0
\nLAW504
\nBusiness and Corporations Law
\nFACULTY OF BUSINESS
\nMODULES
\n*LAW504*
\nBusiness and Corporations Law
\nLAW504 Modules
\nFaculty of Business
\nWritten and compiled by
\nBede Harris
\nii
\nEducational designer
\nBen Bohmfalk
\nProduced by Division of Learning and Teaching Services, Charles Sturt University, Albury –
\nBathurst – Wagga Wagga, New South Wales, Australia.
\nFirst published June 2013
\nLast updated January 2018
\nPrinted at Charles Sturt University
\n\u00a9 Charles Sturt University
\nPreviously published material in this book is copied on behalf of Charles Sturt University pursuant
\nto Part VB of the Commonwealth Copyright Act 1968.
\niii
\nContents
\nPage
\nTopic 1 The Australian legal system 1
\nTopic 2 Sources of law and interpretation of statutes 14
\nTopic 3 Torts – Elements of liability 24
\nTopic 4 Torts – Damages and defences 35
\nTopic 5 Contract – Formation 40
\nTopic 6 Contract \u2013 Legal validity and validity of consent 52
\nTopic 7 Contract \u2013 Contents of contracts 60
\nTopic 8 Contract \u2013 Discharge of contracts 68
\nTopic 9 Consumer Law 76
\nTopic 10 Property law 83
\nTopic 11 Introduction to business organisations 87
\nTopic 12 The law of agency 90
\nTopic 13 Partnership 97
\nTopic 14 The concept of incorporation 105
\nTopic 15 Company liability in crime, tort and contract 118
\nTopic 16 Corporate governance \u2013 the constitution 128
\nTopic 17 Members’ meetings 133
\nTopic 18 Members\u2019 remedies 138
\nTopic 19 Directors 147
\nTopic 20 Directors\u2019 duties 152
\nTopic 21 Corporate finance: shares and debentures 173
\nTopic 22 Fundraising by public companies 181
\nTopic 23 Liquidation 188
\niv
\n1
\nTopic 1 The Australian legal system
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. explain the nature of law and the functions of law in society;
\n2. outline how different world legal systems are classified;
\n3. describe each of the components of the Australian federal
\nsystem;
\n4. outline the functions of the three branches of government:
\nlegislative, executive and judicial;
\n5. describe the structure and the functions of the
\nCommonwealth parliament and the distribution of power
\nbetween the Commonwealth and the States;
\n6. outline the jurisdiction of Commonwealth and State courts;
\nand
\n7. outline the ways in which disputes can be resolved other
\nthan by litigation, using Alternative Dispute Resolution
\n(ADR) mechanisms.
\nVideo
\nA. The nature of law
\nIntroduction
\nLaw is the body of rules for human conduct that are enforceable by the coercive
\npower of the state. Thus law consists of the rules that are generally regarded as
\nbeing obligatory in any given society. They differ from other rules, such as social
\nrules or the rules of etiquette, in that they will be enforced by the courts \u2013 in other
\nwords, the courts will give an order that will be enforced by the police if
\nnecessary, to give effect to the rules of law.
\nWhere a person is found guilty of a criminal offence, the court might order that
\nthey pay a fine or sentence them to prison.
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\nIf there is a civil case (that is, one person sues another) the court may give what
\nis called a remedy to the person who wins the case \u2013 for example, may order the
\nother person to pay money in compensation, restore property or perform as they
\nagreed to under a contract.
\nThe function of law in society
\nMost people think very little about the law until something goes wrong. But the
\nlaw is continuously regulating our behaviour. Goods are sold. People work.
\nCouples get married or live in de facto relationships. Cars are driven. Individuals
\ndie. We pay taxes. Property is leased or purchased. Companies are formed. The
\nlaw lays down rules in respect of these and other matters that affect us all. So
\nthere is a multitude of functions performed by law, including:
\n\uf0b7 Controlling social relations and behaviour;
\n\uf0b7 Providing the machinery and procedures for the settlement of disputes;
\n\uf0b7 Protecting individuals by maintaining order;
\n\uf0b7 Preserving the existing legal system;
\n\uf0b7 Protecting ownership and enjoyment of the use of property;
\n\uf0b7 Reinforcing and protecting the family;
\n\uf0b7 Facilitating social change.
\nThe law is obviously of immense importance in our society.
\nClassification of law
\nLaws may be classified in different ways. Some of the major classifications or
\ndivisions are as follows:
\n1. A very broad classification is between international law and national,
\ndomestic or municipal laws.
\nInternational law is the body of rules of law that regulate the conduct of
\ncountries between themselves, known as \u2018public international law\u2019, or the
\ncitizens of different countries in an international context, known as \u2018private
\ninternational law\u2019. The national, domestic or municipal laws govern
\nrelations between people in or within a country.
\n2. Within the international community, domestic legal systems can be divided
\ninto a number of families. Common law jurisdictions are those like
\nEngland, the United States, Canada, Australia, New Zealand, Hong Kong
\nand Singapore, whose legal systems are all based on the principles of
\nEnglish common law, the principles of which are found in case law,
\nsupplemented by statute law. In Civil law jurisdictions, which include
\nEuropean countries, Japan, China and countries in Latin America, the
\nprimary source of law is a Code based on 18th and 19th century models
\noriginating in Europe. The courts themselves do not create legal rules in the
\nform of case law \u2013 their role is restricted to the interpretation of the Code.
\nIn Sharia systems, law is based on religious rules found in the Qu\u2019ran \u2013 in
\nother words, there is no separation between religious law governing the
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\nlives of believers and the general law applicable to society. The law is
\ninterpreted by religious scholars.
\n3. Another classification is between public law and private law.
\nPublic law is the body of law more concerned with the government of a
\ncountry, for example, constitutional law, administrative law, criminal law
\nand revenue law.
\nPrivate law is concerned with regulating the lives of individual citizens in
\ntheir relations with one another, for example tort law (covered in next
\ntopic (sample nursing essay examples by the best nursing assignment writing service)), contract law, property law and family law.
\n4. A third classification is between criminal law and civil law.
\nCriminal law is directed towards the enforcement of rules on behalf of
\nsociety as a whole. A criminal case is brought by a prosecutor acting on
\nbehalf of the government, pursuing the interest society has in ensuring that
\norder is maintained. The objective of criminal law is punishment. The level
\n(or \u2018onus\u2019) of proof required is high \u2013 the court must be convinced of the
\ndefendant\u2019s guilt beyond reasonable doubt, which is a very high level of
\nprobability.
\nCivil law (note the completely different meaning of the term \u2018civil law\u2019 to
\nthat used in point 2 above) involves a dispute between two private parties
\nwhich could be people or companies). In a civil case the person bringing
\nthe case (the plaintiff) asks the court to adjudicate a private dispute that they
\nhave with the defendant. The objective of a civil case is compensation of
\nthe plaintiff for the damage they allege they have suffered because of the
\nacts or omissions of the defendant. The standard of proof in civil cases is
\nlower than in criminal cases \u2013 the court needs only to be persuaded that the
\ncase of one party or the other is true on a balance of probabilities \u2013 that is,
\nthat that party\u2019s case is more likely to be true than not.
\nNote that, although criminal law and civil law are different in important
\nrespects, both a criminal and a civil case could result from the same event.
\nFor example, if a speeding driver hits a pedestrian on a crosswalk, the driver
\nmay be charged with the criminal offence of dangerous driving causing
\ngrievous bodily harm, and could then face a separate civil action where the
\npedestrian sues him or her for damages under the law of torts.
\n5. A fourth classification is between substantive law and procedural law.
\nThe divisions within substantive law include criminal law, property, torts,
\ncontracts and constitutional law. Substantive law consists of those laws
\nwhich identify the rights and liabilities under the law.
\nProcedural law provides the means of enforcement and operation of the
\nsubstantive law, for example, the laws relating to civil procedure, criminal
\nprocedure and evidence. They specify the courts in which actions are to be
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\ncommenced, how trials are to be conducted, the orders the judges make, and
\nthe grounds and avenues of appeal.
\nSources of law
\nThere are two main sources of law:
\n\uf0b7 Statute law (also referred to as legislation) which is enacted by a law
\nmaking body, such as the Commonwealth or State Parliaments or a local
\nauthority.
\n\uf0b7 Case law (or common law) which consists rules of law developed over the
\ncenturies and applied by the courts if there is no statute law on a topic (sample nursing essay examples by the best nursing assignment writing service).
\nWe will explore this distinction in much more detail in the next Topic.
\nWeb Content
\nThe most comprehensive source of Australian statute and
\ncase law is AUSTLII (the Australian Legal Information
\nInstitute) at https:\/\/monkessays.com\/write-my-essay\/austlii.edu.au\/ . Follow this link to the
\nsite, where you will be able to search for Commonwealth,
\nState and Territory law.
\nB. Australian constitutional law
\nThe institutions, or branches of government, that collectively constitute the legal
\nsystem are:
\n1. The Legislature – the Commonwealth Parliament, State Parliaments,
\nTerritory Assemblies and local authorities that make statute law;
\n2. The Executive – the government departments \u2013 Federal, State and Territory –
\nthat apply, administer and implement the laws; and
\n3. The Judiciary – the Commonwealth, State and Territory courts and tribunals
\nthat apply and interpret statute law, develop rules of common law and
\nresolve disputes.
\nOther components of the legal system include the law enforcement agencies such
\nas the customs, prisons, health inspectors and the police which enforce the laws
\nand play an important part in the judicial process.
\nThough strictly not part of the legal system, the legal profession also plays an
\nimportant part in the administration of law and the operation of the legal system.
\nAustralia has a federal parliamentary system. This means that Australia has a
\ncentral government located in Canberra empowered to make laws for the whole
\ncountry, while each State and Territory has its own government that can make
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\nlaws that have application within their respective States and Territories. The effect
\nis that there are two legal systems, that is the Commonwealth, and that of each
\nState or Territory. Australia, the United States of America, and Canada have
\nfederal systems of government in contrast to the United Kingdom and New
\nZealand that have a single or unitary system.
\nAny federal system of government has three key features. They are:
\n1. A division of legislative authority by the national Constitution, with some
\npowers being given to the central \/ federal \/ Commonwealth legislature that
\nmakes laws for the whole country, and the rest to State \/ Provincial
\nlegislatures which make laws for their particular jurisdictions;
\n2. The inability of either the federal or the State governments to change the
\nConstitution on their own and
\n3. A court with jurisdiction to enforce the Constitution and determine disputes
\nbetween the central and state governments.
\nThese features are found in the Commonwealth of Australia Constitution Act
\n1900, which came into operation on 1 January 1901.
\nUnder the Australian model of federalism, the Commonwealth Parliament can
\nlegislate only on those matters which are stated in the Commonwealth
\nConstitution as falling within its legislative power. If a topic (sample nursing essay examples by the best nursing assignment writing service) is not mentioned in
\nthe Constitution, then by implication it is left to the States to legislate on.
\nAlthough this arrangement appears to give only a limited role to the
\nCommonwealth, broad judicial interpretation of the Commonwealth\u2019s legislative
\npowers over the past 90 years has led to an increase in Commonwealth legislative
\npowers at the expense of the States. Furthermore, the Commonwealth often
\nexploits the fact that the States are reliant on the Commonwealth for grants (as
\nthey do not raise enough revenue to run their governments) by making the grants
\nconditional on the States enacting laws that serve the policy ends of the
\nCommonwealth.
\nMost of the powers of the Commonwealth Parliament are listed in s 51 of the
\nCommonwealth of Australia Constitution Act \u2013 you can follow this link to look
\nup sections in the Constitution. Others are found in ss 52, 90, 114 , 115 and 122.
\nSome of the Commonwealth\u2019s powers \u2013 found in ss 52, 90, 114 and 115 are
\nexclusive. This means that the States may never legislate on these topic (sample nursing essay examples by the best nursing assignment writing service)s.
\nHowever of the legislative powers of the Commonwealth are not exclusive \u2013 in
\nother words the States may legislate on the topic (sample nursing essay examples by the best nursing assignment writing service)s they relate to. However, this is
\nsubject to the qualification that if the Commonwealth legislates on a topic (sample nursing essay examples by the best nursing assignment writing service) and
\nthere is existing or future legislation passed by a State that is inconsistent with the
\nCommonwealth legislation, s 109 of the Constitution provides that the State
\nlegislation will be invalid to the extent of the inconsistency.
\nIt should also be noted that the Territories are in a special position: Although the
\nACT, Northern Territory and Norfolk Island have Legislative Assemblies that can
\nenact laws, s 122 of the Constitution gives the Commonwealth complete power
\nover the Territories \u2013 in other words, the Commonwealth is not restricted to the
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\npowers listed in s 5 of the Constitution when passing laws applying to the
\nTerritories. The Territories do have Assemblies, created by the Commonwealth
\nusing the power contained in s 122, but the Commonwealth can and does limit
\nwhat the Territories can legislate on, and can invalidate any law passed by a
\nTerritory Assembly.
\nAn important legal doctrine is that of separation of powers. The classic
\nstatement of this, by the 18th century French political philosopher Montesquieu
\nwas that each of the three branches of government \u2013 legislature, executive and
\njudiciary \u2013 should be separate from each other in that none should perform the
\nfunctions of any other and no individual should hold office in more than one
\nbranch. The doctrine does not fully apply to countries, such as Australia, which
\nhave a Westminster system, also referred to as the system of \u2018responsible
\ngovernment\u2019, because under that system, Ministers (who are members of the
\nexecutive) must be members of Parliament (the legislature) and hold office only
\nso long as they have a majority in the legislature. So separation of power does
\nnot apply between the executive and the legislature. However, under the
\nCommonwealth Constitution separation of power does apply between the
\njudiciary one the one hand and the executive and the legislative branches on the
\nother, as only the courts can exercise judicial power.
\nExercise
\nAnswer the following questions, by following this link to the
\nCommonwealth of Australia Constitution Act:
\n1. If the federal Parliament was concerned that private people in
\nQueensland were selling to each other cars which did not
\nhave working brakes, is there any power in s 51 of the
\nConstitution which would enable the Commonwealth
\nParliament to legislate on this intra-State trade (i.e. trade
\nbetween residents of Queensland)? Would your answer to be
\ndifferent if the cars were being sold by corporations ?
\n2. Could Victoria enact a law for the formation of a State Navy
\nto protect its coastline ?
\n3. Under what three sub-sections of s 51 the Constitution might
\nthe Commonwealth Parliament have the power to pass laws
\ngoverning the selling of goods on flights by a corporation
\nrunning an airline which flies to overseas destinations?
\n4. What is an excise duty? Could the State of New South Wales
\nimpose a customs duty on imported cars?
\n5. If the federal Parliament passed an Act stipulating that the
\nmetric system was to be abandoned and Australia was to
\nrevert to the Imperial system of weights and measures, and
\nSouth Australia then passed legislation retaining the metric
\nsystem, what would the legal position be in that State?
\nExplain your answer step by step, first identifying whether
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\nsuch legislation lies within the competence of the
\nCommonwealth Parliament.
\nC. The legislative branch
\nThe federal parliament is a bi-cameral (that is, two-chamber) law-making body.
\nThe two chambers are the House of Representatives or the Lower House, and the
\nSenate or the Upper House. The third component of the Parliament is the Queen
\n(or the Crown) who is represented by the Governor-General.
\nThe House of Representatives
\nThe House of Representatives is elected directly by the people divided into
\nelectorates based on population size, varying from State to State by a preferential
\nvoting system. General elections take place about every three years. The elected
\nrepresentatives are known as Members of Parliament (MPs). They may be the
\nmembers of the government, opposition members, and independent members.
\nThe political party or coalition of political parties with the majority of members in
\nthe House of Representatives forms the government. The head of the government
\nis the Prime Minister. The Governor-General appoints as Prime Minister a person
\nwho can form a government enjoying the confidence of the House of
\nRepresentatives. Ministers are the parliamentary heads in charge of administering
\nparticular public service departments. The senior ministers constitute the Cabinet.
\nThe political party or parties in coalition which has the second largest membership
\nin the Lower House, and is therefore not the governing party constitutes the
\nopposition. The opposition has its own leader, known as the leader of the
\nopposition. In addition the opposition allots \u2018portfolios\u2019 to its shadow ministry and
\ncabinet. The opposition expresses its dissent to government policy by its
\ncontinued criticism and makes itself attractive to the electorate as an alternative to
\nthe government.
\nThe Senate
\nThe Senate or Upper House is also elected directly by the people by a system of
\npreferential voting, but on a State-wide basis. Each State elects twelve senators,
\nwhile the Australian Capital Territory and the Northern Territory elect two
\nSenators each. A Senator\u2019s term is six years, but because of the rotation system
\nthere are six senators from each of the six States retiring every three years.
\nThe Senate was intended to represent the interests of the people of the States, as a
\nfederal device, to protect the rights of the smaller states against the more populous
\nstates. Thus, the reason for an equal number of representatives from each State,
\nirrespective of their population and size. The Senate was also established as a
\nhouse of review, to consider legislation initiated by the Lower House. However,
\nin reality the Senate does not operate as a house of review or as a symbol of the
\nunion and equality of the States because in practice the Senate operates on
\npolitical and party lines.
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\nThe Senate has the same legislative power as the House of Representatives but for
\none important difference that money bills, a bill that appropriates money or
\nimposes taxation must not originate in the Senate. Neither can the Senate amend
\nsuch bills, but the Senate can send a money bill back to the Lower House with a
\n\u2018request\u2019 for amendment. Apart from money bills, the Senate can introduce or
\namend ordinary bills, just as much of the House of Representatives can. The
\nlimitation on money bills is one of the chief distinctions between the Senate and
\nthe House of Representatives.
\nThe Queen
\nThe Queen (or the Crown) who is represented by the Governor General is the
\nthird element in the Australian Legislature. All bills passed by the House of
\nRepresentatives and the Senate have to be assented by the Government General
\nfor their legal validity. Royal Assent is required for a Bill to become an Act of
\nParliament. However, according to long-established \u2018conventions\u2019 (which are
\nessentially customs that everyone follows), the Governor-General must always
\ngrant her assent to Bills that have passed both houses. The role of the Governor
\nGeneral is in fact now of reduced significance because, with only a few
\nexceptions (notably the power to dismiss a Prime Minister who has lost her
\nmajority in the House or cannot get parliamentary approval for taxation and
\nexpenditure legislation), under the constitutional conventions, the GovernorGeneral
\nexercises her powers on the advice of the Ministers.
\nDelegated legislation
\nThe process of passing an Act of Parliament can be slow. Quite often, the time
\ninvolved and expense of having Parliament sit and debate laws means that it is not
\nefficient for Parliament to spend time on minute details in legislation. Parliament
\ncan therefore delegate some of the detail needed for laws to some responsible
\nperson. An immense volume of law appears in regulations. Thus, most Acts of
\nParliament (be it Commonwealth or State) will confer power on a Minister to
\nmake regulations to give effect to the Act \u2013 for example, making regulations to
\nadd to the list of substances prohibited by anti-narcotics legislation, or making
\nregulations specifying the maximum weight of vehicles on the roads. Such
\nregulations are termed \u2018delegated\u2019 or \u2018subordinate\u2019 legislation, because the power
\nto make them derives from a higher body (that is, Parliament). If regulations
\nconflict with an Act of Parliament they will be invalid.
\nD. The executive branch
\nUnder the Constitution the executive power of the Commonwealth is vested in the
\nQueen, and is exercised by the Governor General as the Queen\u2019s Representative.
\nThe Governor General is advised by a Federal Executive Council comprising the
\nPrime Minister and other ministers. All ministers are members of the formal
\nExecutive Council, but most important decisions are taken by the informal body
\nknown as the cabinet, which consists of the Prime Minister and her inner circle of
\nministers, usually about 20 in number. The Prime Minister is appointed by the
\nGovernor General and is the leader of the political party or the coalition of
\npolitical parties with a majority of seats in the House of Representatives.
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\nThe concept of responsible government means that Ministers are responsible to
\nParliament, for their policies and the administration of government departments
\nunder their control. Ministers are made responsible to Parliament by the
\nrequirement in s 6 of the Constitution that all ministers must be members of the
\nSenate or the House of Representatives and. Furthermore, the doctrine of
\nresponsible government means that a government must retain the support of (ie a
\nmajority in) the House of Representatives, and a Prime Minister who loses her
\nmajority in Parliament must either resign or call an election. The concept of
\ncollective responsibility means that decisions of Ministers are treated as collective
\ndecisions of the Cabinet and all Ministers are expected to support cabinet
\ndecisions.
\nIt is a constitutional convention that the Governor General generally acts only on
\nthe advice of the Prime Minister. However, there are certain situations when the
\nGovernor General may act independently of the advice of the Prime Minister. The
\nGovernor General has reserve, discretionary or prerogative powers. The dismissal
\nof the Whitlam Government in 1975 is be an example of the exercise of such
\nindependent powers.
\nUnderneath the Ministers are the various Commonwealth government
\ndepartments, staffed by public servants. The Minister in charge of a particular
\ndepartment under his control is the parliamentary head, while the public servant
\nwho heads the department is the permanent head. Public servants continue in
\noffice despite change in government, and are expected to be impartial.
\nE. The judicial branch
\nSection 71 of the Commonwealth Constitution vests the judicial power of the
\nCommonwealth in the High Court of Australia, and such other federal courts as
\nParliament creates, and such other courts as it invests with federal jurisdiction.
\nThe High Court of Australia was established in 1903. The principal functions of
\nthe High Court are to interpret the Constitution, to act as an appellate court from
\nother courts exercising federal jurisdiction, hear appeals from Supreme Courts of
\nthe States, and in certain cases act as a court of original jurisdiction. The High
\nCourt is the highest court in Australia and its judgements are binding precedents
\non all other Australian courts.
\nThe provisions of the Constitution have been interpreted by the High Court in a
\nmanner that effects a separation of the Commonwealth\u2019s judicial power from both
\nits legislative and executive power. Judicial powers of the Commonwealth cannot
\nbe vested in non-judicial bodies, nor can Commonwealth Courts be vested with
\nnon-judicial functions. The independence of the judges of the High Court are also
\nestablished by provisions in the Constitution relating to their appointment, tenure
\nand remuneration.
\nThe Federal Court of Australia was created in 1976 to cover areas of
\nCommonwealth jurisdiction such as bankruptcy, federal tax, industrial law,
\nintellectual property law and trade practices. The Family Court of Australia was
\nestablished in 1976 to administer the Family Law Act 1975 (Cth).
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\nThe function of the courts is to decide disputes between people. The courts
\ninterpret statute law when its meaning is doubtful and, in areas of the law where
\nthere is no statute law, to create rules of common law through the decisions they
\nmake. These decisions are also referred to as \u2018case law\u2019.
\nCourts exist at two levels, Commonwealth and State. The Commonwealth courts
\nhave jurisdiction to hear matters arising under Commonwealth law, while the
\nState courts hear matters arising under State law. Remember that, under the
\ndivision of powers between the Commonwealth and the States, the
\nCommonwealth Parliament legislates only in relation to matters allocated to it by
\nthe Constitution. Thus it is only cases arising under Commonwealth legislation
\nthat would start in the Commonwealth courts \u2013 for example, litigation involving
\nissues arising under the Corprations Act 2001 (Cth), the Competition and
\nConsumer Act 2010 (Cth) (which replaced the Trade Practices Act), as well as
\nlitigation arising in relation to marriage, bankruptcy, intellectual property, banking
\nand insurance, and offences against Commonwealth legislation, prosecuted under
\nthe Crimes Act 1904 (Cth). All other matters, such as those involving contracts,
\ntorts and motor vehicle accidents will be heard in the State courts. It can of
\ncourse sometimes happen that a case involves both Commonwealth and State law.
\nIn that event, the case will be heard in the State courts, because the Jurisdiction of
\nCourts (Cross-Vesting) Act 1987 (Cth) gives State courts the jurisdiction to hear
\nsuch matters.
\nThe two hierarchies of courts (State and Commonwealth) are linked, in that the
\nHigh Court of Australia is the ultimate court of appeal for Commonwealth matters
\nand for State law matters appealed from the Courts of Appeal of the six States and
\nfrom the Territories.
\nThe hierarchy of Commonwealth courts, from top to bottom, is as follows:
\nHigh Court of Australia (single judge and full court)
\nFederal Court of Australia (single judge and full court)
\nFederal Circuit Court.
\nNote that two of these courts (the Federal Court and the High Court) have two
\ndivisions \u2013 a single judge, and a full court (3 or more judges). So, for example, if
\na case is heard in the Federal Court, it will be heard by a single judge, but if one
\nof the parties appeals against that judge\u2019s decision, the case will go to the Full
\nCourt of the Federal Court.
\nAlthough the names of the courts differ slightly from State to State, most have a
\nhierarchy as follows:
\nCourt of Appeal
\nSupreme Court
\nDistrict Court
\nMagistrates Court
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\nJurisdiction of the courts
\nThe \u2018jurisdiction\u2019 of a court is the authority it has \u2013 in other words, what types of
\ncase it is able to hear. When bringing a legal action, it is important to initiate it in
\nthe correct court. The jurisdiction of a court depends on a number of factors:
\nThe first issue to determine is whether the case involves Commonwealth or State
\nlaw, as that will determine whether you bring the case in the Commonwealth or
\nState courts. If the case involves State law, one then has to determine in which
\nState the events occurred, as it is that State\u2019s courts that will have jurisdiction. If
\nit involves a matter arising under a Commonwealth statute, then you would
\ncommence it in either the Federal Magistrates Court or the Federal Court,
\ndepending on the amount involved. Once one has worked out which hierarchy
\nhas jurisdiction, the next issue to consider is whether the case is being heard for
\nthe first time (in which case, you must find a court which has original jurisdiction
\nover the matter), or whether it is being brought on appeal (in which case you must
\nfind a court which has appellate jurisdiction to hear cases on appeal from the
\ncourt that originally heard it). Thus \u2018original jurisdiction\u2019 is the power to hear a
\ncase for the first time, while \u2018appellate jurisdiction\u2019 is the power to hear a case on
\nappeal from a lower court.
\nThe second issue is what the amount of money involved is, because different
\ncourts have different monetary jurisdiction.
\nThere is a diagram illustrating the jurisdiction of the courts in the Resources
\nfolder on Interact.
\nOriginal civil jurisdiction
\nAlthough the jurisdictional amounts differ slightly from State to State, the
\nfollowing example of the jurisdictional limits of the courts in New South Wales
\ngives a good idea of how jurisdiction is structured:
\nMagistrates court matters up to $100,0001
\nDistrict court matters from $100,000 – $750,000
\nall motor vehicle matters, irrespective of
\namount
\nSupreme Court matters > $750,000
\nIn the case of the Commonwealth courts, the original jurisdiction is as follows:
\nFederal Circuit Court matters up to $750,000
\nFederal Court (single judge) matters over $750,000
\nHigh Court (single judge) constitutional matters<\/p>\n
1 Note that the jurisdiction used to be $ 60 000 but has been increased to $ 100 000.
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\nAppellate jurisdiction
\nWhen it comes to appellate jurisdiction, New South Wales courts have jurisdiction
\nas follows:
\nDistrict Court from Magistrates Court
\nCourt of Appeal from Supreme Court and from District Court
\nThe appellate jurisdiction of the Commonwealth courts is as follows:
\nFederal Court (full court) from Federal Circuit Court and from
\nFederal Court
\nHigh Court (full court) from Federal Court (full court) and from
\nState Courts of Appeal
\nExercise
\nImagine that you are advising your employer on which court to
\nbring a case before. Consider the following situations, and state
\nwhich court would be the correct one to approach. Assume all
\nevents have occurred in NSW:
\n1. A truck belonging to your company has been involved in a
\nmotor accident caused by a drunk driver. The damage to the
\ntruck is $120,000.
\n2. Judgment has been given in a matter heard by the District
\nCourt and you wish to appeal it.
\n3. You believe that the directors of your company have
\nbreached the Corporations Act 2001 (Cth) and you want to
\nbring legal action against them to recover $1million that they
\nhave defrauded from the company.
\n4. You have lost an appeal heard by the New South Wales Court
\nof Appeal and want to take that decision on appeal.
\nF. Alternative dispute resolution
\nCrime, by its nature must generally be resolved in a court system. Civil claims
\nneed not be. Using court process to resolve disputes does not always achieve a
\ngood and prompt resolution, and it has the effect of clogging the court system
\nwith claims, some of which are lodged only designed to intimidate the other side.
\nThe court system itself now provides a number of means to reduce the number of
\nclaims that go to trial through case management systems where parties appear
\nbefore a Registrar (a quasi-judicial officer) in order to narrow down the issues
\nLAW504 Modules
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\nbetween the parties. Empirical research has shown that almost 90% of court
\nclaims are settled before trial, and even more are settled during the course of trial
\nbefore a judgment is delivered. As costs of litigation rise and waiting times in
\ncourt lists grow longer, individuals and businesses no longer wish to waste time
\nand money on litigation, and therefore often have recourse to alternative dispute
\nresolution (ADR). Many commercial contracts contain clauses in which the
\nparties undertake to resolve disputes by ADR before having recourse to the courts.
\nThere are three types of ADR:
\nMediation is a process whereby a 3rd party Helps he parties in dispute to achieve
\nan agreed settlement. The mediator acts as a go-between, facilitating negotiations
\nbetween the parties. However it is the parties themselves who must ultimately
\ncome to an agreement \u2013 if they fail to do so, the mediator cannot impose a
\nsettlement.
\nConciliation is similar to mediation, in that a 3rd party provides a channel of
\ncommunication between the parties, however a conciliator takes a more active
\nrole than a mediator, and may suggest solutions to the parties \u2013 but successful
\nconciliation still depends on the parties voluntarily coming to an agreement.
\nArbitration is a process whereby a person settles a dispute between parties \u2013 in
\nother words, the arbitrator acts in a manner similar to a judge, and their decision
\nbinds the parties. The process by which arbitration takes place is regulated by
\nlegislation \u2013 in New South Wales by the Commercial Arbitration Act 1984
\n(NSW). Contract clauses prohibiting parties from going to court unless they have
\nsubmitted their case to arbitration are invalid (s 55). However, once parties have
\ngone to arbitration, they cannot appeal to the courts except on narrow grounds of
\nmisconduct by the arbitrator (s 42) or where all the parties agree to an appeal to
\nthe courts on a matter of law (s 38(2)).
\nG. The states
\nThe same system of parliamentary government that exists at Commonwealth level
\noperates at State level. All State parliaments (except Queensland), like the
\nCommonwealth Parliament, have a bi-cameral system, with parliament consisting
\nof a Upper House and a Lower House. In NSW the Upper House is known as the
\nLegislative Council and the Lower House is known as the Legislative Assembly.
\nIn State Parliaments, the Governor appoints as Premier whoever leads the party or
\ncoalition which has a majority in the lower house. The Premier and the State
\nMinisters form the State cabinet which runs the executive branch of government.
\nIn all the States, the Parliaments have delegated some of their law-making powers
\nto local authorities which, within the scope of the Acts creating them, have the
\npower to enact local ordinances which, like Acts, are a form of statute law.
\nHowever, because the local authorities are only the delegates of the State
\nParliaments, their laws are known as \u2018delegated\u2019 or \u2018subordinate\u2019 legislation, and
\ncan be over-ridden by State Parliaments.
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\nTopic 2 Sources of law and interpretation of
\nstatutes
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. describe the nature of statute law and common law;
\n2. outline how the doctrine of precedent operates;
\n3. explain how cases are cited in law reports;
\n4. engage in legal research and find statute and case law;
\n5. explain the role of the courts in statutory interpretation; and
\n6. apply the common law rules and presumptions of statutory
\ninterpretation to statutory texts.
\nA. Sources of law
\nStatute law
\nAs stated in Topic 1, statute law, or legislation, is enacted by a law-making body.
\nIn Australia, these legislative bodies (or \u2018legislatures\u2019) exist at three levels:
\n\uf0b7 The Commonwealth Parliament which, on the topic (sample nursing essay examples by the best nursing assignment writing service)s allocated to it by the
\nConstitution, makes laws for the whole
\ncountry
\n\uf0b7 State and Territory Parliaments and Legislative Assemblies
\nwhich make laws for their particular
\njurisdictions
\n\uf0b7 Local authorities which are given authority by State and
\nTerritory legislatures to make laws for
\nparticular municipal areas.
\nLegislation passed by the Commonwealth, State and Territory legislatures are
\ncalled Acts. But, as noted in Topic 1, it is simply not possible for legislatures to
\nupdate the details of the law, and so it is common for Acts of Commonwealth or
\nState Parliament to delegate the power to make legislation to government
\nministers. Such pieces of delegated, or subordinate, legislation are called
\nLAW504 Modules
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\nRegulations. In addition, State Parliaments delegate law-making power to local
\nauthorities, which produce delegated legislation called Ordinances or Local Laws.
\nAlthough regulations, ordinances and local laws have the same legal effect as
\nActs, their subordinate status means that if they conflict with an Act of their
\njurisdiction, they will be invalid.
\nThe key feature of statute law is that it is a superior source of law to common
\nlaw and over-rides it if there is an inconsistency. Thus, if faced with a statute that
\nis different to a rule of the common law, a court must apply the statute, no matter
\nhow long-standing the rule of common law. To take an example, whereas in the
\n19th century it was an accepted rule of common law, brought to Australia at
\nsettlement, that a man could lawfully chastise (that is, beat) his wife, legislation
\nwas enacted by the various State Parliaments in Australia declaring the practice to
\nbe illegal and indeed a crime. That is an example of legislation reforming the
\ncommon law.
\nAnother important feature of statute law is that it (i) affects everyone and (ii) is
\npresumed to be prospective \u2013 in other words, only affects events arising after the
\nlegislation comes into effect. It is however possible for Parliament to legislate
\nretrospectively \u2013 for example, to state in an Act that comes into effect on 1 July
\n2010 that tax rates are reduced with effect from 1 January 2010, with the result
\nthat people get an unexpected rebate. However, retrospective legislation is
\nunusual, and would obviously have unjust consequences in the case of criminal
\nlaw if Parliament were to make conduct criminal even though it had not been a
\ncrime when it was engaged in.
\nCommon law, or case law
\nThe second source of law is called \u2018common law\u2019 or \u2018case law\u2019. So far as the
\nterm \u2018common law\u2019 is concerned, students may find it confusing, because it tends
\nto be used in three different ways.
\nIn one sense it is used to refer to the type of legal system which exists in England.
\nThe English system was passed on to many countries including Australia, through
\nthe British Empire. Today the Australian legal system differs from the English
\nsystem in many respects, but is still based on the English model as is the system in
\nNew Zealand, United States of America, Canada and other former colonies of
\nBritain. It is referred to as the Common Law system as opposed to Islamic law or
\nHindu law, or the Civil Law system which exists in many countries of Europe.
\nIn the second sense the \u2018common law\u2019 is used to refer to a source of law, that is,
\nthe body of law produced by the judges as distinct from Parliament. This is the
\nsense in which it is used in these notes.
\nIn the third sense, the \u2018common law\u2019 is used in a narrower context to refer to a
\ntype of judge-made law. When used in this sense, the common law is often
\ndistinguished from the law of equity. The distinction between common law and
\nequity is of little importance nowadays. The law of equity refers to a collection of
\nrules and principles established and developed by judges in the Courts of
\nChancery which were distinct and separate from the Common Law Courts.
\nHowever, this system of dual law between equity and common law was
\nLAW504 Modules
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\ninconvenient, and the branches of law were fused so that Supreme Courts of the
\nStates and Territories are now vested with jurisdiction to apply both bodies of law
\nin cases coming before them. We therefore do not need to concern ourselves with
\nthe distinction between common law and equity \u2013 nowadays when people refer to
\n\u2018common law\u2019 or \u2018case law\u2019 they mean all judge-made law, irrespective of the
\nhistorical origins of those principles.
\nThe key thing to remember about the common law is that it developed over
\nhundreds of years when judges were called upon to decide legal disputes in the
\nabsence of statute law. The facts of the cases, along with the decisions they made,
\nwere recorded and then applied in later cases with the same facts in accordance
\nwith the doctrine of precedent (discussed below). So, to take a simple,
\nhypothetical example, one could imagine a judge in 16th century England hearing
\na dispute between two farmers, one of whom had sold a pig to the other, the pig
\nhaving died a few days after the sale. If the buyer sued the seller to recover the
\nprice of the pig, and assuming there was no statute governing such cases, the court
\nwould have to make a decision. Assuming there was no previous reported case on
\nthe issue, the court would be free to make its own decision. Let us assume that
\nthe court held that the seller could not recover his money. By making that
\ndecision, the court would be doing two things: deciding the case between those
\nparticular litigants and laying down a rule for lower courts to follow in any other
\ncase involving sales of animals. Thus many of the principles of torts and
\ncontracts were developed by judges in this way.
\nHowever, if there is statute law which is applicable to a case, the courts must
\napply the statute, even if there was a rule of common law to the contrary. Thus, to
\ntake the example discussed above, if Parliament enacted a consumer law which
\ngave a seller the right to bring an action to recover their money if livestock fell ill
\nwithin a certain period of having been bought, the pre-existing common law rule
\nwould be overridden.
\nAn important feature of judge-made law is that, unlike statute law, it is
\nretrospective – in other words, it a common law decision in a contractual dispute
\nbetween parties A and B changes the common law rule governing al other people
\nin the same relationship \u2013 even if they entered into that relationship before the
\ncourt decided the case of A v B \u2013 so parties C and D whose case had the same
\nfacts as that of A and B would, if they went to court, have that same rule applied
\nto them, even though they could not have known of that rule at the time they
\nentered into the contract.
\nB. The doctrine of precedent
\nHow does one know whether a case decided by an earlier court should be
\nfollowed? The answer to this is provided by the doctrine of precedent (sometimes
\nreferred to as stare decisis – \u2018let the decision stand) which is that a court is bound
\nby an earlier decision if that decision was on the same material facts and by a
\nhigher court in the same hierarchy.
\nAs was explained in Topic 1, each State has its own hierarchy of courts, as does
\nthe Commonwealth. Under the doctrine of precedent, a court in a State is bound
\nby earlier decisions delivered by courts higher than it in that State, so a District
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\nCourt judge in NSW would be bound by a NSW Court of Appeal decision, but
\nwould not be bound by a decision of the Victorian Supreme Court, for example.
\nAll courts in Australia are bound by decisions of the High Court, because it is the
\nultimate court to which one can appeal from all the state Courts of appeal (as well,
\nof course, as from the Commonwealth courts).
\nThe fact that a court in one State is not bound by decisions handed down by the
\ncourts of another means that the common law can differ from State to State, at
\nleast until someone appeals a case on that point of law to the High Court.
\nAlthough the courts of one State are not bound by decisions in another, such
\ndecisions are very commonly referred to in judgments, because they have
\npersuasive value, and might be drawn upon by judges in other States in their
\nreasoning. Similarly, decisions by courts in New Zealand, England and other
\nCommonwealth countries are often referred to by courts in Australia.
\nRatio decidendi and obiter dictum
\nWhat part of a court\u2019s decision is binding? Judgments are often very long, and it
\ntakes skill in reading cases to determine what principle of law a case stands for.
\nThe binding rule in a decision is called the ratio decidendi \u2013 or \u2018reason for the
\ndecision. It consists of the material facts + the rules of law used by the judge +
\nhis or her decision. Any lower court presented with a case with the same facts
\nwill have to reach the same decision. So, in our example about the pig discussed
\nabove, the ratio would be that if one person buys an animal from another which
\ndies after three days [material facts], the law of sale does not permit the seller to
\nrecover the cost of the animal [rule of law] and so the buyer is not liable to the
\nseller [decision].
\nAnything else in the judgment is referred to as obiter dictum \u2013 \u2018statements by the
\nway\u2019. These are things written by the judge which were not necessary for
\ndeciding the case. They may have been general comments on the area of law or
\nstatements by the judge as to how the case would have been decided if the facts
\nwere different. This can be useful persuasive authority for later courts to draw on
\n(even though they are not bound by obiter dicta ) if they do have to decide a case
\nwith those different facts.
\nC. Legal research
\nStatute law is found in the official sets of statutes published by the
\nCommonwealth, State and Territory legislatures. Acts are referred to by their
\nname, year of enactment and jurisdiction \u2013 for example the Corporations Act
\n2001 (Cth).
\nCase law is reported in law reports. There are many different series and publishers
\nof law reports. Reports of the High Court are published in the Commonwealth
\nLaw Reports (CLR). High Court and Federal Court cases are reported in the
\nAustralian Law Reports (ALR). Each State and Territory has its own set of law
\nreports in which are reported the decisions of their Supreme Courts and Courts of
\nAppeal (for example the New South Wales Law Reports (NSWR).
\nLAW504 Modules
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\nThere is a system for finding case reports, and it is fairly simple once you \u2018break
\nthe code\u2019. You will have noticed already from your reading that cases have names
\nand a \u2018code\u2019 after the name. The \u2018code\u2019 is the citation or the place where the case
\nreport is located.
\nTake for example:
\nDonoghue v Stevenson [1932] AC 562
\nThis is a civil case, in which Donoghue and Stevenson were the parties to the
\ndispute. The use of the lower case letter \u2018v\u2019 between the names is short for versus,
\nhowever, when we say the name of the case we never say \u2018versus\u2019, we merely say
\n\u2018Donoghue and Stevenson\u2019.
