In contracts between professionals and their clients, there is an implied term that the professional person will carry out his or her contractual duties with reasonable care and [page 274] skill. This applies to accountants and auditors, lawyers,1 doctors,2 engineers,3 architects4 and other professional service providers. Engineers and architects are also under an implied warranty that the services supplied be reasonably fit for the purpose for which they were acquired.5 Again, this duty probably applies to all professional service providers. The standard of care is the same as that required of a professional person under the tort of negligence (see [2.25]).

Contracts for work and materials 7.5

In contracts for work and materials (eg, contracts with builders and plumbers), the court will imply terms that: the contractor use reasonable care in performing the work; the service be reasonably fit for the purpose for which it was acquired; and any materials supplied in relation to the work be of ‘good quality’ and fit for the purpose for which they were supplied.6 For example, a house builder is required to exercise reasonable care in erecting the building according to plan7 and to ensure that the materials used in the construction are fit for the purpose.

Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 (High Court) Facts Reg Glass hired Rivers to supply and fit a particular steel-sheeted door and locking system to his shop. The door was described as ‘burglar-proof’. Rivers fitted the door to the existing wooden door frame. Burglars broke in by forcing the door from the frame. Reg Glass sued Rivers for breach of contract. Issue Had Rivers breached a term of the contract? Decision This was a contract for work and materials. Therefore, there was an implied term that the door would ‘be reasonably fit to keep would-be breakers out of the shop’. The ‘door as fitted was not of that character’. Therefore, Rivers had breached its contract.

However, the court will not imply such a term if it would be unreasonable in the circumstances. [page 275]

Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1 (High Court) Facts The plaintiff owned a Bell helicopter which had been manufactured by the Bell Helicopter Corporation in the United States. The plaintiff had a service contract with the defendant to service and repair the helicopter. The service contract required the defendant to conform to the requirements of the manufacturer’s manual. The manual required all spare parts to be acquired from the manufacturer’s authorised distributor and to comply with the manufacturer’s design specifications. The bolt retaining the helicopter’s tail rotor blade in position was replaced in the normal course of servicing the

machine. The bolt was manufactured by Bell and acquired from one of its authorised dealers. The defendant did not have the equipment or expertise to conduct fitness tests on the bolt. Nor did it have any way of ensuring that the bolt complied with the manufacturer’s design specifications as these designs were kept secret by Bell. The plaintiff was fully aware of these facts. The bolt contained a latent defect. During a flight over Circular Quay in Sydney, the bolt snapped, the helicopter crashed and all the occupants were killed. The plaintiff sued the defendant for breach of the service contract. Issue The plaintiff argued that there was an implied term in the contract that all parts supplied pursuant to the service contract must be reasonably fit for the purpose for which they were required and that the bolt was not so fit. The defendant argued that such a term was unreasonable in the circumstances. Decision The High Court held that unless special circumstances applied, a contract to do work and supply materials normally contained an implied term that the materials supplied are of good quality, free from latent defects and reasonably fit for their intended purpose. However, in the circumstances of this case, it would not be reasonable to imply such a term as both parties were aware that the defendant had no opportunity to ensure that the parts obtained from Bell’s authorised dealer were free of latent defects.

Other service contracts 7.6

There is an infinite variety of service contracts; for example, providing taxi services, operating a carpark, supplying information for a fee, transporting goods, and operating a travel agency or a cinema. In all these cases, the service provider is under an implied obligation to take reasonable care and skill in providing the service and to ensure that the service is reasonably fit for the purpose for which it was acquired. [page 276]

Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd [1998] FCA 693 (Federal Court)

Facts Costa Vraca operated a farm growing tomatoes. Berrigan operated a cropdusting business. Costa Vraca retained Berrigan to spray its tomato crop with insecticides, fungicides and a nutrient. Following the spraying, the crop wilted and died. The court found: that the crop was destroyed as a result of it being sprayed with chemicals that were contaminated by 2,4-D ester; and the reason there was contamination by 2,4-D ester was that Berrigan did not properly clean its spraying rig, either in accordance with the instructions of the manufacturer of 2,4-D ester, or at all. Costa Vraca sued for breach of contract. Issue Had Berrigan breached an implied term of the contract? Decision There was an implied term that Berrigan would carry out its services with the reasonable care and skill to be expected from a person providing the services that Berrigan provided. Such an obligation would require Berrigan to take reasonable precautions to ensure that its spraying rig was not contaminated with any chemical that might damage or destroy Costa Vraca’s tomato crop. Berrigan did not take adequate steps to ensure that its spraying rig was free from contaminants and was therefore in breach of contract. Berrigan was ordered to pay damages.

Hire contracts 7.7

Where goods are hired out, the party hiring out the goods is under an implied obligation to ensure that the goods are reasonably fit for the purpose for which they are hired: Derbyshire Building Co v Becker (1962) 107 CLR 663. See also White v John Warwick & Co Ltd, in [6.35], where the bicycle hired was not reasonably fit to be ridden. Warwick, however, escaped liability for breach of contract (but not negligence) because of an exclusion clause. In Cottee v Franklins Self-Serve Pty Ltd (1995) Aust Contract Reports 90-060, a shopper who was injured when using a defective supermarket trolley was awarded damages in contract for breach of the implied term that the trolley had to be reasonably fit for its purpose.

Employment contracts

7.8

The employer has an implied duty to provide a safe system of work. The employer also impliedly undertakes not to require the employee to do any unlawful act. The employee has an implied duty to obey all reasonable instructions of the employer, to carry out his or [page 277] her work with an appropriate level of skill and competence, to act in good faith towards the employer and to keep the employer’s trade secrets confidential.

Landlord/tenant 7.9

In landlord/tenant agreements, the landlord impliedly warrants to give the tenant quiet enjoyment of the premises. This means that the landlord is not permitted to give access to any other persons or to make unscheduled inspections (especially in the middle of the night). The tenant impliedly warrants to pay the rent and to use the premises in a ‘tenant-like’ manner.

TERMS IMPLIED AS A MATTER OF FACT 7.10

The courts are reluctant to add to the express terms of a contract. The view taken is that the parties should be the sole arbiters of their agreement. Sometimes, however, the parties neglect to include a term either because:

It is risky to rely on the courts to fill in a gap in the contract. The courts will only do this in limited circumstances. Primary responsibility is on the parties to make sure they get the contract they intend.

it was so obvious that it was overlooked; or each party assumed that it applied. In such cases the courts will imply the term. However, the courts

will only do so where they believe that the term reflects the intention of the parties. Intention is objectively ascertained. Therefore, the implied term cannot be in conflict with an express term of the contract, or with the general tenor of the contract.8 For an implied term, see Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, in [6.16].

Terms implied on the basis of a course of past dealings 7.11

Commerce is replete with examples of continuing relationships where the parties rely on trust, goodwill and common sense as much as they do on any formal documentation. This can lead to problems of uncertainty if the relationship is ever put to the legal test by one of the parties. To sort out the rights of the parties, the courts may have to look at past dealings. In order to imply a term on the basis of past dealings, it must be proved that: the term claimed to have been used in past dealings is clearly identifiable (eg, from a past written contract); the previous dealings were sufficiently numerous and consistent to constitute a regular course of dealing; the present dealing fits into that course of dealing to the extent that it can reasonably be said that the same terms should be included; and there is no conflict between the implied term and the express terms. Normally, one or two dealings would not be sufficient to be a course of past dealings.9 If the terms in the past had varied there would be no consistent course of past dealings. For a case in which the court refused to imply a term based on past dealings see D J Hill and Co Pty Ltd v Walter H Wright Pty Ltd, in [6.7]. [page 278]

Henry Kendall & Sons v William Lillico & Sons Ltd [1968] 2 All ER 444 (House of Lords) Facts The vendor regularly sold Brazilian ground nuts to the Suffolk Agricultural Poultry Producers Association (SAPPA). There had been three or four transactions per month for the past three years. On each occasion, the vendor sent a sold note to SAPPA confirming the prior oral contract (the order). The sold note contained terms which SAPPA had not bothered to read. A dispute arose. Issue Whether the terms contained in the sold note were included in each contract. Decision The House of Lords held that the terms of the sold note were part of the contract on the basis of the consistent course of past dealings between the parties. There were no express terms to the contrary.

Terms implied as a result of custom or trade usage 7.12

A term may be implied on the basis of custom or trade usage provided: it is possible to state the term with precision; the custom or trade usage relied on is so well known and widespread throughout the industry that all contracts of the same type can be said to have that term (even if one of the parties to the contract was not aware of the custom); the custom is reasonable; and there is no conflict between the implied term and the express terms.10

British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1974] 2 WLR 856 (UK Court of Appeal) Facts

The parties were in the same industry. They both hired out cranes. From time to time, one of them would hire a crane from the other. On one particular occasion, as a matter of urgency, Ipswich Plant hired a crane, together with a driver, from British Crane by phone. No terms were discussed. British Crane sent a crane and driver over to Ipswich Plant. Later, British Crane sent a hire form to Ipswich Plant. Ipswich Plant did not read it. The hire form said that Ipswich Plant was liable for all costs incurred during the hire of the crane. [page 279] The crane became bogged in the mud. British Crane sued Ipswich Plant to recover the costs of retrieving the crane. British Crane claimed that it was entitled to these costs because of the term contained in the hire form. Ipswich Plant, on the other hand, denied that the costs clause was a term as it had not been expressed at the time of making the contract. In response to that British Crane claimed that Ipswich Plant must be taken to have agreed to the terms in the hire form because: Ipswich Plant had hired a crane from the plaintiff on two previous occasions and the hire form had been used both times (the past dealings argument); and the hire form was almost identical to the hire form recommended by the industry association of which both Ipswich Plant and British Crane were members (the trade usage argument). In fact, Ipswich Plant used a very similar form itself. Ipswich Plant denied these claims. Who was successful? Issue Should the exemption clause contained in the hire form be regarded as a term of the contract either (1) on the basis of past dealings or (2) because such a term was normal within the industry? Decision There had not been sufficient past dealings between the parties to amount to a course of past dealings. However, the term in the hire form ought to be regarded as a term of the contract because not only was it common within the industry, it was also very similar to a term used by Ipswich Plant itself. Therefore, the court concluded that the parties must be taken to have contracted on the basis of the term in the hire form. British Crane was entitled to succeed.

In Bell Group Ltd v Herald & Weekly Times Ltd [1985] VR 613, a case involving the customs and usages of the stock exchange, the court held that there was an implied term that share transactions

conducted on the stock exchange be conducted pursuant to the rules, regulations and articles of the exchange and not otherwise. This applied whether or not the client was aware of the exchange’s rules. The cases demonstrate that it is difficult to convince a court to imply a custom or trade usage. Just because a practice is popular in an industry does not necessarily make it a trade usage. Any person entering into a transaction in which trade usage plays an important part would be advised to ensure that any relevant trade usage becomes an express term of the contract.

Terms implied in order to make the contract effective As with terms implied because of past dealings or trade customs, the critical issue for the courts to determine in regard to terms implied to make the contract effective is what the parties — by their actions and their words — intended.

7.13

The courts will only imply a term to make a written contract effective (ie, to have the effect that the parties must have intended it to have) provided all the following criteria are satisfied:11 The term is capable of clear and precise expression. The term is necessary to make the contract effective. It is not sufficient to show that the term is ‘reasonable’. There must be a gap in the contract that makes the contract unworkable. [page 280] The term is so obvious that it ‘goes without saying’ (officious bystander test). The term is fair and equitable to both parties. There is no conflict with the express terms.

The Moorcock

(1889) 14 PD 64 (UK Court of Appeal) Facts Plaintiff (P) owned a ship and wished to berth it at a particular wharf on the Thames. Defendant (D) owned the wharf and agreed to allow P to use it for a fee. Both P and D knew that the ship would sit on the bottom of the river at low tide. In fact, the ship not only sat on the bottom but it sat across a ridge of hard ground beneath the mud. This caused damage to the ship. D did not own and had no control over the river bed. P and D had not discussed the suitability of the river bed. P sued D for damages for breach of contract. P argued that the contract contained an implied term that D take reasonable care to ascertain that the bottom of the river adjoining the jetty was in such a condition as not to cause injury to a vessel such as The Moorcock. D had taken no such steps. In its defence, D claimed that the river bed was not its responsibility, and there was no express term in the contract imposing such an obligation. Issue Should the court imply the terms suggested by P? On what basis should such terms be implied? Decision The Court of Appeal agreed with P. D was under an implied contractual obligation to take reasonable care to ascertain whether the bottom of the river adjoining the jetty was suitable for a vessel such as The Moorcock. If the river bed was not suitable, D had an obligation to warn P. These obligations were implied into the contract to make it effective in a business sense. D had failed to carry out its obligations and, consequently, P was entitled to damages.

In Specialist Diagnostic Services Pty Ltd v Healthscope Pty Ltd [2012] VSCA 175, the proprietor of a hospital was under a contractual obligation not to lease any part of the hospital premises to any diagnostic services provider other than Symbion. The proprietor later arranged for and aided a rival of Symbion to take up premises on the hospital grounds. Technically, this was not a breach of the express obligation as the proprietor did not own these particular premises. The Victorian Court of Appeal, however, held that it was a breach of an implied obligation of good faith (not to undermine Symbion’s interests under the lease contract). The court implied the term on the basis that it was

necessary to make the contract work. See also Rooney v ABB Grain Ltd, in [8.15]. When deciding whether a term is necessary, care must be taken to avoid confusing what is necessary with what is reasonable. The High Court of Australia has sounded a warning to contracting parties not to rely on the courts to fill in all the gaps. In Hospital [page 281] Products Ltd v United States Surgical Corporation (see [6.22]), the High Court refused to imply a term that Blackman and Hospital Products do nothing adverse to the market in Australia for the surgical stapling products of USSC.

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (High Court) Facts The State Rail Authority (SRA) was building a new railway in New South Wales. Codelfa successfully tendered for the job of excavating a number of tunnels. As part of the tender, Codelfa promised to do the work in 130 days. This was based on an assumption (a belief) held by both SRA and Codelfa that Codelfa would be able to work three shifts a day, including on Sundays. Although this assumption was held by both parties it was not included in the contract. Nor, of course, did the contract say who would bear the extra expense if the assumption turned out to be incorrect. Excavating tunnels is noisy, dirty and very disruptive for residents living nearby. And so the local residents obtained an injunction against Codelfa preventing Codelfa from operating on Sundays and otherwise restricted Codelfa to two shifts per day (instead of three). As a result, Codelfa’s costs increased significantly because it was unable to finish the job on time. Codelfa claimed that the SRA should bear these extra costs, arguing that there was an implied term in the contract that SRA warranted that Codelfa would be able to operate three shifts a day, including on Sundays. The injunction prevented this and therefore (according to Codelfa) SRA was in breach of contract (the implied term). The New South Wales Court of Appeal agreed with Codelfa. The SRA appealed to the High

Court. (Codelfa also appealed against certain aspects of the Court of Appeal’s decision.) Issue Was the term suggested by Codelfa implied into the contract? In other words, were the elements necessary to imply a term for business efficacy satisfied? In particular, was the suggested term both necessary and obvious? Decision The High Court refused to imply the suggested term. In the opinion of the majority, the term suggested by Codelfa did not satisfy the criterion of obviousness. If the parties had known that the SRA’s immunity did not apply to Codelfa, how would they have reacted? It was by no means certain that the parties would have replied, ‘Well, of course, the SRA will be responsible for all the additional costs and expenses reasonably incurred’. It is just as likely that the parties would have responded, ‘Well, we’d better sit down and negotiate this’. Brennan J refused to imply a term because, inter alia, the contract did not have a gap which had to be filled in order to make the contract work. It was simply the case that Codelfa made a mistake as to the completion date. (Note: The court, however, decided the contract was discharged by frustration (see [8.6]).)

[page 282] Where the contract has not been reduced to a formal written document the courts are much more tolerant about implying a term. Provided the term ‘is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case’ and provided there is no conflict with the express terms, the courts will tend to imply a term: see Hawkins v Clayton [1988] HCA 15 at [5].

SALES OF GOODS CONTRACTS Background to sale of goods legislation 7.14

The common law and, later, parliament have been tinkering with

sales of goods contracts for a long time. Prior to the 1890s, judges in the mercantile courts (courts that heard trading disputes) developed a number of terms that were implied into contracts for the sale of goods. In 1893, the British Parliament codified the existing common law in the Sale of Goods Act 1893 (UK). This legislation was largely copied by each of the Australian states and territories. These Acts continue to apply today.12 History of mercantile Law Mercantile law includes not only sales of goods, but also insurance, bills of lading, negotiable instruments, agencies and partnerships. It is called mercantile law because it is based on the customs and practices of merchants. The history of the adoption of mercantile law into the law of Great Britain (and then Australia) is quite different from laws dealing with land, torts and crimes. The story begins in the Middle Ages. Despite its success in other areas, the common law in the Middle Ages failed to develop a broad-based law of contracts. Thus, the common law courts were a poor forum for handling mercantile disputes. The common law courts were also unattractive to merchants because they were slow and inflexible, bogged down by arcane rules of procedure which only lawyers could understand. This was no good to merchants who travelled from market to market, and who might be in England one month and France the next. Merchants wanted a speedy resolution of their disputes based not just on local practices but on the customs and practices applying in the great fairs and markets of Europe. And so, mercantile law began to be applied by special mercantile courts (called piepowder courts) which were normally attached to the major market towns. Compared with the common law courts, the mercantile courts were informal and speedy. Merchants often acted as judges. The emphasis was on resolving disputes by compromise and not by formal rules. Medieval mercantile law has been described as a combination of ‘rough-and-ready justice and speedy process’. As trade and commerce continued to grow and become more sophisticated (both internationally and domestically), the mercantile courts were found wanting. By the 16th century the inadequacies of the mercantile courts meant that mercantile law was ripe for a takeover. The contestants were the admiralty courts and the common law courts. The admiralty courts had an advantage in that they were not bogged down by common law procedures. The common law courts, however, won the day. Why? [page 283] Beginning in the 16th century, but really gaining pace in the 18th and 19th

centuries, the common law modernised its processes. One of the early developments was a streamlined action for breach of contract (although not called by that name). This enabled the common law courts to attract disputes involving merchants, insurers, bankers and shippers. The common law courts adopted the procedure of considering evidence of mercantile customs using juries made up of merchants. Eventually, many of these customs became part of the common law. In the late-19th century the British Parliament decided that the mercantile customs which had become part of the common law on sales of goods should be codified. This led to the Sales of Goods Act 1893 (UK). At about the same time, the common law rules relating to partnerships were also codified.

Consumers have special protections under the Australian Consumer Law The implied statutory terms discussed in this chapter are relevant to non-consumer contracts for the sale of goods.

7.15

Consumer contracts are now specially dealt with under the Australian Consumer Law (ACL). The ACL provisions are discussed in Chapter 9. This chapter is concerned with those contracts for the sale of goods that do not come under the ACL. The following are examples of such contracts: sales of component parts to a manufacturer; sales of raw materials to a commercial enterprise; sales of finished goods to a reseller (eg, manufacturer to wholesaler or wholesaler to retailer); sales of industrial goods (ie, goods not normally bought for personal, domestic or household use or consumption) where the sale price is in excess of $40,000; and international sales of goods.13

What terms are implied by the sale of goods legislation? Consumer contracts for the sale of goods are discussed in Chapter 9.

7.16

Every contract for the sale of a good (whether new or used) has the

following implied terms (Note: This chapter will refer to the Goods Act 1958 (Vic) (VGA), but the same or similar provisions apply in each state and territory: see the comparative table in this chapter’s Appendix): an implied condition that the seller has a right to sell: VGA s 17; an implied warranty that the buyer shall have and enjoy quiet possession of the goods: VGA s 17; an implied warranty that the goods are free from encumbrance (ie, not mortgaged or charged in any way): VGA s 17; where the goods were sold by description, an implied condition that the goods match the description: VGA s 18; an implied condition that the goods be of merchantable quality: VGA s 19(b); where the buyer has expressly or implicitly made known to the seller the purpose for which the goods were being purchased in such circumstances that the seller knew or ought to have known that the buyer was relying on his or her skill or judgment, an implied condition that the goods shall be fit for the said purpose: VGA s 19(a); and where the goods were sold by sample, an implied condition that the goods match the sample: VGA s 20. [page 284] These terms may be excluded or varied at the wish of the parties (see [7.32]). This is done by use of an appropriate exemption clause (see also Chapter 6).

Correspondence with description Sellers must ensure that goods correspond with any description by which they are sold.

7.17

Where goods are sold by description, they must correspond with that description (s 18): When there is a contract for the sale of goods by description there is an implied condition that the goods shall correspond with the description: and if the sale be by sample as well as by description it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.

A purchaser alleging a breach of contract on the basis that the goods do not correspond with the description by which they are sold (within the meaning of VGA s 18) would have to prove the following: there was a contract for the sale of goods; the contract was made in Victoria; the goods were sold by description; and the goods do not match that description. Description is not a reference to product quality 7.18 The implied condition of correspondence with description is concerned with those matters that serve to identify the goods sold. This should be contrasted with merchantable quality where the key is the condition or quality of the goods (the fitness of the goods for their normal purpose). When are goods sold by description? 7.19 A sale of goods where the goods are unascertained or yet to come into existence is by necessity a sale by description. For example, see Ashington Piggeries Ltd v Christopher Hill Ltd (in [7.20]), where the contract was for the sale of animal feed which had not been made up at the time of the contract. A sale of goods where the purchaser has not seen the goods will almost certainly be a sale of goods by description.

Varley v Whipp [1900] 1 QB 513 (Queen’s Bench Division)

Facts The buyer contracted to buy, without inspection, a reaper described by the vendor as almost new and only used to cut 50 or 60 acres. When the reaper was delivered, it was apparent that it was old and had been repaired. The buyer refused to accept the goods. Issue Had the seller breached the implied condition that the reaper correspond with the description (‘almost new’) by which it was sold? Decision The buyer was within his rights to refuse to accept the goods as there had been a breach of the implied condition of correspondence with description.

[page 285] It is possible to have a sale by description even where the purchaser has seen the goods. For example, the purchaser of tinned food has seen the goods in the sense of seeing the packaging but has had no opportunity to check that the contents conform with the description on the label. Therefore, there may be a sale by description even where the goods are displayed in a shop and the customer makes his or her selection on the basis of the display. Many supermarket and department store sales will be sales by description (see Grant v Australian Knitting Mills, in [7.28]).

Beale v Taylor [1967] 1 WLR 1193 (UK Court of Appeal) Facts A seller advertised a car for sale as a ‘Herald convertible, white, 1961’. The buyer inspected the car before purchase. Later, the buyer took the car to a garage and was told that the car was in fact two cars welded together. The rear was a 1961 Herald but the front was an earlier model. Because of the welding, the car was not roadworthy. The buyer sued for breach of the implied condition that the car correspond with the description by which it was sold.

Issue Had the seller breached the implied condition of correspondence with description by describing the hybrid car as a 1961 Herald? Decision Although the buyer inspected the car, it was still a sale by description. As the car did not match that description (it was not entirely a 1961 model), there was a breach of contract.

Packaging can form part of the description.

Re Moore & Co Ltd and Landauer & Co [1921] 2 KB 519 (UK Court of Appeal) Facts The contract called for the sale and delivery of canned fruit packed 30 tins to the case. About half of the consignment was packed 24 tins to the case. In all other respects the goods conformed with the contract. The buyer refused to accept delivery of any of the consignment. The seller sued for breach of contract. Issue Was the requirement that the goods be packed ‘30 tins to the case’ part of the description by which the goods had been sold? [page 286] Decision The court held that the requirement that the goods be packed 30 tins to the case was part of the description by which the goods were sold. Therefore, there was a breach of the condition that the goods must correspond with the description by which they were sold. As it was a breach of condition, the buyer was entitled to reject the complete consignment even though there was no evidence that the packing affected the value of the goods.

The buyer must rely on the description 7.20 The implied condition of correspondence with description does not apply where the buyer had not relied upon the description.

Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1990] 1 All ER 737 (UK Court of Appeal) Facts The defendants were London art dealers who sold to the plaintiff, also art dealers, a painting said to be by the German artist, Münter. The sellers made it known that they were not experts in German art and knew nothing about the provenance of the painting. The buyer had a special interest in the German Expressionist School, although, it appears, little expert knowledge. The buyer viewed the painting and purchased it for £6000. The painting turned out to be a forgery and the buyer sued for breaches of sale by description and merchantable quality. Issue Had the buyer relied on the seller’s description (ie, the painting is by the German artist Münter) so that the buyer could sue for breach of the implied term that the painting correspond with the description by which it was sold? Decision The majority of the Court of Appeal held that it was not a sale by description. To be a sale by description, there must be some reliance by the buyer upon the description. In this case, the seller expressly indicated that it knew nothing about the provenance of the painting and, indeed, had never heard of Münter. The buyer inspected the painting. The court also rejected the argument that the goods were not of merchantable quality.

[page 287]

Ashington Piggeries Ltd v Christopher Hill Ltd [1971] 1 All ER 847 (House of Lords) Facts Ashington operated a farm on which minks were bred. Ashington ordered a quantity of mink food from Hill. Hill operated a business mixing and supplying feed products for animals, although it had never previously prepared food for minks. The mink food, called ‘King Size’, was prepared from a formula supplied by Ashington. In preparing the formula, Hill used herring

meal which it obtained from Norsildmel. The contract between Hill and Norsildmel called for ‘Norwegian Herring Meal fair average quality of the season’. The preservative used on the herring by Norsildmel caused a chemical reaction which produced a substance called DMNA. This substance was poisonous to minks and probably to most animals. The minks died. Ashington sued Hill for breach of contract, claiming that the goods did not correspond to the description by which they were sold, that they were of unmerchantable quality and that they were not fit for the purpose which had been expressly made known to the seller at the time of sale. Hill sued Norsildmel for breach of contract, claiming breaches of the implied terms of sale by description and fitness for particular purpose. Issue Had the seller breached the implied conditions of correspondence with description and/or fitness for purpose by supplying feed containing preservative that was lethal for minks? Decision In relation to sale by description, the majority of the House of Lords held that Hill had not breached this condition. Lord Diplock described the ambit of the implied condition of correspondence with description in the following terms (at 884): [U]ltimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to him on the ground that their failure to correspond with what was said about them makes them goods of a different kind from those he had agreed to buy. The key to [the implied condition of correspondence with description] is identification. ‘King Size’ called for the use of herring meal and that is what was used. The fact that it contained DMNA went to the quality or condition of the herring meal and not its identification. In respect of the contract between Hill and Norsildmel, Norsildmel had supplied Norwegian herring meal as described in the contract. The requirement that the herring meal be ‘fair average quality of the season’ was not part of the description. It was a reference to quality or condition. In relation to fitness for purpose, the majority held that Ashington had relied upon Hill. Although the recipe was Ashington’s, they relied upon Hill to obtain herring meal that was suitable for being fed to mink. The majority also found that Norsildmel was in breach of the implied term of fitness for purpose even though Norsildmel was only aware that the herring meal was to be used in feeding animals. [page 288]

The majority also found that Hill had supplied goods of unmerchantable quality in breach of the implied condition. The argument on merchantable quality turned on whether Hill dealt in goods of the type sold (‘King Size’). The majority held that Hill dealt in animal feed and that was sufficient to include mink food. The dissenting Lords said the section applied only if it could be said that Hill had dealt in mink food, which it had not.

Fitness for purpose Sellers must be careful that, where they recommend goods as being fit for a particular purpose, the goods are actually fit for that purpose.

7.21

Goods must be reasonably fit for the purpose for which they were bought provided that purpose was made known to the seller and the buyer relied on the seller’s skill (s 19(a)): … where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skill or judgment and the goods are of a description which it is in the course of the seller’s business to supply (whether he be the manufacturer or not) there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose;

A buyer alleging a breach of contract on the basis that the goods are not fit for the purpose which they were acquired (within the meaning of s 19(a) of the VGA) would have to prove the following: there was a contract for the supply of goods; the contract was made in Victoria; the seller was in the business of supplying goods of that type; the buyer expressly or impliedly made known to the seller the purpose for which the goods were required; the buyer relied on the seller’s skill and judgment; and the goods were not reasonably fit for the specified purpose. What is meant by ‘fitness for purpose’? 7.22 There are many occasions when both the implied condition of

fitness for purpose and also the implied condition of merchantable quality will apply.

David Jones Ltd v Willis (1934) 52 CLR 110 (High Court) Facts Willis asked an employee of David Jones for a pair of walking shoes for herself. She also informed the salesperson that the shoes must fit comfortably over a bunion on her foot. The shoes proved to be very comfortable but not very sturdy. On the third occasion on which Willis used the shoes, one of the heels collapsed while she was walking, causing her to fall and break her leg. There was evidence that the shoes were ‘a very bad job’. The heels were not properly fastened. Willis sued for, inter alia, breach of implied condition that the goods be suitable for a particular purpose. [page 289] Issue Were the shoes reasonably fit for the buyer’s specified purpose (ie, walking)? Decision Willis succeeded. The shoes were not of merchantable quality nor were they fit for the purpose specified by Mrs Willis.

The implied condition of fitness for purpose may apply whether the goods are new or used. Of course, second-hand goods are not generally expected to be as fit as new goods. See Bartlett v Sidney Marcus Ltd, in [7.28].

Atkinson v Hastings Deering (Qld) Pty Ltd (1985) ATPR 40-625 (Federal Court) Facts Atkinson purchased a second-hand tractor from Hastings Deering Pty Ltd. The tractor proved to be defective in that it was prone to overheating. Atkinson claimed that the tractor was not fit for the purpose of scrub-pulling which had been made known to Hastings Deering at the time of sale.

Issue Were the goods supplied reasonably fit for the buyer’s specified purpose? Decision The Queensland Sale of Goods Act 1898 applied. Under that Act, the court held that the tractor was reasonably fit, having regard to the fact that it was second-hand and, therefore, more likely to be subject to breakdowns due to wear and tear. Therefore, Atkinson failed in his claim.

The buyer must rely on the seller’s skill and judgment 7.23 The implied condition of fitness for purpose has no application if the buyer did not rely upon the seller’s skill and judgment or it was not reasonable in the circumstances to do so. To do this, the buyer must make known the special purpose for which the goods are required. [page 290]

Griffiths v Peter Conway Ltd [1939] 1 All ER 685 (UK Court of Appeal) Facts Griffiths purchased a Harris Tweed coat from Conway, a tailor, which was specially made for her. Shortly after she began to wear the coat, she developed dermatitis. Evidence showed that there was nothing in the cloth that would have affected a normal person. Griffiths, however, had abnormally sensitive skin. Griffiths sued for breach of contract on the grounds that she had made known to Conway the purpose for which she required the coat and that therefore there was an implied condition that the coat be reasonably fit for that purpose. Conway denied any breach of contract. Issue Had Griffiths made her specific purpose known to Conway so that Conway was under an obligation to ensure that the coat was fit for that purpose? Decision Lord Greene MR held that the purpose had not been made known to the

seller. The particular purpose was that the coat be suitable for a person with abnormally sensitive skin. Griffiths had not made her abnormal condition known to the seller. The buyer therefore failed.

Buyer’s purpose may be a matter of inference 7.24 Normally, the buyer will make the purpose known by speaking with the sales staff. However, it is not necessary that specific or, indeed, any words be used. Where goods are acquired for their normal purpose, it is not necessary to state that purpose. The purpose will be inferred from the circumstances.

Godley v Perry [1960] 1 All ER 36 (Queen’s Bench Division) Facts A six-year-old boy purchased a toy plastic catapult. When he used the catapult, it broke and a fragment damaged one of his eyes. Subsequently, he lost the use of the eye. The boy sued for, inter alia, breach of the implied conditions that the catapult be of merchantable quality and fit for the purpose for which it was bought. He sought damages against the retailer for loss of the eye. Issue Were the goods supplied reasonably fit for the buyer’s purpose? Although the buyer had not specifically stated his purpose, was this necessary in the circumstances? Were the goods of unmerchantable quality? [page 291] Decision The court held that the catapult was not of merchantable quality. Further, it was not fit for the purpose for which it had been purchased. That purpose had been made known by implication because it was obvious that a catapult would be used to hurl objects. As the goods were being bought for their normal purpose, the customer was entitled to rely upon the shopkeeper’s skill and judgment in the selection of his stock.

The same principle was applied in the case of a hot water

bottle,14 milk15 and underwear.16 Generally speaking, if the purpose is expressly made known to the seller, it should not be difficult to show that the buyer relied upon the seller’s skill. However, each case depends on its own circumstances (see Henry Kendall & Sons v William Lillico & Sons Ltd, in [7.11]). The buyer’s reliance may be only partial. Provided the partial reliance is a ‘substantial and effective inducement’ to purchase, the implied condition is satisfied: Cammell Laird & Co Ltd v Manganese Bronze & Brass Co Ltd [1934] AC 402. The buyer’s reliance must be reasonable 7.25 The implied condition will not apply if it was not reasonable for the buyer to rely on the seller, or the facts are such that the buyer could not have relied on the seller.

Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 All ER 886 (UK Court of Appeal) Facts The seller (Belton) supplied 12 mobile air compressors to Richards Marketing Ltd, as agent for Teheran-Europe, knowing that they were to be exported to Iran for resale in that country. The buyer argued that, because of these circumstances, there was an implied condition that the tractors be suitable for resale in Iran. The tractors did not satisfy Iranian import requirements. Issue Was it reasonable in the circumstances to rely on the seller to ensure that the goods satisfied Iranian import rules? Decision The Court of Appeal totally rejected the buyer’s argument. The implied condition of fitness for purpose only applies where it can be said that the buyer has made the particular purpose known to the seller in such a way that the seller knows that he or she is being relied upon. There was no reason why the seller ought to have known about Iranian import requirements. In fact, the buyer was in a much better position to know these matters than the seller.

[page 292] Where a good is sold under its patent or other trade name there is no implied condition as to its fitness for any particular purpose.

Merchantable quality Sellers must be careful that goods they sell are reasonably fit for their normal purpose or purposes.

7.26

Goods must be of merchantable quality (s 19(b)): … where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not) there is an implied condition that the goods shall be of merchantable quality: Provided that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed …

Whether goods are of merchantable quality is very much an issue of fact. A buyer alleging a breach of contract on the basis that the goods are not of merchantable quality (within the meaning of VGA s 19(b)) would have to prove the following: there was a contract for the sale of goods; the contract was made in Victoria; the goods were sold by description; the supplier dealt in goods of that description; the goods were not as fit for their normal purpose or purposes as is reasonable to expect having regard to the price and other circumstances (this is the definition of merchantable quality); the buyer was not aware of the defect prior to sale; and the inspection made by the consumer prior to sale would not have revealed the defect.

Frank v Grosvenor Motor Auctions Pty Ltd [1960] VR 607 (Supreme Court of Victoria) Facts

Frank purchased, for resale, a Renault Dauphine motor car from Grosvenor Motor Auctions (GMA) for £580. During the course of negotiations, GMA referred to the vehicle in the following terms: There is nothing wrong with this car. The clutch is a bit fierce. It is very good value for the money — we have two of the same cars and that is why we are selling this one so cheaply. Our mechanic inspected the whole car and all it wants doing is that the clutch wants adjusting. This is a 1958 model. The vehicle proved to be a 1956 model. The gearbox was split, as was the differential. The cost of repairs was £180. Frank sued for (a) breach of express warranties, (b) breach of implied terms of merchantable quality and fitness for particular purpose (driving), and (c) fraudulent misrepresentation. The complaint was dismissed by the Magistrates Court and Frank applied to the Supreme Court for a retrial. Issue Have all the elements of a breach of the implied conditions of fitness for purpose and merchantable quality been satisfied? [page 293] Decision In relation to merchantable quality, Pape J outlined the steps that have to be examined. First, it must be determined whether there has been a sale by description. This is a question of fact. Pape J (at 610) referred to the comments of Dixon J in Australian Knitting Mills Ltd v Grant (1933) 50 CLR 387 at 417: When the ground upon which the goods are selected or identified is their correspondence to a description, and when, therefore, it may be said that the buyer primarily relies upon their classification or possession of attributes, then, notwithstanding that they are bought as specific goods ascertained and identified, the goods are bought by description. The question is whether the buyer bought the car that was in front of him irrespective of the seller’s words, or whether the buyer bought the car on the basis of both the inspection and the description. Second, if the sale is by description from a seller who deals in goods of that description, the goods must be of merchantable quality. This means that the goods must be in such a state that a reasonable person, acting reasonably, would, after a full examination, accept them under the circumstances of the case in performance of his offer to buy them, whether he buys them for his own use or to sell again. His Honour was of the opinion that the Renault was not of merchantable quality.

Third, if the goods are not of merchantable quality, did the buyer inspect the goods and, if so, ought that inspection to have revealed the actual defect or defects? In relation to fitness for particular purpose, his Honour rejected the argument that the buyer had to expressly indicate to the seller that he was relying on the seller’s skill and judgment. The reliance may arise by implication such as in Grant v Australian Knitting Mills (in [7.28]) and Godley v Perry (in [7.24]). The Frank case was sent back to the Magistrates Court to be re-heard.

What is meant by merchantable quality? 7.27 Broadly speaking, goods are of merchantable quality if they are reasonably fit at the time of sale for their normal purpose, having regard to the circumstances of the case including the contract description and the price. At common law, if a good has more than one purpose it will be of merchantable quality if it is fit for one of those purposes, having regard to the circumstances: B S Brown & Sons Ltd v Craiks Ltd, below.

B S Brown & Sons Ltd v Craiks Ltd [1970] 1 WLR 752 (House of Lords) Facts The sellers manufactured woven cloth. The buyers ordered a quantity of cloth. The cloth ordered could be used for dress-making or industrial purposes, depending on the quality. The contract price was cheap for dress-making cloth but expensive for industrial cloth. [page 294] The buyer wanted the cloth for dress-making but did not tell the seller. When the cloth was delivered it complied with the contract description but was unsuitable for dress-making purposes. The buyer sued for breach of contract — breach of the implied term of merchantable quality. Issue Had the seller breached the implied condition of merchantable quality? Decision The buyer failed. The cloth was suitable for industrial purposes and, given the

contract price, the seller could not have known that the buyer wanted it to be suitable for dress-making.

The indicators of merchantable quality 7.28 Price can be an important indicator of the quality expected. For instance, where a good has more than one purpose, the contract price can be critical. Compare B S Brown & Sons Ltd v Craiks Ltd (in [7.27]) with the following case.

H Beecham & Co Pty Ltd v Francis Howard & Co Pty Ltd [1921] VLR 428 (Supreme Court of Victoria) Facts The buyer wanted to buy some spruce timber for making pianos. The seller was a timber merchant. The parties agreed that the buyer would select the wood from the seller’s yard. The wood contained a latent defect in that it was infected with dry rot. This made the wood unsuitable for making pianos, although it was suitable for making boxes. The price of the wood was well above the price normally paid for wood suitable for boxes. Issue Had the seller breached the implied condition of merchantable quality? Decision The court held that, given the price paid, the wood was not of merchantable quality even though it was perfectly useful for some purposes to which wood is put.

The contract description of the goods is an extremely important guide to the expected quality. A higher level of quality would be expected of a good described as ‘new’ compared to a ‘second-hand’ good. However, even a ‘new’ good is not expected to be perfect. For example, a car cannot be returned just because it has a fault. There must be a fundamental fault. Alternatively,

[page 295] there must be a whole sequence of minor faults: for example, in Rogers v Parish (Scarborough) Ltd [1987] 2 All ER 232, the Court of Appeal held that an expensive Range Rover which had faulty oil seals and defects in the engine, gearbox and body was not of merchantable quality. In Wormell v RHM Agriculture (East) Ltd [1987] 1 WLR 1091, the court held that the presence or absence of instructions or inadequate or misleading instructions could make goods unmerchantable. However, each case must be judged on its own facts. The quality of the container is also a part of merchantable quality. In Geddling v Marsh [1920] 1 KB 668, a bottle of mineral water was held to be unmerchantable when a defect in the bottle caused it to explode.

Bartlett v Sidney Marcus Ltd [1965] 2 All ER 753 (UK Court of Appeal) Facts Bartlett purchased a second-hand Jaguar motor car from Sidney Marcus. During a test run prior to completing the sale, one of Sidney Marcus’s sales staff pointed out to Bartlett that there was something wrong with the clutch and the oil pressure. Sidney Marcus suggested that either the clutch needed bleeding or there was a leak between the main cylinder and the slave cylinders. Neither of these would be a serious problem. Sidney Marcus offered to sell the car for £575 if Sidney Marcus did the repairs and for £550 if Bartlett took responsibility for the repairs. Bartlett chose the latter course. Having driven the vehicle for four weeks (about 300 miles) without trouble, Bartlett took it to be repaired. The problem proved to be far more serious than either Bartlett or Sidney Marcus had expected and the repairs cost Bartlett £45. Bartlett sued for breach of the implied conditions of merchantable quality and fitness for purpose. Did he succeed? Issue Had the seller breached the implied condition of merchantable quality? Decision The Court of Appeal rejected the buyer’s claims. Lord Denning MR said that a

used car was fit for its purpose if ‘it is in a roadworthy condition, fit to be driven along the road in safety, even though not as perfect as a new car’. His Honour further stated that a used car was of merchantable quality if it was in a usable condition. It did not have to be in perfect condition. Bartlett had driven the car for four weeks without trouble. The car clearly satisfied both the test for merchantable quality and for fitness of purpose.

Goods may not be of merchantable quality even though the defect, once discovered, can be easily remedied. [page 296]

Grant v Australian Knitting Mills [1935] AC 85 (Privy Council) Facts Dr Grant bought some woollen underwear manufactured by Australian Knitting Mills (AKM) from John Martin’s retail store in Adelaide. The day after first wearing the underwear he contracted dermatitis. The illness was extremely serious and lasted for approximately a year. The court found that the dermatitis was caused by bisulfite of soda in at least one pair of the underwear. This was alleged to be due to negligence in the manufacturing process. Grant sued AKM for negligence and John Martin for breach of the implied conditions of sale by description, merchantable quality and fitness for particular purpose. In relation to the contract claim against John Martin, the trial court held that the goods were bought by description and were not of merchantable quality. Even though the defect probably could have been eradicated by washing prior to use, this was not a normal procedure. The High Court reversed this decision and Dr Grant appealed to the Privy Council. Issue Had the seller breached the implied condition of merchantable quality? Decision The Privy Council decided in favour of Dr Grant.

A good may be of unmerchantable quality even though there is

nothing wrong with it. For example, a person who purchased some oysters would have a right to return the oysters if a warning was issued after the purchase that some of the oysters might be contaminated with a virus. As there is no way to determine whether any particular oyster is contaminated without actually destroying the oyster, the buyer would be entitled to treat all the oysters as unmerchantable. Goods must not only be of merchantable quality at the time of sale but should remain so for a reasonable period following sale, having regard to all circumstances. How is merchantable quality affected by the buyer’s inspection of the goods? 7.29 If the buyer inspects the goods, there is no implied condition of merchantable quality in so far as those defects are concerned which were, or ought to have been, revealed by such inspection. However, it is important to remember that the buyer is under no duty to make any inspection at all. Despite some cases to the contrary, it would appear that if the buyer makes only a cursory inspection, then only the most obvious defects will be excluded from the implied conditions. The closer is the inspection the greater the number of defects that will be excluded from the implied condition.

Correspondence with sample 7.30

Where there is a term in the contract that the goods are sold by sample, the bulk of the goods must correspond with that sample and must be free of any defect which would render the [page 297] goods unmerchantable. The buyer has a reasonable time to compare the bulk with the sample (s 20): 20 (1) A contract of sale is a contract for sale by sample where there is a

term in the contract express or implied to that effect. (2) In the case of a contract for sale by sample — (a) there is an implied condition that the bulk shall correspond with the sample in quality; (b) there is an implied condition that the buyer shall have a reasonable opportunity of comparing the bulk with the sample; (c) there is an implied condition that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample.

A purchaser alleging a breach of contract on the basis that the goods do not correspond with the sample by which they are sold (within the meaning of s 20 of the VGA) would have to prove the following: there was a contract for the sale of goods; the contract was made in Victoria; the contract contained an express or implied term that the goods were sold by sample; and the bulk of the goods do not match that sample/the goods have a defect that renders them unmerchantable. What is meant by correspondence with sample? 7.31 The implied condition of correspondence with the sample is similar to correspondence with description in that it is concerned with matters that identify the goods. Merely giving the buyer a sample does not necessarily make the contract a sale by sample. Once it is established that the sale is one by sample, it is a question of fact whether the bulk of the goods corresponds with the sample.

Excluding, or limiting liability for breach of, the implied terms 7.32

The seller may exclude the implied terms or it may limit its liability for breach: s 61. Where the seller is in a stronger bargaining position than the buyer, the seller is likely to take advantage of this provision to exclude, restrict or limit liability.

The normal rules governing incorporation and interpretation of terms apply to a sale of goods. Thus, an exemption clause contained in a signed contract is likely to be binding even if it was not read: L’Estrange v F Graucob Ltd (in [6.5]); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (in [6.5]). Where the exemption clause is in writing but unsigned, the clause will only be a term of the contract if the party seeking to rely on the clause (the seller) has taken reasonable steps to bring the existence of the exclusion clause to the attention of the other party prior to or at the time of making the contract: Parker v South Eastern Railway Co (1877) 2 CPD 416. Even if the seller has given sufficient notice to include the term, it is still necessary to determine whether the term is drafted to cover the breach. For example, under the ambiguity rule, any ambiguities will be resolved in favour of the buyer (see [6.34]). Most of the implied obligations are conditions, not warranties. Thus, an exemption clause which exempted liability for breach of warranty would not be effective against the implied conditions. As [page 298] Lord Morris of Borth-Y-Gest commented in Henry Kendall & Sons v William Lillico & Sons Ltd (see [7.11]): The words of [the exclusion clause] are wholly inapt to exclude a condition of the contract. They do not refer to a condition. One does not exclude a condition by excluding or purporting to exclude a warranty.

In a sale of second-hand earthmoving equipment, a term that the equipment was sold on an ‘as is basis’ was sufficient to negate any obligation of merchantable quality: Groundhog Sales & Rentals Pty Ltd v Eastern Pearl Corp [2012] FCAFC 113. In Victorian Alps Wine Co Pty Ltd v All Saints Estate Pty Ltd [2012] VSCA 81, the following clause was successful in excluding the implied terms: ‘To the full extent permitted by law … all statutory and implied conditions and warranties except as to title are excluded’.

Remedies 7.33

Provided there is no exemption clause to the contrary, the aggrieved buyer has the right to terminate the contract and/or to seek damages for a breach of any of the implied conditions. Thus, the buyer can reject the goods if they do not comply with the description by which they were sold (see Re Moore & Co Ltd and Landauer & Co, in [7.19]). Only damages are available for a breach of an implied warranty. The buyer’s right to reject the goods is limited. The VGA provides that once the goods have been accepted or, in the case of specific goods, property has passed to the buyer, the innocent party can only sue for damages: s 16(3). Thus, the right to reject the goods is lost once the goods have been accepted. If the defect in the goods is only discovered after acceptance, the buyer will have a right to damages, but has no right to compel the seller to take the goods back.

Other matters affecting sales of goods 7.34

Sale of goods legislation has provisions covering price, delivery and payment, acceptance, passing of property and risk. These are discussed below very briefly. In all cases, the parties are free to decide their own terms. It is only where the contract is silent that the statutory provisions apply. The sale of goods legislation also contains further provisions which are beyond the scope of this book.

Ascertaining the contract price for the goods 7.35 In relation to price, the sale of goods legislation provides as follows (s 13): 13

(1) The price in a contract of sale may be fixed by the contract or may be left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties. (2) Where the price is not determined in accordance with the foregoing provisions the buyer must pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

This means that, provided all other necessary details of the transaction have been agreed, the contract will not fail merely because the parties have neglected to express a price. However, s 13 will not create a contract where none exists. Section 13 will only apply where there is evidence of a concluded contract. [page 299]

ANZ Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 (Supreme Court of Victoria) Facts Frost Holdings submitted a proposal to the ANZ Bank to print and supply calendars featuring Australian paintings. The ANZ informed Frost that it accepted the proposal in principle, but would require an upgrading of the quality of the work. Frost submitted a new proposal. The ANZ, however, changed its mind and informed Frost that it did not wish to proceed. Frost sued for breach of contract. ANZ denied that any contract existed. Issue Had a contract been formed (offer, acceptance, etc)? Decision The Victorian Supreme Court held that no contract existed because there was no agreement as to the essential elements, such as the price, quality, size or design of the calendars. The VGA s 13 applied only where there was a contract. That is, the parties must have agreed on all other essential elements of the contract before s 13 would operate.

Delivery and payment 7.36 It is the duty of the seller to deliver the goods as agreed, and the duty of the buyer to accept and pay for them: VGA s 34. The rules relating to delivery are set out in the VGA s 36. For example, where no time is fixed for delivery, the seller shall deliver within a reasonable time: VGA s 36(2). On delivery, the seller is bound to give the buyer a reasonable opportunity to inspect the goods to

ensure they conform with the contract: VGA s 41(2). Acceptance 7.37 The time of acceptance is important in non-consumer contracts because once the goods have been accepted, they cannot be rejected. In a consumer contract, the goods may still be returned even after acceptance. The buyer is taken to have accepted the goods: when the buyer indicates to the seller that the goods have been accepted; where the goods have been delivered, the buyer does anything in relation to the goods which is inconsistent with the seller’s ownership (eg, selling the goods to a third party); or where a reasonable time has lapsed since delivery and the buyer has not tried to reject: VGA s 42. This is subject to the VGA s 41, which gives the buyer a reasonable opportunity to inspect the goods. Passing of property in the goods 7.38 Property must be distinguished from possession. Property means ownership. A person may own goods without being in possession of them. In a sale of goods, the general rule is that property in the goods passes when the parties intend it to pass: VGA s 22. For the [page 300] purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Where it is not possible to ascertain the intention of the parties, the VGA provides a number of rules for determining when property passes. Thus, where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer

when the contract is made, and time of payment or time of delivery is immaterial: VGA s 23 r 1.17 The rules on passing of property are subject to the principle that no one may pass on a better title than that which he or she has (nemo dat quod non habet). For example, if A steals a watch from B and sells it to C, B still owns the watch and has a right to have it returned, unless B has represented expressly or impliedly to C that A had a right to sell the watch: VGA s 27. In the latter case, B would be estopped from claiming the watch.18 Passing of risk in the goods 7.39 Passing of risk is important because it determines who will bear the loss if the goods are damaged or destroyed. The general rule is that, unless otherwise agreed, the goods remain at the seller’s risk until the property is transferred to the buyer. When property is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not: VGA s 25. This is subject to the proviso that where delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault: VGA s 25.

ADVICE — LAW IN PRACTICE When negotiating any contract, but particularly when negotiating a complex commercial arrangement, you should ensure that there are as few gaps in the contract as possible. It is risky to rely on the courts to fill the gaps. When making contracts for the sale of goods, you should ensure that the goods: correspond with any description or sample by which they are sold; be fit for their normal purposes; and

be fit for any special purpose where the customer relies on your skill and knowledge. You can avoid these obligations in non-consumer contracts if you make sure that the contract specifically exempts liability.

[page 301]

APPENDIX: COMPARATIVE TABLE OF SALE OF GOODS LEGISLATION NSW 1(1) 1(2) 2 3 4 5 6 7 8 — 10 11 12 13 14 15 16 17 18

Vic 1 1 — 2 4, 5 3 6 7 8 — 10 11 12 13 14 15 16 17 18

Qld 1 2 — — 61 3 4 5 6 — 8 9 10 11 12 13 14 15 16

SA 62 61 — 58 59 60 1 2 3 — 5 6 7 8 9 10 11 12 13

WA 62 61 — 58 59 60 1 2 3 4 5 6 7 8 9 10 11 12 13

Tas 1 2 — — 5 3 6 7 8 9 10 11 12 13 14 15 16 17 18

ACT 1 2 — 4 62 5 6 7 8 — 10 11 12 13 14 15 16 17 18

NT 1 — — 3 4 5 6 7 8 — 10 11 12 13 14 15 16 17 18

19 20 21 22 23 24 25 26 — 27

19 20 21 22 23 24 25 27 — 29

17 18 19 20 21 22 23 24 — 25

14 15 16 17 18 19 20 21 22 23

14 15 16 17 18 19 20 21 22 23

19 20 21 22 23 24 25 26 27 28

19 20 21 22 23 24 25 26 — 27

19 20 21 22 23 24 25 26 — 27 [page 302]

NSW — 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

Vic — 30, 31 82 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Qld 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

SA 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

WA 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Tas 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

ACT 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

NT — 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

44 45 46 47 48 49 50 51 52 53 — 52 55 56

48 49 50 51 52 53 54 55 56 57 58 57 60 —

43 44 45 46 47 48 49 50 51 52 53 56 55 —

41 42 43 44 45 46 47 48 49 50 51 54 53 —

41 42 43 44 45 46 47 48 49 50 51 54 53 —

46 47 48 49 50 51 52 53 54 55 56 59 58 —

45 46 47 48 49 50 51 52 53 54 55 54 57 —

44 45 46 47 48 49 50 51 52 53 — 52 55 56 [page 303]

NSW 57 58 59 60 61

Vic 61 62 63 64 32–33

Qld 56 57 58 59 —

SA 54 55 56 57 57A– 57B

WA 54 55 56 57 —

Tas 59 60 61 62 63

ACT 58 5(2)(b) 59 60 61

NT 57 58 59 60 —

[page 304]

QUESTIONS Question 1 (a) Explain the difference between express terms and implied terms. (b) When will terms be implied into a contract? (c) Are implied terms conditions or warranties? Explain. (d) Should a term of ‘good faith’ be implied into all commercial contracts? Discuss. (See Burger King Corp v Hungry Jack’s Pty Ltd (in [7.3]) and Specialist Diagnostic Services Pty Ltd v Healthscope Pty Ltd (in [7.13]).) (e) How many past dealings are required before the court will imply a term on this basis?

Question 2 Elvira has just opened up a new business consultancy office. She visits Fred’s Furniture Retail Store Pty Ltd and buys a new desk for $2000. Elvira then hires ABC Transport Co Pty Ltd to take the desk to her office. The written contract between Elvira and ABC Transport Co is very brief and only includes details of the goods to be carried and the destination as well the parties’ names and the price. (a) What terms could be implied in the contract between Elvira and ABC Transport Co? (b) What would your answer be if Elvira had used Fred’s Furniture once before?

Question 3 Fred, a 33-year-old banking executive, was depressed. His solution was to get a tattoo, so he visited Madame Tattoo, his favourite tattoo parlour. Fred paid Madame Tattoo $1000 for the tattoo of a blood-red rose on his right shoulder. ‘That’s a great choice, Fred. It’ll go well with all the other tattoos you have there. Here’s the receipt,’ said Madame Tattoo, as she gave him the receipt folded in half. Sadly for Fred it turned out to be a bad choice because he was rushed to hospital soon afterwards with a severe case of blood poisoning. Investigation revealed that dirty needles were responsible. When confronted later by Fred, Madame Tattoo said that she usually used new needles on each client but, lately, due to a downturn in business, had decided to use new needles only for every second client. Besides, she thought the client she’d tattooed before Fred had no diseases because he had just been released from hospital. Finally, Madame Tattoo pointed to a clause at the bottom of the receipt, which said: ‘Madame Tattoo is not responsible for any harm to or loss suffered by her clients’. Fred had never bothered to read the receipt before and had not seen this statement. Advise Fred what terms (if any) have been breached and whether the exemption clause will protect Madame Tattoo.

Question 4 W Ltd operates a construction firm. From time to time W requires large amounts of slate. For the past five years W has acquired its slate from Slate Supplies Pty Ltd. On the first occasion that W dealt with Slate Supplies, W negotiated a deal whereby Slate Supplies would replace

any slate tiles that got damaged in the course of construction. This term, which is [page 305] not common in the industry, has been a part of the written contract between the parties ever since. Slate Supplies management recently decided at a Board meeting to exclude this term as it is no longer economically viable. (No mention of this was made to W Ltd.) Recently, W ordered a large supply of slate by phone. The only details discussed on the phone were current price, quantities and delivery times. After the slate was delivered, X received an invoice from Slate Supplies which contained the new terms and conditions of trading. The terms and conditions did not include the replacement clause. In fact the terms and conditions made no reference to damaged slate. Slate Supplies wants to know if it is obligated as a matter of law to replace the damaged slate.

Question 5 Kasish works for West Gippsland Farmers Pty Ltd (WGF) in Victoria, an agricultural company that produces, among other things, large quantities of raw, unpasteurised milk. Raw milk has become increasingly popular, and WGF had recently received a large order from Poles Ltd, a large nationwide retailer, to supply 20,000 litres at $4 per litre for each of the next two years. While raw milk is popular, it is also potentially dangerous due to the milk being unpasteurised. Many years ago, people — children, in particular — had died

from drinking unpasteurised milk. WGF had been one of the first producers to recently work out the necessary ways of producing safe raw milk, but it needed to be stored carefully. So, WGF decided to update their storage facilities. Kasish rang NED’s Refrigerators Ltd. He told the sales representative that he needed freezers for commercial use that would store large quantities of unpasteurised milk safely for several days. Kasish contacted NED’s because WGF had used them for years and trusted their recommendations and the quality of their goods. The sales representative assured Kasish that DynamoFreezer Model 5, valued at $45,000, would meet his requirements. Kasish agreed and ordered one to be delivered and installed at WGF’s premises. The freezer arrived a week later, accompanied by tradesmen from NED’s who would install it. Prior to taking possession, Kasish signed the ‘Acknowledgement of Delivery’ form NED’s always used. He signed it without reading the following: NED’s Refrigerators seeks the fullest protection available under the Australian Consumer Law.

(Similar clauses are common in the agricultural industry.) When the installation was complete, Kasish stored 1000 litres of raw milk into the new cooler for the first delivery to Poles Ltd in three days’ time. However, Poles Ltd rejected the milk as being undrinkable. The milk had spoiled and this was due to the fact that: The salesperson had installed the Dynamo-Freezer Model 4 instead of the Dynamo-Freezer Model 5. The Model 4 was not sufficiently powerful to maintain the correct temperature for storing unpasteurised milk.

The appliance had not been assembled properly by NED’s tradesmen. Kasish had to dispose of the milk. Poles Ltd are threatening to terminate the contract. Advise Kasish and WGF.

Question 6 James worked for large menswear retailer in Melbourne called Gentleman’s Attire Ltd. James had a long discussion with the sales representative of Underclothes Ltd, during which he told [page 306] them that Gentleman’s Attire wanted a type of underwear that was highly breathable and also was ‘ready-to-wear’. The sale representative recommended a new product made of bamboo fibre and sent a sample to James for his inspection. James examined the sample. After finding no information on the label on the sample about whether the underwear was ‘ready-to-wear’, James rang the sales representative, who told him: ‘Yes, I think so. Isn’t it mentioned on the label? You should check the label’. James looked again but could see nothing. Having tested the underwear himself for a week, he muttered, ‘It looks ok — Underclothes Ltd is a good company’, and proceeded to place the order. So, on behalf of Gentleman’s Attire, he purchased 15,000 units, at $4 each, of bamboo underwear. About two months later, James was told by a number of store managers that the new underwear was being returned by unsatisfied customers who had found that, after wearing the underwear for a short period, they had

contracted dermatitis, a skin disease. Some customers had even been hospitalised for several days. Even worse, some of the customers affected were models and they had been unable to work for several weeks. The models had been given the underwear free of charge as part of a promotional campaign. Initially, they had loved the bamboo underwear because it was so breathable and was, in fact, so comfortable that they wore the underwear for several days without washing it. However, now they were very upset and threatened to boycott all of Gentleman’s Attire’s products. After an investigation by Underclothes Ltd, it was discovered that the dermatitis was due to residues of a chemical called sulfite in the underwear. Sulfite was used in the production process of the underwear, but Underclothes Ltd used a washing process that removed most of the sulfite. Knowing that some people have a rare sensitivity to sulfite, Underclothes Ltd printed the following warning on the packaging: Wash before wearing. Underwear may have sulfite residue in the fabric. Whilst we make every effort to remove this residue, we recommend that you wash the garment in cold water before wearing. Sulfite causes dermatitis in some people.

Unfortunately, Gentleman’s Attire Ltd store managers had removed the packaging and replaced it with their own distinctive packaging. As a result, none of the customers saw the warning, nor did they wash the underwear before use. (a) Advise Gentleman’s Attire Ltd of its potential legal liability in the situation described above. (b) Imagine you are James. How would handle the problem of unsatisfied models threatening to boycott Gentleman’s Attire? (c) Imagine you are a legal compliance officer working for Underclothes Ltd. What strategy would you

adopt to prevent problems, such as what occurred above, from happening again in the future? What term or terms could you introduce into the contract with prospective retailers, such as Gentleman’s Attire, to minimise Underclothes Ltd’s legal risk?

_________ 1 2 3 4 5 6 7 8 9 10 11

12

13

14 15 16 17

18

Astley v Austrust Ltd [1999] HCA 6; Hawkins v Clayton [1988] HCA 15 per Mason CJ and Wilson J; Macpherson & Kelley v Kevin J Prunty & Associates [1983] 1 VR 573. Breen v Williams [1996] HCA 57.. Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095. Voli v Inglewood Shire Council (1963) 110 CLR 74. Breen v Williams [1996] HCA 57. Zorba Structural Steel Company Pty Ltd v Watco Pty Ltd (1993) 115 FLR 206. Bryan v Maloney [1995] HCA 17. See Hope v RCA Photophone of Australia Pty Ltd, in [6.31]. British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd, in [7.12] — two dealings over a period of 10 months. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd [1986] HCA 14. B P Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1977) 52 ALJR 20 (Privy Council) approved by High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (High Court), in [7.13]. Sale of Goods Act 1954 (ACT); Sale of Goods Act 1923 (NSW); Sale of Goods Act 1972 (NT); Sale of Goods Act 1898 (Qld); Sale of Goods Act 1895 (SA); Sale of Goods Act 1896 (Tas); Goods Act 1958 (Vic); Sale of Goods Act 1895 (WA). International sales of commercial goods have terms implied by the United Nations Convention on International Sales of Goods incorporated into local law by state Acts; for example, Sale of Goods Act (Vienna Convention) Act 1987 (Vic). Preist v Last [1903] 2 KB 148. Frost v The Aylesbury Dairy Company Ltd [1905] 1 KB 608. Grant v Australian Knitting Mills, in [7.28]. The rules cover different situations. For example, r 2 provides: ‘Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state the property does not pass until such thing be done and the buyer has notice thereof’. There are other exceptions to the nemo dat rule. For example, in certain circumstances, a seller who remains in possession of the goods after sale, or a buyer who obtains possession before the sale is completed, may pass on good title to the goods to a purchaser who acted in good faith: VGA ss 30, 31.

[page 307]

CHAPTER 8

REMEDIES IN CONTRACT CASES

CONTENTS Objectives of this chapter Setting the scene: The sensitive side of heavy metal Introduction and outline of chapter Terminating the contract Termination by performance Termination by agreement Termination by a term of the contract Termination by frustration

Termination for breach of a condition of the contract Termination for serious breach of an intermediate term Termination for repudiation Termination for anticipatory breach Termination: process and consequences Recovery of the contract price In general Sale of goods [page 308]

Damages What is the purpose of damages? Losses must be caused by a breach of the contract Agreed damages Plaintiff has a duty to mitigate losses Damages must not be too remote: the rule in Hadley v Baxendale Calculating the amount of damages Contributory negligence Specific performance Injunction Rectification of the contract Restitution Quantum meruit and partially performed contracts Rescission Introduction to rescission Grounds for rescission in equity The nature of rescission in equity Statutory rescission

Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should know: when and how contracts may be terminated; in what circumstances money paid pursuant to a contract may be recovered; how damages for breach of contract are calculated; in what circumstances the courts will order: – an injunction; – specific performance of the contract; – restitution; and when a contract may be rescinded, and how this differs from termination.

[page 309]

SETTING THE SCENE: THE SENSITIVE SIDE OF HEAVY METAL In 2005, former Guns N’ Roses guitarist, Slash, and his wife, Perla, bought a house in Hollywood Hills for $6.25 million. Slash said he and Perla bought the house because the agent

told them it was 7800 square feet, on a private, gated street and was a good location to hold ‘big bashes’. A disappointed Slash sold the property in 2007 for $5.75 million, never having moved in. According to Slash the house was much smaller than advertised (not big enough for their parties) and was on a public street (‘with severe parking restrictions’ and security problems). Slash and Perla sued for the loss on the sale. They also sued for the ‘grief, shame, humiliation, embarrassment, anger, worry, disappointment, nervousness, stomach disorders, backaches, loss of appetite and inability to concentrate on work’ that the agent’s conduct had allegedly caused them. Can a person sue for these sorts of damages in Australia?

INTRODUCTION AND OUTLINE OF CHAPTER 8.1

The ultimate aim behind a contract dispute is to influence outcomes. The parties are not really interested in the finer points of contract law but in the practical consequences of resolution: How will resolution of the dispute shape what they must do? If the parties cannot negotiate a resolution, the court will impose one. The first question an aggrieved party might ask is: Can I get out of this contract and how do I go about it? The law permits a degree of self-help here. A person is entitled to escape from the performance of a contract (without going to court) if certain requirements are satisfied. These are discussed, respectively, under the first and last topics in this chapter: ‘Terminating the contract’ and ‘Rescission’. Many commercial contract disputes will be settled by negotiating compensation for one of the parties. A negotiated settlement is generally in the interests of both parties. Going to trial should be a last resort. If both parties are in possession of the

facts and if both parties adopt a realistic approach to settlement, an agreement should be possible. Nevertheless, sometimes negotiations fail and the parties must look to the courts to impose a remedy. This is a question of damages: Is one party entitled to damages and, if so, how much? It is therefore useful to know something about how the courts approach the making of an award of damages in contract cases. While termination and damages are the main remedies, there are other possible court-imposed outcomes to a contract dispute. Each of these is briefly discussed in this chapter. [page 310]

TERMINATING THE CONTRACT 8.2

A contract may be terminated or discharged in a variety of ways (see Figure 8.1).

Terminating the contract means bringing the contract to an end so that all future obligations are cancelled.

Figure 8.1

Terminating or discharging a contract

Termination by performance 8.3

Where the parties wholly or substantially perform their obligations under the contract, the contract is discharged (see Hoenig v Isaacs, in [8.23]).

Termination by agreement 8.4

The parties to a contract may agree to discharge their obligations to one another. They may do this in order to replace the old agreement with a new one, or they may simply agree to terminate their contractual relationship.

Termination by a term of the contract

8.5

The parties may have agreed that their contract would be terminated on the happening or non-happening of a particular event. For example, a contract for the sale of a house may be conditional upon the purchaser selling his or her existing residence. If the purchaser fails to sell the house, the contract is terminated.1 Sometimes, the term may give one of the parties [page 311] a choice whether to terminate. The person wishing to terminate must elect to do so. This is similar to the election to terminate for breach (see [8.20]).

Termination by frustration A contract is said to be frustrated when an event occurs which makes it impossible to perform the contract as contemplated by the parties.

8.6

Where an intervening event, not contemplated by the contract nor the fault of either party, makes performance of the contract impossible or radically different to that originally contemplated, the contract is discharged for frustration. For example: A contract may become impossible to perform because there has been a change in the law. A contract for personal services may become impossible because of the death, injury or illness of one of the parties. A contract for the delivery of goods may become frustrated by destruction of the goods without fault of either party.2 The hire of a ship may become frustrated by the loss of the ship through an ‘act of God’ (eg, a typhoon). The hire of any property may be frustrated where the property has been compulsorily acquired by the government. A contract may become frustrated through unforeseen delay. Delay is a major cause of contracts being discharged for

frustration, but see Davis Contractors Ltd v Fareham Urban District Council, below. In each of these cases, the contract is brought to an end and the parties are discharged from their obligations.

Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 (Court of Queen’s Bench) Facts Taylor hired a concert hall from Caldwell. Unfortunately, the hall burnt down prior to performance. Taylor sued Caldwell for damages. Issue As the hall was not provided as required by the contract, was Taylor entitled to damages or was The contract terminated by frustration? Decision The contract was discharged for frustration and, therefore, Taylor could not get damages.

[page 312] In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (see [7.13]), a majority of the High Court of Australia held that the contract was frustrated by an injunction which prevented the construction company from operating three shifts a day, seven days a week, as contemplated by the contract. Mason J commented (at 360): The critical issue then is whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances.

Sometimes, it is difficult in a commercial venture to distinguish

between an event that frustrates a contract and an event that merely disappoints one of the parties.

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 (House of Lords) Facts Davis Contractors won a tender to build 78 houses to be completed in eight months for the Fareham Urban District Council. At the time, there was a serious shortage of labour. As a result of the shortage, it took Davis Contractors 22 months to complete the job at an additional expense of £17,500. Davis Contractors claimed that the shortage of labour frustrated the contract. (If the contract was terminated for frustration, Davis Contractors could claim the extra £17,500 on a quantum meruit basis (see [8.42]).) Issue Did the shortage of labour frustrate the contract? Decision The House of Lords held that the contract had not been frustrated. The delay caused by the labour shortage was foreseeable. A contract is not frustrated just because one party is commercially disappointed with the outcome. Therefore, Davis could not claim the extra £17,500.