\nThe citation is a relatively simple system.
\nDonoghue Stevenson v [1932] AC 566
\nThe year in which the case was decided.
\nIf it appears in square brackets, then the Report
\nis bound in volumes for each year.
\nName of the Report – Appeal Cases. These
\nare English cases. See the Style Guide in your
\nSubject Outline booklet.
\nPage number
\nNote firstly that the names of the parties must always appear in italics when you
\nare giving a case citation. The name which appears first is the name of the party
\nwho is commencing the dispute. When a case is first heard the first party is called
\nthe plaintiff and the second party is called the defendant. Thus if Donoghue v
\nStevenson was the name of the case, Donoghue (the plaintiff) is suing Stevenson
\n(the defendant).
\nIt is rare for the initial hearing of a case to be reported. Donoghue v Stevenson is
\nin fact an appeal. The first party, Donoghue is the appellant, the person bringing
\nthe appeal against the earlier decision. The second party, Stevenson, is the
\nrespondent.
\nIn a criminal case the Crown or the State usually prosecutes and the crown\u2019s
\nparticipation is indicated by the letter \u2018R\u2019 or \u2018Regina\u2019.
\nFor example, R v Clark (1927) 40 CLR 227 is a criminal case and when reciting
\nthe name verbally we say \u2018The Crown against Clark\u2019.
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\nR Clark v (1927) 40 CLR 227
\nYear of decision, but these reports
\nare not bound in volumes each year.
\nVolume number
\n of Reports
\nPage
\nnumber
\nName of the Reports. The
\nCommonwealth Law Reports
\n(CLR) are the official reports of
\nthe High Court of Australia.
\nLaw libraries have copies of statutes and law reports. However, the most
\nconvenient way to look up the law is by referring to the AUSTLII (Australian
\nLegal Information Institute) website, at https:\/\/monkessays.com\/write-my-essay\/austlii.edu.au . It provides a
\nsearchable database of Commonwealth, State and Territory law.
\nThe site lists each jurisdiction, and within each jurisdiction databases of statute
\nlaw and case law. It is possible to browse statute and case law alphabetically or
\nby year. Austlii also contains an Advanced Search feature, which enables one to
\nsearch across the entire database, or within specific jurisdictions, for particular
\nwords or terms. The Boolean search function allows one to search for particular
\nphrases.
\nExercise
\nUse Austlii to answer the following questions:
\n1. What is the Commonwealth Law Report citation of the case
\nof Lange v Australian Broadcasting Corporation?
\n2. How is the term \u2018action\u2019 defined in the Limitations Act 1969
\n(NSW)?
\n3. Name a decision handed down by the Supreme Court of
\nSouth Australia this month.
\n4. What is the citation of the decision by the New South Wales
\nCourt of Appeal in Higgins v Brennan?
\n5. What is the most recent Tasmanian case to deal with the
\nconcept of vicarious liability?
\n6. Who were the three justices who delivered the joint judgment
\nat paragraph 26 of the decision in Griffith University v Tang?
\nLAW504 Modules
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\nD. Statutory interpretation
\nIt is often incorrectly assumed that when courts apply a statute they are engaging
\nin a mechanical act that involves no discretion. The reality is far different \u2013
\nlanguage is inherently ambiguous. Take as a simple example, a statute dealing
\nwith weapons which said:
\nIt is an offence to possess arms.
\nTaking the word \u2018arms\u2019 literally, it could have two meanings: limbs attached to a
\nperson or weapons of war. Clearly the former interpretation would be absurd, but
\nthere must be some rule which indicates to a court that it is the second meaning
\nthat should be adopted. To take another example, if a statute said
\nA motorist must stop their vehicle if they are involved in an accident.
\nWould a court convict a person who, after crashing into another vehicle, stopped
\ntheir car and then drove off? Does \u2018stop\u2019 here literally mean \u2018stop\u2019 or does it
\nmean \u2018stop and wait\u2019? Arguably one can say that such ambiguities reflect poor
\ndraughtsmanship, but that does not solve the problem of what the courts should do
\nwhen faced by such ambiguities.
\nThree major sources are used to interpret legal words and statutes in cases of
\nambiguity (that is, uncertainty as to the meaning of the statute):
\nLegislation
\nSometimes the Act one is interpreting will contain a definition section in which
\nwords used in the statute are defined.
\nFailing a definition in the Act, one should refer to the Acts Interpretation Act of
\nthe jurisdiction from which the Act comes. Interpretation Acts contain rules that
\napply to all Acts passed by the relevant Parliament \u2013 for example how \u2018days\u2019 are
\ncalculated. The content of these Acts lies outside the scope of this subject, except
\nfor very important provision, relating to the \u2018purpose rule\u2019 (see below).
\nCommon law rules of Statutory Interpretation
\nOver the centuries, the courts have developed common law rules of statutory
\ninterpretation to Help them in interpreting statutes. Note the very important point
\nthat, apart from the purpose rule, all the common law rules and presumptions have
\nequal weight, and it is up to the courts to decide which of them to apply. In other
\nwords, judges can affect the outcome of the cases they decide by the choice of
\nrules of statutory interpretation they apply \u2013 so this is an area in which judges
\nhave real power. There are four major rules:
\nLAW504 Modules
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\n\uf0b7 The literal rule
\nThis is the starting point for interpreting statutes, and means that the
\nmeaning of a statute is determined by referring to the natural or ordinary
\nmeaning of the words (i.e., from an Australian dictionary \u2013 e.g., Macquarie
\ndictionary).
\n\uf0b7 The golden rule
\nThis is a proviso to the literal rule to the effect that if a word has more than
\none literal meaning, one which is irrational or absurd, and the other sensible,
\nthen the latter should be chosen. This approach would obviously be of
\nHelpance in interpreting the words \u2018arms\u2019 and \u2018stop\u2019 in the examples given
\nabove.
\n\uf0b7 The mischief rule
\nIf the statute was enacted to overcome a specific \u2018mischief\u2019 or problem, then
\nthe statute should be interpreted in such a way as to ensure that it is effective
\nin overcoming the problem.
\n\uf0b7 The purpose rule
\nAlthough originally a common law rule of interpretation, the purpose rule,
\nwhich requires the courts to interpret statutes in a manner which furthers to
\npurpose for which they were enacted, now appears in s 15AA of the Acts
\nInterpretation Act 1901 (Cth) and in identical provisions in all the other
\njurisdictions\u2019 Acts Interpretation Acts. In the case of New South Wales this
\nis contained in s 33 of the Interpretation Act 1987 (NSW).
\nThe Commonwealth Act states
\n…a construction that would promote the purpose or object underlying the Act
\n(whether that purpose or object is expressly stated in the Act or not) shall be
\npreferred to a construction that would not promote that purpose or object.
\nNote however that although this principle is important, it becomes relevant
\nonly if the Act one is interpreting is ambiguous \u2013 if there is only one
\npossible meaning, then s 15AA cannot be used to give the Act a different
\nmeaning that its text cannot support.
\nIn applying the purpose rule and the mischief rule where legislation is ambiguous,
\nthe courts may refer to \u2018extrinsic\u2019 material \u2013 that is, material lying outside the text
\nof the Act itself. Such material includes Parliamentary reports and the
\nexplanatory memorandum that accompanied the legislation when it was
\nintroduced to Parliament as a Bill, along with the relevant Minister\u2019s speech to
\nParliament when the Bill was introduced.
\nThe eiusdem generis rule
\nEiusdem generis means \u2018same kind\u2019 in Latin and is to the effect that if specific
\nwords belonging to a single class or type are followed by a general word, then the
\nLAW504 Modules
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\ngeneral word is presumed to be qualified and refers only to items of the same
\nclass as the specific words. For example, if an Act provides that a person may
\nkeep only \u2018horses, cows, sheep, and other animals\u2019 on a farm, could they keep a
\ntiger? Because horses, cows and sheep are domestic animals, the words ‘other
\nanimals’ are interpreted to mean only domestic animals.
\nPresumptions of statutory interpretation
\nA presumption is something that the law assumes to be true unless someone
\nproves that it is not true. In cases where a statute is ambiguous, the common law
\nprovides that certain presumptions of statutory interpretation apply. Note that
\npresumptions apply only if there is ambiguity \u2013 they will not apply if the meaning
\nof the legislation is such that it is clear that the legislative body did not intend
\nthem to apply. Examples of presumptions include:
\n\uf0b7 the presumption that legislation is not retrospective; and
\n\uf0b7 the presumption that the legislature did not intend to take away fundamental
\nrights.
\nExercise
\nAmidst growing concern at the level of violent crime in society, the
\nNew South Wales Police Minister makes a speech to Parliament in
\nwhich he says:
\n\u2018This government is determined to crack down on violent street
\ncrime, particularly crimes involving young people going out armed
\nwith knives.\u2019
\nAssume that, as a result, the New South Wales Parliament enacts
\nthe Crimes (Dangerous Weapons Amendment ) Act 2011 (NSW), s
\n1 of which provides as follows:
\nDangerous weapons
\nIt is an offence to carry any knife, club, gun or other
\ndangerous weapon in a public place. Penalty: Fine of
\n$2,000.
\nTom Butcher, who is an apprentice chef, is walking to work one
\nday. He is carrying a 10 cm long carving knife in a sheath attached
\nto his belt. His jacket swings open just as he is walking past
\nConstable Plod, who is on foot patrol in the CBD. Constable Plod
\narrests Tom for a breach of s 1 of the Act.
\nAdvise Tom of the likely outcome of the case. In the course of your
\nanswer discuss the various rules of statutory interpretation that may
\nbe considered to resolve this problem, what the outcome would be
\nif each was applied, and reach a conclusion on the question of
\nLAW504 Modules
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\nwhich approach you think would be best for a court to adopt and
\nwhy.
\nNOTE: The statute in this problem is fictional \u2013 so you will not
\nfind it, or cases interpreting it, on Austlii. You must interpret the
\nlaw solely with reference to the rules of statutory interpretation.
\nYou must use the Issues, Law, Application, Conclusion format
\nwhen writing your answer.
\nLAW504 Modules
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\nTopic 3 Torts – elements of liability
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. discuss the nature of tort law;
\n2. explain the various interests protected by tort law;
\n3. describe the three essentials of the tort of negligence;
\n4. apply the test of reasonable foreseeability in relation to the
\nduty of care;
\n5. explain the circumstances in which a duty of care arises
\nwhen giving advice;
\n6. explain the factors used to determine the breach of the
\nstandard of care;
\n7. describe the \u2018but for\u2019 test of causation; and
\n8. apply these principles of liability to factual situations.
\nA. Law of Torts
\nA \u2018tort\u2019 is a civil wrong which the law redresses by an award of damages. A
\n\u2018wrong\u2019 is an infringement or violation of a person\u2019s legal right by another. There
\nare many torts, each relating to a different type of harm:
\nNegligence: careless causation of injury to person, damage to property or
\neconomic loss
\nDefamation: damage to reputation
\nNuisance: conduct that interferes with a neighbour\u2019s enjoyment of their
\nproperty
\nTrespass: to person (physical assault), to goods (unlawful entry onto
\nproperty) to goods (interference in a person\u2019s use of their
\ngoods)
\nIn this Topic we will focus on the tort of negligence, which is a failure to take
\nreasonable care towards another person which results in that person suffering
\nharm. There is no need for the plaintiff to prove that harm was intended by the
\ndefendant \u2013 the essence of the action is that insufficient care was taken, and that
\nthat resulted in harm. Negligence can also be defined as the doing of something
\nthat a reasonable person would not do, or, not doing something that a reasonable
\nLAW504 Modules
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\nperson would do, which causes harm. In other words, both acts and omissions can
\namount to a tort.
\nIn recent years all Australian jurisdictions have enacted statutes (such as the Civil
\nLiability Act 2002 (NSW)) which effect reforms in the area of torts law, such as
\ncapping the amount of damages that can be awarded for certain claims. Each
\njurisdiction enacted a similar Act in 2002-03, but for the sake of convenience,
\nsection numbers in this subject refer to the NSW Act.
\nHowever, it is important to note that, apart from these specific reforms, the Civil
\nLiability Act largely re-states the common law, is not inconsistent with the
\ncommon law and so does not replace the common law. Indeed, where the Act
\nrefers to terms such as \u2018duty of care\u2019, it assumes that such terms will continue to
\nbe interpreted in light of the existing case law. Therefore, when you are
\nanswering questions to do with the law of torts and you are stating what the law
\nis, you should refer to sections in the Act (where there is a relevant section – many
\nparts of the common law are left unmentioned by the Act, and so carry on being
\ngoverned by the common law on its own) and to cases which give meaning to
\nconcepts mentioned in the Act, in order to give a complete statement of the law.
\nB. Three essentials of negligence
\nThere are three essentials that a plaintiff needs to prove on a balance of
\nprobabilities in order to establish a claim in negligence:
\n\uf0b7 that the defendant owed the plaintiff a duty of care
\n\uf0b7 that the defendant breached the standard of care of a reasonable person
\n\uf0b7 that the defendant\u2019s conduct caused harm to the plaintiff
\nVideo
\nC. Duty of care \u2013 1
\nst essential
\nThe plaintiff must establish that the defendant owed him or her a duty of care.
\nThe test for establishing duty of care re negligent acts was formulated in the
\nfamous case of Donoghue v. Stevenson [1932] All ER 1. In this case two women
\nwent to a cafe. One of them bought the other, Mrs Donoghue, a bottle of ginger
\nbeer. Mrs Donoghue drank the ginger beer, and found a decomposed snail at the
\nbottom of the bottle. She became severely ill with gastro-enteritis. Because Mrs
\nDonoghue had not been the person to buy the ginger beer, she could not sue for
\nbreach of contract. Her only course of action was in negligence. The issue was
\nwhether the defendant (Stevenson, who owned the factory that made the ginger
\nbeer) owed the plaintiff a duty of care. The court formulated a test for
\ndetermining whether a duty of care is owed (sometimes called the \u2018neighbour\u2019
\ntest), stating as follows:
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\nThere must be, and is, some general conception of relations giving rise
\nto a duty of care…The rule that you are to love your neighbour
\nbecomes in law you must not injure your neighbour; and the lawyer’s
\nquestion: Who is my neighbour? receives a restricted reply. You must
\ntake reasonable care to avoid acts or omissions which you can
\nreasonably foresee would be likely to injure your neighbour. Who,
\nthen, in law, is my neighbour? The answer seems to be – persons who
\nare so closely and directly affected by my act that I ought reasonably
\nto have them in contemplation as being so affected when I am
\ndirecting my mind to the acts or omissions that are called in question .
\n. . a manufacturer of products, which he sells in such a form as to
\nshow that he intends them to reach the ultimate consumer in the form
\nin which they left him with no reasonable possibility of intermediate
\nexamination, and with knowledge that the absence of reasonable care
\nin the preparation or putting up of products will result in an injury to
\nthe consumer’s life or property, owes a duty to the consumer to take
\nthat reasonable care.
\nThe key test that emerges from Donoghue v Stevenson is that of reasonable
\nforeseeability. The test is also adopted in s 5B(1) of the Civil Liability Act 2002
\n(NSW), but it is the case law which continues to dominate this issue, because the
\ncases contain the tests for determining whether a duty of care exists and which
\ncontain the factors that the courts will refer to in making that determination.
\nThe test of whether a duty of care exists, as enunciated in Donoghue v Stevenson
\ndepends on whether a reasonable person in the position of the defendant would
\nhave foreseen that their conduct could cause harm to someone in the position of
\nthe plaintiff. This must be established by the plaintiff in order to satisfy the first
\nelement of the tort of negligence. Note that \u2018reasonable foreseeability\u2019 is an
\nobjective test – \u2018what would a reasonable person have foreseen?\u2019 not, \u2018What did
\nthis particular defendant actually foresee?\u2019 Note also that the plaintiff does not
\nhave to prove that the defendant owed a duty of care to him or her as a specific
\nperson (after all, as for example in a motor accident, the plaintiff may be
\ncompletely unknown to the defendant). The issue is whether the defendant owed
\na duty of care to a person in the position of the plaintiff \u2013 i.e., that they belong to
\nthe class of person who the defendant should have been aware of when doing the
\nculpable act.
\nA problem that the courts have had to grapple with is how far liability should
\nextend. There may be many persons to whom harm could be foreseen because of
\nan act or omission by the defendant, however whether the defendant should be
\nliable to all of them is a different question. For example, in the famous case of
\nUltramares Corp v Touche, Niven & Co 174 NE 441 (1931), in which accountants
\nhad been negligent in auditing a company, and that company had then shown the
\naudited reports to another company which lent it money in the belief that the
\naccounts were accurate, the court had to decide whether the accountants would be
\nliable to the lender. The court said that they would not, because to hold that they
\nowed a duty of care to anyone who happened to read the reports would create
\nliability \u2018in an indeterminate amount for an indeterminate time to an indeterminate
\nclass\u2019. In other words, it would be unfair to impose liability even if, theoretically,
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\nit was foreseeable that if the accounts were shown to 3rd parties, they might suffer
\nloss, because the liability could be limitless.
\nIn addressing the problem of how to determine whether harm is reasonably
\nforeseeable, the courts have used a variety of tests. The current law in Australia
\nwas stated in Perre v Apand (1999) 198 CLR 180, in which the High Court said it
\nwill pay attention to a number of factors (none of which is decisive) in deciding
\nwhether a duty of care is owed, including:
\n\uf0b7 whether harm was reasonably foreseeable because of the proximity, or
\ncloseness in relationship, between the plaintiff and the defendant,
\n\uf0b7 other cases in which a duty of care has been found to exist,
\n\uf0b7 the salient features of the relationship between the plaintiff and the
\ndefendant (for example, whether the plaintiff relied on the defendant,
\nwhether the plaintiff was vulnerable to the defendant\u2019s conduct, whether the
\ndefendant could control whatever caused the harm)
\n\uf0b7 whether there are any policy reasons not to impose liability (for example,
\nbecause the potential number of claims or the size of the liability would be
\nimpossible to meet, as in Ultramares)
\nThe key focus is on how close the connection or relationship was between the
\ndefendant and the plaintiff, and the courts refer to this broad question when
\ndeciding whether the defendant should have anticipated that someone in the
\nposition of the plaintiff would suffer harm. In Perre v Apand the defendant was a
\nchemical company which had carelessly sprayed a farm with a harmful product.
\nThe crops on that and adjacent farms were destroyed by the chemical. The State
\ngovernment imposed a prohibition on crops grown within a certain radius of these
\nfarms from being sold (even if those farms had not showed any sign of being
\naffected), as it was unknown how far the chemical had drifted. The High Court
\nheld that the defendant owed a duty of care to the plaintiff, who owned one of
\nthese quarantined farms and who suffered economic loss because they could not
\nsell their crop, because it was reasonable to foresee that a careless spraying of
\nchemicals could lead to such consequences – in other words, quarantining of
\nsurrounding farms was a reasonably foreseeable consequence of careless spraying
\nof a poison.
\nA duty of care can arise from a number of circumstances:
\n\uf0b7 Physical \u2013 where there is closeness in time and space between the defendant
\nand the plaintiff, as when one motorist crashes into another.
\n\uf0b7 Circumstantial \u2013 where the particular relationship between the defendant
\nand the plaintiff gives rise to a duty of care, as between a doctor and patient
\nor investment adviser and client.
\n\uf0b7 Causal \u2013 where harm is foreseeable to the plaintiff as an expected cause of
\nthe defendant\u2019s conduct, even if the plaintiff is physically removed from the
\ndefendant and is not known by them, as in Jaensch v Coffey (1984) 155
\nCLR 549, where a defendant who crashed into a motor cycle rider was held
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\nliable not only to the rider but also to his wife, who suffered emotional
\nshock and psychological illness as a result of hearing of her husband\u2019s
\ninjuries. Note that under s 31 of the Civil Liability Act 2002 (NSW), where
\nA negligently injures B, a plaintiff C can recover for emotional shock only
\nif the shock resulted in psychiatric illness that goes beyond ordinary levels
\nof grief and, under s 30(2) if they (i) either witnessed the injury or (ii) did
\nnot witness the injury but were an immediate family member of B.
\nExercise
\nAlbert is driving his car and is talking on his mobile phone.
\nBecause he is distracted, he crashes into the back of Bob, who is
\nstopped at traffic lights, damaging Bob\u2019s car. The impact pushes
\nBob\u2019s car forward, and Bob knocks over Cathy, who is injured.
\nCathy is a surgeon on her way to operate on Doug. Cathy cannot
\ndo the operation. Because there is no other surgeon available,
\nDoug dies. To whom does Albert owe a duty of care and why do
\nyou reach those conclusions?
\nOver the decades, case law has established many of categories in which there is a
\nrecognised duty of care of which these are some of the more prominent:
\n\uf0b7 employer to employee;
\n\uf0b7 legal adviser to client;
\n\uf0b7 doctor to patient;
\n\uf0b7 road users to other road users and to pedestrians; and
\n\uf0b7 school to student.
\nThe courts have also recognised certain categories of duty of care which are \u2018nondelegable\u2019.
\nThis means that the defendant cannot escape liability simply by
\ngiving to a 3rd party the job of ensuring that due care is taken. A good example of
\nsuch a category is the non-delegable duty of care owed by a landlord to a tenant to
\nensure that rented premises are maintained in a safe condition. If a tenant suffers
\ninjury from electric shock because an electrician employed by the landlord did not
\ndo his job properly, the landlord cannot plead that, as the electrician was properly
\nqualified, he (the landlord) had discharged his duty of care by hiring the
\nelectrician to do maintenance. The tenant could still sue the landlord (although
\nthe landlord could in turn recover from the electrician, but that would be a
\nseparate case).
\nSpecific rules on duty of care in cases of negligent advice
\nSpecific issues arise in determining whether a duty of care exists in cases of
\nnegligent advice. People give advice in numerous contexts, including to friends
\nand casual acquaintances. On the other hand, the law should impose liability for
\nnegligent advice given in professional contexts (for example, by doctor to patient,
\nlawyer to client, engineer to builder).
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\nIn Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 36 ALR 285,
\nthe High Court held a local government liable for negligently failing to check
\nwhat roads were going to be widened before advising a property developer that a
\nroad would not be widened adjacent to the land he was buying. That advice was
\nnot correct and, after the sale, 1\/3 of the property was compulsorily bought by the
\ngovernment, making redevelopment of the remainder impossible, resulting in loss
\nof profit by the developer. The court held that a duty of care in relation to advice
\nis foreseeable if:
\n\uf0b7 the advice is given in a professional context;
\n\uf0b7 the speaker ought to have realised, that his or her advice would be acted on;
\nand
\n\uf0b7 it was reasonable for the recipient to act on the advice.
\nWhether a duty of care exists between the giver of advice and someone who acts
\non it is of particular importance to accountants, as is shown by Esanda Finance
\nCorporation v Peat Marwick Hungerfords (1997) 188 CLR 241. This is currently
\nthe leading case on negligent mis-statement. In this case, Peat Marwick
\nHungerfords, a firm of accountants, conducted an audit of a company called EX
\nLtd. The audit was conducted negligently in that Peat Marwick failed to detect
\nfraud by an employee in EX Ltd, and overstated EX Ltd\u2019s financial position.
\nClearly the accountants would have been liable if they had been sued by their
\nclients, EX Ltd, as they clearly owed them a duty of care.
\nBut that is not what happened: Some months later, EX Ltd wanted to borrow
\nmoney from Esanda, who asked for information of EX Ltd\u2019s financial position.
\nEX Ltd gave Esanda a copy of the audit report, and on the basis of the information
\nin it, Esanda lent EX Ltd money. EX Ltd was unable to pay the money. Esanda
\nsued Peat Marwick, alleging that they had conducted the audit negligently, that it
\nwas because Esanda relied on the audit that it had lent EX Ltd the money, which it
\n(Esanda) would not have done had it known EX Ltd\u2019s true financial position. The
\ncourtheld Peat Marwick were not liable to Esanda, as they did not owe Esanda a
\nduty of care. They had written the report for EX Ltd, not for Esanda. They did
\nnot foresee that the report would be used by a 3rd party for loan risk purposes – it
\nhad been written solely for EX Ltd\u2019s audit purposes. Esanda was not someone the
\ndefendants had in mind As in the US case of Ultramares Corp v Touche, Niven &
\nCo 174 NE 441 (1931) the court was influenced by the fact that if liability was
\nimposed on a defendant in respect of any and all 3rd parties who might act on the
\nadvice, liability would be potentially limitless.
\nD. Breach of standard of care \u2013 2nd essential
\nHow much care must be exercised, assuming a duty of care is owed? The answer
\nis that one must take reasonable care – i.e., must act as a reasonable person would
\nin the circumstances. What are the attributes of the \u2018reasonable person\u2019? The
\n\u2018reasonable person\u2019 is: a person who behaves with due care in all circumstances
\nand is presumed to be of average intelligence. If they engage in an activity
\nrequiring any particular qualifications, they are presumed to have the level of
\nknowledge and skill that it would be reasonable to expect such a qualified person
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\nto have \u2013 so in performing an operation, a surgeon\u2019s conduct is compared to that
\nof the reasonable surgeon, not the reasonable ordinary person. Minors are judged
\nagainst normal children of the same age. Persons with disabilities are judged
\nagainst similarly disabled persons.
\nFactors determining breach of standard
\nSection 5B(2) of the Civil Liability Act (2002) NSW refers to four factors in
\ndetermining whether the standard of reasonable care has been breached. These
\nfactors must be balanced against each other in order to determine whether the
\nplaintiff\u2019s conduct was negligent (i.e., breached the required standard of care).
\nThe courts balance
\n\uf0b7 the likelihood that the defendant\u2019s acts would cause harm;
\n\uf0b7 the seriousness that harm would occur and
\n\uf0b7 the social utility (ie importance to society) of the defendant\u2019s conduct
\nagainst
\n\uf0b7 the cost and effort that would have been required to avoid the harm.
\nThis means that the outcome of each case is different, because it depends on the
\nfacts of the case. What the court is doing is comparing what the reasonable
\nperson would have done with what the plaintiff did by asking itself: \u2018In light of
\nthe likelihood of the harm occurring, the its seriousness if it did and the
\nimportance of the activity, what steps would a reasonable person have taken to
\navoid the harm, and did the plaintiff in this case take those steps?\u2019
\n(i) Likelihood (or probability) of harm
\nIn Bolton v. Stone [1951] AC 850, the plaintiff was struck by a cricket ball, which
\nhad been hit from a cricket pitch in the town gardens opposite her house. Such
\nevent (i.e., a cricket ball being hit out of this ground) had occurred only six times
\nin the previous 30 years and no one had been injured. It was decided that the risk
\nof a ball actually striking someone on the road was so small that a reasonable
\nperson would have been justified in disregarding it, and thus so too was the
\ndefendant.
\n(ii) Seriousness of harm if it does occur
\nIn Paris v. Stepney Borough Council [1951] AC 367 a garage mechanic with sight
\nin only one eye was removing a rusted bolt with a hammer when a metal chip flew
\ninto his good eye blinding him totally. His employer (the Council) had not
\nprovided goggles for him to wear. The court held that, in view of the fact that this
\nemployee would suffer particularly serious harm if his eye was injured (i.e., he
\nwould become totally blind) a reasonable person in the position of his employer
\nwould have taken care to provide him with goggles.
\n(iii) Steps needed to avoid the risk of harm
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\nAfter evaluating the likelihood of harm and its seriousness, the court looks at what
\nsteps a reasonable person, in the position of the plaintiff, would have done to
\navoid the harm. This will depend on the effort and cost that would be required to
\navoid the harm. For example, if the likelihood of harm is small, and the cost (or
\ndifficulty) of avoiding the risk is great, then a court is likely to find that a
\nreasonable person would not have bothered to take those steps, and so if the
\nplaintiff did not take those steps, he or she was not negligent. But if the likelihood
\nof harm and \/ or its seriousness were so great that the reasonable person would
\nhave taken steps (even if they required great effort or expense) so as to avoid the
\nharm, and the plaintiff did not take those steps, then the plaintiff will be held to
\nhave been negligent. Complex cases arise where, for example, the likelihood of
\nharm occurring is small, but if it does occur it will be significant (or vice versa).
\nIn those cases, determining what steps the reasonable person would have taken
\ncan be difficult.
\nAn example of the application of this factor is Latimer v. AEC Ltd [1953] AC 643,
\nin which a factory had been flooded with oil. The owner put sawdust on the floor
\nin order to prevent workers from slipping. However, one worker did slip and
\ninjure himself. The factory was found not liable. The court held that it had done
\neverything a reasonable employer would do, given the moderate degree of risk
\ninvolved, to avoid harm. Risk could have been completely avoided only by
\nshutting down the factory completely, and this was beyond what was reasonably
\nrequired. Denning L. J. said \u2018In every case of foreseeable risk it is a matter of
\nbalancing the risk against the measures necessary to eliminate it.\u2019
\nIn other words, you need to consider the facts of each case carefully in order to
\ndetermine whether the plaintiff fell below the standard of the reasonable man.
\nThe important thing to remember is that in most cases it will not be possible to
\neliminate risk entirely – the question then becomes what the reasonable person
\nwould have done to reduce the risk to an acceptable level, and whether the
\ndefendant did the same.
\n(iv) Social utility of the defendant\u2019s activity
\nThis factor, added by the Civil Liability Act 2002 (NSW) is one that was not taken
\ninto account by the common law. Its operation in concrete circumstances is
\ntherefore yet to be fully fleshed out. Some have argued that an activity that is of
\nhigher benefit to society may warrant the taking of greater risks, but no court has
\nconcluded that as yet.
\nRelevance of professional standards
\nNote that, if the negligence is alleged to have occurred in the course of providing
\nservices as part of a profession or occupation, then whether the defendant
\nconformed to what was required under current standards of practice in that
\nprofession will be taken into account in determining whether reasonable care was
\nexercised. This is also provided by s 5O(1) of the Civil Liability Act 2002 (NSW).
\nSo, whether a surgeon was negligent will depend in part on what a reasonable
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\nsurgeon would have done in the same situation. Thus in Pacific Acceptance
\nCorporation v Forsyth (1970) 92 WN (NSW) 29 where the defendant auditors
\nfailed to detect fraud by an employee of the plaintiff, the auditors were held liable
\nbecause they way they conducted the audit did not meet the standard of a
\nreasonable auditor.
\nE. Causation of harm \u2013 3
\nrd essential
\nThe plaintiff must show that they suffered harm and then that the defendant\u2019s act
\nor omission was the cause of the harm. This is a common law requirement, reiterated
\nby s 5D(1) of the Civil Liability Act 2002 (NSW).
\nHarm can take a variety of forms, for example:
\n\uf0b7 personal physical injury,
\n\uf0b7 psychological injury (\u2018nervous shock\u2019)
\n\uf0b7 damage to property
\n\uf0b7 financial loss.
\nCausation
\nIn addressing causation, the question is whether the defendant\u2019s culpable act
\ncaused the plaintiff’s loss? The plaintiff must show that, if the defendant had not
\nacted as he did, the plaintiff would not have suffered harm. The test to determine
\ncausation is called the \u2018but for\u2019 test, which was formulated by Lord Denning in
\nCork v Kirby Maclean [1952] 2 ALL ER 402 where it was stated:
\nIf you can say that the damage would not have happened but for(or in
\nthe absence of) a particular fault, then that fault is in fact a cause of
\nthe damage; but if you can say that the damage would have happened
\njust the same, fault or no fault, then the fault is not a cause of the
\ndamage.
\nSo if the harm would not have happened \u2018but for\u2019 the defendant\u2019s negligent act,
\nthen that act is a cause of the harm (note that it doesn\u2019t have to be the sole or even
\nmajor cause) but if the harm would have happened even if the defendant had not
\nbeen negligent, then the defendant\u2019s act is not a cause of the harm, and so the
\ndefendant will not be liable for the harm. What the \u2018but for\u2019 test requires us to do
\nis take away the defendant\u2019s negligent act from the story, and see if the harm
\nwould still have happened. If removing the defendant\u2019s conduct means that the
\nharm would not have happened, we can say that the defendant caused the harm.
\nBut if taking away the defendant\u2019s conduct doesn\u2019t change the outcome, then the
\ndefendant\u2019s conduct did not cause the harm.
\nIn Cork v Kirby MacLean Ltd a painter who was working on a platform next to a
\nbuilding had a fit and fell to the ground. The employer had not fitted the platform
\nwith guardrails. If the plaintiff would not have fallen but for the lack of
\nguardrails, then defendant\u2019s failure to provide guardrails was a cause (albeit not
\nnecessarily the sole, or even, major cause) of the harm. If plaintiff would have
\nfallen with\/without guardrails present, then their absence was not a cause. The
\ncourt held that the plaintiff would not have fallen \u2018but for\u2019 the absence of
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\nguardrails. Thus, defendant\u2019s failure to provide guardrails was a cause (i.e.,
\ncausation established); and defendant was liable.
\nAn example of the application of the \u2018but for\u2019 test is provided by Barnett v.
\nChelsea & Kensington Hospital [1969] 1 QB 428. The facts were that after
\ndrinking tea and vomiting, the plaintiff went to the hospital\u2019s casualty section. He
\nwas examined cursorily by a doctor, who told him to go home and see his own
\ndoctor in the morning. Five hours later plaintiff died. An autopsy revealed that
\nthis was due to arsenic poisoning. It was held that although the defendant hospital
\nobviously owed the patient a duty of care and had breached the required standard
\nof care (because the doctor had not examined him properly), the hospital was not
\nliable because the patient would have died even if the correct diagnosis had been
\nmade. In other words, because at the stage that he came in there was nothing that
\nmedicine could have done for him, it could not be said that plaintiff would not
\nhave died \u2018but for\u2019 the failure to treat him \u2013 but, it could be said that he would
\nhave died with treatment. Even if one removed the hospital\u2019s negligence from the
\nstory, the man would still have died, so there was no causation and thus no
\nliability for negligence.
\nRemoteness
\nAn important factor that must be considered whether a defendant caused damage
\nsuffered by the plaintiff is the issue of remoteness. Because the consequences of
\nan act can be infinite, the law distinguishes between factual causation and legal
\ncausation. Once it has been established (using the \u2018but for\u2019 test) that, as a matter
\nof fact, the defendant caused the harm to the plaintiff, the next question is whether
\nthat causation was reasonably foreseeable, because defendants are liable only for
\nkinds of damage that is reasonably foreseeable (that is, damage that is not too
\nremote or unpredictable). A defendant can only be expected to guard against
\neventualities that they could predict, so if harm is caused in a way that could not
\nbe reasonably predicted, the defendant will not be liable.
\nThis doctrine was laid down in Overseas Tankship (UK) Ltd v Morts Dock &
\nEngineering Co Ltd [1961] AC 388, often referred to as The Wagon Mound (No
\n1) case, after a ship involved in the case). In this case, the defendant company had
\ndisposed of waste oil by pouring it into the harbour. Several hundred metres cross
\nthe harbour, welders were working on a ship called The Wagon Mound, owned by
\nthe plaintiffs, and sparks were falling into the sea. Unknown to the defendants,
\nthere was cotton lint floating on the water in the harbour, and it absorbed the oil,
\nand the oil-soaked lint was carried it across the harbour by currents. The sparks
\nfell onto the cotton which ignited the oil, resulting in the adjacent wharf being
\nburnt down. The court held that although the defendants owed a duty of care to
\nother people in the harbour, had been negligent in pouring the oil into the water
\nand had, in a factual sense, caused the fire, it was not reasonably foreseeable that
\nthe oil would ignite. For this reason legal causation was not satisfied, and so they
\nwere not liable. Because it was not reasonably foreseeable that oil floating on
\nwater would burn down a wharf, the defendant was not liable.
\nNote that this is the second issue in the law of negligence where you encounter a
\nforeseeability test – the other being in relation to whether a duty of care exists –
\nbut the tests are used differently. In the case of the duty of care foreseeability is
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\nused to identify the class of people who might suffer harm because of the
\ndefendant\u2019s acts. In the case of causation, foreseeability is used to determine
\nwhether the way in which the actual type of harm caused to the plaintiff was
\nforeseeable or not. If the way in which the harm was caused is not reasonably
\nforeseeable, the defendant will not be liable.
\nFinally in relation to causation, it is necessary to mention the \u2018egg shell skull\u2019
\nrule, which qualifies the issue of remoteness \/ reasonable foreseeability, but only
\nin cases personal injury. The rule is to the effect that if the plaintiff has some
\nphysical weakness or illness which leads to them suffering greater harm that
\nwould usually be foreseeable, then, provided that some injury was reasonably
\nforeseeable, the defendant will be liable for all the injuries suffered by the
\nplaintiff \u2013 including those not reasonably foreseeable. The rule is sometimes
\nreferred to by the dictum \u2018You must take your victim as you find him\u2019.
\nExercise
\nBob works on a building site. He is told to keep his tools in a box,
\nbut does not do this, as he finds it too bothersome to put each tool
\ninto the box after he has finished using it. Instead he simply leaves
\nthe tools around him as he works. He knocks a hammer off the
\nbuilding. The hammer hits Frank on the foot, cutting it open. An
\nambulance is called to take Frank to hospital. The building site is
\nin a very busy part of town. The police stop the traffic in order to
\nallow the ambulance a clear run to the hospital. Because of the
\nresultant delays Tom, an electrician, is stuck in traffic for an hour.
\nBecause Tom cannot get to his next repair job of fixing the
\nrefrigerators in Sam\u2019s restaurant, Sam has to destroy $5,000 worth
\nof meat which goes bad. When Frank arrives at the hospital, it is
\ndiscovered that the cut in his foot is small, and would usually not
\nbe serious, but that because Frank suffers from a rare circulatory
\ndisease, his foot has to be amputated. Advise on all the legal
\nliabilities that arise out of this situation. Cite case authority where
\nrelevant.
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\nTopic 4 Torts – Damages and defences
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. outline the various heads of damage and explain how they
\nare calculated;
\n2. explain the principles of proportionate liability and
\nvicarious liability;
\n3. explain what defences are available to a claim in
\nnegligence; and
\n4. apply the common law principles of tortious liability to
\nfactual situations.
\nA. Calculation of damages
\n\u2018Damages\u2019 is the sum of money that is awarded for loss or damage suffered. The
\npurpose is fair compensation, not punishment or retribution \u2013 that is, to put the
\nplaintiff back in the same financial position they would have been in if the harm
\nhad not occurred. The law of torts recognises various types of loss or harm that
\nare compensable:
\n\uf0b7 physical injury;
\n\uf0b7 damage to property; and
\n\uf0b7 pure economic loss.
\nWhen a plaintiff goes to court they must make sure that they have calculated all
\nthe amounts they are suing for. Once judgment is entered, they cannot go back to
\ncourt to sue for more – this is known as the \u2018once and for all\u2019 rule.
\nLosses – for which damages in Negligence may be awarded are categorised as
\neither:
\n\uf0b7 pecuniary = a loss that can be readily determined in monetary terms.
\n\uf0b7 non-pecuniary = a loss that is difficult to determine precisely in monetary
\nterms, and so has to be estimated by the courts.
\nThe type of damages that will be claimable depend on the type of harm caused.
\nThus, for physical injury, one could claim:
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\n\uf0b7 pecuniary damages to compensate the plaintiff for the calculable financial
\nlosses flowing from the injury such as
\n– medical expenses (e.g., hospital, dental, optical, physiotherapy,
\npsychiatric or psychological counselling expenses – past and future);
\n– loss of earning capacity (e.g., loss of profits, bonuses, wages, salary,
\nother remuneration etc);
\n– rehabilitation expenses (e.g., cost of providing wheelchairs, modifying
\ncars, home-carers, conveyances or dwellings, prosthetic devices etc);
\nand
\n\uf0b7 non-pecuniary damages, to compensate the plaintiff for other (non-financial)
\nconsequences of the injury, such as
\n– pain and suffering arising from physical or mental injury;
\n– shortening of life expectancy;
\n– loss of amenities (i.e., inability to enjoy normal activities because of,
\nfor example, the loss of a limb, teeth, etc.); and
\n– loss of faculties (e.g., loss of smell, taste, hearing, sight, touch, etc.).
\nIn the case of harm to property, only pecuniary losses would be recoverable, for
\nexample, repair of damage caused to plaintiff\u2019s motor vehicle by defendant\u2019s
\nnegligent driving.
\nDamages for pure economic loss similarly results in pecuniary damages being
\nawarded – for example, recovery of lost investment due to negligent financial
\nplanning advice.
\nNote that the Civil Liability Act 2002 (NSW) places caps on damages for pain and
\nsuffering and for loss of earnings consequent on personal injury. Different caps
\napply in different jurisdictions.
\nExercise
\nBill is driving down the road after drinking. He runs over Tom,
\nwho is riding along in the cycle lane. Tom\u2019s bicycle is destroyed,
\nand he suffers a broken collar bone. Tom owns his own business as
\nan I.T. consultant. He was also a keen tennis player, but now can
\nno longer play tennis at the level he used to. Assume that you are
\nTom\u2019s lawyer, Jennifer, and that Tom has asked you to launch a
\nclaim in negligence against Tom. Under what heads of damage
\nwill you claim?