Frustration will not apply where: the contract makes specific provision for the supervening event; the party seeking to rely on frustration foresaw the event; or the event was caused by the party seeking to rely on frustration. If a contract is discharged for frustration, the future obligations of the parties are cancelled immediately. If there has been a total failure of consideration, the courts will order any money paid to be repaid. However, if there has not been a total failure of consideration, the position becomes somewhat complex. In Victoria, it is governed by the provisions of the Frustrated

Contracts Act 1959 (Vic). Very broadly, the court may order a refund of moneys paid under a frustrated contract, and may also order compensation for any performance that occurred prior to frustration. The Frustrated Contracts Act 1978 (NSW) and the Frustrated Contracts Act 1988 (SA) also seek to achieve fairness between the parties. The other states rely on the common law. [page 313]

Termination for breach of a condition of the contract A condition is a term of a contract the breach of which entitles the innocent party to terminate the contract.

8.7

Terms in a contract can be divided into three types: 1. warranties; 2. conditions; and 3. intermediate terms. Breaches of warranty attract damages only. Breaches of condition attract damages and entitle the innocent party to terminate the contract. Some terms (intermediate terms) may be treated as either a warranty or a condition, depending on the seriousness of the consequences flowing from the breach. See Figure 8.2.

Figure 8.2

Consequences for breach of a term in a contract

We can recognise that a term is a condition in the following ways: because a statute says so; because the term goes to the very heart of the contract; or because the parties have expressly provided that the term be a condition. Terms made conditions by statute Certain terms are given the status of conditions by statute. For 8.8 example, in a sale of goods, the implied terms as to correspondence with description, merchantable quality and fitness for purpose are declared to be conditions (see Chapter 7). Terms that go to the very heart of the contract A condition is a term that goes to the essence or heart of the 8.9 contract. In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641–2 Jordan CJ said: The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of

such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: … If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.

[page 314] In determining whether any term is a condition, the courts will examine all the circumstances, including: the way in which the term is expressed; the likely consequences of a breach; the objective importance of the term to the overall contract; and whether damages are likely to provide adequate compensation.

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 (High Court) Facts Joseph Bancks was one of Australia’s leading cartoonists. He created the ‘Ginger Megs’ character in a comic strip known as ‘Us Fellers’. Associated Newspapers published a newspaper called the Sunday Sun and Guardian. Associated Newspapers hired Bancks to draw a weekly comic strip for the paper. Clause 5 of the agreement provided that: Bancks was to prepare and furnish a full-page comic strip of ‘Us Fellers’ every week; and Associated Newspapers would publish the comic strip on the front page of the comic section of the paper. Due to a shortage of newsprint, the newspaper changed the printing process so that the comic strip appeared as an insert in the colour magazine which was also part of the Sunday Sun and Guardian. Bancks’ cartoon appeared on page 3 of this insert, although the page was headed ‘Sunday Sun Comics’. In truth, the comic strip only appeared on the front page of the comic section if the insert was taken out and reverse-folded. Bancks protested and eventually gave notice that the contract was terminated. He then signed a

contract with a rival newspaper. Associated Newspapers brought an action for an injunction to restrain Bancks from breaching his contract. Issues Whether the requirement to put the comic strip on the front page of the comic section was a condition or only a warranty. If it was a condition, Bancks was entitled to terminate. If it was only a warranty, Bancks was not entitled to terminate. Was Bancks acting within his rights to terminate? Decision The High Court said that a condition was the heart or essence of the contract. The defendant’s obligation to supply a weekly full-page drawing of ‘Us Fellers’ and the plaintiff’s undertaking to present the drawing each week on the front page of the comic section were concurrent and correlative promises (both part of cl 5). The defendant’s obligation — to produce a weekly drawing — was clearly a condition (at 337–8): It would be strange if his obligation was a condition of the contract while the undertaking of the plaintiff was a subsidiary term the breach of which would only sound in damages. [page 315] The undertaking is really a composite undertaking comprising three ingredients: (1) to present a full-page drawing; (2) to present it weekly; and (3) to present it on the front page of the comic section. It is impossible to attach different values to the defendant’s obligation and the plaintiff’s undertaking. The plaintiff would not have employed the defendant unless it had been assured that the defendant would perform his promise, and the defendant would not have made the promise unless he was assured that his work would be published in a particular manner. Obviously it was of prime importance to the defendant that there should be continuity of publication so that his work should be kept continuously before the public, that his work should be published as a whole and not mutilated, and that it should be published on the most conspicuous page of the comic section. It is like a contract under which an actor is engaged to act in a theatre. It is not sufficient if the employer pays his salary. He must find work for him to do in the sort of part, principal or subsidiary, for which he is employed … A failure to give an actor a proper part is a breach of contract which goes to its root and justifies the actor in treating the contract as rescinded: White v Australia & New Zealand Theatres Ltd (1943) 67 CLR 266. Note Would the situation have been different if Associated Newspapers’

undertaking to publish on the front page had been in a different clause to Bancks’ undertaking to provide a weekly comic strip?

If damages would adequately compensate the injured party, the courts are likely to refuse termination. In Shevill v Builders Licensing Board (1982) 149 CLR 620, the issue was whether continual late payment of rent amounted to a breach of condition. The High Court held that continual late payment of the rent did not entitle the lessor (owner) to terminate the lease even though the evidence suggested the late payments would continue in future. The court was partly influenced by the fact that the landlord could be adequately compensated by an award of damages. In Oaktech Pty Ltd (t/a Eureka Garages & Sheds) v Legion Heights Pty Ltd (t/a A M Machinery) [2008] VSCA 145, the court held that there was no breach of condition where a machine costing over $400,000 failed to comply with a safety regulation but the failure could be easily remedied for less than $10,000. Terms expressly made a condition by the parties Where a term is said to be ‘of the essence of the contract’ it is almost invariably a condition.

8.10

The parties may expressly provide that a term be treated as a condition. The most common way of ensuring that a term is treated as a condition is by including words to the following effect: ‘The parties agree that strict compliance with this term is of the essence of the contract’. For example, contracts for the sale of land often use the expression, ‘Time is of the essence of the contract’. This ensures that a time stipulation is treated as a condition and not a warranty: see Foran v Wight (in [8.20]). Time clauses are discussed further in [8.11]–[8.12]. Merely calling a term a ‘condition’, however, will not necessarily make it one. The general view of the courts is that completion of a contract should be encouraged. Therefore, in cases of doubt, the courts are reluctant to characterise a term as a condition. They

prefer to treat it as a warranty. The fact that a term has been called a ‘condition’ is one of the factors (albeit an important one) that the courts would take into account in determining whether the innocent party had a right to terminate. [page 316]

L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (House of Lords) Facts Schuler, a manufacturer of presses, agreed to give Wickman sole selling rights in the United Kingdom. The contract provided, inter alia, that: [It] shall be a condition of this agreement that Wickman shall send its representatives to visit [certain UK manufacturers] at least once a week for the purpose of soliciting orders. Wickman committed some minor breaches of this clause and Schuler attempted to terminate for breach of condition. Wickman argued that the clause was not a condition, despite it being called that in the contract. Issue Did Schuler have a right to terminate the contract — in other words, was the term that had been breached a condition? Decision The House of Lords held that the clause in question was not a condition and did not give Schuler the right to terminate. The word ‘condition’ may have more than one meaning when used in the context of a contract. It may mean no more than a term or it may mean an essential term. Therefore, it is necessary to look at the term within the context of the entire arrangement between the parties in order to ascertain which meaning the parties intended.

Examples of common terms Time clauses in mercantile contracts Time stipulations in commercial contracts are generally presumed to be conditions.

8.11

Where the contract is a contract between merchants (eg, between a wholesaler and a retailer of goods), the presumption is that a time stipulation (other than time of payment) is a condition.

Bunge Corporation New York v Tradax Exports SA Panama [1981] 1 WLR 711 (House of Lords) Facts Tradax agreed to sell a quantity of soya bean meal to Bunge. Delivery was to be made by a number of shipments. One shipment was to be made in June. The contract required the buyer to give the seller 15 consecutive days’ notice of readiness of the ship and the quantity required. The buyer (Bunge) failed to comply with the time stipulation. The seller terminated and claimed damages. [page 317] Issue Was the time stipulation a condition of the contract? Decision The House of Lords held that, despite the fact that the consequences of the breach were not overly serious, time stipulations in mercantile contracts were generally regarded as conditions. Therefore, even a minor breach would give the innocent party the right to terminate. The seller had correctly terminated the contract and was entitled to damages.

Time clauses in other contracts Time stipulations in sales of land are generally treated as warranties.

8.12

In non-mercantile contracts, including sales of land, the general tendency is to treat any time stipulation as a warranty. This is only a presumption and can be rebutted by specific words, such as ‘time shall be of the essence of the agreement’, or by construction of the contract when read as a whole.

Bettini v Gye [1874] All ER Rep 242; 1 QBD 183 (Queen’s Bench Division) Facts Bettini was a tenor. Gye was an impresario. Gye hired Bettini to sing at concerts and operas at various locations in Great Britain and Ireland between 30 March 1875 and 13 July 1875. The contract stated: ‘Mr Bettini agrees to be in London without fail at least six days before commencement of his engagement, for the purpose of rehearsals’. Owing to illness, Bettini did not arrive in London until 28 March 1875. Gye terminated the contract. Bettini argued that the termination was invalid and sued for breach of contract. Issue The issue was whether Gye had the right to terminate or whether by terminating Gye had himself breached the contract. Decision The court held that Gye could only terminate if the time stipulation was a condition. Whether it was a condition could only be judged by looking at the contract as a whole to see whether the parties had intended the time stipulation to be the root of the contract, the essence of the contract, the heart of the contract. Perhaps if the contract had been for a very limited number of performances, the six-day rehearsal period may have been construed as an essential part of the bargain. However, the contract was for an extensive period, involving a variety of performances and, in the overall context, the time stipulation was not so important as to amount to a condition.

[page 318]

8.13

Time can be made a condition by serving a notice Where time is not of the essence of the contract (ie, a warranty) and one party is in breach (ie, late in performing its obligations), the other party may make time of the essence by serving a notice requiring the defaulting party to remedy the default within a stated period. The period allowed must be reasonable in all the circumstances of the case. If the defaulting party then fails to

comply with the new time requirement, the innocent party may terminate.3

8.14

Terms referring to quality are normally warranties Other than the terms implied by the sale of goods legislation, terms referring to the quality of performance will normally be regarded as warranties or as intermediate terms: see Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, in [8.15].

Termination for serious breach of an intermediate term An intermediate term is a term of a contract that may give rise to a right of termination for breach depending on how serious the consequences are. Intermediate terms are also sometimes referred to as ‘innominate’ terms.

8.15

The courts have gradually accepted the need for a classification of terms that is not quite so inflexible as the condition/warranty dichotomy. They now accept that there are some terms which are impossible to characterise as conditions or warranties at the time of making the contract. These are called intermediate terms. A serious breach of an intermediate term will give the innocent party the same rights as if a condition had been breached: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61. Refer Figure 8.2. A serious breach of an intermediate term is one which will substantially deprive the innocent party of the whole benefit for which he or she entered into the contract in the first place.

Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (UK Court of Appeal) Facts The Hongkong Fir was the name of a ship owned by the Hongkong Fir Shipping Co Ltd. The ship was hired under a charterparty to Kawasaki Kisen

for a period of two years. A charterparty is a contract for the hire of a ship, with or without crew. The contract contained a seaworthiness clause. This type of clause is always found in a charterparty. The clause stated that the ship was ‘in every way fitted for ordinary cargo service’. The engine room crew was inadequate and, as a result, the charterers (Kawasaki) lost 57 days’ sailing time. Kawasaki served notice of termination of the contract. Issue Whether Kawasaki had the right to terminate the contract or whether it only had a right to damages. The difficulty with the ‘seaworthiness clause’ is that it covers everything from trivial matters (such as not having proper medical supplies or two anchors) to the most serious defects in the ship. Should the same remedy be available for all breaches? [page 319] Decision A majority of the Court of Appeal held that the remedy for breach of the ‘seaworthiness’ term depended on whether the innocent party (Kawasaki) had been deprived of substantially the whole benefit that it had contracted for or not. On the facts, the delays caused by the incompetent engine room crew were not so serious as to entitle Kawasaki to terminate.

Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 (UK Court of Appeal) Facts Bremer agreed to sell a quantity of citrus pulp pellets to Cehave. The goods were to be used for animal feed. The contract required the goods to be shipped ‘in good condition’. The court accepted that the goods were not in good condition when shipped and that their value had dropped. However, the goods were still suitable for being used for their original purpose (ie, animal feed). Cehave terminated the contract and sought repayment of the purchase price. Bremer refused and Cehave sued. Issue Did Cehave have a right to terminate the contract (ie, to treat the term as a condition)? Cehave was entitled to repayment of the purchase price only if it

had the right to terminate the contract. Otherwise, it would have to rely on damages. Decision The Court of Appeal held that the term was not a condition but an intermediate term. Therefore, the innocent party could terminate the contract only if the breach was so serious as to deprive the innocent party of substantially the whole benefit for which it had entered into the contract. As the goods were used for their original purpose, the court held that the breach was not so serious as to give rise to a right of termination. Note This case was fought on the express term in the contract. There was no dispute involving the implied terms of merchantable quality or fitness for purpose.

Rooney v ABB Grain Ltd [2010] FCA 139 [Federal Court] Facts The Rooney family (R) operated a wheat farm. R entered into contract with ABB for future delivery of wheat. The price was calculated according to a complex formula which [page 320] meant the possible base price varied from day to day. The buyer had the right to fix (lock-in) the base price at any time. This depended on the buyer having access to certain information which ABB supplied to R daily by email. Before R had selected a base price, ABB stopped sending the daily price information. It did this because it was phasing out the type of contract it had with R. R sent a letter to ABB terminating the contract. Issues The court had to settle a number of contested issues: (1) Was there an implied term that ABB continue to provide the daily information? (2) If there was an implied term, was the term either a condition or an intermediate term? (3) If it was an intermediate term, was the breach sufficiently serious so as to deprive R of substantially the whole benefit for which R had contracted?

Decision The court held: (1) There was an implied term to supply the daily base-price information — the term was either part of the implied term of cooperation or implied to make the contract effective in a business sense. (2) The term was not a condition but an intermediate term — this was so because a breach could be of little consequence (such as a failure to email the information on a single day because of a computer problem) or very serious (such as a continuous refusal to supply the information). (3) In this case, the breach was sufficiently serious to deprive R of substantially the whole benefit for which they had contracted. (4) Therefore, R was entitled to terminate the contract.

Termination for repudiation 8.16

Repudiation occurs where one party to the contract indicates that he or she will not perform (or will not substantially perform) his or her contractual obligations. It applies whether the repudiating party is unwilling to perform or unable to perform. It also applies even though the repudiating party does not believe that it has breached the contract: Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd (see below); Sopov v Kane Constructions Pty Ltd [2007] VSCA 257 (where the repudiating party honestly insisted on an interpretation of the contract which the court subsequently found to be incorrect). Repudiation entitles the innocent party to terminate the contract.

Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd [2009] VSCA 161 (Supreme Court of Victoria) Facts Sunny Springs entered into a contract to sell a hotel with gambling facilities to Penola Trading. The contract was conditional upon Penola obtaining the necessary licences and [page 321]

permits to operate a hotel and a gaming facility. Penola failed to apply for the necessary licences within six months of signing the contract. As a result, Sunny Springs terminated the contract and kept the deposit. Penola sued for return of the deposit, claiming that Sunny Springs had wrongfully terminated the contract. Sunny Springs was successful at trial and Penola appealed. Issue Did Penola’s conduct (failure to apply for the necessary licences within six months of signing the contract) amount to a repudiation? Decision The appeal was dismissed. There was an implied term in the contract that Penola had to take reasonable steps to satisfy the licence and permit conditions in the contract within six months. As Penola failed to do this, it was in breach of contract. The conduct of Penola demonstrated an intention not to be bound by the contract and was therefore a repudiation. A repudiation does not have to be an express refusal. A reasonable person would have understood Penola’s conduct as amounting to a refusal to proceed with the contract.

Under the sale of goods legislation, the buyer has a right to reject goods if the quantity delivered varies from the quantity referred to in the contract.4 Thus, for example, P would be able to reject the goods and terminate the contract if V tried to deliver 90 cases of the contract goods instead of 100 (as required by the contract), or even if V tried to deliver 110 instead of 100 (as required by the contract). Repudiation occurs where one party rejects the contract. That person is said to have repudiated the contract.

The repudiation does not have to be total. Consider a builder who has contracted to carry out certain agreed renovations. If the builder completes 50 per cent of the renovations and walks off the job, the builder would be regarded as having repudiated the contract because the land owner has not received substantially the whole of the benefit which he or she might reasonably have expected (see Hoenig v Isaacs, in [8.23]).

Termination for anticipatory breach

What is an anticipatory breach? Anticipatory breach occurs where one party indicates to the other party – before the time to perform the contract is due – that they will not be able to perform their side of the contract (either wholly or in part).

8.17

Anticipatory breach occurs where one party indicates to the other party — before the time for performing the contract is due — that they will not be able to perform their side of the contract (either wholly or in part). Anticipatory breach is a form of repudiation. The applicable rules can be seen from some examples. Example 1 Imagine that X has agreed to design and build a new yacht for Y. Y has agreed to pay 10 per cent deposit prior to construction and the balance on delivery. Y pays the 10 per cent [page 322] and X commences construction. X has only just built the hull when Y contacts him and says that he does not want the boat any more. What options are available to X? Strictly speaking, Y was only obliged to pay when the yacht was completed. However, Y has clearly indicated an intention to repudiate when the time comes. Does X have to finish building the boat and then tender it for delivery before having any action against Y? Such a result would be silly. Y’s action is called an anticipatory breach. It gives X the option to terminate the contract immediately and sue for damages. Example 2 Imagine that B (a buyer) has contracted to take delivery and pay for certain goods on a particular day (1 January). On 1 December, B notifies the seller that it does not want the goods. What options are available to the seller?

The seller may immediately terminate the contract and sue for damages, or it may decide to treat the contract as continuing and wait for 1 January. That is, the innocent party has a choice: to terminate the contract immediately or to proceed (wait and see). Of course, in many ongoing commercial relationships, it may be that immediate termination is not a practical solution. Example 3 In the two previous examples, the threat was not to perform the contract at all. This clearly gives a right to terminate. What if the threatened breach is of a lesser nature? For example, a buyer intimates that he wants to proceed with the contract but will not be able to pay until seven days after the date due for payment; or a seller who is contractually obliged to deliver a quantity of grain ‘of good quality’ advises the buyer that 5 per cent of the consignment has been damaged by adverse weather conditions. It would appear that the threatened breach must involve a serious breach of a condition or a repudiation is required before the innocent party can terminate for anticipatory breach. The threat to breach must be clear and unequivocal 8.18 The defaulting party’s threatened breach must be clear and unequivocal. The innocent party will not be permitted to terminate just because the other party has expressed some difficulty about meeting their contractual obligations. The terminating party must take special care where it relies on the other party’s inability or incapacity to perform the contract. The terminating party must be able to prove that the other party was ‘wholly and finally incapable’ of performing.

National Engineering Pty Ltd v Chilco Enterprises Pty Ltd [2001] NSWCA 291 (New South Wales Court of Appeal)

Facts National Engineering and Chilco entered into a contract by which National Engineering agreed to hire a crane from Chilco. The crane or its equivalent was to be made available for a period commencing on 14 July 1997. In March 1997, National Engineering became [page 323] aware that Chilco was having some difficulty in arranging the hire. Chilco confirmed this fact. National Engineering then terminated the contract for anticipatory breach on the basis that Chilco would be unable to perform its part of the contract on the due date. While, at the time of termination, it was clear that Chilco was having difficulties, the evidence did not unequivocally support the conclusion that Chilco was totally disabled from supplying the crane by the contract date. Issue Had Chilco repudiated the contract? What is required for repudiation? Decision For National Engineering to terminate for anticipatory breach it had to be able to prove as a matter of fact, not supposition, that Chilco was wholly and finally disabled from performing its contractual obligation. National Engineering had failed to satisfy this test. Therefore, the termination was wrongful and amounted to a repudiation of the contract by National Engineering. Chilco was therefore entitled to damages.

Anticipatory breach: no termination 8.19 If the innocent party decides not to terminate, what happens? Both parties remain bound by their contractual obligations. Therefore, the innocent party must remain in a position to carry out the contract. For example, P agrees to buy a business from V. Settlement is to be made on 15 June. On 15 May, V says that he will not proceed. P elects to wait and see. That is, P elects not to terminate immediately. On 14 June, P goes to the casino and loses all his money playing blackjack. On 15 June, V does not turn up at settlement to hand over keys and books of accounts, etc. Can P sue for breach of contract? The difficulty is that P was not in a position

to settle either. If V had changed his mind and turned up ready to settle, P would not have been able to pay and would, therefore, have been in breach. If P elects to allow the contract to continue, P must remain ready, willing and able to perform his obligations. Otherwise, he cannot insist upon V performing his obligations.

Termination: process and consequences The procedure for termination Termination is not generally automatic. The innocent party must elect whether to terminate or not. Once the decision is made, it cannot be reversed.

8.20

If the innocent party elects to terminate the contract, he or she must do so without doing anything that can be regarded as affirming the contract. The election to terminate must be unequivocal and, generally speaking, must be communicated to the other party. Once the election to terminate has been made, the contract is ended. The party terminating cannot change his or her mind and decide to proceed. The innocent party affirms a contract by doing any act which positively indicates that he or she is treating the contract as still running. The party terminating must be prepared to prove that, immediately prior to the termination, he or she was ready and willing to perform his or her part of the bargain, except to the extent that the other party has dispensed with such performance. [page 324]

Foran v Wight (1989) 168 CLR 385 (High Court) Facts The Forans entered into a contract to buy a property from the Wights. The Forans had trouble arranging finance. Two days before the date of settlement,

the Forans still needed another $10,000. Despite these difficulties, the Forans informed the Wights that they would proceed as required by the contract. The settlement date was described in the contract as ‘of the essence’. The Wights were also having their difficulties. Two days before settlement, they advised the Forans that they would not be able to settle on the due date. The Forans stopped their search for finance. (For the Forans this was quite fortuitous as it seemed unlikely that they would have found the extra $10,000 they needed.) On the settlement date neither party attempted to settle. Two days later, the Forans told the Wights that they had terminated the contract because of the Wights’ failure to complete the sale on the settlement date. The Forans sued the Wights for a return of the deposit. The Wights countersued for damages for breach of contract. The Wights argued that the Forans’ termination was, in fact, a wrongful repudiation. If settlement had taken place on the settlement date as required by the contract, it is quite possible that the Forans would not have been able to pay the purchase price. Issue Were the Forans entitled to terminate the contract or was their termination a wrongful repudiation? Decision The Wights’ failure to settle on the settlement date was a breach of condition. This was because the settlement date was ‘of the essence of the contract’. This would entitle the Forans to terminate the contract. The court rejected the Wight’s argument that the Forans could not terminate the contract because they could not establish that they would have had the necessary funds on the settlement date. The Forans, although still having difficulty with their finance, were ready and willing to settle. Therefore, the Forans were entitled to the return of their deposit.

The effect of an election to terminate 8.21 Termination for breach means that the parties are relieved from all future obligations, but the termination has no effect on those rights or obligations which have already accrued.5 Termination for breach does not make the contract void ab initio (ie, void ‘from the beginning’). There is no attempt to return the parties to the positions they occupied prior to the contract. [page 325]

An example of this is the situation with deposits. Sam agrees to sell his house to B for a deposit of 10 per cent, payable on signing of the contract, and the balance to be paid in 60 days. B pays the deposit, but after 30 days tells Sam that he will not proceed with the purchase. This is an anticipatory breach, giving Sam the right to terminate immediately or wait until the 60-day period has elapsed. Sam decides to terminate immediately. Sam may keep the deposit and sue for damages. Sam may keep the deposit, not because it will help to pay for any losses he might have suffered, but because the right to receive the deposit accrued prior to the termination and, thus, is unaffected by the termination. If the deposit had not yet been paid, or not paid in full, the vendor would have a right to recover it as a debt owing.6 The effect of an election to affirm the contract 8.22 Essentially, affirmation means that the contract is still proceeding. The innocent party will, of course, have a right to sue for damages. However, an affirmation gives the other party an opportunity to rectify the breach. It also means that the innocent party must continue to perform his or her obligations. This includes the situation where the innocent party has elected to affirm after an anticipatory breach. The innocent party must be ready, willing and able to proceed according to the terms of the contract. In the example given above (in [8.21]), Sam could have decided to proceed with the sale despite B’s intimation. Therefore, Sam would have been required to produce and tender the title documents after 60 days. Failure to do so would have meant that Sam was in breach of contract. If B had changed his mind and tendered the balance of the purchase moneys, B could have terminated the contract for Sam’s breach provided that it could be said that Sam’s failure to complete on the due date was a breach of a condition. Failure to perform on time in a contract for the sale of land is normally regarded as a breach of warranty unless it is clear that the parties’ intention was that it should be a condition.

RECOVERY OF THE CONTRACT PRICE In general 8.23

Suppose Bill has agreed to renovate Olive’s kitchen for $10,000. Bill’s obligations are set out in full in the contract. The price is payable on completion. Bill completes the work, but Olive refuses to pay. What should Bill sue for? As he has completed the contract he is entitled to the contract price of $10,000. The big advantage in suing for the contract price is that the plaintiff does not have any problems in establishing the amount. Establishing the amount is one of the problems associated with suing for damages. In the example given above, in addition to the claim for the contract price, Bill could sue for any damages caused by the late payment. What if Bill has not completed the work exactly as contained in the contract? For example, there are some cupboard doors which have been poorly constructed. The cost of completing the cupboard doors is $250. Olive refuses to pay. Can Bill claim payment of the contract price? The modern tendency is for the courts to allow Bill to claim the contract price if he has substantially performed his contractual obligations, unless the contract makes it a condition that the work be completed precisely in accordance with the contract specifications. As there is no evidence of the latter, the question is whether Bill has substantially performed his contractual obligations. This will depend on the circumstances. [page 326]

Hoenig v Isaacs [1952] 2 All ER 176 (UK Court of Appeal) Facts

Hoenig hired Isaacs to do some renovations on his house. The contract price was £750. Isaacs carried out the renovations but Hoenig refused to pay, claiming that Isaacs had not discharged his contractual obligations in the appropriate workmanlike manner. An arbitrator decided that the cost of bringing the job up to the proper standard was £55 18s 2d. Issue Had Isaacs substantially performed his part of the contract? Decision The Court of Appeal held that this amounted to substantial performance. Therefore, Isaacs was entitled to the contract price (£750) less £55 18s 2d. Note Compare this case with Sumpter v Hedges, in [8.42].

If Isaacs had not substantially performed the work, he would not have been able to claim the contract price. For example, if Isaacs had only half-completed the job, Hoenig would not have had to pay anything under the contract. Isaacs would have had to rely on the court awarding payment on the basis of restitution: quantum meruit (ie, ‘as much as is deserved’). Restitution is a doctrine based on the principle of unjust enrichment and is discussed briefly in [8.41].7

Sale of goods 8.24

Where property in goods has passed from the seller to the buyer and the buyer has failed to pay the contract price, the Goods Act 1958 (Vic) provides that the seller may take an action to recover that price: s 55. The contract price is not always payable in a lump sum. It may be payable by instalments. For example, Brown Coal Co agrees to supply 1000 tonnes of coal to the Soft Steel Co, to be delivered at the rate of 250 tonnes per month, each delivery to be paid for within two weeks after delivery. Brown Coal delivers 250 tonnes, but Soft Steel refuses to pay. Brown Coal does not have to deliver the full 1000 tonnes to claim the contract price. The first payment became due as a debt 14 days after the first delivery. Brown Coal

could sue for the contract price for the amount applicable to the first delivery.

DAMAGES 8.25

Every breach of contract (except anticipatory breach) gives a right to damages for breach. The right to damages in the case of anticipatory breach arises only if the innocent party elects to terminate the contract. [page 327]

What is the purpose of damages? Damages are a monetary payment calculated to compensate the innocent party for the loss caused by the breach of contract. Damages are available for every breach of contract.

8.26

The purpose of an award of damages is to compensate the innocent party, not to punish the defaulting party.

Addis v Gramophone Co Ltd [1909] AC 488 (House of Lords) Facts Addis was employed by Gramophone as a branch manager at a salary of £15 per week plus commission. The contract required Gramophone to give six months’ notice of termination. Gramophone gave the necessary six months’ notice but at the same time hired and installed a replacement manager. This prevented Addis from earning commission during that period. A jury awarded a sum of £600 which exceeded, on any calculation, the losses suffered by Addis and appeared to be awarded as punishment against Gramophone or as compensation to Addis for the harsh and unfair way in which he had been treated. Issue There was clearly a breach of contract, but were the damages awarded by the

court excessive? What is the purpose of damages for breach of contract? Decision The court overturned the decision on the amount of damages. The purpose of damages was to compensate the innocent party for losses actually suffered, not to punish the wrongdoer or give compensation for harsh and unfair treatment.

As the purpose of damages is one of compensation, the quantum of damages should place the innocent party, so far as is reasonable, in the position he or she would have been in if the contract had been properly performed.8

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 (High Court) Facts Tabcorp leased a building from Bowen Investments Pty Ltd. A term in the lease provided that Tabcorp was not to make any substantial alterations or additions to the building without Bowen’s written consent. Without informing Bowen, Tabcorp made substantial alterations to the lobby. Bowen sued for breach of contract (the lease). [page 328] Issue What should the level of damages be? An expert estimated that the alterations to the lobby would make very little difference to the amount of rent that the building could attract. Using this method of assessment the damages were about $35,000. On the other hand, the costs of reinstating the original lobby would be in excess of $1 million (including loss of rent while the lobby was reinstated). Decision The contract entitled Bowen Investments to have control over whether any substantial alterations were made to the building. To ensure that Bowen got the benefit of this promise the measure of damages had to be the cost of reinstating the original lobby. Therefore, Bowen Investments was entitled to damages of $1.38 million.

To take another example, imagine that Alice hires Gerry, a builder, to renovate her kitchen according to an architect’s specifications. Gerry completes the work, but some of it is not satisfactory. Provided it can be said that Gerry has substantially carried out his obligations and is therefore entitled to the contract price, what amount of damages is Alice entitled to? The purpose of damages is to compensate Alice for the loss she has suffered. This is done by putting Alice in the position she would have been in if the contract had been performed. Therefore, she is entitled to the costs of employing someone to rectify Gerry’s mistakes and bring the kitchen up to the contract specifications.

Losses must be caused by a breach of the contract 8.27

The plaintiff can only obtain damages for those losses which were caused by the breach of contract. The breach does not have to be the only cause, but it must be sufficiently important that, but for the breach, the loss would not have occurred. Even if losses are caused by the breach, they must still not be too remote (see the rule in Hadley v Baxendale, in [8.31]).

Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 (High Court) Facts Reg Glass hired Rivers to supply and fit a particular steel-sheeted door and locking system to his shop. The door was described as ‘burglar-proof’. Rivers fitted the door to the existing wooden door frame. Burglars broke in by forcing the door from the frame and stole a quantity of goods. Reg Glass successfully sued for breach of contract (see [7.5]). Rivers argued that even if it was in breach of contract, its breach of contract had not caused the loss of the goods. Essentially, Rivers argued that the goods would have been stolen anyway. [page 329]

Issue Was the breach of contract (failing to supply a door that was reasonably fit for keeping would-be breakers out of the shop) a cause of the loss of goods? Decision A majority of the High Court held that the goods would not have been stolen if the correct security door had been installed. The minority dissented on the grounds, inter alia, that it had not been proved that a more secure locking system would have deterred the shop breaker.

Agreed damages When negotiating the contract, the parties may at is a figure for damages for breach of contract. The figure must be a genuine estimate of damages and not a punishment

8.28

The contract itself may make provision for the damages to be paid in the case of breach. This is a useful and efficient device in that it enables the parties to agree a value for various contractual obligations and it saves conducting an expensive court examination into the quantum of damages. However, the law does not permit the contract to set out penalties.9 Any damages clause must be a genuine pre-estimate of damages and not a penalty clause. A penalty clause is unenforceable. Each case must depend on its own facts but, generally, the damages clause must be roughly consistent with the actual loss likely to be suffered. A penalty clause will be one that is ‘out of all proportion’ to the loss suffered: Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71. It is also common for the contract to state that a deposit may be forfeited in certain circumstances. This is legitimate provided the deposit is not excessive.

Plaintiff has a duty to mitigate losses The plaintiff has a duty to mitigate its losses. This means that the plaintiff must take reasonable steps to limit the losses flowing from the breach.

8.29

The plaintiff is not permitted to claim losses which he or she has allowed to mount up if there were reasonable steps that could have been taken to stem or reduce the losses. For example, Sam’s delivery vehicle breaks down because of faulty repair work done by Sam’s repair garage. Sam is forced to hire another delivery vehicle. This vehicle is easier to drive than Sam’s and so Sam does not bother to get his vehicle repaired for a month. Sam’s vehicle then takes a week to repair. Sam wants to claim for the costs of repair plus five weeks’ hire of a replacement vehicle. Sam is under a duty to mitigate his losses. He should have had his vehicle repaired as soon as reasonably possible. In all likelihood, Sam will only be able to claim the costs of repair plus one week’s hire.

Damages must not be too remote: the rule in Hadley v Baxendale 8.30

In a previous example (in [8.26]) we looked at the direct damages that Alice could claim. Imagine that Alice has some other losses that she wants to claim. For example, she claims that the arguments with Gerry caused her much distress and anguish. She says that the extra time required to remedy Gerry’s mistakes meant she had to lease a flat for an extra week. Unfortunately, the flat was robbed and she lost a considerable amount of jewellery and cash. Her car was also stolen from the place where it was parked in the street outside [page 330] the flat which, unlike her house, had no garage. Inside the car was the only copy of the details of an important deal she was making. She lost this together with a winning TAB ticket worth $2000. Can Alice claim all (or any) of these losses? Common sense would say no. So would the law. Why? In Hadley v Baxendale (see [8.31]) Alderson B, giving judgment for the court, said (at 354):

Now we think the proper rule in such a case as the present is this: where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.

The rule in Hadley v Baxendale, therefore, has two limbs. Damages will only be awarded if the losses fall within one of these two limbs. The first limb of the rule in Hadley v Baxendale There are two limbs to the remoteness rule as explained in Hadley v Baxendale: 1. The party in breach will be liable for losses which flow ‘according to the usual course of things’ from the breach. 2. Otherwise, the party in breach is liable only for losses that were within the reasonable contemplation of the parties at the time the contract was made.

8.31

The defaulting party will be liable for losses which flow ‘according to the usual course of things’ from the breach.

Koufos v C Czarnikow Ltd [1969] 1 AC 350 (House of Lords) Facts Koufos chartered a ship (SS Heron II) to Czarnikow Ltd. The vessel was to carry a load of sugar from Constanza to Basrah, a journey that would normally take about 20 days. However, the ship made a number of unauthorised deviations that caused the journey to take an extra nine or 10 days. Czarnikow’s original aim was to sell the sugar in Basrah. Between the time the ship should have arrived in Basrah and the time it actually arrived, the price of sugar fell in Basrah. Czarnikow sued Koufos for damages for breach of contract. The amount of damages claimed was the difference in price. Koufos argued that such damages were too remote. Issue Were the losses resulting from the fall of the price of sugar in Basrah losses that flowed in the ordinary course of things?

Decision The House of Lords agreed with Czarnikow (at 400). Koufos must: … as a reasonable business man have contemplated that [Czarnikow] would very likely suffer loss, and that it would be or would be likely to be a loss referable to market price fluctuations at Basrah. Therefore, it was a foreseeable loss that flowed in the usual course of events from the breach.

[page 331]

Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 (Court of Exchequer) Facts The plaintiff operated a flour mill at Gloucester. A broken crankshaft caused operations at the mill to close down until the crankshaft could be replaced. Baxendale was hired to take the shaft to Greenwich so that a new one could be manufactured. Baxendale was a common carrier and was unaware of the operations at the mill or the importance of the shaft. Owing to Baxendale’s neglect, the shaft was slow in getting to the makers. This meant that the mill was inoperative for a longer period than it otherwise would have been. The plaintiff sued for the loss of profits caused by this delay (ie, Baxendale’s breach of contract). Was the plaintiff successful in claiming these losses? Issue Were the losses resulting from the mill’s closure losses that flowed in the ordinary course of things? Decision The court held that it was not in the usual course of things that the mill would stop altogether because of a broken shaft. It was reasonably possible that the mill would have a spare shaft, or that it could acquire one.

The second limb of the rule in Hadley v Baxendale 8.32 Where the loss does not occur in the usual course of things, the

plaintiff will only be able to claim damages if the loss was such that it must have been within the reasonable contemplation of the parties at the time the contract was made.

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 1 All ER 997 (UK Court of Appeal) Facts Victoria Laundry operated a business as launderers and dyers. There was a shortage of these facilities in England at the time and Victoria decided to expand. It purchased a new and expensive boiler from Newman Industries to be installed in June 1946. Due to the fault of Newman, the boiler was not installed until November 1946. Victoria sued for breach of contract. Victoria claimed damages for loss of profits that it suffered from being unable (1) to take on new business calculated at £16 per week, and (2) to accept a number of highly lucrative dyeing contracts from the Ministry of Supply, calculated at £262 per week. Newman did not know about the Ministry of Supply contracts. Newman claimed the damages were too remote. [page 332] Issue Were both types of losses suffered by Victoria Laundry losses that flowed in the ordinary course of things? If not, did the losses fall under the second limb of Hadley v Baxendale? Decision The Court of Appeal held that the first lot of lost profits fell within the first limb of the rule in Hadley v Baxendale (ie, losses occurring in the ordinary course of things). However, the loss of the Ministry of Supply contracts was outside the ordinary course of things. Therefore, Newman would only be responsible for these losses if it knew about the Ministry of Supply contracts at the time of making the contract for the supply of the boiler. As it was not aware of these contracts at the relevant time, Newman was not liable to pay damages for their loss.

Calculating the amount of damages

Damages are calculated to put the plaintiff in the position he or she would have been in if the contract had been properly performed.

8.33

In each case, the court is concerned to arrive at a figure which, subject to the rule of remoteness in Hadley v Baxendale (see [8.31]), puts the plaintiff in the position he or she would have been in if the contract had been properly performed. Often, this will be a difficult task. Nevertheless, the courts cannot refuse to award damages just because they are difficult to quantify.10 In appropriate circumstances, damages may be claimed for: expectation losses; personal injuries; and disappointment, distress, discomfort.

Damages for expectation losses 8.34 The primary rule in assessing damages is to calculate expectation losses. What are the expectation losses in a sale of goods contract? If one of the parties to a contract refuses to sell or buy the goods which are the subject of the contract, the damages will depend on whether there is a market for the goods. Where there is a market for the goods in question, the damages will be the difference between the contract price and the market price. For example, after negotiation, Ted agrees to buy a new Mack truck from Trusty Truckies Pty Ltd for $100,000. There is a price rise in Mack trucks and Trusty refuses to supply the truck. It will now cost Ted $110,000 to buy the same vehicle. Ted’s damages are $10,000. Alternatively, the price of Mack trucks has gone down and Ted refuses to go ahead with the purchase. Trusty resells the truck at the best price it can, which is $90,000. Trusty Truckies Pty Ltd’s damage is $10,000. If no actual loss is made, the innocent party will be restricted to nominal damages only. Where the seller refuses to deliver goods for which there is no readily available market (such as with unique items), the plaintiff’s preferred remedy may be specific performance. Expectation losses include loss of profits. Lost profits are

recoverable provided they were caused by the breach and were not too remote. Loss of a promised chance [page 333] or commercial opportunity may be claimed as damages. In such cases, damages will be awarded ‘by reference to the degree of probabilities, or possibilities, inherent in the plaintiff’s succeeding had the plaintiff been given the chance which the contract promised’.11 Sometimes, it is almost impossible to calculate ‘loss of bargain’ damages. In such cases, the plaintiff effectively claims reliance expenditure (expenditure incurred as a result of relying on the defendant’s promise).

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (High Court) Facts Amann won a contract to provide aerial surveillance of Australia’s northern coastline. Considerable expense was incurred in setting up the surveillance, including the purchase and adaptation of suitable aircraft. Amann failed to comply precisely with the contract and the Commonwealth served notice of termination. The Commonwealth’s termination, however, was not done properly and amounted to a wrongful repudiation of the contract. Amann then terminated the contract and sued for damages. At first instance, Amann was awarded $410,000, being the profit it would have made under the contract. The court, however, refused to compensate Amann for all its set-up costs on the basis that it had not demonstrated that it would recoup these costs. Amann appealed, claiming $5.5 million — being the costs incurred in setting up and then dismantling the operation (the specially adapted aircraft could only be sold for a fraction of their cost). Issue How should the losses of Amann be calculated, solely on the basis of expected profits, or on a reliance basis? Decision

The purpose of damages for breach of contract is to place the plaintiff in the same position as if the contract had been performed. Thus, the primary basis for an assessment of damages is on an ‘expectation’ basis which would include cost plus expected profit (or minus expected loss). However, where expected profit or loss cannot be calculated, the court may award damages on the basis of reliance costs. Amann was entitled to a presumption that it would recoup its costs. It was up to the Commonwealth to establish that this was unlikely to occur, and this the Commonwealth had failed to do. Therefore, Amann was entitled to $5.5 million plus interest.

[page 334] Damages for personal injuries 8.35 Damages for personal injuries can be recovered, provided they were caused by the breach and were not too remote. For example, Mei Ling had her car repaired by Smokin’ Brakes Pty Ltd. The repairers were careless in repairing the brakes and this caused them to fail while Mei Ling was driving the car. As a result, Mei Ling was involved in an accident and suffered extensive injuries. Smokin’ Brakes was under a contractual obligation to exercise reasonable care and use appropriate parts in repairing Mei Ling’s car. It would appear that Smokin’ Brakes has breached its contract. This entitles Mei Ling to claim damages. It is within the usual course of events for a failure to repair brakes properly to lead to an accident in which the driver is injured. Therefore, Mei Ling can claim for her personal injuries: see Baltic Shipping Co v Dillon, in [8.36]. Damages for disappointment, distress, discomfort, etc 8.36 The courts have generally been reluctant to award damages for disappointment, distress or injured feelings. This is probably still true for most commercial contracts.12 However, damages for distress, etc are available in two situations. First, they are available where the distress flows from physical inconvenience. Second, they are available in those contracts where enjoyment or

entertainment or freedom from molestation is an essential feature of the bargain. The latter applies particularly in the holiday industry.

Jarvis v Swans Tours Ltd [1973] 1 QB 233 (UK Court of Appeal) Facts Jarvis booked a skiing holiday in Switzerland with Swans Tours on the basis of a number of attractive representations made in Swans’ brochure. Unfortunately for Jarvis, what appears in a brochure is not always accurate. Instead of an ideal skiing holiday, Jarvis suffered the following travails: the only available skis were ‘mini’ skis; the ski boots did not fit; the ski fields were quite a distance away; the bar, which was advertised as a feature of the accommodation, was a small annexe to the accommodation and only open one day per week; the tea and cakes advertised in the brochure turned out to be tea and potato crisps; and the lively house party, advertised in the brochure, consisted of Mr Jarvis and the hotel manager who could not speak English. As far as Mr Jarvis was concerned, he had wasted his holiday and his money, so he sued for breach of contract. But what were his damages? Issue Could Jarvis obtain damages for the loss of enjoyment he reasonably expected from the holiday? [page 335] Decision The Court of Appeal awarded Jarvis damages which were approximately twice the cost of the holiday on the basis of his loss of entertainment and enjoyment.

The decision in Jarvis v Swans Tours Ltd was applied by the High Court in Baltic Shipping Co v Dillon, below. Even where

damages for distress, etc are awarded, the injury must not be too remote (see the rule in Hadley v Baxendale, in [8.31]).

Baltic Shipping Co (The Mikhail Lermontov) v Dillon (1993) 111 ALR 289 (High Court) Facts Mrs Dillon booked a holiday cruise on a ship called the Mikhail Lermontov, departing on 7 February 1986 for 14 days through the New Zealand Sounds. On 16 February, the ship sank as a result of the captain’s negligent navigation. Mrs Dillon suffered physical injury and nervous shock, lost her personal belongings and suffered the distress and disappointment of a ruined holiday. She sued for damages on all counts. She also sought restitution of the fare she had paid. The court awarded damages for loss of belongings, physical injuries, nervous shock and $5000 for disappointment and distress at the loss of the entertainment and enjoyment the cruise impliedly promised. The court also awarded restitution of the fare. Baltic Shipping Company appealed. Issue What damages was Dillon entitled to? Was she entitled to a refund of the fare she paid? Decision The High Court approved the award of damages, including damages for disappointment and distress at the loss of the entertainment and enjoyment. The court, however, overturned the order for restitution of the fare paid. An order for restitution of the fare could only be made if there had been a total failure of consideration. As Mrs Dillon had experienced part of the holiday, there had not been a total failure of consideration. Mrs Dillon could not recover her fare. She had to rely on damages.

Contributory negligence 8.37

Where the plaintiff’s negligence has contributed to the loss, the courts will reduce the amount of damages according to what is fair and equitable in the circumstances.

SPECIFIC PERFORMANCE

Specific performance is an order by the court requiring one party to carry out his or her contractual obligations.

8.38

Specific performance is an order by the court requiring one party to carry out his or her contractual obligations. The rule originated because of the inadequacy of damages to do justice in certain cases. This is still the basis of any order for specific performance. [page 336] Specific performance is rarely ordered outside the area of sales of land and only if an award of damages would not be an adequate remedy. It will never be ordered where to do so requires ongoing supervision by the courts,13 or requires the defendant to undertake some personal service. Specific performance is used, therefore, for such things as compelling a vendor of land to sign a transfer of the land so that the purchaser can obtain good title. Occasionally, where the good is unique, such as a painting by a master, the court will order specific performance in a contract for the sale of goods.

Dougan v Ley (1946) 71 CLR 142 (High Court) Facts Dougan agreed to sell his taxicab together with his taxi licence to Ley. The number of licences was strictly limited and controlled by the New South Wales Department of Transport. The sale, therefore, was more than just a sale of goods. It was a sale of a good with a valuable right attached. Dougan refused to proceed with the sale and Ley sued for specific performance. Dougan argued that damages was an adequate remedy. Issue Was Ley entitled to specific performance of the contract? Decision In these circumstances, damages were not sufficient and the High Court of Australia granted specific performance. Dougan was ordered to submit the

necessary documents of transfer to the Commissioner for Road Transport and Tramways for transfer of registration and licence.

Specific performance will never be ordered to enforce a contract for the provision of personal services.

Lumley v Wagner [1843–60] All ER Rep 368 (Court of Chancery) Facts Miss Johanna Wagner, niece of Wagner the composer, was hired by Lumley, the owner of Her Majesty’s Theatre in London, to sing at the theatre for a period of three months. Miss Wagner also agreed not to sing at any other theatre during the contract period. The owner of a rival theatre by the name of Frederick Gye convinced Miss Wagner to break her contract with Lumley (who had a difficult relationship with many of his stars) and to [page 337] sing at Gye’s theatre instead. Lumley sued Wagner for breach of contract and sought an order for specific performance requiring Wagner to carry out her contractual obligations to sing at Lumley’s place. Lumley also sought an injunction to stop Wagner singing at Gye’s. (Lumley also sued Gye, not for breach of contract, but for the tort of interfering with contractual relations. The case of Lumley v Gye (1853) 2 El & Bl 216 is the basis for the law which enables companies to sue union leaders for losses caused during strikes.) Issue Was Lumley entitled to either (1) an order for specific performance, or (2) an injunction preventing Wagner from performing at Gye’s theatre? Decision The court refused to make an order for specific performance on the grounds that it was a contract for personal services. However, the court granted the injunction to stop Wagner performing at Gye’s theatre.

INJUNCTION

An injunction is a court order requiring someone to stop doing something.

8.39

Like specific performance, injunction is a discretionary remedy. It is an order restraining a person from doing something. In the context of contracts, it is an order restraining one of the parties to a contract from breaching his or her contractual obligations. In appropriate circumstances, an injunction may amount to an order to do something. This is called a mandatory injunction. An injunction will not be granted unless it is necessary. Therefore, there must be evidence that the breach will continue or will occur again. An injunction will generally not be granted where it amounts to an order for specific performance of a personal services contract. A court may grant an injunction where an order for specific performance would be refused: see Lumley v Wagner, in [8.38]. However, the courts are generally careful not to permit the plaintiff to achieve indirectly by way of an injunction that which could not be achieved directly by way of specific performance.

RECTIFICATION OF THE CONTRACT 8.40

The courts may order rectification of the contract in appropriate circumstances. Where both parties have signed a contract, the terms of which have been mistakenly written down, the document may be rectified by order of the court.

RESTITUTION 8.41

Restitution is not a contractual remedy. Restitution is a separate body of law based on the concept of unjust enrichment. Restitution does not require a contract, although it often arises in contract-like situations. [page 338]

Where the defendant has gained a benefit at the expense of the plaintiff and it would be unjust in the circumstances to allow the defendant to retain that benefit, the courts will make an order: to enable the plaintiff to reclaim money paid to the defendant; or to enable the plaintiff to claim a reasonable amount from the defendant for goods delivered or services rendered. If A pays a sum of money to B and B totally fails to provide his or her consideration, A may reclaim the money paid. In other words, where there has been a total failure of consideration, the innocent party does not have to rely on damages but may instead seek a return of the moneys paid as well as seek damages (if available). For example, a person who bought and paid for a car that had been stolen would be entitled to restitution of the purchase moneys when the true owner repossessed the car.14 However, the failure of consideration must be total. In Baltic Shipping Co (The Mikhail Lermontov) v Dillon (in [8.36]), the plaintiff was not entitled to claim repayment of the cost of a 14-day cruise which came to an untimely end when the ship sank as a result of the crew’s negligence. As she had experienced eight days of the cruise, the High Court held that consideration had not totally failed. She could not get a partial refund and must, therefore, rely on damages. Where A performs some work for B but, for reasons which are not the fault of A, is unable to claim the contract price, A may be able to claim restitution on a quantum meruit basis (ie, ‘as much as is deserved’).

Pavey & Mathews Pty Ltd v Paul (1987) 162 CLR 221 (High Court) Facts Pavey carried out certain building work for Paul under an oral contract. In New South Wales, a building contract of this type was unenforceable unless it was in writing and signed by the parties. Because the contract did not satisfy

these requirements and was unenforceable, Pavey sued on a quantum meruit basis for work done and materials supplied at the request of Paul. Paul argued that as the contract was unenforceable, Pavey could not succeed by claiming a quantum meruit because this would amount to enforcing an unenforceable contract. Issue What was the basis of a quantum meruit? If the basis lay in contract then the builder was not entitled to any amount as the contract was unenforceable. If, however, the basis was not contract but restitution, there was no objection to Pavey claiming quantum meruit. Decision The High Court of Australia held that the basis of quantum meruit was restitution not contract. Therefore, the court found in favour of Pavey.

[page 339]

Quantum meruit and partially performed contracts 8.42

As we have seen, a person is entitled to claim the contract price only if he or she has substantially performed his or her contractual obligations (see [8.23]). If the obligations have not been substantially performed, the party’s rights will depend on why the contract was discharged: 1. Contract is terminated as a result of the defendant’s breach or repudiation. Imagine that P is hired by D to build a house on D’s land. P half builds the house when D changes his mind and refuses to let P onto the land to finish the job. (Alternatively, D runs out of money and tells P that he will be unable to pay him.) In either event, P is entitled to terminate the contract. P has a claim for damages, but probably also has an alternative claim for a quantum meruit: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510. 2. Contract is terminated as a result of the plaintiff’s breach or

repudiation.

Sumpter v Hedges [1898] 1 QB 673 (UK Court of Appeal) Facts Sumpter, a builder, was hired by Hedges to build two houses for £565. Sumpter ran out of money and was unable to complete the work. Hedges finished the building himself. Sumpter claimed £333 on a quantum meruit basis. Issue Was Sumpter entitled to payment on a quantum meruit basis? Decision Sumpter was not entitled to the money. In the circumstances, it could not be said that Hedges had accepted a benefit. He had no option, as the unfinished buildings were on his land and Sumpter had repudiated the contract.

However, if the defendant accepts a benefit and it would be unjust or unfair to allow the defendant to enjoy the benefit without compensating the plaintiff, the courts may award a quantum meruit even though the plaintiff breached the contract.15

RESCISSION Rescission is the act of bringing a contract to an and the parties are restored as far as possible to the position they occupied immediately prior to the contract.

Introduction to rescission A contract may be rescinded for: misrepresentation; duress; undue influence; mistake; or

unconscionable conduct. Some statutes also allow for the rescission of contracts.

8.43

There are circumstances where the law gives the innocent party the right to rescind the contract (see Figure 8.3). Rescission effectively wipes out the contract. In this part, we consider: 1. the grounds for rescission; and 2. the nature of rescission. [page 340]

Figure 8.3

Rescission

Grounds for rescission in equity Rescission for misrepresentation 8.44 If, during the negotiations for a contract, one of the parties: (a) made a misrepresentation of fact (see [3.7]), and (b) the misrepresentation helped to convince or induce the other party (the representee) to enter into the contract (see [3.8]), then the representee may bring the contract to an end.16 This is called rescinding the contract for misrepresentation. Prior to the

rescission, the contract is said to be voidable for misrepresentation (ie, capable of being rescinded). The misrepresentation does not have to be fraudulent or negligent in order to give a right of rescission. It may be totally innocent. Rescission is still a useful remedy but has become less important since the introduction of statutory rules on misleading or deceptive conduct (see Chapter 3). Rescission for unconscionable conduct 8.45 Where one party to a contract takes advantage of the other party’s vulnerability (special disability) to the extent that the contract is unfair or unconscionable, the courts can set aside the contract. Unconscionable conduct is discussed in Chapter 3. In particular, see Commercial Bank of Australia v Amadio (Amadio’s case), in [3.44].

Blomley v Ryan (1956) 99 CLR 362 (High Court) Facts Ryan was an old farmer with a drinking problem. Alcohol had impaired his mental and physical powers. Blomley wanted to buy Ryan’s property. During a drinking binge, Ryan [page 341] agreed to sell his property to Blomley for £25,000 with a deposit of only £5 and the balance payable at 4 per cent over four years. The property was worth about £33,500 and the market rate of interest was 5 per cent. Ryan’s real estate agent was present, but he was clearly Blomley’s man rather than Ryan’s. The contract was signed at a solicitor’s office after the solicitor had read through the terms. However, the inadequacy of the price was not discussed. When Ryan refused to transfer the land, Blomley brought an action for specific performance of the contract. Ryan claimed that the contract should be set aside as an unconscionable bargain. Was Ryan successful? Issue Unconscionable conduct is unfair or

unjust conduct which arises where one person takes unfair advantage of another person’s special disability. Did the facts establish that this was an unconscionable bargain entitling Ryan to refuse to proceed with the contract? Decision Old age, chronic alcoholism, plus the effects of the binge put Ryan under a special disability vis-à-vis Blomley. Blomley was aware of this. The terms of the contract heavily favoured Blomley. The solicitor failed to protect Ryan. Blomley was aware of this. The circumstances were such that Blomley had taken unfair advantage of Ryan. The contract was set aside on the grounds of unconscionability.

The courts have used the principle of unconscionability to strike down agreements that unreasonably and unconscionably restrict a person’s ability to exploit their talents: see A Schroeder Music Publishing Co Ltd v Macauley [1974] 1 WLR 1308; [1974] 3 All ER 616 and Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 WLR 61; [1975] 1 All ER 237. In both cases, a musician songwriter had entered into a publishing contract whereby copyright was assigned to the publisher for virtually no fee, and with no corresponding obligation on the publisher to publish, record or promote the music involved. In both cases, the contracts were long, wordy, standard form agreements which were signed without the benefit of independent legal advice. Potentially both agreements were of 10 years’ duration. The House of Lords declared both agreements to be void on the grounds of ‘unconscionability’. Rescission for duress Duress occurs where one part is forced to enter into a contract.

8.46

Where a contract is entered into because of some coercion or force (ie, duress), it can be rescinded. The duress may be either: to the person or goods; or

economic duress. Duress to the person occurs where one of the parties to a contract enters into the contract because of threats of physical punishment or imprisonment either to the person or to his or her family or friends. Duress to goods occurs where a party to a contract enters into the contract because of threats that are made against the person’s property. In both cases, it is essential to establish that the will of the contracting party was overborne by the threats: Barton v Armstrong [1976] AC 104. Economic duress occurs where a party to a contract enters into the contract because of some economic threat. Care must be taken in applying this rule, particularly in [page 342] contracts between commercial entities. There is no rule of law that commercial parties have to be fair to one another. Commerce is often ruthless. Therefore, it is difficult to distinguish between economic threats that are legitimate and economic threats that amount to duress. Most cases of economic duress have involved a threat to break an existing contract.

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705 (Queen’s Bench Division) Facts A ship-owner (North Ocean) entered into a contract with a ship-builder (Hyundai) to build a ship. The contract price was stated in US dollars. When the US dollar devalued by 10 per cent, Hyundai demanded that North Ocean pay an extra 10 per cent. North Ocean only agreed to pay the amount because it had no effective option. Hyundai provided consideration. Later, North Ocean sought an order to have the extra money returned on the basis that the contract was induced by duress. Issue

Did the circumstances around the creation of the contract entitle North Ocean to rescind the contract for duress? Decision North Ocean paid under compulsion and, therefore, the contract to pay the extra 10 per cent was voidable for economic duress. (However, North Ocean was held to have unduly delayed in rescinding the contract and had, therefore, affirmed the contract. This meant it could not get the money back.)

Rescission for undue influence Undue influence means unfairly using a relationship of dominance or reliance to influence a weaker party. Undue influence may be actual or presumed.

8.47

Presumption of undue influence in special relationships Suppose Alex is solicitor to Jane. They enter into a contract whereby Jane agrees to sell a property she owns to Alex for $150,000. The market value of the property is $175,000. Because of the solicitor–client relationship between Alex and Jane, the law presumes that the contract was obtained because Alex exerted undue influence over Jane. Alex will have to produce evidence that Jane’s decision to sell for $150,000 was the result of a free exercise of her own will. In determining this issue, the courts will look at all the facts, including: the extent of the bargain Alex is getting; Jane’s ability to make free and independent choices — this would involve considerations of Jane’s age, her knowledge of commercial matters and her education; and whether Jane received independent advice. The presumption of undue influence applies not only to solicitor–client relationships but also to doctor–patient, trustee– beneficiary, parent–child, guardian–ward and religious adviser– disciple. It may apply to any situation where a fiduciary duty is owed.

[page 343]

O’Sullivan v Management Agency & Music Ltd [1984] 3 WLR 448; [1985] 3 All ER 351 (UK Court of Appeal) Facts O’Sullivan was a young, naïve pop singer and composer who placed total confidence in Mills and his management company, Management Agency and Music Ltd. Mills got O’Sullivan to sign a contract with Management Agency and Music Ltd, by which O’Sullivan agreed that the management company would manage all aspects of his career for a period of five years with an option for two more. This included an assignment of the future copyright in his songs. O’Sullivan became extremely successful and challenged the contract. Issue Should the court apply the presumption of undue influence in this case? How should the relationship between Sullivan and the management company be characterised? Decision The court held that the nature of the relationship between O’Sullivan and Mills was fiduciary in character and as such there was a presumption that Mills had exercised undue influence over O’Sullivan in getting him to sign the contract. O’Sullivan was young, inexperienced and without legal advice. Because of this inequality in bargaining power, the court held that the agreement was an unreasonable restraint of trade. The agreement was set aside.

The husband–wife relationship, however, is not a class to which the presumption automatically applies.

8.48

Presumed undue influence in confidential relationships The presumption of undue influence will also apply where the relationship between the parties is such that one party is in a position of dominance or confidence with respect to the other party. There must be more than mere reliance or influence. The party alleging undue influence must show that the contract (or

gift) would not have been made but for the undue influence.

Lloyds Bank Ltd v Bundy [1974] 3 WLR 501; [1974] 3 All ER 757 (UK Court of Appeal) Facts Bundy was an elderly farmer, inexperienced in business matters. For many years, he had been a customer of Lloyds Bank. He had relied on the manager of the bank for financial advice. Consequently, the manager was fully aware of Bundy’s financial affairs. Bundy agreed to guarantee certain debts owing by his son to Lloyds Bank. The bank manager [page 344] did not advise Bundy to get any independent advice before executing the guarantees. The son’s business failed and the bank started legal proceedings against Bundy to enforce the guarantees. Bundy argued that the bank had exercised undue influence over him and that it should have advised him to get independent advice. Issue Should the court treat the relationship between Bundy and his bank as one where there is a presumption of undue influence? What should the bank have done? Decision Banker–customer is not normally a relationship that gives rise to a presumption of undue influence: National Westminster Bank plc v Morgan [1985] 1 AC 686. However, in this case, there was a special relationship of confidence which gave rise to the presumption of undue influence. The bank had failed to rebut that presumption and therefore the guarantees should be set aside.

Most of the cases dealing with parents or spouses providing guarantees to a bank to secure the debts of a relative or loved one are now decided under unconscionable conduct: see Amadio’s case, in [3.44]. Actual undue influence

8.49

The courts may set aside a contract for actual undue influence, but the cases are rare. Unlike presumed undue influence, the person wishing to set the contract aside must establish that undue influence occurred. They must establish that the contract was not an exercise of their free will but of the other party’s influence over them. Unlike duress, the will is not overborne. To establish actual undue influence, it would probably be necessary to establish: that the contract was very one-sided; and that the person wishing to have the contract set aside did not receive independent advice.

Rescission for mistake Common mistake: where both parties are mistaken about a particular matter. Unilateral mistake: where only one party is mistaken about a particular matter.

8.50

8.51

At the outset, it should be stressed that a party cannot get out of a contract just because he or she made a mistake. For example, a person who buys shares in Y Ltd would not be able to rescind the contract of purchase just because the shares do not perform as well as the buyer expected. For the party to have a right of rescission for mistake, there must be an element of unconscionability or unfairness. Even where mistake does apply, it will often be due to one party’s misrepresentation. In such cases, the law of misrepresentation already provides a remedy. Nevertheless, in appropriate cases, equity does allow one of the parties to a contract to rescind the contract where: there has been a common mistake of fact; or there has been a unilateral mistake of fact. Rescission for common mistake A common mistake occurs where both parties to the contract make the same mistake. As the mistake is often due to the innocent misrepresentation of one of the parties, most

[page 345] cases will be resolved under the law of misrepresentation or, where the representation has become a term, breach of contract. In the few cases where mistake will apply, it seems that the courts will only permit rescission where it would be unconscionable not to allow it. The normal limitations on the right to rescind apply.17 In extremely rare cases, the courts can go further than rescission and declare the contract void. Perhaps the most important example of this is in the sale of specific goods where, unbeknown to either party, the goods have been destroyed prior to the contract being made.18

8.52

Rescission for unilateral mistake A unilateral mistake occurs where one of the parties is mistaken as to a fact and the other party is aware of that mistake. This is most likely to occur where one of the parties acts fraudulently. Such matters are generally handled under the law of misrepresentation. However, there are some cases where misrepresentation is not appropriate and the plaintiff will have to rely on mistake.

Taylor v Johnson (1983) 151 CLR 422 (High Court) Facts Johnson entered into a contract to sell 10 acres of land to Taylor. The contract stated the price as $15,000. In fact, the value of the land was more like $50,000 and, if rezoned, possibly $195,000. Johnson thought the contract price was $15,000 per acre. The court held that Taylor was aware of Johnson’s mistake and took steps to ensure that Johnson did not discover the mistake. Issue Was Johnson entitled to rescind the contract What is the rule? Decision The High Court held that Mrs Johnson was entitled to rescind the contract for unilateral mistake. Mason ACJ, Murphy and Deane JJ stated the law as follows (at 432):

[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.

8.53

Contracts can be void for unilateral mistake In some very rare cases of mistake, the courts will go beyond rescission and declare the contract void. This means that the contract is treated as if it never existed. [page 346]

Cundy v Lindsay (1878) 3 App Cas 459; [1874–80] All ER Rep 1149 (House of Lords) Facts A rogue ordered goods from Lindsay claiming to be ‘Blenkiron & Co of 37 Wood Street’. In fact, the real Blenkiron & Co operated from 123 Wood St. The rogue then sold the goods to Cundy, who sold them to another person. Cundy was not aware that the seller was a rogue. Lindsay sued Cundy for damages for selling his property without authority. (There was no point in suing the rogue.) Lindsay would not have been permitted to rescind the contract for misrepresentation because Cundy was an innocent third party (see [8.60]). Consequently, Lindsay argued that the contract was void for mistake. Issue Should the court declare the contract void in these circumstances? What is the effect of declaring the contract void? Decision The contract was void and, therefore, Lindsay was still the owner of the goods.

The decision in Cundy v Lindsay is probably quite restricted in its operation. It would not operate where the dealings were face-toface. It is suggested that eventually the rule in Taylor v Johnson (see [8.52]) will apply even in cases such as Cundy v Lindsay.

8.54

Non est factum In rare cases, the courts will declare a contract void on the basis of non est factum (‘it is not my deed’). This defence is limited to those ‘who are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing; it is also available to those who through no fault of their own are unable to have any understanding of the purport of a particular document’.19

Petelin v Cullen (1975) 132 CLR 355 (High Court) Facts Petelin granted an option over his land to Cullen. Cullen failed to exercise the option within the option period. This meant that the option lapsed. Petelin spoke very little English and he could not read it at all. On the urging of Cullen’s agent, Petelin signed a document which he believed was a receipt for $50. The document was, in fact, a renewal of the option which had lapsed. Cullen then purported to exercise the option. Petelin refused to transfer his land. Cullen sued for specific performance. Petelin argued the defence of non est factum. [page 347] Issue Should the court apply the defence of non est factum in these circumstances? Decision The High Court upheld Petelin’s defence and refused to order specific performance. However, the court made it clear that the defence of non est factum is difficult to establish (at 360): 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 against innocent persons, his failure to read and understand it was not due to carelessness on his part.

The onus on the defendant is quite heavy.

The nature of rescission in equity What is the effect of rescission on the contract? Rescission is not the same as termination. Rescission wipes out the contract. Termination merely stops any further performance of the contract. There are restrictions applying to the right to rescind.

8.55

The aim of rescission is to return the parties to the position they occupied prior to the making of the contract. Effectively the contract is wiped out. Prior to rescission, however, the contract stands. The right to rescind is not absolute. The courts have made it subject to a number of rules.

Contrasting rescission and termination of the contract for breach 8.56 Whereas rescission cancels the contract from the beginning (ie, the law pretends the contract never existed and endeavours to put the parties back to their starting point), termination for breach only cancels the contract from the moment of termination. The distinction is demonstrated in the following example. A farmer bought a tractor for $50,000. The tractor was delivered and the purchase price paid in full. The farmer was induced in part to buy the tractor by the vendor’s statement that the tractor was ‘brand new’, but this was not true. The contract states that it is of the essence of the contract that the tractor be capable of a top speed of 30 miles per hour, but the tractor is not capable of this speed. There has been a breach of a condition which would entitle the farmer to terminate, and a misrepresentation which would entitle the farmer to rescind. Termination does not provide a useful remedy as the contract has been fully performed; there are no contractual obligations outstanding. The farmer would have to rely on damages. Subject to the requirements of restitution (see

[8.59]), the contract can be rescinded for misrepresentation. This would mean that the vendor gets the tractor back and the farmer receives the purchase price. How is a contract rescinded? 8.57 Rescission of a contract is the act of the innocent party. That is, the innocent party elects whether to rescind. The innocent party rescinds by giving notice of rescission to the other party. The notice does not have to take any specific form and may be implied from conduct. The function of the court is to decide, in contested cases, whether the rescission was valid, and to make consequential orders. A court order upholding a rescission is called setting the contract aside. Rescission is not permitted if the contract has been affirmed 8.58 Rescission only occurs where the innocent party elects to rescind. Instead of rescinding, the innocent party may elect to proceed with the contract. Once the election is made, it is binding. [page 348] The representee cannot change his or her mind. If, therefore, the representee has elected to affirm the contract (ie, proceed with the contract) the right to rescind has been lost. The innocent party is regarded as having affirmed the contract whenever he or she does any act which indicates that he or she is treating the contract as still running. Thus, even a demand to rectify the misrepresentation will probably amount to an affirmation, as will taking out proceedings for breach of contract. It should also be noted that, in an appropriate case, a representation may be both a term of the contract and a misrepresentation.20 In such a case, the innocent party must elect either to pursue a remedy in contract or rescind for misrepresentation. He or she cannot do both. If the innocent party

elects to sue for breach, this would amount to an affirmation of the contract, which would make rescission impossible. Where the innocent party does not act promptly, the right to rescind may be lost. Most likely, the court would regard undue delay as an affirmation. However, this will depend on the circumstances of the case. It probably does not apply to fraudulent misrepresentation. Rescission is not permitted if substantial restitution is not possible 8.59 As the purpose of rescission is to return the parties to substantially the position they occupied prior to the contract, it is essential that substantial restitution be possible. If A bought a cake pursuant to an actionable misrepresentation, any right to rescind will be lost if the cake has been eaten. However, precise restitution is not necessary: see Alati v Kruger (1955) 94 CLR 216. This is particularly so where there is evidence of fraud. Moreover, the courts are more willing these days to make compensatory money orders or any other orders necessary to do justice between the parties. Imagine Allan purchased a machine partly in response to an actionable misrepresentation. Before the misrepresentation is discovered, the machine deteriorates slightly through vigorous use. On discovering the misrepresentation, Allan notifies the seller that he is rescinding the contract and wants his money back. The seller refuses to agree. Can Allan then take proceedings to have the contract set aside and an order for the repayment of the purchase price? Given these facts, the court would probably make the necessary orders, although it may also order Allan to compensate the seller for any deterioration in the machine. The courts are less concerned to demand precise restitution where there has been fraud. In a contract for the supply of services, rescission will not be possible once the services have been provided. Restitution cannot be made. For example, Alice hires a painter and decorator to paint her house, partly on the representation that he is a member in good standing of the Painters and Decorators Association. After

the painter completes the work, Alice discovers that he was ejected from the association. Can Alice rescind the contract? Is restitution possible? The answer to both questions must be ‘no’. A service that has already been performed cannot be returned or restored to the provider. On the other hand, a service that has not yet been provided may be rescinded.

Academy of Health & Fitness Pty Ltd v Power [1973] VR 254 (Supreme Court of Victoria) Facts Power, a jockey, entered into a contract to use the appellant’s gym facilities. Prior to entering into the contract, Power was told that the sauna was available for use seven days [page 349] a week. This was not accurate as males could only use the facilities on alternate days. Power never visited the gym or paid the fees. The academy sued for the fees. Issue Had Power rescinded the contract, or had he left the contract in place? Decision The Supreme Court of Victoria held that Power had validly rescinded the contract.

Rescission is not permitted if the legal rights of an innocent third party will be adversely affected 8.60 Imagine that X is induced to sell his car and accept a cheque in payment by a confidence trickster pretending to be a well-known actor. The cheque bounces and X wants his car back. By this time, however, the car has been sold to Y, who was unaware of the confidence trick played on X. Who owns the car? The confidence trickster has disappeared. X will have a right to the car if he rescinded the contract before

the trickster sold it to Y. However, if the evidence shows that Y bought the car first and that Y was innocent of any fraud, Y becomes the car’s owner. X will not be permitted to rescind the contract because to do so would mean that Y would have to be deprived of his legal right to the car. Compare the following case.

Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 (UK Court of Appeal) Facts Caldwell sold his car in return for a cheque. The buyer disappeared and the cheque bounced. Caldwell immediately notified the police and the Automobile Association. The buyer sold the car to the finance company. Who owned the car? Caldwell argued that he had rescinded the contract prior to the finance company acquiring the car and therefore ownership in the vehicle had reverted to him. The finance company argued that Caldwell had not rescinded the contract because he had not given notice of rescission to the buyer. Issue Had Caldwell properly rescinded the contract? What is the effect of rescission? Why was it important in this case? Decision The court decided in favour of Caldwell. Where a party makes the giving of notice of rescission impossible by absconding, neither that party nor any third party who acquires an interest in the subject matter from the absconding party can insist upon actual notice. As long as Caldwell had done all that was reasonable in the circumstances, which he had, the rescission was valid. Thus, Caldwell was not interfering with any third party rights by demanding the return of the car.

[page 350]

Statutory rescission Australian Consumer Law 8.61 Under the Australian Consumer Law (ACL), the courts have a

broad power to declare contracts void for breaches of the ACL, including the provisions dealing with: misleading or deceptive conduct (see [3.21]); unconscionable conduct (see [3.46], [3.49]); and unfair terms in standard form consumer contracts (see [6.40]). Contracts Review Act 1980 (NSW) 8.62 The Contracts Review Act 1980 (NSW) (CRA) applies to contracts in New South Wales. The purpose of the CRA is to provide the courts with a range of powers to deal with contracts that are unjust. Unjust includes ‘unconscionable, harsh or oppressive’: s 4. Whether a contract is unjust is judged from the time the contract was made. Section 9(1) provides that, in determining whether a contract is unjust, the court must have regard to the public interest and to all the circumstances of the case. Section 9(2) sets out a non-exhaustive list of factors to be considered. This is similar to the procedure adopted by the ACL (see [3.48]). The CRA does not apply to contracts entered into for the purpose of trade, business or profession. However, it does cover sales of businesses and loan agreements.

Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 (New South Wales Court of Appeal) Facts Mr and Mrs Khoshaba decided to invest in a shopping-trolley collection business which was being promoted within the Assyrian community in Sydney. Although the business looked attractive, it was in fact nothing more than a highly risky (potentially fraudulent) pyramid scheme. The Khoshabas raised the investment funds ($120,000) by mortgaging their house (and main asset) to Perpetual Trustee. Neither of the Khoshabas had any experience in business or investment. Perpetual was not involved in the investment scheme. The loan application was drawn up by a mortgage broker. Some of the critical information was false; for example, Mr Khoshaba was stated as being employed and earning $43,000 per year. In fact, he was a pensioner. Mr

Khoshaba was not aware that the application contained this false information (although he did sign it). The application was also incomplete; the purpose of the loan was left blank. The application was then submitted to AMW Pty Ltd, which assessed it on behalf of Perpetual in accordance with specified guidelines. AMW failed to follow the guidelines. In particular, it failed to make any checks to ascertain whether the information was correct. According to the trial judge, if AMW had known that the Khoshabas were pensioners, the loan would not have been approved. AMW also failed (contrary to the guidelines) to make any checks about the proposed investment. Finally, AMW did not advise the Khoshabas to seek independent, professional advice. [page 351] The Khoshabas argued that the agreement was unjust within the meaning of the Contracts Review Act 1980 (NSW). The trial judge agreed, and Perpetual appealed. Issue Was the agreement unfair within the meaning of the Contracts Review Act 1980 (NSW)? Decision The Court of Appeal dismissed the appeal. The failure to follow the guidelines, particularly the failure to ascertain what the loan was for, meant that the arrangement was unjust in the circumstances. If AMW (which was Perpetual’s agent) had made proper inquiries (as required by the guidelines), it would have known that the Khoshabas were mortgaging their only real asset, that they had no income other than the pension, that the investment scheme was very risky and that they had not received independent advice from a professional or skilled person.

ADVICE — LAW IN PRACTICE There are many different circumstances by which a contract can be ended before it has been fully performed, but breach of the contract will not necessarily entitle the innocent party to end the contract. When faced with a breach of contract:

Remember that a range of possible remedies are available to the innocent party, including termination of the contract, damages, and injunction or an order for specific performance. Remember that damages are awarded to compensate the innocent party for losses caused by the other party’s breach, and that losses suffered following a breach of contract must be kept to a minimum or they may not be recoverable. Understand that having a legal entitlement to damages for the other party’s breach of contract is only useful if that other party has funds or assets to pay the damages claim; even then, enforcement of damages claims through the courts can be costly and timeconsuming. Sometimes, it may be better to settle the claim for less than the amount owing. In some situations, the contract is susceptible to rescission, which involves returning each party to their precontract position.

[page 352]

QUESTIONS Question 1 Are the following statements true or false? (a) A breach of condition never allows the innocent party to terminate. (b) A breach of warranty sometimes allows the innocent party to terminate. (c) Only a serious breach of condition allows the innocent party to terminate. (d) Any breach of an intermediate term allows termination. (e) Any anticipatory breach allows termination. (f) An innocent party can lose the right to terminate a contract. (g) D agrees to deliver a consignment of machine parts to E by 30 June. The goods arrive on 1 July. E can reject the goods. (h) G has recently negotiated the purchase of a van Gogh painting. However, on the due date, H, the owner, changes his mind. G can seek an order for specific performance to enforce the contract with H.

Question 2 X agrees to deliver 100 Phillips televisions to Y on 1 June. X makes a mistake in ordering the goods and finishes up with 100 National televisions instead. X notifies Y of the mistake on 26 May. Y tells X that she will give him an extra seven days (ie, new delivery date is 8 June) to deliver the correct televisions. The next day, Y changes her mind and telexes X that she has cancelled the contract because of X’s breach. X wants to go ahead as he can get the televisions by 8 June. Advise the parties.

Question 3 Alpha Pty Ltd hires a machine from Beta Machines Ltd. The machine has been negligently maintained by Beta. It breaks down and Alpha Pty Ltd is faced with the potential closure of its factory for three weeks until the machine is replaced by a new one. One option is to hire a replacement, which would cost $5000 in total, but as there is none available for a week, Alpha Pty Ltd is forced to close its factory. Normal losses amount to $1000 a day, and the factory usually operates seven days a week. Alpha Pty Ltd has also lost a lucrative government contract worth a further $50,000. What damages can Alpha Pty Ltd claim? (a) (b) (c) (d)

A total of $21,000 (21 days × $1000) A total of $71,000 (21 days + government contract) A total of $5000 (cost of replacement machine) A total of $55,000 (cost of replacement machine + government contract) (e) A total of $12,000 (cost of replacement machine + 7day closure)

(f) A total of $62,000 (cost of replacement machine + 7day closure + government contract) Please explain your answer, referring to relevant legal principles and cases. [page 353]

Question 4 Aix runs a chain of retail clothing stores using the business name, ‘Clothes for Gentlemen’. It is an upmarket store which boasts that they are the exclusive suppliers of menswear to many high-profile celebrities, such as Brad Pitt and Prince Harry of the United Kingdom. Computer Wizz Pty Ltd (CW) supplies networking systems to businesses. Aix and CW entered into a contract for the supply and installation of a computer network system linking all Aix’s stores. CW has completed 10 stores and there are another 50 to do. One weekend, Aix discovered that hackers have broken into Aix’s confidential database and several customers have reported that their credit cards have been used without their permission. One customer claims he has lost $10,000, and that the credit-card company is not going to reimburse his loss. He publishes his loss on Facebook, blaming Aix’s poor security. Consequently, Aix loses several valuable customers, who publicly announce they will never buy from Aix’s stores again. This list of disgruntled customers includes Baron Paul of England, who spent on average $335,000 a year on clothes ordered from Aix. Aix wants to cancel the contract with CW, remove CW’s system and replace it with another system. On the

other hand, CW argues that the flaw can be rectified and that CW should be entitled to fix the problem and complete the contract. (a) Does Aix have a right to terminate? (b) What would your answer to part (a) be if the contract contains the following clause: ‘It is a condition of the contract that the system be as secure as current technology permits’? (c) News of Aix’s network problems have caused Aix’s bankers to refuse Aix’s application for a loan. Aix has had to borrow from alternative sources at a higher interest rate. Aix calculates this will cost it $250,000. Assuming CW is in breach of contract, could Aix claim the $250,000 from CW? (d) Assuming a breach of contract, could Aix include in its claim an amount that represents the ‘lost business’ due to the ‘several valuable’ customers announcing they will never buy from its stores again?

Question 5 Francesca operates a successful fast-food franchise called ‘Fran’s Food’. Tasty Pty Ltd is keen to open a ‘Fran’s Food’ outlet in the Melbourne suburb of Caulfield. The parties reach an agreement that Tasty Pty Ltd will operate a Fran’s Food restaurant in Caulfield for a period of five (5) years. The agreement contains the following terms: 9.

Francesca promises that she will not open another Fran’s Food franchise within the Caulfield area during the franchise period (that is, five (5) years).

… 13. Tasty Pty Ltd promises that it will operate the restaurant strictly in accordance with the laws and regulations set out in the Health Act.

One year after the restaurant opened, Tasty Pty Ltd was charged and found guilty of breaching the Health Act. Francesca immediately cancelled the remainder of the franchise agreement and opened another Fran’s Food franchise in Caulfield. Francesca decided to operate this new franchise herself. Advise Tasty Pty Ltd whether it has an action for breach of contract against Francesca, and (if so) what the appropriate remedies might be. Give reasons for your answer. (Assume that the answer is not affected by the Franchising Code of Conduct.) [page 354]

Question 6 A Pty Ltd (a retailer) engaged Brags (an advertising agency) to create, produce and place a series of advertisements for television. The agreement was to last for two years. The agreed price was $100,000, plus the costs payable to the TV stations. It was further agreed that Brags would book the TV advertising slots, but that A would have the right at any time up to four days prior to the broadcasting date to cancel any particular booking. A sells expensive imported sports cars and the advertisements play up the exclusiveness, power and speed of the cars. A usually takes a number of slots during the 8.30 pm to 10.30 pm Sunday night movie. On hearing that the TV station was planning to run a movie based around the search for the wealthy driver of an exotic, imported sports car who carelessly knocks down two children, killing them, and then callously drives off,

A phoned Brags and told them to cancel that week’s advertising slots. Brags neglects to do so. The advertisements are run during the movie and A is swamped with calls from irate watchers. Even the newspapers refer to the blatant insensitivity of the advertisements, calling them ‘an outrage’ and ‘crass, unfeeling commercialism’. The current affairs program on a rival TV station runs the story with the pointed question, ‘Would you buy a car from this mob? I wouldn’t’. A is irate with Brags and wants to cancel the contract without any further payments. The contract has 18 months to run. Advise A Pty Ltd.

_________ 1 2

See Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 (High Court). See the Goods Act 1958 (Vic) s 12: ‘Where there is an agreement to sell specific goods, and subsequently the goods without any fault on the part of the seller or buyer perish before the risk passes to the buyer, the agreement is thereby avoided’. Risk normally passes when property in the goods passes (Goods Act s 25), and property normally passes in an unconditional sale of specific goods at the time the contract is made: Goods Act s 23 r 1. Section 23 contains a number of rules for the passing of property in goods (see [7.38]). 3 See Louinder v Leis (1982) 149 CLR 509. 4 See the Sale of Goods Act 1954 (ACT) s 34; Sale of Goods Act 1923 (NSW) s 33; Sale of Goods Act 1972 (NT) s 33; Sale of Goods Act 1898 (Qld) s 32; Sale of Goods Act 1895 (SA) s 30; Sale of Goods Act 1896 (Tas) s 35; Goods Act 1958 (Vic) s 37; Sale of Goods Act 1895 (WA) s 30. 5 See McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457. 6 See Bot v Ristevski [1981] VR 120 per Brooking J. 7 In fact, Hoenig was not trying to obtain the work for nothing. He wanted the work assessed not by the contract price but on a quantum meruit. The reason for this was that Hoenig believed that he had agreed to pay too much and that a quantum meruit would work out to be much less than £750. 8 See Robinson v Harman (1848) 1 Exch 850; [1843–60] All ER Rep 383. 9 See Addis v Gramophone Co Ltd, in [8.26]; Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71. 10 This was applied by the New South Wales Supreme Court in Howe v Teefy (1927) 27 SR

11

12 13 14 15 16 17 18 19 20

(NSW) 301. See Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 where the High Court upheld an award of damages based on the plaintiff’s lost opportunity. The amount of damages was discounted owing to the fact that the opportunity lost was subject to certain contingencies. See Baltic Shipping Co v Dillon (1993) 176 CLR 344. See J C Williamson Ltd v Lukey (1931) 45 CLR 282. See Rowland v Divall [1923] 2 KB 500. See Steele v Tardiani (1946) 72 CLR 386. The elements of a misrepresentation are discussed in Chapter 3 as part of fraud. Rescission for misrepresentation, however, does not require any evidence of deceit. See Solle v Butcher [1950] 1 KB 671. See Goods Act 1958 (Vic) s 11. Petelin v Cullen (1975) 132 CLR 355 at 359. See Alati v Kruger (1955) 94 CLR 216; and Academy of Health & Fitness Pty Ltd v Power, in [8.59].

[page 355]

CHAPTER 9

CONSUMERS’ RIGHTS AND THE SUPPLY OF GOODS AND SERVICES

CONTENTS Objectives of this chapter Setting the scene: A timely lesson Introduction and outline of chapter Consumers’ rights against the suppliers of goods

Introduction Supply to a ‘consumer’ What are the statutory guarantees relating to the supply of goods? When is a supply in trade or commerce? Supply by way of sale by auction Guarantee of acceptable quality Guarantee of fitness for any disclosed purpose Guarantee that goods correspond with description Guarantee that goods correspond with sample Guarantees may not be excluded Liability may be limited in certain circumstances Remedies for breach of statutory guarantees relating to goods Retailers’ right of indemnity against the manufacturer [page 356]

Consumers’ rights against the manufacturers of goods The manufacturers’ obligations to the consumer Defences available to the manufacturer Manufacturer may repair or replace goods provided it has given an express warranty to that effect Measuring the amount of damages Consumers’ rights against the suppliers of services Supply of services must be to a ‘consumer’ Supply must be in trade or commerce Meaning of ‘services’ Services not covered by the ACL Distinguishing services from sales of goods What are the statutory guarantees relating to the supply of services? Guarantees may not be excluded Limiting liability

Terms that limit or exclude liability in recreational services contracts Remedies for breach of statutory guarantees relating to services Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should understand how legislation protects consumers when acquiring goods or services: by requiring sellers to provide certain guarantees which cannot be excluded; and by requiring manufacturers to provide certain guarantees that cannot be excluded

[page 357]

SETTING THE SCENE: A TIMELY LESSON Some years ago, a student came into the office of his former commercial law professor. The student was proud of his new Tag Heuer watch. His father had purchased the watch as a graduation gift for completing his Masters degree. Knowing the professor was an amateur watch collector, the student wanted to show off his new possession. The professor smiled

and was about to congratulate him when the words died in her mouth: it was a fake. The professor looked at the watch for a long time, trying to think of something to say. Did the student’s father know it was a fake? If he did why would he give it to his son as a graduation gift? On the other hand, if he didn’t know it was a fake, then shouldn’t they be told: the father had wasted thousands of dollars. What to say? The professor put on her best professional face and said: ‘That’s a beautiful watch. Tell me, do you remember the topic of sale by description? …’.

INTRODUCTION AND OUTLINE OF CHAPTER The Australian Consumer Law introduced a uniform system of consumer protection throughout Australia. The Australian Competition and Consumer Commission (ACCC) has primary responsibility for enforcing the ACL. The ACCC has a good website at .

9.1

The Australian Consumer Law (ACL) requires sellers of consumer goods and services (generally, retailers) to guarantee those goods and services. Similar obligations are also imposed on manufacturers. Because the ACL is a national scheme, the statutory guarantees and remedies are the same throughout Australia. The guarantees may not be excluded, restricted or modified. This chapter examines: consumers’ rights against the supplier of goods: supply to a consumer; the statutory guarantees;

the statutory remedies; suppliers’ right of indemnity against the manufacturer; consumers’ rights against the manufacturer of goods; and consumers’ rights against the supplier of services: supply to a consumer; the statutory guarantees; the statutory remedies.

CONSUMERS’ RIGHTS AGAINST THE SUPPLIERS OF GOODS Introduction 9.2

The ACL provides the buyer of goods with certain rights against the supplier of those goods, provided the buyer is a consumer. Those rights are called guarantees. If a guarantee is not complied with, the consumer has remedies as set out in the ACL. The consumer [page 358] includes not only the buyer but also any person to whom the consumer gives the goods as a gift (see [9.19]). To understand those rights it is necessary to understand: what is meant by a ‘consumer’; what the guarantees are; and what the remedies are.

Supply to a ‘consumer’ The definition of ‘consumer’ is deliberately cast wide

enough to protect business purchasers where the price is under $40,000.

9.3

The definition of ‘consumer’ is provided by s 3 of the ACL: 3

(1) A person is taken to have acquired particular goods as a consumer if, and only if: (a) the amount paid or payable for the goods, as worked out under subsections (4) to (9),1 did not exceed: (i) $40,000; or (ii) if a greater amount is prescribed for the purposes of this paragraph — that greater amount; or (b) the goods were 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. (2) However, subsection (1) does not apply if the person acquired the goods, or held himself or herself out as acquiring the goods: (a) for the purpose of re-supply; or (b) for the purpose of using them up or transforming them, in trade or commerce: (i) in the course of a process of production or manufacture; or (ii) in the course of repairing or treating other goods or fixtures on land. …

The ACL covers not only a sale of goods but also the lease or hire of goods. Wherever the material in this chapter refers to the ‘seller’ or ‘supplier’ of goods, it also means the ‘hirer’ or ‘lessor’ of goods. In addition to those items normally regarded as goods, the ACL defines ‘goods’ to include ships, aircraft and other vehicles; animals, including fish; minerals, trees and crops, whether on, under or attached to the land or not; gas and electricity; computer software (including software sold online);2 second-hand goods; or any component part of, or accessory to, goods: s 2. In Crago v Multiquip Pty Ltd (1998) ATPR ¶41-620, the Federal Court had to decide whether an ostrich-egg incubator was a good of a kind ‘ordinarily acquired for personal, domestic or household use or consumption’. Lehane J said (at 40,798):

The evidence spoke of an ostrich ‘industry’. It established that, at the relevant time, ostriches and their eggs were traded at high prices. All those, about whose use of incubators evidence was given, used them in the course of a business. Certainly it cannot be regarded as a matter of common knowledge that an ostrich egg incubator is, like a carpet, a washing machine or a television set, ordinarily acquired for personal, household or domestic use. There was no evidence that anyone in fact acquired such incubators for such use. I must therefore hold that Mr and Mrs Crago have not established that the incubators they acquired are ‘goods’ [of a kind ordinarily acquired for personal, domestic or household use or consumption].

[page 359]

Atkinson v Hastings Deering (Qld) Pty Ltd (1985) ATPR ¶40-625 (Federal Court) Facts Atkinson purchased a second-hand tractor from Hastings Deering Pty Ltd. The tractor proved to be defective in that it was prone to overheating. Atkinson claimed that the tractor was not fit for the purpose of scrub-pulling which had been made known to Hastings Deering at the time of sale. Issues (1) Was the contract a consumer contract? This depended on whether the tractor could be described as a good ordinarily acquired for personal, domestic or household use. (2) Was the tractor reasonably fit for the purpose of scrub-pulling, having regard to the circumstances? Decision A tractor was not a good ordinarily acquired for personal, domestic or household use. Nor was the tractor a commercial road vehicle. Therefore, this was not a consumer contract. The Sale of Goods Act 1898 (Qld) applied. Under that Act, the court held that the tractor was reasonably fit having regard to the fact that it was secondhand and therefore more likely to be subject to breakdowns due to wear and tear. Therefore, Atkinson failed in his claim.

What are the statutory guarantees relating to the supply of goods?

9.4

Where a person supplies goods to a consumer, the supplier guarantees that: the supplier has a right to sell or dispose of the property in the goods: s 51; the buyer has the right to undisturbed possession of the goods: s 52; the goods are free from any security, charge or encumbrance not disclosed in writing before the contract was made: s 53. This means the goods are not mortgaged or charged in any way; the goods are of acceptable quality: s 54; the goods are fit for any disclosed purpose, and for any purpose for which the supplier represents that they are reasonably fit: s 55; where the goods are sold by description, the goods correspond with the description: s 56; where goods are sold by reference to a sample or demonstration model, the goods correspond with the sample or demonstration model in quality, state or condition: s 57; and the supplier will comply with any express warranty given or made by the supplier: s 59(2). Except for the first three guarantees, all guarantees apply only where there is a supply to a consumer ‘in trade or commerce’ (see [9.5]). Except for the first three guarantees, all guarantees do not apply to auction sales (see [9.6]). [page 360]

When is a supply in trade or commerce? The ACL does not apply to private sales or sales by auction.

9.5

The goods must be supplied ‘in trade or commerce’ for any of the guarantees in ss 54–59 to apply. The effect of this requirement is that private contracts will not be subject to most of the ACL. For example, student A sells her old law textbook to student B. Student A is not selling the book as part of a business, so the sale is not in trade or commerce. As another example, Priscilla sells her car to Elvis. Provided Priscilla is not in the business of buying and selling cars or is not selling the car as part of a business, the contract is not made ‘in trade or commerce’. Would it be any different if Priscilla sold her car to the Graceland Car Dealership Co Ltd, which buys and sells cars for profit? Would this be ‘in trade or commerce’? The answer is ‘no’ because it is irrelevant that the buyer acquired the goods (the car) in the course of business. The important issue is whether the seller sold the goods in trade or commerce.

Supply by way of sale by auction 9.6

The statutory guarantees of acceptable quality, fitness for purpose and correspondence with description and sample do not apply where there is a sale by way of auction. Sale by auction is defined in s 2 and is limited to traditional auctions using an auctioneer. Online auctions are not auction sales for the purposes of the ACL. Therefore, in the case of a sale using an online auction site, such as eBay, and provided the sale is in trade or commerce, the statutory guarantees apply See Malam v Graysonline, Rumbles Removals and Storage (General) [2012] NSWCTTT 197, where the sale of a glass table by online auction was held to be subject to the ACL. (As the table was broken there was a breach of the s 54 guarantee and the s 55 guarantee.)

Guarantee of acceptable quality 9.7

The consumer has an action against the supplier where the goods are not of acceptable quality (s 54):

54

(1) If: (a) a person supplies, in trade or commerce, goods to a consumer; and (b) the supply does not occur by way of sale by auction; there is a guarantee that the goods are of acceptable quality. (2) Goods are of acceptable quality if they are as: (a) fit for all the purposes for which goods of that kind are commonly supplied; and (b) acceptable in appearance and finish; and (c) free from defects; and (d) safe; and (e) durable; as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods), would regard as acceptable having regard to the matters in subsection (3). (3) The matters for the purposes of subsection (2) are: (a) the nature of the goods; and (b) the price of the goods (if relevant); and (c) any statements made about the goods on any packaging or label on the goods; and

[page 361] (d) any representation made about the goods by the supplier or manufacturer of the goods; and (e) any other relevant circumstances relating to the supply of the goods. …

The supplier is not responsible for defects pointed out to the consumer before sale. This may be done by way of a notice displayed with the goods. Nor is the supplier responsible for defects caused by the consumer’s carelessness. Finally, where the consumer examines the goods prior to sale, the supplier is not responsible for any defects that the examination ought reasonably to have revealed.

Paisley v Aitchison t/a Dean Cars & Anor (Civil Claims) [2012] VCAT 1483

Facts Paisley bought a Kia Carnival from Aitchison. The vehicle was eight years old. It had travelled almost 80,000 km. The price was $12,500.00 inclusive of a DVD, stamp duty and transfer fees. Paisley complained about a number of matters, including a flat battery, a fuel gauge that gave an incorrect reading, an oil leak and a defective windscreen wiper. Aitchison remedied all these defects at no cost to Paisley. Paisley sought to rescind the contract for breach of s 54 ACL (goods not of acceptable quality). Issues Was the car of acceptable quality? If it was not of acceptable quality, did the defects amount to a major failure to comply with the guarantee under s 54 ACL (see [9.15])? Decision In considering whether the vehicle was of acceptable quality, the car must be compared to a similarly aged and used vehicle. In this case, the defects did not mean that the car was not of acceptable quality. Therefore, there was no breach of s 54 ACL. The tribunal also held that, even if the car was not of acceptable quality, none of the defects amounted to a major failure.

In contrast, a used car that continually overheated and stalled, probably because of a cracked cylinder head in the engine, was not of acceptable quality. The defect was a major failure to comply with the s 54 guarantee. The buyer was entitled to reject the car: see Barratta v TPA Pty Ltd (Civil Claims) [2012] VCAT 679. The scope of protection provided to consumers by this statutory guarantee is similar to that under the previous law, which implied a contractual promise of ‘merchantable quality’.3 The case below illustrates facts in which a consumer might argue that the goods were not of acceptable quality. [page 362]

Grant v Australian Knitting Mills

[1935] AC 85 (Privy Council) Facts Dr Grant bought some woollen underwear manufactured by Australian Knitting Mills (AKM) from John Martin’s retail store in Adelaide. The day after first wearing the underwear, he contracted dermatitis. The illness was extremely serious and lasted for approximately a year. The court found that the dermatitis was caused by residual chemicals in at least one pair of the underwear, allegedly due to negligence in the manufacturing process. Grant sued John Martin for breach of contract. One of his arguments was that the goods were not of merchantable quality. (Grant also sued AKM for negligence (see [2.7]).) Issue Were the goods of merchantable quality? Decision In relation to the claim against the retailer, John Martin, the Privy Council held that the goods, as sold, were not of merchantable quality.

If facts similar to those in Grant v Australian Knitting Mills occurred today, the purchaser would argue that the goods were not of acceptable quality, as guaranteed under ACL s 54. Would such an argument succeed? The answer depends perhaps on whether purchasers of new clothing expect to be able to wear the items straight away, or whether it is normal practice for purchasers to wash such clothing prior to wearing. A prudent manufacturer would, of course, include a warning on the packet, and this could protect both the manufacturer and the retailer.

Guarantee of fitness for any disclosed purpose 9.8

If the consumer makes known the purpose for which goods are required and the consumer relies on the seller’s skill in choosing the appropriate goods, then the consumer has an action against the supplier if the goods are not reasonably fit for that purpose. The goods must also be reasonably fit for any purpose for which the supplier represents that they are reasonably fit (s 55):

55

(1) If: (a) a person (the supplier) supplies, in trade or commerce, goods to a consumer; and (b) the supply does not occur by way of 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. (2) A disclosed purpose is a particular purpose (whether or not that purpose 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:

[page 363] (i) the supplier; or (ii) a person by whom any prior negotiations or arrangements in relation to the acquisition of the goods were conducted or made; or (b) the consumer makes known to the manufacturer of the goods either directly or through the supplier or the person referred to in paragraph (a)(ii). …

Dawson v Pacific Chase Investments (General) [2012] NSWCTTT 432 Facts Dawson bought a horse to use in harness racing. The purpose was known to the seller. Later it was discovered that the horse had laryngeal hemiplegia which made it wholly unsuitable for racing. Neither the seller nor Dawson was aware of the problem. Dawson had inspected the horse before sale but did not have a veterinarian check the horse. Dawson sought to reject the horse and the seller refused. Issue Did the ACL apply? Was the horse of acceptable quality (s 54) and fit for the purpose of harness racing (s 55)? Decision This was a consumer contract for the sale of a good within the meaning of the ACL. Although the buyer inspected the horse, the inspection did not and would not have revealed the defect. The horse was therefore neither of

acceptable quality nor fit for the buyer’s disclosed purpose. The buyer was entitled to reject the horse.

The guarantee does not apply if the circumstances show that the consumer did not rely on, or that it was unreasonable for the consumer to rely on, the skill or judgment of the supplier or the manufacturer or other person.

Carpet Call Pty Ltd v Chan (1987) ATPR (Digest) ¶46-025 (Supreme Court of Queensland) Facts Chan sought a number of quotes for the supply of carpet for his nightclub. Eventually, Carpet Call’s quote for $68,839 was accepted. During negotiations, Chan explained to Carpet Call that he wanted a carpet of good quality, grey in colour, capable of withstanding heavy human traffic and generally suitable for a big nightclub catering for young, upmarket patrons. The carpet supplied was rated as heavy duty domestic. [page 364] Chan refused to pay the full amount of the purchase price after certain areas of the carpet became unsightly as a result of cigarette burns, stains and extraordinary customer abuse. Chan would have been better to buy a patterned carpet as the stains and burns would not have been so obvious. Carpet Call had failed to advise Chan of this. Carpet Call sued for the unpaid purchase price. In his defence, Chan argued that the carpet was not reasonably fit for the purpose for which it had been sold. Issue Was the contract a consumer contract — that is, were the goods of a type ordinarily acquired for personal, domestic or household use? Had the buyer relevantly relied on the seller’s skill? Decision The court held that the contract was a consumer contract because the goods were of a type ordinarily purchased for personal, domestic or household use.

They did not lose that character by being purchased in this case for commercial use. Thomas J said (at 53,072): In my view ‘carpet’ is a commodity, or goods, ordinarily acquired for domestic consumption, and it did not lose that description by reason of a commercial rating, or some quality, which makes it last longer than other carpet normally supplied for use in a domestic setting. However, there was insufficient evidence to establish that the buyer had relied on the seller’s skill to supply a carpet that would camouflage the staining caused by the patrons’ use. Therefore, Carpet Call succeeded in its claim for the full purchase price.

Of course it is possible that goods acquired by a consumer might fail to comply with more than one of the statutory guarantees. Imagine that W purchases a pair of shoes from a department store, after asking the salesperson for a pair of shoes for walking which would fit comfortably over a deformity on her foot. The shoes are comfortable, but on the third occasion on which W wears the shoes, one of the heels collapses, causing W to fall and break her leg. Subsequent investigation reveals the shoes were poorly made and the heels were not properly fastened to the shoes. This scenario occurred in the 1930s in David Jones Ltd v Willis (see [7.22]), a case that finished up in the High Court. Today, the consumer would most likely have claims against the department store for breach of the statutory guarantees of acceptable quality and fitness for the disclosed purpose (see Dawson v Pacific Chase Investments, above). Also, the consumer could sue the manufacturer directly, under the ACL s 271 (see [9.21]–[9.24]) and/or for negligence and ACL Pt 3-5 (see Chapter 2).

Guarantee that goods correspond with description 9.9

The consumer has an action against the supplier if the goods do not correspond with the description by which they are sold (s 56): 56

(1) If:

(a) a person supplies, in trade or commerce, goods by description to a consumer; and (b) the supply does not occur by way of sale by auction; there is a guarantee that the goods correspond with the description.

[page 365] (2) 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. …

This guarantee only applies where the goods were sold (or otherwise supplied) by description. Although decided under the previous law, the following case provides a useful illustration of the courts’ approach to the meaning of this phrase.

Beale v Taylor [1967] 1 WLR 1193 (UK Court of Appeal) Facts The seller advertised a car for sale as a ‘Herald convertible, white, 1961 …’. The buyer inspected the car before purchase. Later, the buyer took the car to a garage and was told that the car was, in fact, two cars welded together (a shady practice still occurring today, producing what is often referred to as a ‘cut and shut’ vehicle). The rear was a 1961 Herald but the front was an earlier model. Because of the welding, the car was not roadworthy. The buyer sued for breach of the implied condition that the car correspond with the description by which it was sold. Issue Was the sale a sale by description? What was the description by which the car was sold? Had the seller breached the obligation to ensure the good sold matched the description? Decision Although the buyer inspected the car, it was still a sale by description, viz ‘1961 Herald convertible’. As the car did not match that description, there was a breach of the requirement that the goods match the description by which they were sold.

Guarantee that goods correspond with sample 9.10

Where goods are sold by reference to a sample or demonstration model, the consumer has an action against the supplier if the goods do not correspond with the sample or demonstration model in quality, state or condition. This guarantee also ensures that the buyer has a reasonable opportunity to inspect the goods supplied, to compare them with the sample (s 57): 57

(1) If: (a) a person supplies, in trade or commerce, goods to a consumer by reference to a sample or demonstration model; and (b) the supply does not occur by way of sale by auction; there is a guarantee that: (c) the goods correspond with the sample or demonstration model in quality, state or condition; and

[page 366] (d) 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 (e) the goods are free from any defect that: (i) would not be apparent on reasonable examination of the sample or demonstration model; and (ii) would cause the goods not to be of acceptable quality. …

Guarantees may not be excluded Although the statutory guarantees may not be excluded, the supplier is entitled in certain circumstances to limit its liability.

9.11

Except as provided by s 64A, suppliers are not permitted to exclude, restrict or modify the statutory guarantees. Any attempt to do so is void: s 64.1

Liability may be limited in certain circumstances Liability may be limited where goods not normally bought for personal use, etc The supplier limits its liability by including an appropriate limitation clause in the contract.

9.12

Liability for breach of a statutory guarantee can be limited in certain cases. As a consumer contract can involve the sale of a good which would not normally be regarded as a consumer item, it was thought by the framers of the ACL that the seller in such cases ought to have a limited right to restrict liability. Thus, s 64A allows the seller a limitation clause if the goods are not of a type normally acquired for personal, household or domestic use, and it is reasonable in the circumstances to allow the limitation clause. Under s 64A(1), the seller is permitted to limit its liability to: (a) replacement of the goods; or (b) repair of the goods; or (c) paying for the cost of replacing the goods; or (d) paying for the cost of repairing the goods. All sellers of non-consumer-type products should consider taking advantage of this opening provided by the ACL. To understand the operation of ss 64 and 64A, consider the following problem. Assume that Jonah Pty Ltd is a small company which entered into the following contracts: 1. From Cheap Electrix Ltd, it acquired an electric kettle for use in the staff tearoom. This contract had a clause which stated: ‘All implied conditions and warranties are hereby negatived. In no event shall the seller be liable other than for the replacement of the goods’. 2. From Classy Copiers Ltd, Jonah acquired a photocopier for $5000 for use in the office. This contract contained the following clause: ‘The seller’s liability is hereby limited to the repair or replacement of the goods sold, whether such liability

should arise out of breach of express or implied condition or warranty or out of negligence’. The electric kettle had an electric fault which caused a fire which burnt down the tearoom. The photocopier also had an electric fault which caused extensive fire damage to the office. What would you advise Jonah Pty Ltd in these circumstances? It is suggested that both contracts come under the ACL. Both sales occur in trade or commerce. Neither good is being bought for resale or to be used up in the production process. The kettle is a good ordinarily acquired for personal, domestic or household use and the copier is under $40,000. [page 367] The statutory guarantee of acceptable quality has not been complied with in both cases. Most likely there have also been breaches of the statutory guarantee of fitness for disclosed purpose. The ACL gives the buyer the right to reject the goods provided this is done within the rejection period (see [9.16]). This means that the buyer can return the goods and demand a refund. The buyer also has the right to sue for all damages flowing from the breach which were reasonably foreseeable. In both cases, it was foreseeable that if the goods had an electric fault, fire damage could result. In the case of the kettle, the contract is for a good that is normally purchased for personal, household or domestic use and, therefore, the exclusion clause is invalid in so far as it attempts to exclude liability for breach of the statutory guarantees. Jonah can return the kettle, get its money back and sue for the fire damage. The ACL permits statutory guarantees to be limited only in relation to goods not normally bought for personal, household or domestic use.

However, in the case of the photocopier, the ACL allows the

seller to limit its liability because the contract is for the sale of a good not normally purchased for personal, household or domestic use. Section 64A permits the seller to limit its liability to the repair or replacement of the goods. Jonah Pty Ltd can require Classy Copiers Ltd to repair or replace the copier but it cannot reject the goods or claim damages for the fire. Limitation must be fair and reasonable 9.13 The limitation clause permitted by s 64A(1) will not operate if the consumer can establish that it would not be fair or reasonable in the circumstances for the seller to rely on the clause: s 64A(2). In deciding whether it would be fair and reasonable to rely on the limitation clause, the court must have regard to all the circumstances, but particularly s 64A(3): the relative bargaining strength of the seller and the buyer; the extent to which the buyer had an opportunity to acquire the goods without the limitation clause; whether the buyer knew or ought to have known of the term; and whether the goods were specially adapted for the buyer. Consider, for example, a sale of agricultural equipment to a farmer for use on her farm. This would be a consumer contract provided the price was less than $40,000. However, agricultural equipment is not normally regarded as a consumer-type product. It is not of a type ordinarily bought for personal, domestic or household use. Therefore, the seller of the equipment could include a clause in the sale contract restricting its liability for breach of any of the statutory guarantees to repairing the equipment However, if: the term required the farmer at her own cost to transport the equipment to Sydney for repair, and the farmer’s property was in South Australia, and the term had not been brought to the farmer’s attention at the time of making the contract, but had been buried in the

standard terms and conditions, then the farmer would have an argument that it would not be fair or reasonable in the circumstances for the seller to rely on the limitation clause.

Remedies for breach of statutory guarantees relating to goods 9.14

The remedies available to the consumer where one of the statutory guarantees has not been complied with are set out in the ACL. The remedies depend first on whether the failure to comply is a major failure or not (see Figure 9.1). [page 368]

Figure 9.1

Remedies for breach of statutory guarantees relating to goods

Type of failure Remedies Notes to comply with guarantees Major failure (see Notify the supplier that Sometimes goods may [9.15]) goods are rejected; or not be rejected (see sue for compensation [9.16]–[9.17]) Procedures for for any reduction in rejecting goods value of goods below price paid or payable; The consequences and of rejection sue for damages for any loss or damage caused by failure to comply with guarantee, provided such loss or damage was reasonably foreseeable.

Not a major failure

Provided the failure can Supplier has options as be remedied, require to how guarantee is to be supplier to remedy the remedied (see [9.18]) failure within a reasonable time; or if supplier refuses or fails to comply: – have failure remedied by third party and sue supplier for reasonable costs of doing so; or – notify the supplier that goods are rejected. Sue for damages for any loss or damage caused by failure to comply with guarantee, provided such loss or damage was reasonably foreseeable.

What is a major failure? The basic rule is that a consumer has a right to a refund or compensation wherever there is a major failure.

9.15

The definition of a major failure is set out in s 260. A failure to comply with a guarantee is a major failure if: the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; the goods depart significantly from the description or sample or model by which they were sold;

the goods are substantially unfit for either their normal purposes or any disclosed purpose, and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or the goods are not of acceptable quality because they are unsafe. For a case involving a major failure, see Dawson v Pacific Chase Investments (in [9.8]). In contrast, for a case involving an unsuccessful attempt to prove a major failure, see Paisley v Aitchison (in [9.7]). When may goods not be rejected? 9.16 There are time limits on the right to reject goods. If goods are to be rejected, this must be done within the rejection period. The rejection period starts when the goods are supplied and finishes when the defect should have become apparent. The time at which the defect should have become apparent depends on a variety of factors set out in s 262(2), including the type of goods and the use to which they are likely to be put. [page 369] There are also physical limits on the right to reject goods. The goods may not be rejected if they have been: lost, destroyed or disposed of by the consumer; damaged after being delivered to the consumer for reasons not related to their state or condition at the time of supply; or attached to, or incorporated in, any real or personal property and they cannot be detached or isolated without damaging them. Rejecting the goods 9.17 If the consumer notifies the supplier that the goods are being

rejected, the consumer must return the goods. If this cannot be done except at significant cost to the consumer, the supplier must collect the goods at the supplier’s expense. This must be done within a reasonable time. If the consumer has rejected the goods, the consumer may require the supplier either to: provide a refund; or replace the goods with goods of the same type and value. The choice is up to the consumer. Any replacement goods are subject to the statutory guarantees. The supplier cannot require the consumer to take goods (other than replacement goods) instead of a refund. If the supplier is entitled to correct the failure, how is this to be done? 9.18 If the breach of statutory guarantee is not a major one, the supplier may remedy the breach by: repairing the goods; or replacing the goods with goods of an identical type; or providing the consumer with a refund: s 261. Where the goods have been given to another as a gift 9.19 A person who receives goods from a consumer as a gift has the same rights as the consumer in relation to the goods: s 266.

Retailers’ right of indemnity against the manufacturer 9.20

Where a supplier (eg, a retailer) incurs damages or costs as a result of a failure to comply with the statutory guarantees and the failure is due to the manufacturer, the supplier is entitled to be indemnified by the manufacturer for those damages and costs: s 274. Where the goods are not of a kind ordinarily acquired for personal, domestic or household use, the manufacturer may limit its liability to replacing or repairing the goods (provided that it is reasonable in the circumstances to do so): s 276A.

CONSUMERS’ RIGHTS AGAINST THE MANUFACTURERS OF GOODS The manufacturers’ obligations to the consumer The ACL extends the consumers’ rights to anyone who receives the goods as a gift.

9.21

The ACL requires manufacturers to provide similar guarantees as those imposed on suppliers. ‘Manufacturer’ includes growers, producers, importers (where the actual manufacturer is located overseas), assemblers, own branders and component-part makers: s 7. [page 370] For the purposes of the manufacturer’s obligations, the ‘consumer’ includes not only the person who acquired the goods as a consumer but also anyone who acquired the goods from the consumer or derived title to the goods from the consumer. A consumer may sue the manufacturer for damages where the goods: are not of acceptable quality (s 271(1)); or do not correspond with the description applied to the goods by or with the consent of the manufacturer: s 271(3). The consumer may also sue the manufacturer for damages where: the manufacturer fails to comply with its obligations to provide repair facilities and spare parts under s 58: s 271(5). Section 58 requires the manufacturer to guarantee that it will take reasonable action to ensure that facilities for repair of the goods, and parts for the goods, are reasonably available for a reasonable period after the goods are supplied; or the manufacturer fails to comply with an express warranty

given by the manufacturer: s 271(5). As with suppliers, manufacturers are not permitted to exclude these rights: s 276. Manufacturers are also obliged to indemnify suppliers who incur losses as a result of the manufacturer’s failure to comply with its obligations: s 274. For example, assume that firm M manufactures goods that are not of acceptable quality. M sells the goods to a retailer R. R sells the goods to consumer C. Because the goods are not of acceptable quality, C can sue R or M. If C decides to sue R, R has a right to seek indemnification by M. Therefore, ultimately, M will be responsible for the damages. M cannot avoid this responsibility by use of an exemption clause. The manufacturer may, however, limit its liability where the goods are not of a type ordinarily bought for personal, domestic or household use or consumption: s 276A. Reported cases in this area of the law are not numerous because (1) the expressions used in the law are very similar to the old law and therefore the law is fairly well settled, and (2) we are talking about consumers (who cannot afford expensive appeal cases).

Graham Barclay Oysters Pty Ltd v Ryan [2000] FCA 1099 (Federal Court) Facts A number of persons, including Ryan, contracted hepatitis A in early 1997 as a result of eating oysters grown in Wallis Lake, New South Wales. The oysters were grown by Graham Barclay Oysters Pty Ltd (Barclay), and sold by an associated company (Barclay Distributors Pty Ltd) to Ryan’s father, who had later given some to Ryan. The oysters were contaminated with hepatitis A virus, and Ryan contracted the virus (see [2.48] for further facts). Ryan sued Barclay for damages on the basis that Barclay was the manufacturer and the oysters were not of merchantable quality. (The previous law referred to merchantable quality, not acceptable quality. However, in a case such as this the two concepts are basically the same.) Issue Were the oysters eaten by Ryan of merchantable quality?

[page 371] Decision Barclay’s growing and harvesting of the oysters meant that Barclay was the manufacturer of the oysters. The oysters were not fit for the purpose of being eaten. As the normal purpose of oysters is to be eaten, and as the oysters were not fit for this purpose, the oysters were not of merchantable quality. Therefore, Ryan was entitled to damages.

Graham Barclay Oysters v Ryan is a good example of the importance of considering all possible legal claims. Ryan sued Barclay Oysters and others for negligence, defective (unsafe) goods, misleading or deceptive conduct as well as manufacturer’s liability for the quality of the goods. After appeals to the Federal Court and the High Court, only the latter claim was successful. The claims for negligence, defective goods and misleading conduct all failed for various reasons

Medtel Pty Ltd v Courtney [2003] FCAFC 151 (Federal Court) Facts Courtney had a pacemaker implanted in mid-1999 to regulate his heart rhythm. Medtel Pty Ltd (Medtel) was the Australian distributor of that pacemaker. In 2000, an alert was issued about that model of pacemaker, warning of the risk of early depletion of the battery which, if it occurred, would render the pacemaker ineffective. The alert recommended not just testing each recipient’s pacemaker, but also possible removal and replacement of the pacemaker. Following the alert, Courtney’s pacemaker was tested and found to be working, but was ultimately replaced following the alert’s recommendation. The replacement surgery was free of charge to Courtney, but Courtney sued Medtel, seeking compensation because the pacemaker was not of merchantable quality or fit for the purpose. Issue Was the contract a consumer contract? Was the pacemaker of merchantable

quality? Decision The court found that pacemakers were goods of a kind ordinarily acquired for personal use and that Medtel was a manufacturer. The high risk of premature battery depletion caused a level of risk of malfunction that rendered the pacemakers unfit for the purpose for which pacemakers are normally acquired (ie, surgical implantation into humans to restore and regulate the heart’s beating). Since the pacemaker was not of merchantable quality and the plaintiff had suffered loss, Medtel was liable for compensation. Medtel was ordered to pay the plaintiff $9998.20 in compensation, which included $7500 for pain, suffering and loss of enjoyment of life.

[page 372]

Defences available to the manufacturer 9.22

The manufacturer has a number of statutory defences. Thus, the manufacturer will not be liable for the unacceptable quality of goods or the failure of the goods to correspond with description if the problem was caused by someone other than the manufacturer or its employees; or the problem was due to some cause independent of human control after the goods left the control of the manufacturer: s 271(2). The manufacturer will also not be liable for the unacceptable quality of goods if the goods are unacceptable only because the price charged by the retailer is above the manufacturer’s recommended retail price (or the average retail price) for the goods: s 271(2). The manufacturer will not be liable for failure to provide repairs and spare parts if the manufacturer has taken reasonable steps to ensure that the consumer would be given notice (before sale to the consumer) that repair facilities and spare parts might not be available, or might not be available after a specified period: s 58(2).

Manufacturer may repair or replace goods provided it has given an express warranty to that effect 9.23

A manufacturer may provide an express warranty to repair or replace goods which are of unacceptable quality or do not correspond with the manufacturer’s description: s 271(6). In such cases, the consumer cannot sue for damages unless the manufacturer has failed to honour its warranty within a reasonable time.

Measuring the amount of damages 9.24

The amount of damages that the consumer may recover from the manufacturer is set out in s 272. If the consumer has paid an unusually high price to the retailer for the goods, this does not affect the manufacturer, as the latter is liable only for the decrease in value as compared to the lower of the price paid or the average retail price of such goods at the time.

CONSUMERS’ RIGHTS AGAINST THE SUPPLIERS OF SERVICES Supply of services must be to a ‘consumer’ The ACL applies to services as well as to sales of goods.

9.25

The ACL guarantees apply only where services are supplied to a consumer. Section 3(3) of the ACL provides that: 3

(3) A person is taken to have acquired particular services as a consumer if, and only if: (a) the amount paid or payable for the services, as worked out under subsections (4) to (9), did not exceed: (i) $40,000; or (ii) if a greater amount is prescribed for the purposes of subsection (1) (a) — that greater amount; or (b) the services were of a kind ordinarily acquired for personal, domestic or household use or consumption.

Supply must be in trade or commerce 9.26

The ACL only applies to services supplied in trade or commerce. [page 373]

Meaning of ‘services’ 9.27

‘Services’ is broadly defined in s 2 and includes 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. This includes 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.

Services not covered by the ACL 9.28

There are certain other services not covered by the ACL consumer guarantees. These include: financial services, which are covered by the Australian Securities and Investments Commission Act 2001 (Cth); employment contracts; insurance contracts; contracts for or in relation to the transportation or storage of

goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored; supply of a telecommunication service; and supply of gas or electricity services.

Distinguishing services from sales of goods 9.29

Many contracts require both the provision of services and the provision of goods. Where the goods are provided as incidental to the provision of services, the contract will be regarded as a contract for the provision of services and not as a contract for the sale of goods. Thus, hiring a plumber to fix a leaking tap is a contract for services even though the plumber may install a new washer. Hiring a cabinet maker to make a new dining room table, however, would be a contract for the sale of a good. A contract to supply engineering or architectural drawings is a contract for services.

What are the statutory guarantees relating to the supply of services? 9.30

There are three guarantees relating to the provision of services: 1. a guarantee of due care and skill: s 60; 2. a guarantee as to fitness for particular purpose: s 61; and 3. where no time for the supply of services is fixed, a guarantee that they will be supplied within a reasonable time: s 62. [page 374]

The guarantee of due care and skill 9.31 Section 60 of the ACL provides that, if a person supplies, in trade or commerce, services to a consumer, there is a guarantee that the services will be rendered with due care and skill

Read v Nerey Nominees Pty Ltd [1979] VR 47 (Supreme Court of Victoria) Facts Read twice took his BMW car to Nerey Nominees Pty Ltd (Nerey) to have the transmission fixed. The BMW contained a switch which prevented the car from starting when the automatic transmission was engaged. This meant that the car could only be started when it was in neutral. Nerey told Read that the switch was missing and that, until a new switch became available, Read would have to be careful when starting the car. In fact, the switch was not working because Nerey had wired it incorrectly. On one occasion, Read started the car and forgot to check that the car was in neutral. The car shot forward and damaged Read’s garage. Read sued, claiming that Nerey’s failure to exercise reasonable care and skill had caused Read to suffer a loss. Issues Was Nerey under an obligation to exercise reasonable care and skill in repairing Read’s car? Had Nerey breached that obligation? If so, had the breach caused the damage to Read’s garage? Decision The court held that Nerey was under an obligation to exercise reasonable care and skill. There had clearly been a breach of that obligation. The final issue was whether the breach had caused the damage. The fact that Read had been warned about the defect did not necessarily mean that Nerey’s breach had not caused the loss. The case was sent back to the Magistrates Court to determine who caused the damage.

The guarantee as to fitness for particular purpose 9.32 Where the buyer makes known to the service provider the purpose for which the service is required, the service must be reasonably fit for that purpose (s 61): 61

(1) If: (a) a person (the supplier) supplies, in trade or commerce, services to a consumer; and (b) the consumer, expressly or by implication, makes known to the supplier any particular purpose for which the services are being acquired by the consumer; there is a guarantee that the services, and any product resulting from the services, will be reasonably fit for that purpose.

[page 375] (2) If: (a) a person (the supplier) supplies, in trade or commerce, services to a consumer; and (b) the consumer makes known, expressly or by implication, to: (i) the supplier; or (ii) a person by whom any prior negotiations or arrangements in relation to the acquisition of the services were conducted or made; 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. (3) This section does not apply if the circumstances show that the consumer did not rely on, or that it was unreasonable for the consumer to rely on, the skill or judgment of the supplier. …

In Crawford v Mayne Nickless Ltd (1992) ASC ¶56-144 it was held that there had been a breach of the fitness for purpose obligation in a contract for the installation of an alarm system when the alarm failed to work.

Zhang v United Auctions (Home Building) [2013] NSWCTTT 6 Facts Zhang took his motorcycle to have repair works carried out, including ‘to address a “ticking or tapping” noise that was emanating from the vehicle’s engine’. The repairer carried out a range of repairs but the noise persisted. Issues Did the ACL apply to this repair contract? If so, was there a breach of the ACL? Decision This was a services contract covered by the ACL. The statutory guarantee required by s 61 had been breached as the services were not reasonably fit for the purpose of eradicating the noise. Zhang was entitled to a refund.

Guarantees may not be excluded 9.33

Any term in a contract that purports to exclude, restrict or modify the statutory guarantees is void: s 64.

Limiting liability 9.34

The service provider may limit liability where the service is not of a type normally acquired for personal, household or domestic use, and it is reasonable in the circumstances to allow the limitation clause. The service provider is permitted to limit its liability to: supplying the services again; or paying to have the services supplied again: s 64A(2). [page 376] Whether it is reasonable for the service supplier to limit its liability depends on a range of factors. These are discussed above in relation to goods (see [9.13]).

Terms that limit or exclude liability in recreational services contracts 9.35

Providers of recreational services may limit their liability: s 139A Competition and Consumer Act 2010 (Cth). This is done by including an exemption clause in the contract. To include such a clause in the contract the service provider must give reasonable notice of the clause to the consumer of the service. Recreational service includes any sporting activity or any other activity that (1) involves a significant degree of physical exertion or physical risk and (2) is undertaken for the purposes of recreation, enjoyment or leisure. The limitation of liability will not be effective if the injury is caused by the recklessness of the supplier of the service.

Remedies for breach of statutory guarantees relating to services

The remedies available to the consumer where one of the statutory guarantees has not been complied with are set out in the ACL. As with the supply of goods, the remedies depend first on whether the failure to comply is a major failure or not (see Figure 9.2). Figure 9.2 Remedies for breach of statutory guarantees relating to services 9.36

Type of failure to comply with guarantees Major failure (see [9.37])

Not a major failure

Remedies

Notes

Terminate the contract; Procedures for or terminating (see sue for compensation [9.38]) for any reduction in value of services below price paid or payable; and sue for damages for any loss or damage caused by failure to comply with guarantee, provided such loss or damage was reasonably foreseeable. Provided the failure can Supplier has options be remedied, require as to how guarantee supplier to remedy the is to be remedied failure within a (see [9.18]) reasonable time; or if supplier refuses or fails to comply: – have failure remedied by third party and sue supplier for

reasonable costs of doing so; or – terminate the contract. Sue for damages for any loss or damage caused by failure to comply with guarantee, provided such loss or damage was reasonably foreseeable. What is a major failure? 9.37 The definition of a major failure is set out in s 268. A failure to comply with a guarantee is a major failure if: the services would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; [page 377] the services are substantially unfit for their normal purpose, and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; the services and any product resulting from the services, are unfit for the purpose made known by the consumer, and the services cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; the services and any product resulting from the services, are not of such a nature, or quality, state or condition, that they might reasonably be expected to achieve the purpose made known by the consumer, and the services cannot, easily and within a reasonable time, be remedied to make them fit for

such a purpose; or the supply of the services creates an unsafe situation. Termination of the contract: procedures and effect 9.38 Termination takes effect from the time termination is made known to the supplier (whether by words or conduct). Following termination, the consumer may take action against the supplier for a refund of money or any other consideration provided. Where goods are supplied with the service and the consumer has terminated the services contract, the consumer is taken to have rejected the goods. The consumer must then return the goods unless this is not possible without significant cost to the consumer. In such cases, the supplier must collect the goods: s 270.

ADVICE — LAW IN PRACTICE When supplying goods to consumers or when manufacturing goods that will be supplied to consumers, you should ensure the goods: correspond with any description or sample by which they are sold; be of acceptable quality; and be fit for any special purpose disclosed. When supplying services to a consumer, you should ensure that: the service is supplied with due care and skill; the service is fit to achieve any specific purpose made known to you; and any materials supplied with the service are fit for the purpose. As a supplier or manufacturer, you cannot avoid these obligations.

[page 378]

QUESTIONS Question 1 (a) Are the following contracts ‘consumer’ contracts within the meaning of s 3(1) ACL? (i) Jim buys a new lawnmower for personal use from Garden Supplies Ltd for $350. (ii) X Ltd purchases a new BMW for $75,000 from Classy Motors Pty Ltd for use by its managing director. (iii) Classy Motors buys a new BMW from BMW Imports Ltd for $50,000. The vehicle is to be sold through Classy Motors’ retail store. (iv) Sue, who is a farmer, buys a tractor for use on her farm from Tractors Galore Ltd for $39,000. (v) Betty and Tom buy a second-hand bus for $52,000 to use as a campervan in a round-Australia holiday trip. (vi) A contract for the purchase of 5 tonnes of sugar, to be used to make chocolate, for $39,000. (vii) A second-hand $50,000 gold Rolex watch purchased at an auction. (b) Are the following contracts ‘consumer’ contracts within the meaning of s 3(3) ACL? (i) Thomas pays $100 to have his BMW car serviced.

(ii) X Ltd pays $1000 to have their BMW car serviced. (iii) X Ltd pays $45,000 to have their head office renovated. (iv) Beyonce pays $39,000 to have her private jet serviced. (v) Beyonce pays $42,000 to have her private jet serviced. (vi) X Pty Ltd, a private company that flies celebrities all round the world, pays $42,000 to have their private jet serviced. (c) Is ordering a meal at an exclusive restaurant a contract for a good or a service? What would your answer be if the contract were instead for: (i) buying a tin of spaghetti bolognaise from a supermarket? (ii) buying a takeaway meal from the drive-through from a fast-food chain, such as McDonald’s?

Question 2 You have been hired as the manager of a new retail chain. You will be responsible for the sales staff in five different stores. The owner is concerned about the Australian Consumer Law and asks you to draw up a guide for the sales staff to assist them in dealing with customers’ enquiries and complaints. Sales staff need to know what rights the customers have. Draw up the advice in the form of an FAQ directed at customers.

Question 3 Carolyn is getting married. On the day before her wedding, she goes to Billy-Bob, one of the popular hairdressers in

town, who has cut her hair for many years. While they are discussing her new hairstyle, Billy-Bob tells Carolyn that she has very beautiful, but fine, hair. She replies: ‘Thanks!’. When Billy-Bob asks Carolyn what style she would like, she says, ‘Surprise me! [page 379] No, wait, surprise me, but make me look glamorous!’. BillyBob sighs and says, ‘This is what I always dreamed of in hairdressing academy!’, and he cuts away with great enthusiasm. Two hours (and $240 paid by Carolyn) later, Carolyn is impressed with the amazing colour and style. She leaves very happy and with firm instructions to sleep standing up, to avoid destroying the new hairdo. The next morning, Carolyn wakes up to find a lot of her hair has fallen out. She rushes back to Billy-Bob and yells at him, ‘You’ve made me bald!’. The hairdresser shows her a big sign over the cashier, which says: ‘No refunds EVER! If you don’t like your haircut, GET OVER IT!’. Carolyn is so embarrassed by her hair that she decides to cancel the wedding and suffers severe depression. Advise Carolyn.

Question 4 Clean Pools Pty Ltd operates a business cleaning swimming pools. During the cleaning process, certain chemicals are used which are dangerous if not used in the proper quantities. Clean Pools sent a new employee, who had not been properly trained in the use of the chemicals, to clean Yasmin’s pool. The new employee used double the safe amount of chemicals. As a result, Yasmin suffered injuries. Before the cleaning commenced, Yasmin had

signed a ‘job sheet’ which contained the following statement: ‘Under no circumstances shall Clean Pools Pty Ltd’s liability for injury or loss, whether such injury or loss arises from breach of contract or negligence or otherwise, exceed $500’. (a) Yasmin’s damages are estimated at $1500. Can Yasmin sue Clean Pools for this amount under the ACL? (b) How would your answer to part (a) differ (if at all) if, instead of Clean Pools Pty Ltd, the service provider was Clean Tanks Ltd, a business involved in the cleaning of industrial storage?

Question 5 Mei Ling entered R Pty Ltd’s shop. She said to a salesperson, ‘Look, I’m going climbing in the Himalayas and I need a suitable sleeping bag. I’ll be there in the climbing season, but we will be attempting several 7000metre peaks, and so the bag needs to be waterproof, and also very warm, as the temperature falls at night to around −30 degrees Celsius. What have you got?’ The salesperson showed Mei Ling three sleeping bags, one of which was manufactured by X-Treme Sports Ltd. The salesperson was called away. Mei Ling selected XTreme Sports’ sleeping bag and paid the cashier $750. Mei Ling went to the Himalayas and suffered frost-bite because the sleeping bag was totally inadequate. In fact, it was designed for use in milder climates. Mei Ling hobbled into R’s store and demanded an explanation and compensation. The manager said: ‘Not our problem. You selected the sleeping bag and what’s more the sign at the cashier’s desk clearly states that R Pty Ltd shall not be liable for any damages save and except replacement of goods proved to be faulty at the time of sale.’ Mei Ling remembered reading the sign at the time she bought the goods.

(a) Does Mei Ling have an action against R Pty Ltd for damages under the ACL? Explain. (b) What difference (if any) would it make to your answer to part (a) if Mei Ling had been an expert climber with many years of experience, and this fact was known to the salesperson? [page 380] (c) What difference (if any) would it make to your answer to part (a) if, instead of asking a salesperson, Mei Ling merely selected the bag manufactured from X-Treme Sports Ltd from a section in the shop that was located under a sign saying, ‘Mountaineering Equipment’? (d) What are Mei Ling’s rights against the manufacturer, X-Treme Sports Ltd?

Question 6 Abhinav is an amateur watch collector. He visited Joyce’s Vintage & Second-Hand Watch Store Pty Ltd, where a beautiful Rolex Submariner watch was displayed in the shop window. Placed next to the watch was the following sign: Awesome! Genuine Rolex Submariner! It comes with an official certificate from the Swiss Horological Society. Valued at over $8000, but available for $6000. A GREAT BARGAIN: BUT BE QUICK!! It won’t last long!!

Abhinav examined the watch: he could hardly believe his luck! It looked like a genuine Rolex, so he purchased the watch. Three months later, one of Abhinav’s friends told him about a flourishing trade in cheap fake Rolex watches. So Abhinav took his watch to an official Rolex dealer in

Melbourne. Sadly for Abhinav, the watch proved to be a fake, a very good fake that only an expert could discover by examining inside the watch. Even the certificate was a fake. Abhinav is so embarrassed he decided not to tell his friends because they would laugh at him. So he did nothing until six months later when the watch stopped completely. He stormed into Joyce’s store and showed her the watch. ‘This is a fake and it doesn’t work! Give me back my money!’ Abhinav showed Joyce the report written by the official Rolex dealer stating that the watch was a fake. Joyce replied sincerely: ‘Look, I didn’t know it was a fake. The person who sold it to me lied. He gave me the certificate. It’s not my fault! Anyway it happened so long ago. You have NO legal rights to have your money refunded.’ (a) Advise Abhinav of his legal rights. (b) What would your answer be to part (a) if, inside the store on the counter, there was a sign saying: Dear Valued Customer, Whilst we take all care to guarantee the fine goods sold in this store, all goods are sold at the buyer’s risk, and we are not liable for any defects whatsoever. However, the company may, at its discretion, exchange a good for another of a similar price.

_________ 1 2 3

4

These subsections set out methods by which the amount is calculated in different circumstances. Australian Competition and Consumer Commission v Valve Corporation (No 3) [2016] FCA 196. The previous law required the goods to be of merchantable quality. The notion of merchantable quality is similar to the notion of acceptable quality found in the ACL. For this reason, cases decided under the previous law have been used in this chapter. In fact, misrepresenting the consumer’s rights can lead to significant fines under the ACL.

[page 381]

CHAPTER 10

AGENCY

CONTENTS Objectives of this chapter Setting the scene: Stuck with an unwanted contract Introduction and outline of chapter What is an agent? What are the indicators of an agency relationship? The functions of an agent An agent may make contracts on behalf of the principal An agent may receive moneys on behalf of the principal An agent may pay moneys on behalf of the principal

An agent may make representations on behalf of the principal An agent may receive representations on behalf of the principal Some common commercial relationships and agency Employer–employee Independent contractor Bailor–bailee Partnership Supplier–buyer Franchisor–franchisee [page 382]

How is an agency created? Agency may be created by express agreement Agency may be created by implied agreement Agency may be created by estoppel Agency may be created in cases of necessity Agency may be created by cohabitation The agent’s authority The agent’s actual authority The agent’s ostensible authority Principal may ratify agent’s unauthorised acts Meaning of ratification Rules applying to ratification Who can sue whom? When can the third party sue the principal? When can the principal sue the third party? When can the third party sue the agent? The undisclosed principal rule Duties of an agent

General duties Fiduciary duties Duties of the principal Termination of agency Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to describe the role of an agent in commercial relationships. In particular, you should be able to explain: what an agent is ‘in law’; how someone becomes an agent; the powers of an agent; the duties of an agent; and how an agency is ended.

[page 383]

SETTING THE SCENE: STUCK WITH AN UNWANTED CONTRACT

Steve needs artwork to decorate his office, and hires Primrose, a contact with artistic flair, to purchase some suitable art from a local art gallery. Steve contacts the gallery, advising them to expect Primrose, and promising to pay for Primrose’s selection. Primrose returns to Steve, having spent more money than Steve wanted. To make matters worse, Steve detests the chosen painting. Steve is concerned he’s stuck with a contract to buy the unwanted painting.

INTRODUCTION AND OUTLINE OF CHAPTER 10.1

‘Agency’ is a term widely used in commercial circles. However, not all relationships which, in the wider commercial usage, are called agencies, are agencies within the meaning of the law. This chapter is concerned with agency as a legal concept. A person cannot always act personally. It is necessary on occasions to act through the instrumentality of another. This person is called an agent. The person for whom the agent acts is called the principal. The relationship between the principal and the agent is one of agency. After exploring the key indicators of an agency relationship, this chapter discusses the legal relationships, rights and potential liabilities of the three parties in an agency relationship: 1. the principal; 2. the agent; and 3. the third party.

WHAT IS AN AGENT? 10.2

Broadly speaking, an agency exists wherever the agent has the power to affect the legal rights and obligations of the principal.1

The primary, but not sole, function of an agent is to make contracts on behalf of the principal. Suppose that Principal Motors Ltd is a large new-car dealer. It operates throughout Australia in most of the larger provincial towns. In each town, Principal Motors Ltd is represented by a local sales representative. Principal Motors Ltd has authorised each sales representative to sell new cars on its behalf. The representative negotiates and completes each sale contract with a buyer (the third party). The sales representative is an agent. The contract is not between the sales representative and the buyer, but between Principal Motors Ltd and the buyer. If the buyer wants to sue for breach of contract, the buyer will have to sue Principal Motors Ltd. [page 384] An independent dealer is not an agent. The facts may need to be examined closely to determine the true nature of the legal relationship between the parties.

Taking the above example, it may be that a more efficient distribution system would be to operate as a franchise. Under a franchising arrangement, each franchisee operates his or her own business. Principal Motors would sell the cars to the franchisee, who would then sell them to the buyers. The franchisee is not an agent for making contracts on behalf of Principal Motors. Rather, the franchisee is a principal in his or her own right.

International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 (High Court) Facts At the Sydney Agricultural Show, the third party (Carrigan, a farmer) was given a pamphlet by the principal (International Harvester, a manufacturer of farming equipment) extolling the virtues of the principal’s hay balers. For further information, the third party was told to see an agent, who was

described as the principal’s agent in Gunnedah, New South Wales. The agent carried on business under the description of machinery and general agents as well as describing itself as a dealer for the principal’s products. The third party entered into a purchase contract for one of the principal’s hay balers. The sale document described the agent as a ‘dealer’ and as an ‘owner’. The principal was not mentioned in the document. The third party had nothing but trouble with the hay baler and subsequently brought an action against the principal for breach of contract. (The agent had by this time gone into liquidation.) In order to succeed against the principal, the third party had to show that the agent was acting, not as a principal in its own right in the sale of the hay baler, but as agent for the principal. Did the third party succeed against the principal? Issue Was the seller of the hay baler acting as an agent for International Harvester, or as an independent dealer? Decision The High Court held (at 652–3) that it was not a sale by an agent: Agent is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties. But in the business world its significance is by no means thus restricted … No one supposes that the ‘distributing agent’ or the ‘exclusive agent’ in a particular territory for a proprietary product or specific kind of article or machine is there to put a ‘consumer’ into contractual relations with the manufacturer … In the present case it appears clear enough that the transaction was carried through on the basis that [the agent] sold the baler to [the third party] and that [the principal] was not the contracting party. Note The difference between the situation of the independent dealer, as in the International Harvester case (above), and an agent can be represented as shown in Figure 10.1. [page 385]

Figure 10.1 Independent dealer or an agent?