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\nB. Proportionate liability
\nIt may sometimes occur that more than one person contributes to a plaintiff\u2019s loss
\n– for example where A is driving in his car, B swerves carelessly in front of him,
\ndamaging the side of his car, and C, who is following too closely, crashes into
\nhim, damaging the rear of his car. In such circumstances, A can sue B and C, and
\nB and C are said to share proportionate liability. The court will apportion the
\namount of damages each of them has to pay A (for example 70% – 30%) in
\naccordance with the court\u2019s estimate of how much loss each of them caused. This
\ncommon law doctrine is recognised in s 34(1) of the Civil Liability act 2002
\n(NSW).
\nC. Vicarious liability
\nThe doctrine of vicarious liability applies where the law makes someone jointly
\nliable for a tort committed by someone-else because of the relationship between
\nthem. The most important example of this is the liability that attaches to
\nemployers because of the negligent acts of their employees. If the employee\u2019s
\nnegligent act was performed during the \u2018course and scope\u2019 of their employer\u2019s
\nbusiness, the plaintiff can sue both the employee and (which will be more useful)
\nthe employer. So if, for example, a bricklayer working on a building-site drops a
\nbrick onto a passer-by, the passer-by will be able to sue the worker directly, and
\nthe company that employs him vicariously, for damages. The court will award
\ndamages against the bricklayer and the company jointly, and the plaintiff can
\nenforce the judgment against either or both. In practical terms, successful
\nplaintiffs who have won a case against employee and employer usually enforce
\nthe judgment against the latter, as they will be likely to be able to meet the entire
\njudgment.
\nD. Defences to negligence
\nIn response to a plaintiff\u2019s claim the defendant can raise various defences (apart,
\nof course, from the obvious defence of arguing that they did not owe a duty of
\ncare \/ were not negligent \/ did not cause the harm). The following are the
\ndefences that can be raised:
\nContributory negligence
\nHere the defendant seeks to prove that the plaintiff failed to take reasonable care
\nfor his\/her own interests (e.g. not wearing a seat belt in car), and thus was partially
\nresponsible for the loss he or she suffered. The common law and s 5R of the Civil
\nLiability Act 2002 (NSW) provide that the plaintiff must take reasonable care to
\navoid harm to themselves. Contributory negligence is a partial defence – the
\ndefendant is still liable to the plaintiff, but the amount of damages he or she has to
\npay are reduced according to the court\u2019s decision as to the relative percentages of
\nresponsibility to be borne by the defendant and by the plaintiff – for example, if
\nthe plaintiff claims $ 100 000 in damages, but is found to be 20% responsible for
\nthe event which caused the loss, the defendant will have to pay only $ 80 000.
\nIn Mak Woon King v Wong Chiu [2000] 2 HKLRD 295, a factory-owner had
\nfailed to adjust safety-guards on an industrial saw, and a worker was killed. The
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\nworker had himself failed to comply with safety instructions relating to the use of
\nthe saw. The court held that the factory and the worker were liable for the
\nworker\u2019s injury in the proportions of 85% – 15%, and so the worker\u2019s estate was
\nawarded only 80% of the damages he claimed.
\nIn Imbree v McNeilly [2008] HCA 40 the plaintiff had allowed the defendant, who
\nhad no licence, to drive his (the plaintiff\u2019s) 4WD on a gravel road while under the
\nplaintiff\u2019s supervision. The defendant swerved to avoid rubbish on the road and
\ncrashed, injuring the plaintiff. The plaintiff\u2019s claim was reduced by 30% on the
\nbasis that, as the supervising driver, he was partially responsible for his own
\ninjury in allowing the defendant to drive the vehicle.
\nExercise
\nAnswer the following question, taking into account all the legal
\nprinciples you have learned in this Topic:
\nFrances owns a florist\u2019s shop, Fancy Flowers Pty Ltd. She
\nemploys Brad to drive a delivery vehicle. One night, contrary to
\nFrances\u2019 instructions, Brad exceeds the speed limit while delivering
\nflowers because he wants to have a longer dinner break. He
\ncrashes into Edward\u2019s car. Edward\u2019s car did not have functioning
\nrear lights. Advise Edward on his legal rights.
\nVoluntary assumption of risk (\u2018volenti non fit injuria\u2019)
\nThe phrase volenti non fit injuria means \u2018no harm can be done to one who
\nconsents\u2019 – in other words, a plaintiff who, with full knowledge of a risk, accepts
\nthe risk freely and voluntarily will not be able to recover damages. Section 5G of
\nthe Civil Liability Act 2002 (NSW) creates a presumption that someone who
\nengages in activities that are inherently and obviously risky – such as parachuting
\nor hang-gliding \u2013 is aware of the risks thereof. By engaging in such activities,
\nwhich are commonly known to be risky, the plaintiff is deemed to have accepted
\nthat risk, and can therefore not sue the person who organised the activity. In other
\ncircumstances, there is a duty to warn of risks. Voluntary assumption of risk is a
\ncomplete defence – in other words, the plaintiff cannot recover anything from the
\ndefendant.
\nExpress exclusion of liability
\nIt is possible for a person to expressly advise potential plaintiffs that they (the
\ndefendants) engage in conduct towards the plaintiffs, or provide advice to
\nplaintiffs, on the basis that liability for negligence is excluded. Thus, an entrance
\nto a building site may have a notice in which the public is warned that liability on
\nthe part of the builder is excluded when people enter the site, and an investment
\nadviser may expressly disclaim liability for advice they provide. Note, however,
\nthat exclusion notices are \u2018read down\u2019, or strictly interpreted by the courts \u2013 i.e.,
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\nagainst defendants\u2019 relying on them, as they run counter to the general common
\nlaw principle that a defendant should be liable for his or her conduct.
\nIt is also important to note that under s 64 of the Australian Consumer Law
\n(discussed in Topic 9), it is not possible to exclude liability under provisions of
\nthat Act \u2013 including liability arising from a breach of the implied guarantee in s
\n54(2)(d) that goods are safe.
\nExpiration of time (prescription)
\nStatutes require legal proceedings to be commenced within a certain time. If the
\nplaintiff does not bring his case before the courts within the required time, he
\nloses his right to sue the defendant because of expiration of time, and the claim is
\nsaid to be prescribed. The standard period for prescription of claims in Australian
\njurisdictions is six years. Thus s 14 of the Limitation Act 1969 (NSW) provides a
\ngeneral rule that a claim expires within six years of the right of action arising.
\n(However, note that the act provides different periods for some specific types of
\nclaim). Expiration of time is a complete defence.
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\nTopic 5 Contract – formation
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. explain the three elements of a valid contract: agreement,
\nintention to be legally bound and consideration;
\n2. describe the process of contract formation through offer an
\nacceptance;
\n3. outline the impact of estoppel on the law;
\n4. distinguish contracts, which are intended to be legally
\nbinding, from other types of non-contractual agreements;
\n5. explain the role performed by consideration in contract law;
\n6. explain how problems created by consideration can be
\ncircumvented; and
\n7. explain how international contracts differ from domestic
\ncontracts, and what treaties govern their terms.
\nVideo
\nA. Introduction to contract law
\nThe law of contract is concerned with the rights, duties and obligations of parties
\nwho have entered into a legally binding agreement. This should be clearly
\ndistinguished from the law of torts which imposes obligations automatically on
\neveryone.
\nThe law of contract has it origins in laissez-faire philosophy. This philosophy is
\nbased on the idea that individuals should be free to contract with each other on
\nwhatever terms they wish, with minimal governmental intervention and subject
\nonly to limited restraint on the grounds of public policy (i.e. parties should not be
\nable to enter into a contract for illegal purposes).
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\nFundamental to this philosophy is the notion that the parties to a contract are
\nessentially equal and therefore can negotiate the terms of a contract so that it is
\nacceptable to both. Accordingly, if a party to a contract enters into a bad bargain
\nthen that is considered to be their own fault as they failed to make proper inquiries
\nor foolishly agreed to a term which was particularly harsh.
\nParties entering into contracts thus have the responsibility of making whatever
\ninquiries are appropriate to satisfy themselves in respect to the terms and subject
\nmatter of the transaction. This concept is found in law in the maxim caveat
\nemptor, which means \u2018buyer beware\u2019.
\nSince the late 1960\u2019s the laissez-faire philosophy has been weakened by
\nincreasing judicial and legislative recognition that parties to a contract are often
\nnot in equal bargaining positions and this may result in unfair or unconscionable
\ncontracts being entered into, often by individuals who are unable to negotiate with
\nlarge corporations. Anyone who has tried to negotiate the standard terms of a
\nmortgage with a large bank will appreciate the difficulties which a consumer will
\nhave in trying to reach an agreement which is acceptable to them, as well as to the
\nbank.
\nIn an attempt to remedy some of the more serious excesses of the laissez-faire
\nsystem the courts and Parliaments have developed a range of doctrines and have
\nintroduced legislation intended to protect consumers when entering into certain
\ncontracts. The equitable doctrine of unconscionability, the Competition and
\nConsumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)) and the
\nFair Trading Acts of the various jurisdictions are good examples of this.
\nB. Elements of a valid contract
\nA contract can be defined as a legally binding agreement. This serves to
\ndistinguish contracts from other types of social agreement, which are not legally
\nbinding \u2013 for example where one person agrees to go to the other\u2019s house for
\ndinner. Contracts are fundamental to an individual\u2019s daily life. Every time we
\npurchase something in a shop, ride in a taxi or book a room in an hotel, we enter
\ninto a contract. The knowledge that contracts are binding and that they will be
\nenforced by the courts is the foundation of the certainty that underpins the
\nbusiness sector.
\nThere are three essentials of a valid contract:
\n\uf0b7 agreement
\n\uf0b7 intention to be legally bound and
\n\uf0b7 consideration
\nC. Agreement (offer and acceptance) \u2013 1
\nst essential
\nOffer
\nThe existence of an agreement obviously depends on communication between the
\nparties. However it is important to note at the outset that communication can be
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\nby any means \u2013 by writing, by spoken words or even by actions. So, if I go into a
\nshop and put goods down at the till, and the till-operator enters the price, takes my
\nmoney and then I take the goods, we have entered into a contract even if no words
\nhave passed between us. Our agreement is implicit from, and has been
\ncommunicated by, our actions.
\nThe process by which an agreement to enter into a contract occurs is that of offer
\nand acceptance. In this process the person who makes the offer is the offeror, the
\nperson who receives the offer is the offeree.
\nA contractual agreement occurs when
\nthe offeror has communicated an offer to the offeree; and
\nthe offeree has communicated acceptance to the offeror.
\nIt is important to note that the offer may not be as clear as one party saying to the
\nother \u2018I offer to sell you my car\u2019 and the other party saying \u2018I accept\u2019. Where there
\nhas been a series of negotiations involved in reaching an agreement it is
\nsometimes necessary to consider all of the representations made to determine
\nprecisely what was offered by one party and what was accepted by the other.
\nAlthough ideally contractual liability should arise only when each party actually
\nagrees to enter into a contract (that is, has subjective intention to offer or accept),
\nthe law has to address the question of what happens if a person appears (from an
\nobjective perspective) to agree to something even if they don\u2019t actually intend to
\nagree or communicate agreement in error. In other words, the law has to deal with
\nthe problem posed by the fact that it is impossible to tell what is in another
\nperson\u2019s mind. For this reason, the courts adopt an objective approach in
\ndetermining whether there has been offer and acceptance \u2013 ie, they ask whether a
\nreasonable person observing the conduct of the offeror or the offeree would
\nbelieve that they were making an offer or giving acceptance. As was held in
\nSmith v Hughes (1871) LR 6 QB 597 at 607
\nIf, whatever a man\u2019s real intention may be, he so conducts himself that a
\nreasonable man would believe that he was assenting to the terms proposed
\nby the other party, and that other party upon that belief enters into the
\ncontract with him, the man thus conducting himself would be equally
\nbound as if he intended to agree to the other party\u2019s terms.
\nSee also Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14
\nNSWLR 523, and Brambles Holdings Ltd v Bathurst City Council (2001) 53
\nNSWLR 153 where it was held that agreement could be inferred from conduct.
\nThe effect of this doctrine in the law of contract is that if a person appears to have
\nmade an offer or communicated acceptance (that appearance being tested
\naccording to how it would be interpreted by a reasonable person in the position of
\nthe other party), and the other party has relied on that appearance, then the first
\nparty will be taken to have made the offer or communicated the acceptance.
\nOffers can be expressed in writing or in words or can be implied from conduct \u2013
\nfor example, taking groceries to the cashier at a store implies an offer to buy them.
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\nUsually (in the vast majority of cases), and offer is a bilateral offer \u2013 that is, it is
\nmade to a specific person, and the contract comes into being when the offeror
\nreceives that person\u2019s communication of acceptance.
\nHowever, in a few circumstances, the offer is a unilateral offer. This means that
\nthe offeror communicates it to a large group of people \u2013 sometimes this is said to
\nbe an offer \u2018to the world at large\u2019. In that circumstance anyone who hears or reads
\nthe offer can form a contract just by doing what the offeror asks, without needing
\nto communicate acceptance to the offeror. This is shown by Carlill v. Carbolic
\nSmoke Ball Co [1893] 1 QB 256 in which a company offered a \u00a3100 reward to
\nany person who caught influenza after using one of its smoke balls. After buying
\nand using a smoke ball, Mrs. Carlill caught influenza and sued for the reward.
\nThe court held that an offer did not have to be made to a particular person \u2013 it
\ncould be made to the \u2018world at large\u2019 resulting in a contract with anyone who
\ncame forward and accepted it. The court also held that in such event, the usual
\nrule that acceptance must be notified to the offeror did not apply \u2013 the offeror was
\ntaken to have agreed that anyone who did what the offer invited them to do had
\naccepted the offer.
\nA publication, such as an advert, which uses words that indicate that an offer is
\nbeing made to a specific person (or to the public) – for example by using the
\nwords \u2018for sale\u2019 \u2013 would be an offer capable of being accepted by the offeree (or
\nby the public at large if widely published).
\nHowever, an offer must be distinguished from \u2018invitation to treat\u2019 (that is, an
\ninvitation to make an offer). Under the common law, the mere listing of a price
\nin an advert or putting price labels on goods without the use of words such as \u2018for
\nsale\u2019 do not amount to the making of an offer \u2013 they are an invitation to treat \u2013
\nthat is, an invitation to the customer to make an offer. The reason for this rule is
\nto protect shop owners who mis-label price-tags \u2013 if the price-tag was an offer that
\nthe customer could accept simply by picking up the item, then the contract would
\nbe binding at that moment and the shop keeper would have to accept the amount
\nindicated. But since it is the customer who is making the offer, the shop-keeper
\ncan decline to accept if the price-tag is wrong. The operation of this rule is shown
\nby Pharmaceutical Society of Great Britain v. Boots Cash Chemists [1953] 1 QB
\n401 in which an Act required drugs to be sold under supervision of a pharmacist.
\nA pharmacy put goods on display on open shelves with price tags attached.
\nCustomers would then select the goods and take them to the check-out counter,
\nwhere the pharmacist was on duty. The pharmacy was prosecuted on the basis
\nthat by putting the goods on the shelf it had been making an offer, which
\ncustomers then accepted by picking up the goods. The court held that a display of
\ngoods is an \u2018invitation to treat\u2019, not an offer, and thus the contract had not been
\nentered into when the customer selected the goods. The Act had not been
\nbreached because it is the customer who offers to buy the goods, not the shop
\nwhich offers to sell. The contract was formed when the customer took the goods
\nto the till (where the pharmacist was on duty) and the pharmacist accepted the
\noffer. If the pharmacist declined the offer, there would be no contract.
\nAn offer will terminate (and thus no longer be open for acceptance) in the
\nfollowing circumstances:
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\n\uf0b7 Where the offeror has revoked the offer, which he can do at any time before
\nacceptance by the offeree has reached the offeror (see Byrne & Co v
\nTienhoven (1880) LR 5 CPD 344). The offeror may revoke the offer even if
\nhe has stated that the offer will remain open until a particular date or time
\n(The only exception to this is if the offeror and offeree have entered into a
\nseparate contract called an option contract, whereby the offeror has paid the
\nofferee something, and the offeror has agreed to leave the offer open for a
\nparticular period).
\n\uf0b7 Where it has not been accepted by the offeree within the time or in
\naccordance with the place or method of communication (if any) stipulated
\nby the offeror. So if an offer is stipulated to be open until 11 am on 20
\nOctober, it will lapse automatically if no acceptance has been received by
\nthat time.
\n\uf0b7 Where the offer has not been accepted within a reasonable time (assuming
\nthat the offeror did not stipulate a time for acceptance). A reasonable time is
\nconsidered in view of all the circumstances of the offer \u2013 e.g. a reasonable
\ntime to accept an offer of perishables will be less than that for nonperishables.
\n\uf0b7 Where the offeree has made a counter-offer: A counter offer is an offer by
\nthe party to whom the original offer was made to deal with the first party on
\ndifferent terms. This destroys the original offer, which is thus no longer
\nopen for acceptance by the offeree. For example, in Hyde v Wrench [1840]
\n49 ER 132, H made an offer to sell W a plot of land for \u00a31,000. W
\nresponded by stating that he would pay \u00a3950. W thereby made a counteroffer
\nwhich vitiated the first offer by H. H rejected W\u2019s counter-offer.
\nBecause a counter-offer destroys the preceding offer, when W then
\ncontacted H saying that he would pay \u00a31,000 after all, and H said that he no
\nlonger wanted to sell the land, the court rejected W\u2019s argument that there
\nwas a contract. There was no offer in existence for W to accept. The rule
\nabout counter-offers applies to every detail of an offeree\u2019s response. Thus,
\nif A offers to sell B a green car, for $3,000, with delivery at 10 am on 3
\nOctober, and B responds \u2018I agree to buy your green car for $3,000 with
\ndelivery at 10.30 am on 3 October\u2019, that is not acceptance. It is a counteroffer.<\/p>\n
\uf0b7 Where the death of either party has occurred before acceptance.
\nAcceptance
\nIn order for there to be a valid contract the party to whom the offer has been made
\nmust accept the offer and that acceptance must be communicated to (that is, reach
\nthe mind of) the offeror (subject to the exception relating to \u2018offers to the world\u2019
\ndiscussed above). Generally, acceptance can be communicated by any means,
\nirrespective of how the offer was communicated. However, if a certain manner of
\nacceptance is required then it must be complied with and failure to comply will
\nrender the purported acceptance invalid.
\nAn exception to the rule relating to communication being effective when it
\nreaches the mind of the offeror is the postal acceptance rule, established in the
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\ncase of Adams v Lindsell (1818) 106 ER 250. This rule is to the effect that,
\nwhere the offeror impliedly nominates the post as a method of communication by
\nsending the offer in the mail, then the acceptance is effective when the offeree
\nputs the acceptance letter in the post, not at some later date when the offeror
\nreceives the acceptance. Thus, assume that A sends B a letter offering to sell a
\ncar. B gets the letter on 1 October and posts their acceptance on 4 October. On 6
\nOctober, before receiving the acceptance, A contacts B to revoke the offer. A
\nreceives the letter on 10 October. In that scenario, there is a contract, as
\nacceptance occurred on 4 October, so it was no longer open to A to revoke the
\noffer on 6 October. Obviously in such circumstances it would be prudent for B to
\nhave registered their letter so as to have proof of having posted it.
\nFaced acceptances are effective when read by the offeror \u2013 in other words, the
\nnormal rules, not the postal acceptance rule, applies to faxes.
\nEmails are governed by s 14(1) if the Electronic Transactions Act 1999 (Cth),
\nwhich provides that communications sent by email are effective when they reach
\nthe recipient\u2019s server (irrespective of whether the recipient has actually checked
\nhis or her email). So, an acceptance would be effective when it reached the
\nofferor\u2019s server, even if the offeror had not opened the email.
\nExercise
\n1. Samuel received a printed advertisement in the post stating
\nthat a screwdriver set was \u2018on sale\u2019 at a local hardware store
\nfor $25.00. Samuel went to the store, found the item and took
\nit to the counter. When he tried to pay for the item the cashier
\nsaid that he could not sell it to him as it was the last
\nscrewdriver set left and it was required for display purposes.
\nAdvise Samuel.
\n2. Gina telephoned Victor on November 12 and offered to sell
\nhim 1000 super-deluxe lawn-mowers at the wholesale price
\nof $230 a piece. On November 20 Victor purported to accept
\nthis offer by sending Gina a facsimile. However,
\nunbeknownst to him or Gina, Gina\u2019s facsimile machine was
\nout of order at the time. Hearing nothing from Victor Gina
\nthought that Victor did not want to take up the offer and sold
\nthe lawn-mowers to Michelle. Victor claims that he validly
\naccepted the offer. Advise Victor.
\n3. Bob telephones Mary and says \u2018Would you like to buy 1,000
\nlitres of fuel at $2.00 per litre to be delivered on 4 October?\u2019
\nMary says \u2018I\u2019ll think about it\u2019. Later that day she phones Bob
\nand says \u2018I accept your offer, but with delivery on 5 October\u2019.
\nBob says \u2018No\u2019. Then Mary says \u2018OK, I accept your original
\noffer\u2019. Advise Bob.
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\nD. Intention to enter legal relations \u2013 2
\nnd essential
\nAlthough often taken for granted, the law requires evidence (express or implied)
\nthat the parties intended to make their agreement legally binding. Without
\nevidence, the law presumes that the parties intended to be legally bound by
\ncommercial or business agreements, but did not intend to be legally bound by
\nfamily, domestic or social agreements. However, these presumptions can be
\nrebutted (i.e., shown to be incorrect) by evidence to the contrary.
\nIn Cohen v. Cohen (1929) 42 CLR 91, a husband\u2019s agreement to pay his wife a
\ndress allowance was held to be not binding because it was of a \u2018domestic\u2019 nature
\nand the presumption was not rebutted in court.
\nBy contrast, in Parker v. Clark (1960) 1 All ER 93, an agreement between friends
\nwas found to be a contract. An elderly couple (the Clarks) lived in a large house
\nin the south of England and were on good terms with a middle-aged couple from
\nSussex (the Parkers). The Clarks wrote to the Parkers and invited them to come
\nand live with them and share their large house. Mr. Clark\u2019s letter outlined how
\nthey would share expenses\/running of the house. It also said that, if they agreed
\nto come and live with them, the house would be left to Mr. Parker. The Clarks
\nunderstood that, to do this, the Parkers would have to sell their house in Sussex.
\nThe Parkers agreed to the offer and sold their house. Disagreements between the
\ncouples eventually led to the Parkers being forced out of the Clarks\u2019 house, so
\nthey sued for breach of contract. The Court had to decide whether there was an
\nintention to create a legal relationship? The court held that although the agreement
\nwas prima facie of a \u2018domestic\u2019 nature (i.e., thus, legal relations were presumably
\nnot intended) there was sufficient evidence available to rebut the presumption.
\nThus, the Parkers were successful. Evidence, which led the court to believe the
\nparties intended to become legally bound, included the fact that Mr. Clarks\u2019 letter
\nwas precise and detailed; the sale of the Parkers\u2019 house was a major financial
\ntransaction entered into in reliance on the agreement, and the alteration of Mr
\nClark\u2019s will also indicated that he regarded the agreement as binding.
\nThe normal position is that business agreements are presumed to be contracts.
\nHowever, \u2018honour\u2019 clauses in commercial agreements can rebut the presumption
\nthat legal relationships were intended. In Rose & Frank Co v. J. R. Crompton &
\nBros Ltd [1925] AC 445 an agreement for the supply of tissue paper stated: \u2018This
\narrangement is not entered into …as a formal or legal agreement…but is only a
\nrecord of the purpose and intention of the …parties…to which they each
\nhonourably pledge themselves…that it will be carried through…with mutual
\nloyalty and friendly cooperation.\u2019 The agreement was terminated without the
\nrequired period of notice; and the plaintiff (tissue manufacturer) sued for breach
\nof contract. The court held that no contract existed – only an arrangement binding
\nin an honourable pledge from which all legal consequences were excluded. It
\nshould however be noted that statutory provisions regulating contracts, such in
\nState Sale of Goods Acts and the Competition and Consumer Act 2010 (Cth)
\ncannot be evaded simply by the parties stating that their agreement is not a
\ncontract. If the agreement is clearly a contract as meant in such legislation, the
\nlegislation will apply.
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\nF. Consideration \u2013 3rd essential
\nThe third element of a valid contract is consideration.
\nThis means that each party must promise to give the other something of value to
\nfor the agreement to be a contract. The promise can be to give something, to do
\nsomething or even not to do something (sometimes called a \u2018forebearance\u2019). So
\nfor example, these would be contracts:
\nA promises B promises
\nTo give B her car To pay A $5,000
\nTo pay B $500 To paint A\u2019s house
\nNot to sell her car to anyone-else for 4 days To pay A $50
\nTo cut B\u2019s lawn To wash A\u2019s dog
\nAs long as each party is getting some advantage or is better off as a result of the
\nagreement, there is consideration. The law will not, as a general rule, enforce a
\nmere promise by one party (A) to do something or give something to the other (B)
\nwithout getting anything in return. Thus if A were to promise to give B her car,
\nbut later reneged on the promise and refused to hand it over, B could not enforce
\nthe promise at law. In contrast, if B had agreed to pay $5,000 in exchange for A\u2019s
\npromise to deliver the car then, subject to all other requirements being satisfied,
\nthe agreement would be legally enforceable.
\nWhilst the law requires that consideration is an element of a contract it is not
\nconcerned with the adequacy (the financial value) of the consideration. For
\nexample, a contract for the sale of a prestige car for $50 will be valid irrespective
\nof the fact that the consideration given was less than the market value. This is
\nshown by Chappell & Co Ltd v. Nestle & Co [1960] AC 87 in which Nestle & Co
\noffered purchasers of its chocolates that they would sell them a music record in
\nexchange for 1 shilling and sixpence and three chocolate bar wrappers, as part of
\nan advertising campaign. Under copyright law, the holder of the copyright in the
\nrecord (Chappell & Co Ltd) were entitled to a royalty of 6.25% of the \u2018selling
\nprice of the record\u2019. Were royalties owed on 1 shilling & sixpence or 1 shilling &
\nsixpence plus the value of 3 wrappers (which were generally thrown away as
\nhaving no value, but which Nestle had obviously profited from, because
\ncustomers had to buy a chocolate to get a wrapper). The court held that royalties
\nwere payable on the value of 1 shilling and 6 pence + 3 wrappers. The court said
\nthat the wrappers had some value, even if that was very small, and this had to be
\nincluded in the calculation of the royalties because they were part of the
\nconsideration that Nestle had received from its customers.
\nIt is also not relevant when the consideration is to be given: In some contracts the
\nconsideration is exchanged at the same time the contract is made (for example,
\nwhen you buy something in a shop), and this is called \u2018executed consideration\u2019.
\nHowever, in other contracts, it may be agreed that consideration will pass between
\nthe parties (i.e. the contract is actually performed) some time after it is made (for
\nexample, when a builder agrees to build a house, and the customer receives the
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\nkeys and the builder receives the money a year after the contract was entered into)
\n\u2013 this is called \u2018executory consideration\u2019.
\nNote that because the doctrine of consideration requires that each party promise to
\ngive something in exchange for something the other person will give them, past
\nevent cannot be counted as consideration. So if A washes B\u2019s car on Monday,
\nand then on Tuesday A and B agree that, because A washed B\u2019s car, A will pay B
\n$25, that is not a contract, because A is not getting any advantage now or in the
\nfuture in exchange for promising to pay B $25.
\nThere is an important exception to the requirement that there be consideration in
\norder to create a valid contract. This is where the contract is made \u2018under seal\u2019.
\nContracts which are made under seal are called deeds. It is no longer necessary
\nthat an actual wax seal be affixed to a deed. However, it is still necessary that they
\nare:
\n1. signed by the person making the deed;
\n2. witnessed by a person who is not a party to the deed;
\n3. either a seal is affixed or the document is expressed to be a deed.
\nAll contracts which are not under seal are called simple contracts and require
\nconsideration to be legally enforceable.
\nWhere a party to a contract promises to do something that they are already
\nobliged to do either at law or under another contract with the promisor, then they
\nwill not have given anything in addition under the contract which will constitute
\nconsideration. A promise to do something one is already legally bound to do has
\nno value because it is not giving anything extra \u2013 for example, the fire brigade has
\na duty to protect people\u2019s houses from fire, so if a person who owned a house
\nagreed to pay the fire brigade $500 in exchange for the fire brigade coming to put
\nout a fire, that would not be a contract, because the owner of the house is not
\ngetting any consideration \u2013 they already had a right to ask the fire brigade to put
\nout the fire. This principle was applied in Stilk v Myrick (1809) 2 Camp 317; 170
\nER 1168, in which the crew of a ship had agreed to work for a specified sum.
\nAfter some of the crew deserted, the captain agreed to pay the remaining crew
\nmembers more than the agreed wage. However, when they tried to enforce this
\nagreement, the court said that there was no contract, because the captain was not
\ngetting any consideration in exchange for the increased wage, as the work the
\nship\u2019s crew did was what they were originally obliged to do.
\nHowever, if someone who already has a duty to do something for you does do
\nsomething extra, there will be a contract. This is shown by Glasbrook Bros. v
\nGlamorgan County Council [1925] AC 270. During a miner’s strike in South
\nWales, in 1921, a colliery manager applied for police protection and insisted they
\nprovide a live-in garrison. This was agreed, providing the colliery paid the
\nassociated costs of \u00a32,200. When order was restored, the manager refused to pay,
\nclaiming there was no consideration – i.e., police were only doing what they were
\nlegally bound to do. Judgment was given for the police because, although police
\nare bound to give protection, here they had done something extra, above and
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\nbeyond their normal duties, for the benefit of the coal company by setting up a
\ncamp at the mine.
\nThe doctrine of consideration creates a problem in cases where someone wants to
\nrelease someone from all or part of a debt. Such an agreement obviously gives no
\nadvantage to the releasor, and thus if the other party seeks to enforce the promise
\nby the releasor, they will be unable to, as they themselves gave nothing in return.
\nThis is shown by Foakes v Beer (1884) 9 App Cas 605. Dr Foakes owed Mrs
\nBeer a debt of \u00a32090 plus \u00a3360 in interest. Mrs. Beer agreed to let Dr Foakes off
\nthe \u00a3360 interest if he paid the \u00a32090, which he did. However, Mrs Beer then
\nsued Dr Foakes for the \u00a3360. Was there a contract, enforceable by Dr Foakes?
\nThe court held that Dr. Foakes had paid only the amount he was legally obliged to
\npay Mrs. Beer; so her promise in relation to the additional sum was not binding
\nbecause there was no consideration from him (i.e., he did not give her anything in
\nexchange for not being obliged to pay interest). Thus, her promise was not a
\ncontract and he was liable to pay the additional 360 pounds.
\nThere are however exceptions to the rule that an agreement to accept a lesser sum
\nof money than is owing is not a binding contract. The parties can ensure that they
\nhave a binding agreement if:
\n\uf0b7 they put the agreement in a deed;
\n\uf0b7 the agreement requires the debtor to give the creditor something (no matter
\nhow trifling its value) in exchange for the creditor agreeing to let the debtor
\noff part of the debt; and
\n\uf0b7 the creditor agrees to take part payment on an earlier day than the full
\npayment was due (the theory here is that the creditor has received an
\nadvantage in the form of interest that he can earn on the lesser amount paid
\nearly).
\nProblems raised by the issue of consideration have also been significantly
\neliminated by the doctrine of estoppel, which has been used by the courts to
\nrequire a person to comply with a unilateral promise unsupported by consideration
\nfrom the other party in certain limited circumstances. The doctrine originated in
\nCentral London Property Trust Ltd v High Trees House Ltd [1947] KB 130, in
\nwhich the owner of an apartment block in London was anxious to keep tenants
\nduring World War II. In order to do this they told their tenants that he would
\nreduce the rent for the duration of the war. After the war was over he raised the
\nrent to what it had been, but also sued the tenants for the rent that had not been
\npaid. The tenants argued that the owner was bound by its promise to reduce the
\nrent. The owner said that he had received no consideration for the promise and so
\nno binding contract concerning a reduction of rent existed. The court held that it
\nwas reasonable for the tenants to rely on the owner\u2019s representation, and they had
\ndone so (by arranging their financial affairs on the assumption that the rent would
\nnot be reclaimed). The owner was therefore estopped from raising the argument
\nrelating to consideration, and the promise he had made to reduce the rent was
\nenforceable against him. Arguably cases such as Stilk v Myrick and Foakes v Beer
\nwould be differently decided today in light of the doctrine of estoppel.
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\nThe doctrine of estoppel was accepted into Australian law in Walton\u2019s Stores Ltd
\nv Maher (1988) 164 CLR 387 – although unlike in the Central London case, this
\ncase did not involve absence of consideration but rather the issue of whether one
\nparty had acted in such a way as to lead another to believe there was a contract. In
\nthis case, W Ltd had negotiated a contract with Maher in terms of which Maher
\nwould demolish a building on a plot of land, build a new one and then lease it to
\nW Ltd. The contract was in writing but had yet to be signed. W Ltd\u2019s lawyers
\ntold M that W Ltd\u2019s director would sign the contract, and W Ltd\u2019s director knew
\nthat his lawyer had said this to M. Based on this representation, M began the
\ndemolition job. W Ltd\u2019s directors knew that the demolition had begun. A few
\nmonths later he was contacted by W Ltd\u2019s lawyers to say that W Ltd had decided
\nnot to enter into the contract, and so would not be paying M anything. The court
\nheld that it was reasonable for M to have believed, because of the statement by W
\nLtd\u2019s agent (the lawyers), that W Ltd had agreed to the contract. W Ltd were
\ntherefore estopped from arguing that they had not agreed to the contract and were
\nliable to pay damages to M. They knew that M had relied on the belief that there
\nwas a contract and has suffered detriment by incurring expense, yet W Ltd had
\nallowed that situation to carry on. Brennan J listed what he considered to be the
\nessential elements of an action for promissory estoppel. These were:
\n1. that the plaintiff assumed that a particular legal relationship existed between
\nthe parties or that a particular legal relationship would exist between them,
\nand in the latter case;
\n2. that the defendant would not be free to withdraw from that expected
\nrelationship; that the defendant induced that assumption or expectation;
\n3. that the plaintiff acted or abstained from acting in reliance on the
\nassumption or expectation;
\n4. that the defendant knew or intended that the plaintiff act or abstain from
\nacting in that manner;
\n5. that the plaintiff\u2019s action or inaction will cause it detriment if the
\nassumption or expectation is not fulfilled; and
\n6. the defendant failed to avoid that detriment.
\nG. International contracts
\nSpecific issues need to be considered when a contract is entered into across
\nnational boundaries.
\nChoice of law
\nThe first, and perhaps most important, issue to be considered is whose law will
\ngovern the contract ? Imagine the CEO of a company registered in France signs a
\ncontract with the CEO of a contract registered in the UK while both are attending
\na conference in Hong Kong, for the construction of a sugar refinery in Brazil. If
\nlitigation ensues, which jurisdiction\u2019s law will apply in determining the dispute?
\nThe parties are to some extent free to specify in the contract whose law will
\napply, but if they do not the issue will be determined by applying the principles of
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\nprivate international law (also known as \u2018conflict of laws\u2019). Most countries adopt
\nthe principle that, it is the place where a contract is entered into whose law applies
\n\u2013 so in the example given, any dispute would be determined applying the laws of
\nHong Kong. That would mean that a French court hearing the case would have to
\nascertain what the law of Hong Kong is on the point at issue.
\nInternational sale of goods
\nThere are a number of questions which parties to an international contract for the
\nsale of goods need to consider when entering a contract, including when risk
\npasses (that is, whether the loss occasioned by damage or destruction of the goods
\nis borne by the buyer or the seller); who is responsible for arranging customs
\nclearance; who must bear the costs of freight et cetera. In order to promote
\nuniformity in international sales, a treaty known as the Vienna Sales Convention
\ncame into force in 1988. Signatories (including Australia) undertook to enact its
\nprovisions into domestic law, and each jurisdiction within Australia has done so
\n(see, for example, the Sale of Goods (Vienna Convention Ac ) 1986 (NSW)). The
\nprovisions of the Convention now provide a set of default rules governing
\ninternational sale contracts in the absence of the contracting parties agreeing
\notherwise.
\nInternational transportation of goods
\nBecause all international sales of goods involve transportation of goods,
\nconventions have been drafted governing the rules that apply to carriage of goods
\nby sea (the Hague-Visby Rules of 1968 and the Hamburg Rules of 1978),parts of
\nwhich were enacted into Australian law by the Carriage of Goods by Sea Act
\n1991 (Cth). Similarly, the Warsaw Convention of 1929, governing airtransportation,
\nhave been adopted into Australian law by the Civil Aviation
\n(Carriers Liability) Act 1959 (Cth).
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\nTopic 6 Contract \u2013 Legal validity and validity of consent
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. explain why a contract may be void from the start or may be
\ndeclared voidable by a court on application by a party in
\ncertain instances;
\n2. describe the remedy of rescission and explain when the right
\nto claim it may be lost;
\n3. explain the concept of contractual capacity, and how it may
\nbe limited by minority, intoxication or mental illness;
\n4. distinguish which contracts have to be entered into in a
\nparticular way;
\n5. explain the effect of illegality on contracts;
\n6. explain why a contract may be voidable if a party\u2019s consent
\nwas unfairly obtained;
\n7. explain how misrepresentation, duress, undue influence and
\nunconscionability may vitiate consent; and
\n8. explain how mistake by the parties in relation to what they
\nwere agreeing to may invalidate a contract.
\nA. Factors affecting legal validity
\nSometimes, although there is an agreement between the parties which satisfies the
\nthree essentials for a contract, the law may make the contract invalid. In this
\nTopic we will examine rules relating to capacity, legality and form and the effect
\nthey can have on a contract.
\nThe following terms are relevant to this area of the law:
\n\uf0b7 void – a contract which is a nullity, does not exist, has no legal effect; and
\n\uf0b7 voidable – a contract which can be \u2018rescinded\u2019 by a party.
\nThe concept if rescission is an important one, relevant to this Topic. When a
\nparty wants to rescind a contract, they are asking the court to end the contract and
\nto put the parties back in the same position they were in before the contract was
\nentered into \u2013 so each party must give back to the other anything they received.
\nThe effect of this remedy is to put everything back to where it was, as if the
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\ncontract never existed. The person seeking rescission is referred to as the
\n\u2018innocent\u2019 party, in the sense that they are alleging that there are grounds why it
\nwould be unfair to hold them to the contract.
\nThe right to obtain rescission can be lost if:
\n\uf0b7 it is not exercised within a reasonable time;
\n\uf0b7 the parties cannot be replaced reasonably close to their original positions
\n(for example, the contract was for the purchase of a car, but the car has been
\ndestroyed by lightening);
\n\uf0b7 the innocent party has affirmed the contract in the interim (in other words
\nhas indicated that they wish to stand by the contract); or
\n\uf0b7 another party has in the interim, acquired rights in the subject matter of the
\ncontract in good faith and for valuable consideration (for example, A sold B
\na car, B then sold the car to C \u2013 so B cannot give the car back to A as this
\nwould adversely affect C).
\nB. Legal capacity
\nLegal capacity is the ability of certain people to make legally binding agreements.
\nIf a party lacks legal capacity, an otherwise valid contract may be voidable. We
\nwill consider the position of minors, mentally ill persons and intoxicated persons.
\nMinors
\nMinors are people under 18 years of age. They have limited contracting capacity,
\nas only contracts for \u2018necessaries\u2019 or \u2018beneficial services\u2019 are legally enforceable.
\n\u2018Necessaries\u2019 includes obvious things such as food, clothes and shelter, but is not
\nrestricted to the bare necessities of life. In determining whether goods\/services
\nwere \u2018necessaries\u2019, the courts consider whether they were suitable for the minor
\ngiven his or her station in life. So contracts for taxi rides, movie tickets or CDs
\nwould be considered \u2018necessaries\u2019 in this sense, whereas a motor vehicle or a
\ndiamond ring would not.
\n\u2018Beneficial services\u2019 refers to contracts for education and \/or employment training
\nwhich are of benefit to the minor.
\nContracts which are not for necessaries or beneficial services are not enforceable
\nby the other party against the minor. The minor can choose to remain with the
\ncontract or rescind the contract.
\nMentally ill persons
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\nMentally ill persons have limited contracting capacity. Their contracts are
\nvoidable if the mentally ill person (or, more usually, someone acting on their
\nbehalf) can establish that, when the contract was made:
\n\uf0b7 they were unable to understand their contractual obligations, and
\n\uf0b7 the other party knew, or should have known this.
\nIntoxicated persons
\nThe same rules apply to contracts entered into by intoxicated persons as apply to
\ncontracts entered into by persons who are mentally ill \u2013 i.e. the person wishing to
\nrescind the contract must show:
\n\uf0b7 they were so intoxicated by alcohol or drugs when they entered the contract
\nthat they did not understand what they were doing; and
\n\uf0b7 the other party was, or should have been, aware of their drunken or drugged
\ncondition.
\nAffirmation
\nA party loses the right to rescind a contract if they say or do something which
\nindicates that they affirm (i.e. wish to stand by) the contract. In Matthews v
\nBaxter (1873) LR 8 Exch 132, the plaintiff contracted to buy a property at auction
\nwhen he was drunk. Later, when he sobered up and realised what he had done, he
\nsought information about the contract, which he decided to affirm (i.e., confirm).
\nHe later had a change of heart and, wanting to avoid the obligation, sought
\nrescission on grounds of intoxication. The court held that although he had
\nestablished the elements of his plea (i.e., he was so drunk he did not understand
\nwhat he was doing and the other party knew or should have been aware, that he
\nwas drunk), Baxter\u2019s subsequent confirmation of the contract meant that his right
\nof rescission was lost. Thus, Baxter was bound by the contract, because he had
\nadopted it while sober.
\nC. Legality
\nThe law does not permit enforcement of contracts that are illegal. Contracts can
\nbe made illegal by a statute or by common law. Contracts which are illegal (eg a
\ncontract to commit a crime), are completely void, regardless of the parties\u2019
\nknowledge of the illegality).
\nD. Form
\nThe \u2018form\u2019 of a contract refers to the way in which it was entered into. In general,
\nthe common law does not require contracts to be entered into in any particular
\nway \u2013 any form of communication \u2013 by writing, words or actions is deemed
\nsufficient to reach agreement. However, in some circumstances, legislation does
\nrequire a specific method of communication to be used.
\nYou may come across the terms \u2018simple contracts\u2019 and \u2018formal contracts\u2019. Simple
\ncontracts are those entered into by words, by writing or by action. Most contracts
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\nentered into are simple contracts. Formal contracts are contracts entered into
\nusing a deed.
\nThe following are some significant statutory requirements which must be
\ncomplied with for certain types of contract to be valid:
\n\uf0b7 Contracts for the sale of land must not only be in writing but must be by
\ndeed;
\n\uf0b7 A variety of contracts must be in writing, for example
\ninsurance contracts
\nassignments of rights in copyright, patents and trade marks
\ncredit agreements.
\nE. Factors affecting consent
\nIn order to create a valid contract the parties to the agreement must have given
\ntheir genuine consent to the agreement. Accordingly, the existence of the
\nfollowing may affect the validity or enforceability of the contract:
\n\uf0b7 misrepresentation;
\n\uf0b7 duress;
\n\uf0b7 undue influence;
\n\uf0b7 unconscionable conduct; and
\n\uf0b7 mistake.
\nLack of genuine consent provides a right of rescission to the innocent party.
\nMisrepresentation
\nA misrepresentation is a false statement of fact, which induces a person to enter a
\ncontract. Note: representations must be distinguished from self-evident
\nexaggerations which are referred to as advertising \u2018puffs\u2019 – e.g., \u2018This is the best
\ncar in town!\u2019
\nThere are three elements of misrepresentation. The statement must be:
\n\uf0b7 false;
\n\uf0b7 of fact; and
\n\uf0b7 relied upon when the contract is made.
\nA misrepresentation has no effect if the other party was not aware of its existence
\nor untruth, or does not allow it to affect their judgement – it must, in fact, persuade
\nthe other party to enter the contract. Silence is not a misrepresentation – for
\nexample, if you don\u2019t tell someone about a defect in a product, that does not
\namount to misrepresentation. However, remember that anything you do say has to
\nbe the full truth \u2013 so if the seller of a car says it has been tested, but then does not
\ngo on to tell the buyer of what the test revealed, that would be a
\nmisrepresentation. Also note that if a representation becomes false (to the maker\u2019s
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\nknowledge) between when it was made and the contract being entered, then the
\nmaker has to inform the party of the true position.
\nThere are three types of misrepresentation:
\n\uf0b7 fraudulent;
\n\uf0b7 negligent; and
\n\uf0b7 innocent.
\nFraudulent Misrepresentation is made \u2018knowingly or without believing in its truth
\nor recklessly (careless whether it be true of false) with deliberate intention to
\ndeceive\u2019, as stated in Derry v. Peek (1889) 14 App Cas 33. It must be shown that
\nthe person making the statement knew it was false or had no belief in its truth
\nNegligent misrepresentation occurs where the person making the representation
\ndid not know that what they were saying was untrue, but failed to take reasonable
\nsteps to find out whether it was true.
\nInnocent Misrepresentation is a statement which was made by a person who
\nbelieved it was true and did not make it negligently.
\nThe remedies that the innocent party (that is, the party who entered the contract in
\nreliance on the misrepresentation) can obtain are as follows:
\n\uf0b7 Fraudulent Misrepresentation: rescission + recovery of any consequential
\ndamages flowing from the misrepresentation.
\n\uf0b7 Negligent Misrepresentation: rescission + consequential damages.
\n\uf0b7 Innocent Misrepresentation: rescission only.
\nDuress
\nDuress occurs where the innocent party or their immediate family (i.e., parent,
\nspouse or child) is threatened with actual or perceived violence or imprisonment;
\nor where a threat is made to damage the innocent party\u2019s property, and the
\ninnocent party enters the contract in order to avoid the harm.
\nIf proven, duress renders the contract voidable at the injured party\u2019s option.
\nUndue Influence
\nUndue influence is the improper use by an ascendant person in a relationship of
\ntrust and confidence, of their power or influence over another, for personal
\nbenefit, so that the act of the influenced party to enter a contract is not free and\/or
\nvoluntary. If proven the innocent party (that is, the party who was subject to
\nundue influence) can obtain rescission.
\nThe common law courts recognise special (i.e., dominant and\/or subservient)
\nrelationships, where undue influence is presumed to have occurred – in other
\nwords, where, if the subservient party alleges duress, the dominant party will need
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\nto rebut the presumption of duress. These relationships include: parent \/ child;
\ndoctor \/ patient; religious adviser \/ believer.
\nA good example of duress vitiating a contract is provided by Johnson v. Buttress
\n(1936) 56 CLR 113: An illiterate widower with a low IQ in his 60\u2019s, was wholly
\ndependant relatives for guidance and support, including Mrs. Johnson (a relative
\nof his late wife). He decided to bequeath his small cottage to Mrs. Johnson. Then
\nhe executed a deed transfer the property to her right away. Mrs. Johnson\u2019s
\nsolicitor prepared both documents. His family only became aware of what had
\noccurred after the man died a few years later; and his only son (Mr. Buttress)
\nsought to have the transaction set aside on the ground of undue influence. The
\ncourt held that Mrs. Johnson was in a position of trust and confidence and, thus,
\ncould exercise dominance over the man. The gift of the property was set aside.
\nUnconscionability
\n\u2018Unconscionable\u2019 means unprincipled or unscrupulous. Although the courts will
\nnot intervene simply because one party to a contract has made a bad bargain, they
\nwill do so if a party is at a special disadvantage, which affects their ability to
\nsafeguard their own interests (e.g., through illness, ignorance, inexperience,
\nimpaired faculties, financial need etc) and the other party, being aware of this,
\nunconscionably takes advantage of the opportunity presented when contracting
\nwith them. Intervention by a Court for this reason can result in:
\n\uf0b7 the contract being rescinded; or
\n\uf0b7 damages being awarded; or
\n\uf0b7 a new contract being substituted for the old contract; or
\n\uf0b7 the old contract being amended to remove its harshness.
\nUnconscionability is illustrated by Commercial Bank of Australia Ltd v. Amadio
\n(1982-1983) 151 CLR 447. An elderly Italian couple with limited English were
\npersuaded by their son (a builder) and the son\u2019s bank manager to sign a mortgage
\nover their property as security for a loan the son\u2019s company had with the bank.
\nNeither son nor bank manager disclosed the company\u2019s true financial position and
\nthe couple mistakenly believed their liability was limited to $50,000 for six
\nmonths; when, in fact, it was $240,000. The couple successfully had the
\nmortgage and security set aside on the ground that they would not have signed had
\nthey had known the true state of the company\u2019s account and insolvency. The
\ncourt held that because of their age and limited competence with the English
\nlanguage, the parties were not in an equal bargaining position. The bank should
\nhave disclosed the true position of the son\u2019s company. The mortgage and security
\nwere set aside because of the bank\u2019s unconscionable conduct.
\nF. Mistake
\nGenerally, a \u2018mistake\u2019 is considered to be a belief that something exists when, in
\nfact, it does not (i.e., a state of affairs, matter or object); or, where there is
\nignorance of the true state of affairs. The legal view of \u2018mistake\u2019 is much
\nnarrower \u2013 thus the mistake must be about an underlying, or fundamental, fact in
\nthe contract\u2019s subject matter. Mistake renders a contract void – in other words,
\nLAW504 Modules
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\nsince the parties were not agreeing about the same thing, there never was a
\ncontract. There are three types of mistake:
\n\uf0b7 common mistake;
\n\uf0b7 mutual mistake; and
\n\uf0b7 unilateral mistake.
\nCommon mistake occurs where both parties make the same mistake about the
\nsubject matter of the contract – e.g. Jessica agrees to buy Sam\u2019s pet bird which,
\nunbeknown to both, now lies dead in its cage.
\nMutual mistake occurs where the parties misunderstand each other – that is, they
\nwere thinking and\/or talking about different things when the contract was made.
\nFor example: Jessica accepts Sam\u2019s offer to buy his owl, thinking that he (Sam)
\nwas offering his pet white owl whereas in fact Sam was thinking of his grey owl.
\nUnilateral mistake occurs where only one party is mistaken, and the other party
\nknows (or should be aware) of the first person\u2019s mistake – e.g., Sam offers to sell
\nJessica a car from his car lot. She says \u2018Yes, I will buy that car, because it has a
\nCD player in it\u2019. If the car does not have a CD player in it, Jessica is making a
\nmistake which Sam knows about. He must correct the mistake by telling her what
\nthe true position is.
\nNon est factum
\nSpecial rules apply when a person tries to raise the argument that they were
\nmistaken as to the contents of a written document, so the argument is very
\ndifficult to make successfully. This is known as the \u2018non est factum\u2019 (\u2018it is not my
\nact\u2019) defence to contractual liability. This is a very difficult defence to prove, as
\nthe law presumes that a signature indicates that the signatory has read and
\nunderstood the document, and accepted its terms, thus, \u2018mistaken\u2019 signatories
\nmust show:
\n\uf0b7 the signed document was radically different from what they thought they
\nwere signing; and
\n\uf0b7 when signing they were under a disability (e.g., blindness, illiteracy,
\nreliance on another);
\n\uf0b7 which made them unable to understand the meaning of the document
\nthrough no fault of their own (i.e., it was not just a case of them failing to
\nread a document they could have understood).
\nRectification
\nParties who have actually agreed on certain matters but due to a mistake at the
\ntime of putting the agreement in writing one or more terms have been erroneously
\ncited can apply to a court to have the written document rectified. This is called the
\nremedy of rectification. The parties must prove that at the time of signing they
\nboth agreed on the terms of the contract and that the contract as written does not
\nreflect those terms.
\nLAW504 Modules
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\nExercise
\n1. David had run away from home at the age of 14 and at the
\nage of 15 joined a religious sect known as \u2018Wakki Koresh
\nFreedom Fighters\u2019. David was financially and emotionally
\ndependent on the sect and he relied on the sect leader, Wakki,
\nfor advice and guidance on a number of matters. David has a
\njob as a checkout operator at Truworths Ltd, where he was
\npaid $250 per week. Each week David had gives $50 to the
\nsect to cover food and board expenses, and at the request of
\nWakki, had pus $100 each week into Wakki\u2019s \u2018Freedom
\n(Fighters) Account\u2019 with St. George Bank. David has
\nbecome disenchanted with the sect and now wants to enrol in
\nthe Bachelor of Business degree at Charles Sturt University.
\nHe has no savings and asks your advice as to whether he can
\nreclaim any of the money which he paid to the sect. Advise
\nDavid.
\n2. You need a ute for your business.. You go to Ubeaut Utes and
\ninspect a number of vehicles in their caryard. The salesperson,
\nDonna, comes to your Helpance. You tell Donna that you
\nwant a low mileage utility that has a good service record. She
\nshows you a 2004 Ford utility and says that the other
\nsalesperson has an identical model with only 40,000 km on the
\nodometer, and has a full service history. When you ask about
\nthe condition of the engine she says \u2018It was fully tested by the
\nNRMA\u2019. She further says that the utility is not currently at the
\ncaryard because the other salesperson has taken it to show
\nanother interested customer. She says she can sell it to you that
\nday and shows you a photo of a 2004 Ford utility with
\nnumberplates UDIL,000 and some registration papers for the
\nvehicle. You sign a contract to purchase the utility for
\n$20,000. You return the next day and pay $20,000 to Ubeaut
\nUtes and Donna hands you the keys to your new vehicle.
\nUnfortunately, when you look at the odometer and find that it
\nhas 140,000 km recorded on it. As you drive off, it produces a
\npall of blue smoke from the exhaust and the engine dies.
\nDonna refuses to take the vehicle back or refund your money.
\nYou find out from the NRMA that only 3 of the vehicle\u2019s 4
\ncylinders worked when it was tested. You are losing $400 per
\nday in income from your business because you do not have the
\nute. What remedies do you have?
\nLAW504 Modules
\n60
\nTopic 7 Contract \u2013 Contents of contracts
\nLearning Objectives
\nAt the completion of this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. explain the difference between express and implied terms;
\n2. explain the difference between conditions and warranties
\nand how the remedies available for breach of each differ;
\n3. describe the nature of exclusion clauses and explain the
\nconditions under which they are valid;
\n4. outline the doctrine of privity of contract.
\nA. Contents of contracts
\nGiven the different methods by which parties may communicate, the content or
\nterms of the contract may be expressed (in writing or orally) or be wholly implied
\n(from conduct), or may be a combination of two or three of these. In other words,
\nin determining what obligations parties have undertaken, it may be necessary to
\npay attention to what the parties wrote, what they said and what they did.
\nB. Express and implied terms
\nExpress terms are those explicitly agreed between the parties (i.e., which are
\nspoken or written. Implied terms are those not actually expressed but are
\npresumed (or \u2018read into\u2019 the contract). Some contracts may be wholly expressed,
\nothers may be partly expressed and partly implied, while others may be wholly
\nimplied (as when you go into a shop and purchase goods from the shopkeeper and
\nneither of you says anything during the transaction.
\nTerms can be implied into a contract in the following circumstances:
\n\uf0b7 where it is necessary to give efficacy to the contract (i.e., the contract will
\nnot work unless the term is read into it – see The Moorcock case below);
\n\uf0b7 where there were previous dealings between the same parties on certain
\nterms, and those terms are presumed, in the absence of anything to the
\ncontrary being said, to carry over into a new contract;
\n\uf0b7 where there is a trade custom that everyone engaging in that type of contract
\nshould be aware of; and
\n\uf0b7 where the term is mandatorily implied by statute law.
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\nFor a term to be implied it must be:
\n\uf0b7 fair and reasonable;
\n\uf0b7 obvious (i.e., it must \u2018go without saying\u2019 that both parties intended the
\nterm);
\n\uf0b7 not be inconsistent with any express term; and
\n\uf0b7 capable of clear expression.
\nA good example of the implication of a term on grounds of efficacy is provided
\nby The Moorcock (1889) 14 PD 64, in which the owner of a ship rented space at a
\nwharf with the intention of tying up the ship at the wharf for the purpose of taking
\non cargo. The owner of the wharf knew what size ship would be moored there.
\nWhen the owner moored the ship, it became damaged through hitting the bottom
\nof the harbour as the tide went out. The ship-owner said that the wharf owner had
\nbreached the contract by not providing a wharf where the sea was deep enough to
\naccommodate the ship at low tide. The Court implied a term into a contract that
\nthe owner of the wharf would provide a place for the ship to berth safely
\n(i) because the contract would be useless (i.e. would not be efficacious) unless the
\nship could be tied up at the wharf and (ii) the owner of the wharf knew the size of
\nthe ship.
\nImplied terms often come to the rescue of parties if they have been careless in
\nspecifying terms and have left out something vital – for example, if a person
\nagrees to do work for another but no mention of a payment rate is made, the law
\nwould say that an implied term of their agreement would be that a \u2018a reasonable
\nprice\u2019 would be paid for \u2018the work done\u2019.
\nAn example of terms being implied by trade custom might be where an oil
\ncompany hires a tanker for 6 months and returns it to the owner without cleaning
\nit. Assuming that the contract did not contain a terms relating to who was
\nresponsible for cleaning the ship and the parties entered into a dispute on this
\nissue, either of them might seek to prove that, within the shipping industry it was
\naccepted practice that the obligation to clean the vessel lay on the hirer or the
\nowner.
\nNote that, where the contract is in writing then the \u2018parol evidence rule\u2019 applies.
\nThis rule provides that in such contracts the contract is presumed to contain the
\nentirety of the agreement between the party, and the courts may not look at
\nextrinsic evidence in construing the meaning of the terms of the document. In
\nother words, the party who seeks to rely on other, implied, terms, bears the onus
\nof proving that the written contract did not contain the entirety of what the parties
\nintended.
\nFinally note that terms must not be vague \u2013 they must be sufficiently clear and
\ncertain so that an understanding of the contents agreement between the parties can
\nbe readily established. If terms of a contract are incomprehensible to the extent
\nthat the contract is meaningless, the courts may declare the contract void for
\nuncertainty. However, if the essentials of the agreement are clear and it is only a
\nparticular term that cannot be understood, the courts may delete the uncertain term
\nand leave the rest of the contract in existence.
\nLAW504 Modules
\n62
\nExercise
\nJoe has been involved in the pig-farming industry for 20 years. He
\nenters into an oral contract over the phone with Mike, Managing
\nDirector of Tip-Top Meats Ltd, to supply 40 pigs @ $200 each in
\nJanuary. He has vaccinated the animals prior to sending them to
\nthe market. In February and March Joe phones up Mike to offer
\n40 pigs @ $200 each, Mike accepts the offer and Joe delivers the
\npigs as before. In April Mike phones Joe and says \u2018Please send
\nmore pigs\u2019. Joe puts the pigs on a truck. He receives a phone call
\nfrom Mike after the pigs arrive at the meat works. Mike says \u2018I am
\nnot accepting these pigs \u2013 they have not been vaccinated, and you
\nknow that farmers always vaccinate animals before sending them to
\nmarket. Take them back and vaccinate them. By the way, I\u2019m only
\nwilling to pay $180 per pig for this order\u2019. Joe tells you that no
\nmention was made of vaccination in any of his conversations with
\nMike, and that he also wants $200 per pig. Advise Joe.
\nC. Conditions and warranties
\nWhen considering the terms of a contract a fundamental distinction has to be
\nmade between a condition and a warranty. This is important because of the
\nconsequences of which may flow from a breach of a condition as compared to a
\nbreach of a warranty.
\nA condition can be defined as an important or essential term of the contract one
\nthat was so fundamental to the agreement that the parties would not have entered
\ninto the contract without it. Breach of a condition entitles the innocent party to
\neither terminate the contract and sue for damages, or to elect to affirm the contract
\nand sue for damages.
\nA warranty is a term which, whilst important, is not essential to the contract such
\nthat the contract would not have been entered into without it. A breach of a
\nwarranty entitles the innocent party to sue for damages only. There is no right to
\nterminate the contract.
\nThe following three cases illustrate the difference between a condition and a
\nwarranty:
\n\uf0b7 In Bettini v. Gye (1876) 1 QBD 183 a singer, contracted to sing in a show
\nfor 3\u00bd months and attend rehearsals at least 6 days prior to the season
\ncommencing, arrived four days late because of illness. The promoter
\nterminated the contract alleging a breach of a condition. The court held that
\nthe term relating to attendance at rehearsals was a warranty, not a condition.
\nThe core of the contract could still be performed, so the theatre owner was
\nnot entitled to terminate it.
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\n63
\n\uf0b7 Poussard v. Spiers (1876) 1 QBD 410 was another contract relating to a
\nperforming artist. An actress, engaged to play the leading part in an operetta
\nfor the whole season, missed the first week of the season. The promoter
\n(Spiers) terminated the contract alleging a breach of a condition. The court
\nheld that the promise to perform from the first night went to the \u2018root\u2019 of the
\ncontract and was a condition. Unlike in Bettini v Guy, where the performer
\nhad only missed rehearsals, here the performer had missed the actual
\nperformance.
\n\uf0b7 In Associated Newspapers v. Banks (1951) 83 CLR 322 a comic strip artist
\ncontracted with a newspaper to provide a full-page comic for 10 years, to be
\nplaced on the front page of its comic section. A newsprint shortage caused
\nit to printed on page 3 instead of page 1, which the artist regarded as a
\nbreach of a condition and held himself no longer bound by the contract. The
\nnewspaper sued for breach of contract. The court held that the page 1
\nrequirement went to the \u2018root\u2019 of the contract and was a condition \u2013 the
\nnewspaper had breached the contract, so the cartoonist had been entitled to
\nterminate it and was not himself in breach.
\nAn intermediate or innominate term is a term which does not easily fit within
\nthe category of either a condition or a warranty until the circumstances of the
\nbreach have been determined. This is because some terms may be breached in a
\nserious way in a trivial or less serious way. For example, a term that a motor
\nvehicle is \u2018roadworthy\u2019 may be breached in a serious way if the engine has
\ncompletely seized up. However, the same term may be breached in a less serious,
\nor minor way, as a result of the windscreen wipers being defective. In such cases
\nit is necessary to consider the seriousness of the breach in order to determine
\nwhether the innocent party may treat it as a breach of a warranty or a condition.
\nGenerally, if there is a serious breach of an innominate term then the innocent
\nparty will have the same rights as if the term had been a condition (as in Poussard
\nv. Spiers (1876) 1 QBD 410). If the breach is less serious then the innocent party
\nwill only have the right to sue for damages as if it had been a warranty (as in
\nBettini v. Gye (1876) 1 QBD 183). Note that it is up to the court, taking an
\nobjective view of all the circumstances of the contract, to determine whether a
\nbreach of an innominate term should be treated as a breach of a condition or of a
\nwarranty – whether the parties themselves have called the term a condition or a
\nwarranty is not decisive. The key case which applies where a court needs to work
\nout whether a breach is of a condition or a warranty is Hong Kong Fir Shipping
\nCo Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, in which one company had
\nchartered (ie hired) a ship from another for a year. The contract stipulated that
\nthe ship owners were obliged to supply it in a seaworthy state, however it was not
\nclear whether thos term was a condition or a warranty. The ship was not
\nseaworthy in several respects, and the hirers were unable to use it for several
\nweeks during its voyage while as it needed repairs. The court held that although
\nthe owners of the ship were undoubtedly in breach of contract, the length of time
\nfor which the ship had not been able to be used was not so long as to have
\ndeprived the hirers of the substantial benefit of the contract, and so they were
\nentitled only to damages, and could not terminate the contract.
\nThe distinction between conditions and warranties is of great importance when it
\ncomes to determining what remedy is available for breach of a contract. We will
\ndeal with this later, but for the present it is important to remember the following:
\nLAW504 Modules
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\nBreach of condition Plaintiff can choose termination + damages
\n OR
\nPlaintiff can choose specific performance (an
\norder that the defendant perform as required)
\n+ damages.
\nBreach of warranty Plaintiff can choose specific performance (an
\norder that the defendant perform as required)
\n+ damages. Termination is not available.
\nD. Exclusion clauses
\nExclusion clauses are terms that exclude or limit the liability of a party to a
\ncontract – for example a sign at the entrance to a car park says \u2018No responsibility
\nis accepted for the loss or theft of patrons\u2019 valuables\u2019, or a clause in a building
\ncontract says \u2018The liability of the builder for damages in the event of a breach of
\ncontact is limited to $1,000\u2019. Exclusion clauses can operate to exclude liability
\neither in tort or in contract, or both.
\nIn contract, exclusion clauses will be effective in excluding or limiting the
\nliability of the party relying on them, if they are:
\n\uf0b7 incorporated into the contract, and
\n\uf0b7 expressed widely enough to cover the particular situation.
\nIncorporation into the contract
\nLike any term in a contract, an exclusion clause must obviously be part of the
\ncontract to be effective.
\nIf the contract is a written one, and the exclusion clause is contained in the
\ncontract, the clause will be effective, as is shown by L\u2019Estrange v Graucob [1934]
\n2 KB 394. In this case, a person rented a cigarette-vending machine. The contract
\nwas a written one. It contained a clause excluding the supplier of the machine of
\nany liability to repair the machine if it broke down. The machine broke down and
\nwas therefore useless to the person hiring it. She claimed that the contract had
\nbeen breached because the machine did not work, and that the supplier should
\neither repair the machine or provide her with a new one. She said that she had not
\nread the exclusion clause when she signed the contract. The court held that a
\nperson is presumed to have read a contract they sign. The person hiring the
\nmachine was bound by all the terms of the contract, including the exclusion
\nclause. The supplier of the machine was therefore not liable to repair it.
\nIrrespective of whether the contract is written or oral, the exclusion clause must be
\nin the contract at the time it is entered into. A person cannot unilaterally add
\nclauses to a contract. Giving notice of a term after a contract has been formed is
\nineffective. This is shown by Olley v. Marlborough Court Ltd [1949] 1KB 532.
\nMrs Olley booked into a hotel with her husband. They signed a form at the
\nLAW504 Modules
\n65
\nreception desk. This form contained the contract they had with the hotel. On
\nreaching their room a notice was found on the back of the door excluding liability
\nregarding the safety of articles left in hotel rooms. Their room was burgled and
\nthe hotel claimed exemption from liability because of the clause. The court held
\nthat the hotel could not rely on the exclusion clause because it had not been
\nbrought to the guests\u2019 attention when the contract was made (i.e., at reception
\ndesk).
\nIf the contract is oral (that is, not written) whether the exclusion term is part of the
\ncontract will depend on whether reasonable steps have been taken to bring the
\nclause to attention before, or at the time, the contract was made. The requirement
\nthat the term must be brought to the person\u2019s notice in a reasonable manner has
\nbeen interpreted in a number of cases where people entered into oral contracts and
\nwere then given a receipt or ticket on which an exclusion clause was printed. This
\nhas been held not to amount to reasonable notice. In Causer v. Browne [1952]
\nVLR 1 a person sued for damage to her dress caused by staining during drycleaning,
\nThe dry-cleaner argued that he was not liable because he had handed the
\nplaintiff a receipt for her dress when she left it and on the back of the receipt was
\na notice that the dry-cleaner was not liable for damage to clothes. The court held
\nthat people were reasonably entitled to assume that the receipt was given to the
\nowner after the contract was entered into merely to enable an owner to reclaim the
\narticle (dress). The receipt was not a contractual document with terms. Thus, the
\nplaintiff was not bound by the exclusion clause and the dry-cleaner was liable for
\nthe damage caused to the dress. In such cases, if a person wants an exclusion
\nclause to be effective, they should either actually tell the person that they exclude
\nliability before the oral contract is entered into, or have a notice to that effect
\nprominently displayed so that all customers can see it before deciding whether or
\nnot to enter into a contract.
\nSimilarly, in Thornton v. Shoe Lane Parking Ltd [1971] 2 QB 163 the plaintiff
\nentered and parked his car in parking garage. After he had paid his money into
\nthe machine at the automatic entry gate he received a ticket which said: \u2018This
\nticket is issued subject to the conditions of issue as displayed on the premises.\u2019
\nThe conditions were in a notice inside the garage, which exempted the proprietors
\n(defendant) from liability for personal injury (amongst other things). The plaintiff
\nwas injured when he returned to collect his car and sued for damages. The court
\nheld that the contract was made before the ticket was dispensed from the machine.
\nThus, the terms (and exclusion clause in particular) were not incorporated into the
\ncontract and the ticket was a mere receipt. Nowadays, garages display their terms
\n(including any exclusion clause) at a place that drivers can see them before they
\nbuy a ticket – that is, the terms of the contract are made known before the contract
\nis entered into.
\nSufficient width
\nTo be effective, exclusion clauses must be expressed widely enough to cover the
\nliability that has arisen. Courts have traditionally been hostile to exclusion
\nclauses because they deprive a party of remedies they would usually have, so any
\nuncertainty or ambiguity concerning the meaning or circumstances of application
\nLAW504 Modules
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\nof a clause will be resolved in the plaintiff\u2019s favour, where possible. This principle
\nis known as the \u2018contra proferentem\u2019 rule, which is to the effect that exclusion
\nclauses will be strictly construed against those who seek to rely on them.
\nThe application of this principle is demonstrated by Sydney City Council v. West
\n(1965) 114 CLR 481, in which the plaintiff left his car in a car park and was given
\na ticket, which excluded liability for \u2018damage to the car and its contents or injury
\nto any person\u2019. Later, someone claiming to be the plaintiff and had lost his ticket,
\nwas allowed to drive the car from the car park, notwithstanding citing a
\nregistration number that was different from that recorded for plaintiff\u2019s car. The
\nplaintiff sued for damages. The court held that the defendant could not rely on the
\nclause and was liable for the loss of plaintiff\u2019s car because what happened was
\noutside its terms \u2013 i.e., the clause, as written, did not cover theft of the car; and,
\nthe defendant\u2019s releasing the car without the correct ticket being presented was an
\nunauthorised act. The court held that clear words must be used to negate liability
\n(in this case, liability for negligence).
\nExercise
\nJack and Jill had attended a formal Ball following which both
\nJack\u2019s dinner jacket and Jill\u2019s evening dress required dry cleaning.
\nJack took both garments to D & C Dry Cleaners which he had used
\non numerous occasions. As in the past Ms Gordon, the attendant,
\ntook the garments and handed jack a docket which Jack placed in
\nhis wallet without reading it. When he returned to collect the items
\nhe found his dinner suit had shrunk due to being treated at too high
\na temperature. When he asked for Jill\u2019s dress he was told that a
\nwoman who looked like Jill had arrived to pick it up but said that
\nshe had lost the docket. Ms Gordon had allowed the woman to sort
\nthrough the garment rack and take the dress which she identified as
\nbelonging to her. When shown a photograph of Jill, Ms Gordon
\nadmitted that the woman who collected the dress did not look
\nanything like Jill. When Jack demanded compensation for both his
\ndamaged suit and Jill\u2019s dress Ms Gordon directed him to a clause
\non the back of his docket which said:
\nD C Dry Cleaners will not be liable for any damage to clothing left
\nfor cleaning howsoever such damage may be caused.
\nMs Gordon also pointed to a large sign above the counter which
\nwas in the same terms as the clause on the docket. Jack
\nremembered seeing the sign but said that he had never read either
\nthe sign or the clause on the back of the docket. Advise Jack.
\nLAW504 Modules
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\nE. Privity of contract
\nA fundamental rule of Law of Contract is known as privity of contract, which
\nmeans that only the parties to a contract acquire contractual rights and\/or
\nobligations (because they alone have given consideration).
\nFor example, if A enters into a contract to sell B a TV set for $100. If A does not
\ndeliver the TV set to B, another person, C, cannot sue A for breach of contract, as
\nonly A and B are parties to the contract.
\nLAW504 Modules
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\nTopic 8 Contract \u2013 Discharge of contracts
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. outline the various ways that a contract may come to an end
\n(be \u2018discharged\u2019);
\n2. outline the rules relating to discharge by performance;
\n3. recognise the circumstances in which the law automatically
\ndischarges a contract;
\n4. outline what happens when a contract is discharged as a
\nresult of a breach by one of the parties, and what remedies
\nare available;
\n5. outline determine what damages are recoverable for breach
\nof contract and how such amounts are limited by the
\nconcepts of remoteness and mitigation;
\n6. outline the consequences of termination of a contract as a
\nremedy for breach;
\n7. describe the equitable remedies and the circumstances when
\nthey are available; and
\n8. discuss when a contractual claim becomes prescribed
\nthrough elapse of time.
\nA. Discharge of contract
\nWhen a contract comes to an end it is said to be \u2018discharged\u2019. This can be by:
\n\uf0b7 performance;
\n\uf0b7 agreement;
\n\uf0b7 operation of law; or
\n\uf0b7 breach.
\nDischarge by performance
\nThe most common method for a contract to come to an end is when both parties
\nfulfil their promises. The common law requires that performance be precise
\n(i.e.- exactly what was promised), otherwise, the defaulting party is in breach of
\nthe contract and not entitled to its benefits. The rule of precise performance thus
\nmeans that you are entitled to receive performance only if you are ready to give
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\nperformance \u2013 part performance by one party does not oblige the other party to
\ngive any performance.
\nFor example, if Sam orders 5,000 bricks from Mary but only 4,000 are
\ndelivered. Sam can (i) refuse to accept the bricks or (ii) keep them without
\nbeing liable to pay Mary the purchase price until the rest are delivered.
\nBecause of its harshness to defaulting parties, the courts have developed
\nexceptions to that rule. The first of these is where the contract is \u2018divisible\u2019 (i.e.,
\ncan be separated into parts).
\nFor example, if Jessica contracts with Sam for him to build five tennis
\ncourts @ $7,000 per court, can part-payment (i.e., $28,000) be sought by
\nSam if he completes only four? The courts would say that, because the
\ncontract specified $7000 per court, the contract was \u2018divisible\u2019 and
\npayment is entitled for the four completed courts because the contract was
\nto do five separate things. Note however that contracts are presumed to be
\nentire unless the contrary can be shown \u2013 thus divisibility has to be
\nproved.
\nThe other exception is where there has been \u2018substantial\u2019 performance (i.e., only a
\nslight difference between the actual and required performance).
\nFor example: Sam contracts to build five tennis courts for Jessica. On the
\ndesignated day for completion, all five courts have been built, but the net
\nof the fifth court has not been installed. The contract could be said to have
\nbeen \u2018substantially\u2019 performed, and Sam would be entitled to payment for
\nfive courts, less damages in the amount of what it would cost Jessica to get
\nsomeone to install a net.
\nDischarge by agreement
\nWhat is formed by agreement can be ended at any time by agreement. Agreement
\ncan take several forms:
\nMutual agreement (called a bi-lateral discharge) is available where both parties
\nstill have something to do under the contract.
\nFor example: Sam contracts to build Jessica\u2019s house for $150,000 to be
\npaid progressively during building, and after $100,000 is paid, they both
\nagree to discharge their agreement, then Sam does not have to complete
\nthe house and Jessica does not have to pay the outstanding $50,000.
\nUnilateral discharge happens where one party has fully performed, and the other
\nparty has not.
\nFor example: Sam has completely finished building Jessica\u2019s house.
\nJessica has paid $100,000 of the $150,000 price. Sam wants to release
\nJessica from paying the remaining $50,000. For such an agreement by
\nSam to be binding, Jessica must do something extra \u2013 i.e., she must
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\nprovide some consideration. (See the earlier discussion of Foakes v Beer
\n(1884) 9 App Cas 605).
\nThe other option is for both parties to execute a deed of release (because a deed is
\nbinding without consideration).
\nFinally, remember that the doctrine of estoppel may operate to enable a person to
\nenforce a promise, even where they themselves are not paying consideration
\n(Look back to the discussion of Central London Property Trust Ltd v High Trees
\nHouse Ltd [1947] KB 130).
\nB. Discharge by operation of law
\nThe law provides automatically discharges contracts in certain circumstances,
\nincluding:
\n\uf0b7 death,
\n\uf0b7 bankruptcy, and
\n\uf0b7 frustration.
\nDeath
\nThe law presumes that, in the event of the death of either party personal service
\ncontracts terminate automatically, but other contracts (such as for the sale of
\ngoods) do not terminate, as they can be performed by deceased person\u2019s executor
\nor administrator.
\nBankruptcy
\nBankruptcy is a process by which individuals who are unable to pay their debts as
\nand when they fall due can be cleared of their debts under the law. The bankrupt
\nperson is no longer personally liable for contracts entered pre- bankruptcy, and
\nclaims by creditors are lodged with the \u2018Official Receiver in Bankruptcy\u2019, who
\ndetermines what percentage of the claims can be satisfied out of the bankrupt
\nperson\u2019s assets. The contractual capacity of the bankrupt person is limited until
\nthe order of bankruptcy is discharged by a court.
\nFrustration
\nIf it becomes impossible for a contract to be completed because of events beyond
\nthe control of the parties, the contract is said to be \u2018frustrated\u2019 – for example, if a
\nnatural disaster or a war makes the contract impossible to fulfil, or the law is
\nchanged to make the contract illegal. Parties are free to specify in their contract
\nwhat sort of events will be considered to frustrate a contract, as under the common
\nlaw, only an event that made the contract impossible (as distinct from more
\ndifficult) counted as frustration. For example, the wash-out of a bridge used by a
\ncoal company to send trucks of coal purchased by a power station would not make
\nthe contract impossible to perform if there was another bridge further downstream,
\neven if that required a long diversion and made the contract unprofitable
\nfor the trucking company.
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\nThe parties are also free to specify who will bear the financial loss resulting from
\nfrustration, but if they do not, legislation governs this issue. In NSW provisions
\ncontained in Part 3 of the Frustrated Contracts Act 1978 (NSW) provide that each
\nparty bears equally in the losses flowing from the frustration \u2013 in other words,
\neach party must pay half the expense the other has incurred in preparing to
\nperform under the contract.
\nC. Discharge by breach
\nBreach of contract can arise in two ways:
\n\uf0b7 anticipatory breach – a party says or does something, before the due date of
\nperformance, which indicates that they do not intend to perform; or
\n\uf0b7 actual breach – a party fails to do something at the actual time stipulated for
\nperformance;
\n\uf0b7 in either circumstance the aggrieved party (that is, the person who is entitled
\nto the performance) is entitled to the remedies for breach of contract.
\nVideo
\nThe effect of the breach depends upon what type of term of the contract was
\nbreached. As you will recall, a term of a contract can be classified as
\n\uf0b7 a condition – a term which is of such importance to the contract that a party
\nwould not have entered into the contract at all had they known that the term
\nwould not be complied with
\nOR
\n\uf0b7 as a warranty – term which is of lesser importance (in other words, all the
\nother terms of the contract which are not conditions)
\nFor breach of a condition the aggrieved part can obtain
\n\uf0b7 specific performance (an order that the contract be performed by the other
\nparty) + damages
\nOR
\n\uf0b7 termination (a declaration that the contract is at an end and that the innocent
\nparty no longer has to perform) + damages.
\nFor breach of a warranty, the aggrieved party cannot obtain termination, and can
\nonly obtain
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\n\uf0b7 Specific performance + damages
\nExercise
\nFrank needs a new house. He meets with Gordon, who is a builder.
\nHe looks at several house plans. He chooses one that he likes and
\non 1 July they sign a 50-page contract in which the fact that the
\nhouse will have a steel roof is listed as one of the specifications.
\nThe overall cost of the house is stated in the contract as being
\n$250,000. On 5 July , Gordon sends to Frank a bulky set of
\ndocuments containing site plans, house plans, agreed colour
\nschemes and landscaping plans, all consistent with the contract that
\nwas signed. Unnoticed by Frank was a single sheet of paper
\nincluded in the pile, headed \u2018Standard Terms of Our Construction
\nContracts\u2019, which contained a statement (which did not appear in
\nthe July 1 contract) as follows:
\nThe building contractor excludes all liability for consequential
\ndamages taking the form of financial loss in the event of a breach
\nof this contract.
\nThe day the house is finished Frank notices that although all the
\nother terms of the contract have been complied with, the house has
\na tile roof, not a steel one. It would take 3 months to take off the
\ntile roof and put on a steel one, and it would cost Frank $6,000 to
\nrent another house to live in while the work is done. Advise Frank
\nfully as to all the legal issues arising out of this scenario and his
\nlegal rights against Gordon.
\nD. Damages
\nDamages are intended to provide compensation and are based on the principle of
\nrestitution \u2013 that is, their purpose is to replace plaintiff in the same financial
\nposition as if the breach had not occurred – in other words, to put them in the
\nfinancial position they would have been in had the contract been performed
\nproperly.
\nThe first thing that a plaintiff seeking an award of damages must do is prove
\ncausation \u2013 that is, that the damages were caused by the defendant\u2019s breach of
\ncontract.
\nThe amount of damages that will be awarded is limited by the concept of
\nremoteness: The party who has breached the contract is not necessarily liable for
\nall damage caused by the breach. They are liable only for damages that flow
\nnaturally from the breach \u2013 i.e., in the usual course of things, and\/or were
\nanticipated by the parties when the contract was made. Damages that were not
\nforeseeable, because they were too remote, are not recoverable \u2013 see Hadley v.
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\nBaxendale (1854) 9 Exch 341, in which the court held that a defendant is only
\nliable for:
\n\uf0b7 damages that \u2018flow naturally from the breach\u2019 \u2013 i.e., in the usual course of
\nthings (and it was unusual in this case that the mill had only one crankshaft);
\nand\/or
\n\uf0b7 such damages \u2018as may reasonable be supposed to have been in the
\ncontemplation of both parties\u2019 when the contract was made.
\nCompare this case with Victoria Laundry Ltd v Newman Industries Ltd [1949]
\n2 KB 528, in which a commercial laundry entered into a contract to have one of
\nits boilers repaired. It was agreed that the repairs would be done by a certain date.