What are the indicators of an agency relationship? 10.3

In determining whether a relationship is an agency, the court must have regard to all the circumstances, including: Does the agent keep the profits it makes or does it have to pay them across to the principal? An independent dealer is more likely to keep the profits. Is the agent paid a commission? An agent is more likely to be paid a commission. Does the agent have an obligation to account to the principal for sales? This could indicate an agency as it is one of the duties of an agent to make a full and honest account to the principal.

Potter v Customs and Excise Commissioners [1985] STC 45 (UK Court of Appeal) Facts The principal (Potter) was a wholesale distributor of Tupperware. Potter appointed dealers who organised friends and acquaintances to run parties at which Tupperware and other goods were displayed, and orders taken. All dealers signed an agreement in which they declared they were

‘independent agents’. Potter gave the dealers a recommended price and the dealers paid 70 per cent of that price to Potter on each sale made. However, there was no compulsion on the dealers to sell at that price. Anything over 70 per cent, the dealer kept as profit (called a ‘commission’). The dealer agreement stated that the goods remained the property of Potter until Potter was paid. The dealer was not required to reveal the names of the buyers, nor were any restrictions placed on dealers ordering goods. Each dealer was responsible for his or her own bad debts. [page 386] Customs and Excise assessed Potter for tax on the retail price of the Tupperware on the basis that the dealers were Potter’s agents. Potter argued that the dealers were not agents but independent buyers and therefore tax should only be levied on the amount the dealers paid to Potter (ie, 70 per cent of the recommended price). Issue Whether the Tupperware dealers were selling the goods as agents for Potter, or as independent dealers. Decision The matter could not be decided on the basis of what the parties called themselves. It was necessary to have regard to the circumstances. On the balance of the facts, the court held that the dealers were not agents for Potter.

In determining whether an intermediary is an agent, the law does not rely on titles or names used; instead, the law looks carefully at the facts that reveal the nature of the relationship.

Because of the complexity of commercial relationships, it can often be difficult to determine the true nature of the relationship between two parties. In appropriate circumstances, the court will look beyond the ‘form’ of a relationship in order to determine its ‘substance’.

THE FUNCTIONS OF AN AGENT 10.4

While the most common function of an agent is to bring about a contractual relationship between the principal and a third party, it

is not an agent’s only function, nor is it a necessary function. A person who has no authority to make contracts on behalf of his or her principal may nevertheless be an agent if he or she has authority to: receive moneys on behalf of the principal and give a valid receipt; pay moneys on behalf of the principal; make representations for which the principal will be responsible; and/or receive representations on behalf of the principal. These are only some of the more common examples of what an agent may do in appropriate circumstances. The common factor is that, in each case, the agent has authority to affect the legal position of the principal vis-à-vis third parties.

An agent may make contracts on behalf of the principal 10.5

The most important task of an agent is to make contracts on behalf of the principal. This is an exception to the rule of privity of contract.

An agent may receive moneys on behalf of the principal 10.6

In appropriate circumstances, an agent can have power to receive moneys on behalf of the principal and to give a valid discharge (receipt). If a debtor pays the debt to the principal’s agent, the principal cannot sue the debtor for non-payment. However, just because a person receives money does not make him or her an agent. For example, the general rule in respect of estate agents is that they receive the deposit from the purchaser as a stakeholder and not as agent for the vendor. If, therefore, the agent disappears with the money, the purchaser will suffer, not the vendor. [page 387]

Petersen v Moloney (1951) 25 ALJR 566 (High Court) Facts Petersen (the principal) instructed an estate agent to find a purchaser for her house. She gave no other express authority to the agent in relation to the house. The agent located Moloney (the third party) who paid the full price to the agent and received a receipt. The receipt made no mention of the principal. When the agent failed to hand the purchase moneys over to the principal, the principal sued both the agent and Moloney. Moloney claimed that the estate agent was the principal’s agent and that Moloney had discharged his obligation by paying the purchase moneys to the estate agent. Issue Whether the estate agent was Petersen’s agent for the receipt of the money. Decision The High Court stated (at 567) that: In connection with the sale and purchase of property the word ‘agent’ is apt to be used in a misleading way … When a person is employed to find a buyer of property, he is commonly said to be employed as an agent, and the term ‘estate agent’ is a common description of a class of persons whose business is to find buyers for owners who wish to sell property. But the mere employment of such a person under the designation of agent does not, apart from the general rule that the employer will be responsible for misrepresentations made by him, necessarily create any authority to do anything which will affect the legal position of his employer. The court held that Moloney had failed to establish that the estate agent had express or implied authority to receive the purchase moneys. Further, Moloney had failed to establish that the principal had ratified the agent’s act (see [10.34]) or that the principal had held out the estate agent as having the authority to receive the money (see [10.20]). Thus, the court held that the estate agent was not the principal’s agent for the receipt of the money.

An agent may pay moneys on behalf of the principal 10.7

An agent can have power to pay moneys on behalf of the principal and to receive a valid discharge. For example, home buyers often use a solicitor to arrange final settlement of the purchase and to

pay the balance of the moneys due under the contract.

An agent may make representations on behalf of the principal 10.8

In appropriate circumstances, an agent will have power to make representations on behalf of the principal which will be legally enforceable against the principal. This may apply even though the agent does not have the power to create contractual relations between the principal and those third parties. For example, a real estate agent will normally have [page 388] the power to make representations binding on the principal, but generally does not have the power to make a contract, or even to receive moneys for the vendor (see Petersen v Moloney, in [10.6]). This is a particularly important function of an employee. Employers ought to be aware that their potential legal liability is not curtailed by merely ensuring that their employees cannot make contracts on their behalf.

An agent may receive representations on behalf of the principal 10.9

Just as an agent may have the power to make representations on behalf of another person, an agent may have the power to receive representations on behalf of another. This means the principal can enforce representations made to the agent.

SOME COMMON COMMERCIAL RELATIONSHIPS AND AGENCY 10.10 There are numerous varieties of special agents, such as mercantile agents, stock brokers and solicitors. The powers of the agent in

each case will depend on the facts of the case. It should be noted that an agency relationship may co-exist with another legal relationship.

Employer–employee 10.11 Not all employees are agents because not all employees have the authority to affect their employer’s legal position with respect to third parties. However, many employees do have such authority. Perhaps the most common example is the salesperson who has express authority to make contracts of sale on behalf of the employer. In the case of a salesperson, even if such authority is not expressed, it is generally implied by virtue of the nature of the employment. At such times, the employee is acting as the agent of the employer.

Independent contractor 10.12 An independent contractor is said to be hired on a contract for service, whereas an employee is on a contract of service. The distinction is important in many areas of law, but has no great significance for agency law. As with an employee, an independent contractor may be an agent with wide authority, limited authority or not an agent at all. Everything depends on the nature of the relationship between the hirer and the independent contractor. As an example, a finance broker who introduces a borrower to a lender is more likely to be an independent contractor than an agent for the lender: Perpetual Trustees Victoria Ltd v Ford [2008] NSWSC 29.

Bailor–bailee 10.13 A bailee is a person who has lawful possession of the bailor’s goods. Clearly, an agent will often have possession of his or her principal’s goods and will, therefore, be a bailee as well. However, it does not follow that a bailee will always be an agent. Mere lawful possession of another’s goods does not automatically carry a corresponding authority to sell them to a third party or otherwise

create a legal relationship between the bailor and third parties.

Partnership 10.14 Each partner is an agent for each other partner. This is examined further in Chapter 11. [page 389]

Supplier–buyer 10.15 Normally, a dealer does not act as an agent for a supplier. The best example of this is the International Harvester case, in [10.2].

Franchisor–franchisee 10.16 In a normal goods or services franchise, the franchisee will be acting independently and not as an agent for the franchisor (see Potter v Customs and Excise Commissioners, in [10.3]).

HOW IS AN AGENCY CREATED? A deed is a special type of document that states it is signed under seal.

10.17 The relationship of principal and agent may be created by deed, by agreement in writing or orally, or by operation of law. There are no formal requirements, except in the following situation: An agent can only execute a deed on behalf of the principal if the authority to do so is contained in a deed. This deed is called a Power of Attorney and is widely used within the community. The Power of Attorney may be limited to one matter or it may be extremely wide, entitling the agent (attorney) to do most things that the principal could do in person. The usual wording for the wider power would be as follows: ‘I authorise my attorney to do on my behalf anything that I may lawfully authorise an attorney to do.’ Being a deed, the Power of Attorney must be signed, sealed and delivered by the principal in the presence of witnesses.

Although there are no formal requirements for the creation of an

agency, there are certain statutory restrictions on who may operate as an agent in certain areas. Thus, certain types of professional agents require a licence or an approved qualification. Often, a licence will be subject to a person proving to the satisfaction of the appropriate authority that he or she is a fit and proper person to hold such a licence. Real estate agents, finance brokers, travel agents, employment agents and solicitors (among others) are subject to legislative requirements. Failure to have the appropriate licence or qualification may subject the agent to criminal sanctions (usually a fine). Subject to the above exceptions, an agency may be created by express agreement, by implied agreement, by estoppel, by necessity, by cohabitation and by ratification. Each of these is discussed below.

Agency may be created by express agreement 10.18 The simplest way in which an agency may be created is by express agreement between the principal and the agent. The agreement does not have to be a binding agreement (ie, a contract). For instance, it is not necessary that the principal provide any consideration. It is sufficient if the principal instructs or requests the agent to do something and the agent agrees to carry out that request or instruction.

Agency may be created by implied agreement 10.19 Just as a contract may be inferred from the conduct of the parties, so also may an agency be implied from conduct. This will occur where it is reasonable to infer from all the circumstances that the parties have conducted themselves in such a way that a principal– agent relationship exists. The test is objective. In the next case, the issue was whether an insurance consultant was an agent for the insurance company, or an agent for the insurer, or neither. [page 390]

Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981 (Supreme Court of Victoria) Facts Brennans (the third party), a haulage company, was seeking appropriate insurance cover for its business. Brennans was approached by A (an insurance consultant), who recommended the principal (Norwich Insurance). Discussions were held between Brennans, A and Norwich. Eventually, Brennans took out a number of policies. Brennans was instructed by Norwich that the business was to be handled through A, but that Brennans could refer directly to Norwich if necessary. Brennans paid all premiums to A. When time for renewal of the policies arrived, Brennans paid A and the policies were renewed even though the money had not been forwarded to Norwich by A. Subsequently, A went into liquidation without ever paying the money across to Norwich. Norwich sued Brennans for the premiums. Brennans’ defence was that A was the agent of Norwich for receiving the premiums and therefore Norwich could only seek reimbursement from A. There was no evidence that Norwich had expressly appointed A as its agent for the collection of premiums. However, Brennans argued that the agency relationship was implied by the conduct of the parties, or, alternatively, an agency by estoppel existed. Who succeeded? Issue Was A acting as an agent for Norwich and, if so, did A have authority to collect insurance premiums on Norwich’s behalf? Decision The Victorian Supreme Court commented that an insurance consultant may be either a broker, in which case he is likely to be the agent of Brennans, or an insurance agent, in which case he is likely to be an agent for Norwich. Even if A was an insurance agent representing Norwich, it is still necessary to determine whether his authority extends to collecting premiums on behalf of Norwich. Each case will depend on its own facts. On the basis of the evidence, the court held that the conduct of the parties gave rise to the inference that A was an agent for Norwich and that A’s authority included collecting the premiums from Brennans.

Agency may be created by estoppel Estoppel is a legal doctrine that prevents someone arguing a position which would contradict the position implied by their own previous words or actions.

10.20 Imagine that an agent has been sacked by the principal. Imagine also that the principal has failed to take any steps to notify those who have had dealings with the agent in the past. Such persons may continue to deal with the agent, believing that he or she is still working for the principal. Should the principal be bound by the former agent’s conduct? In such situations, the courts may stop the principal from denying that the former agent was still his or her agent. This is called agency by estoppel. A similar problem can occur where a partnership comes to an end or one of the partners leaves. [page 391] The elements for establishing an agency by estoppel are: a representation (either by word or conduct) has been made by the supposed principal to the effect that the supposed agent is the principal’s agent (this is often described as the principal holding out the agent as his or her agent); a third party has relied on such representation; it was reasonable in the circumstances that the third party rely on the representation; and there has been an alteration in that third party’s position as a result of reliance upon the representation.

Pole v Leask [1861–73] All ER Rep 535 (House of Lords) Facts X acted as agent for Pole (the principal) in a number of transactions with Leask (the third party). As agent, X negotiated contracts with Leask in the name of Pole and received considerable amounts of money on behalf of Pole. Pole fully acquiesced in all these transactions. X’s authority to act for Pole was then terminated. Despite this, X continued to enter into contracts with Leask and to receive money from Leask, supposedly on behalf of Pole. All this was done without Pole’s authority.

Leask, however, was unaware that X’s authority had been terminated. He thought X was still Pole’s appointed agent. X fraudulently took the money for his own benefit. Pole argued that X was not his agent because the agency had been terminated. Leask responded by arguing that Pole should have informed Leask about the termination, and that as he had not done so, Pole should be estopped from denying that X was his agent. Issue Was X acting as Pole’s agent at the time X received the money from Leask? Decision The House of Lords accepted that a principal could be estopped from denying that a person was his agent. Under what circumstances would this occur? Lord Cranworth proposed the following test for agency by estoppel (at 541): [W]here one has so acted as from his conduct to lead another to believe that he has appointed someone to act as his agent, and knows that the other person is about to act on that behalf, then unless he interposes, he will, in general, be estopped from disputing the agency, though in fact no agency really existed. By a majority, the court held that an agency by estoppel existed.

Agency by estoppel arises from the principal’s conduct that leads a third party to believe (on reasonable grounds) that someone is the principal’s agent, and the third party relies on that belief. A business which allocates one of its email addresses to a private contractor, or allows that contractor to use an email signature suggesting the individual [page 392] works for the business, could create an appearance of agency. However, the court would not find agency by estoppel unless the third party was actually induced into believing an agency relationship existed and had acted in reasonable reliance on that

belief: HomeSec Finance Express Pty Ltd v Richardson [2012] NSWSC 1375.

Agency may be created in cases of necessity 10.21 A master of a ship has traditionally been held to have power to act in cases of emergency, including power to pledge a principal’s credit, to sell the cargo and even the ship. The power will only arise where the master has no opportunity to communicate with the owners. The agent by necessity must act reasonably and prudently in the circumstances: see China-Pacific SA v Food Corporation of India (The Winson) [1981] 3 All ER 688. Other carriers have also been held to have similar powers. In Sims & Co v Midland Railway Co [1913] 1 KB 103, the carrier was deemed to have power to sell goods that were deteriorating where there was no opportunity to get instructions from the owner. However, the courts have not been so willing to extend the operation of the rule to other bailees.

Sachs v Miklos [1948] 1 All ER 67 (UK Court of Appeal) Facts Miklos (the alleged agent) allowed Sachs (the principal) to store some furniture in one of the agent’s rooms. For three years, the principal failed to contact the agent. In 1943, the agent wished to let the room and made every possible effort to locate the principal. When she failed to do so, she sent the furniture to be auctioned and placed the proceeds in trust for the principal’s return. The principal brought an action against the agent for the tort of conversion (ie, dealing with another’s property in an unauthorised way). Miklos argued in defence that she became Sach’s agent by necessity and therefore she had authority to sell the goods and pay the proceeds to the principal. Issue Had Miklos had become an agent by necessity in order to sell the furniture? Decision The court expressed sympathy for the agent’s plight, but rejected her defence. There was no real emergency such as to give rise to an agency by necessity. Lord Goddard CJ said (at 68):

It was not a case where the house had been destroyed and the furniture left exposed to thieves and the weather. There was nothing perishable here in the sense in which that term is used when applied to goods.

Agency may be created by cohabitation 10.22 Traditionally, a woman has power to pledge the credit of the man with whom she is living for necessaries. This is not based on estoppel, but is rather a presumption of fact which [page 393] may be rebutted by evidence to the contrary. The presumption arises out of the court’s acceptance that often household requirements are purchased almost exclusively by one party — traditionally, the wife. In principle, there is no reason why the presumption should not apply to the man if the circumstances are appropriate.2 In several Australian jurisdictions, this common law doctrine has been abolished altogether by statute.3 Do you think that creation of implied agency by cohabitation is an example of the common law having not kept pace with society’s views and expectations?

THE AGENT’S AUTHORITY After establishing that the intermediary was an agent for the principal, the next step is to examine whether the intermediary’s actions fell within some kind of authority (or were properly ratified).

10.23 It is necessary to determine not only whether a person is an agent, but also the extent of the agent’s authority. A principal will be bound by the actions of his or her agent where the agent acts:

within actual authority, whether express or implied; or within apparent or ostensible authority (‘apparent’ and ‘ostensible’ have the same meaning). Actual authority and ostensible authority are different concepts. They are not mutually exclusive. See Figure 10.2. Figure 10.2 The sources of an agent’s authority

Actual authority depends on the express or implied agreement between the principal and agent. Ostensible authority is an application of the doctrine of estoppel and depends on how the principal has held out the agent to outsiders. The principal will be estopped from denying the authority of the agent where the agent acts within ostensible authority.

The agent’s actual authority The agent’s express actual authority 10.24 The agent’s actual authority may be express or implied. Express authority is the power expressly invested in the agent by the principal. For example, a stock auctioneer (agent) who is hired by an overseas principal to sell a particular horse has express power to make a contract for the sale of the horse. An agent’s express actual authority is determined by applying the [page 394]

ordinary principles of construction that apply to contracts. The test is objective and depends on how a reasonable person would interpret the words of the agency agreement. Where authority is given in ambiguous terms, every act done by the agent in good faith, which is justified by any one of the possible constructions of the ambiguous term, is deemed to be authorised. However, where instructions are patently ambiguous, the agent may have a duty to clarify those instructions before acting. The agent’s implied actual authority 10.25 The express agreement between the agent and the principal may not cover all aspects of the agent’s power. Certain powers may have to be implied. For instance, in the example given in [10.24], the stock agent who has express power to make a contract for the sale of a particular horse may need to have the power to receive money on behalf of the principal and to give a valid receipt. Provided there was no conflict with an express power this power would be implied by the courts to give business efficacy to the agreement between the agent and the horse owner. The courts may imply powers on the basis of: custom or trade usage; a course of past dealing; or a need to make the agency agreement effective. Custom or trade usage 10.26 See Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 with respect to terms implied as a result of a custom or trade usage, and see also Bell Group Ltd v Herald & Weekly Times Ltd [1985] VR 613, discussed in [7.12]. A manager of a business will have implied authority to purchase goods necessary to carry on that business: see Watteau v Fenwick [1893] 1 QB 346. The goods, of course, must be of a type normally purchased by such business. An agent who deals in a certain class of goods has implied authority to sell goods of that

class and to do whatever is incidental to effect such a sale (such as giving a warranty). Course of past dealings 10.27 In appropriate circumstances, the courts will imply a term into a contract where there has been a consistent course of past dealings between the parties.

Hely-Hutchinson v Brayhead Ltd [1967] 3 All ER 98 (UK Court of Appeal) Facts Richards (the agent) was the chairman and chief executive officer of Brayhead Ltd (the principal). On matters of finance, Richards frequently took the decisions himself, often without prior reference to the board of directors. The board acquiesced in all these decisions. On the occasion in question, Richards signed letters which provided an indemnity and guarantee to HelyHutchinson (the third party) on behalf of the principal. The letters were signed by Richards as ‘Chairman of the Board’. Brayhead (the principal) failed to honour the guarantee and Hely-Hutchinson (the third party) sued. Brayhead (the principal) argued that the letters were not binding, as Richards had no authority. [page 395] Issue Whether Richards had authority to provide the guarantee on behalf of the principal (Brayhead). Decision While Richards had no express authority, he had implied authority based on the past dealings between Richards and the board of directors. Note Richards may also have had ostensible authority, but it was not necessary for the court to decide the matter finally.

10.28 An agent who is given certain express powers will normally have all powers necessarily incidental to the performance of the express

powers. For example, an agent who has authority to sell will have an implied authority to sell in the usual manner. What constitutes ‘the usual manner’ will depend on the circumstances of the case.

ANZ Bank Ltd v Ateliers de Constructions Electriques de Charleroi (1966) 39 ALJR 414 (Privy Council) Facts A Belgian company appointed an Australian agent to receive cheques on its behalf from an Australian customer. The cheques were in Australian dollars made out to the Belgian company. The Belgian company had no bank account in Australia. Australia prohibited the export of currency beyond a certain amount. The agent endorsed the cheques and paid them into its own account. Unfortunately, the agent became insolvent. Issue Whether the agent had authority to endorse the cheques and pay them into the agent’s account. Decision The Privy Council held (at 420) that the agent must have had implied authority to bank the cheques into its own account: It could not have been supposed that they would be sent to Belgium to be indorsed, and the plaintiff company had no bank account of their own in Australia. Apart from exchange control difficulties, the only practical plan from a business point of view was for [the agent] to indorse the cheques and pay them into [the agent’s bank] account. This became the only possible plan when the total amount of the cheques exceeded the sum which exchange control permitted to be exported, or when it became proper for [the agent] to retain part of the sum in any cheque to pay local expenses. Implied authority was necessary to give business efficacy to the transactions.

[page 396]

The agent’s ostensible authority

Ostensible authority is also known as apparent authority.

10.29 Ostensible authority is a concept that often gives problems.4 Put simply, ostensible authority exists where the agent appears to have authority. In Hely-Hutchinson v Brayhead Ltd (see [10.27]), Lord Denning MR distinguished actual and ostensible authority in the following manner (at 102): [A]ctual authority may be express or implied. It is express when it is given by express words, such as when a board of directors pass a resolution which authorizes two of their number to sign cheques. It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint 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 … Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority. Thus, when the board appoint one of their number to be managing director, they invest him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office.

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630 (UK Court of Appeal) Facts Buckhurst Park Properties Ltd (a company) was set up to purchase and develop some land. Although the agent was never formally appointed managing director of Buckhurst Park, he acted as if he were. He did so with the acquiescence of the company. The agent engaged Freeman & Lockyer (architects) to prepare a plan for the development of the land and to apply for the necessary planning approvals. Freeman & Lockyer sued the company when their account was not paid. The company denied liability on the basis that the agent did not have the authority to engage the services of an architect. Issue Did the agent have authority to bind the company by a contract with the architects? Decision The Court of Appeal held that he did. Although the agent did not have actual authority, the conduct of the company was such that the agent had ostensible

authority. In the course of his judgment, Diplock LJ said (at 646) that an agent will have ostensible authority if it can be shown: that a representation that the agent had authority to enter on behalf of the [principal] into a contract of the kind sought to be enforced was made to the contractor; [page 397] 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; and that [the contractor] was induced by such representation to enter into the contract, that is, that he in fact relied upon it.

Ostensible authority depends on the principal’s holding out There is often overlap between an agent’s actual authority and his or her ostensible authority.

10.30 Ostensible authority becomes an issue where the agent exceeds his or her actual authority (both express and implied). Clearly, the principal cannot be liable for all the agent’s acts. A person cannot make himself or herself an agent for another person by saying that he or she is an agent. There must be some act of the principal which makes it reasonable for third parties to assume that the agent has the necessary powers. It is a form of estoppel. Imagine Lemons Ltd is a large retailer of consumer goods ranging from clothes to electrical products. Lemons Ltd hires Alex as a salesperson to work in the whitegoods section. Alex is instructed to handle all normal sales, but to refer all requests for discounts and all complaints to senior sales staff. Consuela is a consumer who wants to buy a new dishwasher. The machine she likes is marked at $750. Consuela is a good negotiator: she convinces Alex to offer her the dishwasher for $700. Alex is so swept up in the flow of negotiations that he forgets to have the sale approved by his sales manager. In fact, Lemons Ltd had bought

the dishwashers for $705 each and therefore the sale represented a loss. Is Lemons Ltd bound by the deal offered to Consuela? Whether Lemons is bound will depend on whether Alex acted within actual or ostensible authority. From the evidence, it would appear that Alex did not have actual authority to make this sale. His express actual authority was to make sales at normal or marked prices. As a matter of necessity, he would have implied authority to receive moneys from customers and give a receipt. Neither his express or implied authority included making this contract. In fact, he was expressly told not to make such sales. However, by hiring Alex as a salesperson, Lemons Ltd is representing to customers that Alex has the power that one would normally expect such a salesperson to have. How would a reasonable person in Consuela’s position see Alex’s authority? In other words, what is Alex’s ostensible authority? There is no evidence that Consuela was aware that Alex was expressly prohibited from giving discounts. The product is a dishwasher. It is common for customers to negotiate the price of such products. It is common for vendors to give discounts. It is common for sales staff to have authority to agree to discounts up to a certain level without the need to seek approval from senior staff. The discount negotiated was less than 10 per cent. In all the circumstances, it seems reasonable to conclude that Lemons Ltd ought to be bound by this contract because it falls within Alex’s ostensible authority. What should Lemons Ltd have done to reduce the chance of this occurring? Would Lemons Ltd have been bound if Consuela had negotiated a 50 per cent discount or a 75 per cent discount? Would Lemons Ltd have been liable if Alex had been hired to work in the clothing department, but Alex moved himself (without Lemons’ knowledge) into the whitegoods department? Often, ostensible authority will overlap with actual authority (express or implied). Although it was not an issue in our example, Alex would also have had ostensible authority to make normal sales and to receive moneys with respect to those sales and to give

a valid receipt. That is, part of Alex’s ostensible authority overlapped with his actual authority, both express and implied. [page 398] Cases on ostensible authority 10.31 The following cases illustrate circumstances in which a third party might argue that the agent was acting within ostensible authority. See also Pacific Carriers Ltd v BNP Paribas [2004] HCA 35.

Heperu Pty Ltd v Morgan Brooks Pty Ltd (No 2) [2007] NSWSC 1438 (Supreme Court of New South Wales) Facts Morgan Brooks carried on business as a mortgage originator and mortgage manager. In 1994 Morgan Brooks entered into a licence agreement with Mr and Mrs Cincotta, under which the Cincottas were referred to as ‘Morgan Brooks’ Coffs Harbour Agent’. Another licence agreement was also created in 1995, under which a company directed by the Cincottas (and another) was referred to as ‘Morgan Brooks’ Double Bay Agent’. With the consent of Morgan Brooks, Mr Cincotta and his company used business cards, stationery and office signage describing them as Morgan Brooks’ licensees. Morgan Brooks’ website described Mr Cincotta as the manager of the Coffs Harbour and Double Bay licensed offices. Clients handed more than $4 million to Mr Cincotta and his company, in their role as Morgan Brooks’ Coffs Harbour and Double Bay agents, wanting the money to be invested by Morgan Brooks in a particular investment. Unfortunately, Mr Cincotta misappropriated and misapplied the money. Only $1 million was recovered and Mr Cincotta was bankrupt by the time this matter went to court. The clients sued Morgan Brooks for refund of their missing moneys. They argued that Mr Cincotta and his company had been agents for Morgan Brooks and were acting within the scope of their authority, making the clients’ investment contracts binding on Morgan Brooks (as the principal). Morgan Brooks denied that Mr Cincotta or his company had been its manager, employee or agent, arguing that they were independent contractors, as the licence agreements permitted them to use Morgan Brooks’ name, but only to receive and forward loan applications.

Issue Was Mr Cincotta an agent of Morgan Brooks and, if so, did the transactions fall within his authority — actual or ostensible? Decision By approving the usage of the stationery, signage and business cards and by the description on its own website, Morgan Banks had held out Mr Cincotta as its agent. The clients were unaware of the terms of the licensing agreement, and there had been no clear statement on signage or stationery that Mr Cincotta was operating independent businesses, separate to Morgan Brooks. The clients’ transactions here fell within the scope of Mr Cincotta’s ostensible authority to create a contract on behalf of Morgan Brooks, and therefore Morgan Brooks was bound by the contracts.

[page 399]

First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 (UK Court of Appeal) Facts First Energy Ltd (the third party) was a company which installed commercial heating systems. To run its business, First Energy required a substantial line of credit. It approached the senior manager (the agent) of the Manchester office of the Hungarian International Bank (the principal) with a view to arranging a suitable credit facility. The head office of the bank was in London. Manchester was its only other office. The senior manager told First Energy that he could not personally approve a loan facility of the size required and that approval was required from the board of directors in London. The application was forwarded to London. Later, believing that approval had been granted, the senior manager sent a letter to First Energy offering to provide the credit facility. First Energy accepted. In fact, the board had not approved the loan and eventually decided to reject it. When the bank refused to open the line of credit, First Energy sued the principal for breach of contract. The bank (the principal) argued that the senior manager (the agent) did not have actual or ostensible authority to sanction loans of this type, and therefore the bank was not liable. First Energy (the third party) argued that while the senior manager did not have authority to sanction the loan, he did have ostensible authority

to communicate the bank’s decision and to handle the necessary documentation, and therefore his letter of offer was binding on the bank because it was an act falling within the senior manager’s ostensible authority. Issue Whether a person who has no actual or ostensible authority to personally sanction a loan could nevertheless have ostensible authority to communicate to third parties that the board had decided to grant the loan. What do you think? What is the fairest answer from the point of view of commercial practice? Decision [T]he idea that First Energy should have checked with the Managing Director in London whether HIB had approved the transaction seems unreal … In my judgement a decision that [the agent] did not have apparent authority to communicate head office approval would defeat the reasonable expectations of the parties. And it would fly in the face of the way in which in practice negotiations are conducted between trading banks and trading customers who seek commercial loans.

A person with ostensible authority cannot create ostensible authority in another person 10.32 A person with ostensible authority to act in a particular way on behalf of the principal lacks power to represent that some other person can act in that way on behalf of the principal.5 [page 400] This is an application of the second part of Diplock LJ’s rule in Freeman & Lockyer v Buckhurst Park Properties Ltd (see [10.29]). Was the third party aware of the agent’s actual authority? 10.33 As in all cases of estoppel, the third party must rely on the principal’s representation (that the agent has authority). This is the third part of Diplock LJ’s rule in Freeman & Lockyer v Buckhurst Park Properties Ltd (see [10.29]). The third party cannot rely on

ostensible authority if he or she is, or ought to be, aware of the limits of the agent’s actual authority. Additionally, the third party cannot rely on ostensible authority if he or she is aware that the agent is acting for his or her own benefit and not for the benefit of the principal.6

PRINCIPAL MAY RATIFY AGENT’S UNAUTHORISED ACTS Ratification normally involves retrospective approval or adoption of the transaction by the principal, provided certain rules are satisfied.

Meaning of ratification 10.34 If the agent acts outside actual and ostensible authority, the principal will not be liable unless the principal subsequently ratifies the agent’s actions. Ratification involves the principal’s adoption or approval of the agent’s actions. For example, Allan obtains credit from a shopkeeper by explaining that the goods are being bought for Peter Principal. In fact, Peter Principal knows nothing of the transaction and is merely a casual acquaintance of Allan’s. Peter would not be bound by the actions of Allan as Allan had neither actual nor ostensible authority to purchase goods for Peter on credit. If, however, Peter agreed to take the goods from Allan, this would amount to a ratification of Allan’s actions. Peter is now bound to the shopkeeper. Once Peter has ratified, he cannot withdraw the ratification.

Rules applying to ratification 10.35 The following rules must be complied with for a ratification to be effective: The agent must contract as an agent and the third party must be aware that the person he or she is dealing with acts as an agent only, and the principal is named or is sufficiently identified that he or she is ascertainable. (This means that

ratification has no application to the doctrine of the undisclosed principal: see [10.42].) The only person who can ratify is the principal and that person must do so within a reasonable time, or, where a particular time has been specified, within that time. What amounts to a reasonable time will depend on the circumstances of each case.7 The principal must have been in existence and capable of being ascertained at the time when the contract was made.8 The principal must have contractual capacity at the time the contract was made. Certain classes of persons, such as minors and bankrupts, have a restricted capacity to make contracts. Generally, this cannot be cured by ratification. The principal can only ratify if he or she is aware of all the facts, or if he or she adopts in totality the agent’s acts whatever they happen to have been.9 Ratification must apply to the whole contract. It would be unfair to allow a principal to ratify only those parts of the agent’s actions which benefited the principal. However, if the agent enters into a number of separate transactions on behalf of the principal, the principal may ratify one or more of those transactions. [page 401] Ratification can be inferred from the principal’s conduct, and need not be express.10 Ratification will be ineffective where the original transaction is void: Bedford Insurance Co Ltd v Instituto De Resseguros Do Brasil [1985] QB 966. There is some doubt as to whether the ratification dates back to the time the contract was made,11 or whether it dates only from the time of ratification.12 This could be important where the third party

tries to revoke before ratification, but after the agent has concluded the contract. The better view would seem to be that the ratification does not date back to the time at which the contract was made.13

Keighley, Maxsted & Co v Durant [1900–3] All ER Rep 40 (House of Lords) Facts The principal (Keighley, Maxted & Co) was a corn merchant, as was the agent. The agent received an offer from a third party (Durant) to buy some wheat. The agent and principal agreed that the agent should make a counter offer and that the agent and principal would become purchasers on joint account. The agent, in making the counter offer, was clearly acting as both principal in his own right and as agent for the principal. The third party refused the counter offer and the agent purchased at a higher price. The principal’s name was not mentioned and it appeared that the sole purchaser was the agent. Later, the agent informed the principal of the deal and the principal agreed to be a purchaser, even at the higher price. Subsequently, the contract price was not paid and the third party sold the wheat at a loss. The third party sued both the agent and principal. Issue Whether the principal was a party to the contract by virtue of its ratification of the agent’s actions. Decision The House of Lords rejected this argument. Ratification will only apply if the agent is known to be acting as an agent for another person. Therefore, ratification will not apply in the situation of an undisclosed principal. Note An undisclosed principal exists where the third party believes that he or she is dealing with an agent as a principal; that is, the third party is totally unaware of any principal (see [10.42]).

[page 402]

WHO CAN SUE WHOM?

When can the third party sue the principal? 10.36 To summarise the notions of actual and ostensible authority and ratification, it is possible to say that the principal can be sued by third parties in three situations. See Figure 10.3. Figure 10.3 When can the third party sue the principal?

The flowchart presented in Figure 10.4 may be used to determine when the principal is bound.

Figure 10.4 When is the principal bound?

[page 403]

When can the principal sue the third party? 10.37 The principal can sue the third party in certain situations; see Figure 10.5.

Figure 10.5 When can the principal sue the third party?

In the case of ratification, the mere act of suing may, in appropriate circumstances, be a ratification.14

When can the third party sue the agent? Liability of an agent known to be an agent 10.38 Where the agent is known to be an agent, the general rule is that the agent cannot sue or be sued unless: the principal did not exist at the time of making the contract;15 the agent executed a deed or bill of exchange in his or her own name; custom or trade usage makes the agent liable; or the terms of the contract make the agent liable. Liability of agent where the principal is undisclosed 10.39 Where the principal is undisclosed, the agent may sue or be sued provided that certain criteria are satisfied (see [10.42]). The third party, however, must decide whether to sue the agent or the principal. He or she cannot sue both. The agent acted without authority 10.40 An agent may induce a third person to enter into a contract or act in a particular way by claiming that he or she is acting for a principal. Why would an agent claim authority which does not exist? There are numerous possible explanations. The agent:

may be engaged in some fraud; may believe that he or she can convince the principal to accept the deal after it has been made; may be genuinely mistaken as to the extent of his or her powers; or may be genuinely mistaken as to the existence of the agency; for example, the agent may be unaware that the principal has died — death terminates an agency, as do bankruptcy and insanity. [page 404] What rights does the third party have in such situations? Obviously, the third party will not be able to sue the principal unless the principal ratifies the agent’s activities. The third party, however, may have one of two options against the agent: the third party could sue for misrepresentation (fraud, negligence, Australian Consumer Law s 18 (see Chapter 3)); or the third party could sue the agent for breach of warranty of authority under the principle enunciated in Collen v Wright (see [10.41]). Breach of warranty of authority 10.41 In Collen v Wright (see below), the court held that, in certain circumstances, there was a contract between the agent and the third party, in which the agent warranted his or her authority. In this way, the third party can get damages from the agent for breach of this contract. It is not necessary to prove that the agent acted fraudulently or negligently.

Collen v Wright [1843–60] All ER Rep 146 (Court of Exchequer

Chamber) Facts The third party entered into an agreement to lease certain land belonging to the principal. The matter was handled by the agent, who believed that he had authority to enter into such a contract. The third party also believed that the agent had authority. In fact, the agent did not have the necessary authority. When the principal refused to proceed with the lease, the third party sued the agent for damages. Issue Whether the agent who has acted outside the scope of his authority can be liable to the third party. Decision The court held that there was a contract between the third party and the agent in which the agent warranted that he had authority to lease the principal’s land on behalf of the principal. The agent did not have such authority and was, therefore, in breach of contract (breach of his warranty of authority).

To succeed in an action for breach of warranty of authority, the third party must establish three elements: 1. The agent asserted his or her authority. The agent will not be liable if he or she has made it clear that he or she does not warrant his or her authority, or the contract excludes any action for breach of warranty of authority. 2. The third party was induced to enter into the transaction partly on the basis of that assertion. There is no duty upon the third party to investigate whether the agent’s assertion of authority was true or not. 3. The third party would not otherwise have entered into the transaction. [page 405]

THE UNDISCLOSED PRINCIPAL RULE An undisclosed principal situation should not be confused with an unnamed principal. In the latter, the third party is aware the agent is acting for someone else.

10.42 Sometimes, an agent (A) will act as an agent, but will not disclose that fact to the third party. The third party thinks that it is dealing with A as a principal. The third party is totally unaware of the involvement of the principal. In these situations, the agent is said to be acting for an undisclosed principal. (Do not confuse the undisclosed principal with the unnamed principal. In the latter situation, the third party is aware that A is an agent, but is not aware of the principal’s identity. In a contract created for an unnamed principal the agent is not automatically liable; however, the agent might be seen as a party to the contract if the facts reveal such an intention: see Carminco Gold & Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd [2007] FCAFC 194.) The rule is that the undisclosed principal may sue or be sued provided that the following three conditions apply: 1. In entering into the contract, the agent was not only acting on the principal’s behalf, but was acting within actual authority (express or implied). Ratification does not apply to an undisclosed principal. 2. The terms of the contract do not exclude or are not inconsistent with the possibility of there being a principal. Thus, if the contract makes it clear that A is to act personally, the principal may not intervene. For example, it would be surprising if a well-known portrait painter were permitted to claim that he or she had entered into a contract to paint a portrait as agent for another (undisclosed) painter. 3. The identity of the principal is not critical to the third party: see Said v Butt, below. The third party can raise any defence against the undisclosed principal that could have been raised against the agent. For

example, the third party may argue that he or she has rescinded the contract because of the agent’s misrepresentation. In the case of an undisclosed principal, the third party has a right to sue either the agent or the principal, but may not sue both. This is a rule that small businesses should remember. For example, in Minter v Mendies C480–95 [1996] QBT 42, Minter entered into a contract to have his roof replaced. The roof contractor was apparently Mr Mendies. In fact, Mendies operated his business as a company, but he failed to disclose this to Minter. Therefore, the company was an undisclosed principal. When Minter wished to sue for breach of the contract he could elect to claim damages from either the agent, Mendies, or the principal, his company. Given that the company probably had few assets, Minter elected to proceed against Mendies personally. For a more recent example of a similar undisclosed principal situation, see Jenkins & Anor v Bourke & Ors [2015] QDC 24.

Said v Butt [1920] 3 KB 497 (King’s Bench Division) Facts TP owned a theatre. P was a theatre critic who had written a number of disparaging articles about plays that had been performed at TP’s theatre. As a consequence, P was barred from TP’s theatre. On the opening night of a new play, P had a friend (A) buy him a ticket. When P attended the theatre he was refused admission. P sued TP for breach of contract. Clearly, P was an undisclosed principal. [page 406] Issue Whether the circumstances around the formation of the contract for sale would permit the undisclosed principal (as purchaser of the ticket through an agent) to sue on the contract. Decision The court rejected P’s suit for breach of contract. P could not sue as undisclosed principal because it was evident that the identity of the ticket

purchaser was critical. TP would never have sold the ticket to A if he had been aware that A was acting as agent for P.

DUTIES OF AN AGENT General duties Agents owe duties to the principal. Breach of duties will render the agent liable to the principal.

10.43 An agent owes certain duties to his or her principal. These include that the agent: must perform what he or she has undertaken to perform; must obey instructions; must exercise due care and skill in carrying out the agency; and must act personally. Unless the parties have otherwise expressly or impliedly agreed, an agent is expected to carry out his or her duties personally. However, there are many situations in which it will be readily implied that the agent is entitled to delegate at least some of his or her duties.

Fiduciary duties 10.44 An agent also owes fiduciary duties to the principal.16 A fiduciary relationship exists where ‘the actual circumstances of the relationship are such that one party is entitled to expect that the other will act in [the first party’s] interests in and for the purposes of the relationship’.17 This describes the principal–agent relationship. Fiduciary duties are built around the notion of good faith. Fiduciary duty to account honestly 10.45 An agent must account honestly to the principal for all transactions conducted by the agent on behalf of the principal.

Fiduciary duty to avoid a conflict of duty and interest (rule against self dealing) 10.46 An agent owes a duty to avoid conflicts of interest. Thus, an agent is not permitted to deal with itself on behalf of the principal unless the principal is aware of the dealing and has consented to it. There can also be a problem where an agent, such as a solicitor, tries to act for both parties. [page 407] Fiduciary duty not to make secret profits, accept secret commissions or take bribes 10.47 An agent must not make secret profits. Any profits derived by the agent in carrying out the agency must be disclosed to the principal. Any profits made by the agent in breach of this duty are held on trust for the principal.18 It is also an offence under the Secret Commissions Act 1905 (Cth) for an agent to accept or obtain for himself or herself or any person other than the principal any gift or consideration as an inducement or reward unless it is done with the knowledge and agreement of the principal.19 Fiduciary duty not to use principal’s property or information for self gain 10.48 An agent must not take advantage of information or exploit an opportunity or use property belonging to the principal for personal gain without the principal’s informed consent. Any profits made by the agent in breach of this duty are held on trust for the principal.20

DUTIES OF THE PRINCIPAL 10.49 The principal owes the following duties to the agent: The principal must remunerate the agent according to the

agreement between them. The fact that the principal has derived no benefit from the agent’s acts is immaterial to the payment of remuneration. The question is solely whether the agent performed what he or she was employed to do. The agent has a lien over the principal’s goods for debts owed by the principal to the agent. This means that the agent may withhold the goods until the debt is paid. The principal is required to indemnify the agent. While some contracts of agency may expressly state the duty of the principal to indemnify the agent against losses, liabilities and expenses incurred in the performance of the undertaking, mostly it is implied. The agent has no right to claim an indemnity for: unauthorised actions, unless these are subsequently ratified; or losses caused by the agent’s own default or negligence.

TERMINATION OF AGENCY 10.50 An agency will be terminated where or by: the principal and agent agree to terminate the arrangement. This, of course, may not affect ostensible authority. The principal should, therefore, notify all relevant persons that the agent no longer has authority to act for the principal; the principal revokes the agent’s authority. The principal cannot do this in respect of transactions already completed or where to do so would unfairly prejudice the agent; the period of the agreement has expired; the death of the principal or agent; the bankruptcy of the principal or agent; the insanity of either the principal or agent; and/or the agreement becomes illegal or impossible to perform.

[page 408]

ADVICE — LAW IN PRACTICE If you appoint someone as your agent, or even just allow them to appear as if they are your agent, you will be liable for any of their activities that fall within their actual or their apparent authority. For agents’ activities that fall outside the scope of their authority, ratification might still render those activities binding as between the agent and the third party. A principal is legally entitled to expect the agent to act in the principal’s best interest, not in self-interest.

[page 409]

QUESTIONS Question 1 (a) What is the critical factor in determining whether an agency relationship exists? (b) List three examples of principal–agent relationships. (c) An agent is said to owe a fiduciary duty to the principal. What does this mean? Give some examples of fiduciaries’ duties. (d) Explain the difference between an undisclosed principal situation and an unnamed principal.

Question 2 Match each type of authority (a)–(c) with the correct definition (1)–(3): (a) Express (1) Power(s) that the agent actual appears to have, in the eyes of authority a third party acting reasonably in light of impressions created by the principal. (b) Implied (2) Power(s) expressly conferred actual on the agent by the principal. authority

(c) Apparent (3) Power(s) that the law confers or on the agent due to necessity ostensible or past dealings. authority

Question 3 The security officer at a large department store stopped a customer, Lisa, at the store exit, and asked to see her receipt for the goods in her possession. Lisa has four CDs in her possession, but her store receipt only lists three. Lisa says that the shop assistant said she could have the fourth CD for free because she is a loyal customer, and also because he likes her. The shop assistant confirms this is an accurate description of his conversation with Lisa, but the store has a strict policy prohibiting discounts without a manager’s approval (which was not obtained here). Which of the following statements most accurately describes the situation? Explain your answer fully. (a) Lisa has a binding contract for all four CDs. (b) Lisa has a binding contract, but only for three of the CDs. (c) There was no contract created because the shop assistant acted outside his authority.

Question 4 Andrew used to work for Peter. His job primarily consisted of collecting debts from Peter’s clients. One of Peter’s clients, Trevor, who did not know that Andrew had been dismissed, paid Andrew $200 which he owed Peter. Andrew disappeared with the money.

[page 410] Peter wants to know whether he can compel Trevor to pay him again, or must he seek the money from Andrew?

Question 5 Megan was an advertising executive at Top Spin Marketing (Top Spin) for many years. Recently, she decided to quit Top Spin and to start her own public relations and advertising business. To this end, Megan contacted all her former clients from her years at Top Spin, and offered them her services at a 30 per cent discount to the rates that they were currently paying Top Spin. Has Megan breached any fiduciary duty owed to Top Spin? Does your answer depend on whether Megan’s actions occurred before or after she left Top Spin? What remedies would be available for any breach of duty here?

Question 6 Pacific Carriers (PC) shipped a cargo of lentils to Calcutta on behalf of New England Agricultural Traders Ltd (NEAT). Owing to a delay in documentation, PC would not deliver the lentils to the Indian buyer until it received an indemnity from NEAT and from its bankers, BNP. (An indemnity is like a guarantee.) NEAT prepared and signed an indemnity which was then forwarded to BNP for signing. The indemnity was sent to the bank’s Documentary Credit Department. This department handles matters dealing with trade finance, including the documentation (eg, letters of credit). It was the department that NEAT invariably dealt with. The

manager of this department signed the indemnity and affixed the bank’s stamp. The stamp was not the bank’s common seal, but it was designed for, and regularly used on, documents such as letters of credit. The indemnity was sent to PC which then delivered the lentils to the buyer. Subsequently, PC had to pay compensation and, as a result, sought to enforce the indemnity against BNP. (NEAT had become insolvent by this time.) According to BNP’s internal procedures, indemnities were to be signed by the Guarantee Loan Department and not the Documentary Credit Department. BNP’s Documentary Credit Department manager insisted that she signed the document to verify the NEAT signature and not to indicate BNP’s acceptance of the indemnity. However, the document made no mention of this. On its face, the indemnity document looked just like any normal indemnity document. Neither NEAT nor PC was otherwise told that the manager’s signature was for the limited purpose of verifying NEAT’s signature. Was BNP liable for the indemnity? (See Pacific Carriers Ltd v BNP Paribas [2004] HCA 35.) Explain your answer.

_________ 1

2 3 4 5

See F M B Reynolds, Bowstead and Reynolds on Agency, 19th ed, Sweet and Maxwell, London, 2010, which defines agency as ‘the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should represent him or act on his behalf, and the other of whom similarly consents so to act or so acts’ (p 1). For example, see Married Persons Property Act 1986 (NT) s 4. Married Persons (Equality of Status) Act 1996 (NSW) s 7; Married Persons (Equality of Status) Act 1989 (NT) s 5; Law of Property Act 1936 (SA) s 104. ‘Apparent’ and ‘ostensible’ are generally taken to have the same meaning. See Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd

6 7 8 9 10

11 12 13 14 15 16 17

18 19 20

(1975) 7 ALR 527. Combulk Pty Ltd v TNT Management Pty Ltd (1993) 113 ALR 214. See Re Portuguese Consolidated Copper Mines Ltd (1890) 45 Ch D 16. See Kelner v Baxter (1866) LR 2 CP 174. See Taylor v Smith (1926) 38 CLR 48. Ratification by silence (Richardson v Dean (1870) 4 SASR 7); ratification by beginning a court action (Re Portuguese Consolidated Copper Mines Ltd (1890) 45 Ch D 16); ratification of agent’s act by paying part of the account incurred by agent (Patten v Rudall (1881) 7 VLR (L) 148). Bolton Partners Ltd v Lambert (1889) 41 Ch D 295. Kidderminster Corporation v Hardwick (1873) LR 9 Ex 13; Davison v Vickery’s Motors Ltd (in liq) (1925) 37 CLR 1. See discussion in S Fisher, Agency Law, Butterworths, Sydney, 2000, pp 63–5. See Re Portuguese Consolidated Copper Mines Ltd (1890) 45 Ch D 16. See Kelner v Baxter (1866) LR 2 CP 174. Other fiduciary relationships include partner–partner, solicitor–client, trustee–beneficiary, director–company, guardian–ward. P D Finn, ‘The Fiduciary Principle’ in T G Youdan (ed), Equity, Fiduciaries and Trusts, Carswell, Toronto, 1989, p 46, quoted in News Ltd v Australian Rugby Football League Ltd (1996) ATPR ¶41-521 at 42,631. See Kak Loui Chan v Zacharia [1984] HCA 36. Each state has similar legislation. See Kak Loui Chan v Zacharia [1984] HCA 36.

[page 411]

CHAPTER 11

PARTNERSHIPS

CONTENTS Objectives of this chapter Setting the scene: Choose your partner carefully Introduction and outline of chapter Choosing the appropriate business structure Types of business organisations Factors that determine the choice of business organisation Naming the business Creation of a partnership Are any formalities required to create a partnership?

Definition of a partnership Carrying on business Carrying on a business in common Carrying on business in common with a view of profit Partnerships are contractual relationships Rules governing partners’ relationship with each other The contract between the partners Partnership Act 1958 (Vic) Partners’ duties of good faith [page 412]

Partnership property What is partnership property? What right does each partner have to the partnership property? Liability of partners to third parties Limited partnerships Joint liability for a firm’s debts and obligations Joint and several liability for wrongful acts Joint and several liability for misapplication of money or property Liability by holding out (estoppel) Assignment of a partnership interest Termination of a partnership Termination by the partners Termination by operation of law Termination by supervening illegality Termination by the courts Partners remain jointly liable for debts even after dissolution of a partnership Distribution of assets on dissolution

Advice — Law in practice Appendix: Comparative table of Partnership Acts Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to describe the nature and operation of partnerships. This includes: distinguishing partnerships from other business structures; knowing how partnerships are created; understanding the rules that govern the relationship between partners, including: – how partnership decisions are made; – what amounts to partnership property; – how partnerships are dissolved; – how partnership interests are assigned; and understanding the rules that govern the relationship between the partners and other persons.

[page 413]

SETTING THE SCENE: CHOOSE YOUR PARTNER CAREFULLY Con was a mechanic working at a local garage. The garage

was run by Petrou and Kourmandakis, as a partnership. The garage was a lively place as the employee mechanics enjoyed joking around and played occasional practical jokes on each other. Kourmandakis joined in some of these activities, and this camaraderie between a boss and the employees made it a fun place to work. One day, Con and another employee were fooling around, spraying water and chasing each other Kourmandakis joined in and, in the process, he accidentally spilled some paint thinner on Con. The joking continued even when a customer arrived, and the customer joined in with teasing comments. When the customer went to light a cigarette, Kourmandakis took the lighter and made a teasing gesture with it towards Con, but unfortunately disaster followed. The evaporating fumes from the paint thinner on Con carried the lighter flames onto Con’s clothes, and badly burned him. Kourmandakis’ actions involved negligence and breach of work safety laws. When the matter went to court, it was not only Kourmandakis who was sued, but also his partner, Petrou, who was nowhere near the premises at the time. Con’s damages were almost $400,000. Could Petrou be personally responsible for his partner’s foolhardy acts?1 Would you want to be liable for such stupid actions of a business partner?

INTRODUCTION AND OUTLINE OF CHAPTER As partners are agents for their co-partners, concepts explained in Chapter 10 underline much of the law relevant to partnerships.

11.1

There are a number of different legal structures under which a business might be owned and managed. Partnerships are a common business structure, partly because they are quick and cheap to create. Indeed, the lack of formalities required to set up a

partnership means that some people who start running a business together may be surprised to learn that their legal relationship is classified as a partnership. This chapter begins with a brief discussion of different business structures, as alternatives to partnerships. In a partnership, each partner is an agent for his or her co-partners. As explained later in this chapter, partnership involves potential personal liability for business transactions and also for the actions of all co-partners, making it a structure that would be undesirable for some business situations. Partnerships, and the rights and liabilities of the business owners and managers under this business structure, can also be more clearly understood by comparison with the other key structures, of which companies and trusts are explored in Chapters 12–14 of this book. [page 414]

CHOOSING THE APPROPRIATE BUSINESS STRUCTURE Types of business organisations 11.2

A business may be owned and operated by: an individual (a sole trader); a partnership; a company (which may be proprietary or public); or a trustee (see Chapter 14).

Factors that determine the choice of business organisation Choosing the right business structure is very important. The wrong choice can have serious financial implications for the parties involved. Consequently, the sensible thing to do is to get proper professional advice.

11.3

In order to choose which business organisation to use, it is important first to understand the key differences between the types of business entities. Key differences exist in relation to: number of possible owners; personal liability for the business’s debts; degree of control over the business; requirements to make public disclosure about details relating to the business; degree of regulation; and administrative cost. Figure 11.1 presents a comparison of the main types of business organisations. Figure 11.1 The main types of business organisations Aspect

Sole trader

Number of One possible owners

Owner has personal liability for business debts Owner’s degree of control over business Public disclosure about business Regulatory control over business

Yes

Partnership 20 (except for certain professional partnerships) Yes

Proprietary company 50 (excluding any employee shareholders)

Public company Unlimited

No

No

Full

Shared with other partners

Very limited

Very limited

Very little (business name is registered) Very little

Very little (business name is registered) Very little

Company details on public record Some reporting requirements to ASIC*

Considerable

Administrative Small Not significant costs of setting up and maintaining structure * Australian Securities and Investments Commission

Significant reporting requirements to ASIC* Greater than for High partnership

[page 415] Therefore, in determining which business structure to use, a number of matters must be considered. These include: the size of the business; the type of business; start-up costs; maintenance (ongoing) costs of the structure; the nature of the business (How risky is it?); future capital requirements (debt versus equity considerations); management requirements; and taxation implications. Sole trader 11.4 A sole trader presents no special legal problems. While the cost of setting up and maintaining a sole tradership is relatively small, the disadvantage is that the sole trader is personally liable for all business debts. By its very definition, a sole tradership is restricted to one-person operations. Partnerships Partnerships and companies are two different business structures, and should not be confused. The main disadvantage of a partnership compared with a company is that partners have unlimited liability. The issue of liability is one of the central features in the choice of business structure.

11.5

Partnerships are not as important as they once were. Nevertheless, many small businesses are still owned in partnership, as are many professional businesses, such as accounting and legal firms. Accounting, taxation, management and financial advisers ought to have a working knowledge of partnerships. Unlike a company, a

partnership is not a separate legal entity. This is the essential weakness of a partnership as a mode of conducting business. Partners have unlimited liability for the debts of the partnership. This means that one partner may be liable to the full extent of his or her assets for the unauthorised actions of his or her partners. Partnerships are inherently unsuited to risk-taking when compared to corporations. Partnerships are also limited in size. Except in the case of certain professional partnerships, such as legal and accounting firms, a partnership is not permitted to have more than 20 members. On the other hand, partnerships do have a number of practical advantages. They allow pooling of resources (assets) and skills to assist a business in operating without imposing any significant establishment and administrative costs. Companies 11.6 Companies are now the most popular method of commercial ownership for all medium-to-large businesses. The essence of company law is that the company is treated as a separate legal person from its shareholders and members. The big advantage of a company is the ability to limit personal liability for business debts. There are other advantages. In many cases, it is easier to acquire or dispose of an interest in a company than it is in a partnership. This is because most companies are limited by shares. Interests in the company are acquired or disposed of by buying or selling shares. However, there are disadvantages to companies. A company is more expensive to set up and maintain than a partnership. Company law is more complex than partnership law. An introduction to company law is provided in Chapter 12. Figure 11.2 lists the key advantages and disadvantages of the main types of business organisations. [page 416]

Figure 11.2 Key advantages and disadvantages of the main types of business organisations Sole trader

Partnership

Few legal issues Set-up costs are low Maintenance costs are low Full control Very regulatory oversight

little

Proprietary company Advantages

Set-up costs are low Maintenance costs are relatively low Control is shared with partners (may be a disadvantage) Very regulatory oversight

Public company

Limited liability

Limited liability

Control can be maintained by retaining a majority of shares

(If listed on stock exchange) it is easy to sell shares Equity raising

little

Disadvantages Only available where there is one owner Personal liability

Personal liability Size is limited to 20 partners (except for professional partnerships) Control is shared with other partners

Control is limited unless majority shareholder Can be difficult to dispose of shares when a dispute arises Regulatory requirements

NAMING THE BUSINESS A business name will require registration if the name is different to the names of the owner(s) of the business. A common mistake made by traders is to believe that a business names registration protects the business name. This is not the case. To protect a business name against use by a competitor, it is possible to use s 18 of the Australian Consumer Law (see Chapter 3). There is a system of registration for the protection of trade marks (including trade names) under the Trade Marks Act 1995 (Cth).

Very little control as a shareholder Set-up costs are very high Maintenance costs are high Regulatory oversight is high

11.7

Firms often use a business name for trading purposes. This applies equally to sole traders, partnerships and companies. For example, Joanna Smith, Fred Nerc and Tom Jones may operate a business in partnership and call it ‘Simple Things’. They are entitled to do this, but must register the name under the relevant business names legislation. In Australia:2 18

(1) An entity [which includes an individual, a partnership and a company] commits an offence if: (a) the entity carries on a business under a name; and (b) the name is not registered to the entity as a business name on the Business Names Register. … (2) Subsection (1) does not apply if: (a) the entity is an individual and the name is the individual’s name; or (b) the entity is a corporation and the name is the corporation’s name; or (c) the entity is a partnership and the name consists of all of the partners’ names; …

Registration under the Business Names Registration Act 2011 (Cth) is designed to protect persons dealing with the business which is trading under a business name. The register is a public record and can be inspected by anyone. In this way, it is possible to know who is behind the business name. The registration of business names moved to the Commonwealth Parliament’s jurisdiction in 2011–12, when the states and territories referred this power to the Commonwealth under s 51(xxxvii) of the Australian Constitution (see [1.11]). [page 417]

CREATION OF A PARTNERSHIP 11.8

Partnership law is regulated not by the Commonwealth, but by the various states of Australia. Thus, there is a Partnership Act in each

state. This is one of the problems of a federal system of government. Fortunately, the Acts are essentially the same. In this chapter, any reference to the Partnership Act is a reference to the Partnership Act 1958 (Vic). See the table of comparative legislation in the Appendix to this chapter.

Are any formalities required to create a partnership? 11.9

Unlike the creation of a company, which requires approval and registration, the creation of a partnership requires no formalities whatsoever. If two people decide to open a restaurant together, they are probably forming a partnership. Quite possibly, they will not discuss the legal ramifications of their new business. In particular, they might not discuss the following matters: how decisions are to be made in the case of disagreement; what property is to become partnership property; how the partnership is to be dissolved; or what happens on dissolution. Quite probably, they will not write anything down. This does not matter. The existence of a partnership does not depend on these things. The existence of a partnership depends on the true nature of the relationship between the persons. Only certain relationships are partnerships. If the relationship between our two restaurateurs is a partnership, the Partnership Act 1958 (Vic) provides the necessary rules for decision making, dissolution and other matters.

DEFINITION OF A PARTNERSHIP There are three requirements for a partnership.

11.10 A partnership is defined in the Partnership Act 1958 (Vic) s 5(1): 5 (1)

Partnership is the relation which subsists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership within the meaning of Part 5.

1. 2. 3.

Section 5(2) ensures that shareholders in a company will not be regarded as partners. There are three elements to the partnership relationship: the carrying on of a business; in common; with a view of profit.

Carrying on business 11.11 ‘Business’ is defined to include any ‘trade, occupation or profession’: s 3. In analysing the meaning of ‘carrying on business’, the courts have found it necessary to draw some distinctions: distinguishing between carrying on a business and carrying on a hobby; distinguishing between carrying on a business and preparing to carry on a business; and distinguishing between carrying on a business and carrying out a single venture. [page 418] A business or a hobby? 11.12 This issue was discussed in the following case involving questions of income tax. Although the case did not involve a partnership, the principles to be applied in distinguishing a business from a hobby are the same.

Ferguson v Federal Commissioner of Taxation (1979) 79 ATC 4261 (Federal Court) Facts Ferguson was employed in the Australian Navy. He was keen to leave the navy and go into primary production. Therefore, he leased five cattle for

breeding purposes. Ferguson then entered into an agreement with a property owner to pasture and manage his cattle. Through judicious breeding, Ferguson intended to increase the herd to 200, which would then be established on a farm which he intended to purchase. Ferguson made losses which he claimed were deductible from his income tax. The Commissioner of Taxation disallowed the deductions on the basis that the losses on the cattle were not incurred in carrying on a business. Issue Whether Ferguson’s cattle breeding was a hobby or a business. Decision The court held that Ferguson was carrying on a business. The operation had a commercial flavour about it. The intention was to make a profit. Repetition and regularity of activities are important but not necessarily decisive. Ferguson’s activities were organised in a systematic, business-like manner. Books and records were kept. In certain circumstances, the size of an operation may be useful in distinguishing between a business and a hobby.

Similarly, in Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540, Evans won $800,000 over the year by betting on races. The Australian Tax Office asserted Evans was carrying on a business of ‘professional gambling’, but the court held it was merely a hobby due to lack of any business structure, systematic operations or record-keeping. Carrying on a business or preparing to carry on a business? 11.13 A partnership only exists once the parties are said to be carrying on a business. Preparing to do so is normally not sufficient. [page 419]

Goudberg v Herniman Associates Pty Ltd [2007] VSCA 12 (Supreme Court of Victoria, Court of Appeal)

Facts Williams had an idea to convert hotel restaurants (mainly in Sydney) into a chain of franchised restaurants. Williams discussed the idea with Goudberg. Together, they selected a number of possible US franchises to visit. They held discussions with their preferred US franchisor, Applebee’s. They discussed the appropriate structure for the venture and possible financing. At this stage, no hotel had been approached, no finance had been sought and no corporate structure set up; indeed, the project was still essentially a ‘feasibility study’. Williams then engaged Herniman Associates, architects, to advise on possible architectural requirements. Eventually, the project collapsed. Herniman sued Williams and Goudberg for $186,000 for unpaid fees, loss of profits and costs. Goudberg denied liability on the basis that he had not engaged Herniman and was not a partner with Williams. Issue Whether a partnership existed between Williams and Goudberg. Decision While the evidence suggested that Williams and Goudberg were acting in common, they were not engaged in carrying on a business. Their activities were exploratory and preparatory to setting up a business, but did not constitute carrying on a business. Therefore, no partnership existed. Therefore, Goudberg was not liable.

In Goudberg v Herniman, above, the potential business was essentially still at the ‘idea’ stage. However, a new business operation could constitute a partnership before it begins actually trading. Most businesses involve some pre-trading commercial activity undertaken with a view of ultimate profit; for example, acquiring and fitting out the business’s premises and contracting with suppliers. The operators could be seen as already ‘carrying on the business’ (and therefore they could be in partnership) during that pre-trading stage Carrying on business or a single venture? A partnership is a purely business structure. Therefore, there must be a business being carried on. The partnership relates only to the business activities of a relationship.

11.14 In both cases discussed in [11.12], repetition and regularity of activities were factors taken into account in determining whether a

business was being carried on. This traces back to Smith v Anderson (1880) 15 Ch D 247, in which Brett LJ suggested that ‘carrying on business’ required a succession of acts and did not apply to a relationship which was formed for the purpose of performing a single act. However, a single venture may create a partnership. This is recognised by the Partnership Act 1958 (Vic) s 36. In Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance) (1974) 131 CLR 321, the High Court held that a contract to finance one-off concert tours created a partnership because the parties went into the arrangement with a view of profit, agreed to share profits, agreed to make joint decisions and clearly intended to become joint owners of the benefits of the contract In contrast, see Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd (No 1) (1979) 22 SASR 552, where the court held that a joint venture set up to promote and exploit a circus tour did not create a partnership. [page 420] The expressions ‘joint venture’, ‘syndicate’ and ‘consortium’ have no precise meaning in law. They are merely words used to describe a contractual relationship. The important question is whether that relationship fits into the definition of a partnership. If it does, the law of partnership applies. If it does not, no special laws apply.3 Do not make the mistake of concluding that a partnership does not exist merely because the parties call it a joint venture or a syndicate or a consortium.

Carrying on a business in common The problem stated 11.15 For a partnership to exist, the business must be carried on in common. Consider the following situations: In each case, can it be

said that a business is being carried on in common? A lends a sum of money to B, who operates a small business. In return, B promises to pay A 10 per cent of gross receipts. B wishes to start up a business. A agrees to supply $10,000 on condition that she receives 50 per cent of net profits for five years. A owns a rural property. B operates a mining business. A agrees to allow B to mine his property, provided B pays A a percentage of the profits realised on the sale of the minerals. A owns a rural property. He enters into an agreement with B, whereby B will work the property in return for A receiving a percentage of the profits. A takes no part in the management of the business (see Harvey v Harvey, in [11.33], where one of the issues was whether the arrangement between two families was a partnership to farm land or a mere licence to use land). Mutuality of rights and obligations 11.16 Whether two or more persons are carrying on business in common is often a very difficult factual question. A and B will only be in partnership if it can be said that B is carrying on the business for and on behalf of both A and B. This is what ‘carrying on business in common’ means. In other words, A must be carrying on the business as agent for himself or herself and B in order for a partnership to exist. It is not necessary that all partners take an equal interest in the management of the business. The management of many family businesses, which are operated as partnerships, is dominated by one person. This does not mean they are not partnerships. In most cases, it is clear that the parties always intended that one person would run the business for the benefit of everyone. The non-active partners are called dormant or silent partners. Although one partner may manage the partnership, it is the essence of a partnership that all partners have a right to a say in the management (see Momentum Productions Pty Ltd v Lewarne [2009] FCAFC 30). There must be a mutuality of rights and obligations.

Just because two parties share profits does not mean they are necessarily in partnership For example, if the sharing of gross receipts or gross or net profits is merely a way of ensuring repayment of a loan, then A is carrying on business for himself or herself and not for B. B is merely a creditor. However, the sharing of profits will often be a strong indicator that a partnership exists, especially where it is combined with an agreement to share losses. If a mutuality of rights and obligations exists the parties cannot declare that a partnership does not exist. [page 421]

Re Ruddock (1879) 5 VLR 51 (Supreme Court of Victoria) Facts Ruddock carried on business in his own name. He owed a debt to Mrs Bear. Ruddock and Mrs Bear agreed that Mrs Bear would acquire a quarter-share in the business in return for discharging the debt. Mrs Bear was to be solely in control of her quarter-share and to receive 25 per cent of the net profits. It was agreed that Mrs Bear would not be responsible for any losses. Ruddock further agreed that he would not do anything to hold Mrs Bear out as a partner. In other respects, however, Ruddock agreed to treat Mrs Bear in the same way as a partner would be treated. There was no expiry time placed on the agreement. Ruddock continued to manage the business. Mrs Bear took no part in the day-to-day management. When Ruddock wished to introduce a new person into the business he sought and obtained Mrs Bear’s consent. When Ruddock became insolvent, Mrs Bear sought to claim her debt as a creditor. However, she could not do this if she was in partnership with Ruddock. Issue Was there a partnership between Ruddock and Bear? Decision The court held that Mrs Bear was a partner. Ruddock and Bear treated each other as partners and the relationship was determined by this mutuality of rights and not by the words used by the partners.

To be carrying on a business in common, the parties must be engaged in the same business.

Checker Taxicab Co Ltd v Stone [1930] NZLR 169 (Supreme Court of New Zealand) Facts Checker owned a taxicab. The taxi was hired to a driver under the terms of an agreement between the driver and Checker. The agreement provided that the cab was hired each day to the driver, who was required to return it at the end of the day in good condition. The driver agreed to pay a percentage of his takings by way of a hiring fee. The driver was to pay all his own running costs and had complete control over the use of the cab during the hiring period. [page 422] Issue Whether Checker was responsible for the negligence of the driver. Checker would only be responsible if the driver was an employee or a partner. Decision The court held that the driver was neither an employee, nor a partner, of Checker. Checker and the driver were carrying on separate businesses.

Partnership Act 1958 (Vic) s 6: the statutory rules The Partnership Act contains guidelines for determining whether a business is being carried on in common by two or more people.