\nThe repair company knew that the laundry relied upon the boiler to operate at its
\nnormal level of business. However, the repair company did not know that the
\nlaundry was due to receive a special order to do the laundry for a hotel, from
\nwhich it would have earned profits above what it normally earned. The court held
\nthat the repair company was liable to pay damages to the laundry company equal
\nto the average profit per day that the laundry company would usually make, as
\nthese were losses that were reasonably predictable. However the repair company
\ndid not have to pay damages to compensate the laundry for the loss of the extra
\nprofit it would have made from the special contract, as the repair company had not
\nbeen informed of this potential (and not reasonably foreseeable) loss by the
\nlaundry.
\nExercise
\nQantas Ltd signs a contract with Airbus Industries SA under which
\nAirbus will build a new-generation A380 for Qantas at a price of
\n$200 million. The contract contains 500 clauses of specifications.
\nClause 34 states that the aircraft must have 400 economy, 50
\nbusiness and 25 first class seats. On the day the aircraft is due to be
\nhanded over, Qantas finds that all clauses of the contract have been
\ncomplied with, except clause 34, in that the aircraft has 400
\neconomy, 45 business and 25 first class seats. The board of Qantas
\nhas asked you if they can terminate the contract. You are also told
\nthat it would take Airbus two weeks to add 5 business class seats,
\nthat Qantas makes a profit of $250,000 per day an aircraft is
\noperational, and that over the next two weeks it stands to make
\n$100,000 extra because of a special contract it has with the
\nAustralian Netball Federation to take players to the World Netball
\nChampionships in Germany. Advise Qantas on its legal position.
\nPecuniary loss
\nUnder the common laws, compensation can be paid only for actual financial (or
\npecuniary) loss. It is not available for injury to a plaintiff\u2019s feelings due to
\ninconvenience, discomfort or mental stress However, \u2018sentimental\u2019 damages can
\nbe recovered where the object of the contract was to provide pleasure and\/or
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\nrelaxation (i.e., in holiday travel \/ accommodation type contract), as in Jarvis v
\nSwan Tours [1973] 1QB 233, where the court held that the plaintiff was entitled to
\ndamages for disappointment when a Swiss skiing holiday didn’t match the
\ndescription in the defendant\u2019s advertising brochure.
\nMitigation of loss
\nThe innocent party has a duty to mitigate their loss \u2013 i.e., do everything
\nreasonable to keep their loss to a minimum. For example, assume that a tenant
\nbreaches a 12 month lease agreement after two months by leaving the property
\nand ceasing to pay rent. The lessor is entitled to sue the tenant for the loss
\nflowing from the breach, i.e. lost rental payments, but is also obliged to take
\nreasonable steps to mitigate their loss by trying to find another tenant. If the
\nlessor finds another tenant after say, three months, then the damage recoverable
\nagainst the first tenant will be the lost rental over the three month period, plus
\nincidental expenses. If the lessor fails to take any steps to find another tenant and
\nthe first tenant can show that there was a reasonable supply of suitable tenants
\navailable, then the lessor will not be able to claim as damages against the first
\ntenant the whole ten months lost rental – a court would award only what it
\ncalculated the lessor would have lost had he taken reasonable steps in mitigation.
\nThe defendant must establish that the plaintiff has not mitigated his\/her loss (not
\nvice versa).
\nLiquidated damages clauses and penalty clauses
\nDamages are classified as either liquidated or unliquidated. Liquidated damages
\nare those that are determined (and included as a clause) when the contract is made.
\nFor example, in their contract, Sam and Jessica agree that, if her house is not
\ncompleted by a specified date, Sam will pay damages of $250 per week to Jessica
\nuntil it is finished so that she can rent a house while she is waiting. Unliquidated
\ndamages are those that have to be proved by a party in the usual if they sue for
\nbreach of contract.
\nA penalty provision is a sum specified in a contract to deter the other party from
\npossible breach \u2013 for example, a clause in a contract which says \u2018If you fail to
\nmaintain our IT system, we can recover $2,000 per day in lost profits, plus ,1,000
\nper day in penalties\u2019. Penalties are not enforceable at law. The law does not allow
\none party to punish another \u2013 parties are entitled to recover only their actual loss
\nor (in the case of liquidated damages clauses) a reasonable estimate thereof. If a
\ncourt concludes that a sum in a contract is not a genuine estimate of potential loss,
\nit cannot be relied upon – and the plaintiff will have to prove actual damage.
\nParties often erroneously refer to liquidated damages clauses as penalty clauses,
\nbut this should be avoided for obvious reasons.
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\nE. Termination
\nIf a condition of a contract is breached, the plaintiff may elect to terminate the
\ncontract. Performance of the contract ceases at that time. Although the parties do
\nnot have to return any property that they may have given each other during the life
\nof the contract, anything they have each lost and gained financially up until
\ntermination will be taken into account in determining what damages will be
\npayable to the aggrieved party.
\nFor example: Assume Adam contracts to build a warehouse for Bob for
\n$100,000, anticipating a profit of $25,000 (i.e. that it would cost $75,000
\nto build the warehouse). Assume also that Adam and has already spent
\n$30,000 on the project ( help with nursing paper writing from experts with MSN & DNP degrees) and has received a deposit of $10,000 from Bob. If
\nBob breaches the contract by saying that they no longer want the
\nwarehouse, how much will the court award Adam?
\nF. Equitable remedies
\nThe remedies of damages and termination came from the common law. The
\nremedies of specific performance and injunction come from the law of equity.
\nThis distinction in origins is now of historical interest only, as the same courts
\napply common law and equity rules. Equitable remedies are discretionary (i.e., at
\na court\u2019s discretion) and will not be awarded where damages are considered to be
\nan adequate remedy. This means that, given a choice between ordering a party to
\nperform under a contract or to pay damages to the aggrieved party, the courts will
\ndo the latter. An exception to this rule is provided by contracts of sale for land or
\nanything that is unique and cannot readily be obtained elsewhere. In such cases,
\nthe courts will order a defaulting seller to perform.
\nSpecific performance is a court order requiring a party to complete his or her
\ncontractual obligation. Specific performance is not granted in contracts of
\nemployment, because the very fact that litigation has occurred indicates that the
\nemployer-employee relationship has been damaged and that it would be futile to
\nrequire the employee to work for the employer.
\nAn injunction is a court order that restrains someone from doing a wrongful act.
\nIn the case of contract law an example would be where A and B enter a contract
\nthat A will sell his car to B, and two days before delivery, B finds out that A is
\nabout to give the car to C. B can get an injunction prohibiting A from doing this.
\nG. Prescription
\nWe have already seen in the discussion of the law of torts that there are statutory
\ntime limits on the right to sue. In New South Wales the right to sue on a contract
\nis lost if legal proceedings are not commenced within six years from the cause of
\naction arising in the case of simple contracts (s 14(1)) of the Limitation Act 1969
\n(NSW), and 12 years from the cause of action in the case of deeds (s 16).
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\nTopic 9 Consumer law
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. explain why consumer protection requires that the common
\nlaw of contract be modified by statute law;
\n2. explain how to identify who is a consumer under the
\nAustralian Consumer Law;
\n3. describe the operation of the implied guarantees contained
\nin the Australian Consumer Law;
\n4. describe the protection given by the Competition and
\nConsumer Act 2010 (Cth) to consumers against misleading
\nand deceptive conduct;
\n5. explain how the Competition and Consumer Act 2010 (Cth)
\nprotects consumers against duress, unconscionable conduct
\nand unfair terms.
\nA. Statute law, common law and consumer protection
\nIn previous topic (sample nursing essay examples by the best nursing assignment writing service)s you have studied have contract law and have begun to apply it
\nto factual situations. A defect in the common law of contract is that it offers little
\nprotection to contracting parties who find that the goods or services they have
\npurchased do not match their expectations. True the common law does provide
\nremedies in cases of misrepresentation, but in the absence of misrepresentation, a
\nperson who finds that what they have bought is defective has no remedy – the
\ngeneral rule is caveat emptor (let the buyer beware). In addition, many of the
\ncommon law rules governing certain types of contract, such as sale and lease,
\nwere found to be unsuitable to modern commerce. For these reasons the law of
\ncontract has been considerably modified by statute, and in this topic (sample nursing essay examples by the best nursing assignment writing service) we are going
\nto examine some of these modifications.
\nB. The Australian Consumer Law (ACL)
\nA major reform of consumer law took place with the enactment of the
\nCompetition and Consumer Act 2010 (Cth), which replaced the Trade Practices
\nAct 1974 (Cth). The Australian Consumer Law (ACL) is a Schedule to the 2010
\nAct. Although the Commonwealth Parliament cannot legislate generally on
\nbusiness law, it can legislate on corporations, and so the Act applies to any
\ncontract which a consumer enters into with a corporation. In addition, and in
\norder to make the ACL applicable to contracts entered into by consumers other
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\nthan with corporations (for example, with a sole trader), all the States undertook
\nto enact the ACL into law in their jurisdictions. The result is that there is now a
\nuniform law national governing consumer contracts. Any contracts which do not
\nfall under the definition of consumer contracts continue to be governed by the
\nvarious State Sale of Goods Acts.
\nWho is a consumer?
\nKey to the operation of the ACL is the definition of a \u2018consumer\u2019 contained in
\ns 3(1), which states that a consumer is a person who acquires goods or services
\neither if
\n\uf0b7 the price of the goods is less than $40,000 or
\n\uf0b7 the price exceeds $40,000 but the goods are those commonly acquired for
\npersonal, domestic or household use or consumption.
\nSection 3(2) excludes from the category of goods acquired as a consumer those
\ngoods which are acquired for purposes of re-supply or for the purpose of being
\nused up or transformed in trade or commerce in the course of a process of
\nproduction or manufacture, or of the treatment or repair of other goods or fixtures
\nto land.
\nThe ACL implies a number of guarantees into all consumer contracts. These
\nguarantees cannot be excluded by agreement \u2013 s 64 provides that such an
\nexclusion clause will be invalid. The purpose of this non-exclusion provision is to
\nprotect consumers who are usually in a weaker bargaining power than suppliers.
\nThe guarantees implied by the ACL are as follows:
\ns 51 that the supplier has clear title in the goods, and can thus transfer
\nownership to the consumer.
\ns 52 that the consumer obtains the right to undisturbed possession \u2013 that is,
\nwill not be legally challenged in their right to possess the property
\ns 53 that there are no undisclosed securities over the property \u2013 that is, that
\nthere is no 3rd party who has rights over the property because it had been
\nused a security for a loan, for example
\ns 54 that goods are of acceptable quality \u2013 we will examine this in more detail
\nbelow
\ns 55 that goods are fit for any specific purpose that the consumer made known
\nto the supplier
\ns 56 that goods will correspond to any description of them by the supplier
\ns 57 that goods supplied with reference to a sample shown to the consumer
\nwill correspond to the sample
\nIn the case of contracts for the supply of services, the ACL implies the following
\nguarantees:
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\ns 60 that services will be performed with due care and skill (which will be
\ntested according to a standard of reasonableness)
\ns 61 that services are suitable for any purpose which the consumer made
\nknown to the supplier
\ns 62 that services will be rendered within a reasonable time.
\nAcceptable quality \u2013 s 54
\nPerhaps the most common consumer complaint is that goods were not of
\nacceptable quality. It is very important to realise at this juncture that a
\nconsumer\u2019s rights are not limited by the terms and duration of any warranty they
\nmay have received when they purchased goods \u2013 such warranties cannot limit the
\noperation of any provision of the ACL \u2013 so just because a warranty has expired
\ndoes not prevent a consumer from pursuing remedies under the ACL.
\nThe key provision of the ACL is s 54, which imports into consumer contracts a
\nguarantee that goods are of acceptable quality. \u2018Acceptable quality\u2019 is defined as
\nfollows:
\n(2) Goods are of acceptable quality if they are as:
\na. fit for all the purposes for which goods of that kind are commonly
\nsupplied;
\nb. acceptable in appearance and finish;
\nc. free from defects;
\nd. safe; and
\ne. durable.
\nas a reasonable consumer fully acquainted with the state and condition
\nof the goods (including any hidden defects of the goods), would
\nregard as acceptable having regard to the matters in subsection (3).
\nThe factors listed in subsection (3) are the nature of the goods, their price (if
\nrelevant), any statement made on the packaging of the goods and any
\nrepresentation by the manufacturer or the supplier, and any other relevant
\ncircumstance. The guarantee does not apply if the reason the goods were not of
\nacceptable quality was drawn to the consumer\u2019s attention (ss (4)), if the
\nconsumer\u2019s own conduct causes them to become of unacceptable quality (ss (6))
\nor the goods were examined by the consumer and the examination ought
\nreasonably to have revealed that the goods were not of acceptable quality (ss (7)).
\nRemedies for breach of statutory guarantees are found in sections 259-264 of the
\nACL. Key to the operation of these provisions is the concept of \u2018major failure\u2019 of
\ngoods, defined in s 260 as meaning, inter alia, failure which would have caused
\nthe consumer not to acquire the goods if aware of the failure (s 260(a)), or failure
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\nwhich renders the goods \u2018substantially unfit\u2019 for the purpose for which such goods
\nare commonly supplied, and which cannot be remedied within a reasonable time
\n(s 260(c)).
\nIf a failure to comply with a guarantee – such as the guarantee of acceptable
\nquality in s 54 – constitutes a major failure, the consumer may, subject to s 262
\n(discussed below), reject the goods (s 259(3)(a)) or recover compensation for the
\nreduction in value of the goods resulting from the failure to comply with the
\nguarantee (s 259(3)(b)). In addition, the consumer may recover any
\nconsequential damages caused by the failure to comply with the guarantee (s
\n259(4)).
\nIn cases where the failure was not a major failure, s 259(2) states that the
\nconsumer must give the supplier an opportunity to remedy the failure within a
\nreasonable time, but that if the supplier fails to comply, the consumer may either
\nhave the defect remedied and recover the costs from the supplier, or may reject the
\ngoods. Section 261 provides that where a supplier is required under s 259(2) to
\nremedy a failure to comply with the guarantee, the supplier may do so by
\nrepairing the goods, replacing the goods with identical goods, or refunding the
\nconsumer what they paid for the goods.
\nUnder s 262(1), the consumer\u2019s right to reject the goods is lost if the rejection
\nperiod for the goods has ended, the goods have been lost, destroyed or disposed of
\nby the consumer, if the goods were damaged after delivery to the consumer for
\nreasons unrelated to their condition at the time of supply or if the goods have been
\nattached to other property and cannot be detached without damage to the goods.
\nThe key provision which will limit consumers\u2019 rights to return goods and obtain a
\nrefund is that relating to expiry of the rejection period, contained in s 262(1)(a).
\nThe \u2018rejection period\u2019 is defined in s 262(2) as follows:
\nThe rejection period for goods is the period from the time of the supply of
\nthe goods to the consumer within which it would be reasonable to expect the
\nrelevant failure to comply with a guarantee referred to in section 259(1)(b)
\nto become apparent, having regard to:
\na. the type of goods; and
\nb. the use to which a consumer is likely to put them; and
\nc. the length of time for which it is reasonable for them to be used; and
\nd. the amount of use for which it is reasonable for them to be put before
\nsuch failure becomes apparent.
\nThe operation of s 262 is problematic, as it will be difficult for a court to
\ndetermine how long any given item \u2013 a fridge, a TV, a pair of shoes \u2013 should
\nreasonably be expected to last.
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\nExercise
\nTom buys a DVD player from the local branch of Darley Gorman
\nAppliances Ltd. It is a top range model, costing $250. The DVD
\nplayer comes with a 12 month warranty. The order form that Tom
\nsigned at the time of purchase contained the following clause:
\nDarley Gorman Ltd makes no representation as to the quality
\nof the goods purchased. The liabilities of Darley Gorman Ltd
\nare confined to the terms of our 12 month warranty, which
\nrequires that we may choose to repair or replace goods at our
\ndiscretion, where the purchaser can prove that goods were
\ndefective at the time of sale. The purchaser acknowledges
\nthat this contract contains the entirety of the terms of the
\ncontract with Darley Gorman Ltd, and that all other remedies,
\nstatutory or common law, are excluded.
\n13 months after purchase, the DVD player stops working. He takes
\nit back to Darley Gorman Ltd. They say that because the warranty
\nperiod has expired they have no obligations towards Tom. Advise
\nTom as to the likelihood of success if he was to take this matter to
\ncourt.
\nC. Misleading and deceptive conduct
\nOne of the most frequently used provisions under the Trade Practices Act 1974
\nwas s 52 which prohibited a corporation when engaging in trade or commerce
\nfrom engaging in \u2018conduct that is misleading or deceptive or is likely to mislead
\nor deceive\u2019. This section has now been replaced by s 18 of the ACL, contained in
\nthe Competition and Consumer Act 2010 (Cth). One would expect the courts to
\ndraw upon case-law generated under the old s 52 as they interpret the new s 18.
\nThe section has deliberately been framed in broad terms and encompasses a wide
\nrange of business activities. It is not confined to cases involving consumer
\ncontracts and would, for example, apply to actions performed by one corporation
\nvis-a-vis to another.
\nSection 18 says that \u2018a person must not, in trade or commerce, engage in
\nmisleading or deceptive conduct, or conduct that is likely to mislead or deceive\u2019.
\nSection 18 applies only to a person engaging in trade or commerce \u2013 that is, in the
\ncourse of a business. So a person selling their car would not be subject to s 18 in
\nrelation to any statements they made (although they would be subject to the
\ncommon law of misrepresentation).
\nNote that an intention to mislead or deceive is not required for liability. It is not
\nthe intention or negligence of the person engaging in the conduct that has to be
\nproved \u2013 it is the effect of that conduct on the plaintiff. Once a plaintiff proves
\nthat they were misled, the question becomes whether the defendant\u2019s conduct was,
\nobjectively, misleading or deceptive. The objective nature of the test means that
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\nthe court determines what an average consumer in the position of the plaintiff
\nwould have believed, and if such a person would have been misled, then s 18 has
\nbeen breached \u2013 see Taco Company of Australia Inc v Taco Bell Pty Ltd [1982]
\nATPR 40-303.
\nThe Act provides a wide range of remedies for breach of s 18, including:
\ns 232 injunction ordering a party not to engage in conduct in breach
\nof the ACL
\ns 236 damages to compensate parties who suffered financial loss as a
\nresult of being misled
\nss 237-238 ancillary orders (such as rescission of the contract, variation of
\nthe contract, a declaration that all or part of the contract is
\nvoid, or an order that money be refunded or property be
\nreturned).
\nExercise
\nMary reads an advert in the local newspaper which reads as
\nfollows:
\nSpecial offer: Get a full set of tyres from Exhaust `n Tyre
\nthis week and we will throw in a free one-year membership
\nof the NRMA. You can have confidence in our tyres and in
\nthe road services offered to motorists by the NRMA.
\nMary goes to her local Exhaust \u2018n Tyre branch. She buys four tyres
\nat $150 each, and receives an NRMA membership. She is very
\npleased about this until she speaks to her friend Tom, who tells her
\nthat he bought the same set of tyres from Exhaust `n Tyre the
\nprevious week for $100 per tyre, and that he is an NRMA member,
\nthe annual fees for which are $80. When Mary contacts Exhaust \u2018n
\nTyre about this, they say that the advertising campaign put into the
\nnewspaper in error by a misguided marketing manager, and that the
\ncompany had not intended it to run. Advise Mary as to what
\nremedies she might have.
\nD. Unconscionable conduct
\nWe have already seen how the common law allows a contract to be rescinded
\nwhere the consent of a party was obtained by unconscionable means \u2013 see
\nCommercial Bank of Australia v Amadio (1983) 151 CLR 447. The Competition
\nand Consumer Act 2010 (Cth) contains a statutory version of unconscionability,
\nwhich can be remedied by a wider range of orders than were available under the
\ncommon law. The key provisions are as follows:
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\ns 20 provides that a person may not, in trade and commerce, engage in
\nconduct which is unconscionable under the unwritten (i.e. common) law
\ns 21 specifically prohibits unconscionability in consumer contracts (for goods
\nordinarily acquired for personal or domestic use), with factors listed in s
\n21(2) to guide the courts in determining whether unconscionability exists
\n(such as the relative bargaining strength of the parties; whether the terms
\nof the contract were not reasonably necessary to protect the supplier; the
\nconsumer\u2019s ability to understand documentation and the use of pressure
\ntactics by the supplier)
\ns 22 provides specific protection from unconscionability to small business, in
\nthat unconscionability is prohibited in the supply of goods and services
\nunder commercial contracts to unlisted companies.
\nThus one would expect that consumers will use s 21, small businesses s 22 and all
\nother contracting parties s 20 when alleging unconscionability.
\nThe remedies available for unconscionable conduct are the same as for misleading
\nand deceptive conduct.
\nE. Unfair contract terms
\nA similar area to unconscionability is unfair contract terms. Section 23(1) of the
\nACL provides that a term of a consumer contract (that is, a contract goods,
\nservices or land acquired predominantly for person al or domestic purposes) will
\nbe void if
\n\uf0b7 it is unfair and
\n\uf0b7 the consumer contract is a standard form contract
\nSection 25 lists the criteria that will determine if a term is unfair \u2013 essentially if
\nthe term leads to an imbalance of contractual rights and obligations; it is not
\nreasonably necessary to protect the legitimate interests of the party who would be
\nadvantaged by the term and it would cause the consumer detriment.
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\nTopic 10 Property law
\nLearning Objectives
\nAfter studying this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. outline the legal definition of property;
\n2. explain the distinction between real and personal property;
\n3. explain how that ownership consists of a bundle of rights in
\nrelation to property;
\n4. explain the distinction between ownership and possession;
\n5. explain the statutory regimes protecting copyright.
\nA. The nature of property
\nProperty is anything that a person can have rights of ownership over.
\nProperty can be classified as:
\nReal property immovable property, such as land and buildings
\nPersonal property everything other than real property, including
\ntangible movable property, called \u2018chattels\u2019 (such as
\na car or a TV set) and also intangible property, such
\nas shares and rights of action
\nProperty can also be classified as:
\nTangible property things that can be touched, such as houses or cars)
\nIntangible property incorporeal property, such as shares or rights of
\naction and intellectual property
\nB. Ownership and possession
\nIf you are the owner of property, a list of things you can do with it might look like
\nthis: I can
\n\uf0b7 possess it
\n\uf0b7 use it
\n\uf0b7 sell it
\n\uf0b7 give it away
\n\uf0b7 lend it to someone
\n\uf0b7 use it as security for a loan
\n\uf0b7 destroy it
\n\uf0b7 stop others from using it or taking it.
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\nYou will have fairly described most of the rights of ownership attached to
\npersonal property. Property law protects each of these rights, although you may
\nfind that the law will give these rights a special name. So ownership is best
\nconsidered to be a bundle of rights.
\nThe right to use or keep property is referred to as the right to possession. Note that
\npossession is a lesser right than ownership – if I lend my car to someone for a
\nmonth, I have temporarily transferred one of the rights that is an incident of
\nownership to them, because they have possession – but I am still the owner. The
\nfact that ownership is a bundle of rights in respect of a particular item means that
\n(as in the example of lending someone your car) it is possible to split or divide
\nthese rights amongst two or more persons. This can be done in at least 3 ways.
\nC. Intellectual property
\nThere are two types of personal property or \u2018choses\u2019 (chose is the French word for
\n\u2018thing\u2019) \u2013 tangible personal property or \u2018choses in possession\u2019, called chattels (like
\ncars, books, cats) and intangible personal property or \u2018choses in action\u2019. Even
\nthough they have no physical existence, choses in action are rights that are legally
\nprotected, and it is in this area that intellectual property belongs. The law that
\nregulates this area is mostly statute law but there are some areas where common
\nlaw remedies apply. The most important types of intellectual property: patents,
\ndesigns, copyright, trade marks, and circuit layouts. This Study Guide focuses on
\ncopyright.
\nThe purpose of granting intellectual property rights are threefold:
\n\uf0b7 to stimulate the creation of new technology and inventions by research and
\ndevelopment;
\n\uf0b7 to reward creators of inventions with assurances of gain from the potential
\nbenefit from their endeavours by granting a monopoly for a limited period
\nso that it may be commercially exploited but not be a bar to the
\ndissemination of information; and
\n\uf0b7 to protect customers and traders by preventing confusion between genuine
\nproducts and cheap imitations.
\nD. Copyright
\nIn Australia copyright is regulated by the Copyright Act 1968 (Cth). Copyright
\ngrants protection to two categories of the intellectual property – original literary,
\ndramatic, musical and artistic works, and subject matter other than works,
\nincluding sound recordings, films, television, sound broadcasts and published
\neditions of works. Protection is also given to the way in which a particular edition
\nof the work is set out, as distinct from the copyright material that it contains.
\nIn general, while copyright is granted only to original works, the degree of
\noriginality required is not high. Thus, maps, lectures, bingo cards, and a model
\ncontract for the sale of land have been held to be capable of copyright protection.
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\nUnlike in the case of patents, designs and trade marks, copyright is not required to
\nbe registered for protection. Once a work is created, it is automatically protected
\nby copyright, although authors often put the copyright symbol: \u00a9 on their work to
\nremind others that the work is protected. Copyright only applies to something that
\nhas been given a physical form. Copyright does not protect ideas. Therefore, if
\nsomeone gives an author an idea for a book or a song writer an idea for a song, the
\nperson who gave the idea has no copyright in the book or the song when it is
\ncompleted. This is shown by Donoghue v Allied Newspapers Ltd [1938] Ch 106,
\nwhere a jockey told his life story to a newspaper, and the newspaper printed an
\narticle based on that story. The newspaper owned the copyright in the article, as
\none of its journalists was the author \u2013 only the idea came from the jockey, and he
\ncould not own copyright in that.
\nOwnership of copyright
\nThe author of the work is the usual owner of the copyright. However, if a work is
\nproduced by an employee pursuant to a contract of employment, the copyright
\nbelongs to the employer (s 35(5)).
\nThe copyright holder may license the copyright to others. A licence of copyright
\npermits the licensee to do what would otherwise be an infringement of the
\ncopyright owner\u2019s rights. An exclusive licensee may protect his or her exclusive
\nrights in the same way as an owner, and institute infringement proceedings against
\nany person who, without permission, infringes his or her exclusive rights. Thus
\nan author of a novel may sell the copyright to a publisher in exchange for a
\nroyalty (calculated as a flat fee or as a % of what the publisher sells books for).
\nThereafter it is the publisher, not the author, who owns the copyright and who
\nwould therefore take legal action if the book was illegally copied.
\nDuration of copyright
\nThe duration of copyright protection is seventy years after publication or first
\nperformance or, if the work is not published in the author\u2019s lifetime, seventy years
\nafter the death of the author. Copyright protection in the case of sound
\nrecordings, films, television and sound broadcasts is seventy years after the expiry
\nof the calendar year in which they were published.
\nInfringement and remedies
\nThe Act provides statutory remedies for infringement (s 115). An injunction may
\nbe brought to restrain continued infringement. In addition, an action may be
\nbrought for an account of the infringer\u2019s profits. In the case of flagrant
\ninfringements, such additional damages may be awarded by a court, as it
\nconsiders appropriate in the circumstances. A copyright owner may also bring an
\naction for conversion or detention to recover any infringing copies of the
\ncopyright material or devices used for making them, which are usually then
\ndestroyed.
\nIn addition to the statutory remedies, a copyright owner may also be able to obtain
\nan Anton Piller Order, which is an order given under the law of civil procedure,
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\nnamed after the case of Anton Piller KG v Manufacturing Processes Limited
\n[1976] Ch 55. This order permits the copyright owner or his or her representative
\nto enter the infringer\u2019s premises to search for and take into custody offending
\ncopies of works as well as other documentary evidence relating to them to prevent
\ndestruction or disposal of the offending materials before copyright action can be
\ntaken.
\nPenal sanctions
\nIn addition, to the civil remedies, the Copyright Act also provides for a number of
\npenal sanctions, punishable normally by a fine and in some cases by
\nimprisonment (s 132). Examples of illegal infringing activity that attracts
\ncriminal sanctions include making articles for sale or hire or creating a literary,
\ndramatic or musical work or a sound recording to be performed or heard in public.
\nInternational copyright protection
\nInternational copyright protection is covered by the Berne Convention for the
\nProtection of Literary and Artistic Works 1866. In order to be covered by the
\nBerne Convention, material must be published or made available in a member
\ncountry. A similar agreement that also provides copyright protection is the
\nUniversal Copyright Convention of 1952, administered by the United Nations
\nEducational, Scientific, and Cultural Organisation. Citizens of member countries
\nof the UCC holding copyrights are entitled to the same protection against
\ncopyright infringement as nationals. Several other international conventions and
\nagreements have also an impact on copyright protection. For example, the
\nInternational Covenant on Economic, Social and Cultural Rights 1966, and the
\nUniversal Declaration on Human Rights. The latter convention protects the moral
\nand material interests in any copyright. Finally, the General Agreement on Tariffs
\nand Trade (GATT) Treaty requires signatories not to apply intellectual property in
\na discriminatory manner.
\nExercise
\nBartholomew is a musician. He has written a song which he is
\ntrying to get a recording contract for. To develop some publicity for
\nhis song, he often plays it on the street corner. Matthew has often
\nstopped to listen. Bartholomew discovers that Matthew has released
\na CD containing a song which uses exactly the same words as the
\nfirst two verses from Bartholomew\u2019s own song. He also finds that
\na local CD shop is selling Matthew\u2019s CD. Bartholomew used to
\nwork for a hotel as a pianist in its restaurant. Part of his job
\ninvolved composing and playing music for the restaurant. He no
\nlonger works for the hotel and is angry when one day, as he walks
\npast the hotel, he hears a recording of his music being played over
\nspeakers in the hotel lobby. Advise Bartholomew as to his legal
\nposition in relation to Matthew and the hotel owners, citing relevant
\nsections from legislation.
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\nTopic 11 Introduction to business organisations
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Distinguish between incorporated and unincorporated
\norganisations;
\n2. Distinguish between the different types of business
\norganisations;
\n3. Determine which factors should be taken into account when
\nchoosing an appropriate business structure.
\nA. Introduction
\nThere are a variety of factors that must be taken into account when advising
\nsomeone on what business structure to adopt. A critical factor in determining
\nwhich to adopt is the extent to which the person who has established the business
\nwill be liable for its debts. This Topic gives a brief overview of four principal
\nbusiness structures, focusing on the rules of liability for each. Subsequent
\nsections of this Study Guide give an overview of partnerships and trusts, but most
\nof the subject is devoted to corporations, which are by far the most important
\nvehicle for business, generating in excess of 97% of business turnover in
\nAustralia.
\nB. Business structures
\n(i) Sole proprietorship
\nSole proprietorship carries numerous disadvantages. First and most importantly,
\nis the risk of personal unlimited liability \u2013 as the business is not a separate entity,
\nthe personal assets of the owner of the business can be attached by creditors
\nenforcing a judgment debt.
\nThe scale of business is restricted by the individual\u2019s personal capital resources.
\nThe scope of the business is restricted to proprietor\u2019s areas of knowledge and skill
\n(i.e., ownership and management vest in same person)
\n3rd parties entering into contracts with the business have no way of determining
\nthrough any public records what assets the individual has and thus how creditworthy
\nhe or she is.
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\n(ii) Partnership
\nThe risks associated with partnership are even worse than sole proprietorship:
\nNot only is the partner personally liable for their own business debts, because the
\npartnership is not a legal entity, they have personal unlimited liability for the debts
\nincurred by other partners in the course of the partnership business. Great caution
\nis thus needed in choosing partners!
\nThe scale of the business restricted by personal expertise of partners, however the
\ncapital of several individuals can be pooled
\nA 3rd party dealing with a partnership bears the risk of no public knowledge of
\nthe assets of partners, however some security provided by their joint liability.
\n(iii) Company
\nA person wanting to create a business can incorporate a company and become its
\nshareholder.
\nThe crucial point here is that the shareholder\u2019s liability limited to paying up shares
\n\u2013 the company is separate legal entity and it, not the shareholder(s) are liable for
\nits debts.
\nA company provides a mechanism for raising large amounts of capital.
\nAs there will usually be a large number of members, ownership is generally
\nseparated from control \u2013 directors control the company – usually (but not
\nnecessarily) elected by shareholders in proportion to shareholding. Shareholders
\nare usually not given any day to day decision- making power. Experts can be
\nelected as directors and\/or employed as managers. Investment security for
\nshareholders is provided by internal rules and accounting requirements.
\nSo far as 3rd parties are concerned, the assets of individual company members are
\nunavailable to satisfy the company\u2019s debts \u2013 only the company\u2019s assets can be
\nlooked to for that purpose, but there are public records available which give an
\ninsight into the company\u2019s financial position, particularly if it is listed on the
\nASX.
\n(iv) Trust
\nA trust not a separate legal entity. Rather it is a relationship where a person who
\nowns property (the settler) transfers that property to a trustee to be managed on
\nbehalf of others (the beneficiaries). The settler and the trustee may be the same
\nperson, as where a parent creates a trust in relation to property for the benefit of
\ntheir children and also administers the trust. A beneficiary can also be the trustee
\n(except in cases where he or she is the sole beneficiary). Although ownership of
\nthe property vests in the trustee (or trustees), the benefits derived from the
\nproperty (such as income) belong to the beneficiaries who are said to have the
\n\u2018equitable interest\u2019 in the property, and the trustee must always act in the best
\ninterests of the beneficiaries, to whom he or she owes a fiduciary duty.
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\nThe scale of business for which a trust can be used is limited by the assets of the
\ntrust, and the areas in which it will involve itself is determined by the knowledge
\nand skill of the trustees.
\nThe trustee can be sued by the beneficiaries if he or she does not fulfil her
\nfiduciary duties.
\n3
\nrd parties dealing with a trustee have no knowledge of the trustee\u2019s or the trust\u2019s
\nassets. However, trusts that are managed investment schemes which raise funds
\nfrom the public (eg unit trust funds) are regulated under Ch 5C of the
\nCorporations Act 2001 (Cth).
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\nTopic 12 The law of agency
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Understand the nature of the agency relationship;
\n2. Distinguish between the different types of authority an
\nagent may have;
\n3. Appreciate the fiduciary nature of the agent\u2019s relationship
\nwith the principal;
\n4. Understand what happens when an agent represents a
\nprincipal without disclosing the existence of the principal to
\nthe 3rd party;
\n5. Apply the law of agency and determine the liabilities of
\nprincipal, agent and third party in different circumstances.
\nA. Introduction
\nAgency is a special type of contract.
\nIt is particularly important because:
\n(i) In a partnership, each partner is an agent of all the others.
\n(ii) Only someone who is an agent of a company can bind it.
\nWe therefore need to examine the law of agency before looking at business
\nstructures in detail.
\nB. Definition
\nAgency is simply an agreement by one person (the principal) in terms of which he
\nor she confers authority on another (the agent) to make contracts with third parties
\non his or her (i.e. the principal\u2019s) behalf.
\nAgency can be gratuitous (i.e. no consideration given by principal to agent) and
\ncan arise by operation of law (i.e. without an agreement between agent and
\nprincipal).
\nThus three parties are involved in agency:
\nthe Principal (P)
\nthe Agent (A)
\nthe Third party (T)
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\nNote that (subject to a few exceptions) no obligations arise between agent and
\nthird party \u2013 the contractual link created by the agent is between principal and
\nthird party.
\nC. Types of authority
\nWhether the principal is bound depends on whether he or she conferred authority
\non the agent.
\nThe following are the types of authority recognised by the common law:
\nActual authority express
\nimplied (sometimes called \u2018customary\u2019 authority)
\nOstensible authority
\nAuthority of necessity
\nVideo
\nD. Actual authority
\nExpress: stated by the principal (orally or in writing)
\nImplied: such authority as is necessary to execute express authority or, where no
\nexpress authority is given and someone is appointed to a position, such authority
\nas normally falls within the scope of activities of that position. Thus titles given
\nto employees matter, because by giving them a title or a role, you are
\nautomatically vesting them with the authority necessary to discharge that role.
\nNote the important point that a private agreement between principal and agent
\nlimiting the latter\u2019s authority to something less than what usually attaches to the
\nposition will not disable 3rd party from relying on the normal scope of that
\nAuthority
\nPrincipal Agent
\nContract Conduct
\nThird Party
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\nauthority: In Watteau v Fenwick [1893] 1 QB 346, the owner of a pub appointed
\na manager to run it for him, thereby giving him all the authority that usually went
\nwith the title of \u2018pub manager\u2019. The fact that the owner had expressly told the
\nmanager not to buy cigars did not prevent the principal being bound by a contract
\nfor the purchase of cigars by the manager, because the purchase of cigars was
\nsomething that fell within the usual range of authority of a pub manager in 19th
\ncentury England. Only if the 3rd party has been made aware of the limitation on
\nthe agent\u2019s authority will it be effective against him.
\nE. Ostensible \/ apparent authority
\nIn this case, the principal does not intend to give authority, but because he
\nrepresents that the agent has authority, the principal is bound by that
\nrepresentation – i.e. is estopped from denying the agent\u2019s authority.
\nThe representation must be by the principal \u2013 the agent\u2019s own representation that
\nhe has authority is not, in itself, sufficient to create apparent authority.
\nHowever, it should be noted that the \u2018representation\u2019 by the principal can take the
\nform of inaction, as where the principal knows that the agent is acting as if he had
\nauthority, and the principal either does not intervene to correct the impression that
\narises in the mind of 3rd parties, or actually condones what the agent is doing:
\nFreeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630 \u2013 the
\nboard of a company knowingly allowed one of its directors (Kapoor) to act
\nas M.D on several occasions, even though he had not been appointed to that
\nrole. The Co was held bound by contract Kapoor had entered into with
\narchitects \u2013 because in light of what the board had knowingly allowed
\nKapoor to do, it was reasonable for the 3rd party to believe that he had been
\ngiven the actual authority of an MD. Thus the key test is whether, because
\nof something the principal has done or has knowingly allowed the agent to
\ndo, it was reasonable for the 3rd party to believe that the principal gave the
\nagent authority.
\nOf course if 3rd party knew, or ought reasonably to have suspected, that the agent
\nhad no authority, the principal is not bound \u2013 this is a vital issue of evidence.
\nApparent authority can carry on in existence even after an agent is dismissed by
\nthe principal but 3rd parties with whom the agent used to deal do not know of that
\nfact.
\nF. Authority of necessity
\nThis arises where a person is in control of with the property of another person, an
\nimmediate expense is required to preserve the property, the owner of the property
\nis virtually impossible to contact, the person entrusted with the property (agent)
\nmust act in the best interests of the principal and go no further than is necessary to
\npreserve the property.
\nAn example of agency of necessity is Great Northern Railway Co. v Swaffield
\n(1874) LR 9 Ex 132, in which the owner of a horse was not on hand to collect it
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\nwhen it arrived by train at a country station. As it was raining, the station-master,
\nwho could not contact the owner, entered into a contract with a stable-owner to
\naccommodate and feed the horse. The owner of the horse was held liable on the
\ncontract with the owner of the stables, on the basis that the station-master had
\nbeen vested with agency of necessity.
\nG. Ratification
\nA principal may agree to be bound even in the absence of authority (express,
\nimplied or ostensible) if he or she decides to ratify (adopt) the unauthorised
\ncontract entered into by the agent. Of course the principal will ratify only if he or
\nshe wants to be bound by the contract.
\nSpecial rules apply in respect of ratification, among them are:
\n(a) ratification effective retrospectively to when the agent acted.
\n(b) the principal must have existed (ie, if a company, must have been
\nregistered), and the 3rd party must have known that the agent was purporting
\nto act on behalf of a principal at the time
\n(c) to bind the 3rd party the principal must manifest ratification and within a
\nreasonable time.
\nH. Where the agent acts without authority
\nIf there is no express, implied or ostensible authority then in the absence of
\nratification by the principal or the principal being bound by the doctrine of
\nnecessity, no contract is formed between the principal and the 3rd party, however
\nthe agent is liable to 3rd party either
\nin tort, for deceit or negligent misstatement or
\nin contract, for breach of common law implied warranty of authority which
\nthe agent is held to have given to the third party \u2013 ie, anyone who says they
\nhave authority when they do not becomes liable to compensate the 3rd party
\nfor any financial loss the 3rd party suffers (eg, loss of profit) because they
\n(the 3rd party) discovers that they have no contract with the principal the
\n\u2018agent\u2019 purported to represent (Yonge v Toynbee [1910] 1 KB 215).
\nI. Duties of the parties
\n(1) The agent\u2019s duties to principal:
\nto adhere to the principal\u2019s instructions
\nto act within the principal\u2019s authority \u2013 note that the agent will be liable to
\nthe principal if the agent breaches the principal\u2019s authority (as, for example
\nin a situation such as that in Watteau v Fenwick, where the principal found
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\nhimself liable to the third party under a contract where the agent had
\nexceeded restrictions on his authority)
\nto use due skill and care, measured according to the standards of the
\nbusiness involved
\nto act in good faith (fiduciary duty).
\nFiduciary duty involves:
\n(a) avoidance of conflict of interest \u2013 the agent must inform principal
\nwhere such a conflict arises – Christie v Harcourt [1973] 2 NZLR 139
\nthe principal successfully sued the agent for damages and for the
\ncommission on the sale of the principal\u2019s home because the agent sold
\nthe house at less than market value to his daughter and her fianc\u00e9.
\n(b) the agent may not make secret profit at principal\u2019s expense – Bentley v
\nCraven (1853) 52 ER 29 \u2013 agent retained by a sugar refinery to obtain
\nsugar for it (obviously at the lowest market price) bought up sugar for
\nhimself and then sold it to the refinery at an inflated price \u2013 the
\nprincipal recovered the agent\u2019s profit.
\n(c) must not use confidential information gained as an agent \u2013Robb v
\nGreen [1895] 2 QB 315 \u2013 the court restrained employee from using
\nclient lists taken from former employer when he (the employee) left to
\nset up his own Co. Note however that agent cannot be prohibited
\nfrom using general skill and experience, even if obtained working for
\nprincipal.
\nAgents may not sub-delegate without express or implied authority to do so.
\nWhere an agent breaches any of their duties to the principal, the principal may
\nrecover damages from the agent \u2013 eg where, contrary to the principal\u2019s
\ninstructions, the agent has disregarded limitations on their authority but the 3rd
\nparty was not aware of such limitations, as in Watteau v Fenwick, and as a
\nconsequence the principal has found himself bound by a contract he did not want.
\n(2) The principal\u2019s duties to the agent:
\nto pay the agent remuneration for the agent\u2019s services
\nto reimburse the agent for reasonable expenses.
\nJ. Undisclosed principals
\nA contract is formed between 3rd party and principal even if agent does not
\ndisclose that he or she is acting on behalf of a principal (\u2018undisclosed principal\u2019).
\nThe 3rd party is still liable to perform to the principal but
\nmay set off against the principal any debt owed by the agent to the 3rd
\nparty, and
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\nis absolved from liability to the principal if, ignorant of the agency
\nrelationship between agent and principal, the 3rd party has settled with (ie
\nhas already given performance to) the agent.
\nFinally, and very importantly, in cases of undisclosed principals, the 3rd party
\nmay always elect from whom to demand performance (ie may obtain performance
\nfrom either the agent or the principal) – this is called the \u2018doctrine of election\u2019 \u2013
\nSiu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199. This is often
\nimportant where the 3rd party entered into a contract with the agent (believing the
\nagent to be acting on his own behalf) because the agent possessed a particular
\nskill. In that circumstance, when it is revealed that the agent was acting on behalf
\nof a principal, the 3rd party will usually demand performance from the agent rather
\nthan from the principal with whom he discovers he has a contract.
\nK. Termination
\nTermination of the relationship is governed by the express and implied terms of
\nthe contract between agent and principal.
\nNote however that even where the agency relationship has been terminated, the
\nprincipal may still be liable under the rules of ostensible authority if, from 3rd
\nparties\u2019 perspective, the agent still seems to have authority.
\nExercise
\nPam, a sole trader and the owner of \u2018Pam\u2019s flower wholesalers\u2019,
\nemploys Judy as a \u2018flower purchaser\u2019. Tom is a flower producer
\nand often sells flowers to \u2018Pam\u2019s flower wholesalers\u2019. Consider the
\nfollowing scenarios and determine the legal implications that arise
\nout of them:
\nScenario 1
\nThe agency agreement between Pam and Judy places no limit on
\nthe amount for which Judy can purchase flowers.
\na. Judy tells Tom that she is contracting on behalf of Pam and
\npurchases flowers from Tom.
\nb. Judy tells Tom that she is contracting on behalf of Pam and
\npurchases a painting from Tom.
\nc. Judy purchases flowers from Tom. (Judy does not disclose
\nthat she is in fact acting on behalf of Pam. Thus Tom thinks
\nhe is contracting with Judy.)
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\nScenario 2
\nAssume that Pam and Judy had explicitly agreed that Judy would
\nnot have the authority to buy flowers in excess of $ 10 000 per
\ntransaction. Pam does not inform Tom of the limitation on Judy\u2019s
\nauthority. Judy tells Tom that she is contracting on behalf of Pam
\nand, in a single transaction, purchases flowers from Tom for $ 12
\n000.
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\nTopic 13 Partnership
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Define partnership;
\n2. Name the sources of partnership law;
\n3. Understand how a partnership is formed and terminated;
\n4. Understand the relationship between partners and third
\nparties and apply this knowledge to practical legal
\nsituations;
\n5. Understand the relationship between partners inter se and
\napply this knowledge to practical legal situations.
\nA. Definition
\nEach State and Territory has its own Partnership Act. They are by and large the
\nsame, but there are variations. For convenience we will use the Partnership Act
\n1892 (NSW).
\nWeb Content
\nThe following link will take you to the Partnership Act 1892
\n(NSW). However, for the purposes of this subject, you need be
\nfamiliar only with the sections mentioned in the Study Guide.
\nThe essential elements of a partnership are stated in s 1 of the Act
\na relationship between persons
\ncarrying on a business in common
\nwith a view to a profit
\nSection 1(2) specifically excludes bodies corporate from the definition of
\n\u2018partnership\u2019.
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\nSection 115 of the Corporations Act 2001 (Cth) limits the maximum number of
\nmembers of a partnership to 20 except in the case of some professional
\npartnerships which Commonwealth regulations permit to have higher numbers
\n\uf0b7 1000 for accountants
\n\uf0b7 400 for legal practitioners
\n\uf0b7 100 for architects, pharmaceutical chemists, veterinary surgeons
\n\uf0b7 50 for actuaries, medical practitioners, patent attorneys, trade mark
\nattorneys and stockbrokers.
\nIf there are over 20 partners then the firm must incorporate (i.e. form a company)
\n\u2013 this is discussed below
\nNote that because it lacks legal personality, a partnership could not be a member
\nof a Co. A Co. could however be one of the legal persons belonging to a
\npartnership.
\nThe existence of a partnership usually proved by the existence of a partnership
\nagreement. Such an agreement can be either written or oral.
\nIn the absence of such an agreement, whether a partnership exists (i.e. whether the
\nessential elements in s 1 of the Act have been satisfied) can be difficult to
\ndetermine.
\nThe issue is commonly litigated either (i) by parties seeking to enforce partnership
\nobligations against the other alleged partners, or (ii) by 3rd parties seeking to hold
\nall the alleged partners liable in contract or torts. In general the courts look at any
\nagreement between the parties as well as all surrounding facts. In other words, the
\ncourt may find that a partnership existed on the facts, even though some of the
\nmembers of the partnership were unaware that that was the nature of the legal
\nrelationship they were in.
\nSection 2 of the Act contains various criteria for what does and does not constitute
\nevidence of a partnership:
\nSection 2(1) states that joint ownership of property (eg a share of a unit trust fund)
\nor share in income from property is not in itself the carrying on of business: In
\nSmith v Anderson (1880) 15 Ch D 247 investors gave money to trustees to invest
\nfor them but there was no communication between members of the fund. The
\ncourt held that the investors were not engaged in joint business merely by holding
\na share in a trust fund \u2013 the fund thus did not constitute a partnership.
\nSection 2(2): sharing gross returns does not in itself create partnership.
\nSection 2(3): sharing in net profits is a prima facie indication of partnership, but
\nthere are certain circumstances in which the presumption does not operate \u2013 (e.g.
\nemployees, s 2(3)(b)) – i.e., it is a presumption which may be disproved.
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\nRemember \u2018profits\u2019 does not mean gross profits, but rather net profits (gross
\nprofits less expenses). Thus partners share joint liabilities of enterprise, as well as
\nthe receipts. For example, in Cox v. Coulson [1916] 2 KB 177 two people staged
\na play for profit. They shared the gross takings but one party hired the actors and
\npaid all the associated expenses and the other party hired the theatre and paid all
\nthe associated expenses. All expenses were taken out of their respective shares of
\nthe takings. The court held that there was no partnership – each party did their
\nown thing and it was possible for one person to make a profit while the other
\nmade a loss. This was a joint venture. This question was important on the facts
\nof the case: One of the actors had fired a gun that he thought was not loaded,
\ninjuring a member of the audience. That person then sued the actor and wanted to
\nsue both the person who employed the actor and the person who hired the theatre
\non the basis that they were jointly vicariously liable for the actor\u2019s tort. However,
\nbecause they were not partners, the spectator could only sue the actor and the
\nperson who had hired him, and could not join the person who had hired the
\ntheatre.
\nRemember that courts will not accept as definitive how persons label their
\nrelationship – rather they look at the reality of the relationship in its entirety –
\nCanny Gabriel Advertising v Volume Sales (Finance) Pty Ltd (1974) 131 CLR
\n321 \u2013 the HC held that relationship described by parties as \u2018joint venture\u2019 was in
\nreality a partnership.
\nB. Relationship between the partners
\nRemember that a partnership does not have a separate legal personality \u2013 so
\nalthough partners may trade under a firm name (s 4), Supreme Court rules permit
\none to sue in partnership name, and partners may agree that certain property
\nbelongs to the partnership, ultimately all partners are personally liable for
\npartnership debts. This is the greatest disadvantage of being in a partnership.
\nPartnership can be formed without formality, but a written agreement is obviously
\ndesirable.
\nA partnership does not have perpetual succession \u2013 it lasts only as long as
\ncommon purpose does (this is called a partnership \u2018at will\u2019).
\nUnless the partners agree to contrary, a partnership is \u2018at will\u2019 which means that it
\nautomatically terminates when membership changes (s 26) \u2013 eg by resignation (s
\n32(c)) or death or bankruptcy of a partner (s 33(1)). So to prevent the dislocation
\nthat would result from automatic termination, partners can agree upon fixed
\nduration of partnership (s 32(a)), which may be extended by agreement – which
\ncan be implied – s 27(1). Note that after the extension period terminates, the
\npartnership reverts back to being \u2018at will\u2019. More usually however, the partnership
\nagreement will provide that partnership carries on indefinitely (despite
\nresignations and deaths) until all current partners agree to dissolve it.
\nShares of both profits and losses are equal among all partners – s 24(1) (even if
\nunequal amounts of capital were contributed at establishment) unless a partnership
\nagreement provides to the contrary. Most partnership deeds thus usually provide
\nthat share of profits and losses will equal the shares of capital contribution.
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\nNo remuneration is paid to partners for work done – s 24(6) – in the absence of
\nagreement to the contrary.
\nAll partners are presumed to participate in the management of the firm – s 24(5) –
\nunless there is agreement to the contrary.
\nSection 24 also provides that, unless the partnership agreement states to the
\ncontrary, all partners shall take part in decisions to admit new partners, all
\ndecisions shall be made by the majority and each partner has a right to inspect the
\nbooks.
\nExpulsion of a partner is not possible (s 25) unless there was a pre-existing
\nexpress agreement permits this \u2013 failing this, the only other remedy is an
\napplication to court for dissolution (s 35).
\nPartners are entitled to be refunded expenses incurred in conduct of partnership
\nbusiness – s 24(2).
\nC. Partnership property
\nIt is important to make clear what property is \u2018partnership property\u2019 because:
\nThe increase in value of personal property belongs to its owner, but increase in
\nvalue of partnership property will be divided among partners in proportion to their
\nshare in profits.
\nWhat is partnership property affects the order in which property can be attached –
\na partnership asset will be the first property claimed by creditors, while an asset
\nowned as personal property by a partner may be claimed by creditors only if there
\nis insufficient partnership property, furthermore, the partner who owns the
\nproperty has a right of recourse against fellow partners to reimburse him for his
\nloss in proportion to their shares of the partnership.
\nIn the absence of agreement Act provides that property brought into the firm or
\nacquired during course of firm business (s 20(1)) or with partnership money (s 21)
\nis presumed to be partnership property until the contrary is proved.
\nD. Assignment of interest
\nIf a partner assigns his interest in the partnership to a 3rd party, that party has
\nrights only against the assigning partner, not against the other partners, and cannot
\nparticipate in the management of the partnership (s 31).
\nA partner\u2019s interest may be alienated involuntarily – a partner\u2019s interest in the
\npartnership forms part of his or her assets so it can be attached – s 23(2). A
\ncreditor will become entitled to receive partner\u2019s profits (and capital on
\ndissolution). However, in these circumstances, the other partners have the option
\nto dissolve the partnership – s 33(2).
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\nE. Fiduciary duty
\nPartners owe each other a duty of utmost good faith. This fiduciary duty derives
\nfrom nature of relationship and the fact that each partner is an agent for all the
\nothers. Thus partners must
\nrender account in respect of dealings affecting the partnership (s 28),
\ndisclose benefits received through the business (s 29), and obviously not
\nmake secret profits (Birtchnell v Equity Trustee, Executors & Agency Co
\nLtd (1929) 42 CLR 384).
\nnot compete with the firm unless this is otherwise agreed (s 30).
\nF. Relationship between partners and outsiders
\nEssentially this is governed by the law of agency as modified by ss 5 \u2013 9 of the
\nAct, which you should read.
\nThe partners may, in a written or oral partnership agreement, stipulate what their
\nauthority is. In that case, they all have express authority to that extent, and
\ncontracts entered into by each partner to the extent of that authority will bind all
\nthe other partners.
\nHowever, it is also important to take into account s 5(1) of the Act, which
\nprovides as follows:
\n5 Power of partner to bind firm
\n(1) Every partner in a partnership other than a firm that is a limited
\npartnership or incorporated limited partnership is an agent of the firm and
\nof the other partners for the purpose of the business of the partnership; and
\nthe acts of every partner who does any act for carrying on in the usual way
\nbusiness of the kind carried on by the firm of which the partner is a
\nmember, binds the firm and the other partners, unless the partner so acting
\nhas in fact no authority to act for the firm in the particular matter, and the
\nperson with whom the partner is dealing either knows that the partner has
\nno authority, or does not know or believe the partner to be a partner.
\nThis provision has two important effects:
\nFirst, even in the absence of an express conferral of authority by the partners, s
\n5(1) means that each partner has implied authority as an agent for all the other
\npartners in respect of partnership business. The same would hold true if the
\npartners had not subjectively intended to form a partnership, but had allowed each
\nother to act as if they were partners \u2013 in which circumstance each of them would
\nhave ostensible authority. Note, however, that the authority conferred by s 5(1)
\napplies only in respect of partnership business \u2013 ie the implied or ostensible
\nauthority of partners is obviously restricted by the nature of the business. So, for
\nexample, a transaction in which a lawyer purchased a dental chair would not be
\nbinding on the other partners of the law firm. (Acts lying outside firm\u2019s business
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\nwould bind the other partners only if they conferred special express authority on
\nthe partner concerned \u2013 s 7). Assuming that a transaction lies within the express,
\nimplied or ostensible authority of a partner, s 6(1) of the Act provides that each of
\nthe partners is bound by the others\u2019 acts.
\nThe second important aspect of s 5(1) is that even if a partner contracts beyond
\nhis or her express authority (eg because they disregard some internal limitation on
\nauthority), a 3rd party can still succeed in holding the partnership liable if he is
\nable to show that the transaction was one lying within the usual implied authority
\nof a partner of a firm carrying on that type of business, unless other partners can
\nprove that the 3rd party was aware of the partner\u2019s lack of authority or that he did
\nnot know the person to be a partner. So s 5(1) protects a 3rd party in the sense
\nthat, as long as the transaction is within what would be the normal implied
\nauthority of an agent of a firm engaging in that type of business, the 3rd party can
\nstill hold the other partners liable, even if the partner the 3rd party was dealing
\nwith was exceeding his or her express authority.
\nTo reinforce this, the Act expressly states in s 8 that any internal agreement
\nbetween partners limiting their authority will affect 3rd party rights only if the 3rd
\nparty was aware of the agreement. An example of the application of these rules is
\nprovided by Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103, where two
\npartners in a garage business had agreed that they would not buy and sell cars.
\nHowever, one of them did sell a car which the business did not own, to a 3rd party.
\nThe 3rd party obviously had to return the car to its rightful owner, and then sued
\nboth of the partners for breach of contract of sale in that clear title had not been
\ntransferred. The partner who had not participated in the transaction sought to
\navoid liability on the basis of the agreement between the two partners limiting
\ntheir authority. However the court held that the buying and selling of cars was
\nwithin the normal scope of business of a garage, that there was no evidence that
\nthe 3rd party as aware of the agreement, and so both partners were liable.
\nWhere a partner with authority does not reveal the partnership to the 3rd party, the
\npartners will still be bound to the 3rd party under the doctrine of the undisclosed
\nprincipal. But of course where such a partner acts outside his actual (express or
\nimplied) authority, the firm will not be bound, because there can obviously be no
\nostensible authority if the principal is undisclosed, because for ostensible
\nauthority to exist, a 3rd party must be able to show reliance on a representation by
\nthe principal.
\nThe Act draws a distinction between partners\u2019 liability in contract and in tort:
\nSection 9(1) imposes joint liability for partnership contracts, this means that if a
\nplaintiff formally releases one partner from liability, all are released. Under the
\ncommon law it also meant that all partners must be sued individually by name \u2013 if
\na plaintiff omitted a partner (as distinct from actually releasing him), a subsequent
\nseparate action against that partner was not permitted. However, Supreme Court
\nrules now permit a plaintiff to bring an action against the firm, which has the
\neffect that all individual partners are sued, thus effectively eliminating the risk of
\naccidentally failing to join a partner in the action. Note that once the 3rd party has
\na judgment against all the partners, the 3rd party can execute the entire judgment
\nagainst one, any or all of them, and that if, for example, the 3rd party recovered the
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\nentire amount from one partner, that partner would have to pay the full amount
\nand would subsequently have to recover shares from the other partners.
\nSection 10 states that the firm (that is, all the partners) is liable for torts of partners
\narising out of partnership business, and also (s 11) for misapplication of money
\nand property received from 3rd parties. This liability is joint and several (s 12),
\nwhich means that a 3rd party can proceed against partners in separate actions (if
\nmore partners discovered) until the whole claim satisfied. An example of a
\npartnership being found liable in tort is provided by Polkinghorne v Holland &
\nWhitington (1934) 51 CLR 143, where a partner in a law firm had defrauded a
\nclient of money by establishing a sham company in which he told the client he
\nwas investing the client\u2019s money. Since the fraud was conducted within the
\ncourse and scope of the work of the law firm, all the partners were held liable for
\nthe tort committed by one of them.
\nA partner will not be liable for debts arising from transactions before he or she
\nentered the firm (s 17(1)), but will be liable for debts incurred while a member of
\nthe firm even after he or she has left – s 17(3)- unless released by other partners
\nand the firm\u2019s creditors \u2013 s 17(5).
\nG. Limited partnerships and incorporated limited partnerships
\nPart 3 of the Act permits the formation of limited partnerships and incorporated
\nlimited partnerships.
\nA limited partnership consists of \u2018general\u2019 (i.e. ordinary) partners and \u2018limited\u2019
\npartners (there must be at least one of each). The general partners have unlimited
\npersonal liability, as usual. The limited partners are liable only to contribute
\nspecified capital share. The firm must end its name with \u2018a limited partnership\u2019 or
\n\u2018LP\u2019- s 75. A limited partnership is effective only if a certificate listing partners
\nand including the partnership agreement is lodged with Registrar of Limited
\nPartnerships.
\nLimited partners may not take part in the management of the business (s 67(1)), so
\nlimited partnership is ideal for sleeping partners who want to invest but not
\nengage in management or be exposed to personal liability. Limited partners lose
\nprotection if they participate in the business (s 67(2)).
\nAn incorporated limited partnership is similar in all respects to a limited
\npartnership, except that it is a separate legal entity (s 53) with perpetual
\nsuccession. It has the same powers that a corporation does (s 53A). In other
\nrespects it is like a partnership \u2013 i.e. its general partners will be personally liable
\nfor the debts of the partnership, while its limited partners will be liable only up to
\na specified amount.
\nExercise
\nAgatha and Christie are both graduates of the School of Interior
\nDesign at the University of Sydney. They see a market for
\nproviding home-owners with household fittings, cushions and
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\nwallpapers etc. They locate premises in the northern suburbs of
\nSydney. After some careful research they conclude that they would
\nneed $ 100 000 to open a shop there. Agatha contributes $ 70 000
\nand Christie $ 30 000. They use the money to fit out the premises
\nand to buy stock. They also open a bank account in the name of
\n\u201cA&C Designs\u2019. The shop starts making sales, and profits are
\ndeposited into the A&C Designs Bank account. Nothing is written
\nbetween Agatha and Christie, but they orally agree that Agatha can
\ndraw 70% and Christie 30% of the amounts deposited into the
\naccount.
\nAgatha and Christie start to argue about the market they should
\ntarget. Agatha wanted to stock a range of expensive wallpaper,
\ncosting $ 60 per metre, but Christie disagreed. A few weeks later,
\nwhen Christie was away at a trade fair in Adelaide, Agatha placed
\nan order for 100 metres of this wallpaper. When Christie arrived
\nback she was furious, and refused to pay the bill, contacting the
\nsupplier to say that she was returning the wallpaper. However the
\nsupplier has refused to take back the paper saying \u201cA deal is a deal\u201d
\nand has said he will sue to obtain payment of the $ 6 000.
\nIn addition, a customer suffered a broken ankle after tripping over a
\nloose piece of carpeting in the shop which Christie knew about but
\nhad failed to attend to, and has said that he will be lodging a claim
\nfor $ 10 000 in damages.
\nDetermine what legal relationship (if any) exists between Agatha
\nand Christie and then state what liabilities that arise out of these
\nfacts, giving reasons for your conclusions and citing all relevant
\nstatute and case law
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\nTopic 14 The concept of incorporation
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. Understand the source of the Commonwealth\u2019s power to
\nenact laws relating to corporations;
\n2. Understand the role of ASIC and the remedies available to
\nenforce the Corporations Act 2001 (Cth);
\n3. Appreciate the concept of incorporation and its legal
\nconsequences;
\n4. Recognise the circumstances in which the law will lift the
\nveil of incorporation;
\n5. Explain the process used for registering companies;
\n6. Differentiate between different types of company according
\nto their liability and whether they are public or proprietary;
\n7. Understand what liability a promoter acting on behalf of an
\nas yet unregistered company has for contracts entered into
\non behalf of the company.
\nWeb Content
\nThe Australian Securities and Investments Commission website is
\nat www.asic.gov.au, and contains general information about
\ncompanies \u2013 their formation, characteristics, rights and obligations.
\nThe full text of the Corporations Act 2001 (Cth) can be found on
\nthe Austlii site. However, for the purposes of this subject, you need
\nknow only the sections of the Act mentioned in this Study Guide.
\nA. Introduction
\nThe Commonwealth can legislate with regard to corporations by virtue of s 51(xx)
\nof the Constitution but in New South Wales v Commonwealth (Incorporation
\ncase) (1990) 169 CLR 482, the High Court held that while the Commonwealth
\nParliament could enact legislation regulating companies once they were formed, it
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\ndid not extend to the actual formation of companies, rested with the States. This
\nraised the possibility of a company having to register in a multiplicity of
\njurisdictions.
\nThe problem was solved by each of the States agreeing in 2001 to use the
\nprovisions of s 51(xxxvii) of the Commonwealth Constitution to give to the
\nCommonwealth Parliament the power to legislate on corporations. This enabled
\nthe Commonwealth to enact the Corporations Act 2001 (Cth), so that now there is
\na single, national Corporations Act.
\nIn these notes the abbreviation \u2018CA\u2019 refers to the Corporations Act.
\nB. ASIC\u2019s enforcement role
\nCorporations are regulated by ASIC (Australian Securities and Investments
\nCommission) which is itself governed by Australian Securities and Investments
\nCommission Act 1989 (Cth) (ASIC Act).
\nASIC has numerous roles including to
\nact as a companies\u2019 registry \u2013 lodgment of documents, availability of public
\nsearches (using the ASCOT database)
\nprotect potential investors (by requiring the lodgment of prospectuses under
\nPt 6D of CA)
\nto protect shareholders (ASIC can bring actions under s 50 of the ASIC Act
\n– e.g. on behalf of a against malfeasant directors)
\nregulate trading in securities (e.g. in relation to stock market trading Parts
\n7.2 and 7.3 of the CA and takeover bids under Pt 6.5 of CA)
\nPt 3 of the ASIC Act confers wide powers on ASIC which it uses to enforce the
\nCA, including by means of criminal prosecutions (s 49 of the ASIC Act).
\nASIC can apply for an injunction under s 1324 of the CA to stop existing or future
\nbreaches of the CA.
\nContraventions of the CA can have differing consequences:
\ncriminal offence: doing what the CA forbids or failing to do what it
\nrequires amounts to a criminal offence under s 1311,
\nbut note that under s 1311(1A), contraventions of
\ncertain Parts of the CA are offences only if a penalty
\nfor such a contravention is mentioned in Schedule 3.
\nSuccessful conviction requires proof on the criminal
\nstandard \u2013 beyond a reasonable doubt.
\ncivil penalty: sections for which a civil penalty declaration can be
\nmade by a court are listed in s 1317E
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\na penalty order may be applied for by ASIC s 1317J
\nin addition, a pecuniary penalty can be imposed under
\ns 1317G if the contravention materially prejudices the
\ncorporation, its members or the corporation\u2019s ability to
\npay creditors.
\ncivil standard of proof (on a balance of probabilities) is
\nall that is required for ASIC to succeed when it brings
\ncivil proceedings: s 1317L
\nASIC or the Co can also apply for an order under s
\n1317H to recover compensation for the Co where it has
\nsuffered loss as a result of someone contravening a
\nsection listed in s 1317E
\nASIC can apply to court for an order under s 206C
\nprohibiting a person from being involved in the running
\nof a corporation for a specified period
\nthe court can grant relief from civil penalty liability
\nwhere it thinks this is equitable \u2013 s 1317S
\nWhether ASIC will chose to initiate civil penalty proceedings or to ask the
\nCommonwealth DPP to initiate a prosecution depends on (i) how serious the
\nbreach was (ii) whether it was intentional and (iii) whether the available evidence
\ncan support a finding beyond reasonable doubt (criminal standard) or on a balance
\nof probabilities (civil standard).
\nC. The concept of incorporation
\nSection 119 of the CA provides that a Co comes into existence as a body
\ncorporate upon registration – i.e. becomes a legal person. This means that it has
\nthe attributes of a body corporate at common law including:
\nLegal existence separate from its members
\nPerpetual succession – ie continued existence until de-registered (confirmed
\nby s 601AD(1)), irrespective of the changing identities of its shareholders.
\nCapacity to own property \u2013 the shareholders of a Co have no legal interest
\nin property, only the Co does: Macaura v Northern Assurance Co Ltd
\n[1925] AC 619
\nCapacity to sue and be sued in its own name – also note, only Co, not
\nmembers, can sue on its behalf, and note that the members can sue the Co.
\nSection 124(1)(a): a Co has the legal capacity and powers of an individual (i.e. a
\nnatural person) and the powers of a body corporate.
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\nThe powers of body corporate are listed in s 124(1).
\nSection 22 of the Acts Interpretation Act 1901 (Cth) states that a \u2018person\u2019 includes
\na body corporate, unless the contrary intention appears. Thus generally a
\ncorporation can do whatever a natural person can do, and is subject to the same
\nprohibitions as is a natural person.
\nThe fact that a Co is separate from its members has certain consequences:
\n\uf0b7 The liabilities of Co are its own. Shareholders of a limited liability
\ncompany (which 99% of companies are) have no liability for Co debts –
\ntheir liability is limited (hence \u2018limited liability\u2019) to pay for their shares (s
\n516).
\n\uf0b7 The Co is not the agent of its shareholder(s). They merely own parts of it,
\nbut it is the Co (acting through its board of directors, who are agents of the
\nCo) which does things on its own behalf.
\nHow much control the shareholders in general meeting have over the directors
\ndepends on the Co\u2019s constitution.
\nThe concept of separate personality and limited liability of shareholders was
\nestablished in Salomon v Salomon & Co Ltd [1897] AC 22
\nSalomon formed a company (Salomon & Co Ltd). He transferred the assets of his
\nbusiness (a shoe shop) to the Co \u2013 the company paid him with shares and a
\ndebenture. So, Salomon changed from being the owner of a shoe store to being
\nthe shareholder and secured creditor of a company which owned a shoes
\nstore. A debenture is a certificate indicating that someone has provided capital to
\na Co in the form of a loan, and that the loan is secured by company assets. This
\nmeans that that if the Co becomes insolvent, the debenture holder has to be
\nsatisfied out of company assets first, before any unsecured creditors got anything.
\nDebentures can also be traded \u2013 i.e. the holder can sell the debenture to someone
\nelse.
\nNote that Salomon acting in three capacities: 3rd party seller of business to the Co
\n(in exchange for shares and the debenture), majority shareholder in the Co and
\nM.D. elected by majority shareholder. Salomon later sold debenture to a 3rd party.
\nSubsequently the company went insolvent.
\nThe creditors of the Co (i.e. people who had supplied goods to Salomon & Co
\nLtd) sought to have debenture holder denied preference on basis that company
\nwhich issued debenture was a sham, that the debenture was thus invalid, and that
\nSalomon was thus personally liable to them and to the debenture holders as
\nequally ranking creditors. The court rejected the creditors\u2019 argument, holding that:
\n\uf0b7 The company was an entity separate from Salomon, its majority
\nshareholder.
\n\uf0b7 Publically-lodged documents were available to creditors to discover the
\nexistence of the debenture.
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\n\uf0b7 There was no indication of any fraud – ie intent to deceive – in the
\nestablishment of company.
\nIn this way, the principle of \u2018corporate veil\u2019 was established.
\nSalomon was affirmed for NZ in Lee v Lee\u2019s Air Farming Ltd (1961) AC
\n12. Lee formed and owned a crop-spraying company. As MD of the Co, he
\nemployed himself as pilot. The court held that, even though he was owner of
\nthe Co and its MD, he was an employee under worker\u2019s compensation
\nlegislation, and his wife could claim compensation when he was killed in an
\naircraft. The court held that the fact that Lee as shareholder was behind the
\ncompany veil was irrelevant \u2013 it had still employed Lee. This case also
\nshows that a shareholder can contract with the Co in which he \/ she owns
\nshares.
\nIn Walker v Wimborne (1976) 137 CLR 1, HC held that fact that several
\ncompanies belonged to a corporate group did not entitle the directors of any
\nparticular Co to move funds between them and to use property of one as
\nsecurity for liabilities of another – a director owes fiduciary duty to the
\nspecific Co of which he is a director, not to the group as a whole.
\nIndustrial Equity Ltd v Blackburn (1977) 137 CLR 567 \u2013 the mere fact that
\ngroup accounting statements were prepared did not entitle holding Co to pay
\ndividends out of subsidiary profits.
\nThe separate legal existence of a company means that it is the company, not its
\nshareholders, own company assets, and harm to assets of Co may be sued for only
\nby Co, not by the shareholders:
\nMacaura v Northern Assurance Co Ltd [1925] AC 619 a timber estate
\nowner sold estate to company in exchange for shares (like Salomon). He,
\nnot company, took out an insurance policy on the timber. Sixteen (!!) days
\nlater, a fire destroyed the timber. The policy holder sought to recover on the
\npolicy. The court held that only the company (as owner) had an insurable
\ninterest in the timber. (If you want to use incorporation to protect your
\npersonal estate from business losses, why should you still be entitled to an
\ninterest in what is now company property?). The shareholder has an interest
\nin a Co., but only the Co. has an interest in its property.
\nD. Lifting the corporate veil
\nIn certain limited circumstances, the law \u2018lifts the veil\u2019 – i.e. will allow the courts
\nto take cognisance of the human controllers of the Co, and to impute the Co\u2019s
\nactions to them.
\nGilford Motor Co Ltd v Horne [1933] Ch 935 – avoidance of contractual
\nobligations: An employee of the plaintiff had agreed to a restraint of trade.
\nHowever, he then began engaging in the same line of business, signing
\ncontracts in the name of a company formed by him, of which his wife and
\nanother former employee were shareholders. The court held that the
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\nrestraint had been broken, looking behind the Co and identifying him as its
\ncontroller.
\nJones Re Darby; Ex parte Brougham [1911] 1 KB 95 – lifting the veil where
\nfraud has occurred \u2013 i.e. where a company is formed for the purpose of
\ndefrauding investors or creditors, the court will attribute the intentions of its
\nowners to it.
\nDaimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307 \u2013 where
\nthe courts lift the veil because a company is being used to escape the effect
\nof a law \u2013 here during WW1 trading with Germany was prohibited, and the
\ncourts held that to trade with a UK registered Co with German shareholders
\nwas really to trade with the enemy.
\nGreen v Bestobell Industries Ltd [1982] WAR 1 – Green formed a Co, C
\nLtd, to tender for a project ( help with nursing paper writing from experts with MSN & DNP degrees). B Ltd (of which he was a director, and thus
\nowed a fiduciary duty) was also tendering. The establishment of the
\ncompeting business (C Ltd) was an obvious breach of the fiduciary duty
\nowed by Green to B Ltd. When proceedings were brought for breach of
\nfiduciary duty, C Ltd was held liable to B Ltd, as C Ltd had participated in
\nthe breach. In other words, although the competing bid had been made by C
\nLtd, the court looked behind C Ltd and attributed its acts to Green, its
\ncontroller.
\nThere is also a statutory instance where the veil is lifted:
\nThe CA looks behind the Co – in s 588V-X, which provides that, in the
\ncontext of a corporate group, a holding Co may be liable for its subsidiary\u2019s
\ninsolvent trading where the holding Co failed to prevent the subsidiary
\nincurring a debt where there were reasonable grounds for the holding Co to
\nsuspect that the subsidiary was insolvent.
\nApart from the above specific circumstances, which have an element of
\nwrongdoing or deceit common to all of them, the courts in Australia will not lift
\nthe veil.
\nHere it is important to note that, unlike courts in the UK, Australian courts have
\nnot accepted the argument that, just because a holding company wholly controls a
\nsubsidiary, the subsidiary should be viewed as the agent of the holding company,
\nand that therefore the holding company can be held liable in contract or tort for
\nthe acts of the subsidiary \u2013 see Briggs v James Hardie & Co Pty Ltd (1989) 16
\nNSWLR 549 and ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005)
\n91 SASR 570. That would wholly undermine the Salomon doctrine, a cornerstone
\nof which is that a shareholder (be they a human being or a holding company) is
\nnot liable for the acts of a company in which they own shares.
\nE. Formation of companies
\nA person may purchase an already existing shelf Co from a firm that owns them
\n(i.e. the purchaser simply purchases all the shares in the Co from the lawyer).
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\nAlternatively, a person may register a Co themselves.
\nThe applicant (sometimes called a \u2018corporator\u2019 lodges an application with ASIC
\nunder s 117(1), giving the information required in s 117(2).
\nTypes of companies (s 117(2)(a)) – governed by s 112, discussed below.
\nNote the requirement for consents by directors and the company\u2019s secretary
\n– s 117(2)(c)-(f) and (5) \u2013 a private company (Pty Co) must have at least 1
\ndirector. Public companies (Ltd) must have at least three and a company
\nsecretary (can be the same person).
\nIf a Co is to have a constitution, it must lodge a copy – s 117(3). The Co
\nmay however decide simply to regulate its affairs by the default \u2018replaceable
\nrules\u2019 contained in the CA.
\nNote that under s 22 of the Acts Interpretation Act 1901 (Cth) (defining \u2018person\u2019)
\nas read with s 231, a body corporate may be a member of a Co – i.e. one Co may
\nown shares in another.
\nA Co must have at least one member – s 114. If it ceases to have at least one
\nmember, ASIC can apply to court for winding up on 1 month\u2019s notice – s 462(2A).
\nUpon receipt of application, ASIC may register the Co under s 118, assigning an
\nAustralian Company Number (ACN). ASIC gives a certificate of registration
\nstating info in s 118(c).
\nThe certificate is conclusive evidence of valid incorporation – s 1274(7A).
\nUnder s 119, the Co comes into existence upon registration, and directors and
\nsecretary automatically take office – s 120(1).
\nF. Company name
\nUnder s 148(1) a Co can have a name requested upon registration or may simply
\nuse its ACN as its name.
\nIt is possible to reserve a name for up to two months prior to registration – s 152.
\nWhether Co has a name or uses ACN, it must indicate what type of company it is
\nwhenever it uses its name (types of companies are dealt with below). So it must
\nhave
\n\u2018Limited\u2019 (or Ltd) after its name if a limited liability public Co, or
\n\u2018Proprietary Limited\u2019 (Pty Ltd) if it is a limited liability private Co –
\ns 148(2)
\njust \u2018Company\u2019 (Co) if it is an unlimited public company
\n\u2018Proprietary\u2019 (Pty) if it is an unlimited proprietary Co – s 148(3)
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\n\u2018No Liability\u2019 (NL) if it is a no liability Co – s 148(4)
\nThe requirement to use \u2018Ltd\u2019 enables 3rd parties dealing with the Co to be aware
\nof its members\u2019 limited liability.
\nAbbreviations as provided in s 149 may be used (Ltd, Pty, Co, NL)
\nThe terms \u2018Limited\u2019, \u2018Proprietary\u2019, \u2018No Liability\u2019 + abbreviations thereof cannot
\nby businesses that are not companies – s 156
\nThe Co must set out name + ACN on all public documents (defined in s 88A) and
\nnegotiable instruments – s 153
\nThe Co can change its name by special resolution and application to ASIC under s
\n157 (provided name is available under s 147).
\nG. Types of companies
\nUnder s 57A \u2018corporation\u2019 is defined as including a \u2018company\u2019, which is in turn
\ndefined in s 9 as meaning a Co registered under the CA. Thus a company
\nregistered under the CA is just one type of corporation.
\nTypes of companies are listed in s 112:
\nThere are four different classifications pertaining to types of liability
\nCo limited by shares
\nCo limited by guarantee
\nUnlimited Co
\nNo liability Co
\nWe will deal with companies limited by shares, as the overwhelming majority of
\ncompanies are of this type.
\nThere are two classifications pertaining to status
\nPublic Co (can be of any of the above 4 types of liability)
\nPrivate Co (can be either limited by shares or unlimited)
\n(i) Company limited by shares
\nThis is the most common form of Co (98% of companies are limited by shares).
\nThe shareholders\u2019 liability is limited to paying into the Co whatever amount they
\nagreed upon in return for shares – s 516. If this amount was not fully paid by
\nshareholder upon acquisition of shares, the Co can call for the amounts
\noutstanding.
\nA holder of unpaid shares may sell them to someone-else, in which case the new
\nowner takes the liability to pay what is owing. However, a past members\u2019 liability
\nto contribute capital for unpaid shares continues for 1 yr after selling their shares
\nbut only if
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\n\uf0b7 the company is being liquidated (s 521),
\n\uf0b7 the company does not have capital to pay for any liability incurred before
\nthe past member ceased to be a member (s 520), and
\n\uf0b7 the subsequent shareholder is unable to pay what is owing (s 522).
\nThe fact of limited liability indicated by use of \u2018Ltd\u2019 after Co\u2019s name.
\nA share = a bundle of rights, most importantly to:
\nattend and vote at meetings
\nreceive dividends (if declared)
\nreceive return of contribution when Co is wound up (assuming it is able to
\nmeet its debts)
\nShares can be of different classes with different rights.
\nCompanies limited by shares can be either public or private.
\n(ii) Proprietary (private) and public companies
\nAll companies, whatever their type of liability must be either proprietary or public
\n\u2013 s 9 defines \u2018public Co\u2019 as any Co which isn\u2019t Pty.
\nPty companies used where the corporators do not wish to offer shares to the
\npublic.
\nSection 112(1) \u2013 a Pty Co must be limited by shares, or
\nan unlimited Co.
\nSection 113 requires that proprietary companies
\nHave no more than 50 non-employee shareholders
\nNot engage in any fundraising activity that would require the lodging of a
\nprospectus under Part 6D (which means make any offer other than one
\nexcluded from Part 6D), offers to existing shareholders or employees
\nexcepted.
\nIf a Pty Co infringes s 113, ASIC can compel it to convert to a public Co (s 165).
\nProprietary companies can be classified as either Large or Small Proprietary
\nCompanies. Under s 45A a company is a small proprietary company if it satisfies
\nat least two of the following criteria.
\na. consolidated gross operating revenue is less than $ 25m
\nb. value of consolidated gross assets is less than $ 12.5m
\nc. it has fewer than 50 employees.
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\nIf a company cannot satisfy two of the three it is a large proprietary company.
\nThere are advantages in being classified as a small Proprietary Company. Large
\nPty Companies and public companies have to prepare financial reports (s 292) and
\nmust have these financial reports audited (s 301). Small Pty companies need only
\nprepare audited reports if requested by ASIC or shareholders holding at least 5%
\nof the total shares. Large Pty companies must send copies of financial report,
\ndirectors\u2019 report and auditor\u2019s report to members (s 314) and must lodge financial
\nreports and directors reports with ASIC (s 319).
\nEssentially the Pty Co exists to provide a simpler vehicle for business than the
\npublic Co. Because it does not solicit investments from the public, it is subject to
\nless rigorous control than are public companies. Some of these are:
\nOnly 1 director required, whereas public companies require 3: s 201A(2).
\nNo need to hold an AGM.
\nInformal procedure of passing resolutions without meeting is available: s
\n249A.
\nCertain restrictions on appointment and removal of directors apply only to
\npublic companies (see ss 201D and ss 203D and E).
\nDirectors of public companies must be individually voted onto the board,
\nunless by unanimous agreement of GM \u2013 s 201E.
\nDirectors of public companies must be able to be removed by resolution of
\nshareholders in GM \u2013 s 203D(1) \u2013 Pty companies can deal with this in their
\nconstitution, otherwise replaceable s 203C gives power to GM.