11.17 Determining whether a business is being carried on in common is not always easy. To assist in distinguishing partnerships from other relationships, the Partnership Act 1958 (Vic) contains certain statutory rules: s 6. These rules are designed to assist in the interpretation of the main definition (s 5), not to replace it: 6

In determining whether a partnership does or does not exist regard shall be

had to the following rules — (1) Joint tenancy tenancy in common joint property common property or part ownership does not of itself create a partnership as to anything so held or owned whether the tenants or owners do or do not share any profits made by the use thereof. (2) The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. (3) The receipt by a person of a share of the profits of a business is prima facie evidence that that person is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make that person a partner in the business and in particular — (a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make that person a partner in the business or liable as such; (b) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such; (c) a person being the spouse, domestic partner or child of a deceased partner and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner is not by reason only of such receipt a partner in the business or liable as such; (d) the advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the business does not of itself make the lender a partner with the person or persons carrying on the business or liable as such: Provided that the contract is in writing and signed by or on behalf of all the parties thereto;

[page 423] (e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by that person of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.

Under s 6(1), co-ownership of property does not by itself indicate that the co-owners are in partnership. Likewise, under s 6(2), the sharing of gross returns (turnover) does not by itself indicate a partnership. On the other hand, the sharing of the profits of a business does point to the existence of a partnership, but does not prove it: s 6(3). A person may share in the profits of a business without being a partner. Subsections 6(3)(a)–(e) give five examples where this may occur, and these are discussed below. Partnership Act 1958 (Vic) s 6(3)(a) 11.18 Subsection 6(3)(a) recognises that creditors will often secure the repayment of a debt by agreeing to take a proportion of the annual profits until the debt is repaid. In doing so, the creditor may require powers of control and inspection.

Cox v Hickman (1860) 11 ER 431 (House of Lords) Facts Cox and others were creditors of a trading partnership which got into financial difficulties. The creditors agreed with the partners that the business would be held by the creditors until the debts were paid off, at which time the business would revert to the sole ownership of the partners. Until the debts were paid off in full, all profits from the partnership business were to be shared by the creditors. Issue Whether Cox and the other creditors were partners in the debtor’s business. Decision The court held that they were not partners even though they had a right to share in the profits. Section 6(3)(a) was based on the decision in this case.

Partnership Act 1958 (Vic) s 6(3)(b) 11.19 Subsection 6(3)(b) reflects the common situation that employees are often offered a share of the profits as an incentive as part of

their overall remuneration package. This does not make the employee a partner. Agents, especially management agents, often receive a commission based on profits as remuneration for providing the management services. This does not in itself create a partnership. For example, Alan is the manager of the country office of an accounting firm. As an incentive to get Alan to go to the country office, he is paid a base salary plus a share of the net profits generated by that office. The evidence does not establish that Alan is a partner. [page 424]

Plummer v Thomas [2002] NSWSC 1185 (Supreme Court of New South Wales) Facts Plummer and Thomas entered into an arrangement which Plummer claimed amounted to a partnership. The joint enterprise involved opening up a workshop for the manufacture and sale of ceramics and other craft items. Plummer was a ceramicist. Thomas was a farmer who wanted to set up a business which would involve his four adult children. According to the arrangement, profits were to be shared 50/50. Otherwise, Thomas arranged the lease in his name and paid the bond, registered the business name in his name, opened the bank accounts in his own name, paid all the debts, decided who would be hired and fired, and decided who the accountant would be and what form the financial records would take. Plummer brought a number of specialty items to the workshop. However, when the relationship broke down, she claimed these back and Thomas agreed. Issue Whether a partnership existed between Plummer and Thomas. Plummer argued that there was a partnership. Thomas denied this. Decision Despite the fact that there was an agreement to share profits, the rest of the

evidence did not support the existence of a partnership. In particular, there was no suggestion that Plummer had agreed to share losses.

Partnership Act 1958 (Vic) s 6(3)(c) 11.20 Subsection 6(3)(c) covers the payment of an annuity to a widow, widower or child of a deceased partner. An annuity is an annual payment. For example, Alan, Bill and Cecil are partners in a trading firm. They have a partnership agreement which states, inter alia, that on the death of any partner, the widow of such partner shall be entitled to an annuity based on that year’s profit. Cecil dies and his widow is paid a lump sum out of the profits. The widow is not a partner of Alan and Bill. Partnership Act 1958 (Vic) s 6(3)(d) ‘Bona fide’ is a Latin phrase meaning ‘good faith’.

11.21 Subsection 6(3)(d) is designed to protect the bona fide creditor who finances a project in return for a share of the profits. For example, sharing in the profits may be the only way that the financier can ensure repayment of the moneys lent. If repayment of the loan is to be made out of profits, the creditor will require certain powers, such as the right to inspect the debtor’s books of account and the right to sell off the debtor’s assets if the profits are insufficient. In such circumstances, the parties never intended a mutuality of rights and obligations. The creditor and the debtor would not be regarded as partners. However, if the financier seeks greater powers and rewards, he or she may become a partner. [page 425]

Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511 (Chancery Division)

Facts Megevand and another intended to set up a business in partnership. Delhasse agreed to lend them £10,000. There was a written agreement between Megevand, Delhasse and the other party. The agreement expressly stated that Delhasse was a creditor and not a partner. The agreement also stated that Delhasse had a right to share in the profits of the business to a fixed percentage, that Delhasse had a right to inspect the books of account and that, in certain circumstances, he was to have the right to dissolve the partnership and conduct the winding-up. All these conditions are consistent with Delhasse being a creditor and not a partner. However, the agreement also stated that the ‘loan’ was not to be repayable until after the partnership was dissolved. Moreover, the evidence indicated that Delhasse’s £10,000 was the only capital of the partnership. Issue Whether Delhasse was a partner or a creditor. Decision The court held that he was a partner. The terms of the agreement went beyond the requirements of a standard loan. The fact that the ‘loan’ was not to be repaid until the partnership was dissolved was more consistent with a partner’s capital contribution rather than a loan.

See also Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance), in [11.14]. Of course, in Canny Gabriel, there were other facts which indicated that a partnership existed. Creditors must be careful when drawing up the terms of the loan agreement. Partnership Act 1958 (Vic) s 6(3)(e) 11.22 Subsection 6(3)(e) represents a fairly common way of securing payment for the sale of a business. Suppose that Alwyn owns a manufacturing business and he sells it to Bernie for $100,000. The purchase price is to be paid as follows: $50,000 on settlement; and the balance to be paid by paying to Alwyn 30 per cent of net annual profits of the business until such time as the balance is cleared.

This arrangement does not make Alwyn a partner of Bernie.

Carrying on business in common with a view of profit 11.23 A partnership must aim to make a profit. This does not mean that it cannot make a loss. In fact, a partnership might never make a profit. The important thing is that making a profit was its original purpose. This part of the definition emphasises that a partnership is a commercial relationship and does not include non-profit associations and clubs. [page 426]

Partnerships are contractual relationships A court will decide whether a partnership exists based on the facts of the relationship, rather than relying on how the parties describe their relationship.

11.24 Although the definition of a partnership does not refer to a contract, it is clear that the relationship is contractual. The agreement may be wholly in writing, partly in writing or wholly oral. It will contain express terms and, in appropriate circumstances, implied terms. Mostly, these implied terms will come from the Partnership Act 1958 (Vic). Contracting parties cannot avoid being partners just by agreeing not to be partners. For example, a written agreement between two persons to operate a business jointly may contain a clause stating: ‘Nothing in this agreement shall be taken as creating a partnership’. Such a clause would be largely ignored by a court in determining whether a partnership existed (see Re Ruddock, in [11.16]; Re Megevand; Ex parte Delhasse, in [11.21]). By the same token, describing a person as a partner does not necessarily make him or her a partner.

Stekel v Ellice [1973] 1 All ER 465 (Chancery Division) Facts Both the plaintiff and the defendant were chartered accountants. Stekel was described as a ‘salaried partner’. According to the agreement between Stekel and Ellice, Stekel was to receive a salary and had no interest in or right to the capital of the ‘partnership’. All profits belonged to Ellice and all losses were his responsibility. Issue Whether Steckel was a partner or just an employee. Decision Having said that calling a person a ‘salaried partner’ does not necessarily make him a partner, Megarry J then decided that, in all the circumstances of the case, Stekel was a partner and not just an employee. (Megarry J commented that, with regard to third parties, Stekel was certainly a partner, if not actually, then by holding out (see [11.49]).)

Rather than relying solely on the parties’ stated intention, the court will look at the parties’ actions to determine whether a partnership existed, and who the partners were. This is illustrated in Deputy Commissioner v Tuza (1995) 31 SATR 261, where three brothers ran a business in partnership. Although the parties stated they did not intend their father to be a partner, the father had use of a partnership car and access to the firm’s bank account, he received a share of the firm’s income and was referred to as a partner on insurance and other documents. These facts led the court to hold he was a partner.

RULES GOVERNING PARTNERS’ RELATIONSHIP WITH EACH OTHER 11.25 The rights and liabilities of the partners with respect to each other are determined by three factors:

1. 2. 3.

the contract creating the partnership; the Partnership Act 1958 (Vic); and the law relating to fiduciary relationships. A fiduciary relationship exists between partners. [page 427]

The contract between the partners 11.26 The contract is supreme in determining the rights and liabilities of the partners between themselves: Partnership Act 1958 (Vic) s 23. The partnership contract is subject to all the normal rules of contract. Consequently, the contract may be totally in writing, partly in writing or it may be inferred from the conduct of the parties. The terms of the contract may be partially express and partially implied. There are certain terms that are normally implied into a trading partnership agreement provided there is no express term to the contrary. Such terms include: a partner has the right to sell the firm’s trading stock; a partner has the right to buy stock of a kind usually used or traded by the business; a partner has the right to receive payments owing to the partnership and to give a valid discharge; a partner has the right to make, accept and issue cheques and other negotiable instruments; and a partner has the right to pledge the firm’s credit for the purchase of stock.

Partnership Act 1958 (Vic) People entering a partnership should consider signing a partnership agreement to clarify the partners’ rights and liabilities. The Partnership Act 1958 (Vic) does contain some general rules, but these will not suit every partnership situation.

11.27 The Partnership Act 1958 (Vic) contains rules that will apply to the partnership if the partners have not agreed among themselves. Matters may arise during the course of a partnership that the partners may not have considered at the time of forming the partnership. For example: How are partnership decisions to be made — by majority vote or by unanimous vote? Is there a difference between decisions regarding ordinary or everyday matters and decisions affecting the nature of the partnership business? Is a partner entitled to interest on the capital subscribed by her or him? For instance, it is possible that the partners will contribute capital in varying amounts. It is possible that not all partners will contribute capital. How are profits, losses and capital to be shared? If a partner makes a payment out of his or her own pocket, does the partnership have to indemnify him or her? Can a partner claim wages? This could be important where there is a silent partner. Can one partner be excluded from management by the other partners? Can a majority of partners introduce (or expel) a partner? In order to answer these questions, it is necessary to look at the agreement between the partners. If, however, the partners have no agreement on these matters, then ss 28 and 29 apply: 28

The interest of partners in the partnership property and their rights and duties in relation to the partnership shall be determined subject to any agreement express or implied between the partners by the following rules: (1) All the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses whether of capital or otherwise sustained by the firm. (2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him — (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.

[page 428] (3) A partner making for the purpose of the partnership any actual payment or advance beyond the amount of capital which he has agreed to subscribe is entitled to interest at the rate of seven per centum per annum 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 him. (5) Every partner may take part in the management of the partnership business. (6) No partner shall be entitled to remuneration for acting in the partnership business. (7) No person may be introduced as a partner without the consent of all existing partners. (8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners but no change may be made in the nature of the 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 when he thinks fit have access to and inspect and copy any of them. 29

No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.

Partners’ duties of good faith 11.28 Because the relationship between partners is one of trust and good faith, partners owe fiduciary duties to each other. Fiduciary duties were previously discussed in relation to principal and agent (see [10.44]–[10.48]). The fiduciary duties owed by partners are similar. These duties have been expressly incorporated into the Partnership Act 1958 (Vic) by ss 32, 33 and 34. Two cases (one pertaining to the end of a partnership and the other pertaining to the beginning of a partnership) demonstrate how a person under a fiduciary duty cannot act in the same manner as a normal business person.

Chan v Zacharia

(1984) 154 CLR 178 (High Court) Facts Chan and Zacharia were two doctors who decided to dissolve their partnership. Before the partnership had been wound up, Chan (without Zacharia’s knowledge) renewed the lease so that he could continue to practise medicine from the same address. Of course, this excluded Zacharia. Zacharia argued that Chan could not keep the lease for himself because, at the time the lease was renewed, Zacharia and Chan were partners and therefore owed fiduciary duties to each other. Issue Whether Chan owed fiduciary duties regarding the lease, or whether he could treat the lease as his own property. [page 429] Decision The High Court held that Chan held the lease on trust for both himself and Zacharia. This meant that Chan owed fiduciary duties to his partner in respect of the lease and would have to account to Zacharia for the benefit Chan was receiving from the lease renewal.

If no partnership existed, or if the partnership had been completely wound up, Chan would have been permitted to act in his own interests even if that disadvantaged Zacharia.

United Dominions Corp Ltd v Brian Pty Ltd [1985] HCA 49 (High Court) Facts Security Projects Ltd (SPL), a property owner, UDC (a finance company) and Brian (an investor) entered into a partnership agreement to develop certain land owned by SPL as a shopping centre. Before the partnership actually commenced, but after detailed negotiations had been held, SPL gave a mortgage over the land to UDC to secure moneys that UDC had lent to SPL not only for the development of the shopping centre land but also for other developments which Brian was not involved in. Brian knew nothing about the terms of the mortgage. Eventually the shopping centre was built and sold at a profit. UDC, however, kept the proceeds to pay off other debts that it was

owed by SPL and to which it claimed to be entitled under the terms of the mortgage. Brian objected that the terms of the mortgage amounted to a breach of fiduciary duty and were unenforceable against Brian. Issue Whether UDC owed a fiduciary duty to Brian. Decision The High Court held that, in the circumstances, UDC owed a fiduciary duty to Brian Although the partnership had not yet commenced, the parties had moved well beyond the stage of preliminary negotiations. UDC had breached that duty by taking a mortgage that advantaged itself to the disadvantage of Brian without Brian’s consent.

In the absence of a fiduciary obligation, UDC would not have been obliged to obtain Brian’s consent before entering into such a security arrangement with SPL. Duty to make disclosure 11.29 Section 32 sets out the broad duty owed by all partners to make full and frank disclosure of all matters relating to the partnership. Section 32 provides: 32

Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representative.

Each partner is entitled to insist upon a full disclosure being made and, failing that, has a right to demand that partnership accounts be taken, if necessary, by court order. For example, A and B are in partnership in a small business. A leaves the running of the [page 430] partnership to B. B refuses to provide A with a copy of the accounts or with current details of the business. B also refuses to give A access to the relevant documents. A is concerned that B is

trading beyond the limits of their agreement. A has a right to seek a court order for an account to be taken and for access to be given. Duty to account for benefits derived from dealings with partnership 11.30 Section 33 prohibits a partner from having dealings with the partnership without disclosing the nature of those dealings to the other partners. For example, A and B are in partnership as builders. The partnership enters into a lucrative contract with Developers Ltd to renovate certain properties owned by Developers Ltd. Unbeknown to B, A is a major shareholder in and director of Developers Ltd. Section 33 makes it clear that A is in breach of his fiduciary duty and that any profits he makes as a result of the contract belong to the partnership, even where the contract is highly beneficial to the partnership: 33

(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 surviving partner or by the representatives of the deceased partner.

Duty to account for use of partnership assets 11.31 Section 33 also prohibits a partner from deriving a benefit from the partnership name, property or business connection without the consent of the other partners. That is, a partner must not keep a benefit which belongs to the partnership. For example, imagine that A and B are partners in a firm of architects. In the course of the business, A learns of a government tender to design a new office block for one of the government departments. Without disclosing this opportunity to B, A submits a tender in his or her own name. If A wins the tender, s 33 will apply. Any benefits obtained by A belong to the firm. Duty not to compete with partnership 11.32 Section 34 sets out the fiduciary duty not to compete with the

partnership: 34

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.

For example, imagine that A and B are partners in a firm of architects. In the course of business, the partnership submits a tender for the design of a new house. Without telling A, B also submits a tender in another name. Because of B’s knowledge of the partnership, B is able to undercut the partnership and so win the tender. B has breached his or her fiduciary duty under s 34. Any benefit obtained by B belongs to the firm.

PARTNERSHIP PROPERTY What is partnership property? As every partner has rights (and responsibilities) in respect of the partnership property, it can be important to establish which assets are partnership property. This will depend upon the facts involved.

11.33 Imagine that Mei Ling and George decided to open up a florist. Mei Ling had certain shop fittings left over from her previous business, which were used in the florist shop. Mei Ling also supplied her laptop computer, which remained on the business premises and was used only for business purposes. George had a van which was used for making deliveries. Mei Ling and George’s business name was painted on the side of the van. George also used [page 431] the van for his private purposes. He owned no other vehicle. Mei Ling and George had a fight and dissolved their partnership. At

the time of dissolution, the business had $2000 worth of stock No debts were owing. The sole question to be resolved was who owned the various items of property. If any property is partnership property, then it is held for the partnership and, on dissolution of the partnership, it must be apportioned according to the agreement between the partners; or, if no agreement exists, then according to the Partnership Act 1958 (Vic). Thus, if George’s van has become partnership property, George cannot just claim it as his own. He must account to Mei Ling for her share of its value. According to s 24, partnership property includes: items brought into the partnership property as partnership property; items acquired on account of the firm; and items acquired for the purposes of and in the course of the partnership business. Items bought with partnership money are deemed to have been bought on account of the firm unless a contrary intention appears: s 25. The stock owned by Mei Ling and George is clearly partnership property. It was acquired either on account of the firm or for the purposes of the firm. The shop fittings, the laptop computer and the van will be decided on the basis of the first element. Were they brought into the firm as partnership property? Whether particular items brought into the partnership have become partnership property depends on the parties’ intention as evidenced by their actions. Did they intend the items to be partnership property?

Harvey v Harvey (1970) 120 CLR 529 (High Court) Facts H H Harvey (HH) was the owner of certain farming land in Tasmania. Because of ill health, he had considered selling his property. However, he

decided against selling when his brother, H L Harvey (HL), approached him and suggested that the farm could be worked by HL and HL’s sons. The parties agreed that the arrangement had mutually beneficial aspects. It would enable HL’s sons to gain experience of pastoral management and it would preserve the property so that it would be available for HH’s son, who was then aged six. The arrangement was oral. HL and his sons would contribute skill and labour but no capital. HH was to provide certain stock and implements, but was not to take part in the dayto-day working of the business. Expenses, including the cost of improvements, and profits were to be shared equally. Both parties were aware that substantial improvements had to be made to the property if it was to maximise returns to the partnership. Over time, these improvements were made to the farm and included substantial areas being cleared and cultivated, fences being erected, dams constructed and bores sunk. The improvements significantly increased the value of the land. There was no express agreement as to whether the land would be a partnership asset and it was not treated as such in the books of the partnership. There was no agreement as to how the improvements were to be dealt with in the partnership accounts or otherwise between the partners on the dissolution of the partnership. The partnership ran for 20 years. In 1967, it was terminated. [page 432] Issues There were three related issues: 1. Did a partnership exist? 2. If a partnership existed, had the land become partnership property? 3. If a partnership existed and the land had not become partnership property, should the value of the improvements be taken into account in assessing each partner’s interest in the assets? Decision On appeal to the High Court it was held by Menzies and Walsh JJ (Barwick CJ dissenting) that: 1. The arrangement was clearly intended to be a partnership. 2. The land did not become an asset of the partnership. The evidence supported the view that the intention of the parties had been to preserve the land for HH’s son. If the land had become partnership property this objective would have been defeated because all partners would have had a beneficial interest in the land. If the property had become partnership property, the land would have to be sold and the proceeds divided between the partners. 3. The additional value of the pastoral property attributable to the improvements made to it in the course of the partnership business should not be taken into account in the final accounts of the partnership.

There is no general principle that, in the absence of agreement, a partner whose property has been increased in value by the expenditure of partnership money is bound to allow the other partners to share in the increased value. It was further held by the whole court that the final accounts should be adjusted to the extent that the owner had not been charged in the partnership accounts with the cost of making the improvements and the owner’s account should be debited with half the expenses, but that, in the making of the adjustments, no allowance should be made for the labour contributed by the firm. The decision meant that H H Harvey not only kept the land but also was under no obligation to pay the other partners any compensation for the improvements that had been made.

A similar situation arose in Sobey v Sobey [2016] VSCA 36, where the Court of Appeal agreed that the parties’ action showed there was no intention for the parents’ land to be a partnership asset. Rather, the intention was merely for the properties to be used by the parents and two sons for carrying on a partnership business of farming.

What right does each partner have to the partnership property? 11.34 The right of each partner to partnership property is a matter of considerable complexity. It was described by Deane J in the Full Federal Court decision in Federal Commissioner of Taxation v Everett (1978) 21 ALR 625 (at 635–6): In the absence of agreement to the contrary, a member of a partnership has no definite or separate share or interest in any particular partnership receipt or other item of partnership

[page 433] property. He has an undivided interest in the totality of partnership assets … and is entitled to insist that they be applied for legitimate purposes of the partnership. … [A] partner’s separate interest in relation to partnership assets is to share, either equally or in such other proportion as the partners may agree, in

any surplus remaining, upon a dissolution, after the realization of the assets and payment of the debts and liabilities of the partnership.

Thus, although a partner has no title to specific property owned by the partnership, he or she has a beneficial interest in each and every asset of the partnership. This was explained by the High Court in Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance) Pty Ltd (at 327) (see [11.14]): The partner’s share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a ‘beneficial interest’ … The assets of a partnership, individually and collectively, are described as partnership property … The description acknowledges that they belong to the partnership, that is, to the members of the partnership.

LIABILITY OF PARTNERS TO THIRD PARTIES 11.35 As a partnership is not a separate legal entity, individual partners are responsible for the debts and liabilities of the partnership. The relationship between partners and third parties will be discussed under the following headings: joint liability for debts and obligations; joint and several liability for wrongful acts; and joint and several liability for misapplication of money or property. First, however, it is necessary to briefly mention the concept of limited partnerships.

Limited partnerships 11.36 Under the Partnership Act 1958 (Vic), the only way for individual partners to limit their potential liability to third parties is for the partnership to be registered with the Australian Securities and Investments Commission as a limited partnership.4 In a limited partnership, one or more of the partners can have his or her

liability for partnership matters limited to a fixed amount (including nil). Limited partners cannot take part in the management of the firm, or they lose their limited liability. Limited partners also lack the power to bind the partnership. Not all partners in a firm can be limited partners — at least one partner must bear full liability for the partnership debts and liabilities. Limited partnerships have not been very popular. Most business owners wishing to obtain limited liability for their business’s obligations form a limited company instead. However, some businesses, such as accounting and legal firms, have traditionally been barred from incorporating, and some of these firms have registered as limited partnerships. For example, Legal Eagles is a law firm with three equity (profit-sharing) partners and one salaried partner. Legal Eagles could remain as a normal partnership, in which case all four partners would be jointly liable for all partnership liabilities. Alternatively, the firm could register as a limited partnership (Legal Eagles (Limited)), with the salaried partner listed as a limited partner having no liability for firm debts, and the three equity partners listed [page 434] as the general partners (full liability). This would give the salaried partner the status of a partner, without the normal liability. Limited partners need to be careful not to hold themselves out as normal partners to credit providers of the firm, or they may still be liable for those debts (see [11.49]).

Joint liability for a firm’s debts and obligations Where a contractual claim against the partnership is involved, each partner’s liability depends on the operation of s 13 (ie, liability for partnership ‘debts and obligations’). Joint liability for debts means that all debtors are used

together, and the resulting court order makes them all liable for the whole amount of the debt.

11.37 Liability of all partners for partnership debts is described by s 13 (emphasis added): 13

Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner …

What does joint liability mean? 11.38 The easiest way to understand joint liability is to consider an example. Imagine A and B are partners in a building firm. The partnership has borrowed $250,000 from the bank to build a number of units on land which the partnership owns. The partnership is now unable to repay the loan because the property market has collapsed and the units cannot be sold except at a loss. A owns her own house and has significant assets. B has a few assets, including a car, but his house is fully mortgaged to another bank. When the partnership fails to repay the loan, the bank sues A and B jointly as partners. The court gives judgment against A and B. If A and B fail to pay the judgment debt, the bank will first sell the units and recover $150,000. The obvious second move for the bank is to pursue A because she has the money and assets. The bank is not required to recover $50,000 from A and $50,000 from B. It may seek the whole $100,000 from one partner. This is because each partner is jointly liable for the partnership debts: s 13 A is required to pay to the bank $100,000. If B does not pay the bank anything, A can then pursue B for $50,000, provided that the partnership agreement requires losses to be borne equally. If the partnership agreement requires A to bear 75 per cent of losses, A can only recover $25,000 from B. The bank’s position, however, remains the same. Joint liability is the major disadvantage of partnerships. Contrast this with the position of companies (see Chapter 12) where the shareholders cannot be held liable to pay for the company’s debts.

What are the firm’s debts and obligations? 11.39 A and B run a building firm. A orders a large quantity of timber on credit from the timber mill without telling B. There is no written or unwritten agreement as to who buys the supplies or in what quantities. Is the debt owing to the timber mill a debt of the partnership, or is it A’s personal debt? To answer this question, it is necessary to apply the Partnership Act 1958 (Vic) s 9 (emphasis added): 9

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, 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.

Just as a commercial agent has the power to bind his or her principal, so does a partner have the power to bind his or her partners. The critical words in s 9 are ‘in the usual way business of the kind carried on by the firm’. This means that a partner will bind his or her partners where he or she transacts a deal which is: within the scope of the kind of business carried on by the partnership; and [page 435] within the usual way that partnerships of that kind conduct business; unless the partner had no authority to so act and the third party knew this or did not know or believe that the partner was a partner. To return to the problem posed at the beginning of this section: B is liable because a partner in a building firm would be expected to have authority to purchase reasonable quantities of building supplies (The position could be different if the quantities are

unusually large.) Therefore, the transaction would be a usual type of transaction for the kind of business carried on by A and B (ie, a building business). B is liable jointly with A for the debt under ss 9 and 13. Another way of expressing s 9 is to say that a partnership will be bound by the acts of one of its partners where that partner is acting within their actual or ostensible authority: Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd, in [11.42]. Commercial partner’s normal authority Actual authority and ostensible authority (also known as apparent authority) are concepts explained in Chapter 10.

11.40 If a partnership is of a general commercial nature, it would normally be within the scope of such a partnership for one partner to: buy stock on credit; sell stock and other general partnership property; borrow money; incur debts in the partnership name; pay partnership debts; receive moneys owing to the partnership; sign cheques; and hire employees. The issue in the next case was whether it was within the scope of a partner’s normal authority to lease premises on behalf of a retail partnership.

Young v Lamb [2001] NSWCA 225 (New South Wales Court of Appeal)

Facts Mr and Mrs Lamb and Mr and Mrs Newell conducted a partnership under the name Moruya Furniture and Bedding. The business was operated from leased premises which were owned by Young. The partnership had operated from the same premises since 1989. Mrs Newell did most of the lease negotiations. She always paid the rent to Young’s agent. In 1995, Mrs Newell negotiated a new three-year lease with an option for a further lease. In 1998, Mrs Newell sent a letter to Young’s agent stating that the partnership intended to exercise the option. She had no actual authority from the other partners to do this. The partners argued that the partnership was not bound by Mrs Newell’s letter. Issue Whether Mrs Newell’s action fell within the meaning of s 5 of the Partnership Act 1892 (NSW) (equivalent to s 9 of the Partnership Act 1958 (Vic)). [page 436] Decision Whether one partner’s act can be said to be done in the usual course of carrying on a particular business depends on the nature of the business, the duration of the partnership and the practices normally adopted by persons engaged in carrying on businesses of that type. Leasing premises was a necessary act for carrying on the partnership business. The premises had been used by the business since 1989. Mrs Newell had negotiated the lease. Mrs Newell was the contact between the partnership and Young’s agent. The letter in 1998 purported to speak for the partnership. In all the circumstances, therefore, Mrs Newell’s act in sending the letter taking up the option was an act ‘relating to the business of the firm, done in the firm’s name, revealing an intention to be bound’. The partnership was bound by Mrs Newell’s act.

On the other hand, borrowing money has been held not to be within the normal scope of a partner in a stock and station agency (Commercial Bank v Lakeman (1890) 7 WN (NSW) 40) and a moneylending business (Mandelberg v Adams (1930) 31 SR (NSW) 50). Even if borrowing is within the normal scope of a partnership, the particular transaction in question must also be the usual way of borrowing in that kind of business.

Goldberg v Jenkins

(1889) 15 VLR 36 (Supreme Court of Victoria) Facts Jenkins, a partner in a business, borrowed money in the partnership name and supposedly on behalf of the partnership at an exorbitant rate of interest (60 per cent). In fact, the borrowings were for Jenkins himself. His partner was unaware of Jenkins’ activities. Jenkins defaulted in payment and the lender sued the partnership Jenkins’ partner denied that the debt was a partnership debt. Issue Whether the loan taken out by Jenkins was binding on all partners in the firm. Decision The court held that borrowing money fell within the normal scope of conducting a partnership of the kind in question. However, borrowing at exorbitant rates was not within the usual way and, therefore, the other partners were not bound. Hodge J said (at 38–9): A person conducting his transactions in the ordinary way in the year 1888 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 … 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.

[page 437]

Seiwa Australia Pty Ltd v Beard [2009] NSWCA 240 (New South Wales Court of Appeal) Facts Seeto was a partner in an accounting firm that performed audit and insolvency services. The partners and other employees of this firm also provided other accounting services to clients, but using a separate company structure to run that side of the accounting practice. Seeto’s clients included a

young businessman and, in the course of their frequent accounting-related meetings, Seeto persuaded the client (and the client’s companies) to hand over sums totalling US$4.6 million. These funds were to be deposited in a special offshore ‘custodian account’ controlled by Seeto (supposedly secured by the firm’s insurance policy), where they would become part of an elaborate overseas profit-earning scheme. When the promised 50 per cent returns were not forthcoming, the clients sought return of their investment. The money had disappeared (withdrawn by a business associate of Seeto), and Seeto was unable to make good the clients’ loss. The clients sued Seeto’s partners in the accounting firm. The court had to decide whether the partnership was bound by Seeto’s actions. This required interpretation and application of Partnership Act 1892 (NSW) s 5 (equivalent to s 9 of the Partnership Act 1958 (Vic)). The clients had believed Seeto was a partner and they had been unaware of his lack of actual authority to solicit client investments for investment schemes. However, the firm was only bound by Seeto’s actions if those actions fell within ‘carrying on in the usual way business of the kind carried on by the firm’. Issue Whether Seeto’s actions bound the whole firm. Decision The clients were unaware of the internal division within the accountants’ business (the partnership and the company). Given the circumstances and the correspondence involved, Seeto’s action would have appeared to have been conducted in his role as partner and on behalf of the accounting partnership. The court found that operating a trust account could have fallen within the kind of business that accounting firms carried on at that time, and receiving clients’ moneys to hold in such a trust account as a temporary measure could have been within the usual way accounting firms might conduct such business. However, the account here was not called a trust account, and nor were the clients’ funds to be deposited in the account temporarily. The court held that Seeto’s actions — operating the ‘custodian account’ and depositing of clients’ funds into that account as an integral part of an outlandish investment scheme — were not the usual way in which chartered accountants carried on their business. Hence, the partnership was not bound by Seeto’s actions.

[page 438] Ratification

Ratification normally involves retrospective approval or adoption of an act.

11.41 Even if a partner acts beyond actual and ostensible authority, the partnership may still become liable if the other partners ratify the act. The principle is precisely the same as the agency principle of ratification (see [10.34]).

Re Oppenheimer (1872) 3 VR (I, E & M) 20 (Supreme Court of Victoria) Facts The partnership was described as a firm of importers. Goods were purchased in Paris by one partner, transported to Australia and sold in Melbourne by another partner. Contrary to agreement, the Melbourne partner bought stock in Melbourne but was unable to pay for it. The Parisian partner visited Melbourne for the purpose of winding up the partnership. He examined all the transactions, took possession of the stock bought by the Melbourne partner and arranged for its sale. He paid some of the debts incurred by the Melbourne partner. Others, however, he refused to pay, arguing that he had no liability to do so. The unpaid creditors argued that he was liable. Issue Whether the contracts made by the Melbourne partner, to purchase stock in Melbourne, were binding on the whole firm. Decision The court held that the buying of stock in Melbourne instead of Paris was not within the usual way of doing business and, therefore, the Parisian partner would not normally be bound. However, the Parisian partner was found liable because, on the evidence, he had ratified his partner’s actions.

Ratification may be inferred from a partner’s subsequent conduct. However, such subsequent conduct is only relevant if the partner had knowledge of the unauthorised transaction — without such knowledge, a partner’s actions cannot amount to

retrospective sanction or approval of the transaction: Lederberger v Mediterranean Olives Financial Pty Ltd [2012] VSCA 262. The proviso to s 9 11.42 Looking closely at the words of s 9 (see [11.39]), we see it contains an exception or proviso. The proviso to s 9 states that the firm will not be bound by the actions of a partner where: (a) the partner had no actual authority to act; and (b) (i) the third party knew the co-partner had no actual authority; or (ii) the third party did not know or believe that the partner was in fact a partner. [page 439]

Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd [1985] HCA 13 (High Court) Facts Two companies (Tambel Pty Ltd and Hexyl Pty Ltd) conducted a business of land development in partnership. Tambel acquired some land in its own name and engaged Construction Engineering, a construction firm, to build home units on it. The contract between Tambel and Construction Engineering was a standard building contract and made no mention of Tambel’s partner, Hexyl. In fact, Construction Engineering did not know of the existence of Hexyl, nor did it believe that Tambel was acting as anything but a principal. Some of the terms of the construction contract were inconsistent with the idea of Tambel acting as agent for some undisclosed party. A dispute arose and the parties went to arbitration. Construction Engineering tried to join Hexyl as a party to the dispute, claiming that Hexyl was bound by the construction contract by virtue of its relationship with Tambel. Hexyl denied it was bound. Issue Whether the construction contract created by Tambel was also binding on Hexyl due to the fact that Tambel and Hexyl were partners.

Decision The High Court found that Tambel did not have actual authority to make contracts on behalf of the partnership. Neither did Tambel have ostensible authority because Construction Engineering was unaware of Hexyl’s existence. In reaching its decision, the High Court commented that s 9 of the Partnership Act effectively states the common law notion of actual and ostensible authority.

Imagine that A and B are in partnership. B takes no part in the day-to-day management. In other words, B is a silent partner. The partnership is conducted in the name of A alone. In fact, there is no indication that it is a partnership. A and B have agreed that A will not buy stock from a particular third party. However, A proceeds to buy stock from the third party on credit. Is B bound by the debt to the third party? A’s act was within the scope of the partnership. There is no evidence that it was in any way unusual. Therefore, B would be bound unless the proviso to s 9 applies. A did not have actual authority to make the transaction. If the third party did not know that A was involved in a partnership (ie, the third party thought that A was a sole trader), B would not be bound Would the result be different if the third party thought A was in partnership with X, but knew nothing about B? [page 440]

Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 (Queen’s Bench Division) Facts G and P operated a garage as a partnership. P managed the business. G was a silent partner. The agreed business of the firm was to repair vehicles and lease out lock-up garage space. G and P expressly agreed that P would not buy and sell vehicles as part of the business. Contrary to this express agreement, P fraudulently sold a vehicle to MC. MC’s cheque in payment was

made out to the partnership. When the fraud was discovered, MC sued G and P to get its money back. G denied liability. Issue Whether G was liable for the car sale contract created by his partner, P. Decision Although P had no authority to sell cars, the firm could still be liable if P was acting within the scope of his authority (in Victoria, this would be within s 9 of the Partnership Act). This depended on whether selling cars was a normal function of this type of business. The evidence suggested that it was quite normal for a garage specialising in repairs also to be involved in selling vehicles. Therefore, G was bound.

The operation of s 9 can be further illustrated by the following problem scenarios (these are discussed further below): 1. A and B run a building firm. A orders an extremely large quantity of timber on credit from the timber mill without telling B. In fact, the order is three times the normal amount ordered by the firm. There is no written or unwritten agreement as to who buys the supplies or in what quantities. Is the debt owing to the timber mill a debt of the partnership, or is it A’s debt? (A and B have been dealing with the same timber mill for a number of years.) 2. A and B run a building firm. Without telling B, A decides that the partnership ought to go into real estate development. So A purchases, in the partnership name, two blocks of land. Is B liable jointly with A for the purchase price? 3. A and B run a development and building business. The business buys land, develops it and then sells at a profit. A and B normally finance their equipment purchases by way of chattel mortgage from the Eastpac Bank Normally, the interest rate payable to the bank is the bank’s standard commercial rate for secured borrowings (usually about 15 per cent). The partnership agreement contains no terms as to permissible borrowings. A purchases a new cement mixer in the partnership name without telling B. The bank refuses to

make the necessary loan and so A borrows the necessary funds from a moneylender at a rate of interest of 30 per cent. Is B jointly liable for the principal and interest on the loan? [page 441] 4.

A and B are two young accountants who decide to open an accountancy practice in partnership. As funds are extremely short, they decide that all purchases, except necessary stationery, shall only be made after both partners agree. A is offered a great deal on a small photocopier and a fax machine. Unfortunately, B cannot be contacted, so A purchases the copier and the fax machine on credit terms. Meanwhile, B has been offered a lucrative job with a multinational accounting firm and has decided to terminate the partnership. Is B liable for the purchase of the copier and fax machine? Would the answer be different if the seller of the items was aware that A and B had agreed not to make purchases without the approval of both?

Problem 1 Buying timber is a normal transaction for a business of the kind operated by A and B (ie, a building business). However, the quantity purchased by A may not be the usual way of conducting such a business, especially where A was dealing with a regular supplier who was aware of the size of the usual purchases. This example shows how difficult it can often be to determine the extent of a partner’s apparent authority. Problem 2 A and B run a building firm, not a development business. Therefore, it is likely that a court would find that the purchase of a block of land was not within the kind of business carried on by the partnership. In other words, the purchase was not within A’s actual

or apparent authority. As a result, B is not jointly liable for the purchase price unless B ratifies the transaction. Problem 3 Borrowing money to pay for equipment purchases such as a cement mixer is a normal practice for a building and development business. Therefore, A was transacting business of a kind carried on by the partnership. However, A has agreed to pay 30 per cent interest to a moneylender when the partnership normally pays 15 per cent to a bank. Is this the usual way of transacting business for a building and development firm? Probably we would need more evidence of the usual borrowing habits of development businesses. Although A and B normally borrow at 15 per cent, it may be reasonably common in the industry to borrow at higher rates and from moneylenders instead of banks. What is your opinion? Problem 4 Clearly, there was no actual authority for either of these purchases. However, it would seem that a fax machine is a common piece of equipment in an accountancy office, even a small office. It is the type of equipment that one would normally expect one partner to buy. It does not seem necessary that both partners be involved in the actual purchasing. Therefore, the purchase would fall within the apparent authority of A and both A and B would be liable. Would the same apply to the photocopier? If the supplier was aware that A did not have actual authority, B will not be liable. 11.43 The proviso to s 9 is supported by s 12: 12

If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.

[page 442]

Joint and several liability for wrongful acts If negligence, fraud or another tort or wrongful action is involved, a partner’s liability depends on the operation of s 14 (ie, liability for ‘wrongful acts’ — see below).

11.44 Partners are jointly and severally liable for wrongful acts or omissions committed by any partner in the ordinary course of the business of the firm. This is the combined effect of ss 14 and 16 (emphasis added): 14

(1) … where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her co-partners loss or injury is caused to any person not being a partner in the firm or any penalty is incurred the firm is liable therefor to the same extent as the partner so acting or omitting to act

What are wrongful acts or omissions? 11.45 Wrongful acts include torts. A tort is a civil wrong for which the courts will grant damages to any injured party. It is a separate body of law to contract law. Torts include fraud, negligence, defamation and assault. Negligent driving by one partner of a partnership vehicle is a wrongful act for which the other partners might be liable if the driving occurred in the ordinary course of the business of the firm Negligence has become an important area, particularly in professional partnerships. Wrongful acts also include misleading and deceptive conduct under the Australian Consumer Law s 18 or the Australian Securities and Investments Commission Act 2001 (Cth) s 12DA. It should be remembered that civil wrongs can be committed by a failure to act as well as by an overt act. For example, an employer who fails to provide a safe system of work may be liable in negligence if one of his or her employees is injured. When are acts in the ordinary course of the business of a partnership? 11.46 In establishing when an act is in the ordinary course of the business of a partnership under s 14, the first thing to determine is the ‘business’ of the firm. This will be a question of fact and may

require an analysis of the partnership agreement, if any, as well as the nature of the transactions conducted by the partnership. Having determined the business of the partnership, it is necessary to consider whether the act in question fell within the ordinary course of such business. Whether the activity involved falls within the ordinary course of the business is a question of fact, requiring determination of the kind of activities the firm might undertake as a normal part of its business. It is not necessary for the partner’s improper manner of performing that activity to have been authorised or commonplace within the firm’s business.

Polkinghorne v Holland & Whittington (1934) 51 CLR 143 (High Court) Facts Holland, Whittington and Harold Holland (son of Holland) conducted a solicitor’s office as partners. Harold advised a client of the partnership (Polkinghorne) to sell government bonds and invest in a company run by an acquaintance of Harold’s. The company had no assets and the whole scheme was designed to defraud the client. [page 443] The other two partners were not aware of Harold’s activities. Polkinghorne sued the partners. The partners argued that they were not responsible for the actions of Harold because his activities were not within the scope of the kind of business carried on by the partnership. The argument was based on the fact that Harold gave investment advice rather than legal advice. Issue Whether Harold’s fraudulent advice to the client was within the ordinary course of the firm’s business, which would make all partners equally liable for Harold’s actions. Decision The High Court said (at 156): By associating themselves in a partnership with Harold Holland, the

[partners] 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 … On the whole circumstances of this case, the advice and guidance which the appellant [Mrs Polkinghorne] sought from Harold Holland … involved work which it was in the course of a solicitor’s business to perform. Although a solicitor had no special skill with regard to investment in securities, it is within the ordinary course of a solicitor’s business to make inquiries on behalf of a client when consulted. Therefore, the partners were held to be liable to Polkinghorne.

Contrast National Commercial Banking Corp of Australia Ltd v Batty [1986] HCA 21, in which the High Court held that a partner in an accountancy practice was not acting in the ordinary course of the business of the firm when he banked cheques payable to a third party in the partnership’s account and then withdrew the proceeds for his own use.

Walker v European Electronics Pty Ltd (in liq) (1990) 23 NSWLR 1 (New South Wales Court of Appeal) Facts A firm of chartered accountants included three partners. One partner concentrated on company liquidation work, one partner handled tax and secretarial work and the third partner, Garrity, handled the company receivership work, among other things. The partners were fairly much independent operators within their own field of expertise. Garrity misappropriated a large sum of money from a trust account that had been set up in the course of one of his receivership jobs. The other two partners were unaware of Garrity’s deeds. European Electronics sued all three partners for the losses caused by Garrity’s misappropriation. [page 444] Issue Whether Garrity’s operation of the trust account was within the ordinary

course of the firm’s business, which would make all partners equally liable as Garrity for the money misappropriated. Decision The New South Wales Court of Appeal held that Garrity was acting in the ordinary course of the business of the firm when operating the trust account in the receivership matter and that, therefore, the other two partners were jointly and severally liable.

As noted above, it is not necessary for the partner’s improper manner of performing an activity to have been authorised or commonplace within the firm’s business. An example of this occurred in the New Zealand case of Proceedings Commissioner v Ali Hatem [1999] 1 NZLR 305, where a garage partnership existed, and the partner in charge of recruitment and staff management had sexually harassed some of the firm’s employees. Of course, sexual harassment per se was not acting in the ordinary course of the firm’s business. However, this conduct had occurred during activities such as staff interviews and other dealings with employees at work, which were indeed part of carrying on the normal course of the firm’s business. This made the co-partners equally liable as the partner who had committed the wrongful conduct. Liability is joint and several ‘Several liability’ means that each person can be sued individually (or in groups) for the whole amount of the claim.

11.47 Once it is determined that the partner’s wrongful act occurred in the ordinary course of the partnership’s business (or with the copartners’ consent), each partner is liable both jointly and severally for losses suffered by third parties (s 16): 16

Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the last two preceding sections.

Joint and several liability is best understood by looking at an

example. Imagine A, B and C run a demolition business called ‘A & B Demolitions’. C takes no part in the management of the business C is the financier, the partner with the money. A and B, on the other hand, are not wealthy. B has some assets, but A has none. In the course of demolishing a house, A carelessly demolishes the house next door as well. The aggrieved homeowner suffers losses totalling $250,000. The homeowner knows that A does not have any money and so she sues B alone. Later, the homeowner discovers that there is a third partner, C. She is then entitled to sue C, once again without joining A. This is what is meant by joint and several liability. The plaintiff can sue one partner at a time for the whole of the damage suffered. The difference between joint liability and joint and several liability does not cause any great difficulty in practice, owing to the rule that all the partners in a partnership may be sued under the firm name.

Joint and several liability for misapplication of money or property 11.48 Section 15 makes the firm liable for money or property misapplied by a partner: 15

In the following cases, namely — (a) where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it; and

[page 445] (b) where a firm in the course of its business receives 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 — the firm is liable to make good the loss.

For misapplication of money or property, all partners are jointly and severally liable: s 16.

The missing millions In March 1998, the partners in a small Melbourne law firm woke to the news that the taxation partner in their firm, Max Green, had been found dead in a hotel room in Cambodia Green had been severely beaten about the head and face with a brick and then strangled with a tie. As devastating as this event was in its own right, the situation got even worse for the partners when the firm’s trust accounts were investigated. Over $30 million in clients’ money was missing. Instead of investing the clients’ money in a tax-minimisation scheme as he was supposed to, Green had stolen the money and used it for his own purposes in a series of shady schemes involving gems in Cambodia and Laos. The money was never recovered and Green’s killers were never found. Despite knowing nothing about Green’s activities, the remaining partners were fully liable for Green’s misuse of the money belonging to the firm’s clients. Green’s activities eventually led to a huge number of court cases involving not only the clients and the law firm but also banks, accountants and auditors. The moral of the story is, select your partner(s) carefully and take out insurance.

Liability by holding out (estoppel) 11.49 In certain circumstances, a non-partner can become liable for the debts of the partnership. This occurs where a person acts in such a way that people dealing with the partnership reasonably believe him or her to be a partner (s 18): 18

(1) Every one who by words spoken or written or by conduct represents himself or who knowingly suffers himself to be represented as a partner in a particular firm is liable as a partner to any one who has on the faith of any such representation given credit to the firm whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made. (2) Where after a partner’s death the partnership business is continued in the old firm-name the continued use of that name or of the deceased partner’s name as part thereof shall not of itself make his executors or administrators estate or effects liable for any partnership debts contracted after his death.

In Stekel v Ellice (see [11.24]), Megarry J had no doubt that a person who allowed himself or herself to be called a ‘salaried

partner’ and to appear on the firm’s letterhead as a partner was holding himself or herself out as a partner. This is another example of estoppel. [page 446]

D & H Bunny Pty Ltd v Atkins [1961] VR 31 (Supreme Court of Victoria) Facts Bunny operated a business supplying hardware. Atkins and Naughton were interviewed by Barnard, the credit manager of Bunny. There was some confusion as to what was said at the interview. One version (which the court eventually accepted) was that Atkins and Naughton told Barnard that they had already gone into partnership in a plumbing business and that they were merely waiting for credit from Bunny in order to commence trading. The second version was that Atkins and Naughton told Barnard that they were planning to go into business as partners. Barnard did not ask any questions about the partnership terms, nor ask to see a copy of the agreement. Bunny provided the credit. In fact, Atkins and Naughton never went ahead with the partnership, although this was never made known to Bunny. Naughton bought goods on credit. The statements of account were regularly made out to ‘Atkins and Naughton’. Twice, Atkins collected goods from Bunny on behalf of Naughton. On both occasions, he signed for them without commenting on the fact that the account was improperly made out. Twice, Atkins paid Naughton’s accounts with his own cheque. The accounts were made out to ‘Atkins and Naughton’. Eventually, Naughton failed to pay his account. Bunny sued Atkins and Naughton. Atkins argued that he was not liable as he was not a partner. Issue Whether on either version of events Atkins was a partner of Naughton’s or, because of his actions, was to be treated as a partner. Decision The court held that if version one of the interview was correct, Atkins had clearly held himself out as a partner and was liable. If the other version was correct, Atkins was still liable because he knew that the accounts were being issued in joint names and he did nothing to advise Bunny to the contrary. On at least two occasions, Atkins had collected supplies for Naughton from

Bunny and signed a receipt made out to joint names. On two occasions, Atkins had paid Bunny’s account with one of his own cheques. Sholl J said of Atkins’ conduct (at 34): [H]aving noticed that the plaintiff was supplying to Naughton goods on credit for use in plumbing work to the debit of an account in which he was apparently named as one of the members of a firm, he did nothing to ensure the communication to the plaintiff of any denial by him of his ostensible liability. Such conduct, in my opinion, amounted either to knowingly holding himself out, or to knowingly allowing himself to be held out, as a partner, and … amounted to a representation that the partnership then mentioned [that is, in the interview] was in business, and carrying on as then proposed.

[page 447] Leaving the partnership Care must be taken when leaving a partnership. In certain circumstances, a former partner will still be liable for new debts incurred by the partnership.

11.50 An outgoing partner is particularly susceptible to partnership by holding out. Persons who dealt with the partnership before the partner’s retirement are entitled to treat all apparent partners as still partners of the firm unless that person receives notice of the retirement: s 40(1). Therefore, when quitting a partnership, the retiring partner should send a circular letter to all those who have had dealings with the partnership. To protect himself or herself against an allegation of holding out made by a third party who started dealing with the firm after the partner quit, the retiring partner should take advantage of the notice provisions of s 40(2). By putting a notice in the Government Gazette and in a newspaper circulating in each district in which the firm carries on business, the retiring partner is giving notice that he or she has retired A third party cannot rely on the holding out provision if he or she had notice of the partner’s retirement.

Even if a retiring partner fails to give actual notice to all those who have had dealings with the partnership and fails to take out the necessary gazette and newspaper notices, he or she will not be automatically liable for debts incurred after leaving the partnership. There must be a holding out of some type, and the third party must have acted in response to that holding out. Thus, the partner will not be liable in any of the following circumstances: the third party was aware, from whatever source, that the retiring partner was no longer a partner (s 40(1)); the third party was never aware that the outgoing partner was a partner (s 40(3)); or the outgoing partner did nothing to hold himself or herself out as a continuing partner: see Tower Cabinet Co Ltd v Ingram, below. However, this will not work against existing creditors of the firm: s 40(1).

Tower Cabinet Co Ltd v Ingram [1949] 1 All ER 1033 (King’s Bench Division) Facts Mr Christmas and Mr Ingram carried on business as household furnishers under the name ‘Merry’s’. The firm’s letterhead mentioned the names of both partners. In 1947, the partnership was dissolved with Christmas agreeing to buy out Ingram. Ingram gave notice of the dissolution to the bank. He failed to put any notice in the newspaper or the relevant gazette. He did, however, agree with Christmas that Christmas was to notify all those dealing with the business, of Ingram’s departure. Christmas had a new letterhead prepared which did not refer to Ingram. Shortly after Ingram’s departure, Christmas ordered six sets of furniture from Tower Cabinet. The order was confirmed by letter. Unfortunately, Christmas used one of the old letterheads which included Ingram’s name. Tower Cabinet argued that Ingram was liable as if he were a partner. Issues The first issue was whether Ingram was to be treated as a partner by holding out (s 18). The second issue was whether Ingram was liable for the partnership debt created after he had left the firm. [page 448]

Decision In reference to s 18, the court decided that Ingram had not held himself out, or knowingly allowed himself to be held out, as a partner. The only representation that he was a partner was made by Christmas ‘without Mr Ingram’s knowledge and without his authority’. At the time Ingram retired from the partnership, Tower Cabinet was not aware that he was a partner. Therefore, as the debt to Tower Cabinet was incurred after Ingram retired, so 40(3) operated. Under s 40(3), Ingram was not liable for the debt owing to Tower Cabinet.

Section 40 sets out the potential liability of former partners to third parties: 40 (1) Where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change. (2) An advertisement in the Government Gazette and in at least one newspaper circulating in each district in which the firm carries on business as to a firm whose principal place of business is in Victoria shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised. (3) 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 retires from the firm is not liable for partnership debts contracted after the date of the death bankruptcy or retirement respectively.

Elders Pastoral Ltd v Rutherfurd (1990) 3 NZBLC 99-201 (High Court of New Zealand) Facts Mrs Rutherfurd was a partner in a pastoral business for a number of years. During this time, the partnership had dealings with Elders. However, Mrs Rutherfurd’s existence was not known to Elders until after she had retired as a partner. When she retired, Mrs Rutherfurd neglected to give any notice of her retirement. Following her retirement, the partnership incurred a number of debts to Elders. Elders sought to make Mrs Rutherfurd liable for these debts jointly with the actual partners. Issue

Whether Mrs Rutherfurd was liable for the partnership debts, created after she had left the firm. Decision The court held that pursuant to s 40(3), Mrs Rutherfurd was not liable for debts incurred by the partnership to Elders after she had retired.

[page 449] Debts incurred after death or bankruptcy of partner 11.51 The estate of a partner who has died or become bankrupt is not liable for partnership debts incurred after the death or bankruptcy: s 40(3). Debts incurred before resignation or admission of a new partner 11.52 A partner who has retired or the estate of a partner who has died remains liable for partnership debts incurred when the partner was a member of the firm (s 21(2)) unless released by the creditor and all remaining partners: s 21(3). An incoming partner does not become liable for the debts of the firm incurred prior to becoming a partner: s 21(1).

ASSIGNMENT OF A PARTNERSHIP INTEREST The lack of transferability of a partner’s interest in the business can make partnership a less attractive business structure compared to a company.

11.53 A partner cannot sell a partnership interest so that the buyer automatically becomes a partner. However, a partner may assign his or her right to the profits or, on dissolution, the assets of the partnership Such assignment will not entitle the assignee to take part in the management of the partnership or to inspect the books of the partnership. The assignee does have the right to an account on dissolution of the partnership: s 35.

TERMINATION OF A PARTNERSHIP 11.54 A partnership may be terminated by: the partners; operation of law; supervening illegality; or the courts.

Termination by the partners 11.55 Just as partners are free to enter into a partnership agreement, they are also free to terminate it, provided all partners agree: s 36. A partner cannot unilaterally terminate a partnership unless the partnership is for an unspecified period of time and the partner gives reasonable notice of intention to terminate: s 30.

Termination by operation of law 11.56 A partnership is dissolved by the death or bankruptcy of any partner: s 37. Often, however, the partnership agreement will state that a partnership made up of the remaining partners will continue despite the death or bankruptcy. The Partnership Act also provides that partners may terminate a partnership where one of the partners uses his or her partnership interest as security for a non-partnership debt: s 37(2).

Termination by supervening illegality 11.57 A partnership is in every case 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 it on in partnership: s 38. [page 450]

Termination by the courts

11.58 A partnership may be wound up by the courts for any of the following reasons (s 39): (a) insanity of a partner; (b) permanent incapacity of one partner; (c) prejudicial conduct of a partner (eg, commission of a criminal offence); (d) wilful or persistent breach of the partnership agreement, such as one partner persistently failing to account for moneys received by him or her on behalf of the partnership; (e) partnership can only be carried on at a loss; or (f) it is just and equitable that the partnership be dissolved. This would occur where, for example, the mutual trust necessary for the successful operation of a partnership has been irrevocably destroyed: see Re Yenidje Tobacco Co [1916] 2 Ch 426, where the two persons involved in the partnership business had reached the stage where they refused to talk to one another.

Partners remain jointly liable for debts even after dissolution of a partnership 11.59 When a partnership is terminated, there remains the question of what to do about the debts and assets of the defunct partnership. The partners cannot walk away from the debts. They remain jointly liable, as previously discussed.

Distribution of assets on dissolution 11.60 Section 48 sets out rules for the distribution of assets following the dissolution of a partnership. These rules apply only if the partners have not agreed on what to do in the event of dissolution. On dissolution, the partnership property is to be applied to pay off the debts of the partnership and, if there is any surplus, to be distributed to the partners: s 43.

ADVICE — LAW IN PRACTICE Remember: There are no legal formalities to becoming a partner. Merely operating a business jointly with another person could make you a partner under the law. All partners are jointly and severally liable for the partnership’s debts. All partners can also be liable (jointly and severally) for one partner’s wrongful acts and misappropriations. Consequently, it is important to have adequate insurance. While you remain in a partnership you owe certain duties to your partners and they to you. These include fiduciary duties. If you wish to leave a partnership you must be careful to ensure that you give the necessary notices so that you will not be liable for debts incurred after your departure.

[page 451]

APPENDIX: COMPARATIVE TABLE OF PARTNERSHIP ACTS NSW s 1A s 1B s 1C s1

Qld s1 s3 s 5A s5

SA s 1A s 1B s 1C s1

Tas s1 s4

Vic s1 s3

WA s1 s3

ACT s1 s2

NT s1 s3

s6

s5

s7

s6

s5

(1) (2) s2 (1) (1)(2) (1)(3) (a) (b) (c) (d) (e) (2)

(1) (1A) (2)

(1)

s6 (1) (1)(a) (1)(b) (1)(c) (i) (ii) (iii) (iv) & (v) (vi) (3)

s2 (1) (1)(a) (1)(b) (1)(c) (i) (ii) (iii) (iv) (v) (2)

(2)

(1) (1A) (2)

(1) (3) (2)

s7

s6

(a) (b) (c) (i) (ii) (iii) (iv) (v)

(1) (2) (3) (a) (b) (c) (d) (e)

s3 s4

s7 s4

s3 s4

s8 s9

s7 s8

s5

s8

s5

s 10

s9

s6 s7 s8 s9

s9 s 10 s 11 s 12

s6 s7 s8 s9

s 11 s 12 s 13 s 14

s 10 s 11 s 12 s 13

(1)

(1)

(1)

s4 s 7(2) s8 (1A) (1) (2) (3) (4) (5) (6) (7) (8)

(2)

(3) (3) s6 (1) (1)(a) (1)(b) (1)(c) (i) (ii) (iii) (iv) (v)

s9 s 10 s 11 s 12 s 26 s 27 s 13 s 14 s 15 s 16

s7 (1) (2) (3) (4) (a) (b) (c) (d) (e) (5)

(2) s7 Dictionary s 8

s9

s9

s 10 s 11 s 12 s 13

s 10 s 11 s 12 s 13

[page 452] NSW s 10 s 11 (1)(a) (b)

Qld s 13 s 14 (1)(a) (b)

SA s 10 s 11 (1)(a) (b)

Tas s 15 s 16 (1)(a) (b)

(2)(a) (b)

(2)(a) (b)

(2)(a) (b)

(2)(a) (b)

s 12

s 15

s 12

s 17

Vic s 14 s 15 (a) (b)

s 16

WA s 17 s 18 (1) (1) (2)

s 19

ACT s 14 &14A s 15 (1)(a) (b)

NT s 14 s 15 (1)(a) (b)(i) & (ii)

(2)(a) (b) (3) s 16

(2)(a) (b)(i) & (ii) s 16

s 13 (1)

s 13 (1) (1a)(a) (1a)(b)

s 18 (1)

(1)(2)

s 16 (1) (2)(a) (2)(b)

(2) (3)(a) (3)(b) s 14 (1) (1A) (2) s 15 s 16 s 17 (1) (2) (3) (4) (5) (6) s 18

(3) (4)(a) (4)(b) s 17 (1) (2) (3) s 18 s 19 s 20 (1) (2) (3) (4) (5) (6) s 21

(2) (3)(a) (3)(b) s 14 (1) (1a) (2) s 15 s 16 s 17 (1) (2) (3) (4) (5) (6) s 18

(2) (3) (4) s 19 (1) (2) (3) s 20 s 21 s 22 (1) (2) (3) (4) (5) (6) s 23

s 17

s 20

(1) (2) s 18 (1)

s 20 s 21 (1)

(2) s 19 s 20 s 21 (1) (1) (2) (2) (3) (3) s 22

(2) s 22 s 23 s 24 (1) (1) (2) (2) (3) (3) s 25

s 17 (1) (2)(a) (2)(b) s 17A (1) (2)(a) (2)(b) s 18 (1), (2) (3), (4) (5) s 19 s 20 s 21 (1) (2) (3) (4), (7) (5) (6), (7) s 22

s 17 (1)

(2) (3)(a) (3)(b) s 18 (1), (3) (2), (3) (4) s 19 s 20 s 21 (1) (2) (3) (4) (5), (6) (5), (6) s 22

[page 453] NSW s 19 s 20 (1) (2) (3) (4) s 20A (1) (2)

Qld s 22 s 23 (1) (2) (3) (4) s 23A (1) (2)

SA s 19 s 20 (1) (2) (3) (4) s 20A (1) (2)

Tas s 24 s 25 (1) (2) (3) (4) s 25A (1) (2)

Vic s 23 s 24 (1) (2) (2)

s 21 s 22 s 23

s 24 s 25 s 26

s 21 s 22 s 23

s 26 s 27 s 28

s 25 s 26 s 27

WA s 29 s 30 (1) (2) (2)

ACT s 23 s 24 (1) (2), (3) (4) s 24A (1), (2) (3)

s 31 s 32 s 28

s 26 s 27

NT s 23 s 24 (1) (3) (4) (2) s 24 (5) (6) (7) s 25 s 26 s 27

(1) (2) (3) (4) s 24 (1)(2) (1)(3) (1)(4) (1)(5) (1)(6) (1)(7) (1)(8) (1)(9) (2) s 25

(1) (2) (3) (4) s 27 (1)(a) (1)(b) (1)(c) (1)(d) (1)(e) (1)(f) (1)(g) (1)(h)

(1) (2) (3) (4) s 24 (1)(a) (1)(b) (1)(c) (1)(d) (1)(e) (1)(f) (1)(g) (1)(h)

(1) (2) (3) (4) s 29 (1)(a) (1)(b) (1)(c) (1)(d) (1)(e) (1)(f) (1)(g) (1)(h)

(1) (2) (3) s 28 (1) (2) (3) (4) (5) (6) (7) (8) (9)

(2) s 28

(2) s 25

(2) s 30

s 29

s 34 (1) (2) (3) (4) (5) (5) (6) (7) & (9) (7B) (8) s 35(1) s 35(2)

s 29(10) (1) (2) (3) (4) (5) (6) (7) (8) (10) (9) (11) s 30

(1) (2) (3) (4) s 28 (1)(a) (1)(b) (1)(c) (1)(d) (1)(e) (1)(f) (1)(g) (1)(h)

(12) s 29

[page 454] NSW

Qld

SA

Tas

Vic

s 26 (1) (2)

s 29 (1) (2) (3) s 30 (1) (2) (3) s 31 s 32 (1) (2) (3) s 33 s 34 (1)

s 26 (1) (2) (3) s 27 (1) (2) (3) s 28 s 29 (1) (2) (3) s 30 s 31 (1)

s 31 (1) (2) (3) s 32 (1) (2) (3) s 33 s 34 (1) (2) (3) s 35 s 36 (1)

s 30 (1) (2)

s 27 (1) (2) (3) s 28 s 29 (1) (2) (3) s 30 s 31 (1)

WA s 36 s 37 (1) (2)

s 31 (1) (2)

s 38 (1) (2)

s 32 s 33 (1) (2)

s 39 s 40 (1) (2)

s 34 s 35 (1)

s 41 s 42 (1)

ACT

NT

s 31 (1)

s 30 (1) (2) (3) s 31 (1) (2) (3) s 32 s 33 (1) (2) (3) s 34 s 35 (1), (2)

(2) s 32 (1) (2) (3) s 33 s 34 (1) (2) (3) s 35 s 36 (1), (2)

(2) (3) s 31A s 32 (a) (b) (c) s 33 (1) (2)

(2) (3) s 34A s 35 (1)(a) (1)(b) (1)(c) s 36 (1) (2)

(2) (3) s 31A s 32 (a) (b) (c) s 33 (1) (2)

(2) (3) s 36A s 37 (a) (b) (c) s 38 (1) (2)

(2)

(2)

s 36 (a) (b) (c) s 37 (1) (2)

s 34 s 35

s 37 s 38

s 34 s 35

s 39 s 40

s 38 s 39

s 43 (a) (b) (c) s 44 (1) (2) (3) (4) s 45 s 46

(3) (4) s 36A s 37 (1)(a) (1)(b) (1)(c), (2) s 38 (1) (2)

(3) (4) s 35A s 36 (1)(a) (1)(b) (1)(c) s 37 (1) (2)

s 39 s 40

s 38 s 39

[page 455] NSW (a) (b) (c) (d) (e) (f)

Qld (a) (b) (c) (d) (e) (f)

SA (a) (b) (c) (d) (e) (f)

Tas (a) (b) (c) (d) (e) (f)

Vic (a) (b) (c) (d) (e) (f)

s 36 (1) (2) (3) s 37 s 38 s 39

s 39 (1) (2) (3) s 40 s 41 s 42

s 36 (1) (2) (3) s 37 s 38 s 39

s 41 (1) (2) (3) s 42 s 43 s 44

s 40 (1) (2) (3) s 41 s 42 s 43

s 40 (a) (b) s 41 (a)

s 43 (a) (b) s 44 (a)

s 40 (a) (b) s 41 (a)

s 45 (a) (b) s 46 (a)

s 44 (a) (b) s 45 (a)

WA (a) (b) (c) (d) (f) (g) (e) s 47 (1) (2) (3) s 48 s 49 s 50 s 51 s 52 s 53 (a) (b) s 54 (a)

ACT (1)(a), (2) (1)(b) (1)(c) (1)(d) (1)(e) (1)(f)

NT (1)(a) (1)(b) (1)(c) (1)(d) (1)(e) (1)(f)

s 41 (1) s 43 s 41(2), (3) s 42 s 44 s 45

s 40 (1) (2) (3), (4) s 41 s 42 s 43

s 46 (a) (b) s 47 (a)

s 44 (a) (b) s 45 (a)

(b) (c) s 42 (1) (2)

(b) (c) s 45 (1) (2)

(b) (c) s 42 (1) (2)

(b) (c) s 47 (1) (2)

(b) (c) s 46

s 43 s 44 (a) (b)

s 46 s 47 (a) (b)

s 43 s 44 (a) (b)

s 48 s 49 (a) (b)

s 47 s 48 (a) (b)

(b) (c) s 55 (1) (2) (3) s 56 s 57(1) (2) (3)

(b) (c) s 48 (1) (2)

(b) (c) s 46 (1) (2)

s 49 s 50(1) (2) (3)

s 47 s 48 (a) (b)

[page 456] NSW 1 2 3 4 s 46 s 47

Qld (i) (ii) (iii) (iv) s 121

SA (i) (ii) (iii) (iv)

Tas (i) (ii) (iii) (iv) s5

Vic (i) (ii) (iii) (iv) s4 s2

WA (a) (b) (c) (d) s6

ACT (a) (b) (c) (d) s5

NT (i) (ii) (iii) (iv) s4

[page 457]

QUESTIONS Question 1 (a) What requirements must be satisfied before a partnership can be said to exist? (b) Does a partnership agreement need to be in a written form?

Question 2 List the factors a court may consider in deciding whether an activity is a hobby or a business. Identify whether each of the following statements is true or false, using sections of the Partnership Act and case law to support your answer: (a) Carrying on a hobby with another person will amount to a partnership. (b) For a business to be carried on as a partnership, it must be making a profit. (c) Each partner is entitled to an equal share of profits unless they have agreed differently. (d) A majority of partners can expel any partner from the firm. (e) Every partner has the right to participate in making management decisions for the firm’s business.

(f) In a limited partnership, the limited partner(s) cannot participate in management decisions for the firm’s business.

Question 3 In each of the following cases, indicate whether a partnership exists for the purposes of partnership law. Please give reasons for your answers. (a) Patricia owns a business and employs Robert as manager of the business. Robert is paid an agreed salary and is also entitled to 20 per cent of the net profits of the business. (b) Henri owns a factory jointly with Ian. Ian runs an auto electrician’s business from that factory. Henri receives 10 per cent of the net profits from Ian’s business as rent for Henri’s share of the factory. (c) Uwe sold his timber business to Vera. It was agreed that the amount payable for the ‘goodwill’ of the business would be paid to Uwe in five annual instalments, with each instalment comprising 10 per cent of the net profits of the business for each of those five years. (d) Xander, Yifei and Zac are partners in a legal firm. Zac dies. Xander and Yifei, the remaining partners, pay Zac’s widow an annuity for the rest of her life. Is the widow a partner? (e) Yanni wants to start up a hardware business but is short of capital. Zoe, a friend, lends him $10,000, with a signed agreement that Zoe will receive half of the share of the profits at the end of the financial year. (f) Ali and Bill decide to stage a comedy festival. Ali is to provide the comedians and be responsible for

paying them. Bill is to provide the musicians, refreshments and souvenirs and be responsible for paying for them. Gross returns are to be shared 50/50.

Question 4 Candice and Billie wanted to establish a bakery business called ‘Bakers’ Buns’. Candice was a trained baker, while Billie had $45,000 that she invested in the business. Candice also [page 458] provided a commercial oven worth $5000, which helped reduce their set-up costs. Due to renovation costs, they had to borrow $50,000 from Alice, a very experienced business woman. Alice agreed to help manage the business but stated that once she has been repaid in full by sharing the profits equally, she would ‘leave them to run the business by themselves’. At first, business thrives due to Alice’s expert guidance. Then Candice orders very expensive baking trays from Eddie’s Kitchen Supplies Pty Ltd. These new trays cost a total of $3000. When the invoice arrives, Alice and Billie are furious because Candice did not discuss the purchase with them. Billie told Candice she had no right to buy such expensive new equipment, and that if she wanted to use such fancy baking trays, then Candice would have to pay for them herself. In response, Candice calls Billie a ‘giant control-freak who’s impossible to work with’. Billie is so angry that she meets with Alice in secret and they decide to expel Candice from the business and hire a new baker.

Advise Billie about the following matters: (a) Is Alice a partner in the firm? (b) Can Alice and Billie expel Candice from the business? (c) Who is liable to pay the unpaid invoice from Eddie’s Kitchen Supplies Pty Ltd? (d) If Candice leaves the business, can she keep the trays and/or the oven?

Question 5 Four musicians formed a professional alternative rock band, The Smiths, and carried on this business as a partnership. There was no written agreement on the distribution of profits between the partners. The lead singer (Morissey) and the lead guitarist (Johnny Marr) felt that they were the key members of the band, providing the major talent and being the key attractions of the band, compared to the other two partners who were the drummer (Joyce) and the bass guitarist. For some time, the band’s accountants had been distributing the profits unequally, sending 40 per cent of the profits each to Morrissey and Marr, and only 10 per cent of the profits each to the drummer and the bass guitarist. The accountant had sent periodic accounts to Joyce that indicated this 40/40/10/10 profits distribution, but there was no evidence that Joyce understood the accountant’s statements. Several years later, Joyce discovered the unequal distribution and claimed he was legally entitled to an equal (25 per cent) share of the profits. Using relevant section(s) of the Partnership Act and case law, discuss whether Joyce was legally entitled to 25

per cent share of the profits, or just the 10 per cent share he had received. (See Joyce v Morrissey [1998] TLR 707.)

Question 6 Angie, a partner in a law firm, is very passionate about her job and is known to argue her clients’ cases very vigorously. One recent case on behalf of a client of the firm was quite acrimonious. In court, the verbal argument between Angie and the opposing lawyer, Zac, was heated. One day in court, an assault occurred: when Zac tried to take documents away from Angie, without her permission, Angie fought to hold onto the documents, scratching Zac in the process and then slapping him in the face when the incident was over. The slap amounted to the tort of battery by Angie against Zac. Zac is seeking considerable damages (compensation) for Angie’s tortious actions. Since Angie has high personal debts and little disposable income, Zac is suing Angie’s partners in the law firm, arguing they are liable for Angie’s conduct. Is Zac likely to succeed in this action? (See Flynn v Robin Thompson & Partners and Wallen, The Times, 14 March 2000.)

_________ 1 2 3

4

See Petrou v Hatzigerorgiou [1991] Aust Torts Reports 81-071. Business Names Registration Act 2011 (Cth) s 18. Even though the business relationship is not a partnership, it may still be a fiduciary relationship. This means that the joint venturers would owe each other various fiduciary duties similar to a partnership: see the discussion by the High Court in United Dominions Corp Ltd v Brian Pty Ltd [1985] HCA 49. See Partnership Act 1958 (Vic) Pt 3. Similar provisions exist in New South Wales, Queensland, South Australia, Tasmania and Western Australia.

[page 459]

CHAPTER 12

INTRODUCTION TO COMPANY LAW

CONTENTS Objectives of this chapter Setting the scene: Understanding the nature of your debtors Introduction and outline of chapter Sources of companies The nature of a company The powers of a company Types of companies: general classification

Types of companies which may be registered Consequences of the principle of separate identity Registering a company Steps for registration of a company The company’s constitution and rules Implications of the certificate of registration Managing a company Comparison of companies and partnerships How does a company create contracts? [page 460]

How does a company sign a contract? When is a company bound by the actions of its agents? People having dealings with a company may make certain assumptions When do the assumptions not apply? Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to: describe the types of company that can be created; outline the process by which most companies today are created; explain the effect that the separate legal entity principle has for: – the company; – its officers;

– its members; – its creditors; and distinguish between circumstances where a company will be bound by transactions purportedly created on its behalf, and circumstances where that company would not be bound.

[page 461]

SETTING THE SCENE: UNDERSTANDING THE NATURE OF YOUR DEBTORS A longstanding supplier to Wayne’s network of cafés follows Wayne’s request to address all future invoices to ‘Wayne’s World Pty Ltd’ rather to Wayne himself, because he has incorporated his business. Several months later, the supplier notices that the cafés’ invoices are in arrears, although Wayne is a wealthy man. On approaching Wayne, the supplier learns that the café business isn’t doing well, and these invoices might remain unpaid for some time. Wayne maintains he is not personally liable for the cafés’ debts.

INTRODUCTION AND OUTLINE OF CHAPTER 12.1

The most significant legal factor aiding the growth and expansion of capitalism since the Industrial Revolution has been the creation of the trading company. The trading company provides two important factors which have underpinned the success of capitalism: 1. the company provides a structure which allows for the efficient separation of ownership of resources and management of those resources; and

the company provides a mechanism by which the owner of capital can limit his or her liability to third parties. This chapter provides an introduction to the law of companies or corporations created under the Corporations Act 2001 (Cth). Generally speaking, there are four types of business structure which may be entered into, or created, to enable persons to carry on businesses of various kinds: sole proprietorships; partnerships; companies; and trusts. Partnerships are discussed in Chapter 11. Trusts are introduced in Chapter 14. Sole proprietorships, of course, do not involve any legal relationships between the business owners, as there is only one owner. This chapter focuses on the formation and general nature of companies. It should be stressed that company law is an extremely large body of law, much of which must remain beyond the scope of a general and diverse business law book such as this. The following topics are addressed in this chapter: sources of companies; nature of a company; creation and management of a company; and creating contracts with companies. Corporate governance, particularly directors’ duties, is discussed in Chapter 13. 2.

[page 462]

SOURCES OF COMPANIES Companies created by special Acts of Parliament are rare. Australia’s public universities are statutory companies. Most

companies today are formed by following a registration process.

12.2

Companies are a popular business structure today. Historically, companies were derived from three main sources: 1. partnerships; 2. royal charter — companies were created in this way by the Crown granting permission for the creation of a company via a document known as a ‘Charter’ deed; and 3. special Acts of Parliament — parliament passed an Act which created a statutory company. Although companies may still be created by way of Royal Charter or a special Act of Parliament, it is not typical for most present-day companies to be created in these ways. Today, companies in Australia would normally be created under the Corporations Act 2001 (Cth). The problem of creating a uniform companies law in a federal system The Commonwealth Parliament’s power to regulate companies in Australia is limited by the Constitution. Unfortunately, the Constitution does not provide the Commonwealth Parliament with all the legislative powers needed to fully regulate the formation and operation of companies. This has caused considerable concern. Uniform regulations and uniform administration of those regulations are clearly desirable from a number of aspects (including justice and efficiency). In commerce today, companies tend to operate over a wide geographical area, rather than being confined to one region or state. Uniform company laws throughout Australia are needed to simplify matters for companies operating across several states and territories. Over the last three decades, the Commonwealth and the states and territories have tried several cooperative legislative schemes (designed to overcome the constitutional problems) without success. The most recent cooperative scheme was known as the Corporations Law and came into force in 1991. However, in a series of cases from 1999 to 2001, the High Court effectively destroyed this scheme by declaring some of its most essential elements unconstitutional.1 The only solution was for the states/territories to hand over to the Commonwealth Parliament the necessary powers.2 This occurred in 2001. Each state and the Northern Territory agreed to refer their powers over matters formerly regulated by the Corporations Law to the Commonwealth

Parliament. This referral of power was initially agreed to for up to five years, but continues to apply today Using the powers referred to it by the states and the Northern Territory, the Commonwealth Parliament passed the Corporations Act 2001 (Cth). The Act began operating on 1 July 2001 and replaced the Corporations Law.

All references in this chapter to sections pertain to the Corporations Act 2001 (Cth).

This chapter deals exclusively with the provisions of the Corporations Act 2001 (Cth) (Corporations Act) and all references in this chapter to sections relate to that Act. [page 463]

THE NATURE OF A COMPANY 12.3

A company is an independent legal entity with rights and powers of its own. This distinguishes a company from a partnership. Unlike a partnership, a company must be registered. In fact, its very existence derives from registration. The nature or characteristics of a company can best be understood by examining companies under the following headings: the powers of a company; the types of companies; and the notion of a company’s separate identity

The powers of a company Humans are natural persons, whereas companies are artificially created persons. Both humans and companies are legal persons, meaning that the law recognises them as individuals in their own right.

12.4

Section 124(1) provides that, from the date of registration, a company has the full legal capacity of a natural person. This section therefore recognises the company as a legal person which

may sue and be sued, and may acquire, hold and dispose of property in its own right. The term ‘legal person’ refers to an artificially created entity able to act in its own right, independent of people who control or run the entity. Once registered, a company is clearly a legal person as it is legally able to act on its own behalf. (See Salomon v A Salomon & Co Ltd, in [12.14].) Section 126 allows authorised agents of a company to make, vary, ratify or discharge a contract on behalf of the company, using express or implied actual authority. Section 127 recognises that the agents of a company are also able to execute documents on its behalf by either using its common seal; that is, a rubber stamp noting the company’s name and registration number, with the appropriate witnesses’ signatures or, alternatively, the signatures of appropriate company officer(s). The lifespan of the company is not affected by the death of its members or officers As a recognised legal person, a company would survive even if all its members and officers no longer existed. A company remains a legal person with full legal capacity until it is finally deregistered: s 601AD(1). Section 124(1) powers A company has the legal capacity to do anything that a natural person may do, plus it has additional powers, such as those listed here.

12.5

Section 124(1) gives a company the legal capacity of an individual. As explained above, this means a company may engage in any legal act or transaction, without limitation, as would be the case for adult people, such as you or I. In addition, the section grants a company further powers relevant only to companies, including the power to: issue and cancel shares in the company;3 issue debentures of the company;4 grant options over unissued shares in the company; distribute any of the property of the company among the

members; give security by charging uncalled capital; grant a floating charge on property of the company; arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction; and do any other act that it is authorised to do by any other law (including a law of a foreign country) [page 464]

Types of companies: general classification A company must be either public or proprietary. A proprietary company is essentially a private company.

12.6

A company may be broadly classified as either a proprietary company or a public company.

Proprietary company 12.7 The following are characteristics of a proprietary company: it may be formed by one person (ie, one individual may be the only shareholder and the only director); its membership is limited to 50 persons (excluding employees who hold shares in the company); it is prohibited from doing anything that would require lodgment of a disclosure document (this prohibition does not affect certain types of share offers to the public, such as: small-scale share offerings, offers to wealthy or professional investors or certain offers of shares to existing shareholders of the company); it must have share capital; and it includes the word ‘proprietary’, or an abbreviation thereof, in the company name (eg, Melbun Pty Ltd or Sidni Pty).

Public company In addition to being either public or proprietary, every company must be one of four types (classified according to the liability of its members): 1. 2. 3. 4.

liability limited by shares; liability limited by guarantee; unlimited liability; or no liability.

12.8

The following are characteristics of a public company: it needs a minimum of one member and three directors to be formed; it may have an unlimited number of members; it may invite the public to subscribe for any shares in, or debentures of, the company and it may be required to prepare disclosure documents when it issues shares; and if it is a limited liability company, it includes the word ‘limited’ or an abbreviation thereof, after the name of the company (eg, Bizlaw Ltd). Public companies may be listed on the Australian Securities Exchange (ASX). These companies are known as ‘listed companies’ and their shares are normally bought and sold through the ASX. There are approximately 2200 companies listed on the ASX, being a very small percentage of the total number of companies registered in Australia. In addition to complying with the requirements of the Corporations Act, listed companies must also comply with ASX listing rules. Further information about the ASX and listed companies is available at .

Types of companies which may be registered 12.9

The Corporations Act provides for the registration of proprietary and public companies. There are four types of companies that may now be registered. A public company can be any one of these four types, whereas a proprietary company can only be one of two types: s 112. By far the most popular type is companies limited by

shares. Companies limited by shares In companies with share capital, the term ‘shareholders’ can be used to describe the members.

12.10 Companies where the members’ liability is limited by shares may be either public or proprietary in nature Such companies are ‘limited liability’ companies, which means that the extent of a member’s liability to contribute to the debts of the company, in the event of a winding up, is restricted to the amount, if any, unpaid on the issue price of the shares held by the member. The liability of the shareholders to the company is limited, but the liability of the company to its creditors is not limited. Hence, what is restricted is the liability of shareholders and not the company itself. For example, if a shareholder owns 100 shares with an issue price of $1 per share, but has only paid 30 cents on each [page 465] of the shares, the remaining liability is 70 cents per share, or $70. The extent of the shareholder’s liability to contribute to the debts of the company would be limited to $70. Companies limited by guarantee 12.11 Companies where the members’ liability is limited by guarantee must be public companies. They do not have share capital and therefore have a restricted field of business operation. These types of companies are suitable for clubs. The original guarantors of the company undertake to guarantee the payment of a stipulated sum to be used in the satisfaction of the company’s debts in the event of a winding up. The liability of the guarantors to contribute to the debts of the company is limited to the amount guaranteed. The amount guaranteed cannot be increased or decreased and may only be called up if the company is wound up. The guarantors are

the members (owners) of the company. Unlimited companies 12.12 Companies where the members’ liability is unlimited may be proprietary or public in nature, according to whether they have share capital. If the companies do not have share capital, they must be public companies. If they do have share capital, they may be either public or proprietary companies. Such companies are still regarded as separate legal entities. However, there is no limitation on a member’s liability and members are liable to contribute whenever calls are made. The liability of members may extend to their personal assets. Because liability is unlimited, this type of company is generally unsuitable for trading concerns It may have some application for professional firms, such as solicitors, which are not permitted to limit liability. No liability companies 12.13 Companies where the members have no liability must be public in nature and are restricted to companies created solely for mining purposes. Because the shares do not carry any liability to pay calls, investors will be prepared to acquire partly paid shares with a high issue price and low paid-up amount. This type of share is perfect for the highly speculative nature of mining, which requires large injections of capital from time to time. The capital can be raised by making calls on the issued shares without the need to issue a disclosure document. A member is not required to meet any calls made on unpaid shares. However, if the calls are not met, the shares are forfeited.

Consequences of the principle of separate identity The rule in Salomon’s case A company is a separate legal person from its members and shareholders.

12.14 Apart from being regarded as a legal person, a company is

recognised as a separate legal entity with independent existence from its members and shareholders. The company owns property in its own right and its property is not the property of its directors or members and shareholders. A company can incur debts, create contracts and commit torts in its own name and these debts, contracts or torts are not the responsibility of its members and shareholders.

Salomon v A Salomon & Co Ltd [1897] AC 22 (House of Lords) Facts Mr Salomon was a boot manufacturer who originally operated the business as a sole trader. He converted the business into a company, as several of his sons worked in the business and he wished to give each a share. The subscribers to the memorandum were [page 466] Mr Salomon, his wife and five children. They each took up one share. However, evidence was raised to show that the wife and five children held their shares as nominees for Mr Salomon, with the result that Salomon & Co Ltd was in reality a ‘one man’ company. He was also appointed the managing director of the company and two of his sons were appointed as directors. Mr Salomon sold his business to the company and received more shares and securities in the form of debentures and secured loans from the company in payment. The company then experienced financial difficulties and eventually went into liquidation. The creditors of the company sued Salomon for the company’s debts. They argued that Mr Salomon should be liable for the company’s debts as the company was just an alias for Mr Salomon himself. Mr Salomon, on the other hand, argued that he was not the company and therefore could not be made liable for its debts. Issue Who was responsible for the debts owed to the creditors? Can the company be considered a separate entity when the major shareholder and office bearer are the same person? Decision The court held that the company was a separate entity from its shareholders. It had conducted business in its own right and was not just an alias of Mr

Salomon. The debts belonged to the company, not to Mr Salomon personally, and Mr Salomon was not liable to indemnify the company.

Salomon’s case established the principle that control and management of a company remain distinct from its ownership. The courts do not look behind the corporate structure to see who really controls it, and, as a consequence, persons ‘behind’ the company do not become personally liable for the company’s debts.

Lee v Lee’s Air Farming Ltd [1961] AC 12 (Privy Council) Facts Mr Lee ran an aerial crop-spraying business and formed a company to conduct the business. The capital of the company comprised 3000 shares, 2999 being owned by Mr Lee and the remaining share being taken up by his solicitor as nominee for Mr Lee. Mr Lee was the managing director of the company. He was also named as an employee of the company under the company’s workers’ compensation insurance. Unfortunately, Mr Lee was involved in a plane crash and died. His widow claimed compensation under the Workers’ Compensation Act 1922 (NZ) on the basis of her husband being an employee of the company. [page 467] The company’s lawyers argued that Mr Lee could not be an employee of the company because he was, in fact, the owner of the company. The widow’s lawyers argued that the company was a separate legal entity and therefore Mr Lee could be, and was, an employee of the company. Issue Were Mr Lee and his company separate entities, or were they essentially the same ‘person’? Decision The Privy Council strictly applied the principle established in Salomon’s case; that is, that a company is a separate legal entity with independent existence from its shareholders. Mr Lee was separate to his company and, on the facts,

he was regarded as an employee of the company. This meant the widow was able to claim workers’ compensation.

Only in very rare instances have courts been prepared to treat the person in control of a company as if he or she were the company itself. These cases have involved attempts to use a corporate structure to avoid existing contractual or fiduciary duties5 or, alternatively, extreme circumstances and incontrovertible evidence that the company was purely and solely an agent for some principal.6 In Australia, the courts have tended to apply the rule in Salomon’s case strictly, even where the corporations involved are related. This was made clear by the High Court in Industrial Equity Ltd v Blackburn (1977) 137 CLR 567.

Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467 (Supreme Court of New South Wales) Facts A corporation (the subsidiary) executed a deed. Later, the plaintiff alleged that the terms of the deed had been breached by the actions of the subsidiary’s holding company. The court was asked to treat the holding company and the subsidiary company as one and the same. Issue Should the holding company and the subsidiary company be treated as one entity (and therefore both bound by the deed), or as separate entities? [page 468] Decision The court rejected the plaintiff’s submission. The holding company and its subsidiary were separate legal entities and must be treated as such. The holding company was not acting as agent for the subsidiary. There were good commercial reasons to have separate companies and, therefore, it could not be said that a separate corporation had been established for the sole or dominant purpose of evading a contractual or fiduciary obligation.

James Hardie: a case study in corporate responsibility James Hardie is like many corporate conglomerates — it is not just one company running a business, but many related companies, owning different assets and conducting different operations. This is a common practice. Often, one company owns the assets and another company within the group incurs the debts and other liabilities. This is not such a problem where the issue is one of breach of contract. In a contract situation, the parties know who they are dealing with. If the contract negotiations involve a subsidiary company with few assets, the other party has an opportunity to investigate the company, to ascertain its financial backing, and to obtain guarantees from the company’s directors or from the parent company. Thus, the risk of dealing with a company (within a group of companies) can be managed. The situation is quite different where a tort — such as negligence — is involved. Under the principle of separate legal identity, torts committed by one company within a group are not the responsibility of the other companies in the group, including the parent company. Therefore, the victims of a tort cannot generally look to the group to pay their damages. This can be devastating to the victim if the tort is committed by a subsidiary company with no real assets. The victim has no recourse even though the group as a whole may be extremely rich in assets. The spectre of asset-rich corporate conglomerates escaping liability for their subsidiaries’ torts has aroused considerable public concern in recent years. Much of this concern has centred around the asbestos industry. The James Hardie group of companies mined asbestos from which it manufactured asbestos cement building products. Asbestos is an insidious product; its fibres cause a range of deadly diseases, including lung cancer, mesothelioma and asbestosis. Asbestos fibres affected both employees of the James Hardie companies and users of asbestos building products. This gave rise to potential tort claims against companies within the James Hardie group. The claims, however, were not necessarily against the companies that had the assets. This presented a potentially disastrous situation for the victims. However, in one of the early asbestosis and mesothelioma cancer cases, the New South Wales Court of Appeal held it was possible that the particular facts of the case might result in the courts treating the parent company and its subsidiaries as one: see Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841. This was good news for the victims. It would mean that the parent company, not just the subsidiary company, would be liable to compensate the victim. The parent company, of course, had plenty of assets. [page 469]

As a result, in 2001 the James Hardie group established a fund of $293 million to meet potential claims by asbestos victims in Australia. The group then restructured and most of the remaining assets were effectively transferred out of the control of Australian companies to different companies in the Netherlands. The Australian court approved this restructuring after receiving an assurance that the asbestos fund was sufficient to cover future claims. In fact, within a short time, it became apparent that the compensation fund was grossly inadequate. The company and the directors were again faced with stinging criticism. As a result of considerable public pressure, the corporate group agreed in 2004 to contribute money to a new and significantly larger fund, using profits of the off-shore companies within the group. Unhappily for James Hardie, however, its actions, whatever their motivation, looked blatantly opportunistic, unethical and unlawful. In 2007, the Australian Securities and Investments Commission (ASIC) brought civil penalty proceedings against the 2001 board of directors and some senior executives for a range of breaches of the Corporations Act 2001 (Cth). The case was appealed to the New South Wales Court of Appeal and subsequently to the High Court.7 Ultimately, the courts imposed fines and disqualified the former directors (including the non-executive directors) from acting as company directors for a number of years. Among the sanctions decided were a disqualification period of 15 years and a $350,000 fine awarded against the chief executive officer at the time,8 and a fine of $75,000 and a disqualification period of seven years for the company secretary and general counsel at the time.9 The James Hardie case provides a good example of the interplay between law, corporate social responsibility and ethics. In many ways, the saga has been a case study in how not to manage a company through a significant legal and social risk. There seems to be general consensus that companies should have a broader social responsibility than just protecting profits.

REGISTERING A COMPANY Steps for registration of a company 12.15 A company is normally created through the registration process, which leads to its incorporation. Contrast this with partnerships, which do not require registration. The registration process involves lodging an application to register: s 117. The application must include a variety of information, including the type of company, details of initial members, directors and the

company secretary, the addresses of the registered office and the principal place of business, details of issued shares and the proposed company name: s 117(2). The promoters of the company should check the availability of the proposed company name,10 and may choose to reserve a name prior to applying for registration of the company: s 152. A company may use its Australian Company Number (ACN) instead of a name (eg, ACN 132 465 798 Pty Ltd). Corporations Regulations now permit a company to use its ABN (Australian Business Number) when this contains the same last nine digits as its ACN. Eventually, ACNs will be replaced by ABNs. [page 470] The Application for Registration is lodged with the Australian Securities and Investments Commission, more commonly referred to as ASIC. Once the registration process has been completed, ASIC will issue a certificate of registration.

The company’s constitution and rules 12.16 Until July 1998, every company had a constitution, consisting of a memorandum of association (compulsory) and a set of articles of incorporation (optional, depending on the type of company). Essentially, the articles contained the rules applicable within the company, including such matters as the frequency of meetings, the number of directors and the rights attached to different classes of shares. On the other hand, the memorandum of association contained matters affecting the relationship between the company and outsiders; for example, the type of company, liability of members on dissolution, authorised share capital and objects or powers of the company. In July 1998, the Corporations Law was amended to remove the requirement for a memorandum of association. Now, any sets of rules adopted by the company are referred to as that company’s constitution.

The Corporations Act contains a series of replaceable rules that will apply unless the company’s members have voted to exclude or modify those rules in the company’s constitution. Thus, recently formed corporations may be governed by the replaceable rules and/or the company’s constitution. Corporations that were established before these amendments to the legislation may have a constitution consisting of a memorandum and articles of association.

Implications of the certificate of registration 12.17 The Certificate of Registration operates as the birth certificate of a company. It also contains the company’s Australian Company Number, which serves as a unique identifier for the company and must be printed on every company document. Section 1274(7A) deems the Certificate of Registration to be conclusive evidence that all requirements under the law have been complied with, that the company is registered and that it is registered from the date of the certificate. The Certificate of Registration carries with it considerable legal significance as the company is incorporated from the date of the certificate, is recognised as a separate legal entity and inherits significant powers by virtue of s 124(1).

MANAGING A COMPANY 12.18 Although a company is a separate legal person, it is not a natural person, and must therefore act through others. The management of a company is in the hands of the directors, who are elected according to the rules of the company or nominated in the constitution. Where a company has shareholders, the shareholders will normally elect the directors. Again, this is done according to the rules of the company. Not all shares necessarily have voting rights. The number of directors will vary according to the type of company and its size. Small proprietary companies may have only

one director. Public companies will have a board of directors consisting of at least three directors. In a large company, the directors will normally delegate the dayto-day operations of the company to employee–managers. Often, the senior employee–manager (the chief executive officer) will be a director. Many companies have more than one manager on the board of directors. Directors who are also managers are called executive directors. Other directors are called non-executive directors. [page 471]

COMPARISON OF COMPANIES AND PARTNERSHIPS 12.19 To better understand the nature of a company, it may be helpful to compare key aspects of companies with another business structure already discussed in Chapter 11. Figure 12.1 compares key aspects of two different business structures: companies and partnerships. Figure 12.1 Comparison of key aspects of companies and partnerships Feature Company Partnership Numbers of Public: Minimum of one, no Minimum of two; maximum of 20 members maximum. (except for professional partnerships). Proprietary: minimum of one, maximum of 50 (excluding any employee shareholders). Liability of members Formation

Varies according to the type of company. By ASIC registration under the Corporations Act. Property and Belong to the company as such assets and not to the members. Management Vests in the directors and company officers acting in accordance with the constitution

Unlimited and may extend to private property. By private partnership agreement (written or oral) or may be implied. Vests in the partners. Vests in the partners. Each individual partner is entitled to share in the management subject to the terms of

Legal action Agency

Alteration of constitution Continuity of existence Status

subject to the Corporations Act. Company may sue and be sued in its own name. Directors or officers may be agents for the company. Members are not agents merely by virtue of membership. Must be carried out in the way prescribed by the Corporations Act. Death, bankruptcy or retirement of a member does not affect the company. A separate legal entity exists distinct from its members.

the partnership agreement. Partners sue and are sued personally (jointly or separately). Each partner is an agent of the partnership, unless restricted by the partnership agreement. A matter of mutual consent between partners. Dissolution may be necessary upon death, bankruptcy or retirement of a partner. Has no separate legal existence from the partners.

HOW DOES A COMPANY CREATE CONTRACTS? 12.20 As we have seen, a company must act through natural persons. This raises the issue of company liability. How do we determine which acts bind the company? A company is liable in tort (eg, negligence) for the actions of its employees where they are acting in the [page 472] course of their employment. This is called vicarious liability.11 A company can also be liable for criminal activities.12 However, this commentary is mainly concerned with a company’s contractual liabilities. How do we determine whether a company is bound by a contract? The starting point is to recognise that a company has the legal capacity and powers of an individual person, plus certain additional powers specific to a corporate entity.13 Therefore, for all practical purposes, a company may enter into any contract that an individual can enter into. The actions of a company are not

invalidated just because they happen to be contrary to the powers and purposes set out in the company constitution (s 125): 125 (1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution. (2) If a company has a constitution, it may set out the company’s objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution.

HOW DOES A COMPANY SIGN A CONTRACT? Being legal persons with full legal capacity, companies have the power to create contracts. The company might create contracts itself, or through agents, such as directors or employees, who have the required authority.

12.21 Section 127 provides the manner in which a company may execute a document, including a contract. A company may execute a document without using the common seal (s 127(1)): 127 (1) A company may execute a document without using a common seal if the document is signed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the company secretary — that director.

A company may execute a document using the common seal (s 127(2)): 127 (2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: (a) 2 directors of the company; or (b) a director and a company secretary of the company; or (c) for a proprietary company that has a sole director who is also the company secretary — that director.

The company’s constitution may prescribe one of these methods

for the company to execute contracts. However, failure to follow the method set out in the constitution is not fatal to third parties who deal with the company. Provided the company executes a document in accordance with s 127 (even though not in accordance with its constitution), people who have dealings with the company will still be able to rely on the assumptions contained in s 129(5) (where the common seal is not used) and s 129(6) (where the common seal is used), unless they know or suspect that this assumption is incorrect.14 If a person who purports to be a director or company secretary of the company does not hold that position or has not been validly appointed, it may be necessary to rely on the assumptions contained in s 129(2) and (3). [page 473]

When is a company bound by the actions of its agents? 12.22 A company may be bound by contracts entered into by agents acting on its behalf. The rules relating to agency are discussed in Chapter 10. Section 126 covers situations where a person has actual authority to act on behalf of the company: 126 (1) A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal. …

Actual authority may be express or implied. Express actual authority is the authority expressly conferred on the agent. For the meaning of implied actual authority, see Hely-Hutchinson v Brayhead Ltd, in [10.27]. The company will also be liable for the acts of its officers, employees and agents acting within their authority. Apparent

authority is the authority the agent would reasonably be expected to have in the circumstances, given the company’s holding out to the third party.15 Imagine that a managing director buys a brand new Rolls Royce in the company’s name, using the company’s credit, without discussing the matter with anyone. Is the company bound to pay? Although the contract has not been executed in accordance with s 127, the company may still be bound if: the managing director acted within his or her actual authority (express or implied); the managing director acted within his or her apparent authority; or the company has ratified the managing director’s action.

People having dealings with a company may make certain assumptions 12.23 In addition to the normal common law rules of apparent authority, s 128 states that people having dealings with a company are entitled to make a number of assumptions about the company and its officers, unless they know or suspect that the particular assumptions are not correct: s 128(4). Under s 128: 128 Entitlement to make assumptions (1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. (2) A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. (3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings. (4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

[page 474] The Corporations Act s 129 lists the assumptions that persons dealing with the company may make under s 128. Under s 129: 129 Assumptions that can be made under section 128 Constitution and replaceable rules complied with (1) A person may assume that the company’s constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with. Director or company secretary (2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company. Officer or agent (3) A person may assume that anyone who is held out by the company to be an officer or agent of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. Proper performance of duties (4) A person may assume that the officers and agents of the company properly perform their duties to the company. Document duly executed without seal (5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Document duly executed with seal (6) A person may assume that a document has been duly executed by the company if: (a) the company’s common seal appears to have been fixed to the

document in accordance with subsection 127(2); and (b) t he fixing of the common seal appears to have been witnessed in accordance with that subsection. For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Officer or agent with authority to warrant that document is genuine or true copy (7) A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy. (8) Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.

[page 475] Compliance with the constitution and replaceable rules 12.24 Under s 129(1), a person dealing with a company may assume that the company’s constitution (if any) and any provisions of the Corporations Act that apply to the company as replaceable rules have been complied with. To illustrate this point, consider this example: a company’s constitution prohibits it from acquiring assets in excess of $50,000 without the approval of the shareholders. The third party, who had no knowledge or suspicion of this internal rule, sold certain equipment to the company for $75,000. Assume that there is nothing particularly unusual about the sale. Assume also that the board of directors had not received approval for the transaction from the shareholders. The transaction is binding on the company because, although the company’s constitution has not been followed, the third party was entitled to assume that those rules had been complied with. Reliance may be placed on ASIC records 12.25 Under s 129(2), a person having dealings with a company may rely on ASIC records as to the details of the directors and company

secretary of a company. ASIC keeps records on all companies. This includes information about directors and company secretaries, and this information is available to the public. Responsibility for ensuring the accuracy of the information lies with the company. A person who relies on ASIC’s records concerning the directors and company secretary of a company is entitled to assume that information is correct. The person is further entitled to assume that the persons who appear in ASIC’s records as the directors and company secretary of a particular company have been validly appointed and have the authority to exercise the powers and perform the functions and duties customarily associated with a director or secretary of a similar company. For a discussion on customary powers, see [12.27]. Holding out 12.26 Under s 129(3), a person may assume that anyone who is held out by the company to be an officer or agent of the company has been duly appointed and has the authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. This prompts the question: When does a company hold out a person as one of its officers or agents? If another officer within the company holds out the person as being an officer or agent, does s 129(3) apply? The answer depends on the person who does the holding out. He or she must have actual authority (express or implied) to do so. If he or she only appears to have authority, s 129(3) will not apply.

Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253 (Supreme Court of Victoria, Full Court) Facts Brick & Pipe Industries Ltd provided a guarantee to Occidental. The deed of

guarantee had to be executed (signed) by a director and either the secretary of Brick & Pipe or a person appointed for that purpose; otherwise, the guarantee was not valid. The deed was executed by Goldberg and by Furst. Goldberg was the managing director of Brick & Pipe with exceptionally broad powers. Furst purported to be, but was [page 476] not in fact, the company secretary. Before the deed was executed, Occidental asked about Furst. Occidental was told that Furst had been appointed secretary. The assurance was given by a person (not Goldberg) who had no actual authority to give such an assurance. Goldberg was at the meeting and heard the assurance given. He did not say anything. Issue Was the guarantee signed by someone with the necessary authority? Furst was not actually the company secretary, but had the company held out Furst as being the company secretary? This issue would determine whether the guarantee was binding on the company. Decision Furst had not been appointed as secretary of Brick & Pipe Industries. However, Occidental was entitled to assume that he had been validly appointed as secretary if the company held him out as secretary. The person who expressly informed Occidental that Furst had been validly appointed did not have actual authority to do so, although he may have had apparent authority. This was not enough. A person who only has apparent authority cannot confer ostensible authority on another person. Goldberg, on the other hand, was the managing director with very broad powers. He had implied actual authority from the company to give the assurance that Furst was validly appointed. By remaining silent, he had impliedly given the assurance that Furst was validly appointed. Therefore, Brick & Pipe was bound by the guarantee.

In line with the common law approach towards ostensible authority of agents (see [10.29]–[10.33]), there must be some holding out by the company (or someone with actual authority to perform the actions involved). Section 129(3) would not apply where it was only the individual who held himself or herself out as being an agent or employee of the company: NCR Australia Pty Ltd v Credit Connection Pty Ltd [2004] NSWSC 1.

Customary powers Where a company has more than one director, the power to create contracts customarily rests with the board of directors.

12.27 Under s 129(3), a person may assume that an officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. This raises the question: What are the customary powers of directors and company secretaries?16 Where a company has more than one director, the individual directors do not normally have any customary power to bind the company contractually with third parties. A managing director has customary authority to do all those things in the ordinary management of the company that the board of directors has, including hiring staff and contractors17 and borrowing money for the ordinary purposes of the company. A company secretary is regarded as having customary authority to make contracts concerning the internal administrative matters of the company. [page 477]

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 (UK Court of Appeal) Facts Bayne, the company secretary of Fidelis Furnishing, hired some expensive cars from Panorama Developments in the name of Fidelis. Bayne told Panorama Developments that the cars were to be used to carry important customers of Fidelis. In fact, Bayne used the cars for his private purposes and lacked any actual authority to hire the cars. When Fidelis refused to pay the account, Panorama sued Fidelis Furnishing, claiming that Bayne had apparent authority to enter into the contract.

Issue Was the creation of this contract within Bayne’s apparent authority as agent for Fidelis? Decision It was held by Denning LJ that a company secretary would be regarded as having the apparent authority to hire cars on behalf of its company. Hence, Bayne’s actions bound the company to the contract and made it liable for the payment of the account.

Where a company has one director that sole director would normally have full management powers of the company, including authority to act on the company’s behalf.

Nicholson v Hilldove Pty Ltd [2012] VSC 598 (Supreme Court of Victoria) Facts Hilldove owned the Crown hotel in Lilydale on behalf of investors in a trust. The investors wanted to sell the hotel. Although Hilldove was the legal owner of the property (as trustee; see [14.6]), the investors expected to approve or reject any offer to buy the hotel. Negotiations occurred between an interested purchaser, Nicholson, and Niall, who was the sole director of Hilldove. Finally, Nicholson made an offer to buy the hotel for $6 million, which seemed attractive to Niall. In December 2011, an agreement regarding sale of the hotel was signed by Nicholson (as purchaser) and also by Niall, on behalf of Hilldove, without Niall first obtaining approval from Hilldove’s investors. In early February 2012, Hilldove sold the same hotel to a third party, Tomsic. Nicholson sought damages from Hilldove for breach of the first contract of sale. Niall denied there was a contract; he claimed that he needed to obtain the investors’ approval of any sale, and that, without such approval, he lacked authority to bind Hilldove to a sale agreement. [page 478] Issue Was Nicholson entitled to assume that Niall had authority to bind Hilldove by signing the agreement for the sale of the hotel? Decision

Section 129(3) entitled Nicholson to assume that Niall had the normal powers and broad authority of a sole director. This would include unrestricted authority to create contracts on behalf of the company. The court also found no evidence that Nicholson knew or suspected that Niall’s authority was restricted by any need to obtain shareholders’ or investors’ approval (see [12.28]).18

When do the assumptions not apply? An assumption listed in s 129 is not available if the outsider knew or suspected facts which contradicted the assumption.

12.28 A person is not entitled to make an assumption contained in s 129 if, at the time of the dealings, he or she knew or suspected that the assumption was incorrect: s 128(4).

Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 (Supreme Court of South Australia) Facts Sunburst Properties owned a vineyard and water licences to irrigate the property. The water travelled through a pipeline owned by Agwater. By midJuly 2003, Sunburst Properties was in serious financial difficulty; external administrators had been appointed and the National Australia Bank had appointed receivers and managers to protect the bank’s interests in the company’s assets. On 7 November 2003, a contract was created between Sunburst Properties and Agwater, in which the two companies jointly agreed: to sell Sunburst’s vineyard and water licences together with Agwater’s water pipeline; and to divide between them the proceeds of such sale. This joint-sale agreement was signed for Sunburst by a receiver and manager, Heard, and signed for Agwater by Crosby and Marshall, as directors of Agwater. Before his appointment as receiver and manager, Heard had obtained a search of the ASIC company register for Agwater, which listed Agwater’s directors as including Crosby and Marshall. The company register also listed

two further directors, including a Mr Garrett. However, Heard was informed by other sources that those other two directors had recently resigned. [page 479] On 15 November, Heard received a communication from Garrett, claiming that he had recently been appointed director of Agwater. Garrett claimed that Crosby had resigned as director in December 2002 or, alternatively, Crosby and Marshall had been dismissed as directors in November 2003. Garrett claimed that Crosby and Marshall were not directors of Agwater and that they lacked authority to enter the joint-sale agreement on behalf of Agwater. On behalf of Sunburst Properties, Heard sought to use s 128(1), to rely on the assumptions in ss 129(2), 129(4) and 129(5). Garrett argued that s 128(4) prevented Heard from relying on these assumptions because Heard should have known or suspected that Crosby was not a director of Agwater at the time. Issue Was Agwater bound by the contract? This could occur either because (a) the signatories for Agwater (Crosby and Marshall) were directors of Agwater at the time and held the necessary authority to contract on behalf of the company, or (b) if they were not directors, then Sunburst Properties was entitled to rely on the statutory assumptions in ss 129(2), 129(4) and 129(5). Decision On the facts, the court found that Crosby and Marshall were directors at the time the joint-sale agreement was signed. (The court rejected the allegations that Crosby had resigned in 2002 or prior to the execution of the joint-sale agreement with Sunburst Properties.) Although it was not necessary for the decision, the court added that even if Crosby had in fact resigned before the joint-sale agreement was signed, the decision would have been the same. Heard and Sunburst Properties did not know about such resignation; they had assumed that Crosby and Marshall were both directors due to their names being listed as such on Sunburst Properties’ company register lodged with ASIC. Under s 128(4), a person is prevented from relying on an assumption in s 129 if that person ‘knew or suspected that the assumption was untrue’. However, that person’s suspicions are assessed using a subjective test, not an objective test; it is irrelevant that a reasonable person might have been suspicious, or that Heard’s suspicions ought to have been aroused. On the facts, Heard (acting for Sunburst Properties) did not know or actually suspect that his assumptions under ss 129(2), 129(4) and 129(5) were incorrect, so s 128(4) did not apply here.

In Oris Funds Management Ltd v National Australia Bank Ltd

[2003] VSC 315, the Supreme Court of Victoria also formed the opinion that s 128(4) applies where the person had actual knowledge or suspicion that the assumption was incorrect. The onus of proof lies on the company to prove that the third party knew or suspected the assumption was incorrect: Sofyer v Earlmaze Pty Ltd [2000] NSWSC 1068. [page 480]

ADVICE — LAW IN PRACTICE A company is created by registering the appropriate documents at ASIC. Once created, a company is considered a separate person to its shareholders and its managers. This means that: –

the assets of the company belong to the company itself;

–

in the case of most companies, the members’ liability to contribute to the company is strictly limited; and

–

the company’s directors and managers are not personally liable for the company’s debts (but may become so in certain circumstances).

The company is bound by the conduct, representations and agreements made by its officers, employees and agents, provided they were acting within their authority (actual or apparent). Third parties are entitled to make certain important assumptions about the company which are binding on the company.

[page 481]

QUESTIONS Question 1 (a) What is a company? How is it created? How does it function? (b) List the benefits in using a company structure to run a business. (c) What principle was established in Salomon v A Salomon & Co Ltd (see [12.14])? Explain the principle, using the facts of that case or an alternative case.

Question 2 Kai Cheng is an unhappy accountant. While he was a student at university, he had many exciting outdoor adventures. So, when Kai Cheng inherits a lot of money from a wealthy uncle, he decides to leave his job as an accountant and start a private business that would take wealthy clients — accountants, lawyers, academics — on exciting adventures worldwide. He plans to organise an adventure race where multiple teams of four would run, walk and kayak from Kathmandu in Nepal to Pakistan — a journey of some 1232 kilometres through some very dangerous territory. Kai Cheng’s friends, Tim and Bronte, are interested in pursuing his idea but they will need to

borrow substantially to fund the event. Kai Cheng talks about offering prize money, getting sponsorship from relevant businesses, inviting teams from around the world and making a video documentary. He plans to call this event ‘The Great Race’. What sort of business structure should Kai Cheng, Tim and Bronte create together if they go ahead with ‘The Great Race’? Please explain your choice in light of the potential legal risks the planned event would face.

Question 3 Andrea owns 1000 shares in XYZ Ltd. The shares have an issue price of $1 but carry the right for the shareholder to pay for the shares in set instalments. The shares were partly paid 20 cents when Andrea bought them from Bob, for 25 cents each. XYZ Ltd goes into liquidation. How much must Andrea pay the liquidator of XYZ Ltd?

Question 4 Sheila is the majority shareholder and managing director of Be Cool Pty Ltd, which operates a business. Be Cool Pty Ltd has very few assets, with little realisable value. One of the suppliers to Be Cool Pty Ltd is owed a significant amount of money. The assets of Be Cool Pty Ltd are insufficient to cover the debt. Can the supplier sue Sheila personally?

Question 5 Alan was employed as the stock buyer for CarParts Pty Ltd. In this role, Alan was authorised to purchase up to

$30,000 of stock per month. Last May, the store’s usual supplier had a special discount for large orders, which prompted Alan to place an order for $60,000 worth [page 482] of car parts — twice the usual size of his orders. When the invoice arrived at CarParts Pty Ltd, the managing director refused to pay the supplier or take delivery of the parts. Who is liable for the $60,000 invoice?

Question 6 Candice is the company secretary in Doggy Dudds Pty Ltd, which manufactures dog clothes. The board consists of Rhonda as the managing director, Fred as an executive director and Daniella as the chief financial officer. One day, after hearing an employee complain about the poor quality of their existing sewing machines, Candice decides to replace all the existing machines with new ones, costing a total of $10,000, without consulting anyone else. Candice visits the ABC Bank Ltd, where she asks Michael, the newly appointed senior accountant, for a loan. Michael replies: ‘Who are you? I don’t know you.’ To which Candice replies: ‘Oh, I’m the company secretary of Doggy Dudds Pty Ltd — we’ve been banking here for years.’ Michael is a bit nervous but he checks the account details, and finds that Doggy Dudds has indeed banked with the branch for many years. So, Candice signs a loan agreement with ABC Bank ‘for and on behalf of Doggy Dudds’, and Michael signs on behalf of the ABC Bank.

When Ken, the bank manager, returns from lunch and sees the loan agreement, he immediately rings Daniella to discuss the matter. Daniella is furious with Candice, claiming that she had no right to sign the loan contract without asking for permission first. (a) Advise whether Doggy Dudds is bound by the loan agreement with ABC Bank. (b) Advise ABC Bank whether they are bound by the loan agreement.

_________ 1

2 3 4 5

6 7 8 9 10

11 12 13 14

See, for example, Re Wakim; Ex parte McNally (1999) 198 CLR 511 in which the High Court held that, as the Corporations Law was state law, it was unconstitutional to give judicial power over the Law to federal courts. Under s 51(xxxvii) of the Constitution, the states may refer powers to the Commonwealth. This power does not apply to companies limited by guarantee, as that type of company does not issue shares. A debenture is a document under seal acknowledging a company’s indebtedness for a particular amount. It usually includes a charge (mortgage) over the company’s assets. For example, see Jones v Lipman [1962] 1 All ER 442, in which Lipman sold his house to a company owned largely by himself, in an attempt to avoid a specific performance order to transfer the property to Jones (pursuant to an earlier contract sale). The court treated Lipman and his company as one, and granted an order of specific performance against the company. Spreag v Paeson Pty Ltd (1990) 94 ALR 679. ASIC v Hellicar; ASIC v Brown; ASIC v Gillfillan; ASIC v Koffel; ASIC v Terry; ASIC v O’Brien; ASIC v Willcox; ASIC v Shafron [2012] HCA 17 and Shafron v ASIC [2012] HCA 18. ASIC v Macdonald (No 12) [2009] NSWSC 714. Gillfillan v ASIC [2012] NSWCA 370. Under the Corporations Act s 147, a name is available to a company unless it is (1) identical to a name that has already been reserved or registered, (2) identical to a registered business name held by another person or (3) unacceptable. See Hollis v Vabu Pty Ltd, in [2.37]. See P Lipton, A Herzberg and M Welsh, Understanding Company Law, 18th ed, Lawbook Company, Sydney, 2016, pp 135–137. See [12.4]–[12.5]. For the text of s 129, see [12.23].

15 16 17 18

See Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, in [10.29]. See also Corporations Act s 129(2). See Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, in [10.29]. The Supreme Court also court rejected Hilldove’s assertion that Niall had informed Nicholson that the signed agreement could not come into effect until and unless Niall obtained investors’ approval. This reinforces the difficulty in proving the existence of a verbally agreed condition precedent that might avoid liability under a signed agreement (see [6.8]).

[page 483]

CHAPTER 13

DUTIES OF COMPANY DIRECTORS AND OTHER OFFICERS

CONTENTS Objectives of this chapter Setting the scene: Directorships can be a burdensome role Introduction and outline of chapter What are the functions of a director? The source of directors’ duties

Duties also owed by officers Reasonable care and diligence The business judgment rule Is any particular level of skill required of a director? The level of attendance required The importance of being informed The role of reliance The duty to act in good faith and for a proper purpose The duty to act in good faith Directors’ duty to exercise power for proper purposes [page 484]

The duty not to misuse the position Contracts with the company The duty imposed on directors to disclose certain interests The duty not to use information improperly What kind of information must not be used? The consequences of a breach of statutory duty Civil consequences Criminal consequences: s 184 Directors’ duties at common law The insolvent trading rule When is a company insolvent? What remedies or sanctions may apply? Defences to s 588G Sections 588G and 588H in action Complying with the rules of the company Further statutory obligations

Who will sue the directors for a breach of duty? Exceptions to the rule in Foss v Harbottle A shareholder’s right to take personal action Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER After studying this chapter you should be able to: describe the key legal duties owed to the company by company officers, including directors; and describe the legal consequences likely to result from breach of those duties.

[page 485]

SETTING THE SCENE: DIRECTORSHIPS CAN BE A BURDENSOME ROLE A local preschool is owned by a company, with non-executive directors including volunteering parents of children attending the preschool. Vi and Wayne agree to become directors for a year, although Wayne finds himself too busy to attend any meetings. Neither receives any payment for their

role, but Vi’s own catering business secures a year-long contract with the preschool. The preschool struggles financially; it is often late paying staff wages and is in arrears on loan payments. After the conclusion of their year as directors, Vi and Wayne are dismayed to learn they might be liable for some of the preschool’s debts, and perhaps face additional penalties, for breach of directors’ duties.

INTRODUCTION AND OUTLINE OF CHAPTER This chapter focuses on corporate governance — the systems and laws regulating the control and directorship of companies.

13.1

This chapter deals with corporate governance and the role of directors in particular. Companies obviously rely on natural persons to carry out their activities. The management and control of the company is vested in the directors, who are appointed in accordance with the rules of the company. A proprietary company can exist with only one director. A public company, however, must have at least three directors, and a large public company is likely to have many directors. When a company has more than one director, those directors form what is known as the board of directors.

Corporate social responsibility Should companies concentrate solely on making a profit? Or should they look beyond the profit line to what has been called the ‘triple bottom line’? The triple bottom line approach requires companies to consider not only the financial impact of their business practices but also the environmental and social impact. In other words, what social responsibility does a company have? The question of corporate social responsibility (CSR) is a hot topic, both locally and internationally. CSR involves an ongoing commitment to transparent and ethical business

behaviour and to sustainable economic development, while at the same time improving the quality of life of the workforce, the community and society generally. If a company’s governance practices promote stakeholder engagement, ethical business practices and social accountability, then sustainability and CSR are enhanced. Advocates of CSR also contend that taking CSR considerations into account will benefit the company itself. Benefits include better risk management, greater employee satisfaction and an improved business reputation. However, CSR has its critics. Some argue that the responsibility of companies is to maximise profits for their shareholders or members. This approach leads to the proposition that any CSR considerations should be limited to developing and implementing practices likely to result in a net increase in the company’s profits, and not involve attention to social or environmental outcomes that might decrease shareholder returns and thereby obstruct [page 486] capitalism and a free market. Certainly, a company’s directors must ensure compliance with the law that regulates companies, including the legal duties imposed by common law and the Corporations Act 2001 (Cth). Many of those key legal duties are introduced in this chapter. However, while compliance with legal duties is necessary, that alone may not be sufficient for good corporate governance; consideration should also be given to society’s expectations in terms of CSR.1

WHAT ARE THE FUNCTIONS OF A DIRECTOR? Where a company has more than one director, the directors form a board of directors.

13.2

In a small proprietary company, there may be only one director who does practically everything. It is quite different with a large public company. In a large company, the complexity and sheer volume of transactions involved mean that the board of directors will most likely delegate the day-to-day running of the company to executive officers, such as managers and assistant managers. The board of directors of a large company is generally regarded as having the following functions: to set policy and formulate strategy — this will involve being

properly informed; to monitor the implementation of policy — this will also require being informed; review, at reasonable intervals, the firm’s progress towards attaining its goals; provide accountability to members; to elect, evaluate and, where appropriate, dismiss the principal executive officers; and to carry out any statutory functions, such as presenting duly attested financial reports at the annual general meeting. Some directors are also employees of the company, making them executive directors.

A director may also be an executive officer and, if so, he or she is commonly referred to as an executive director. Within the corporate world, it is common for the chief executive officer to be a director (the managing director). Following a series of collapses of large, public, listed companies, serious concerns have been raised about failures in corporate governance since the early 2000s. In 2014, the Australian Securities Exchange Corporate Governance Council released a third edition of its Corporate Governance Principles and Recommendations,2 reflecting global developments in corporate governance in response to concerns over events leading up to, and during, the global financial crisis. The current (third) edition contains eight principles of good corporate governance and 29 specific recommendations to support the principles. These include recommendations for a majority of external independent directors on the board of directors, and for formally documenting the role and responsibilities of the board and management with delegated powers. Under the Australian Securities Exchange (ASX) listing rules every public company listed on the ASX must disclose in its annual report whether or not it has followed all of the principles and recommendations. Any company that has not followed all

principles and recommendations must explain its reasons. Listed companies must also describe the actions they have taken to follow the principles and recommendations.3 [page 487]

THE SOURCE OF DIRECTORS’ DUTIES A fiduciary relationship is based on the imperative to act in the best interests of another (see [10.44]). Company directors and officers are in a fiduciary relationship with their company.

13.3

13.4

Directors and other officers owe certain duties to the company. These duties are owed to the company and not to the members as individuals. The duties arise from a number of sources, including: the Corporations Act 2001 (Cth) (Corporations Act); the fiduciary nature of the relationship between a director or officer and the company; the common law duty to act with reasonable care; and the rules of the company. Sections 180–184 of the Corporations Act impose certain duties upon directors. Section 180 imposes a duty of care and diligence. Sections 181, 182 and 183 impose duties concerning good faith and conflict of interest. The court may make an order for a civil penalty where the duties are breached. Each of these duties has an equivalent common law duty. Section 184 creates criminal offences for dishonest breaches of the duties of good faith.

DUTIES ALSO OWED BY OFFICERS 13.5

Directors are not the only people within a company who owe duties to the company. For the duties arising from the Corporations Act, ss 180–184 impose duties on directors and other

officers. Section 183 also imposes a duty on company employees. The term ‘director’ has a broad meaning under the Corporations Act. Obviously, people properly appointed as directors (or alternate directors) are included. However, the definition also normally includes people who are not properly appointed, yet they either act as directors or they give instructions or make decisions that the other directors and officers habitually follow: s 9.4 All directors owe duties to their company to: exercise reasonable care and skill; act in good faith; exercise their powers for proper purposes; avoid actual or potential conflicts of interest (eg, avoid misuse of position and misuse of information); and avoid insolvent trading.

The term ‘officer’ is broader than ‘director’. Under s 9, officers include directors, the company secretary, and people who participate in making decisions affecting a major part of the company’s business or who have the capacity to significantly affect the company’s financial position.

REASONABLE CARE AND DILIGENCE 13.6

Section 180 of the Corporations Act sets out the duty of company directors and officers to exercise a reasonable degree of care and diligence. A similar duty not to act negligently is also owed at common law. For the statutory duty, an officer of a company includes a director or secretary of the company, shadow directors (eg, management advisers), administrators, receivers and liquidators: s 9. The purpose of s 180 is to require directors to exercise a minimum level of care and diligence based on objective standards: 180 (1) 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. …

[page 488] Thus, a director who allowed his company to purchase large quantities of stock, which were not required, at a time when the company was not only experiencing some financial difficulties but also had been refused insurance because of three previous stock robberies, was held to have breached his duty of care to the company.5

South Australia v Clark (1996) 14 ACLC 1019 (Supreme Court of South Australia) Facts Clark was the managing director and chief executive officer of the State Bank of South Australia. He was instrumental in the bank acquiring all the shares in a life assurance company for an amount that was substantially in excess of the company’s true value. Clark failed to ensure that the bank obtained an independent valuation of the life assurance company, despite the fact that the purchase was an unusually large one for the bank. Clark also knew that the proceeds of the sale would be used to repay a loan to Equiticorp Holdings Ltd, a company of which Clark was a director and in which his family held a substantial number of shares. Clark failed to disclose his involvement with Equiticorp to the bank. The state of South Australia and the bank claimed that Clark had breached his duty of care, and claimed damages. Issue In approving the bank’s investment, had Clark exercised the level of care and skill that is expected of directors when carrying on the company’s business? Decision The court held that Clark had breached his duty of care to the bank and he was ordered to pay the sum of $81 million by way of damages.

Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 (Supreme Court of Queensland) Facts Greenslade was managing director of the plaintiff, Circle Petroleum. He had very extensive experience in the petroleum industry and was well aware of the risks of not maintaining tight credit control. Promco was a customer of Circle Petroleum. Promco had suffered severe trading difficulties and was in debt to Circle. The board of Circle decided not to extend any further credit to Promco. Despite the board’s view, Greenslade allowed Promco to acquire further supplies of petroleum on credit. The court found that, among other things, Greenslade was aware that Promco had been, and continued to be, [page 489] a difficult trade debtor; that it was well outside its credit limit; that there was little prospect of Promco being rescued by takeover; and that Promco was having difficulty with its bank. When Promco was unable to pay its debt, Circle issued proceedings against Greenslade for breach of his statutory duty to exercise reasonable care and skill. Issue Had Greenslade exercised sufficient care and skill in his role as managing director of Circle Petroleum? Decision The court held that Greenslade had failed to exercise the degree of skill and care which could reasonably be expected from a person of his knowledge and experience. Muir J said (at 1594): The defendant’s conduct in relation to the Promco account involved a substantial departure from what even he regarded as normal industry practice and defied the express wishes of all members of the board of directors, including himself. It involved the taking of abnormally high risks without, it would seem, attempting to assess the benefit which might be obtained in return for the risk. The defendant appeared to be gambling on the prospect that Promco’s directors would solve that company’s financial problems eventually. But the evidence does not suggest that he had a reasonable basis for concluding that Promco’s financial difficulties would be resolved. Greenslade was ordered to pay the plaintiff damages.

13.7

Another example is provided by the James Hardie Industries Ltd cases (see [12.14]). The company made public announcements that it had ensured sufficient funds were set aside to resolve all asbestos-related claims against the James Hardie Group. The statements turned out to be inaccurate. Following hearings in the New South Wales Supreme Court, the New South Wales Supreme Court of Appeal and the High Court, all directors were found liable for breaches of s 180(1). So, too, were other officers of the company, namely the chief financial officer and the company secretary and general counsel (see [12.14]). For there to be a breach of s 180, there must first be some wrongful or inappropriate act by the company. The court then looks to whether that act involved a lack of care or skill by a director or other officer of the company. In Forrest v Australian Securities and Investments Commission [2012] HCA 39, the chairman and chief executive, Forrest, was sued for alleged breaches of s 180 (carelessly causing the company to release certain misleading or deceptive statements to the market). However, when the High Court held the statements were not misleading or deceptive, the action for breach of duty against Forrest could not succeed.

The business judgment rule The business judgment rule provides a defence to breaches of both the statutory and common law duties of care and skill, provided that all the criteria of s 180(2) are satisfied.

13.8

The business judgment rule in s 180(2) of the Corporations Act provides a defence for actions that may otherwise be in breach of s 180(1). The purpose of the rule is to make it clear that it is not the intention of the law to second guess the decisions of directors. [page 490] The effect of the business judgment rule is that the director is

assumed to have acted with appropriate care and diligence if all the factors contained in s 180(2) are satisfied: 180 (2) 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. … (3) In this section: business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

The business judgment rule in s 180(2) also applies to the common law duty. However, it should be noted that the rule does not apply as a defence to the duties under ss 181–183 or their common law equivalents.

Is any particular level of skill required of a director? 13.9

A director does not have to have any particular skill, but he or she ought to be capable of understanding the affairs of the company, at least to the extent of being able to reach a reasonably informed opinion of its financial capacity. Although the test is objective, the actual knowledge and experience of the director are important. If a director has particular experience or skill, he or she will be expected to bring that experience or skill to bear when making decisions affecting the company. Even non-executive directors, who are not normally involved in the day-to-day operations of the company, are expected to exercise skill, care and diligence: Daniels v Anderson (1995) 37 NSWLR 438.

If they breach this duty, they will face liability. An example is provided in Australian Securities and Investments Commission v Hellicar [2012] HCA 17, where the High Court held that the seven non-executive directors of James Hardie Industries Ltd each breached their duties as a director of the company by approving the company’s release of a misleading announcement to the Australian Securities Exchange (see [12.14]).

The level of attendance required 13.10 Because of the rules and decisions with respect to insolvent trading, directors cannot expect to escape liability by staying away. The modern trend is to expect directors to attend board meetings and take an active interest in the company’s affairs unless the director has a good reason for being absent. If a director finds that he or she is unable to fulfil this duty of care and diligence, then he or she should resign as director.6 Once a director does attend a meeting of the board, he or she is expected to pay attention. Failure to do so may result in [page 491] liability for damages for breach of duty. How often should the board meet? This matter can only be judged in the light of the circumstances facing the company at any given time. The board should meet as often as is necessary to carry out its functions properly. Directors are expected to be actively involved in their role. Failure to attend board meetings may constitute breach of duty. Contrast partnerships: a partner may take a passive role, as a dormant or silent partner (see [11.16]).

How times have changed! The Cardiff Savings Bank was formed in 1817 under the auspices of the Marquis of Bute. The Marquis remained president of the bank until his death

in 1848. According to the bank’s books, the late Marquis’ son then became president. He was six months old at the time. The new Marquis remained president of the bank for the next 38 years, until 1886 when the bank was placed in liquidation (having been systematically defrauded by one of its employees for over 30 years). The liquidator sought to make the Marquis liable for negligence. The Marquis in his defence argued that he had not breached the standard of care owed by a director. During his 38-year tenure as president, the Marquis attended one board meeting. This was in 1868 when the Marquis happened to be in Cardiff. The Marquis had no recollection of the meeting, and indeed testified that when he was told the bank had gone into liquidation he was surprised that he had any connection with it. This was despite the fact that he was regularly sent correspondence concerning the bank. Apparently, his staff did not bother to pass on the correspondence. The court decided in the Marquis’ favour. According to Stirling J, ‘neglect or omission to attend meetings is not, in my opinion, the same thing as neglect or omission of a duty which ought to be performed at those meetings’.7 In the absence of knowledge or notice that the other directors and managers were not doing their job, the Marquis was entitled to rely on those directors and managers. The Marquis was a famous man in Victorian England. He was one of the richest men in the world. He was a talented scholar and linguist, intrepid traveller and philanthropist. He was responsible for the restoration of many ancient buildings. He was not a very diligent director but, according to the law at the time, he did not need to be. (See Re Cardiff Savings Bank [1892] 2 Ch 100.)

The importance of being informed 13.11 An important part of decision making is being properly informed. This applies not only to directors of large companies but also to directors of small companies. There are many small family companies where one director effectively runs the company. The other director, often a spouse, merely does what he or she is told. It is now clear that a director cannot absolve himself or herself from responsibility by arguing that he or she left the running of the company to another director. In Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827, the court commented that a director cannot hide behind ignorance. A director has a duty to ‘take diligent and intelligent interest in the information either

available to him or which he might with fairness demand from the executives or other employees and agents of the company’ (at 847 per Ormiston J). [page 492]

The role of reliance 13.12 A director is entitled to rely on information or professional or expert advice prepared by another director or an employee of the company or a professional adviser, provided the director acted in good faith and made any inquiries that seemed warranted by the circumstances. In such cases, the director’s reliance is said to be reasonable: Corporations Act s 189. This is particularly important in large companies. However, if a director has notice of mismanagement or reasonable grounds for suspicion that there is something wrong, he or she is under a duty to make further inquiries.8

THE DUTY TO ACT IN GOOD FAITH AND FOR A PROPER PURPOSE 13.13 Section 181 of the Corporations Act sets out the duties of directors and officers to act in good faith and for a proper purpose. These duties are also owed at common law. They are similar to the duties owed by other fiduciaries, such as partners and agents. Section 181 catches not only the director or officer of the company, but also their accomplices: 181 (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. … (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

The duty to act in good faith 13.14 The duty to act in good faith means that directors must act honestly in the interests of the company as a whole (often described as ‘the members as a whole’). The duty is owed to the company as a whole and not to individual members. Provided that the directors act in what they honestly believe to be the best interests of the company, the courts will be very reluctant to interfere.9 Nevertheless, the courts have from time to time overridden the decisions of the directors.

Walker v Wimborne (1976) 50 ALJR 446 (High Court) Facts The directors of Asiatic Electric Co Pty Ltd made certain payments prior to a liquidator being appointed. The liquidator challenged these payments as not being in the interests of Asiatic. At the time the payments were made, Asiatic was unable to pay its debts as they fell due. Asiatic was one of a group of companies which had common shareholders and directors. The payments had been made on behalf of other companies within the same group to pay off debts and wages owing by these other companies. [page 493] Issue Were the directors in breach of their duties to Asiatic when they dealt with Asiatic’s assets for the benefit of the group rather than for the benefit of Asiatic? Decision By majority, the High Court rejected the directors’ approach and held that the directors owed their duty to the particular company in question and not to the group as a whole. Therefore, directors who authorised payments to be made out of the assets of Asiatic to discharge debts owed by other members of the group where there was no significant benefit to Asiatic were in breach of their duty.

Directors’ duty to exercise power for proper purposes

Proper purposes for issuing shares include raising of capital or to acquire an asset. Improper purposes for issuing shares include thwarting a takeover offer or affecting the balance of voting power.

13.15 Directors must exercise their powers for the proper purposes of the company (for the benefit of the company as a whole) and not for any extraneous purpose. Breach of this duty is often alleged in connection with issuing shares, particularly where the action will cause a shift in control or thwart a possible takeover move. Suppose that A and B are the directors of a family company. They are also shareholders along with C and D. A and B are in dispute with C and D, who threaten to challenge A and B’s control of the company. A and B use their power to allot new shares in the company to themselves. This prevents C and D from mounting any challenge to A and B’s control. Directors have the power to allot new shares in the company but they must use this power for a proper purpose. If the allotment would not have been made but for the desire to thwart C and D’s aspirations, then A and B probably breached their duty to exercise this power for a proper purpose.10

THE DUTY NOT TO MISUSE THE POSITION Section 182 of the Corporations Act also affects employees of a company.

13.16 Section 182 of the Corporations Act imposes on a director or other officer or employee of a company a duty not to improperly use his or her position for personal gain, for gain by a third party or to cause detriment to the company. The duty imposed by s 182 extends to accomplices: 182 (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. … (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

This duty is also owed at common law. The rationale for this rule, as indeed it is for all fiduciary duties, is to remove the temptation for directors, officers and employees to place themselves in a position where they may put their own interests before the interests of the company. [page 494]

Cummings v Claremont Petroleum NL (1992) 11 ACLC 125 (Federal Court) Facts Cummings and Fuller were directors of Claremont, a mining company. There was a third director situated in the United Kingdom. Cummings and Fuller managed to obtain control of the board and passed a number of resolutions which favoured themselves or their consulting companies. These included a sizeable termination allowance and the free lease of a luxury motor vehicle. By any criteria, the termination payments and other benefits (including the motor vehicles) were extremely generous. Cummings and Fuller made no attempt to obtain an outside assessment of the reasonableness of the termination payments and benefits, despite the fact that Claremont was a public company. Subsequently, Cummings and Fuller were voted off the board. The new board cancelled the motor vehicle leases and sought an order that the termination payments be repaid. It was alleged that Cummings and Fuller had breached their duty of care as well as their duties to act honestly and not to misuse their position. Issue Whether Cummings and Fuller had breached the duties they owed to the company, Claremont. Decision The Federal Court upheld the new board’s submissions on the basis that the termination payments and other benefits were, in all the circumstances of the case, manifestly excessive and not merely generous. Accordingly, the directors had misused their position for personal gain and breached their duty to act honestly in the company’s interest. Allowing Claremont to enter into these transactions also involved a breach of the directors’ duty of care.

Directors of all companies are subject to these duties. For an

instance of the directors of a small family company being found in breach of ss 181 and 182 following their approval of an excessive termination payment to one of them, see Re Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250. Of course, a director is prohibited from taking bribes or making secret commissions. Any commission earned by the director belongs to the company, whether or not the company suffers a detriment. Directors must be careful in their use and application of company funds. Theft or embezzlement is clearly a breach of duty.

Contracts with the company 13.17 There is clearly potential for conflict whenever a director, either directly or indirectly, has commercial dealings with the company of which he or she is a director. For instance, the directors of a company (X Ltd) decide to enter into a contract to purchase goods or services from a partnership, of which one of the company’s directors is a partner. [page 495] The director–partner clearly stands to gain from the contract. In such circumstances, the director–partner should stand aside. At the very least, the director–partner must make his or her interest in the partnership known. Take another example. Imagine that an agricultural company is negotiating a contract with a number of wholesale suppliers for the supply of some farming equipment. One of the suppliers is Farm Supplies Ltd. One of the directors of the agricultural company is a substantial shareholder in Farm Supplies Ltd. The director has a personal interest in the outcome of the negotiations with the supplier and ought to disclose such interest to the directors of the agricultural company. If the director does not do so, the director will be liable to the agricultural company for the profit accruing to the director as a result of the decision (in which the director took

part) to award the contract to Farm Supplies Ltd. This would apply even if the contract with Farm Supplies Ltd was in the best interests of the agricultural company.

The duty imposed on directors to disclose certain interests 13.18 By virtue of s 191 of the Corporations Act, a director must disclose to the other directors any material personal interest in a matter that relates to the affairs of the company. Provided this is done, the director of a proprietary company may be entitled to vote on any matter involving that contract. Provided the director of the proprietary company discloses the interest before the contract is entered into, the contract is binding and the director may retain any benefits derived from the contract: s 194. Section 194 is a replaceable rule applicable only to proprietary companies. The provisions relating to directors of public companies are slightly more complex. It is not necessarily just a matter of disclosure. In respect of certain financial benefits (such as buying or selling an asset from or to a director; providing finance, property or securities to a director), it is necessary to obtain approval from the members of the company. There are exceptions to this requirement. For example, approval is not required for small financial benefits (less than $2000). Nor is approval required for the payment of reasonable remuneration and financial benefits where they are provided on the same terms as similar deals or benefits have been provided to people outside the company. These provisions are contained in Ch 2E of the Corporations Act.

THE DUTY NOT TO USE INFORMATION IMPROPERLY Section 183 of the Corporations Act also affects employees of a company.

13.19 Section 183 imposes on a director or other officer or employee of a

company a duty not to improperly use inside information. The duty imposed by s 183 extends to accomplices: 183 (1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. … (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

Directors, officers and employees must recognise that information acquired or created in the course of carrying out their role within the company belongs to the company and cannot be used for personal gain, for gain of a third party or to harm the company. This duty is also owed at common law. [page 496]

What kind of information must not be used? 13.20 Information covers a wide variety of material, including, in appropriate circumstances, inventions and innovations, customer and supplier information, marketing strategies, certain financial information and information concerning the company’s current negotiations. Even if the director created the information, the information still belongs to the company if it was created in the course of carrying out his or her duties as a director, officer or employee.