\nA director of Pty Co can be present at board meeting and vote on matter in
\nwhich he is interested (s 194) subject to disclosure of interest (s 191),
\ndirectors of public companies cannot attend or vote \u2013 s 195(1) \u2013 unless
\nexempted by board \u2013 s 195(2).
\nA company may change its type by special resolution in accordance with the
\noptions permitted in s 165.
\nApplication is made to ASIC under s 163, which approves change under s 164.
\nSection 165 states that ASIC itself can direct change from Pty to public Co if s
\n113 no longer being complied with.
\nH. Holding and subsidiary companies \u2013 corporate
\ngroups
\nA subsidiary is defined in s 46(a) as a Co in respect of which another Co
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\ncontrols the composition of the board \u2013 i.e. can control appointment or
\nremoval of a majority of its directors \u2013 s 47. This must be a legally
\nenforceable (not merely de facto) power, or
\ncan cast or can control the casting of 50% of votes at AGM, or
\nholds more than 50% of share capital by value (excluding preference
\nshares).
\nIf C is a subsidiary of B which is in turn a subsidiary of A, then C is also a
\nsubsidiary of A \u2013 s 46(b).
\nAlso important is the concept of a related body corporate \u2013 s 50, which makes
\ndifferent subsidiaries of the same holding Co related to each other.
\nIn practice, many companies are part of a group of companies. A group occurs
\nwhen one or more companies is in the hands of another company. There are many
\nreasons for conducting business through a group
\n\uf0b7 different aspects of the enterprise can be separated,
\n\uf0b7 one part can be isolated through the limited liability doctrine. It will not
\nthen be liable for debts of another part and vice versa.
\nCorporate groups are very common. Most large public companies will have at
\nleast one controlled entity.
\nWithin corporate groups each company is treated as a separate entity by the law.
\nI. Foreign companies
\nA body corporate incorporated outside Australia cannot do business in Australia
\nunless it is registered under the CA \u2013 s 601CE.
\nJ. ASX listing
\nIt is important to understand the difference between a listed company and an
\nunlisted company. A listed company is one whose shares are listed for quotation
\non Australian Stock Exchange Limited (ASX). This means that people who wish
\nto do so can buy and sell those shares from or to other investors through the stock
\nmarket conducted by ASX.
\nOf over one million companies in Australia, only about 1,300 are listed. Note that
\nonly a public Co can be listed on the ASX.
\nThe ASX Listing Rules are rules drafted and imposed by the Australian Stock
\nExchange. When a company applies to be admitted to the Official List of ASX,
\nand to have its securities quoted, it agrees to abide by the Listing Rules. The
\nListing Rules contain requirements additional to those contained in the
\nCorporations Act and the general law, which are designed to protect public
\ninvestors and promote a transparent and informed market in securities.
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\nOnly listed companies are bound by the Listing Rules. Sometimes the listing rules
\noperate to impose restrictions on entities controlled by listed companies.
\nK. Promoters and pre-incorporation contracts
\nEven though companies can be registered fairly quickly, it still sometimes occurs
\nthat the people who are setting up the company enter into arrangements and
\ncontracts in anticipation of the company coming into existence \u2013 e.g. leasing
\npremises and buying furniture. These people are called promoters. This creates an
\narea of legal risk for them, because the issue arises as to who \u2013 the promoters or
\nthe company \u2013 will be liable on any contract entered into by the promoters on
\nbehalf of the as yet unregistered Co.
\nOne way (and the safest way) of avoiding this problem is for promoters to buy an
\nalready existing shelf Co, elect themselves as directors and then enter into
\ncontracts as agents of the Co. In this way there will be no doubt that it is the Co
\nand not the promoters personally which will be liable.
\nBut what of the situation where the Co does not exist and the promoters enter into
\ncontracts? How can it be made liable for pre-incorporation contracts?
\nUnder the common law, a promoter could not be an agent because the principal
\ndid not exist, nor could the Co ratify once it came into existence, because under
\nthe law of agency, the principal must have existed at the time the agent purported
\nto contract on its behalf.
\nThe promoter would be personally liable on the basis of breach of warranty of
\nauthority – i.e. when someone purports to contract on behalf of another, they
\nimpliedly warrant that they have authority. And if the other person (the principal)
\ndoes not yet exist, the \u2018agent\u2019 clearly could not have had authority.
\nThis area has now been reformed by s 131, which now covers this issue
\nexclusively (s 133) where a person acts on behalf of an as yet unregistered Co:
\nUnder s 131(1) a Co may ratify pre-incorporation contracts within the time
\nspecified in the contract or within a reasonable time. Note that if a time is
\nspecified and no ratification occurs, the contract is not binding on the Co.
\nIf (i) the Co is never registered or (ii) is registered but does not adopt the
\ncontract, then the promoter is liable to 3rd party in the same way as the Co
\nwould be for non-performance – s 131(2).
\nIf the situation is one where the Co has been registered but refuses to adopt
\na pre-incorporation contract, then in order to deal with the situation where
\nthe company has received some benefit under the contract, the court may,
\nunder s 131(3) order the Co to give any remedy it feels appropriate,
\nincluding requiring the Co to pay a proportion of the damages for which the
\npromoter is liable, transfer property received by virtue of the contract or pay
\nan amount to the 3rd party.
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\nUnder s 131(4), if the Co does adopt the contract but fails to perform, the
\ncourt may order the promoter to pay some of the damages for which the Co
\nis liable.
\nExercise
\nOtis Lillicrap is a scallop fisherman in NSW. Stocks of scallops
\nare dwindling, and so the State Parliament has enacted legislation
\nwhich provides that
\n\u201cEach person wishing to fish for scallops must obtain an
\nannual licence, may be granted one licence only and is
\nlimited to taking 50 scallops from the sea per month\u201d.
\nOtis has incorporated three companies \u2013 Otis\u2019 Fishing Pty Ltd,
\nSouth Coast Scallops Pty Ltd and Lillicrap\u2019s Fishing Pty Ltd, and
\nas managing director of each applies for 3 licences, as well as a
\nlicence for himself. Assume that you are legal adviser to the NSW
\nFisheries Department. What would you advise in relation to the
\nfour applications? Cite relevant case law. (Do not look at fisheries
\nlegislation when researching this problem \u2013 consider it only from
\nthe perspective of corporations law principles).
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\nTopic 15 Company liability in crime, tort and
\ncontract
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service) you should be able to:
\n1. Understand how a body corporate can be liable in crime;
\n2. Appreciate the different theories that have been used to affix
\ncriminal liability onto a company;
\n3. Understand how the doctrine of vicarious liability operates
\nto make a company liable in tort;
\n4. Identify who are the agents of a company, and what express,
\nimplied and ostensible authority they have;
\n5. Understand the Turquand rule;
\n6. Be able to explain the operation of the statutory regime in ss
\n125-129 of the Corporations Act 2001 (Cth).
\nA. Introduction
\nThe law faces a problem in that in order to enforce civil and criminal liability
\nagainst a Co, some way has to be found round the conceptual problem of how to
\nimpute liability to an entity that has no physical existence. Obviously this must be
\nthrough the actions of its human representatives.
\nB. Company liability in crime
\nMany statutes, for example environmental and OH + S statutes impose criminal
\nliability in cases of breach. Under what circumstances can a company (as distinct
\nfrom the person who performed the Act) be found liable for an offence?
\nThe starting assumption is that because under the general law (s 22 Acts
\nInterpretation Act (Cth)) \u2018person\u2019 includes a body corporate, companies can be
\ncriminally liable for any crime for which a natural person can be prosecuted.
\nIn addition, s 12.1(2) of the Criminal Code (Cth) provides that a body corporate
\ncan be found guilty of an offence, and s 4B of the Crimes Act 1914 (Cth) provides
\nthat where an offence is stated as being punishable only by imprisonment, a Co
\nmay nevertheless be found guilty of the offence and fined.
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\nThe key question which determines whether a Co is liable under criminal statutes
\nfor the acts of its employee or agent is whether the act (actus reus) and fault (mens
\nrea) of the employee or agent will cause the company to become liable along with
\nthat person. In this context, \u2018fault\u2019 can mean intent, recklessness or negligence,
\ndepending on what the elements of the offence are.
\nSection 12.2 of the Commonwealth Criminal Code states that whether the
\nactus reus of an offence has been performed by a company depends on
\nwhether it was performed by an employee, agent or officer of the Co, acting
\nwithin the actual or apparent scope of their employment or authority.
\nAccording to s 12.3(1), the mens rea element of an offence will be attributed to a
\ncompany if
\nit expressly, tacitly or impliedly authorised or permitted the commission of
\nthe offence. The evidence for this can, under s 12.3(2) be provided by the
\nfact that the board or \u2018high managerial agent\u2019 expressly, tacitly or impliedly
\nauthorised the offence, unless the board can show that it exercised due
\ndiligence to prevent the conduct.
\na corporate culture existed that directed, encouraged, tolerated or led to the
\nunlawful conduct or
\nthe body corporate failed to create and maintain a culture that required
\ncompliance.
\nFor the purposes of these provisions s 12.3(6) states that \u2018high managerial
\nagent\u2019 means an employee, agent or officer with duties of such
\nresponsibility that their conduct may fairly be assumed to represent the body
\ncorporate\u2019s policy, while \u2018corporate culture\u2019 means an attitude, policy, rule,
\ncourse of conduct or practice.
\nWhether a corporate culture requiring compliance exists often depends on whether
\ndue diligence has been adhered to by the officers of the corporation. In SPCC v
\nKelly (1991) 5 ACSR 607 the court held that whether \u2018due diligence\u2019 has taken
\nplace depends on the facts of each case and requires that the defendant took such
\nsteps as a reasonable person would have in his or her circumstances.
\nNote that, as is stated by s 3.1(2) of the Criminal Code, some offences may not
\nrequire that fault be proved. In other words, in relation to those offences, liability
\narises without intent, recklessness or negligence, and the mere performance of the
\nact amounts to a breach of the law. In such cases, the company is liable
\nirrespective of the fault of any of its human employees. All that is required is than
\nan officer or employee have performed the act.
\nC. Company liability in tort
\nAs is true of any employer, a Co is vicariously liable for the torts of its employees
\ncommitted within the course and scope of their employment:
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\nIn Citizens Life Insurance Co Ltd v Brown [1904] AC 423, a Co was held
\nliable in defamation for a defamatory letter sent out by one of its employees.
\nIn Hollis v Vabu Pty Ltd (2001) 207 CLR 21, a Co was held liable for
\ninjuries caused by one of its employees, a bicycle courier, to a pedestrian.
\nD. Company liability in contract
\nThe question to be addressed in the subsequent sections of this topic (sample nursing essay examples by the best nursing assignment writing service) is: who has
\nthe authority to bind a Co in contract? The theories discussed earlier that are
\nused to determine corporate liability in crime and tort are not at all relevant
\nto liability in contract.
\nThe answer to this question is given by the rules of agency. You should refer
\nback to the Topic in which we discussed the law of agency. In order for an agent
\nto bind a principal the agent must have authority to do so. In the context of a Co
\nthis means that some human agent must have authority from the Co. Section
\n126(1) provides that a Co may exercise its power through an agent. However, the
\ncommon law has been superseded in this area by the statutory provisions
\ncontained in ss 126-130 of the CA.
\n(i) Express authority
\nIn the context of a Co, actual authority will be conferred by the Co constitution or,
\nin its absence in accordance with the replaceable rules of the CA.
\nIn general, in the case of any Co with more than 1 director, authority is vested in
\nthe board collectively – s 198A In the case of a single-director company, that sole
\ndirector has the power to bind the company \u2013 s 198E(1).
\nAny act lying outside the authority of the directors or the board can be performed
\nby the members in general meeting – s 198A(2)
\n(ii) Implied authority of Co officers
\nThe board may appoint one of its members as Managing Director (conferring on
\nthat person the powers of the board – s 198C(1)), or may delegate its powers to
\nsomeone-else (s 198D(1)(d)), who is usually referred to as the CEO.
\nIn the absence of any explicit conferral of power, the MD \/ CEO is taken as
\nhaving such authority as the common law implies in that position which, as was
\nstated in Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5
\nACSR 424 means generally being in charge of the business of the Co, including
\nthe authority to bind the Co.
\nNote however that the MD\u2019s authority is limited to acting within the normal
\ncourse of business of the particular Co of which he is MD – thus he could not do
\nsomething as radical as sell the Co\u2019s entire undertaking. The fact that authority
\nrelates to the particular Co concerned means that the type of transaction which
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\ncould be entered into by the MD of BHP would be far larger than one entered into
\nby the MD of a small family concern.
\nThus in Re Tummon Investments Pty Ltd (in liq) (1993) 11 ACSR 637 the
\ncourt upheld the liquidator\u2019s rejection of a claim by L Ltd which had lent 2
\nx $ 6 000 to T Ltd, represented by its MD Mr T, because loans of that size
\ndid not lie within the authority of an MD of a Co of that size.
\nAn ordinary director has no authority implicit in that position, the only exception
\nbeing where there is only 1 director: The sole director \/ shareholder of a Pty Co
\nhas authority to represent the Co – s 198E(1)
\nThe Chairman of the board does not, by virtue of that office alone, have any
\nimplied authority.
\nThe Co Secretary has such authority as is implied in his job as chief
\nadministrative officer of the Co, s was held in Panorama Developments (Guilford)
\nLtd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 where the court held that a
\nCo was bound by its Secretary\u2019s contracts to hire luxury cars.
\nThe board might appoint other executives to positions which carry implied
\nauthority (likely to be a very large number of people) as in
\nAWA Ltd v Daniels t\/as Deloitte Haskins & Sells (1992) 7 ACSR 759 where
\nthe court held that someone appointed as forex dealer had the authority to
\nenter into contracts to buy forex from banks.
\nIt is important to realise that the vast majority of company contracts are entered
\ninto by employees who are very low down in the company hierarchy, but
\nnevertheless have authority to bind the Co by virtue of the position they have been
\nappointed to. Thus while the MD of a large chain of supermarkets has plenary
\nauthority (that is the authority to enter into any type of contract binding the Co), it
\nis equally true to say that the worker at a check-out binds the company when they
\nsell groceries to a customer.
\n(iii) Ostensible authority
\nAs stated above, ostensible \/ apparent authority may arise through acquiescence
\nby the board in conduct by someone who acts on their behalf without express
\nauthority and without being appointed to a position which carries implied
\nauthority. The classic case of ostensible authority is Freeman and Lockyer v
\nBuckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
\nThe board knowingly (this would have to be proved by the 3rd party seeking
\nto hold the principal – in this case the board – liable) allowed an ordinary
\ndirector (Kapoor) to act as M.D on several occasions. The Co. was held
\nbound by contract Kapoor had entered into with a firm of architects.
\nRemember that the representation of ostensible authority must be made by
\nsomeone with actual authority. Usually this will be by the board, but it could be
\nby the single director of a single-director Co or anyone else vested with actual
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\nauthority, as held in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty
\nLtd [1992] 2 VR 279.
\nE. The Turquand rule
\nAlthough now of only historical interest in view of the fact that it has effectively
\nbeen replaced by the statutory regime contained in the CA (and so you must
\nanswer questions on this area of law by referring to the provisions of the Act
\nand cases that have arisen under it), it is necessary to examine the Turquand
\nrule in order to understand the background against which ss 126-130 of the CA
\nwere enacted.
\nBecause the conferral of authority on a Co agent requires compliance with
\nformalities (eg the convening of the board, the presence of a quorum, the passing
\nof a board resolution to confer authority etc) which it would be very difficult for a
\n3
\nrd party to verify, the court in
\nRoyal British Bank v Turquand (1856) 119 ER 886 developed a rule (known
\nas the Turquand rule or sometimes as the \u2018indoor management\u2019 rule) which
\nis to the effect that a 3rd party is entitled to assume that internal formalities
\nhave been complied with when dealing with Co agents, and that the Co is
\nestopped from pleading that they have not. This case involved a Co, the
\nconstitution of which required that the board could borrow money only if
\nauthorised by a resolution passed at a GM. No resolution had been passed,
\nbut the court held that the bank was entitled to assume, without inquiring,
\nthat it had, because the Directors collectively, as the board, had authority to
\nbind the Co.
\nA practical example of the operation of the Turquand rule would be where the
\nMD of a large Co is prohibited from entering contracts of over $ 10 000 – a sum
\nwhich lies within the authority usually implied in his position as MD of a large Co
\n– without a resolution passed at a GM. In that situation his express authority is
\nless than his implied authority. Even if a 3rd party is aware of the restriction, he
\ncan contract safely with the Co, as he \/ she is able to assume that the GM
\nresolution has been passed.
\nThe Turquand rule would however not apply where a person has knowledge –
\neither actual or constructive – that a formality has not been complied with.
\nIn Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR
\n146, Mr X, who was a Director of N Ltd, had signed a document purporting
\nto pass a mortgage over land which was N Ltd\u2019s major asset as security for a
\nloan for another unrelated Co of which he was also a director. The
\ndocument had been attested by his son Y as Co Sec (even though he had not
\nbeen appointed as such). Under N Ltd\u2019s constitution a director could pass a
\nmortgage only if the board had passed a resolution giving authority to do so
\nand the mortgage was also signed by the Co Secretary. The court held that
\nthe lender of the money could not rely on the Turquand rule because in the
\ncircumstances it should have been put on its inquiry to check the director\u2019s
\nand Sec\u2019s authority given that the transaction appeared to be unrelated to N
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\nLtd\u2019s business and not to its benefit \u2013 in other words, there was something
\nsuspicious about the transaction.
\nThe Turquand rule was undermined by the doctrine of constructive notice in terms
\nof which 3rd parties were presumed to know of the Co\u2019s public documents, and
\nthus had to inquire whether any limitations contained therein had been complied
\nwith. Subsequently however the doctrine of constructive notice was abolished (s
\n130), and so 3rd parties are not presumed to know of the existence of limitations
\neven if they appear in a Co\u2019s constitution (in any event note that only public Co\u2019s
\nare required to lodge their constitutions – s 117(3)).
\nNote also that the Turquand rule did not relieve the 3rd party seeking to bind the
\nCo to show that the person they were dealing with had some kind of authority –
\nexpress, implied or ostensible. All the rule did was exempt them from checking
\nthat formalities have been complied with.
\nF. The statutory regime
\nThe Turquand rule has effectively been replaced by the statutory regime
\ncontained in the CA. For this reason it is the Act and not the Turquand rule
\nthat should be applied when answering problems dealing with this area of the
\nlaw. In particular, the Act contains a different standard of knowledge required on
\nthe part of 3rd parties before they are denied the right to rely on fulfilment of
\nindoor management restrictions than was set in cases such as Northside
\nDevelopments Pty Ltd v Registrar-General (1990) 170 CLR 146
\nVideo
\nThe CA effectively adopts the Turquand rule, in that under s 128(1) a person
\ndealing with the Co is entitled to make s 129 assumptions, which include
\ns 129(1) that the company representative is complying with the Co\u2019s
\nconstitution and replaceable rules
\ns 129(2) that a person named as D or Sec of the Co in publicly available
\ndocuments (such as the ASIC register) has been validly appointed and has
\nthe authority of a director or Sec of a similar Co
\ns 129(3) that a person held out as officer or agent has been validly appointed
\nand has authority of that kind of officer or agent of a similar Co (ie note that
\nthe scope of the authority that an agent can be assumed to have will be
\nlimited by the size and scope of the company\u2019s business)
\ns 129(4) that officers and agents properly perform their duties to Co \u2013 ie are
\ncomplying with any restrictions imposed by the Co
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\ns 129(5) that a document has been validly executed without seal if s 127(1)
\nappears to have been complied with
\ns 129(6) that a document has been validly executed under seal if s 127(2)
\nappears to have been complied with
\nSection 128(2) protects those who acquire interests in property from those who
\nhave in turn acquired them from a Co by providing that the first party is entitled to
\nmake the s 129 assumptions in respect of the Co and the other party.
\nSection 128(3) provides that the s 129 presumptions are available even in cases of
\nfraudulent conduct or forgery – in other words, the fact that a company
\nrepresentative has forged someone’s signature on a document during the course of
\nengaging in a transaction with a 3rd party does not prevent a 3rd party from
\npresuming that that signature is genuine.
\nSection 128(4) is the statutory equivalent of the exception to the Turquand rule
\nrelating to a person\u2019s knowledge – those who \u2018knew or suspected\u2019 – that the
\nassumptions were incorrect. The onus of proving such knowledge or suspicion
\nwould lie on the Co.
\nOne must analyse very carefully the meaning of the words \u2018knew\u2019 and \u2018suspected\u2019
\n\u2013 they are different from what applied under common law cases such as Northside
\nDevelopments:
\n\u2018knew\u2019 \u2013 means actual knowledge \u2013 it does not include constructive
\nknowledge.
\nsuspected\u2019 \u2013 requires that 3rd party must have formed a positive opinion, no
\nmatter how weak, that an assumption is incorrect. Mere ignorance as to
\nwhether it is correct (which might put the 3rd party on their inquiry under the
\nold common law doctrine) would not suffice.
\nIn Oris Fund Management Ltd v National Australia Bank [2003] VSC 315
\nthe court held that the word \u2018suspect\u2019 in s 128(4) should be interpreted
\nsubjectively – that is, as requiring that the 3rd party be shown to have
\nactually suspected that an assumption was not true. It would not be enough
\nto show that the 3rd party ought objectively to have suspected (ie that a
\nreasonable person in his position would have suspected). The same
\ninterpretation was applied in Sunburst Properties Pty Ltd v Agwater Pty Ltd
\n[2005] SASC 335.
\nNotwithstanding the courts\u2019 interpretation that \u2018suspected\u2019 requires proof of
\nsubjective suspicion on behalf of the 3rd party, if the company wishes to
\nevade liability under s 128(4), practically speaking there will hardly ever be
\nevidence of what the 3rd party\u2019s state of mind was \u2013 unless the 3
\nrd party
\nadmits to having had suspicions (which of course is highly unlikely, given
\nthat the 3rd party will be trying to hold the company liable on the contract).
\nThis means that whether the 3rd party suspected something really depends
\non an analysis of all the circumstances of the case to determine whether
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\nthe 3rd party must have suspected that a s 129 assumption was not true. In
\nother words, a suspicion on the part of the 3rd party will often be inferred
\nfrom the facts. If the facts were such that suspicious circumstances would
\nhave been evident to the 3rd party, then the courts will find that s 128(4)
\napplies.
\nNote that where in ss 129(2) and (3) the CA states that a person is entitled to
\nassume that someone named in documents lodged with the ASIC as a director or
\nheld out by the Co as such has authority, it is such authority as is held by a
\ndirector of a similar Co. In other words, the statute incorporates the common law
\nposition re the existence of implied and ostensible authority – i.e. that it relates to
\nthe size and business of the Co.
\nA director who purports to bind a 3rd party to a Co but who turns out not to have
\nauthority will be liable to the 3rd party for breach of implied warranty of
\nauthority.
\nG. The ultra vires rule and restrictions on a corporation\u2019s
\ncapacity in its constitution
\nStatutory assumptions are also relevant to the removal of the ultra vires rule from
\ncorporations law.
\nCompany constitutions sometimes have clauses in them that restrict the
\ncompany\u2019s operations to certain activities. But what happens if a company officer
\nengages in a transaction which lies beyond the scope of (ultra vires) the
\nconstitution? Under s 125(1) and (2) acts are not invalid merely because they
\ncontravene a restriction in the Co\u2019s constitution or fall outside a clause which
\nrestricts the objects of the Co.
\nFurthermore, under s 129(1), 3rd parties can assume that the Co\u2019s constitution and
\nprovisions of the CA applying to the Co as replaceable rules have been complied
\nwith.
\nA 3rd party can safely contract with a Co without concern that the contract may lie
\noutside the Co\u2019s self-imposed powers or objects.
\nA 3rd party is not deemed to have constructive notice of such restrictions merely
\nbecause they are discoverable in public documents – such as the constitution –
\nobtainable from ASIC – s 130(1).
\nHowever, under s 128(4) a 3rd party is not entitled to make a s 129 assumption
\nwhere the 3rd party \u2018knew or suspected\u2019 that the assumption was incorrect. Thus
\neverything will depend in such cases on the facts of the case in determining
\nwhether the 3rd party had actual or constructive knowledge of the infringement of
\nthe constitution. If that was the case, then the contract would be voidable by the
\nCo.
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\nH. Executing documents
\nAnother way for a company to be bound to a contract or by the contents of a
\ndocument is to use the procedure contained in s 127, either with or without using a
\ncompany seal. This is just one way (and in fact a very infrequent way) for a Co
\nto enter into a contract. Most company contracts are entered into by individuals
\nwithout any formality of the type covered by s 127. For example, a checkout
\noperator in a supermarket enters into contracts on behalf of the corporation they
\nare employed by, because selling groceries lies within the implied authority of a
\ncheckout operator.
\nA Co does not have to have a common seal – s123 makes having a seal optional.
\nIf a Co has a common seal it must reflect the wording prescribed in s 123(1). Use
\nof a seal not carrying the prescribed info is an offence – s 123(3).
\nWhen used, s 127(2) requires that the seal be attested by
\n2 directors or
\n1 director and the Co Sec or
\nwhere a Pty Co has only 1 director who is also Co Sec, that person
\nWhen a Co assents without using a seal, then s 127(1) requires signature by
\n2 directors or
\n1 director and the Co Sec or
\nwhere a Pty Co has only 1 director who is also Co Sec, that person
\nSection 127(3) states that a Co may execute a document as a deed in either of the
\nways stipulated in ss 127(1) or (2).
\nA person is entitled under s 129(6) to assume that a doc has been executed under
\nseal if the seal appears to have been affixed under s 127(2) and to have been
\nwitnessed as required by that section.
\nSimilarly under s 129(5) a person can assume that a document has been assented
\nto without seal if s 127(1) appears to have been complied with.
\nNote that the s 128(3) assumptions can be made even where a sealing or
\nattestation are forgeries.
\nExercise
\nFred was appointed as a salesman by Silver Star Motors Ltd, which
\nsells luxury cars. One of the conditions of his appointment was that
\nhe could not give discounts of more than 5% on cars without the
\napproval of his regional Sales Manager. One Friday, towards the
\nend of the financial year, Fred was approached by Tom, who is the
\nVehicle Purchasing Manager for Hyatt Hotels Australia Pty Ltd.
\nTom has been given the job of buying a new fleet of cars to take
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\nhotel guests to and from the airport. He says that he is willing to
\npurchase six Mercedes Benz 450SE cars. Fred is desperate to make
\nhis sales quota for the year and says he can give Tom a 15%
\ndiscount. Tom says that he will get back to Fred later that day.
\nTom goes back to the hotel and tells a colleague, Michael, about
\nthe potential deal. During the course of the conversation Tom says
\n‘This discount seems huge – in fact, too good to be true. I’ve never
\nheard of a 15% discount before, do you think the salesman can
\noffer it?’ but Michael says ‘Look, think of how great it would be if
\nyou were able to get these cars at such a great price.’
\nTom phones Fred and agrees to the deal. It is agreed that delivery
\nof the cars and payment of the money by bank draft will take place
\non the following Tuesday. However, when Tom goes to the Silver
\nStar Motors showroom on Tuesday, the manager refuses to accept
\nthe bank draft or hand over the cars, saying that Fred did not have
\nauthority to give a 15% discount.
\nAdvise Hyatt Hotels Australia Ltd as to their legal position. You
\nshould assume that all the facts in the question are provable in
\ncourt.
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\nTopic 16 Corporate governance \u2013 the constitution
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Distinguish between those parts of the Corporations Act
\n2001 (Cth) which are mandatory and those which are
\nreplaceable;
\n2. Explain the process whereby a corporation adopts a
\nconstitution;
\n3. Appreciate who is bound by the constitution;
\n4. Be aware of the limitations on the power of a corporation to
\namend its constitution.
\nA. Internal governance
\nIn this topic (sample nursing essay examples by the best nursing assignment writing service) we will examine the rules which govern the relationship between the
\nparticipants of a company \u2013 called the internal governance rules.
\nWe know that a company is a separate legal entity and we know that one of the
\nfunctions of company law is to regulate how this separate entity operates. Internal
\ngovernance involves rules agreed between the members to govern the internal
\nworkings of the company. That is, the relationship between the company and its
\nmembers and officers.
\nB. Replaceable rules and the company constitution
\nThe requirements for internal rules were changed in 1998 with the passing of the
\nCompany Law Review Act 1998 (Cth). Prior to 1998 a company\u2019s internal rules
\nconsisted of two documents
\n\uf0b7 memorandum of association
\n\uf0b7 articles of association
\nIn 1998 the requirements for memorandum and articles were abolished.
\nNow, under s 134 of the Corporations Act 2001 (Cth), internal governance of Co
\nis controlled by
\nthose parts of the CA are mandatory, in that they cannot be replaced or
\nexcluded by a Co
\nthe common law, some of which cannot be evaded
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\nthe replaceable rules contained in the CA – i.e. those rules which can be
\nvaried by a Co (under s 135(2))
\nthe Co\u2019s constitution – i.e. the variations to the replaceable rules it has
\nchosen to make.
\nThus it is quite likely that a Co will be governed by a combination of: those of the
\nreplaceable rules it has not chosen to alter and those rules it has altered by its
\nconstitution as permitted by s 135(2).
\nUnder s 135(1)(a) rules can be
\nreplaceable in respect of all companies, or
\nreplaceable for Pty Co\u2019s and mandatory for public Co \u2013 eg s 249X relating
\nto appointment of proxies to vote at meetings \u2013 Pty companies can exclude
\nright to appoint proxies, but shareholders must be able to appoint proxies in
\nthe case of public companies
\nThe replaceable rules are tabulated in s 141.
\nThe constitution can be adopted either
\nBy members agreeing to its terms upon registration of Co – s 136(1)(a)
\nBy special resolution (defined in s 9 of the CA as 75% of votes cast) after
\nregistration – s 136(1)(b)
\nInfringement of the replaceable rules in the CA (s 135(3)) or the Co constitution is
\nnot a contravention of the CA (so the CA provisions re criminal and civil liability
\nand injunctions do not apply) but under s 140(1) the replaceable rules and the
\nconstitution act as a contract, compliance with which is enforceable by
\ncontractual remedies as between
\nthe Co and its members \u2013 so Co can get an injunction to compel members to
\nadhere to constitution (Hickman v Kent or Romney Marsh Sheep Breeders\u2019
\nAssoc [1915] 1 Ch 881) and members can similarly enforce their rights as
\nmembers against Co
\nthe Co and its Directors and the Co Sec
\nthe members inter se
\nIt is however important to note that the provisions of a Co constitution are not
\nenforceable by outsiders, or by members in a capacity other than as member. In
\nother words, members are able to enforce the constitution only in relation to their
\nrights as members \u2013 they cannot enforce other rights that the constitution might
\ngive them in a different capacity unrelated to their status as a member:
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\nEley v Positive Government Life Assurance Co Ltd (1875) 1 Ex D 20, held
\nthat where a clause in a Co\u2019s constitution said that one of the members of
\nthe Co would be the Co\u2019s solicitor, but then deprived him of that role, he
\ncould not enforce the clause, as he was not seeking to enforce rights relating
\nto his status as a member
\nIn Forbes v. NSW Trotting Club [1977] 2 NSWLR 515, the plaintiff was a
\nprofessional gambler and the club excluded him from its racetracks. He
\ntried to have the decision overturned on the basis that it did not comply with
\nthe club\u2019s constitution. The court said that, as an outsider, he could not take
\nmeasures to make the club abide by its constitution.
\nA problem often arises as to whether the conditions of service of directors are
\ngoverned by the Co constitution or by a separate contract that the director has with
\na company. If a director has no separate service contract with a Co, then his rights
\nderive solely from the constitution, and he can enforce them under s 140 if he is a
\nmember. However, if the Co alters the constitution so as to change those rights,
\nthe director is subject to the changes \u2013 Shuttleworth v Cox Bros & Co
\n(Maidenhead) Ltd [1927] 2 KB 9.
\nIf, however, the director has a separate contract of service, a change in the
\nconstitution can have no effect on his contractual rights \u2013 Allen v Gold Reefs of
\nWest Africa Ltd [1900] 1 Ch 656. Although a Co may remove a director in such
\ncircumstances the Co remains liable for any contractual breach that might thereby
\nhave occurred.
\nIf both the constitution and the contract are dependant on each other, then even if
\nthe constitution is amended so as to permit dismissal of the director, he can still
\nclaim damages arising out of breach of the contract \u2013 Carrier Australasia Ltd v
\nHunt (1939) 61 CLR 534.
\nC. Limitations on the power to amend the constitution
\nA Co may repeal or modify its constitution by special resolution – s 136(2).
\nUnder s 9 of the CA, a special resolution requires approval by 75% of the votes
\ncast. However, if the Co wants to, its constitution can require a higher majority or
\nother special procedure (s 136(3)).
\nA Co cannot however deprive itself completely (either in the constitution or by
\nseparate contract) of the statutory right to amend as this would be inconsistent
\nwith s 136(2).
\nAmendments cannot increase liabilities of existing shareholders or restrict their
\nrights to transfer shares, unless consented to in writing – s 140(2).
\nIf the rights of a specific class of shareholders are varied, and the constitution
\ndoes not specify a special procedure for variation, then a variation will be valid
\nonly if approved of by a special resolution of the shareholders of that class and a
\nspecial resolution of the shareholders as a whole (s 246B(2)).
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\nThe general rule is that a majority of shareholders is free to amend the company\u2019s
\nconstitution by special resolution. The test for whether an amendment is valid is
\nwhether the amendment is \u2018bona fide in the best interests of the company\u2019 in Allen
\nv Gold Reefs of West Africa. This test is easy to satisfy because, as was held in
\nPeters\u2019 American Delicacy Co Ltd v Heath (1939) 61 CLR 547, the test means
\nthat that the courts would not interfere unless the decision to amend was such that
\nno reasonable group of shareholders could have arrived at it \u2013 ie was absurd.
\nHowever, special considerations apply when an amendment treats a minority
\nunfairly. In Gambotto v WCP Ltd (1995) 182 CLR 432, the HC held that
\n(i) amendments to the constitution that give rise to conflicts of interest between
\nmajority and minority shareholders by permitting expropriation of shares or
\nof valuable property rights in shares are prima facie invalid \u2013 i.e. the onus is
\non majority to justify them, also note that
\nsuch amendments must be exercised for proper purpose, and
\nmust not operate oppressively against minority
\n(ii) other amendments which give rise to conflict of interest between majority
\nand minority are prima facie valid but
\nsuch amendments will be voidable if shown they are for an improper
\npurpose in light of the constitution or are oppressive (the concept of
\n\u2018oppression\u2019 is discussed under the Topic relating to members\u2019
\nremedies).
\nIn so far as (i) is concerned, and specifically expropriation, this will be for a
\nproper purpose only where the continued minority shareholding is detrimental to
\nthe Co and it is reasonable to address it by expropriating. Examples of proper
\npurpose would be where the minority shareholders is competing with the Co –
\nSidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154 or where the Co would
\nnot legally be able to continue functioning (e.g. eliminating foreign shareholding
\nif required by law)
\nNote that the Gambotto decision restricted amendments to company constitutions
\nonly where the amendment treats a majority and a minority differently \u2013 in all
\nother circumstances, the majority is free to amend the constitution by special
\nresolution.
\nBecause of the difficulty posed by the Gambotto decision, Parliament enacted a
\nset of provisions contained in Pt 2J.1 (ss 256B-C) of the Act, which now permit
\ncompanies to compulsorily acquire shares from, provided that certain procedures
\nlaid down in the Act are complied with. This area is technical and is outside the
\nambit of this subject.
\nExercise
\nMr Rebel and Mr Penfold are the majority shareholders of Hunger
\nWines Pty Ltd, owning 98% of the issued shares between them.
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\nThe remaining 2% are held by a number of small shareholders.
\nThe company needs more capital for expansion, and Rebel and
\nPenfold state that they are willing to lend the required funds to the
\ncompany if the 2% shareholding is eliminated. They approach you
\nfor advice as to whether they can alter the constitution in order to
\nachieve this objective. (In answering this question do not concern
\nyourself with Pt 2J.1 of the Act – answer with reference to
\nthe Gambotto decision).
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\nTopic 17 Members\u2019 meetings
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Explain how a person becomes a member of a company;
\n2. Understand the procedures for calling members\u2019 meetings;
\n3. Understand the statutory remedies that are available when
\nirregularities occur in relation to members\u2019 meetings.
\nA. Introduction
\nAs we saw in the preceding Topic, generally the directors may exercise all the
\npowers of the company except any powers that the Corporations Act or the
\ncompany\u2019s constitution (if any) requires the company to exercise in general
\nmeeting. Therefore, the voting rights of members are limited to matters expressly
\nreserved for member\u2019s decision-making in the:
\na. internal governance rules,
\nb. the CA, and
\nc. the common law.
\nB. Membership of a company
\nThe members of a company are its shareholders. Every company must have at
\nleast one member (s.114). Proprietary companies can have a maximum of 50
\nnon-employee members. There is no limit on the number of members for a public
\ncompany.
\nAny person who is capable of holding property in their own name may be a
\nmember of a company. This includes artificial persons, so a company may be a
\nshareholder of another company.
\nA person under the age of 18 years may be a member of a company.
\nA person becomes a member when their name is entered on the register of
\nmembers.
\nA person will cease to be a member when they sell their shares and their name is
\nremoved from the register of shareholders, partly paid shares are forfeited if they
\nfail to pay a call; or when the company ceases to exist (ie is wound up).
\nThe constitution of a company not listed on the ASX can impose restrictions on
\nthe transfer of shares. This is common in proprietary companies because the
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\nexisting members want to restrict who can be involved in the business. This is
\nespecially so when a family is involved. Listed companies cannot restrict the
\ntransfer of shares.
\nC. Members\u2019 meetings
\nWhat power the shareholders have is governed by the CA, the common law and
\nthe specific corporation\u2019s constitution. Under the Act, the default position is that
\nit is the board that is responsible for the running of the business of Co – s 198A.
\nAs stated in Automatic Self-Cleansing Filter Syndicate Co v Cuninghame [1906] 2
\nCh 34, this means that the directors are not subject to the direction of the
\nshareholders in their running of the Co.
\nThis rule has been interpreted very strictly in cases such as NRMA v Parker
\n(1986) 6 NSWLR 517 and Australasian Centre for Corporate Responsibility v
\nCommonwealth Bank of Australia (2016) 113 ACSR 600 as meaning that
\nshareholders do not have the right even to express an opinion about how the board
\nand management exercise their powers, which demonstrates how restricted the
\nrights of shareholders are in Australia.
\nIt would be possible for a company\u2019s constitution to over-ride s 198A (because
\nthat section is a replaceable rule), by giving a GM of shareholders the power to
\ndirect the board in matters relating to the running of the Co, but this is very rare.
\nHowever, under the CA, certain matters must be decided by general meeting.
\nThese are the most important:
\nalteration of constitution – s 136
\naltering rights attaching to shares, unless the constitution specifies another
\nmethod – s 246B
\nchanging the type of Co – s 162(1)
\nin the case of a public Co, removing a Director – s 227
\nShareholder meetings can be by phone or video – s 249S.
\nA document signed by all members of a Pty Co will be effective as a resolution –
\ns 249A.
\nEvery public Co (other than one with only 1 member) must hold an AGM (annual
\ngeneral meeting) – s 250N. Not required of Pty Co\u2019s.
\nThe directors of a public Co must lie before meeting financial report, a directors\u2019
\nreport and an auditor\u2019s report \u2013 s 317.
\nA reasonable opportunity for questions must be provided to shareholders: s 250S
\nand T.
\nResolutions can be put before GM on notice by 5% of votes that may be cast or
\n100 members of Co entitled to vote at a GM, whichever is the lesser.
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\nApart from the AGM, other \u2018extraordinary\u2019 GM\u2019s may be called by
\nthe board – as part of its general running of Co
\nan individual director – s 249C (replaceable)
\nmembers with 5% of votes that may be cast or 100 members that can
\nattend may request the directors to call a meeting under s 249D – giving
\nnotice to Board stating any resolutions to be proposed. The meeting must
\nbe for a proper purpose, remembering that in accordance with NRMA v
\nParker (1986) 6 NSWLR 517 and Australasian Centre for Corporate
\nResponsibility v Commonwealth Bank of Australia (2016) 113 ACSR 600
\na meeting would not be for a proper purpose if it was to interfere in
\nmanagement.
\nThe directors may refuse to call a meeting (NRMA Ltd v Parker (1986) 6
\nNSWLR 517). However, if the directors fail to issue a notice for meeting
\nwithin 21 days, members with >50% of votes that may be cast may
\nconvene it themselves – s 249E, and the Co is required to pay expenses of
\nmeeting, which it may recover from the directors jointly and severally
\n(unless a director can prove reasonable steps to try to get other directors
\nto comply). In other words, while the directors do not expose themselves
\nto any liability if they refuse to call a meeting requested by shareholders
\ncontrolling between 5 and 50% of the votes, they would be very foolish
\nto refuse a request by members controlling more than 50% of the votes,
\nas the directors, rather than the Co, would end up paying the costs of it.