Cranleigh Precision Engineering Ltd v Bryant [1965] 1 WLR 1293 (Queen’s Bench Division) Facts Bryant and another founded Cranleigh Precision Engineering Ltd (the plaintiff). Bryant acted as managing director. Bryant created an above-ground

swimming pool which contained two revolutionary features. During the course of attempting to register a patent over the swimming pool, Bryant learned of an existing patent which was not being utilised in the United Kingdom (the Bischoff patent). Bryant did not reveal the existence of this patent to other officers of Cranleigh. After an internal company dispute, Bryant left to form his own business. He acquired the British rights to the Bischoff patent and made use of the two revolutionary features that he had incorporated into the Cranleigh swimming pool. Issue Had Bryant misused information belonging to Cranleigh? Did Bryant’s duties continue after he left Cranleigh? Decision The court granted an injunction to stop Bryant utilising the confidential information (the revolutionary features) of Cranleigh without Cranleigh’s permission. The court also granted an injunction to stop Bryant making use of the Bischoff patent. The judge held that knowledge of its existence was information which Bryant had acquired on behalf of Cranleigh. It was, therefore, a breach of the duty owed by Bryant to Cranleigh as its managing director not to disclose the information to Cranleigh. It was also a breach of the duty (of confidential information) to use that information to the detriment of Cranleigh. Bryant’s duties in relation to the information acquired while he was a director did not expire when he left the company.

Although a director is not prevented from being involved in managing more than one business, he or she must be careful not to reveal or utilise the trade secrets of one company for the advantage of any other enterprise. Directors ought to have a welldeveloped sense of what constitutes a conflict of interest. [page 497] Of course, not all information is a trade secret. For example, the courts will not grant an injunction to protect information that is in the public domain. However, if the information is confidential, the duty not to use it without permission is quite strict. For instance, it is not necessary to prove that the company has suffered a loss. In

such circumstances, the courts may make an order based on the profits the director (or a third party) has gained.

Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1 (Supreme Court of Western Australia) Facts Green was employed as a divisional manager by Bestobell, a construction company. As a result of his position, Green was aware that Bestobell intended to tender for a construction job. Through his own personal company and while still an employee of Bestobell, Green also submitted a tender. Green was awarded the job. Bestobell’s tender was third. Bestobell sued Green for breach of duty. Issue Had Green breached his duty not to misuse Bestobell’s information? Decision The court ordered Green to pay the profits over to Bestobell, even though Bestobell had not actually lost anything. Even if Green had not submitted his tender, Bestobell would not have won the contract. However, the court held that Green had gained the knowledge or opportunity in his capacity as manager and, therefore, he had breached his fiduciary obligation not to use inside information for personal gain.

THE CONSEQUENCES OF A BREACH OF STATUTORY DUTY 13.21 There are a number of possible consequences for a breach of statutory duty, some having civil consequences and others having criminal sanctions.

Civil consequences Breach of statutory duties may lead to civil penalties and/or criminal sanctions.

13.22 For breach of ss 180, 181, 182 or 183 of the Corporations Act, the

court may order a ‘civil penalty’ in the nature of a fine up to $200,000. The civil level of proof applies, so the Australian Securities and Investments Commission (ASIC) would need to prove the section(s) had been breached ‘on the balance of probabilities’. It is a defence to show that the person acted honestly and that, having regard to all the circumstances of the case, the person ought to be excused from the contravention. Possible consequences include: The court may prohibit the person from managing a company. The court may order the person to pay compensation to the company. If the breach of ss 181, 182 or 183 involves recklessness or intentional dishonesty, then criminal sanctions may apply (see [13.23]). [page 498]

Criminal consequences: s 184 13.23 Section 184 provides that certain intentional or reckless breaches of duty amount to a criminal offence: 184 (1) A director or other officer of a corporation commits an offence if they: (a) are reckless; or (b) are intentionally dishonest; and fail to exercise their powers and discharge their duties: (c) in good faith in the best interests of the corporation; or (d) for a proper purpose. … (2) A director, other officer or employee of a corporation commits an offence if they use their position dishonestly: (a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or (b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in

causing detriment to the corporation. … (3) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information dishonestly: (a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or (b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

The penalty for committing such an offence is a fine of up to $360,000 and/or imprisonment for up to five years for each offence. Being a criminal offence, ASIC would need to prove ‘beyond a reasonable doubt’ that s 184 has been breached.

DIRECTORS’ DUTIES AT COMMON LAW 13.24 Directors owe duties at common law and in equity to their company. The duties are similar to those owed under ss 180–183 of the Corporations Act. They are also similar to those owed by all fiduciaries, including partners and agents. The common law duties apply not only to directors, but also to employees of the company by virtue of the employment contract. Even if there is no express term, the law will imply such terms. The common law offers remedies which are not available under the Corporations Act, including an action for account of profits as an alternative to damages and rescission of contract. The ‘business judgment rule’ defence contained in s 180(2) (see [13.8]) operates as a defence not only to the statutory duty in s 180(1) but also to the common law or equitable duties to exercise care and skill. Where the company is experiencing financial difficulties, the directors also have a common law duty to consider the interests of creditors.11 Unsecured creditors, in particular,

[page 499] face the risk that the debtor may dissipate its assets.12 The consequences can be quite serious when the debtor is in financial difficulty. When the debtor is a company, it is the directors who make decisions affecting the company’s business and its assets and liabilities, and, in making those decisions, the directors must also consider the interests of the company’s creditors if their company is in financial difficulty.

Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215 (New South Wales Court of Appeal) Facts Russell Kinsela Pty Ltd was a family company. The company was in deep financial trouble. The directors decided to lease the business premises to two family members so that the company’s creditors could not immediately get their hands on it. In this way, they hoped to save the family business. All shareholders agreed with this action. The liquidator brought an action against the directors for breach of duty. Issue Had the directors breached a duty to consider the interests of the company’s creditors? Decision Where a company is insolvent, the directors owe a duty to the creditors not to prejudice the interests of the creditors. The directors of Russell Kinsela Pty Ltd had breached this duty. It did not matter that the shareholders were unanimously in favour of the move.

For directors of companies in financial difficulty a further statutory duty becomes relevant: the duty to avoid insolvent trading. For companies which are unable to pay their existing debts, directors owe a duty to prevent any further debts being

incurred. This is known as the duty to avoid insolvent trading. The duty in s 588G to avoid insolvent trading applies where there were grounds to suspect current or impending insolvency.

THE INSOLVENT TRADING RULE 13.25 Section 588M of the Corporations Act provides that, in the circumstances set out in s 588G, the liquidator of a company may bring an action to recover a company debt from the directors personally. This is called the insolvent trading rule. It applies only to the directors of the company, not to all of its officers: 588G (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be. … [page 500] (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company’s circumstances would be so aware. …

If, in the circumstances set out in s 588G(1), a director fails to prevent the company from incurring the debt, then that director contravenes the section if the director: was aware that there were grounds to suspect the company of being or becoming insolvent; or a reasonable person in a like position in the company’s

circumstances would have been aware of grounds to suspect such insolvency: see s 588G(2).

When is a company insolvent? 13.26 A company is regarded as being insolvent when it is unable to pay its debts as they fall due: s 95A(1). Insolvency is a matter of cash flow rather than balance sheet. The modern director is now required to know something about insolvency, at least to the extent of recognising and responding to the warning signs. In Mullenger v Dana Australia Pty Ltd [1998] VSCA 30, the following factors were strongly indicative of insolvency: inability of the company to observe the terms of its overdraft facility; failure to pay trade creditors according to the terms of trading; inability to provide funds to cover even small cheques; and failure to meet demands for payment of the most essential services.

What remedies or sanctions may apply? 13.27 A contravention by a director of s 588G may result in both civil liability and a civil penalty. If a director dishonestly contravenes the section, he or she will likely be deemed to have committed a criminal offence under s 588G(3) and may be liable for a fine of up to $360,000 or imprisonment for five years or both. A breach of s 588G also entitles the liquidator (or, in special circumstances, a creditor: s 588R) to bring an action to recover the amount of the debt: s 588M.

Defences to s 588G 13.28 The four defences to s 588G are set out in s 588H: 588H (1) This section has effect for the purposes of proceedings for a contravention of section 588G(2) in relation to the incurring of a debt … (2) It is a defence if it is proved that, at the time when the debt was

incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person: (a) had reasonable grounds to believe, and did believe: (i) that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and [page 501] (ii) that the other person was fulfilling that responsibility; and (b) expected, on the basis of information provided to the firstmentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company. (5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt. (6) In determining whether a defence under subsection (5) has been proved, the matters to which regard is to be had include, but are not limited to: (a) any action the person took with a view to appointing an administrator of the company; and (b) when that action was taken; and (c) the results of that action.

Each of the s 588H defences is discussed in more detail below. Defence under s 588H(2) The insolvent trading defences in s 588H(2) and (3) apply only where the director reasonably believed the company was solvent and would remain solvent. A mere hope for solvency will not suffice.

13.29 Under s 588H(2), it is a defence for a director to establish that, at the time the debt was incurred:

there were reasonable grounds to expect that the company was solvent and would remain solvent even though the debt (or any other debt at that time) was incurred; and the director believed that the company was solvent and would remain so. Defence under s 588H(3) 13.30 Section 588H(3) is a specific example of the general defence under s 588H(2). Under s 588H(3), it is a defence for a director to establish that, at the time the debt was incurred, the director had reasonable grounds for believing and did believe that: a competent and reliable person was responsible for providing to the director adequate information about whether the company was solvent; and the competent and reliable person was providing that information; and on the basis of the information, the company was solvent and would remain so. In the case of sizeable companies, the directors must, as a matter of practical necessity, rely upon reports provided by accounting staff and others. Provided that such persons are competent and that there is no evidence questioning their reliability, the directors are entitled to rely upon such reports. This is particularly important for non-executive directors. The competence of the information provider must relate to his or her ability to determine whether the company is solvent. The most obvious example of a ‘competent’ person would be the company accountants or auditors. The competent and reliable person must provide adequate information about whether the company is solvent. In the case of small companies, the question may arise whether one director can passively rely upon information provided by a dominant and active director. In such cases, it may be difficult for the passive director to establish all the elements of the defence. It would be necessary to establish that:

the director was reliable and competent to provide information about the company’s solvency; the director was responsible for providing such information; [page 502] the director did provide such information; the information was adequate to make a judgment about the company’s solvency; the director believed the information was adequate to make such a judgment; and on the basis of the information, the director believed the company would remain solvent. If the director provided either no, or inadequate, information about the company’s solvency, the defence under s 588H(3) would not apply. In a small company, it is likely that a director himself or herself would have an obligation to find out some of the information. Again, the most obvious person upon whom to rely is the company’s accounting adviser. Defence under s 588H(4) With today’s variety of communication methods, it is unlikely that any reason other than serious illness would provide a defence under s 588H(4) against a claim of insolvent trading.

13.31 Under s 588H(4), it is a defence for a director to establish that he or she took no part in the management of the company at the time the debts were incurred because of illness or some other good reason. In Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, the New South Wales Court of Appeal discussed the phrase ‘or some other good reason’ within the Corporations Act. In obiter dicta the court considered s 588H(4). The facts involved a director

who left all company management functions to her co-director husband. The court found that a director’s non-participation in the company’s management due to marital relationship was not a sufficiently ‘good reason’. This interpretation of the phrase ‘or some other good reason’ is consistent with the positive duties directors owe to exercise reasonable care, skill and diligence (see [13.6]–[13.12]). Defence under s 588H(5) 13.32 It is a defence if a director took all reasonable steps to prevent a debt being incurred as provided by s 588H(5). This may require the director to go public if he or she thinks that the company ought not to incur a debt on insolvency grounds. Where directors suspect that a company is insolvent, they may make application to have the company placed under voluntary administration. This has been a popular tactic in the last few years.

Sections 588G and 588H in action 13.33 The following cases illustrate the effect of ss 588G and 588H.

Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 (Federal Court) Facts Miller and others were directors of Raydar Electrics Pty Ltd. In December 1993, Raydar’s creditors were demanding payment of outstanding moneys. In the same month, Raydar was hired by a third party to carry out certain electrical work. Miller, acting on behalf of Raydar, then subcontracted part of the work to Metropolitan Fire Systems. Miller later assured Metropolitan it would be paid for the work as Raydar was expecting payment from the third party. Shortly after this, another of Raydar’s creditors had Raydar wound up for insolvency. Metropolitan sued the directors of Raydar for breach of s 588G. Miller and the other [page 503]

directors argued that s 588G had not been breached. Alternatively, they argued that they had a defence under s 588H(2). Two of the directors also argued they had a defence under s 588H(3) because they had relied on the third director (Miller) to provide them with information about the company’s financial state. Issue Had the directors breached s 588G, by subcontracting part of the work to Metropolitan (and thereby incurring a liability to pay Metropolitan for the work done)? If so, did the directors have any defence(s) under s 588H? Decision The Federal Court held: (1) that Raydar was insolvent at the time the debt to Metropolitan was incurred; and (2) there were reasonable grounds to suspect such insolvency. The reasonable grounds to suspect insolvency were: the demands for payment by the other creditors; the fact that all Raydar’s major assets were locked in as security for two major debts; the fact that Raydar had been unable to collect moneys that were owing to it; and the likelihood that Raydar would not succeed in collecting those moneys in time to help the company’s financial problems. This meant s 588G had been breached. Any belief that directors may have held about Raydar’s current and future solvency were not founded on any reasonable grounds, so the s 588H(2) defence failed. The two directors arguing a defence under s 588H(3) were Miller’s wife (a fulltime casual clerk for Raydar) and Ewins, an electrician. The court found Mrs Miller may have lacked detailed knowledge of Raydar’s financial situation, but held that she had no reasonable grounds to believe her husband was fulfilling the responsibility of providing adequate information to codirectors. The court also found that Ewins must have known of the dissatisfaction of Raydar’s creditors, and that he had not fulfilled his obligation to make inquiries about the company’s financial status after his suspicions should have been raised. All directors had breached s 588G and were therefore liable to Metropolitan under s 588M.

ASIC v Plymin, Elliott & Harrison (No 1) [2003] VSC 123 (Supreme Court of Victoria) Facts Plymin, Elliott and Harrison were directors of two companies, Water Wheel Mills Pty Ltd and Water Wheel Holdings Ltd. Water Wheel Mills Pty Ltd

operated a flour- and rice-milling business and was the only active subsidiary of Water Wheel Holdings Ltd. [page 504] The solvency of the holding company depended entirely upon the solvency and profits of this subsidiary. For both companies, Plymin was the managing director, Harrison was the chairman of the board and Elliott was a nonexecutive director. In February 2000, the Water Wheel companies were placed into voluntary administration by the board. However, ASIC took action for insolvent trading prior to that date. Since late 1998, Water Wheel Mills had accumulated significant outstanding debts. Despite initial predictions of a sizeable profit in 1998, subsequent accounts revealed the company had, in fact, made a significant loss. This was disclosed at a board meeting in February 1999, although there was some dispute about the accuracy of the figures used. The directors believed that sales were missing from the reports used, meaning the company had been more profitable than indicated. Accountants appointed to investigate this discrepancy were unable to locate the supposed missing sales by April, although investigations continued. In April 1999, questions were raised about the lack of available financial results and information for the companies, plus the difficulties being faced in obtaining necessary finance. Two other directors resigned suddenly without explanation. Water Wheel Mills experienced further financial difficulties, with a loss of over $2 million in the half year to June 1999. By August 1999, the company’s bank announced the company’s credit facility was in default, and its investigations revealed that the company’s considerable outstanding debts exceeded its current assets. Yet the directors allowed Water Wheel Mills to continue to trade and allowed both companies to incur further debts until February 2000, when an administrator was appointed. ASIC argued that the directors had breached s 588G by allowing both companies to trade while insolvent and sought orders to that effect, plus remedies including compensation orders, pecuniary penalties and orders prohibiting the directors from managing any company for a period of time. Plymin and Elliott argued that they had not breached s 588G. Elliott also claimed that he was unaware of the company’s insolvency as he was a nonexecutive director and had not realised the extent of the company’s financial difficulties until February 2000. Issue Had the directors breached s 588G? If so, did the directors have any defence(s) under s 588H? Decision Plymin, Elliott and Harrison had breached s 588G by failing to stop the companies incurring debts while insolvent. Insolvent trading had occurred since September 1999 when it was apparent that the companies were

insolvent. To avoid liability using s 588H(2) or (3), directors of a company in financial difficulty must show they had made sufficient inquiries and sought sufficient external advice to allow them to reasonably conclude that the company is not insolvent and is not likely to become insolvent. Nonexecutive directors cannot escape liability for breach of s 588G by turning a blind eye to the company’s financial problems. [page 505] Harrison had admitted a breach of s 588G during the hearing. The court held that neither Plymin nor Elliott had proven any of the defences in s 588H. The court found Elliott did not have reasonable grounds to believe that others were fulfilling the responsibility of providing adequate information to him about the companies’ financial position, and that the information he had received did not give him reasonable grounds to believe the companies were solvent and would remain so. In a subsequent hearing on penalties and sanctions (ASIC v Plymin, Elliott & Harrison (No 2) [2003] VSC 230), the directors were ordered to pay compensation to the companies under s 588J(1) (Plymin: $1.43 million, Elliott: $1.43 million and Harrison: $300,000). Disqualification orders and pecuniary penalties were also applied. Plymin, Elliott and Harrison were disqualified from managing any company for 10 years (reduced to seven years on appeal),13 four years and seven years respectively. Plymin and Elliott also received pecuniary penalty orders of $25,000 and $15,000 respectively.

Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 (Supreme Court of New South Wales) Facts Bott was appointed as a director of Tourprint in September 1992. Between July and early December, the company incurred debts exceeding $500,000. A liquidator was appointed in early 1994. The liquidator claimed Bott had breached s 588G and sued Bott for these debts under s 588M. Bott’s experience was largely in marketing and sales. Before joining the company as director, Bott made no inquiries as to its financial wellbeing. Had he done so, he would have discovered that the company was probably insolvent. Having become a director, Bott then made little or no attempt to inform himself of the company’s financial state during the first half of 1993. He claimed that he was told by the other director that the financial records were unavailable and that the computer had broken.

The court accepted that the other director had probably misled Bott about the company’s financial state. By mid-1993, however, Bott had become aware of the company’s management and cash flow problems. The co-director told Bott that the company’s cash flow problems could be solved by a new investor, but Bott did not investigate this further. Bott admitted that by September or October of that year, he had realised that no investors were going to materialise and the company’s problems were more serious than temporary cash flow, yet he decided not to resign as director. Bott argued that he expected, on reasonable grounds, that the company was solvent and would remain so: s 588H(2). He also argued that he had a valid defence under s 588H(4) because he had not taken part in the company’s management for ‘some other [page 506] good reason’: see s 588H(4). He based this on the fact that he been misled by his co-director and excluded from management of the company by that director. Issue Was Bott liable for breach of s 588G, or did he have a valid defence under s 588H(2) and/or s 588H(4)? Decision The Supreme Court of New South Wales held that the elements of s 588G had been satisfied. Tourprint was insolvent during the relevant period. A reasonable person would have been aware that the company was insolvent. Austin J commented (at 215): A reasonable person would have pressed forcefully for financial information about the company before taking up an appointment to the board, and then for regularly updated financial information so that a proper assessment of the company’s financial position could regularly be made. A reasonable person in the position of director of Tourprint International would not have suspended his demands for financial information because of any alleged inadequacies of the company’s computer, and would have explored and insisted upon resolving any such problems. It is not easy to envisage circumstances in which a reasonable company director could tolerate a situation in which the company could not produce basic financial information, such as debtor and creditor ledgers, for any significant period of time. In the circumstances of the present case, either a reasonable person in Mr Bott’s shoes would have obtained financial information by mid-1993 which would have provided ample grounds to believe that the company was insolvent or, if such information was sought and not obtained, the absence of the information would itself contribute, together with other

circumstances, to the existence of reasonable grounds for strong suspicion of insolvency. Section 588H(2) requires an actual ‘expectation’ of solvency. This requirement is significantly higher than a ‘mere hope or possibility’ that the company was and would remain solvent. Further, the actual expectation must be based on reasonable grounds, not on neglect or ignorance of duty, or on ignorance of the company’s affairs that was of the director’s own making, or at least contributed to by his own failure to make inquiries. By mid-1993, any expectation that Bott may have held regarding the company’s solvency lacked any reasonable foundation. Bott’s argument for a defence under s 588H(2) failed. On the facts, Bott played an important role in sales and debt recovery from customers, even if he was not active in the financial management of the company. In these circumstances, it was not correct to say that he took no part in the management of the company. However, even if it could be said that he took no part in the management of the company, it could not be said that his failure to do so was caused by a ‘good reason’. Bott argued that he was kept in ignorance by his co-director. However, a director who has not shown the necessary commitment to, or involvement in, the management of a company that is in financial difficulty cannot escape liability under the defence provided by s 588H(4). According to Austin J (at 217): … [he] ought … to have confronted [his co-director] and insisted upon proper involvement in the company’s affairs. Thus, Bott’s argument for a defence under s 588H(4) also failed. The court held Bott was liable for $519,320 under s 588M.

[page 507]

COMPLYING WITH THE RULES OF THE COMPANY 13.34 The company’s constitution and/or replaceable rules form binding contracts between the company and every member, the company and each director, and also between individual members. Directors and company secretaries have a contractual duty to comply with the rules that govern the running of the company: Corporations Act s 140.

FURTHER STATUTORY OBLIGATIONS 13.35 Directors owe further statutory obligations which are beyond the scope of this book. These obligations arise under the Corporations Act (reporting obligations) and under other legislative provisions (eg, the laws designed to protect the environment).

WHO WILL SUE THE DIRECTORS FOR A BREACH OF DUTY? Often, the breach of duty is only discovered when new management is appointed to the company. Directors who have breached their duties can expect to face legal action by the company and/or by ASIC.

13.36 The fact that the directors have breached their duty does not mean they are certain to be sued for damages. For breaches of the Corporations Act, including ss 180–184 and s 588G, ASIC generally decides whether or not to take legal action. Company officers, including liquidators and receivers, are obliged to report breaches of the Corporations Act to ASIC. For breaches of common law duties, the company may seek redress in its own right. The duties are owed to the company and not to the shareholders. Therefore, the proper plaintiff is the company. The company, as opposed to individual shareholders, must sue. Yet the directors control the company and are not likely to decide to bring an action in the company’s name against themselves. If, however, the control of the company passes to new directors or to a liquidator, the old directors may very well find themselves in court. This rule — that the proper plaintiff is the company itself — is called the rule in Foss v Harbottle (1843) 2 Hare 461. The rule makes sense in that it prevents shareholders from interfering in the management of the company every time they disagree with a decision of the board. If a shareholder (who may have only a few shares) had the right to bring an action every

time the shareholder claimed the directors had acted negligently, the business of managing the company would become intolerable.

Exceptions to the rule in Foss v Harbottle 13.37 The Corporations Act provides that members, directors and officers (including former members, directors and officers) may apply to the court for permission to sue on behalf of the company: ss 236 and 237. The court will grant permission only if: the company is unlikely to act; the member, director or officer bringing the proceedings does so in good faith; there is a serious question to be tried; and it is in the best interests of the company: s 237. Possible legal action against a third party is presumed not to be in the best interests of the company if the directors who decided the company should not proceed: acted in good faith for a proper purpose; had no material interest in the decision; were reasonably informed about the matter; and rationally believed the decision was in the best interests of the company. As discussed in [13.36], the Corporations Act also provides that an action for breach of statutory duty may be brought by ASIC. [page 508]

A shareholder’s right to take personal action 13.38 For the purposes of this chapter, it is sufficient to say that a shareholder may have the right to bring an action where the directors’ conduct has interfered with the shareholder’s private rights. For example, members denied the chance to exercise their

voting rights at general meetings would have a right to take action for the breach of their contractual rights under the company rules. The courts also have power under the Corporations Act to make a wide variety of orders, including an order for the winding up of a company (s 233(1)(a)), where the affairs of the company are being conducted in a way that is oppressive to, or unfairly prejudicial or discriminatory against, the company itself or some of the company’s shareholders: s 232.

ADVICE — LAW IN PRACTICE As a director or officer in a company, you have certain legal duties. These responsibilities include duties: –

to take an active interest in the company’s affairs;

–

to exercise care and skill;

–

to act in the company’s best interest; and

–

to avoid actual or potential conflicts of interest.

As a company director, you should not allow the company to continue trading while insolvent. If you do, you may become personally liable for company debts. To reduce the personal risks involved in being a director or officer in a company, you should consider: –

using a qualified financial expert to advise on your company’s solvency; and

–

obtaining adequate insurance coverage for the company’s office-bearers, to include indemnity for insolvent trading if possible.

The possible consequences for breach of officers’ duties include:

–

an order to pay damages and/or financial penalties (the civil consequences); and

–

fines and imprisonment (the criminal penalties).

[page 509]

QUESTIONS Question 1 (a) List the duties owed by directors, including both common law and statutory duties. (b) To whom does a director owe these duties? (c) Why is a director regarded as a fiduciary? What does being a fiduciary mean? (d) What is the purpose of s 588G of the Corporations Act 2001 (Cth)? If s 588G is breached, what defences may be available to the directors?

Question 2 Are the following statements true or false? (a) The board of directors’ role is to manage the day-today operations of the company. (b) It is the role of the board of directors to set the goals of the company and to monitor progress in achieving those goals. (c) A non-executive director has authority to direct the operations of any of the company’s departments (eg, finance, marketing, production, human resources). (d) A non-executive director generally has the power to

fire employees.

Question 3 Sam was the managing director of a public company, and her salary incentive scheme included a sizeable bonus that she would receive if the company’s share price exceeded a particular target by the end of the year. By late December, the relevant share price was almost at the target, but not quite. Sam engaged a stock broker to buy some shares for her in the company, but to list her brother as the purchaser as the company had rules prohibiting directors from buying shares at that time. Although the share transaction was relatively small, it was enough to push up the company’s share price above the target level, which ultimately meant Sam would received the sizeable bonus. Which of the following is correct? Please explain your answer. (a) Sam has only breached her duty under s 181. (b) Sam has only breached her duty under s 182. (c) Sam has breached her duties under both ss 181 and 182. (d) Sam has not breached her duties under either s 181 or s 182. (Hint: See Australian Securities and Investments Commission v Soust [2010] FCA 68.)

Question 4 Dave is a director of OneBell Pty Ltd. He is also a partner in Aywun Advertising Agency. Dave was one of the directors of OneBell Pty Ltd who voted in favour of

giving OneBell Pty Ltd’s promotional and advertising work to Aywun Advertising Agency. Dave did not disclose his interest in Aywun to the other directors of OneBell. [page 510] Deidre is another director of OneBell Pty Ltd, with a background in telecommunications software. Deidre invented a new wireless telephone while working at the company. She then set up her own separate company to manufacture and sell her new invention, without informing OneBell Pty Ltd. Advise Dave and Deidre what they have each done wrong (if anything) and the possible consequences they may face at common law and under the Corporations Act 2001 (Cth).

Question 5 As the managing director of Elec Engineers Pty Ltd, Alan accepted a large order for electrical fittings from Shifty Sellers Pty Ltd. The order was delivered to Shifty Sellers, which failed to pay for the fittings. It appears that Shifty Sellers was well known as a bad credit risk within the industry, including by Alan. Shifty Sellers went into liquidation without ever paying the company for the electrical fittings. Alan also recently borrowed a further $50,000 on behalf of the company, for expansion interstate and overseas. This expansion plan had not been revealed to shareholders. The company had very low cash reserves at the time of obtaining the loan, and had made a loss for

the two most recent quarters. Although Bea is the other director of Elec Engineers Pty Ltd, she is a non-executive director and leaves all company matters for her husband, Alan, to attend to. Bea was aware of Alan’s expansion plans for the company, including the new loan, but as she hadn’t read the latest company accounts, she was unaware of the company’s financial difficulties. In fact, the company has insufficient funds to make even the first payment on the new loan, although if the expansion is successful, the company will make enormous profits. (a) Could Alan be held personally liable for Shifty Sellers’ unpaid debt? (b) Could Alan and/or Bea be held personally liable for repayment of the $50,000 loan?

Question 6 Candice works as a company secretary in Doggy Dudds Pty Ltd, which manufactures dog clothes. The board consists of Rhonda as the managing director, Fred as an executive director and Daniella as the chief financial officer. Sadly, Jock, a Doggy Dudds’ customer’s dog, has developed a severe rash that the veterinarian believes is caused by a dog jumper made by Doggy Dudds. The owner of the affected dog is furious and posts a video on YouTube showing the dog’s rash. The video elicits many angry comments, causing bad publicity for Doggy Dudds. An urgent board meeting is held to discuss the situation. Unfortunately, Rhonda can’t attend the meeting as she refuses to postpone a cruise through the Whitsunday Islands that she booked a month ago. At the meeting, Candice argues that they should recall all

products until they can determine they are safe. Daniella disagrees, arguing: ‘They’re only dogs! Besides, we have a huge contract to supply 2000 jumpers at the annual dog show held at Caulfield race course next week. If we admit there’s a problem then we could lose that contract! If we lose that contract then we could ruin the business completely. We have no choice — we must tell everyone that there is nothing to worry about.’ Candice votes against making any media announcement that there is no problem, as that would be a lie, but Fred votes with Daniella in favour of the announcement. The day after the board meeting, Daniella releases a statement reassuring the public via the press and social media that there was no problem with Doggy Dudds’ clothes. At the same time, Daniella authorises Doggy Dudds to pay for Fred’s whole family to holiday in France. [page 511] Sadly, many dogs at the dog show develop a similar rash to Jock’s, so all 2000 dog jumpers sold at the show are being returned for a full refund. In addition, some dog owners are also seeking compensation for veterinary costs in treating their affected dogs. Rhonda returns from her holiday to discover her company facing severe financial pressure and unable to repay a loan to ABC bank. The bank initiates court proceedings to place Doggy Dudds into liquidation. Advise whether Candice and any of the Doggy Dudds’ officers have breached their statutory duties. In your advice, consider any relevant defences.

_________ 1

2 3 4 5 6 7 8 9 10 11 12

13

The role, if any, that government or the legal system should play in regulation of companies’ social responsibilities is a current topic of debate. See, for example, A Lumsden and S Fridman, ‘Corporate Social Responsibility: The Case for a Self-regulatory Model’ (2007) 25(3) Company and Securities Law Journal 147; D Kinley, J Nolan and N Zerial, ‘The Politics of Corporate Social Responsibility: Reflections on the United Nations Human Rights Norms for Corporations’ (2007) 25(1) Company and Securities Law Journal 30. See . ASX Listing Rule 4.10.3. External persons providing advice to the company as professionals are not caught by the definition in s 9. See Mistmorn Pty Ltd (in liq) v Yasseen (1996) 14 ACLC 1387. See Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, discussed in [13.31]. Re Cardiff Savings Bank [1892] 2 Ch 100 at 109 per Stirling J. See ASIC v Plymin, Elliot & Harrison (No 1), in [13.33]. See Re Smith & Fawcett Ltd [1942] Ch 304. See Whitehouse v Carlton Hotel Pty Ltd (1987) 5 ACLC 421. The statutory duty to avoid insolvent trading is discussed in [13.25]–[13.33]. Secured creditors, such those having a mortgage, should register their security interest under the Personal Property Securities Act 2009 (Cth) to give them stronger rights against the debtor’s assets. Elliot v Australian Securities and Investments Commission (2004) 48 ACSR 621 (Victorian Court of Appeal).

[page 513]

CHAPTER 14

INTRODUCTION TO TRUSTS

CONTENTS Objectives of this chapter Setting the scene: Conducting business through a trading trust Introduction and outline of chapter What is a trust? Definition The essential elements of a trust Parties to the creation of an express trust Duration of a trust

Trusts compared with other entities Types of trusts Discretionary trusts Fixed trusts Operation of a trading trust Trustees’ powers Express powers Implied powers Statutory powers [page 514]

Trustees’ duties, rights and liabilities Duty of prudence, diligence and honesty Personal liability for debts The right of indemnity Insolvent trading by corporate trustee: directors’ liability Beneficiaries’ rights and liabilities Personal right of action against the trustee (‘right in personam’) Proprietary right of action in respect of the trust property (‘right in rem’) Beneficiaries’ liability to creditors The position of creditors in regard to a trading trust Termination of a trust Advice — Law in practice Questions

OBJECTIVES OF THIS CHAPTER

After studying this chapter you should be able to: describe the nature of a trust; distinguish between the different types of trusts; describe the powers, rights and duties of trustees, and the potential liability trustees may face for breach of those duties; explain the effect of trustees’ right to indemnity and describe the circumstances in which that right might be lost; describe beneficiaries’ rights and their potential liability in trusts of different types; and list the parties from whom trust creditors can seek payment of trust debts.

[page 515]

SETTING THE SCENE: CONDUCTING BUSINESS THROUGH A TRADING TRUST Following advice from her accountant, Hua used a trust structure for her property development business. The trust is a fixed trust, with Hua and her adult family members being the unit holders. Following a recent financial crisis and property slump, Hua finds herself in a financial mess. She had intended for the trust structure to protect herself and her family members from liability for any business losses, but with creditors now hungry for repayment of debts incurred by the business, she’s uncertain of her personal liability.

INTRODUCTION AND OUTLINE OF CHAPTER Trusts are used in a variety of business contexts, including commonly as a vehicle for operating: a family business; a superannuation fund; or a commercial property investment.

14.1

An alternative to operating a business as a sole trader, a partnership or a company is to operate it as a trust. One way of understanding the distinction between trusts and other commercial structures is to compare the owner or holder of each type of business and the person in whose interest the business is operated. This is summarised in Figure 14.1. Figure 14.1 Comparison of business ownership versus its primary interest-holder Business Owner or holder of the Person in whose interest structure business the business is operated Sole Sole trader Sole trader tradership Partnership The partners The partners Company The company The company Trust The trustee The beneficiaries of the trust The trustee does not have to be a beneficiary. Thus, a trust is the only structure to recognise a difference between the person who owns or holds the business and the persons in whose interest the business must be operated. Although the shareholders in a company ultimately derive benefits from the company, they have no legal or other right to, or over, the assets (including any business) of the company.

As far as the world is concerned, the trustee is the person carrying on the business. For example, it is to the trustee that the taxation authorities turn for payment of tax. Only in limited circumstances will the beneficiaries be responsible for the activities of the trust. It is also to the trustee that creditors must look for the payment of their debts. Because of this, there are advantages in having a corporate trustee. A corporate trustee can attract limited liability. Consequently, it is common for business trusts (particularly trading trusts) to have a limited company acting as the trustee, carrying on the trust business for the beneficiaries. There are various types of trusts. This chapter examines the nature and characteristics of trusts, including the trustees’ duties and the beneficiaries’ rights. [page 516]

WHAT IS A TRUST? Definition 14.2

A trust is essentially a relationship pursuant to which a person is obliged by the rules of equity to deal with certain property of other persons or for a particular purpose. The courts of equity have, for many decades, recognised a strong fiduciary relationship between the person in control of the trust property (the trustee) and the persons (or the purpose) for whose benefit the trust property is to be administered (the beneficiary). For example, a person (the settlor) may pay another person (the trustee) a sum of money on trust on the proviso that the money is to be invested in shares and the income is to be paid to the settlor’s children for life. Trusts are formed for many reasons other than making financial provision for families. Other common reasons for the formation of trusts have been the avoidance, or minimisation, of income taxes

and, in the past, death duties. Today, fixed trusts are a common structure for managed investment schemes. Superannuation funds are another popular reason to create a trust. Trusts are also a common way in which bequests are made for charitable purposes.

The essential elements of a trust 14.3

There are three essential elements of a trust: 1. the trustee; 2. the trust property; and 3. the beneficiary (or beneficiaries).1 Each of these elements is discussed below.

Parties to the creation of an express trust 14.4

There are three essential parties to the creation of an express trust: 1. the settlor — the person who creates the trust: 2. the trustee(s) — appointed to carry out the settlor’s instructions and hold the trust property for the benefit of the beneficiary; and 3. the beneficiary (or beneficiaries) — the person (or persons) for whose benefit the trust was created. A trust may also be created for a charitable purpose.

Trustee 14.5 All trusts must have a trustee, and many trusts have two or more joint trustees. A trustee may be a natural person or a body corporate. The law recognises the trustee as the legal owner of the trust property. Equity imposes duties on the trustee in relation to his or her dealings with the trust property (see [14.20]). A trust will not fail due to lack of a trustee. If the trustee becomes incapable or unwilling to carry through the trust, the trust will not fail, but a new trustee will be appointed under the terms of the trust or under relevant trustee legislation.2 The trustee can also be the settlor and/or one of the beneficiaries, but the trustee cannot be the sole beneficiary. There

are tax disadvantages for a trust where the settlor is a trustee or beneficiary and it is therefore rare for a settlor to have any rights under the trust. [page 517] Trust property 14.6 The trust property may be real property (land), personal property (eg, money, chattels or accounts receivable) or intellectual property. While trust property traditionally involved land, today trust property might also include business stock and goodwill, leasehold interests, shares or patents. The trust property vests in the trustee, making the trustee the legal owner of the trust property. The trust property is to be used or applied in accordance with the terms of the trust for the benefit of the beneficiaries. This is an equitable obligation which is attached to the trust property and binds the trustee. The beneficiaries have a right to bring an action to force the trustee to administer the trust properly. Beneficiary 14.7 The beneficiary is the person (or persons) for whose benefit the trust was created. If the trust property is the ‘subject’ of the trust, then the beneficiaries may be seen as the ‘object’ of the trust. The old Latin term for a beneficiary is cestui que trust. The beneficiaries may be specific (named) people, a defined group of people (eg, ‘all children and grandchildren of Jane Doe’) or a charitable purpose (eg, ‘cancer research’). Companies can be beneficiaries as they are considered legal ‘persons’. The beneficiaries do not all need to exist at the time the trust is created.3 The trustee may be one of the beneficiaries but not the sole beneficiary, as this would involve a merger of the legal interest (of the trustee) and the equitable interest (of the beneficiary) and the trust would disappear. The beneficiaries must be identified with sufficient certainty.

This means that it must be possible to identify the criteria for determining who is a beneficiary. A trust would be unworkable if the trustee were unable to determine whether any particular person was a beneficiary. For example, a trust for ‘former students of Monash University’ would be acceptable. However, a trust for ‘the friends of Jane Doe’ would not be certain and therefore would be void. Beneficiaries can take action against the trustee to enforce the equitable obligation to properly administer the trust and to properly use or apply the trust property. A beneficiary’s interest under the trust may be either a fixed entitlement or an expectancy, depending on whether it is a fixed trust (see [14.13]), or a discretionary trust (see [14.12]). Where a trustee has breached his or her duties in relation to the trust property, beneficiaries have both a right in personam (a personal right, allowing the beneficiary to sue the trustee personally for his or her loss; see [14.25]) and a right in rem (a right ‘in thing’, allowing the beneficiary to recover or trace the trust property; see [14.26]). On rare occasions, the beneficiary of a trust will be a charitable purpose. An example would be a trust ‘to conduct research into cures for cancer’. The law recognises such a purpose as a valid object of a trust. A charitable trust is enforceable by the state Attorney-General.

Duration of a trust 14.8

The duration of the trust may be stated in the terms of the trust itself or may be necessarily implied from those terms. Trusts cannot last indefinitely: a person is not allowed to put property in trust forever. The trust property must vest in a particular person or persons within the period allowed by the law. This is called the rule against perpetuities. At common law, the rule was that a trust must vest within a life in being plus 21 years: Cadell v Palmer (1833) 6 ER 956. It was common to take as the life in being a member of the royal family living at the time the trust was created. Today, the perpetuity period cannot exceed 80 years

[page 518] in most states and territories of Australia: for example, Perpetuities and Accumulations Act 1968 (Vic) s 12. Most discretionary trusts expressly provide that the date for vesting the trust is 80 years from its creation.

Trusts compared with other entities 14.9

Two important characteristics of a trust differentiate it from a company and a partnership: 1. Whereas a company has a separate legal identity from its members, a trust does not. A trust is merely a relationship. In a company, shareholders have contractual rights against the company conferred on them by the company’s constitution. In a trust, the rights of the beneficiaries arise from the rules of equity and the terms of the trust, not from any contract between the trustee and the beneficiaries. 2. Unlike a partnership, a trust does not involve a contractual relationship between all the parties.

TYPES OF TRUSTS 14.10 Trusts can be classified in three ways. They can be classified according to: 1. how they were created: trusts are either created by the act of the settlor (eg, express trusts and implied trusts) or by law (constructive trusts); 2. the nature of the beneficiaries’ interest: the nature of the beneficiaries’ interest will vary depending on whether the trust is a fixed trust or a discretionary trust; or 3. when the trust will begin to operate: a trust may operate during the life of the settlor or only post mortem. The latter are also known as testamentary trusts (taking effect over part or all of the settlor’s deceased estate) and are usually contained in the

settlor’s last will and testament. This chapter focuses on express trusts, as these are the most common in commerce. 14.11 Express trusts are created by the settlor intentionally creating a trust. There must be clear language or conduct showing an intention to create a trust over particular property for a particular purpose and for defined beneficiaries. In practice, trading trusts are created by the settlor signing a deed of settlement. An express trust may be either: a Discretionary trusts or a fixed trust.

Discretionary trusts A discretion trust is a trust where the trustee has a discretion to whom the income and/or capital of the trust may be paid.

14.12 In a discretionary trust, a range of beneficiaries or ‘objects’ is named and the trustee is given the discretion of determining which one(s) should receive a particular benefit (such as income from trust property) at any particular moment of time, and in what proportions. Historically, due to their flexibility and simplicity, discretionary trusts were popular as a means of: income splitting (reducing income tax payable); reducing a person’s assets (to satisfy asset means tests or to avoid property claims following divorce); and avoiding liability for death duties: see Gartside v Inland Revenue Commissioners [1968] AC 553. [page 519] However, the relevant income tax legislation has been altered to

catch such income-splitting schemes, and more recent Family Court decisions have reduced the effectiveness of using a discretionary trust to hold property.4 Death duties are no longer levied in Australia. In a discretionary trust, the trustee has the power to choose which of the beneficiaries will benefit. Hence, particular individual beneficiaries cannot compel the trustee to exercise the power in their favour. Under a typical discretionary trust, the beneficiaries have a ‘mere expectancy’ — all they can do is hope that the trustee will give them something. In the trust deed (also called the ‘deed of settlement’) creating the discretionary trust, there is usually a reference to someone (a person or company) who will take the property in default of the trustee giving the income or capital to any of the other beneficiaries. Therefore, at the very worst, this taker on default will finish up with the property. The discretionary trust is a reasonably popular device for operating a small trading business, enabling the business income to be divided between a number of persons (the beneficiaries) so as to lessen the total amount of income tax payable. In particular, it is often an effective structure for a family business. However, income tax rules imposing penalty income tax rates on distributions to children over a certain amount ($416 in the 2015–16 financial year)5 and special anti-avoidance rules (particularly in relation to personal exertion income) have somewhat lessened the tax effectiveness of discretionary trusts.

Fixed trusts In a fixed trust (eg, a unit trust), the trustee has no such discretion. Where the trust property includes an operating business, the trust is known a a trading trust. Trading trusts can involve discretionary trusts or fixed trusts.

14.13 In a fixed trust, the proportion of the trust property which vests in particular beneficiaries is fixed, not discretionary. One type of

fixed trust is the unit trust. The unit trust has proved to be an extremely important commercial structure. Unit trusts 14.14 In a unit trust, the trust fund is divided up into a number of equal units. The trustee holds the trust property and manages it for the benefit of the unit holders (beneficiaries), each of whom is entitled to the capital and income according to the number of units they hold. Unit trusts have become a popular structure for investment schemes for three main reasons: negotiability of the units; fixed annual entitlements to income; and fixed entitlements to ‘capital’ (the value of the units). Unit trusts are also a popular method of structuring a business. A single family running a small business may see a discretionary trading trust as an alternative structure to a private company. However, a business involving several families cannot be so easily accommodated under a discretionary trust. In this case, a unit trust may be more advantageous as the distribution of income and capital is not left to the discretion of a trustee but is based on the number of units held by each unit holder (beneficiary). Figure 14.2 compares a discretionary trust and a simple unit trust. [page 520]

Figure 14.2 Comparison of a discretionary trust and a simple unit trust

The units in a unit trust may be held by another trust. For example, the X family’s unit in the unit trust may be held by the X family discretionary trust. The full structure may look as presented in Figure 14.3.

Figure 14.3 Example of more complex structure combining trusts of different types

Additionally, the negotiability aspect of the units in a unit trust offers greater flexibility over the structure of a private company. In a unit trust, operating as a trading trust, the units are transferable. This can be contrasted to the nature of shares in many proprietary companies, as the Corporations Act 2001 (Cth) (Corporations Act) allows a proprietary company to restrict the right to transfer shares. [page 521]

Operation of a trading trust 14.15 The trust property of a trading trust includes an operating business that is carried on by the trustee on behalf of the beneficiaries. The trustee is usually a proprietary limited company with perhaps $2 of share capital ($2 company). Being a corporation, the corporate trustee is a legal entity. Shareholders of a limited

liability corporate trustee have limited liability — limited to the amount (if any) still unpaid on their shares (see [12.10]). Although the trustee’s liability as a company is unlimited, the problem for trust creditors is that the corporate trustee does not usually have any assets in its own right. The only asset that it usually has is the $2 share capital, as the business and the business’s assets are trust assets (the trust property).

TRUSTEES’ POWERS 14.16 The powers of a trustee may be divided into three categories, according to the source of those powers: 1. express powers; 2. implied powers; and 3. statutory powers. All of the trustee’s powers must be exercised in accordance with the trustee’s duties.

Express powers 14.17 For an express trust, the trust deed will usually list the powers of the trustee. These express powers may be very broad or very narrow, depending on the wording of the deed. For a trading trust, the trustee would normally be given the express power to carry on the trust business.

Implied powers 14.18 While the trust deed may not specifically state this, a trustee will generally be given the (implied) power to do anything and everything that is required to realise, protect or administer the trust property. Naturally, these implied powers cannot contradict any express powers, so any limitation specifically imposed upon the trustee’s powers in the trust deed will be binding and the trustee’s implied powers will be restricted accordingly. Perhaps because of the risks inherent in carrying on a business,

the law does not imply a power to carry on business. Hence, trading trusts will contain an express power to carry on the trust’s business.

Statutory powers 14.19 The trustee also has various powers conferred by the Trustee Act 1958 (Vic). Among those statutory powers are the following: power to invest trust funds, unless the trust deed stipulates otherwise: s 5; power to mortgage trust property, where the trust deed expressly empowers the trustee to use trust capital for any purpose or in any way. This entitles the trustee to, inter alia, mortgage any part of the trust property: s 20; power to insure any insurable trust property: s 23; [page 522] power to employ agents: s 28; and power to give receipts for money or securities received in relation to the trust: s 18. Such receipts are binding on the trust in relation to the third party.

TRUSTEES’ DUTIES, RIGHTS AND LIABILITIES Duty of prudence, diligence and honesty ‘Bona fide’ means ‘in good faith’. A fiduciary relationship exists where ‘the actual circumstances of the relationship are such that one party is entitled to expect that the other will act in [the first party’s] interests in and for the purposes of the relationship’ (see [10.44]). In a trust relationship, the beneficiaries are entitled to

expect the trustee to act in their collective interests.

14.20 Trustees are in a fiduciary relationship with the beneficiaries with respect to the trust property. Accordingly, trustees owe duties under equity and common law: to act bona fide in beneficiaries’ interests; to exercise their powers for proper purposes; and to avoid any actual (or potential) conflict of interest. Fiduciary duties are discussed in Chapter 13 in relation to company directors and officers. Trustees are the most trusted of fiduciaries, as they legally own the trust property, yet hold it for the benefit of the beneficiaries. The duties of the trustee are often set out explicitly in the trust deed. Where the trustee is to carry on a business, these duties are normally quite extensive. In addition, the Trustee Act 1958 (Vic) imposes duties. The statutory duties of a trustee may collectively be summarised as a duty to act diligently, prudently, honestly and in accordance with the terms of the trust in relation to the trust property. The statute expressly retains duties of a trustee as developed under common law and equity, unless they are inconsistent with the statute: s 7 Trustee Act 1958 (Vic). Specific duties imposed on a trustee include: to be familiar with and observe the terms of the trust;6 to preserve the trust property and to properly distribute trust income and corpus (capital);7 to distribute trust property only to those entitled under the trust deed;8 to make only authorised investments;9 to act impartially as between beneficiaries;10 to keep proper accounts and provide full information when required;11 to act personally;12 to not take profit;13 and

to exercise care and skill.14 [page 523] In relation to the duty to exercise care and skill, the general standard of care expected is the degree of care that would be exercised by an ordinary prudent person managing their private business affairs.15 However, higher standards of care are expected in certain circumstances, particularly where a trustee has special skills or has held itself out as having special skills. This is illustrated in the following case.

Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] 1 All ER 139 (Chancery Division) Facts Barclays Bank Trust was a professional trustee company specialising in trust management. It held a controlling interest in a property company, as trust property. This property company formed a wholly owned subsidiary, which engaged in a highly speculative purchase of land. The purchase turned out to be disastrous and the value of the trust property (ie, the shareholding in the property company) plunged. The trustee had not ensured it received an appropriate flow of information from the property company to take an active role in the investment decisions of the company or of its subsidiary. The beneficiaries sued the trustee for compensation, claiming the trustee had breached its duty of skill and care. Issue Whether the trustees had exercised sufficient care and skill in managing the trust’s assets. Decision The trustee company had breached its duty of care and skill. The trustee had inadequately and imprudently supervised the property company. This was caused by the trustee’s failure to ensure it received appropriate information, relying instead merely on annual financial statements and reports, and attendance at the property company’s annual general meeting (and the lunches that followed).

The court also stated that, where a trustee company held itself out as having the skill and expertise to carry on the specialised business of property management, a higher standard of skill and care was required than that of an ordinary prudent person without such knowledge and expertise. On the facts, this higher standard of care had clearly been breached.

For professional trustees, the statutory duty of care and skill is similar to the duty of care owed to avoid negligence: trustees whose profession, business or employment includes acting as a trustee (or investing money for others) must exercise at least as much care, skill and diligence that a prudent person in that profession, business or employment would exercise in managing another person’s affairs.16 [page 524]

Personal liability for debts 14.21 A trust is not a separate legal entity. This means that a trustee enters into contracts with third parties in the trustee’s own name, rather than as an agent contracting on behalf of a principal. The trustee of a (trading) trust is personally liable for the business debts incurred in carrying on the trust business (Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319) unless agreed otherwise between the trustee and the creditor.17 The trustee, however, usually has a right of indemnity against the trust (see [14.22]). Since the trustee personally incurs the business debts of a trading trust, a trust creditor has the same rights as a personal creditor of a person or company, in that he or she can bring proceedings to have the trustee declared bankrupt, or, in the case of a corporate trustee, wound up.

The right of indemnity An indemnity entitles the holder to be protected against, or compensated for, the liabilities in question.

14.22 Even though the trustee is personally liable for the debts of a (trading) trust, it does have a right of indemnity for these debts out of the trust property where the transactions that gave rise to the liabilities were authorised by the trust deed. Further, where the trustee is indemnified against his or her liability, he or she does not have to pay the debts out of his or her own pocket and then turn to the trust property for recoupment but, rather, can pay those liabilities straight from the trust property. Therefore, in the case of a trading trust with a corporate trustee, the trustee has the right to indemnity from the trust assets for business debts properly incurred in running the trust business, and can pay these liabilities straight from the trust property. Of course, if the trust assets are insufficient to meet these liabilities, the trustee remains liable for any shortfall. This is the reason that trustees of trading trusts are usually limited liability companies and generally have no significant assets of their own. For debts unauthorised by the terms of the trust, the trustee has no right of indemnification from trust assets. This is illustrated in the following case.

Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 (Federal Court, Full Court) Facts Unique Goal was the trustee of a unit trust established to purchase, lease out and then resell a commercial building. Fitzwood was a significant unit holder of the trust. Following disputes between the trustee, the property manager and the unit holders, the trustee gave an undertaking not to deal with the trust assets without the consent of certain unit holders. When a real estate agent received a good offer to buy the property, that was open only for one day, the trustee accepted that offer and entered into a contract to sell the trust property to that purchaser. This occurred without the required consent of the unit holders and in breach of a last-minute injunction obtained by Fitzwood. When the injunction was extended to stop the transaction settling, the purchaser terminated the contract and claimed $25,000 damages for breach of contract. The real estate agent also claimed a commission of $123,000 on the sale of the property, as the agency agreement provided that the commission would also be payable if a binding contract was created, but the sale was not completed due to the trustee’s default.

[page 525] Fitzwood argued that the trustee was not entitled to any indemnity for the damages payable to the purchaser or for the real estate agent’s commission, as the trustee had acted in breach of its undertaking and not in good faith. Issue Did the trustee have a right of indemnity out of trust assets, or had the trustee lost that indemnity due to breach of its fiduciary duties? Decision The trustee company had lost its right to be indemnified from trust assets. Given the trustee’s undertaking and the injunction against the sale of the trust property, the trustee had acted in breach of the trust and in breach of its fiduciary duties to the unit holders. The trustee’s actions in entering into the contract of sale were also not in good faith. This resulted in the trustee losing its right to be indemnified by the trust for the real estate agent’s commission and for the damages sought by the purchaser.

The trustee may be (and often is) a company. In such cases, the corporate trustee and its directors are also regulated by company law (see Chapters 12 and 13).

The trustee will also lack a right of indemnity if the trust deed prohibits indemnification from trust assets. In situations where the trustee is a company and the trustee lacks a right of indemnity from trust assets, directors of that corporate trustee may find they are personally liable for such debts if the trustee cannot pay: Corporations Act s 197: 197 (1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation: (a) has not discharged, and cannot discharge, the liability or that part of it; and (b) is not entitled to be fully indemnified against the liability out of trust assets solely because of one or more of the following: (i) a breach of trust by the corporation; (ii) the corporation’s acting outside the scope of its powers as trustee; (iii) a term of the trust denying, or limiting, the corporation’s right to be indemnified against the liability.

(2)

(3) (4) (5)

The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. Note: The person will not be liable under this subsection merely because there are insufficient trust assets out of which the corporation can be indemnified. The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred. This section does not apply to a liability incurred outside Australia by a foreign company. This section does not apply to a liability incurred by a registrable Australian body outside its place of origin. This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation. Note: Section 271-1 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 deals with the liability of directors of Aboriginal and Torres Strait Islander corporations for debts and other liabilities incurred by those corporations as trustee.

[page 526] Although s 197 carries the heading ‘Directors Liable for Debts and Other Obligations Incurred by Corporation as Trustee’, the section does not impose personal liability on corporate trustees’ directors towards the beneficiaries of the trust for any breach of trust by the trustee: Cole v Tillman [2015] FCA 1512. When s 197 of the Corporations Act applies, each director becomes jointly and severally liable with the other directors and the corporate trustee itself. Also, directors of a corporate trustee do not become personally liable under s 197 merely because the trust has insufficient funds to meet the debt.18 However, if a corporate trustee is unable to pay trust liabilities as and when they fall due, it is possible that insolvent trading has occurred.

Insolvent trading by corporate trustee: directors’ liability 14.23 In Chapter 13, we examined the liability of directors under the Corporations Act s 588G for insolvent trading by their company.19

These provisions would also be relevant for directors of a corporate trustee that has engaged in insolvent trading. To sue directors of a corporate trustee on grounds of insolvent trading, a trust creditor (or the liquidator of the corporate trustee) would need to prove that the company was unable to pay its debts (incurred as trustee) as they fell due, and that: the director(s) was or were directors at the time the debt was incurred; the company was already insolvent when the debt was incurred, or became insolvent by incurring this debt; there were reasonable grounds upon which to see or suspect such insolvency; the director(s) saw, or at least should reasonably have seen, the existing or impending insolvency: Corporations Act s 588G; and ■ none of the defences available to directors under Corporations Act s 588H apply to the facts (see [13.28]– [13.33]).

BENEFICIARIES’ RIGHTS AND LIABILITIES A right in rem refers to a right in respect to certain property or assets. Literally, it means a right in or against a thing. A right in personam means a right in or against a person.

14.24 Equity recognises that beneficiaries of a trust have an interest in the trust property — either a fixed interest (in fixed trusts) or a mere expectancy (in discretionary trusts) (see [14.12]–[14.13]). A fixed interest gives the beneficiaries a right in rem. This right in rem is enforceable against the world at large, as opposed to a right in personam, which is enforceable against a specific person.20 In addition to his or her right in rem, the beneficiary also has a right in personam against the trustee if the trustee has breached any of his or her duties as trustee.

Personal right of action against the trustee (‘right in

personam’) 14.25 If the trustee has breached any duty, the beneficiary can exercise a personal right of action to sue the trustee for any loss arising from that breach. The court may order the trustee to [page 527] pay compensation, but punitive damages are unlikely to be awarded against the trustee: Harris v Digital Pulse Pty Ltd [2003] NSWCA 10. Where there are several trustees, they are liable jointly and severally, so a beneficiary may sue any (or all) of the trustees for the whole loss and leave that trustee to claim contribution and indemnity from their co-trustees. If the trustee has wrongfully dispersed trust property to other beneficiaries, the rightful recipient has a personal claim against the trustee for the amount of the wrongful distribution. If the trustee has insufficient funds, the rightful recipients can sue the overpaid or wrongly paid recipients for any shortfall: Ministry of Health v Simpson [1951] AC 251.

Proprietary right of action in respect of the trust property (‘right in rem’) 14.26 The beneficiaries have a right to take action to recover trust property that has been misapplied. It is a proprietary (or property) right as it involves and attaches to the trust property. It arises from the proprietary obligations imposed on the trustee to deal with the trust property in accordance with the terms of the trust. If the trust property exists, but is either being controlled by someone other than the appointed trustee or is being dealt with by the trustee in ways outside the terms of the trust, then a beneficiary can seek a court order requiring the property be brought back under proper administration. While this right of action is only available when the trust

property still exists, the law does not necessarily require the trust property to still exist in exactly the same form. Thus, where trust moneys (trust property) have been used to purchase a house in contravention of the terms of the trust, the beneficiaries can ‘trace’ the trust funds to the house and can seek a court order that the house belongs to the trust. It is important that the house (or some other item of property, as the case may be) can be identified as the original trust property, although existing in some other form.

Foskett v McKeown [2000] 3 All ER 97 (House of Lords) Facts McKeown held a life insurance policy over his life on trust for his children. McKeown also held moneys on trust for other people who wished to purchase land in Portugal. In breach of this trust, McKeown used some of those trust moneys to pay at least two premiums on his life insurance policy. McKeown died soon thereafter, resulting in the life insurance policy yielding a payout of £1 million. Given the timing of McKeown’s death, this payout would have occurred regardless of whether the two most recent premiums (paid from the Portugal land purchase trust moneys) had been paid. Issue Whether McKeown had breached his trustee’s duties. If so, were the beneficiaries entitled to a share of the proceeds of the trustee’s life insurance? [page 528] Decision The Portugal land purchasers’ moneys had been wrongly used to pay some premiums on the life insurance policy. This was in breach of the trust under which McKeown held those moneys. The beneficiaries (the Portugal land purchasers) had a valid claim against McKeown for breach of trust, and were entitled to enforce this claim by an equitable charge over the property purchased by unauthorised use of trust moneys. The House of Lords held (3–2) that the Portugal land purchasers were entitled to 40 per cent of the life insurance payout, as their moneys had been used in breach of trust to pay two of the five premiums paid on that policy. The Portugal land purchasers’ moneys were traced to a proportion of the life insurance policy.

This equitable right of tracing, however, would not allow the beneficiary to recover against someone who had purchased the trust property in good faith, for value and without notice of the trustee’s breach of duty. An important advantage of the beneficiary’s proprietary right of action is that if the trustee (or any other person personally liable) is in liquidation or bankrupt, any trust property that appeared to be vested in that person is not available for distribution among creditors, but remains the property of the trust and is recoverable by the beneficiary.

Beneficiaries’ liability to creditors 14.27 It is highly unlikely that creditors to a discretionary trust will have any right of recourse directly against the beneficiaries. Individual beneficiaries of a discretionary trust have no entitlement as such to the trust property, merely an expectation of possible benefit, as any entitlement depends on the trustee’s exercise of discretion. As a result, it would not be fair for trust creditors to expect beneficiaries of a discretionary trust to meet trust liabilities. On the other hand, the beneficiaries under a fixed trust (eg, a unit trust) may be vulnerable to attack by creditors if they are of full age and capacity and are presently entitled to trust property.

Hardoon v Belilios [1901] AC 118 (House of Lords) Facts Hardoon was the registered owner of 50 partly paid shares in the Bank of China, Japan and the Straits Ltd. Although Hardoon was the registered owner of the shares, he was never the beneficial owner. The shares had been originally registered in his name by his employer (a stock-broking company) with the intention that they would be immediately transferred to a client. Hardoon had signed the transfer papers, but these were never registered. When the banking company was wound up in 1894, the liquidator made calls on the partly paid shares and successfully sued Hardoon for that amount, as the registered owner of the shares. Hardoon sought to recover this

amount from Belilios, who had become the sole beneficial owner of those shares in 1892. [page 529] Issue Was the trustee, Hardoon, liable alone for the balance of the share price, or did he have a right to be indemnified by the beneficiary of those shares, Belilios? Decision When Belilios had accepted beneficial ownership of the shares, he became the beneficiary of the trust over the shares. The trustee, Hardoon, was entitled to be indemnified by Belilios for the call on the shares he held on trust. Lord Linley said (at 123–4): The plainest principles of justice require that the cestui que trust [beneficiary] who gets all the benefit of the property should bear its burden unless he can shew some good reason why his trustee should bear them himself … [W]here the only cestui que trust is a person sui juris, the right of the trustee to indemnity by him against liabilities incurred by the trustee by his retention of the trust property has never been limited to the trust property; it extends further, and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify his trustee.

This liability of beneficiaries has been upheld in more recent cases.21 It is based upon the argument that unless agreed otherwise, since the beneficiaries get all the benefit of the trust property, it is fair they should also bear the burdens, including liabilities of the trust.

The position of creditors in regard to a trading trust Creditors must generally look to the trustee for payment of trust debts.

14.28 Businesses operating under a trading trust structure pose a problem for suppliers and credit providers. While the trustee is generally liable for expenses and debts incurred on behalf of the

trust business, that trustee is usually a $2 company with nominal assets of its own. It is for this reason that banks generally require personal guarantees as well as adequate security (eg, a mortgage) when lending to such corporate trustees. The position of the creditor may be summarised as follows: The creditor may ‘stand in the trustee’s shoes’ and seek payment directly from the trust assets, using the trustee’s right of indemnity (see [14.22]). If the trustee is not entitled to indemnification (perhaps because the transaction was unauthorised or involved a breach of trustee’s duties), the creditor can sue not only the corporate trustee but, in certain circumstances, its directors (see Corporations Act s 197, in [14.22]). Directors of the corporate trustee may also be personally liable if the directors have engaged in insolvent trading under the Corporations Act s 588 (see [14.23]). The creditors may have a right to seek recovery directly from the beneficiaries, particularly where the trust is a fixed trust and the beneficiaries concerned are of full capacity and presently entitled (see [14.27]).

TERMINATION OF A TRUST 14.29 A trust may be terminated in the following ways: Revocation. If a settlor included a power for the settlor or trustee to revoke and terminate the trust in the settlement deed, this may be exercised. However, such a power is unusual and may have the unwanted effect of making the trust structure appear to be a sham [page 530] and therefore subject to termination by court order or,

alternatively, rendered ineffective against income tax legislation. Beneficiaries’ consent. If the beneficiaries are all of full age and legal capacity, they may consent to terminate the trust This applies to both fixed and discretionary trusts. Court order. The court has the power inherently and pursuant to the state Trustee Acts. Where a family trust appears to have been created as a sham to avoid a divorce settlement, the Family Court may also terminate the trust. Distribution of trust property. Ultimately, there will come a time when the trust property has all vested in, and been distributed to, the beneficiaries or objects, according to the terms of the trust. Once the trust property has been distributed, the trust no longer exists.

ADVICE — LAW IN PRACTICE If you become a trustee, you will assume serious legal duties arising from the terms of the trust and the strong relationship of trust and good faith imposed on trustees in their dealings with trust property. As an example, a trustee cannot make any gain from their position unless expressly authorised to do so by the trust deed, or following approval of the court. Where trust property includes a business, the trustee will be personally liable for any business debts, with a right of indemnity against the trust for debts and expenses properly incurred. Using a company as a trustee will lead to additional duties imposed by the Corporations Act 2001 (Cth), but may also allow benefits of limited liability for the trustee (depending on the type of company appointed

as trustee). Becoming a beneficiary of a fixed trust will carry with it not only rights to income and capital distributions (depending on the trust’s terms), but also potential personal liability for trust debts.

[page 531]

QUESTIONS Question 1 In your own words, describe each of the following elements of a trust: (a) trust property; (b) trustee; (c) beneficiary.

Question 2 Are the following statements true or false? (a) A person can create a trust expressly, declaring himself or herself to be the trustee and also the sole beneficiary. (b) A trustee can act in his or her own interest. (c) In a discretionary trust, each beneficiary does not have a fixed entitlement to distribution of trust property.

(d) A trustee can withdraw from the trust reasonable remuneration for the services he or she renders as trustee. (e) Beneficiaries of a discretionary trust will not be personally liable for trust debts.

Question 3 Ken has operated a retail business for some years. On the advice of his accountant, Ken has recently declared that this business was to be held by a new company (Barbie Pty Ltd) for the benefit of Ken, his wife and their young children. Barbie Pty Ltd has only one director, Ken, and the trust is a discretionary trust. Which of the following statements is correct? Please explain your answer. (a) Ken will be liable for the future business debts of the trust. (b) Barbie Pty Ltd will be liable for the future business debts of the trust. (c) Ken owes fiduciary duties to the beneficiaries. (d) If the trust is unable to pay its debts, Ken’s wife and children will become liable, as beneficiaries of the trust.

Question 4 Samantha is a unit holder of a fixed trust, with the main trust asset being a large block of flats. The unit holders have recently discovered that the trustee has agreed to sell five of the flats in this building to friends of his, each for $10,000 below current market values. Further investigation reveals that last year the trustee withdrew $200,000 from the trust account and used it to buy a

property by the sea in his own name. That property has increased in value by 50 per cent. What action can Samantha and the other unit holders take in respect of the five flats sold cheaply and also the $200,000 withdrawn from the trust? [page 532]

Question 5 A unit trust was created to develop property, with Tia appointed as trustee. Most of the units were held by an investment company, B Pty Ltd, which had acquired the units with the intention of benefiting from the land development. The trustee entered into a contract to buy certain land from Landsales Ltd and subsequently breached that contract. There was no clause in the trust deed excluding unit holders from liability. Tia’s breach of contract gave rise to a claim of damages by Landsales Ltd, so Landsales claims these losses directly from the major unit holder, B Pty Ltd. Would B Pty Ltd be liable for any (or all) of Landsales Ltd’s losses?

Question 6 Tran Pty Ltd is the sole trustee of the Tran family trust. The business activities of the trust mainly involve operating a retail clothing store in a shop owned by Tran Pty Ltd as trustee for the family trust. Recently, the sole director of Tran Pty Ltd, Tai, ordered $20,000 worth of clothes on credit for the store from Ace Manufacturing Pty Ltd. This purchase was made even though the store

was seriously in debt and the trust had insufficient cash reserves to service its existing loans. In signing the contract, Tai made it clear that he was signing ‘as trustee of the Tran family trust’. The family trust business has failed due to a downturn in consumer demand and cannot meet its debts. The $20,000 owed to Ace Manufacturing Pty Ltd has not been paid, and there are outstanding mortgages and many other debts. (a) From whom (if anyone) can Ace Manufacturing Pty Ltd recover the $20,000? (b) If the beneficiaries decide that the trust’s shop should be sold, would Tai be able to buy the shop for himself?

_________ 1 2

A trust can be created to benefit charitable purposes instead of named beneficiaries. Each state and territory has a Trustee Act. The relevant Act for Victoria is the Trustee Act 1958 (Vic). References in this chapter to the Trustee Act are to that Act. For other states and territories, the relevant Acts are: Trustee Act 1925 (ACT); Trustee Act 1925 (NSW); Trustee Act (NT); Trusts Act 1973 (Qld); Trustee Act 1936 (SA); Trustee Act 1898 (Tas); Trustees Act 1962 (WA). 3 There is, however, a rule known as the ‘rule against perpetuities’ (see [14.8]). 4 For example, In the Marriage of Ashton (1986) 11 Fam LR 457; In the Marriage of Stein (1986) 11 Fam LR 353. 5 See Income Tax Assessment Act 1936 (Cth) Pt III Div 6AA and Income Tax Rates Act 1986 (Cth) ss 13 and 15. The tax rate on minors’ income from a trust can be as high as 66 per cent and the low income tax offset is no longer normally available to such income. 6 Hallows v Lloyd (1888) 39 Ch D 686. 7 Low v Bouverie [1891] 3 Ch 82. 8 Davies v Hodgson (1858) 25 Beav 177; 53 ER 604; Re Hulkes; Powell v Hulkes (1886) 33 Ch D 552. 9 The trustee may only invest trust funds in securities authorised by the trust deed or authorised under the Trustee Act: ss 6(2) and 7(2) Trustee Act 1958 (Vic). 10 For example, Trustee Act 1958 (Vic) s 7(2)(c). The Victorian Law Reform Commission has recommended amendment of the Trustee Act (Vic) to add a statutory right for minority holders of trading trusts who are subjected to oppressive conduct in the operation of that trust. If adopted, this would introduce rights and remedies similar to those available

11 12

13

14 15 16

17 18

19 20

21

to oppressed minority shareholders under the Corporations Act 2001 (Cth) ss 232–234 (see [13.38]): Victorian Law Reform Commission, Trading Trusts — Oppression Remedies, Report 50, January 2015. Kemp v Burn (1863) 66 ER 740; Manning v Federal Commissioner of Taxation (1928) 40 CLR 506. The duty not to delegate responsibility, but rather to administer the trust personally, will often be overridden by a clause in the trust deed allowing the trustee to act as manager or to employ other people to act. Delegation of trustee’s powers is also permitted by the Trustee Act 1958 (Vic) in limited circumstances (see ss 28 and 30). Ayliffe v Murray (1740) 26 ER 433. As a general rule, trustees are not entitled to payment for their services in relation to the trust, as this would be in breach of this duty. However, where the trustee is a professional, he or she may be able to recover payment if a charging clause is included in the trust deed. Alternatively, the trustee can apply to the court for an award for payment for services, or obtain the consent of all beneficiaries. Where a trustee company is involved (ie, a company which carries on the business of acting as trustee for several trusts), the trust deed will usually provide for a certain percentage of the trust’s income as payment for the trustee company’s services. Trustee Act 1958 (Vic) s 6. Trustee Act 1958 (Vic) s 6(1). Trustee Act 1925 (ACT) s 14A(2)(a); Trustee Act 1925 (NSW) s 14(2)(a); Trustee Act (NT) s 6(1)(a); Trusts Act 1973 (Qld) s 22(1)(a); Trustee Act 1936 (SA) s 7(1)(a); Trustee Act 1898 (Tas) s 7(1)(a); Trustee Act 1958 (Vic) s 6(1)(a); Trustees Act 1962 (WA) s 18(1)(a). See Muir v City of Glasgow Bank and Liquidators (1879) 4 App Cas 337; Helvetic Investment Corporation Pty Ltd v Knight (1984) 9 ACLR 773. Section 197 of the Corporations Act 2001 (Cth) was amended to clarify this aspect after the conflicting decisions in Hanel v O’Neill [2003] SASC 409 and Intagro v ANZ Banking Group [2004] NSWSC 618. See [13.25]–[13.33]. The owner of a car has a right in rem. Thus, the owner could bring an action against anyone who was unlawfully in possession of the car, even if that person had innocently acquired the car from a thief. In contrast, a contractual right is a right in personam; it can only be enforced against a party to the contract. See J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd (1985) 9 ACLR 593; Balkin v Peck (1998) 43 NSWLR 706.

Index References are to paragraph numbers

A acceptance — contracts …. 4.36–4.47 communication of acceptance expressly …. 4.43 to large company …. 4.41 to offeror …. 4.40 by third parties …. 4.47 via internet …. 4.42 completes contract …. 4.39 final and unqualified …. 4.38 method and timing …. 4.46 only offeree may accept …. 4.37 postal acceptance rule …. 4.44–4.45

actual authority acting within …. 5.47–5.49 course of past dealings …. 10.27 custom or trade usage …. 10.26 express or implied …. 10.24–10.28 overlap, ostensible authority and actual authority …. 10.30 third party awareness …. 10.33 ‘usual manner’ …. 10.28

agency …. 1.42 actual authority course of past dealings …. 10.27

custom or trade usage …. 10.26 express or implied …. 10.24–10.28 overlap, ostensible authority and actual authority …. 10.30 third party awareness …. 10.33 ‘usual manner’ …. 10.28 agency relationship indicators …. 10.3 agents actions …. 12.22 actual authority and ostensible authority …. 10.23–10.33, 10.50, 11.39, 11.41, 12.4, 12.26 agreement to terminate …. 10.50 assumptions regarding …. 12.23–12.28 contracts …. 5.47 defined …. 10.2 duties …. 10.43–10.48 express agreement …. 10.25 extent of authority …. 10.23 fiduciary duties …. 10.44–10.48 functions …. 5.47, 10.4–10.9 indemnification …. 10.49 make contracts on behalf of the principal …. 10.5 make representations on behalf of the principal …. 10.8 misleading or deceptive conduct …. 3.22 as party …. 10.1 pay moneys on behalf of the principal …. 10.7 reasonable and prudent actions …. 10.21 receive moneys on behalf of the principal …. 10.6 receive representations on behalf of the principal …. 10.9 remuneration …. 10.49 third parties suing …. 10.38–10.41 undisclosed principal rule …. 10.42

creation …. 10.17–10.22 in cases of necessity …. 10.21 by cohabitation …. 10.22 by deed, by agreement in writing or orally, or by operation of law …. 10.17 by estoppel …. 10.20 by express agreement …. 10.18 by implied agreement …. 10.19 implied agency …. 10.22 liability of agent …. 10.38 acting without authority …. 10.40 breach of warranty of authority …. 10.41 ostensible authority …. 10.29–10.33 cannot be created in another person …. 10.32 depends on the principal’s holding out …. 10.30 express or implied …. 10.29–10.30 illustrative cases …. 10.31 overlap, ostensible authority and actual authority …. 10.30 partners as agents for co-partners …. 11.1 principals agreement to terminate …. 10.50 duties …. 10.49 express agreement …. 10.25 as party …. 10.1 suing third party …. 10.37 third party suing …. 10.36 ratification of unauthorised acts …. 10.34–10.35, 11.41–11.42 ratification, meaning …. 10.34 rules of ratification …. 10.35 third party sued by principal …. 10.37 third party suing agent …. 10.38–10.41

third party suing principal …. 10.36 termination …. 10.50 third parties, as party see third parties undisclosed principal, liability …. 10.39, 10.42

agreements agency creation by express or implied agreement …. 10.18–10.19 ‘agreement to agree’ …. 4.52 ‘agreement to negotiate’ …. 4.53 certainty requirement …. 4.51–4.56 commercial agreements …. 5.4–5.9 letters of comfort or support …. 5.6 trade promotions …. 5.5 word clarity …. 5.4 conditional agreements …. 4.55 contract as …. 6.4 negotiating …. 6.2 enforceable …. 4.38 deeds see Deeds simple contracts see simple contracts landlord/tenant agreements …. 7.9–7.10 between partners …. 11.27 principal and agent express agreement …. 10.25 social or domestic agreements …. 5.3 ‘subject to …’ clauses …. 4.55 ‘subject to contract’ …. 4.54, 5.8 to terminate agency …. 10.50 termination of contract by …. 5.28, 8.4 ‘without prejudice’ …. 5.9 see also Deeds

ambiguity rule

exemption clauses …. 6.34 in buyer’s favour …. 7.32

anticipatory breach …. 8.17–8.18 clear and unequivocal threat …. 8.18 defined …. 8.17 no termination …. 8.19

arbitration …. 1.38 auctions, offer and acceptance, bidders …. 4.20 auditors, duty of care, spectre of indeterminacy …. 3.15–3.16 Australian Competition and Consumer Commission (ACCC) guide to unfair contract terms …. 6.40 infringement notices …. 3.40 representative proceedings (class actions) power …. 2.50

Australian Constitution …. 1.7 Australian Consumer Law (ACL) are all losses compensation? …. 2.46 breach elements …. 2.42 business name protection …. 11.7 consumer protection under …. 3.46, 9.1–9.38 defective goods …. 2.1 damage must be caused by …. 2.47 elements of breach …. 2.42 pointed out prior to sale …. 9.7 safety defect …. 2.40–2.50, 2.45, 2.48 defences …. 2.48 exclusion of guarantees, prohibition …. 2.49, 9.21 goods as gifts …. 2.44, 9.19

‘goods’ defined …. 2.44, 9.3 rejection …. 9.16–9.17 major failure, defined …. 9.15 manufacturers damages, amount …. 9.24 defences …. 9.22 express warranty to repair/replace …. 9.23 ‘manufacturer’ defined …. 2.43 obligations …. 9.21 misleading or deceptive conduct …. 11.45 calculating damages …. 3.33 conduct ‘in trade or commerce’ requirement …. 3.23 conduct of directors, employees and agents …. 3.22 damages for breach …. 3.31 declaration of void contract …. 3.37 elements of breach …. 3.21 false advertising cases …. 3.24, 3.32, 3.39 half-truths …. 3.24 mere puffs …. 3.29 onus of proof …. 3.25, 3.28 opinions …. 3.27 penalties …. 3.40 promises and predictions …. 3.28 proportionate liability …. 3.35 silence — reasonable expectation test …. 3.26 variation of terms of contract …. 6.9 other matters …. 2.50 Part 3-5 liability under …. 2.40–2.50 see also negligence remedies

major failure …. 9.14, 9.36–9.37 non-major failure …. 9.14, 9.36 supplier remedy of breach …. 9.18 termination of contract …. 9.38 ‘safety defect’ …. 2.45, 2.48 services not covered by ACL …. 9.28 ‘services’ defined …. 9.27 statutory guarantees …. 9.4, 9.8, 9.12, 9.30–9.32 due care and skill …. 9.31 fitness for purpose …. 9.32 major failure, defined …. 9.37 void guarantees …. 9.11, 9.33 statutory rescission remedies …. 8.61 strict liability scheme …. 2.41 supplier indemnification …. 9.20 suppliers of goods acceptable quality, guarantee …. 9.7 ‘consumer’ …. 9.3 fair and reasonable limitation …. 9.13 fitness for any disclosed purpose …. 9.8 goods correspond with description, guarantee …. 9.9 goods correspond with sample, guarantee …. 9.10 guarantees …. 9.1–9.2 lease or hire of goods …. 9.3 reliance on seller’s skill and judgment …. 9.8 remedies …. 9.14, 9.18 sale by auction …. 9.6 statutory guarantees …. 9.4, 9.8, 9.11, 9.12 in trade or commerce, requirement …. 9.4–9.5

suppliers of services limitation of liability …. 9.34 recreational service contracts, limited/excluded liability …. 9.35 remedies …. 9.36–9.38 sales of goods, distinguished …. 9.28 statutory guarantees …. 9.30–9.32 supply to a ‘consumer’ …. 9.25 in trade or commerce, requirement …. 9.26 ‘supply’ defined …. 2.44 unconscionable business transactions under …. 3.46–3.49 indicative factors …. 3.48 remedies and sanctions …. 3.49 ‘unconscionable conduct’ …. 3.47 unfair terms in standard form contracts …. 6.40

Australian government historical perspectives …. 1.6 responsible government …. 1.15 states, government history …. 1.6 territories, government history …. 1.6

Australian Securities and Investment Commission (ASIC) …. 1.56 Certificate of Registration issue …. 12.15 company’s reliance on ASIC records …. 12.26 legal action for statutory duty breach …. 13.35 Foss v Harbottle rule …. 13.35

Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), provisional imitation of ACL …. 3.41

B

beneficiaries …. 14.4, 14.7 fiduciary relationship with trustees …. 14.2 identification of …. 14.7 liability to creditors …. 14.27 nature of interest — trust classification means …. 14.10 personal right of action against trustee …. 14.7, 14.25 in personam, rights …. 14.7, 14.25 proprietary right of action …. 14.7, 14.25 in rem, rights …. 14.26 rights and liabilities …. 14.7, 14.24–14.28

breach of contract …. 8.25–8.37 anticipatory breach …. 8.17–8.18 clear and unequivocal threat …. 8.18 examples …. 8.17 no termination …. 8.19 contract price, recovery of in general …. 8.23 sale of goods …. 8.24 damages …. 4.9 agreed damages clauses …. 8.28 anticipatory breach …. 8.17–8.18 calculation of damages …. 8.33–8.36 contributory negligence …. 2.34, 8.37 disappointment, distress or injured feelings …. 8.36 expectation losses …. 8.34 losses must be caused by breach …. 8.27 mitigation of loss, plaintiff duty …. 8.29 personal injuries …. 8.35 remoteness rule …. 2.32, 8.30–8.33 election to affirm contract, effect of …. 8.22

election to terminate, effect of …. 8.5, 8.21 time clauses …. 8.10 injunction …. 4.11 mandatory …. 8.39 intermediate terms …. 6.42, 8.15 seriousness of breach consequences …. 8.7 only parties may sue on contract …. 5.15 rectification of contract …. 8.40 rescission see rescission restitution …. 8.41–8.42 partial performance …. 8.42 quantum meruit …. 8.23, 8.41–8.42 total failure of consideration …. 8.6, 8.41 specific performance …. 8.38 termination by innocent party …. 4.8

business business name …. 11.7 Business Names Registration Act 2011 (Cth) …. 1.11 registration …. 1.11, 11.7 entities …. 11.3 importance of contracts to …. 4.1–4.2 law and ethics and …. 1.43–1.58 operating framework …. 1.56 organisations advantages and disadvantages …. 11.6, 11.38 types …. 11.2 ownership versus primary interest-holder, comparison …. 14.1 partnerships, business or hobby …. 11.12 profit sharing — sale of business …. 11.22 role of ethics in …. 1.44

structures see business structures

business decision making impact of business law on …. 1.1

business law reasons for study …. 1.2 risk and uncertainty …. 1.2

business structures companies see companies partnerships see partnerships sole tradership see sole traderships trusts see trusts

C case law see common law system causation …. 2.47 factual causation …. 2.31

civil law common law systems and civil law systems, distinction …. 1.25 civil cases and criminal cases, distinction …. 1.34

collateral contracts …. 6.29 commercial contracts disappointment, distress or injured feelings, damages …. 8.36 incorporating terms — past dealings …. 6.4 types of …. 4.1

commercial relationships agency and …. 10.10–10.16 bailor–bailee …. 10.13

employer–employee …. 10.13 franchisor–franchisee …. 10.16 independent contractor …. 10.12 law and …. 1.39–1.42 legal framework …. 1.39–1.42 partnerships see partnerships supplier–buyer …. 10.15

common law system …. 1.24–1.30 to act with reasonable care …. 13.2 case law as law source …. 1.24–1.30 locating …. 1.27 parliamentary primacy over …. 1.31 common law systems and civil law systems, distinction …. 1.25 contracts illegal at …. 6.39 directors’ duties at …. 13.23 duty not to misuse position …. 13.15–13.17 duty to act in good faith and for proper purpose …. 13.12–13.14 doctrine of precedent (stare decisis) …. 1.26 early mercantile law …. 7.14 equity and …. 1.29

Commonwealth …. 1.7 Commonwealth of Australia Constitution Act 1900 (UK) …. 1.5 companies …. 1.42 authorised agents actions …. 12.22 assumptions regarding …. 12.23–12.28 express or implied actual authority …. 12.4 business structure …. 11.3, 11.6, 14.1

common seal …. 12.4, 12.21 companies versus partnerships, comparison …. 12.19 ‘company’, proper plaintiff …. 13.35 company property …. 12.14 constitution and rules …. 12.25, 13.2 compliance …. 13.33 rules referred to as constitution …. 12.16 Corporations Regulations …. 12.15 dealing with the company, assumptions …. 12.23–12.28 constitution and replaceable rules, compliance with …. 12.25 customary powers …. 12.25, 12.28 exceptions …. 12.28 holding out …. 12.27 reliance on ASIC records …. 12.26 derivations …. 12.2 Foss v Harbottle rule …. 13.35 exceptions …. 13.36 guarantees, companies limited by …. 12.11 insolvency …. 13.25 remedies or sanctions …. 13.26 as legal ‘persons’ …. 14.7 limited companies by guarantee …. 12.11 limited liability companies …. 12.8, 12.10 by shares …. 12.10 managing …. 12.18 members …. 12.14 50-person limited proprietary membership …. 12.7 method of creating contracts …. 12.20 nature of …. 12.3–12.14 no liability companies …. 12.13

partnerships, distinctions …. 12.3 regarding registration …. 12.15 power full legal capacity …. 12.4–12.5, 12.14, 12.20 further powers granted …. 12.5 powers …. 12.3–12.5 customary powers …. 12.25, 12.28 proprietary companies 50-person limited membership …. 12.7 public company limited by guarantee …. 12.11 limited by shares …. 12.10 no liability …. 12.13 unlimited liability …. 12.12 registration …. 12.15–12.17 ACNs replacement by ABNs …. 12.15 Certificate of Registration …. 12.15, 12.17 companies which may be registered …. 12.9–12.13 constitution and rules …. 12.16 steps …. 12.15 separate identity principle, consequences — Salomon’s case rule …. 12.14 shareholders …. 12.10 company’s independence from …. 12.14 Foss v Harbottle rule …. 13.35 right to take personal action …. 13.37 shares companies limited by …. 12.10 partly paid …. 12.13 share capital …. 12.12 signing contracts …. 12.21–12.28

sources …. 12.2 trading companies and capitalism …. 12.1 trusts, distinguished …. 14.9 types general classification …. 12.6–12.8 proprietary companies see proprietary companies public companies see public companies which may be registered …. 12.9–12.13 unlimited companies …. 12.12 voluntary administration …. 13.31

company directors …. 3.1 attendance levels …. 13.9 breach of duty bribery prohibition …. 13.15 civil consequences …. 13.21 criminal consequences …. 13.22 damages …. 13.35–13.38 secret commissions prohibition …. 13.15 business judgment rule …. 13.7 conflicts of interest …. 13.19 corporate social responsibility (CSR) …. 13.1 duties …. 13.2 to act in good faith and for proper purpose …. 13.12–13.14 at common law …. 13.23 company contracts …. 13.16 constitution and rules compliance …. 13.33 interests disclosure …. 13.17 not to use information improperly …. 13.18–13.19 reasonable care, skill and diligence …. 13.30 functions …. 13.1

informed decision making …. 13.10 insolvency knowledge …. 13.25 insolvent trading rule …. 13.24–13.32, 14.23 defences under s 588H(2)–(5) …. 13.29–13.31 liquidators …. 13.24 reliance on reports …. 13.29 ‘or some other good reason’ …. 13.28, 13.31 liability …. 14.23 misleading or deceptive conduct …. 3.22 powers, for benefit of company …. 13.14 reliance, role of …. 13.11 remedies or sanctions, civil liability and civil penalty …. 13.26 skills levels …. 13.8 solvency information …. 13.25 trade secrets …. 13.19

company law companies and partnerships, comparison …. 12.19 managing …. 12.18 method of creating contracts …. 12.20 nature of …. 12.3–12.14 registering …. 12.15–12.17 signing contracts …. 12.21–12.28 sources …. 12.2

Competition and Consumer Act 2010 (Cth) …. 1.10 prohibited contracts …. 6.39

conciliation …. 1.38 conditions of contract breach …. 6.42 damages and termination entitlement …. 8.7

termination of contract …. 8.7–8.14 condition, condition/warranty dichotomy …. 6.42, 8.15 condition precedent …. 6.10 establishing express terms, courts approach …. 6.3 implied conditions …. 7.31, 7.33 patent/trade name — no implied condition …. 7.25 parol evidence rule …. 6.3, 6.24 post-contractual statements …. 6.4 ‘standard terms and conditions’ …. 6.16 terms at contract heart …. 8.9 terms made conditions expressly by parties …. 8.10 by statute …. 8.8

consideration …. 4.14, 5.1–5.50 in collateral contracts …. 6.29 defined …. 5.13 examples …. 5.14 giving up a legal claim …. 5.23 illusory promises are not consideration …. 5.22 may be of nominal value …. 5.20 may not be past …. 5.18–5.19 merely promising to perform an existing contract is generally not good (valid) consideration …. 5.25–5.27 modern development …. 5.27 traditional view …. 5.26 new consideration necessary, on renegotiating …. 5.24 past consideration …. 5.21 performing a public duty …. 5.33 promising to perform a contractual duty owing to a third party …. 5.32 promissory estoppel see promissory estoppel

required in all simple contracts …. 5.12 sufficiency requirement …. 5.21 to tenders …. 4.21

consumer contracts …. 7.15 standard form, unenforceable terms in …. 6.40

consumer protection …. 3.1 under ACL …. 2.43, 3.46, 9.1–9.38

consumer’s rights against manufacturer of goods …. 9.21–9.24 against supplier of goods see suppliers of goods against supplier of services see suppliers of services see also defective goods

contract law …. 1.29, 4.1 ‘intention’ meaning …. 4.6 ‘offer’ meaning …. 4.14 promise must be paid for …. 5.18 promissory estoppel and …. 5.36 rules can lead to unfair results …. 5.34

contracts …. 1.40 affirming …. 8.20, 8.22, 8.58 agreements …. 6.2 between two or more persons …. 4.3 analysis …. 4.2 benefit of the contract …. 7.2 breach of contract see breach of contract collateral contracts …. 6.29 commercial contracts see commercial contracts completed …. 4.39 consideration …. 5.1–5.50

in collateral contracts …. 6.29 parties’ provision of …. 5.10–5.33 to tenders …. 4.21 consumer contracts …. 7.15 unenforceable terms in standard form …. 6.40 contract between partners …. 11.26 contractual dispute …. 6.22 facts, critical importance of …. 6.2 negotiating compensation …. 8.1 statements or representations as …. 6.1 contractual duties, reasonable care and skill …. 7.1, 7.4 contractual relationships …. 11.14, 11.24 contractual rights assignment …. 5.50 courts court-implied terms …. 7.5, 7.10 non-enforcement situations …. 6.11–6.12 defined …. 4.3 discharge …. 8.3–8.4, 8.6 essence of …. 8.9 events that frustrate versus events that disappoint …. 8.6 evidenced conclusion of …. 7.35 existence …. 4.4, 4.14, 4.34 express terms see terms of contract Foakes v Beer …. 5.29 exceptions …. 5.30–5.31 four corners exemption clause coverage …. 6.37 goodwill …. 7.3 implied terms see implied terms importance to business …. 4.1–4.2 intention to contract …. 5.1–5.50 ‘intention’ …. 4.6

objective intention …. 4.6 parties’ intention …. 5.2–5.9 subjective intention …. 4.6 making contracts fashioned and refashioned …. 4.23 formation rules application …. 5.34 intention and consideration …. 5.1–5.50 offer and acceptance see offer and acceptance necessities …. 5.45 negotiation of see negotiation of contract non-consumer contracts see non-consumer contracts parties contractual obligations choice …. 6.32 may sue on contract …. 5.15 own rules under contract law …. 4.3 parties’ intentions …. 6.33 suing on contract …. 5.44 three-party situation …. 6.29 persons with mental disabilities; intoxicated persons …. 5.46 Pinnel’s Case …. 5.29 post-contractual statements, non-binding without fresh consideration …. 6.4 primacy over case law …. 1.31 privity of contract rule, exceptions …. 5.17 between professional persons and their clients …. 7.4 promisees may be joint …. 5.16 may sue on contract …. 5.15 recreational services contracts …. 9.35 relational contracts …. 7.3 remedies …. 4.7–4.13

agreed damages clauses …. 4.13 contract price, recovery of …. 4.12, 8.23–8.24 contract termination …. 4.8 damages …. 4.9 injunction …. 4.11, 8.39 rescission …. 4.8 specific performance …. 4.10 renegotiating …. 5.24–5.27 compositions with creditors …. 5.30 new consideration necessary …. 5.24 part payment by a third party …. 5.31 renegotiating a debt — special problems …. 5.29–5.31 renegotiating debt compositions with creditors …. 5.30 part payment by a third party …. 5.31 replacement contracts …. 4.38 rescission effect of …. 8.55 method …. 8.57 rule of privity of contract, agent exception …. 10.5 sales of goods contracts see sale of goods contracts seller stipulation of applicable law …. 4.22 for services …. 7.4–7.6 silent contracts — statutory provisions application …. 7.34 simple contracts, consideration required in all …. 5.12 sought and given prior to warranty …. 5.18 specific performance …. 8.38 specific types …. 7.4–7.9 suppliers of goods see suppliers of goods suppliers of services see suppliers of services

termination of see termination of contract terms of see terms of contract time lapse, statement to contract …. 6.25 traditional theory …. 7.3 unenforceable …. 6.39–6.41 in general …. 6.39 void contracts …. 3.37 non est factum …. 8.54 unilateral mistake …. 8.53 for work and materials …. 7.5 written contract …. 6.3, 6.29, 7.13 proof advantage …. 4.5 in writing — a necessity? …. 4.5

contributory negligence …. 2.34, 3.35 cooperate, implied duty to …. 7.2–7.3 corporate trustees, insolvent trading …. 14.23 Corporations Act 2001 (Cth) (Corporations Act) …. 1.9 assumptions regarding companies …. 12.23 constitution and replaceable rules, compliance with …. 12.24 customary powers …. 12.27 holding out …. 12.26 incorrect …. 12.28 reliance on ASIC records …. 12.25 ASX listing rules compliance …. 12.8 ‘business judgment rule’ defence …. 13.23 common seal of companies …. 12.21 company agents, actions …. 12.22 company law …. 12.1–12.29 company power, full legal capacity …. 12.4–12.5, 12.14

‘director’ …. 13.4 directors’ and other officers’ duties …. 13.2, 13.3–13.4 duty not to misuse position …. 13.15–13.17 duty not to use information improperly …. 13.18–13.19 duty to act in good faith and for proper purpose …. 13.12–13.14 insolvent trading rule …. 13.24–13.32 debt recovery …. 13.24 defences …. 13.27–13.32 illustrative cases …. 13.32 misleading or deceptive conduct …. 3.42 proportionate liability …. 3.35 ‘officer’ …. 13.4 reasonable degree of care and diligence …. 13.5–13.11 attendance levels …. 13.9 informed decision making …. 13.10 resilience, role of …. 13.11 registration of proprietary and public companies …. 12.9–12.13 replaceable rules …. 12.16 statutory duty …. 13.34 breach …. 13.20–13.22, 13.35–13.38 company contracts …. 13.16 compliance …. 13.33 interests disclosure …. 13.17 statutory duty breach civil consequences …. 13.21 criminal consequences …. 13.22 insolvent trading rule …. 13.24–13.32

counter offers amounting to offer rejection …. 4.34 reasonable persons …. 4.35

replacement contract containing (mutually agreed) additional terms …. 4.38 terms clarification request not a counter offer …. 4.35

courts assessing damages …. 2.33 bias regarding novel duty of care situations …. 2.17 ‘but for’ test …. 2.31 contracts conservation preference …. 4.8 contract terms variance under ACL …. 6.9 non-enforcement situations …. 6.11–6.12 word interpretation …. 6.31 court-implied terms …. 7.5, 7.10 custom or trade usage …. 7.12 giving effect to written contract …. 7.13 past dealings criteria …. 7.11 court-ordered pecuniary penalties …. 3.49 dispute resolution through …. 1.36 mandatory injunction …. 8.39 parol evidence rule …. 6.3, 6.24 past consideration …. 5.21 ‘piepowder courts’ (mercantile courts) …. 7.14 rectification of contract …. 8.40 scope of liability …. 2.31 statute interpretation …. 1.16–1.23 ejusdem generis …. 1.23 expressio unius est exclusio alterius …. 1.23 extrinsic materials …. 1.21 generalia specialibus non derogant …. 1.23 golden rule …. 1.18

interpretive devices …. 1.23 literal rule …. 1.17 mischief rule …. 1.19 noscitur a sociis …. 1.23 objects clauses …. 1.21 principle of legality …. 1.20 rebuttable presumptions …. 1.22 termination of partnership by …. 11.58 termination of trusts …. 14.29

D damages assessing …. 2.33 breach of conditions …. 7.33 in addition to contract termination …. 6.42 breach of contract …. 4.9, 8.25–8.37 agreed damages clauses …. 8.28 anticipatory breach …. 8.17–8.18 calculation of damages …. 8.33–8.36 contributory negligence …. 2.34, 8.37 disappointment, distress or injured feelings …. 8.36 expectation losses …. 8.34 losses must be caused by breach …. 8.27 mitigation of loss, plaintiff duty …. 8.29 personal injuries …. 8.35 remoteness rule …. 2.32, 8.30–8.33 causation …. 2.31, 2.47 compensation not punishment purpose …. 8.26 damages clauses not penalty clauses …. 8.28 Hadley v Baxendale …. 8.30–8.32

first limb …. 8.31 remoteness rule …. 8.33 second limb …. 8.32 for negligence contributory negligence …. 2.34 steps in establishing …. 2.5–2.33 remoteness …. 2.32, 8.30–8.33 torts …. 2.2

Deeds …. 10.17 defined …. 5.11 of settlement …. 14.11–14.12, 14.29

defective goods defences …. 2.34–2.36 liability for another person’s acts …. 2.37–2.38 for negligence …. 2.2–2.39 product liability laws …. 2.51 for safety defects …. 2.40–2.50 negligence see negligence representative proceedings (class actions) …. 2.39

defences contributory negligence …. 2.34 defective goods …. 2.34–2.36

description of goods buyers’ reliance on …. 7.20 is not a reference to product quality …. 7.18 sales by …. 7.16–7.20, 7.28

directors see company directors

discretionary trusts …. 14.7, 14.10 beneficiaries liability to creditors …. 14.27 trustees’ choice regarding benefit to …. 14.12 unit trust, distinction …. 14.14

dispute resolution …. 1.35–1.38 alternative dispute resolution …. 1.38 conciliation, mediation and arbitration …. 1.38 giving up a legal claim consideration …. 5.23 hypothetical case …. 1.37 resolving through courts …. 1.36

doctrine of precedent (stare decisis) …. 1.26 duress …. 6.12 economic …. 8.46 rescission …. 8.46

duty of care …. 2.6–2.17 circumstances giving rise to …. 3.18 disclaimer removal …. 3.17 distributors of products/goods …. 2.9 existence …. 2.6 failure to act …. 2.13 foreseeable risk of injury …. 2.6, 2.12 indeterminacy, auditors (example) …. 3.15–3.16 manufacturers to consumers …. 2.7 to innocent bystanders …. 2.8 plaintiff’s vulnerability …. 2.17 property owners …. 2.11 psychological injury (mental harm) …. 2.14

pure economic loss …. 2.15–2.17 salient features test …. 2.17 reasonableness …. 3.16 remoteness (of loss) …. 2.32, 8.30–8.33 retailers …. 2.9 road users …. 2.8, 2.12 service providers …. 2.10

E economic loss, pure see pure economic loss employees commercial relationships …. 10.13 misleading or deceptive conduct …. 3.22 of partnership, profit sharing …. 11.19

employers, commercial relationships …. 10.13 employment contracts …. 7.8 equity …. 1.29 estoppel …. 5.12 agency creation by …. 10.20 partnerships …. 11.49–11.52 promise overriding signed documents …. 6.8 promissory estoppel see promissory estoppel remedy in cases of …. 5.43–5.44 third party’s reliance on principal’s representation …. 10.33 types …. 5.35

ethics business and law …. 1.43–1.58 deontic theories …. 1.49

developing an ethical culture in the firm …. 1.53 ethical conflict …. 1.49 ethical theories …. 1.47–1.52 combining …. 1.52 Kantianism …. 1.49 psychology of ethical (or moral) behaviour …. 1.45 sensitivity, judgment, motivation and courage …. 1.45 role in business …. 1.44 social contract theory …. 1.50 Rawls’ adaptation …. 1.50 utilitarianism …. 1.48 virtue ethics …. 1.51

exclusion clauses, misleading or deceptive conduct …. 3.30 exemption clauses collateral contract avoidance …. 6.29 within contracts …. 7.12, 7.16 binding …. 7.32 signed contract inclusion …. 6.4 examples of …. 6.32 exclusion clauses …. 6.32 interpreting …. 6.32–6.38 interpreting rules ambiguity rule …. 6.34 deviation rule …. 6.38 four corners rule …. 6.37 fundamental breach, presumption against …. 6.36 general rule …. 6.33 negligence rule …. 6.35 parties’ intentions …. 6.33 limitation clauses …. 6.32, 9.35

notice of …. 6.15 party relying on ambiguities resolved against …. 6.34 bias towards …. 6.32 recreational services contracts, limited/excluded liability …. 9.35 ‘standard terms and conditions’ …. 6.16

express terms see terms of contract express trusts …. 14.10 discretionary trusts see discretionary trusts fixed trusts see fixed trusts parties to creation …. 14.4

F federalism …. 1.7 fiduciary duties of agents …. 10.44–10.48 duty not to make secret profits, accept secret commissions or take bribes …. 10.47 duty not to use principal’s property or information for self-gain …. 10.47 duty to account honestly …. 10.45 duty to avoid conflict of duty and interest …. 10.46 companies …. 12.14 directors …. 13.2, 13.23 partnerships …. 11.28 rule against self-dealing …. 10.46 of trustees …. 14.20

fitness for purpose …. 7.4, 7.5–7.7, 7.21–7.25 buyer’s inference (purpose) …. 7.24

buyer’s reliance reasonableness …. 7.25 on seller’s skill or judgment …. 7.23, 7.25 defined …. 7.22 merchantable quality …. 7.18 unmerchantable quality …. 7.28

fixed trusts …. 14.7, 14.10 franchise arrangement …. 7.3 fraudulent misrepresentation …. 3.2–3.10 broken promises …. 3.28 causal connection between fraud and loss …. 3.10 dangerous products …. 2.2 false statement of fact …. 3.3–3.7 versus mere puff …. 3.5 versus opinion …. 3.4 silence …. 3.6 ‘fraud’ …. 3.9 inducement to act …. 3.8 intent …. 3.2 knowledge of false representation …. 3.9 onus of proof …. 3.25 promises, reasonable grounds for making …. 3.28

frustration of contract, contract termination …. 8.6 G good faith agreement to negotiate …. 4.53 directors’ duty to act in good faith …. 13.13 good Samaritans/volunteers acting in …. 2.36

implied terms of …. 7.3, 7.8, 7.13 partners’ duties of …. 11.28–11.32

H hire contracts …. 7.7 I implied terms breach, exclusion or limited liability for …. 7.32 in contracts, into specific contract types …. 7.4–7.9 contracts for work and materials …. 7.5 of cooperation …. 7.2 employment contracts …. 7.8 of good faith …. 7.3, 7.13 hire contracts …. 7.7 landlord/tenant agreements …. 7.9–7.10 as matter of fact …. 7.10–7.13 in order to give effect to contract …. 7.13 on past dealings basis …. 7.1 court criteria for …. 7.11 as result of custom or trade usage …. 7.12 sales of goods contracts …. 7.16

incorporation of (contract) terms notice, by internet transactions …. 6.19 ticket cases …. 6.18 unsigned terms …. 6.13–6.19 conflicting statements or promises …. 6.17 reasonable notice test …. 6.13–6.14 standard terms and conditions …. 6.16

unusual terms …. 6.16

injunction …. 4.11 mandatory …. 8.39 misleading or deceptive conduct …. 3.21, 3.39

insolvent trading rule directors’ liability …. 14.23

intellectual property …. 14.6 intention to contract Heads of Agreement and Letters of Intent …. 5.7 social or domestic agreements …. 5.3

intermediate terms breach …. 8.15 seriousness of breach consequences …. 8.7 condition/warranty dichotomy …. 8.15 terms of contract …. 6.42 terms referring to quality …. 8.14

internet Electronic Transactions Act 1999 (Cth) …. 4.42 internet transactions …. 6.19 offer and acceptance …. 4.22 law reporting …. 1.28

intoxicated persons …. 5.46 invitation to treat advertisements …. 4.19 catalogues …. 4.18 displaying goods for sale …. 4.17 offer, distinguished …. 4.16–4.19

retail pricing …. 4.17

L land see real property landlord/tenant agreements …. 7.9–7.10 lapse of offer due to death of offeror or offeree …. 4.48 due to time …. 4.49

law administering — separation of powers doctrine …. 1.15 business and ethics …. 1.43–1.58 in commerce …. 1.39–1.42 commercial relationship framework …. 1.39–1.42 company law see company law contract law see contract law contracts contrary to …. 6.39 civil cases and criminal cases, distinction …. 1.34 extracting law from a case process …. 1.30 identifying …. 1.4 internet and law reporting …. 1.28 product liability laws …. 2.51 regulations …. 1.32 risk management and …. 1.54–1.58 sources courts of law see case law parliamentary see parliamentary law statutory obligations …. 1.41 termination of partnership by operation of law …. 11.56

liability

ACL’s strict liability scheme …. 2.41 for another person’s acts …. 2.37–2.38 non-delegable duties …. 2.38 vicarious liability …. 2.37 apportioning liability …. 3.35 beneficiaries, rights and liabilities …. 14.24–14.28 capping liability …. 3.34 company directors …. 14.23 implied terms, exclusion/limited liability for breach …. 7.32 for negligence …. 2.2–2.39 ‘but for’ test …. 2.31 scope of liability …. 2.31 state and territory legislation …. 2.4 no liability of companies …. 12.13 of partners to third parties …. 11.35–11.52 product liability laws …. 2.51 for safety defects under ACL Pt 3-5 …. 2.40–2.50 suppliers of services, limitation of liability …. 9.34 trustees duties, rights and liabilities …. 14.20–14.23 personal liability for debts …. 14.21 unlimited liability of companies …. 12.12

M manufacturers ACL Pt 3-5 behaviour a matter of defence …. 2.41 compensation liability …. 2.42 ‘manufacturer’ defined …. 2.43 no liability exclusion …. 2.49

consumers’ rights against …. 9.21–9.24 damages, amount …. 9.24 defences …. 9.22 duty of care to consumers …. 2.7 to innocent bystanders …. 2.8 express warranty to repair/replace …. 9.23 ‘manufacturer’ defined …. 2.43 obligations …. 9.21

mediation …. 1.38 mercantile law …. 7.14 merchantable quality …. 7.26–7.29, 9.7 buyer’s inspection affecting …. 7.29 criteria under Goods Act 1958 (Vic) (VGA) …. 7.26, 7.30 fitness for purpose …. 7.28 both applicable …. 7.22 contrast …. 7.18 negated obligation …. 7.32 patent/trade name — no implied condition …. 7.25 indicators …. 7.28 meaning …. 7.27 unmerchantable quality …. 7.24, 7.29–7.30

minors …. 5.45 misleading or deceptive conduct …. 3.21–3.42 ASIC Act …. 3.41 Australian Consumer Law (ACL) …. 11.45 conduct ‘in trade or commerce’ requirement …. 3.23 damages for breach …. 3.31, 3.33 false advertising cases …. 3.24, 3.32, 3.39

half-truths …. 3.24 mere puffs …. 3.29 misrepresentation …. 3.21 onus of proof …. 3.25, 3.28 opinions …. 3.27 penalties …. 3.40 promises and predictions …. 3.28 reasonable expectation test …. 3.26 silence as misleading conduct …. 3.26 variation of terms of contract …. 6.9 causation …. 3.32 reliance …. 3.32 contract declaration of void …. 3.37 varying terms of …. 3.38 Corporations Act …. 3.42 damages for breach …. 3.31 apportioning liability …. 3.35 calculation …. 3.33 capping liability …. 3.34 company’s employees or agents …. 3.36 directors, employees and agents …. 3.22 disclaimers …. 3.30 exclusion clauses …. 3.30 injunction …. 3.21, 3.39

misrepresentation damages for loss due to …. 3.31 fraudulent see fraudulent misrepresentation innocent …. 3.30 misleading or deceptive conduct see misleading or deceptive conduct

negligent misrepresentation see negligent misrepresentation non-binding representations …. 6.21 rescission …. 8.44

mistake common mistake …. 8.51 rescission …. 8.50–8.54 terms recording mistake …. 6.11 unilateral mistake …. 6.12, 8.52 void contracts …. 8.53

N negligence …. 2.6–2.17, 3.18 causation …. 2.31, 2.47 factual causation …. 2.31 contributory negligence …. 2.34, 3.35 court assessment of damages …. 2.33 damages contributory negligence …. 2.34 good Samaritans …. 2.36 plaintiff’s assumption of risk …. 2.35 duty of care …. 2.6–2.17 distributors of products/goods …. 2.9 failure to act …. 2.13 foreseeable risk of injury …. 2.6, 2.12 manufacturers …. 2.7, 2.8 non-delegable duties …. 2.38 property owners …. 2.11 psychological injury (mental harm) …. 2.14 pure economic loss …. 2.15–2.17 retailers …. 2.9

road users …. 2.8, 2.12 service providers …. 2.10 elements of cause of action …. 2.5 duty of care …. 2.6–2.17 injury must not be ‘fanciful’ or ‘far-fetched’ …. 2.8 exclusion clauses and disclaimers …. 3.30 good Samaritans …. 2.36 history of negligence action caveat emptor …. 2.2 development …. 2.3 Donoghue v Stevenson …. 2.3, 2.6 early days …. 2.2 reforms …. 2.4 insurance crisis …. 2.4, 2.10 liability …. 2.2–2.39 expressly or implicitly excluded …. 6.35–6.36 insurance crisis …. 2.4, 2.10 scope and ‘but for’ test …. 2.31 onus of proof …. 3.25 professional partnerships …. 11.45 proof of …. 2.41 recklessness, distinction …. 3.9 standard of care …. 2.18–2.30, 7.4 balancing risks, consequences and costs …. 2.18 balancing test — mitigation of known risk …. 2.19 distributor/retailer …. 2.24 event operators …. 2.28 goods design …. 2.20 goods production …. 2.21 inherent risks …. 2.29 mitigation of known risk …. 2.19

obvious risk …. 2.26 product labelling …. 2.23 product packaging …. 2.22 professional service delivery …. 2.25 recreational and other services delivery …. 2.26 res ipsa loquitur, doctrine …. 2.30 unexplained accidents …. 2.30 vicarious liability …. 2.37 non-delegable duties …. 2.38

negligent misrepresentation …. 3.11–3.20 duty of care …. 3.12–3.18 auditors …. 3.15–3.16 disclaimers …. 3.15–3.16 reliance on advice or information …. 3.14 when giving advice or supplying information …. 3.13 elements …. 3.11 remoteness of damage …. 3.20 standard of care …. 3.19 see also negligence

negotiation of contract agreements, good record keeping …. 6.2 invitation to negotiate …. 4.16 offer, distinguished …. 4.23 standard of conduct …. 4.4

non-consumer contracts …. 7.15 time of acceptance (of goods) …. 7.37

non-economic loss …. 2.46 O

offer and acceptance …. 4.1–4.56 acceptance of offer …. 4.36–4.47 battle of the forms …. 4.38 communicated by third party …. 4.47 communicated expressly …. 4.43 communicated to large company …. 4.41 communicated to offeror …. 4.40 communicated via internet …. 4.42 completes contract …. 4.39 final and unqualified …. 4.38 method and timing …. 4.46 only offeree may accept …. 4.37 postal acceptance rule …. 4.44–4.45 silence not tantamount to …. 4.40 advertising puff …. 4.19 agreements agreement ‘subject to contract’ binding? …. 4.54 ‘agreement to agree’ binding? …. 4.52 ‘agreement to negotiate’ binding? …. 4.53 certainty requirement …. 4.51–4.56 conditional agreements …. 4.55 enforceable …. 4.38 auctions, who makes the offer? …. 4.20 consideration see consideration counter offers amounting to offer rejection …. 4.34 reasonable persons …. 4.35 replacement contract containing (mutually agreed) additional terms …. 4.38 terms clarification request not a counter offer …. 4.35

indication of present intention, offer, distinguished …. 4.15 internet transactions, offeror …. 4.22 invitation to negotiate …. 4.16 invitation to treat advertisements …. 4.19 catalogues …. 4.18 offer, distinguished …. 4.16–4.19 lapse of offer due to death of offeror or offeree …. 4.48 due to time …. 4.49 offer counter offers …. 4.34 fate of …. 4.24 invitation to treat, distinguished …. 4.16–4.19 making offer …. 4.14–4.23 meaning …. 4.14 negotiation, distinguished …. 4.23 non-revocable offers …. 4.31 present intention indication, distinguished …. 4.15 standing offers …. 4.15 unilateral offers …. 4.30 offerees …. 4.14, 4.20–4.22 offerors …. 4.14 rejection of offer …. 4.32–4.35 counter offers amounting to …. 4.34 effect …. 4.32 offeree’s conduct indicating …. 4.33 terms clarification request not a counter offer …. 4.35 revocation of offer …. 4.25–4.31 rules …. 4.56 tenders, who makes the offer? …. 4.21

withdrawing offer before acceptance …. 4.27 after acceptance …. 4.26 informing offeree …. 4.28–4.29 non-revocable offers …. 4.31 rules regarding …. 4.25–4.31 unilateral offers …. 4.30

officers or agents of companies …. 13.4 actions …. 12.22 actual and ostensible authority …. 10.29, 10.33, 11.39, 11.41, 12.4, 12.26 assumptions regarding …. 12.23–12.28 authorised agents assumptions regarding …. 12.23–12.28 express or implied actual authority …. 12.4 damages for breach, company’s employees or agents …. 3.36 directors, employees and agents …. 3.22 misleading or deceptive conduct …. 3.22 partners as agents for co-partners …. 11.1 profit sharing …. 11.19

oral statements or representations determining promissory statements …. 6.22–6.28 terms of contract and binding, situations when …. 6.20–6.28 conflicting statements or promises …. 6.17 forms of statements …. 6.1 non-binding post-contractual …. 6.4 promissory in nature …. 6.21 reasonable bystander test …. 6.22, 6.23–6.28 special knowledge …. 6.23, 6.28 statement importance to deal …. 6.26

statement to contract time lapse …. 6.25 words use …. 6.27, 6.31 written document …. 6.24

ostensible authority …. 10.29–10.33 acting within …. 5.47–5.49 cannot be created in another person …. 10.32 depends on the principal’s holding out …. 10.30 express or implied …. 10.29–10.30 illustrative cases …. 10.31 overlap, ostensible authority and actual authority …. 10.30

P parliament ACL introduction …. 2.40 Australian parliamentary structure …. 1.13 changing division of power between …. 1.8 companies, derived from three main sources …. 12.2 executive …. 1.6, 1.15 federalism …. 1.7 overlapping federal system …. 1.8 regulations …. 1.32 regulatory intervention …. 1.32

parliamentary law Bill to Act of Parliament …. 1.12, 1.14 creating …. 1.14 as law source …. 1.5–1.23 locating and referring to …. 1.12 primacy over case law …. 1.31 Royal Assent …. 1.14 statutes (Acts), court interpretation …. 1.16–1.23

partnerships …. 1.42, 10.14 assignment of partnership interest …. 11.53 business structure …. 11.3, 14.1 choosing appropriate …. 11.2–11.6 carrying on business …. 11.11–11.14 acts in ordinary course of the business …. 11.46 business or hobby …. 11.12 business or single venture …. 11.14 preparing to carry on, distinction …. 11.13 carrying on business in common …. 11.15–11.22 ‘in common’ requirement …. 11.15 mutuality of rights and obligations …. 11.16 with a view of profit …. 11.23 companies source …. 12.2 company, distinctions …. 12.3 regarding registration …. 12.15 contractual relationships …. 11.14, 11.24 contract between partners …. 11.26 contracts …. 5.48 creation …. 11.8–11.9 formalities …. 11.9 by single venture …. 11.14 debts and obligations …. 11.39 debts incurred after partner death/bankruptcy …. 11.51 debts incurred before resignation/admission of new partner …. 11.52 decision making …. 11.27 defined …. 11.10–11.24 elements …. 11.10 joint and several liability for wrongful acts …. 11.44–11.47 misapplication of money or property …. 11.33–11.34

joint liability …. 11.37–11.43 meaning …. 11.38 for wrongful acts …. 11.44–11.47 liability of partners to third parties …. 11.35–11.52 acting beyond actual and ostensible authority …. 11.39, 11.41 acts in ordinary course of the business …. 11.46 commercial partner’s normal authority …. 11.40 debts incurred after partner death/bankruptcy …. 11.51 debts incurred before resignation/admission of new partner …. 11.52 estoppel …. 11.49–11.52 of former partners …. 11.50 joint liability after dissolution …. 11.59 joint liability for debts and obligations …. 11.37–11.43 leaving the partnership …. 11.50 limited partnerships …. 11.36 misapplication of money or property …. 11.48 personal liability of former partners …. 11.50 ratification …. 11.41–11.42 s 9 proviso …. 11.42 support to s 9 …. 11.43 torts …. 11.45 wrongful acts …. 11.44–11.47 limited …. 11.36 partners agreements between …. 11.27 authority …. 11.39–11.41 contract between …. 11.26 death or bankruptcy of …. 11.20, 11.51 dormant (silent) partners …. 11.16 fiduciary duties …. 11.28 former partners …. 11.50

liability by holding out …. 11.49–11.52 liability to third parties …. 11.35–11.52 outgoing partners …. 11.50 rights and liabilities between …. 11.26 rules governing relationships between …. 11.25–11.32 partners’ duties account for benefits derived from dealings with partnership …. 11.30 account for use of partnership assets …. 11.31 full and frank disclosure …. 11.29 of good faith …. 11.28–11.32 not to compete with partnership …. 11.32 Partnership Act 1958 (Vic) …. 11.10, 11.17–11.22, 11.27 limited partnerships …. 11.36 rights and liabilities between partners …. 11.26 s 9 proviso …. 11.42 partnership existence …. 11.9, 11.15 based on actions …. 11.24 mutuality of rights and obligations …. 11.16 when carrying on a business …. 11.13 partnership property …. 11.33–11.34 co-ownership of …. 11.17 defined …. 11.33 each partner’s right to …. 11.34 misapplication of money or property …. 11.33–11.34 profit aim …. 11.23 profit sharing …. 11.16–11.17 annuity payments …. 11.20 bona fide creditors …. 11.21 debt repayment …. 11.18 employees …. 11.19

sale of business …. 11.22 risk-taking unsuitability …. 11.5 statutory rules for determination …. 11.17 termination …. 11.54–11.60 assets distribution on dissolution …. 11.60 by courts …. 11.58 joint liability after dissolution …. 11.59 by operation of law …. 11.56 by partners …. 11.55 by supervening illegality …. 11.57 trusts, distinguished …. 14.9 wrongful acts …. 11.44–11.47 or omissions …. 11.45

past dealings implied terms …. 7.1, 7.11 incorporating terms, consistent basis …. 6.4

performance termination of contract by …. 8.3

personal property …. 14.6 persons with mental disabilities …. 5.46 private law …. 1.33 private law and public law, distinction …. 1.33

promissory estoppel …. 5.34–5.50 contract law and …. 5.36 detrimental reliance, importance of …. 5.40 development …. 5.35 elements …. 5.38–5.40 importance …. 5.37

leading case — Waltons Stores (Interstate) Ltd v Maher …. 5.41–5.42 lessons learned …. 5.42 promisor’s responsibility for the promisee’s assumption …. 5.39

property company property …. 12.14 partnership property, each partner’s right to …. 11.34 passing of property in goods …. 7.38–7.39 buyer’s transfer risk …. 7.39 property versus possession, distinction …. 7.38 real property see real property trust property …. 14.3, 14.6, 14.26

proprietary companies business organisation …. 11.3 characteristics …. 12.7 directors …. 13.1 voting on contractual matters …. 13.17 trading trust operation …. 14.15

public companies Australian Securities Exchange (ASX) listing …. 12.8 business organisation …. 11.3 characteristics …. 12.8 collapses …. 13.1 directors …. 13.1

public law …. 1.33 pure economic loss development of law …. 2.16 duty of care …. 2.15–2.17 foreseeable risk of injury …. 2.6, 2.12 salient features test …. 2.17

Perre v Apand and duty to avoid …. 2.17

R ratification — unauthorised acts …. 10.34–10.35, 11.41 ratification, meaning …. 10.34 rules of ratification …. 10.35 third party sued by principal …. 10.37 third party suing agent …. 10.38–10.41 third party suing principal …. 10.36

real property (land) …. 14.6 reasonable bystander test …. 6.22 application guidelines …. 6.23–6.28 special knowledge …. 6.23, 6.28 statement importance to deal …. 6.26 statement to contract time lapse …. 6.25 words use …. 6.27 written document …. 6.24

reasonable care and diligence see also standard of care

recklessness …. 3.46 negligence, distinction …. 3.9

recreational services contracts …. 9.35 regulation …. 1.32 rejection of offer …. 4.32–4.35 counter offers amounting to …. 4.34 effect …. 4.32 expressly or implied …. 4.32 offeree’s conduct indicating …. 4.33

terms clarification request not a counter offer …. 4.35

remedies — contracts …. 4.7–4.13 actual undue influence …. 8.49 confidential relationships …. 8.48 contract price, recovery of …. 4.12, 8.23–8.24 in general …. 8.23 sale of goods …. 8.24 contract termination see termination of contract damages see damages equitable …. 4.11 injunction …. 4.11, 8.39 rectification of contract …. 8.40 rescission …. 8.43–8.62 contract termination, contrast …. 8.56 duress …. 8.46 economic duress …. 8.46 effect on contract …. 8.55 in equity …. 8.44–8.54, 8.55–8.60 innocent party act …. 8.57 introduction …. 8.43 misrepresentation …. 8.44 mistake …. 8.50–8.54, 8.51, 8.52 not permitted …. 8.58, 8.59, 8.60 unconscionable conduct …. 8.45 undue influence …. 8.47–8.49 restitution …. 8.41–8.42 partial performance …. 8.42 quantum meruit …. 8.23, 8.41–8.42 total failure of consideration …. 8.6, 8.41 special relationships …. 8.47

specific performance …. 4.10 statutory rescission Australian Consumer Law …. 8.61 Contracts Review Act 1980 (NSW) …. 8.62 suppliers of goods major failure …. 9.14 non-major failure …. 9.14 supplier remedy of breach …. 9.18 suppliers of services …. 9.14–9.19, 9.36–9.38 major failure …. 9.36–9.37 non-major failure …. 9.36 termination of contract …. 9.38 termination of contract see termination of contract

rescission …. 8.43–8.62 contract affirmed …. 8.58 contract termination, contrast …. 8.56 duress …. 8.46 effect on contract …. 8.55 in equity grounds in …. 8.44–8.54 nature of …. 8.55–8.60 innocent party act …. 8.57 introduction …. 8.43 legal rights of innocent third party will be adversely affected …. 8.60 misrepresentation …. 8.44 mistake …. 8.50–8.54 common mistake …. 8.51 unilateral mistake …. 8.52 not permitted contract affirmed …. 8.58

if legal rights of innocent third party will be adversely affected …. 8.60 substantial restitution not possible …. 8.59 not permitted if legal rights of innocent third party will be adversely affected …. 8.60 statutory rescission Australian Consumer Law …. 8.61 Contracts Review Act 1980 (NSW) …. 8.62 substantial restitution not possible …. 8.59 unconscionable conduct …. 8.45 undue influence …. 8.47–8.49 actual …. 8.49 presumption in confidential relationships …. 8.48 presumption in special relationships …. 8.47

responsible government …. 1.15 restitution …. 8.41–8.42 partial performance …. 8.42 quantum meruit …. 8.23, 8.41–8.42 substantial restitution, not possible — rescission disallowed …. 8.59 total failure of consideration …. 8.6, 8.41 unjust enrichment …. 8.41

retailers detecting defects in packaged goods …. 2.1 distinguishing between invitation to treat and offer …. 4.17 duty of care …. 2.9 standard of care …. 2.24

revocation of offer …. 4.25–4.31 before acceptance …. 4.27 after acceptance …. 4.26 informing offeree …. 4.28, 4.29

non-revocable offers …. 4.31 options …. 4.31 no option granted proviso …. 4.27, 4.31 unilateral offers …. 4.30

rights consumers’ rights against manufacturer of goods …. 9.21–9.24 against supplier of goods …. 9.2–9.20 consumers’ rights against suppliers of services …. 9.25–9.38 contractual rights assignment …. 5.50 partner’s right to partnership property …. 11.34 rescission and innocent third party …. 8.60 shareholder’s right to take personal action …. 13.37

risk/risk management balancing risks, consequences and costs …. 2.18 dealing with …. 1.2 failing to take precautions against risk …. 2.34 foreseeable risk of injury …. 2.6, 2.12 law and …. 1.54–1.58 legal risks …. 1.56 compliance programs …. 1.58 strategies …. 1.57 litigation …. 1.54 mitigation of known risk — balancing test …. 2.19 obvious risk …. 2.26, 2.35 passing of risk in goods …. 7.39 plaintiff’s assumption of risk …. 2.35 risk management defined …. 1.55 risk management policy …. 1.55 risk-taking unsuitability of partnerships …. 11.5

Royal Charter …. 12.2 rule of law …. 1.3 identifying …. 1.4 meaning …. 1.3

S sale of goods at auction see auctions buyer’s reliance on description …. 7.20 reasonable …. 7.25 on seller’s skill and judgment …. 7.23 contract price, recovery of …. 8.24 correspondence with description …. 7.16–7.20 implied condition of …. 7.31 with sample …. 7.16, 7.30–7.31 by description …. 7.16–7.20, 7.28 buyer reliance and application …. 7.20 not product quality reference …. 7.18 packaging forming description part …. 7.19 unascertained goods …. 7.19 fitness for purpose …. 7.4, 7.5–7.7, 7.21–7.25 defined …. 7.22 legislation acceptance …. 7.37 delivery and payment …. 7.36 goods, contract price …. 7.35 implied terms …. 7.16 provisions …. 7.34–7.39

quantity referred to and quantity delivered, differences …. 8.16 state/territory Acts …. 7.14 merchantable quality …. 7.18, 7.26–7.29, 8.16, 9.7 necessities …. 5.45 non-consumer contracts …. 7.15, 7.37 one-off transactions …. 7.3 passing of property …. 7.38 passing of risk …. 7.39 by sample …. 7.16, 7.30–7.31 via internet see internet

sale of goods contracts …. 7.14–7.39 buyer remedies …. 7.33 buyer’s purpose may be inferential …. 7.24 early mercantile law …. 7.14 expectation losses …. 8.34 implied terms exclusion/limited liability for breach …. 7.32 Goods Act 1958 (Vic) (VGA) …. 7.16 non-consumer contracts …. 7.15 importance of acceptance …. 7.37

separation of powers doctrine …. 1.15 service contracts …. 7.4–7.6 reasonable care and skill …. 7.1, 7.4, 7.5–7.6

settlors …. 14.4–14.5 signature rule exceptions condition precedent …. 6.10 equitable doctrines …. 6.12 estoppel …. 6.8 misrepresentation …. 6.9

non-contractual appearance …. 6.7 terms recording mistake …. 6.11

simple contracts, consideration required in all …. 5.12 sole traderships, business structure …. 11.3–11.4, 14.1 specific performance …. 4.10, 8.38 standard of care balancing risks, consequences and costs …. 2.18 balancing test …. 2.19 dangerous recreational activities …. 2.27 distributor/retailer …. 2.24 event operators …. 2.28 general principles …. 2.18 goods design …. 2.20 goods production …. 2.21 inherent risks …. 2.29 mitigation of known risk …. 2.19 obvious risk …. 2.26, 2.35 product labelling …. 2.23 product packaging …. 2.22 professional service delivery …. 2.25 recreational and other services delivery …. 2.26 res ipsa loquitur, doctrine …. 2.30 specialist expertise …. 3.19 unexplained accidents …. 2.30

stare decisis …. 1.26 suppliers of goods acceptable quality, guarantee …. 9.7 auction, sale …. 9.6

Australian Consumer Law see Australian Consumer Law breach of guarantees …. 9.14–9.19 major failure defined …. 9.15 rejection of goods …. 9.16–9.17 supplier entitled to correct failure …. 9.18 ‘consumer’ defined …. 9.2–9.3 consumer’s rights …. 9.2–9.20 goods as gifts …. 9.19 fitness for any disclosed purpose …. 9.8 goods correspond with description, guarantee …. 9.9 goods correspond with sample, guarantee …. 9.10 lease or hire of goods …. 9.3 limitation of liability …. 9.12 fair and reasonable limitation …. 9.13 reliance on seller’s skill and judgment …. 9.8 remedies …. 9.14–9.19 retailers’ right of indemnity against manufacturer …. 9.20 statutory guarantees …. 9.4, 9.8 exclusion of guarantees, prohibition …. 9.11 supply to a ‘consumer,’ in trade or commerce, requirement …. 9.4–9.5

suppliers of services …. 9.36–9.38 consumers’ rights against …. 9.25–9.38 limitation of liability …. 9.34 major failure …. 9.36–9.37 non-major failure …. 9.36 recreational service contracts, limited/excluded liability …. 9.35 remedies …. 9.36–9.38 major failure …. 9.36–9.37 non-major failure …. 9.36 termination of contract …. 9.38

sales of goods, distinguished …. 9.28 service contracts …. 7.4–7.6 services not covered by ACL …. 9.28 ‘services’ defined …. 9.27 statutory guarantees …. 9.30–9.32 due care and skill …. 9.31 fitness for purpose …. 9.32 major failure, defined …. 9.37 void guarantees …. 9.33 in trade or commerce, requirement …. 9.26

T tenant/landlord agreements …. 7.9–7.10 tenders, offer and acceptance, tenderers …. 4.21 termination of contract …. 8.2–8.22 by agreement …. 5.28, 8.4 anticipatory breach …. 8.17–8.18 defined …. 8.17 no termination …. 8.19 proven ‘wholly and finally incapable’ of performing …. 8.18 breach of condition …. 6.42 implied conditions …. 7.33 breach of contract …. 8.7–8.14 discharge …. 8.3–8.4, 8.6 election to affirm contract, effect of …. 8.22 election to terminate, effect of …. 8.5, 8.21 time clauses …. 8.10 by frustration …. 8.6 intervening events …. 8.6

by innocent party …. 4.8 by performance …. 8.3 procedure …. 8.20 repudiation …. 8.16 rescission versus contract termination, contrast …. 8.56 serious breach of intermediate term …. 8.15 supplier of goods — procedures and effects …. 9.38 by term of contract …. 8.5

termination of partnership …. 11.54–11.60 by courts …. 11.58 dissolution assets distribution on …. 11.60 joint liability after …. 11.59 by operation of law …. 11.56 by partners …. 11.55 by supervening illegality …. 11.57

termination of trust beneficiaries’ consent …. 14.29 court order …. 14.29 revocation …. 14.29 trust property distribution …. 14.29

terms of contract …. 6.1–6.42 ‘condition’ …. 8.10 contract between partners …. 11.26 establishing express terms basic tests …. 6.1 courts approach …. 6.3 exclusion clauses and disclaimers …. 3.30 exemption clauses see exemption clauses

implied terms see implied terms importance of …. 6.42 incorporation by notice internet transactions …. 6.19 ticket cases …. 6.18 intermediate terms …. 6.42 meaning of term …. 6.30–6.31 court interpretation of document words …. 6.31 reasonable person test …. 4.6, 6.30 parol evidence rule …. 6.3, 6.24 relevant evidence, ascertaining …. 6.2–6.3 replacement contract containing (mutually agreed) additional terms …. 4.38 signature rule exceptions condition precedent …. 6.10 equitable doctrines …. 6.12 estoppel …. 6.8 misrepresentation …. 6.9 non-contractual appearance …. 6.7 terms recording mistake …. 6.11 signed documents contents misrepresentation …. 6.9 exceptions …. 6.6–6.12 importance …. 6.5–6.12 oral promise overriding term in …. 6.8 signature rule …. 6.5 statements or representations alternatives …. 6.21 binding, situations when …. 6.20–6.28 conflicting …. 6.17 early negotiation versus final inducement …. 6.25

forms …. 6.1 mere representation …. 6.21 non-binding post-contractual …. 6.4 promissory in nature …. 6.21 puffery …. 6.21 reasonable bystander test …. 6.22, 6.23–6.28 special knowledge …. 6.23, 6.28 statement importance to deal …. 6.26 statement to contract time lapse …. 6.25 words use …. 6.27, 6.31 written document …. 6.24 termination of contract by …. 8.5 terms at contract heart …. 8.9 terms implied as matter of fact …. 7.10–7.13 based on custom/trade usage …. 7.1, 7.12 based on past dealings course …. 7.1, 7.11 to give effect to contract …. 7.1, 7.13 terms implied by sale of goods legislation …. 7.1 terms implied by statute …. 7.1 terms made conditions expressly by parties …. 8.10 by statute …. 8.8 time clauses …. 8.10 in mercantile contracts …. 8.11 in non-mercantile contracts …. 8.12 time made condition by notice …. 8.13 types of conditions see conditions of contract intermediate terms see intermediate terms warranties see warranty unenforceable …. 6.40

unreasonable trade restraint …. 6.41 unsigned terms, incorporation …. 6.13–6.19 conflicting statements or promises …. 6.17 reasonable notice test …. 6.13–6.17 terms and conditions, standard …. 6.16 unusual term — extra notice …. 6.16 varying terms of contract …. 3.38

third parties acceptance of offer, communicating …. 4.47 as agency party …. 10.3 awareness of agent’s actual authority …. 10.33 contractual rights assignment …. 5.50 innocent third party, rescission not permitted if legal rights adversely affected …. 8.60 partnership, liability …. 11.35–11.52 acting beyond actual and ostensible authority …. 11.41 acts in ordinary course of the business …. 11.46 commercial partner’s normal authority …. 11.40 debts incurred after partner death/bankruptcy …. 11.51 debts incurred before resignation/admission of new partner …. 11.52 estoppel …. 11.49–11.52 of former partners …. 11.50 joint liability after dissolution …. 11.59 joint liability for debts and obligations …. 11.37–11.43 leaving the partnership …. 11.50 limited partnerships …. 11.36 misapplication of money or property …. 11.48 personal liability of former partners …. 11.50 proviso …. 11.42 ratification …. 11.41

wrongful acts …. 11.44–11.47 sued by principal …. 10.37 suing agent …. 10.38–10.41 suing principal …. 10.36 undisclosed principal rule, agents …. 10.42

torts …. 1.41 fraudulent misrepresentation, dangerous products …. 2.2 negligence see negligence wrongful acts or omissions …. 11.45–11.47

trade terms involving and unreasonable restraint of trade …. 6.41

trading trusts business operation through …. 14.1 creation by deed of settlement …. 14.11 operation …. 14.15 position of creditors in regard to …. 14.28 unit trusts — transferable units …. 14.14

trust property …. 14.6 trustees …. 14.4–14.5 versus beneficiaries …. 14.1 corporate trustees …. 14.1 insolvent trading …. 14.22–14.23 creditors’ position in regard to trading trust …. 14.28 duties, duty of prudence, diligence and honesty …. 14.20 express powers …. 14.17 fiduciary relationship with beneficiary …. 14.2 implied powers …. 14.18 indemnity right …. 14.21–14.22 legal interest …. 14.7

liability directors’ liability (insolvent trading) …. 14.23 personal liability for debts …. 14.21 never sole beneficiaries …. 14.5, 14.7 statutory powers …. 14.19

trusts …. 1.42 beneficiaries …. 14.4 cestui que trust …. 14.7 consent for trust termination …. 14.29 equitable interest …. 14.7 identified with certainty …. 14.7 nature of interest …. 14.10 rights and liabilities …. 14.24–14.28 sole …. 14.5, 14.7 tracing …. 14.26 as trust element …. 14.3 business structure, ownership versus primary interest-holder, distinction …. 14.1 classification …. 14.10 creation, as means of classification …. 14.10 deeds of settlement …. 14.11–14.12, 14.29 defined …. 14.2 discretionary trusts …. 14.7, 14.10, 14.27 income-splitting schemes …. 14.12 duration …. 14.8 enforceable charitable trusts …. 14.7 essential elements …. 14.3 express trusts …. 14.10 parties to creation …. 14.4 fixed trusts …. 14.7, 14.10, 14.13

unit trusts …. 14.14 income tax minimisation …. 14.2 merging of legal and equitable interests — trust disappears …. 14.7 other entities, comparison …. 14.1, 14.9 settlors …. 14.2, 14.4–14.5 acts of …. 14.10 revocation …. 14.29 signing deed of settlement …. 14.11 termination of see termination of trust testamentary trusts …. 14.10 trading trusts …. 14.1 by deed of settlement …. 14.11 operation …. 14.15 position of creditors in regard to …. 14.28 unit trusts — transferable units …. 14.14 trust property …. 14.6 beneficiaries’ right in rem …. 14.26 distribution, termination means …. 14.29 as trust element …. 14.3 trustees …. 14.5 duties, rights and liabilities …. 14.20–14.23 powers …. 14.16–14.19 as trust element …. 14.3 types …. 14.10–14.15

U uncertainty …. 1.49 dealing with …. 1.2

unconscionable conduct …. 3.43–3.49 court-ordered pecuniary penalties …. 3.49

court’s approach (contract) …. 3.43, 6.12 as part of judge-made law remedies …. 3.45 scope of rule …. 3.44 recklessness …. 3.46 rescission …. 8.45 unconscionable business transactions under ACL …. 3.46–3.49

undue influence …. 6.12 rescission …. 8.47–8.49 actual …. 8.49 presumption in confidential relationships …. 8.48 presumption in special relationships …. 8.47

unfair and unlawful conduct …. 3.50 unilateral mistake …. 6.12 unit trusts discretionary trust, distinction with …. 14.14

unsigned terms — incorporation …. 6.13–6.19 reasonable notice test …. 6.13 conflicting statements or promises …. 6.17 document, contractual nature? …. 6.15 a question of fact …. 6.14–6.17 terms and conditions, standard …. 6.16 unusual term — extra notice …. 6.16

V vicarious liability negligence …. 2.37 non-delegable duties …. 2.38

W warranty breach — damages only …. 8.7 condition/warranty dichotomy …. 6.42, 8.15 implied warrants buyer’s possession of goods …. 7.16 tenants …. 7.9 sought and given prior to contract …. 5.18 terms referring to quality usually warranties …. 8.14 ‘warranty’ …. 6.34

workplace culture …. 1.46 written contract …. 7.13 advantages …. 4.5 exemption clauses in …. 6.29 parol evidence presumption …. 6.3, 6.24