\nMembers with between 5% and 50% of the votes that may be cast may
\nthemselves call a GM at their own expense if one is refused by the
\ndirectors – s 249F. This provision is not replaceable and so the members\u2019
\nright to call meetings cannot be denied.
\nThe court may call a meeting – e.g. under s 1322 where the directors have
\nfailed to do so under s 249D, or under s 249G where it is impracticable
\nfor meeting to be called any other way (eg deadlock in small Co).
\nNotice provisions for meetings (generally 21 days \u2013 s 249H(1)).
\nNote that shorter notice provisions are available under s 249H (if all members
\nagree beforehand in the case of an AGM, or if 95% in the case of any other GM (s
\n249H(2)) – but this is unavailable when meeting is to remove D or auditor
\n(s 249H(3) and (4)).
\nA company is obliged to send notice of general meetings to each individual
\nshareholder in writing \u2013 s 249J(1). The only circumstance in which more than
\none shareholder may be covered by a single notice is where shares are held
\njointly.
\nThe directors have a fiduciary duty to provide info regarding business to be
\ndiscussed at meetings – Fraser v NRMA Holdings Ltd (1995) 55 FCR 452.
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\nNotice must be given of proposed special resolutions when the directors call a
\nmeeting on members\u2019 request (s 249D), where members call meeting (s 249F) or
\nwhere members wish to propose resolution at meeting (s 249N).
\nSpecial notice (2 months) must be given for resolution removing a director of a
\npublic Co (s 227) or auditor of any Co (s 329). However, if notice was given but
\nthe meeting was called for a date before the 2 months expires, the resolution can
\nbe dealt with (s 203D(2) and s 329(1A)).
\nOrdinary resolution = simple majority of those voting.
\nSpecial resolution = 75% of votes cast (s 9)
\nSpecial resolutions are required for matters including:
\n\uf0b7 adoption or amendment of the constitution – s 136
\n\uf0b7 change in Co name – s 157
\n\uf0b7 change in Co type – s 162
\n\uf0b7 variation of class rights where constitution doesn\u2019t specify procedure – s
\n246B
\n\uf0b7 giving of financial Helpance for acquisition of shares – s 260B
\n\uf0b7 voluntary winding up – s 491
\nThe constitution may in addition require special resolution for other matters, but
\nnote that s 203D resolution for removal of a director of a public Co must be by
\nordinary resolution.
\nUnder replaceable rule s 250E, voting at GM of Co with share capital is as
\nfollows:
\non show of hands, each member has 1 vote, irrespective of shareholding
\non a poll each share has 1 vote – subject to variations in class rights
\nA poll must be granted if demanded – s 250K. A poll may be demanded by at
\nleast 5 members entitled to vote, members with at least 5% of the votes that may
\nbe cast or the chairperson; the constitution can specify lesser number – s 250L.
\nWhen shares have been sold, the price paid but the shares not transferred, the
\nseller is required to vote as directed by the purchaser. If the price has not been
\npaid, the seller continues to vote his mind, unless the contract stipulates otherwise.
\nA member may become contractually bound to a 3rd party to vote shares as
\ndirected by the 3rd party, and this can be enforced by a mandatory injunction as
\nbetween the member and the 3rd party, but will have no effect against the Co or on
\nthe validity of votes cast.
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\nA member can appoint a proxy to vote his shares – s 249X (mandatory rule for
\npub Co\u2019s, replaceable for Pty Co\u2019s).
\nD. Irregularities
\nSection 1322 governs the consequences of irregularities.
\nUnder s 1322(2), a mere \u2018procedural irregularity\u2019 will not invalidate a proceeding
\nunless an application is made to court and the court finds that the irregularity has
\ncaused or may cause substantial injustice that cannot be remedied by any other
\norder. What is a \u2018procedural irregularity\u2019? Section 1322(1) gives a non-exclusive
\ndefinition as including absence of quorum, or failure to comply with the Act in
\nrelation to notices of meetings or time periods.
\nThe effect of this provision is that a person who wants to overturn a proceeding or
\na meeting because of a procedural irregularity bears the onus of proving that
\nallowing the irregularity to stand would cause a substantial injustice. In practical
\nterms this means that they have to prove that the outcome would have been likely
\nto be different if the irregularity had not occurred, but if the same outcome would
\nhave occurred, the courts will not intervene.
\nExercise
\nThe annual general meeting of Sparx Ltd is held on 1 July.
\nVladimir and Anushka, who are married and who live at the same
\naddress, are both shareholders in the company. Vladimir owns
\n30% of the shares in the company, and Anushka 5%. The company
\nhad sent out a notice on 23 June stating that the meeting was to take
\nplace on 1 July. However, it sent only one notice to Vladimir and
\nAnushka\u2019s address, and that notice was addressed to Anushka.
\nAnushka did not tell Vladimir about the meeting and so he did not
\nattend. Several motions are agreed to at the meeting, including an
\namendment to the company\u2019s constitution. When Vladimir hears
\nof the meeting and the amendment (which he says he would
\ncertainly have voted against), he is furious, and approaches you for
\nlegal advice.
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\nTopic 18 Members\u2019 remedies
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. List the common law and statutory remedies available to
\nmembers;
\n2. Appreciate the limited nature of common law remedies;
\n3. Explain the circumstances in which common law and
\nstatutory injunctions are available;
\n4. Determine when members are able to access a company\u2019s
\nfinancial records;
\n5. Understand the importance of the statutory derivative action
\nwhich members can bring on behalf of the company to
\nremedy harm done to it;
\n6. Understand the concept of \u2018oppression\u2019 and in what
\ncircumstances the remedy for oppression is available;
\n7. Understand the circumstances in which compulsory winding
\nup is available as a remedy and its drastic nature.
\nA. Common law remedies
\nThe common law offers a remedy where there has been an infringement of the
\nrights a shareholder enjoys in their capacity as a shareholder, as held in Hickman
\nv Kent or Romney Marsh Sheep Breeders\u2019 Association [1915] 1 Ch 881.
\nThus a shareholder could take action to prevent expropriation of their shares,
\ninterference in their voting \/ dividend rights, or improper conduct of shareholder
\nmeetings. Note however that a shareholder cannot enforce provisions of the
\nconstitution which confer a personal right on them unrelated to their status as a
\nshareholder (see Eley v Positive Government Life Assurance Co Ltd (1875) 1
\nEx D 20, discussed in a previous Module).
\nA shareholder can also use the common law injunction to prevent breaches of the
\ncompany constitution in so far as such breaches relate to the running of the
\ncompany, as s 140(1) states that it has the effect of a contract between the
\nmembers, the Co and its directors. Thus, for example, a shareholder could seek an
\ninjunction if the board was breaching a provision of the constitution which
\nrestricted the company’s activity to certain areas of business.
\nOther than that, where disputes arise in relation to the running of the company, the
\ngeneral common law principle is that the majority rules. This means that the
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\nmajority may use its voting power to determine issues arising within the Co and
\nthat it will be the majority which determines whether an action needs to be
\nbrought to vindicate Co rights. Thus the common law offers little to Help
\nmembers wanting to prevent harm to a company:
\nFoss v Harbottle (1843) 67 ER 189 \u2013 the plaintiffs sought to bring an action on
\nbehalf of Co. The court held that shareholders could not bring an action on behalf
\nof company where Directors refused to do so because
\n(i) the Co. is separate entity, it (acting through its Board) must bring
\nactions on its own behalf.
\n(ii) the Co. is ultimately governed by majority rule \u2013 if shareholders
\nchallenge what the Board has done \/ not done, the majority decides
\nwhen the Co. should act, and so a meeting of all the members is thus
\nthe mechanism to use to control the board. If the majority at such a
\nmeeting ratifies a certain action, then the disgruntled minority cannot
\nchallenge it.
\nB. Statutory remedies
\nTo address the lack of common law remedies available to shareholders wanting to
\nchallenge wrongdoing in relation to how a company is run, the CA provides a
\nnumber of statutory remedies to shareholders.
\nIt is very important, when dealing with problems in this area of the law, to analyse
\nthe facts of the problem, to determine exactly what wrongdoing has occurred and
\nto select the correct remedy or remedies that are available to address that
\nspecific wrong. In other words, one needs to recognise at the outset that each
\nremedy deals with a specific type of wrongdoing. It is not sufficient simply to
\nstate that \u2018a statutory remedy is available\u2019 without identifying what wrong has
\noccurred and which remedy is available.
\nVideo
\n(i) Injunction
\nAn injunction is a court order requiring someone to stop doing something
\nunlawful \u2013 in other words, it exists to stop or prevent current or future
\nwrongdoing. It is of no Helpance in relation to events that have already occurred.
\nThe s 1324 injunction is available where someone is, or is about to, infringe the
\nCorporations Act.
\nNote that this is different from the common law injunction used to prevent
\ninfringements of the company constitution as a contract, as a breach of the
\nconstitution is not a breach of the Act.
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\nThe s 1324 injunction can be brought by ASIC or anyone whose interests may be
\naffected by conduct complained of. In Airpeak Pty Ltd v Jetstream Aircraft Ltd
\n(1997) 23 ACSR 715 – held that a shareholder had standing to seek an injunction
\nfor any breach of the CA, such as a director\u2019s failure to comply with ss 180-183
\nduties.
\n(ii) Statutory derivative action
\nNormally, when harm has been done to a company, it is only the board, or its
\ndelegate, who can initiate legal action on behalf of the company against the
\nwrongdoer (be they someone inside the company or a 3rd party). This is in
\naccordance with the principles enunciated in Foss v Harbottle (1843) 67 ER 189.
\nAn ordinary shareholder cannot bring actions on behalf of the company, because
\nthe company is run by the board, not the shareholders.
\nNormally one would expect a Co to initiate legal action against a person who has
\nharmed it, and this is what happens in 99% of cases. However, where the
\ncompany (not the shareholders) has been harmed and the board has refused to
\ntake action after having been given an opportunity to do so, a shareholder or
\ngroup of them can, after seeking permission of a court, bring a statutory derivative
\naction on behalf of the Co \u2013 s 236(1).
\nStanding to apply to court for permission to bring the action is conferred upon
\nmembers, former members or person entitled to be registered as a member, or an
\nofficer or former officer.
\nThe classic example of where it will be necessary to bring the statutory derivative
\naction is where someone harms the Co and the board refuses to take legal action
\nagainst that person \u2013 eg where a director expropriates Co property by taking a
\ncorporate opportunity, and the rest of the board will not act against him or her:
\nIn Cook v Deeks [1916] 1 AC 554 a railway Co. had four directors who
\nwere each 25% shareholders. Three directors knew a certain contract would
\nbe beneficial to Co, but formed their own Co. to enter into the contract! An
\naction was brought by other Director. The court held that the three had
\nmisappropriated Co. property (the opportunity), and ordered them to
\nsurrender their profit. Furthermore, their conduct was not ratifiable by the
\nboard or even by a GM a majority cannot strip a Co. of its assets, as that
\naffect both the company and the minority adversely.
\nBecause the action departs from the normal rule that it is the board which decides
\nwhether to launch legal action on behalf of the Co, it is necessary to obtain leave
\nof court to bring the derivative action \u2013 s 237. Criteria used by the court in
\ndetermining whether to give leave \u2013 s 237(2) are:
\nit must be probable that the Co will not itself bring the proceedings
\nthe applicant must be acting in good faith
\nit is in the best interests of the Co that the applicant be granted leave
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\nthere is a serious question to be tried
\nthe applicant gave 14 day\u2019s notice to Co
\nPerhaps the most important of these will be the issue of whether the action is in
\nthe best interests of the Co \u2013 will be used as a filter by the courts to exclude
\nactions based merely on mere commercial disagreements between minority and
\nmajority: there must be some harm to the Co.
\nNote that where the action is between the Co and a 3rd party (NB defined in s
\n237(4) as excluding related parties of Co\u2019s as defined in s 228 \u2013 thus the directors
\nare not 3
\nrd parties for the purposes of s 237), a rebuttable presumption arises under
\ns 237(3) that it would not be in the best interests of the Co to grant leave if all the
\ndirectors who participated in the decision not to bring an action
\nacted in good faith and for proper purpose
\nhad no material personal interest in the decision
\ninformed themselves to a reasonable extent about the subject matter
\nrationally believed the decision not to bring the action was in the best
\ninterests of the Co \u2013 such a belief is rational unless it is one that no-one in
\nthe position of the Ds\u2019 could hold it
\nNote that the court can appoint an investigator to report on Co\u2019s situation in order
\nto Help court in coming to a decision \u2013 s 241(1)(d).
\nThe GM has power to ratify a director\u2019s breach of duties, but only in certain
\ncircumstances:
\nIn Bamford v Bamford [1970] Ch 212, the court held that it was competent
\nfor GM to ratify the directors\u2019 exercise of share issuing power for improper
\npurpose (fending off takeover).
\nHowever, ratification contrary to wishes of a minority is not possible where
\nthe director who committed the wrong is also a shareholder and uses their
\nvoting power as a shareholder to ratify their own wrong, as in Cook v Deeks.
\nSimilarly, a purported ratification was invalidated by the court in Parke v
\nDaily News Ltd [1962] Ch 297, where the directors used their majority
\nshareholding to ratify their giving of large payouts to certain employees.
\nIn other words, a party whose acts are being ratified cannot use the votes
\nattaching to their shares (if they are a shareholder) to help ratify their own
\nbreach \u2013 they must abstain from the vote when the shareholders meet to
\ndecide whether to ratify the wrong done by the director.
\nIn any event, under s 239 ratification in any circumstances (i.e. whether the Co
\nhas been harmed or not) is not an impediment to granting leave, but is only one
\nfactor to be taken into account by the court, bearing in mind how well informed
\nthe members were and whether they were acting for a proper purpose \u2013 s 239(2).
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\nThe court has a discretion re orders about costs \u2013 s 242 enables the court to order
\nthat the company bear the costs of the action by the minority.
\n(iii) Member\u2019s remedy for oppressive or unfair conduct
\nThe remedy for oppression is provided by s 232.
\nThis is a very broad remedy and is available where the Co\u2019s \u2018affairs\u2019 (defined in s
\n53) are being conducted, or act or omission, or proposed act or omission, is \/
\nwould be oppressive or unfairly prejudicial to members or unfairly discriminatory
\nagainst them or contrary to interests of members as a whole. Note that the same
\nset of facts can potentially give rise to a number of alternative actions. For
\nexample, a course of conduct by directors could contain elements which harmful
\nto the Co (which would be remedied by the s 236 derivative action) and elements
\nwhich were oppressive to shareholders (which would be remedied using s 232) \u2013
\nbut one must remember that the s 232 remedy deals with a different type of harm
\nthan does s 236-7. Section 232 deals with unfair or oppressive conduct towards
\nshareholders, whereas s 236-7 deals with harm to the company.
\nIt is therefore always important, when dealing with problems in this area, to firstly
\ndetermine who has been harmed (the company or the shareholders) and then to
\nselect the appropriate remedy (s 236 or s 232).
\nThe s 232 action can be brought by member (even in respect of acts before he
\nbecame a member) or by ASIC.
\nThe courts have interpreted \u2018oppressive…etc\u2019 very broadly \u2013 it is a composite
\nexpression \u2013 not a set of individual wrongs \u2013 and points to an overall concept of
\nunfairness \/ injustice.
\nThe test for unfairness is that of the objective bystander. The applicant does not
\nhave to show that defendants knowingly acted in an unfair manner. Fairness is
\nlooked at from the perspective of all interested parties.
\nIn Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 a
\ncourt found oppression where a holding Co. nominated three directors of a
\nsubsidiary. They used their power to strangle the subsidiary by refusing to
\nsupply it with raw materials. The court held the holding Co. was acting
\noppressively in its capacity as shareholder of the subsidiary.
\nTo what extent will the court\u2019s scrutinise commercial decisions? In Wayde
\nv NSW Rugby League Ltd (1985) 180 CLR 459 the court suggested that a
\ncommercial decision might be unfair \/ oppressive even if bona fide and for
\nproper purposes if it could be shown that no reasonable Board could have
\narrived at it. However, more usually the courts are reluctant to impugn
\nbusiness decisions. In other words, mere disagreement by a group of
\nminority shareholders relating to the commercial direction of the Co will not
\nin itself lead to a finding of unfairness.
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\nIn Thomas v HW Thomas Ltd (1984) 2 ACLC 610 a shareholder wanted to
\nbe bought out of a conservative Co which paid few dividends. A general
\nmeeting had refused to sell company assets in order to get capital to
\nrepurchase his shares. Many employees were also shareholders, and the
\ncompany was run with the primary objective of keeping members of the
\nfamily who owned it in employment. The court refused the application. It
\nheld that the elements of the statutory definition of \u2018oppressive conduct\u2019
\ndefinition overlap with each other, and the overall effect is to prevent
\nconduct which is \u2018unjustly detrimental\u2019 – i.e. unfair \u2013 a \u2018visible departure
\nfrom standards of fair dealing in light of reasonable expectations\u2019. The
\ncourt held that it is not necessary for a plaintiff to adduce evidence of
\nillegality or bad faith, but failure to demonstrate absence of probity or good
\nfaith makes the order less likely. The court must also be satisfied that
\ngranting order is \u2018just and equitable\u2019 – i.e. fairness is a two-way street \u2013 it
\nmust be fair to other shareholders and Co. Held not unreasonable, in the
\ncase of a family Co. for the Co. to be operated primarily to give
\nemployment rather than dividends. It was also premature to say that the
\nplaintiff was \u2018locked in\u2019 – no objection would be raised by the Co to a
\npurchaser who was not a member of the family.
\nExclusion from management can be found to be oppressive, as in Fexuto Pty
\nLtd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97, where the court found
\nthat a closely held family Co (Bosjnak), with directors who were two
\nbrothers + their sister-in-law, had acted oppressively towards one of the
\nbrothers by excluding him from board discussions. There are interesting
\naspects of this case: (i) the court said that the Co should be equated to a
\npartnership in which all three directors had a right to participate, even
\nthough it was a Co and (ii) the application was brought by Fexuto, the Co
\ncontrolled by the excluded brother through which he held his interest in
\nBosnjak, rather than by the brother himself – this emphasises that a
\nshareholder (in this case Fexuto, who had elected the brother as D of the Co)
\ndoes not need to show that it has been unfairly treated, only that there has
\nbeen unfair treatment in relation to the affairs of the Co.
\nThe court can grant various orders – s 233(1) \u2013 and it is important to determine
\nwhich of these orders is most suitable \u2013 ie will address the specific type of
\noppression that has occurred.
\nwinding up, provided that this does not prejudice the oppressed members \u2013
\nnote that because this is the most drastic order available, it is also the one
\nleast likely to be granted (s 233(1)(a))
\nan order regulating conduct of Co\u2019s affairs (s 233(1)(c)) – can even include
\nremoving or appointing persons as directors (Spargos Mining).
\na reduction in Co\u2019s capital and payment to applicant (ie the company
\npurchases a person\u2019s shares from them) \u2013 s 233(1)(e)
\nan order directing Co to institute proceedings against someone (s 233(1(f))
\nor authorising member to do so on Co\u2019s behalf, with the court at actual
\nhearing having the power to indemnify the member for the costs of the
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\naction, irrespective of outcome). A court would usually require its consent
\nfor discontinuance or settlement of action \u2013 s 233(1)(g).
\nan order restraining someone from doing something \u2013 s 233(1)(i)
\nan order requiring someone to do something \u2013 s 233(1)(j)
\nWhere the order is for purchase of shares, valuation must be fair – Dynasty v
\nCoombs (1995) 13 ACLC 1290. Various accounting methods have been used to
\ndetermine a fair value.
\nNote that relief under s 232 will not be granted where the situation is simply one
\nof deadlock over the direction of the Co with no-one at fault – in such
\ncircumstances winding up on the basis of deadlock is the appropriate remedy
\n(s 461(k)). Similarly s 232 cannot be used as a way for a member to force buy-out
\nin a way not prescribed by the constitution where he \/ she is unable to find a buyer
\nfor his \/ her shares.
\n(iv) Winding up
\nMembers may petition the court to compulsorily wind up a Co. Because winding
\nup is a drastic remedy, it will be used only where court is satisfied that no other
\nremedy is available \u2013 s 467(4).
\nCircumstances in which the order can be given are:
\nwhere it is \u2018just and equitable\u2019 to do so – s 461(k)
\nwhere the directors are running Co in their own interests rather than in those
\nof members as a whole or in an unfair or unjust manner- s 461(e)
\nwhere Co affairs are or will be run in an unfairly prejudicial manner or in a
\nmanner contrary to shareholders as a whole- s 461(f) and (g)
\nNote the overlap between s 461(f) and (g) and the same remedy in s 233(1)(a)
\nAn example of winding up on the basis of \u2018unfair and oppressive conduct\u2019 is
\nKokotovitch Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 in
\nwhich the court held that the \u2018moral partnership\u2019 which existed between the
\ntwo shareholders had broken down because the one had tried to dilute the
\nshareholding of the other.
\nAn example of winding up on the \u2018just and equitable\u2019 ground is provided by
\nEbrahimi v Westbourne Galleries [1970] AC 360, E and N were partners in
\nrug business. Then converted the business into a Co, with E, N and N\u2019s son
\nas shareholders. N and son used majority power to freeze E out of business.
\nThe court granted order to wind up \u2013 it held that the Co was \u2018quasipartnership\u2019
\nand was formed on basis that both E and N would continue to
\nrun business. For this reason it was just an equitable to wind up. (Note
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\nsimilarities with Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA
\n97).
\nNote that a Co originally formed as a quasi-partnership may cease to be treated as
\nsuch as new members join.
\nThe \u2018just and equitable\u2019 ground has also been used where a Co was formed with
\nthe intention of defrauding the investing public, where a majority has denied the
\nminority access to info, or where a dispute between shareholders has resulted in
\ndeadlock as in Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426, where two people
\nwho were equal shareholders and the only directors of a Co were hostile to the
\nextent that they could not communicate with each other. Note that in such cases
\nthere is no need for to prove oppression or unjust or inequitable conduct on either
\nside.
\n(v) Miscellaneous statutory remedies
\nUnder s 50 of the ASIC Act, ASIC may, following an investigation, bring an
\naction for damages for fraud, breach of duty etc and for recovery of property in
\nthe name of any person, including the Co.
\nExercise
\nSpace Optics Ltd is a business that provides components for
\ntelescopes. The business was originally formed in 2005 as a
\npartnership between Bridget, Adeline, Mark and Daniel, all of
\nwhom were graduates in optical engineering. They divided the
\ncountry up between them, and each marketed the firm\u2019s products in
\ndistinct geographic areas, returning to their Canberra base for a
\nmonthly meeting of the partnership. In 2010 they incorporated the
\nbusiness, each holding an equal 1\/4 share in the company, and each
\nbeing named a director.
\nThe company\u2019s constitution, which requires a 90% vote to be
\nchanged, contains the following provision:
\n23 The objects and business of this company are restricted
\nto the manufacture, sale and servicing of optical
\nequipment.
\nDaniel finds out that in January 2017, Bridget, Adeline and Mark
\nhad a secret meeting at which they decided to move into the area of
\nproperty development.
\nHe also discovers that Bridget has not visited customers in South
\nAustralia and Western Australia (the areas of the country allocated
\nto her) since the beginning of the year, and has instead spent her
\ntime investigating the property market in Queensland with a view
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\nto finding suitable investment opportunities for the company. As a
\nresult of Bridget\u2019s carelessness, Space Optics Ltd has lost orders
\nworth $ 800 000 from established clients in Perth and Adelaide.
\nDaniel confronts the other three directors at a board meeting in
\nMarch 2017. The meeting is acrimonious. Adeline, Bridget and
\nMark presenting a united front against Daniel, and state that they
\nare adamant that, in their opinion, it would be in the best interests
\nof the company that it abandon optics and move into property
\nspeculation, and that they will carry on taking steps towards that
\nend.
\nAdeline, Bridget and Mark also vote against a motion proposed by
\nDaniel calling for legal action to be taken against Bridget to recover
\nthe $ 800 000 in losses she cased.
\nThe meeting approves a dividend of 25c per share but subject to a
\nmotion that Daniel\u2019s share of the dividend will be withheld.
\nFinally, Daniel has also learnt that Adeline is about to take a
\nholiday to the Gold Coast, using company funds.
\nAdvise Daniel as to what remedies are available to him, specifying
\neach type of harm that has occurred and what the appropriate
\nremedy is.
\n(In answering this question, you should assume that Bridget\u2019s
\nactions regarding the customers breached s 180(1) of the Act and
\nthat Adeline\u2019s proposed use of company funds for the holiday
\nwould breach s 181).
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\nTopic 19 Directors
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Understand the division of powers between directors and
\nmembers of a corporation;
\n2. Define who is a director, de facto director and shadow
\ndirector;
\n3. Define who is an officer of a corporation;
\n4. Understand the process for appointing directors and how
\nthey vacate office.
\nA. Introduction
\nA Co exists to enable those who own and control Co (through shareholders\u2019
\nmeeting) to separate themselves from running the Co. This is the responsibility of
\nthe board of Directors, who are elected in terms of the constitution. Of course, in
\nthe case of some companies, major shareholders may also elect themselves as
\ndirectors, but this is more common in the case of small, family companies,
\nwhereas larger companies with many thousands of shareholders will often elect
\nboards on the basis of expertise and industry knowledge whose members are not
\nnecessarily shareholders in the Co.
\nAnother distinction in the way companies are governed is between those where
\nmembers of the board do not involve themselves in the day to day management of
\nthe co, which is done wholly by executive managers given authority by the board
\n(in which case the directors are described as \u2018non-executive directors\u2019), and those
\nwhere the directors are \u2018executive directors\u2019 who, along with being members of
\nthe board, actually work in and run the Co from day to day. Most boards consist
\nof a mixture of non-executive (sometimes called \u2018independent\u2019) directors and
\nexecutive directors.
\nB. Division of powers
\nEvery Co must have Directors: Pty Co 1 – s 201A(1), public Co 3 – s 201A(2)
\nThe initial directors are those named when Co is registered \u2013 s 120(1).
\nSubsequent directors are appointed under replaceable rules ss 201G and H, or the
\nrules in the particular Co\u2019s constitution.
\nUnder the Act, the default position is that it is the board that is responsible for the
\nrunning of the business of Co – s 198A. As stated in Automatic Self-Cleansing
\nFilter Syndicate Co v Cuninghame [1906] 2 Ch 34, this means that the directors
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\nare not subject to the direction of the shareholders in their running of the Co.
\nIt would be possible for a company\u2019s constitution to over-ride s 198A (because
\nthat section is a replaceable rule), by giving a GM of shareholders the power to
\ndirect the board in matters relating to the running of the Co, but this is very rare.
\nThe vesting of management powers in the board under s 198A means that the
\nshareholders are excluded from running the Co – the only way shareholders can
\nget the board to do what they want is (i) through a change to the Co constitution in
\na general meeting so as to restrict the power of the directors, or (ii) by removing
\nthe directors whose policies the shareholders disapprove of, using the processes
\nprovided for by s 203C or 203D.
\nC. How are the terms \u2018director\u2019 and \u2018officer\u2019 defined?
\nAs we will see in the next Module, what are commonly referred to as \u2018directors\u2019
\nduties\u2019 bind not only people who have that title, but to other officers of a company
\nas well. It is therefore necessary to understand the definitions of the terms
\n\u2018director\u2019 and \u2018officer\u2019.
\nUnder s 9, a director includes
\nsomeone appointed to the position of director (whatever called), and
\nsomeone not validly appointed as director but who
\n(i) acts as a director or
\n(ii) is someone upon whose directions the directors are accustomed to
\nact
\nPoint (i) covers de facto directors – ie people who act as directors even though
\nthey are not as in
\nCorporate Affairs Commission v Drysdale (1978) 141 CLR 236 \u2013 director
\nappointed to fill temporary vacancy on board \u2013 not reappointed at GMtechnically
\nno longer a director, but continued to act as such \u2013 held to be a
\nde facto director.
\nDeputy Commissioner of Taxation v Austin (1998) 28 ACSR 565, where the
\ncourt found A to be a de facto director because as a matter of fact he
\ncontrolled the Co even though he had formally retired from his post as
\ndirector. The court stated that whether someone is found to be a director
\nwill be a matter of degree, relevant considerations including
\nthe size of Co – in large Co mere employees might have significant
\nauthority without being directors
\ninternal practices of Co – was person working as an expert
\nemployee rather than as a director?
\nhow the person was reasonably viewed by outsiders
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\nThe key issue is whether the person exercises \u2018top level management functions\u2019
\nPoint (ii) covers \u2018shadow directors\u2019 (note exclusion in s 9 re professional and
\nbusiness relationships – eg lawyers, accountants, management consultants)
\nIn Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd (1994) 13
\nACSR 386 the court held that before a person could be found to be a
\nshadow director, the board would have to be found to act on instructions of
\nshadow director, not merely stand aside for him and acquiesce in his
\nactions.
\nUnder these provisions, a person who is not formally appointed as a director, but
\nwho is found to be a de facto or shadow director, will nevertheless be affixed with
\nall the duties and liabilities of a director. Therefore, when determining whether
\nsomeone is subject to directors\u2019 duties, one must bear in mind the broad definition
\nof \u2018director\u2019 contained in s 9.
\n\u2018Officer\u2019 is defined very broadly in s 9 as including
\n(a) a director or secretary of the corporation; or
\n(b) a person:
\n(i) who makes, or participates in making, decisions that affect the
\nwhole, or a substantial part, of the business of the corporation; or
\n(ii) who has the capacity to affect significantly the corporation’s
\nfinancial standing; or
\n(iii) in accordance with whose instructions or wishes the directors
\nof the corporation are accustomed to act (excluding advice given
\nby the person in the proper performance of functions attaching to
\nthe person’s professional capacity or their business relationship
\nwith the directors or the corporation).
\nSection 9 goes on to state that receivers, administrators and liquidators are also
\nofficers of corporations (this is discussed in the Module on liquidation).
\nThe people mentioned in (b)(i) \u2013 (iii) can be a broad category, extending below
\nthe level of the board and including senior managers. In Shafron v ASIC (2012)
\n247 CLR 465, the High Court, focussing on people falling within the scope of
\n(b)(i), held that in every case it will be a matter of degree as to whether what a
\nperson does within a corporation amounts to participating in decisions which
\naffect the whole of a corporation or a substantial part. The court also emphasised
\nthat \u2018participation\u2019 in the making of decisions can occur even if the ultimate
\ndecision is made by some other person or body, and held that when the appellant,
\nwho was in-house legal counsel in a company, formulated negligent advice to the
\nboard on which the board then acted he was someone who was \u2018participating\u2019 in
\nthe board\u2019s decision-making within the meaning of (b)(i). The court also held that
\nin determining whether a person is an officer within the meaning of (b)(i), the
\nfocus is not solely on whether that person was involved in the making of the
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\nparticular decision which was a breach of directors\u2019 duties\u2013 a person may be
\nfound to be an officer on the basis of making other decisions and, for that reason,
\nbe found to be an officer of the company and liable for the decision under
\nscrutiny.
\nNote however that the mere fact that a person has the capacity to affect a
\ncompany\u2019s financial position does not make that person an officer. In Buzzle
\nOperations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 77 ACSR
\n410, the court held that even though Buzzle was reliant for its survival on the
\ntransfer of contract rights to it by Apple, whose executives made requests of
\nBuzzle in relation to how Buzzle conducted its business, that did not make Apple
\nan officer of Buzzle \u2013 otherwise any bank upon which a corporation depended for
\nfinance would be considered an \u2018officer\u2019 of the that corporation.
\nThe practical implication of the wide definition of \u2018officer\u2019 is that it is preferable
\nto err on the side of caution in determining whether someone is an \u2018officer\u2019, and to
\nrecognise that, depending on the scope of their roles, many senior executives will
\nfall within the definition of an \u2018officer\u2019 of a corporation and will therefore be
\nbound by what are conveniently referred to as \u2018directors\u2019 duties\u2019.
\nD. The board
\nWhen the CA imposes a duty on the Co, it is presumed that it is performed by the
\nboard collectively, the same applies to any powers given the board under the
\nconstitution.
\nAs a matter of practicality, the board usually cannot involve itself with day to day
\nrunning of the Co, and so there is usually one person who is appointed as chief
\nexecutive of the Co. If this person is a member of the board, they have the title of
\nManaging Director (MD), or sometimes \u2018MD and CEO\u2019. If they are not also a
\nmember of the board, they have the title of CEO. Under law of agency, the MD
\nhas implied plenary authority to bind Co in contract.
\nThe power to appoint the MD \/ CEO rests with the board.
\nSection 201J empowers the board to appoint one of their number as MD and to
\ndelegate their powers to him or her (s 198C).
\nAlternatively, the board may delegate its powers to someone who is not a member
\nof the board \u2013 s 198D(1)(d) \u2013 and this person has the title of CEO. In Australia
\nthis is now more common than having an MD as CEO.
\nE. Appointment of directors
\nThere is no requirement that a director hold shares in the Co.
\nInitial directors are appointed by people consenting to be directors under s 117
\nand becoming such upon registration – s 120.
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\nThe method by which subsequent directors are appointed will, in the absence of a
\nconstitution provision, be regulated by the replaceable rules –
\nreplaceable rule s 201G gives the power to appoint to the GM
\nreplaceable rule s 201H states that directors may appoint additional
\ndirectors, subject to confirmation by GM
\nSubject to those parts of the CA which are non-replaceable, the Co\u2019s constitution
\nmay make any provisions it likes on this matter – the constitution may provide for
\nelections by shareholders (which means that the majority shareholders control the
\nboard \u2013 proportional representation is not generally used in Australia), or may
\ngive a particular shareholder the power to appoint directors irrespective of
\nshareholding (indeed, even an outsider could be given this power), or state that a
\nspecified person is a director.
\nIf a public Co chooses to appoint its directors by resolution at a GM (which is the
\nprocedure used in almost all cases) then each director must be appointed
\nindividually by separate resolution \u2013 s 201E, unless the GM has first agreed
\nunanimously to allow more than one director to be appointed with a resolution \u2013 s
\n201E(1). Appointment contrary to this is a nullity.
\nIn the case of public companies, s 203D(1) requires that the shareholders must
\nalways have the power to dismiss directors by ordinary resolution, irrespective of
\nwhat is in the Co constitution.
\nEligibility to be a director:
\nan individual (i.e. a natural person, not a body corporate) least 18yrs old –
\ns 201B(1).
\nnot be disqualified from holding office:
\nvarious offences – s 206B(1)
\nbankruptcy \u2013 s 206B(3)
\ncourt order for contravention of civil penalty provision \u2013 s 206C \/
\ns 1317E
\ncourt order for past management of insolvent corporations – s 206D
\ncourt order for repeated contraventions of CA \u2013 s 206E
\nASIC\u2019s power to disqualify based on liquidator\u2019s report \u2013 s 206F
\nthese disqualifications make it an offence under s 206A for someone to
\nbecome a director, to carry on in office if already a director and prevent
\nthem from \u2018managing a corporation\u2019 \u2013 this includes any policy and decisionmaking
\nrelating to Co or substantial part thereof (see s 206A), including by
\nexecutives who are not directors \u2013 Commissioner for Corporate Affairs v
\nBracht (1989) 7 ACLC 40.
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\nF. Vacation of office
\nThere are a number of ways in which a director can cease to hold office.
\nThe first is compulsorily operation of law \u2013 s 206A(2) (essentially becoming
\ndisqualified)
\nThe most usual way for a director to cease to hold office is by resignation, which
\nis permitted under the replaceable rule in s 203A.
\nSection 203D(1) requires that a director of a public Co must be able to be
\nremoved by ordinary resolution \u2013 note special notice requirements. Pty Co\u2019s are
\ngoverned by replaceable rule s 203C to the same effect, but otherwise the
\nconstitution can provide a different rule.
\nA director of public Co cannot be removed by the board – s 203E.
\nA court can remove a director under s 233 as a remedy to protect an oppressed
\nminority.
\nG. Remuneration
\nBecause they owe the Co a fiduciary duty, which includes not profiting from their
\nposition, under the common law directors were not entitled to any benefit unless it
\nis expressly permitted by members, replaceable rules or the Co constitution \u2013 Re
\nGeorge Newman & Co [1895] 1 Ch 674.
\nThe default replaceable rule in s 202A is that remuneration is permissible and is to
\nbe fixed by the GM. Company constitutions often provide that MD \/ CEO\u2019s
\nsalary will be determined by board.
\nH. The company secretary
\nA public Co must have a secretary \u2013 s 204A(2). A director of a Co may also be its
\nsecretary.
\nEssentially the Secretary is the Co\u2019s chief administrative officer. He is an officer
\nof the Co under s 9 and is thus affixed with fiduciary duties. Note the specific
\nduties secretaries must fulfil under s 188(1).
\nExercise
\nA group of environmentally-conscious shareholders in XYZ Ltd
\nare concerned that one of the members of the Board, Mr Tuckey,
\nwill persuade the board to sign a contract to purchase an area of
\nnative forest in Tasmania for the purpose of felling the trees and
\nconverting them into timber pulp. The next AGM is 10 months
\naway. These shareholders approach you for legal advice to see if
\nthere is anything that can be done to prevent this occurrence.
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\nTopic 20 Directors\u2019 duties
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Understand the interaction between common law and
\nstatutory duties;
\n2. Understand the content of the various duties \u2013 to act in good
\nfaith and in the best interests of the company; to act with
\ndue care and skill; not to fetter discretion; to exercise
\npowers for a proper purpose; not to allow the company to
\ntrade while insolvent and not to allow a conflict of interest
\nto develop with the company;
\n3. Be able to apply the \u2018but for\u2019 test in determining whether a
\ndirector has exercised powers for a proper purpose;
\n4. Understand the circumstances in which the business
\njudgement rule applies;
\n5. Understand the operation of the statutory prohibition against
\ninsolvent trading in s 588G;
\n6. Be familiar with the requirement that directors disclose any
\ninterests in company contracts and, in the case of public
\ncompanies, to receive shareholder approval for any financial
\nbenefits received from the company;
\n7. Be able to identify the circumstances in which the corporate
\nopportunity doctrine applies;
\n8. Understand in what circumstances members may approve
\nof, or condone, breaches of directors\u2019 duties;
\n9. Understand the range of common law and statutory
\nremedies available for breaches of directors\u2019 duties.
\nA. Introduction
\nThis topic (sample nursing essay examples by the best nursing assignment writing service) will examine the duties that attach to directors and other officers of a
\ncorporation.
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\nBefore we start, we should remember the wide definition of \u2018director\u2019 in s 9 of the
\nCA, discussed in the earlier Module on directors, which included not only persons
\nactually appointed as directors, but also shadow and de facto directors.
\nHowever, it is also important to note that what, for the sake of convenience we
\nrefer to as \u2018directors duties\u2019, apply not only to directors (as defined above) but
\nalso to \u2018other officers\u2019, as is stated in the directors\u2019 duties provisions found in ss
\n180-183 of the Act.
\nDirectors have long been affixed with a number of duties under the common law,
\nand these duties are also reflected in the Act (the statutory equivalents are noted in
\nbrackets).
\nFour of these duties derive from the fact that directors are in a position of trust
\ntowards the company and owe it a duty of good faith. They are therefore
\ndescribed as fiduciary duties. In Hospital Products v United States Surgical
\nCorp (1984) 156 CLR 41 it was held that owing a fiduciary duty means that a
\nperson owes a duty always to act in the best interests of the party to whom they
\nowe the duty rather than in their own interests. The fiduciary duties recognised
\nunder common law are:
\nduty to act bona fide for best interests of Co (s 181)
\nduty to exercise powers for proper purpose (s 181)
\nduty not to fetter discretion (s 181)
\nduty to avoid conflicts of interest with Co (s 182 + 183)
\nThe fifth common law duty derives from the fact that a director owes his or her
\ncompany a duty of care, this is therefore not classified as a fiduciary duty, as it
\nderives from the law of negligence:
\nduty to exercise reasonable care, skill and and diligence (s 180)
\nAlthough these duties have all now been put into statutory form by ss 180 – 183,
\nthe common law duties remain in existence (s 185), and so case law that was used
\nto interpret the common law duties can be used to interpret the statutory duties.
\nThe statutory duties are:
\nduty to exercise care and diligence – s 180
\nduty to act in good faith in the best interests of the corporation and to use
\npowers for a proper purpose \u2013 s 181
\nduty not to make improper use of position in such a way as to gain
\nadvantage for themselves or anyone-else, or to harm Co \u2013 s 182
\nduty not to make improper use of corporate information to make gain for
\nthemselves or any other person or to harm the Co – s 183
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\nIt is clear that the common law duties are mirrored in the CA. The important
\nthing to note is that under s 185 common law duties carry on in parallel with the
\nstatutory duties (except note that the common law duty of care is modified by the
\ns 180(2) business judgment rule). Thus when a director breaches his duties, the
\nCo can bring an action either under the common law (usually referred to as the
\n\u2018general law\u2019 in the CA) or under the statutory provisions of the CA (see the
\ndiscussion on remedies at the end of this section).
\nVideo
\nB. Duty to act in good faith and for the benefit of the Co
\nas a whole
\nUnder a director\u2019s fiduciary duties, he must act in the best interests of the Co as a
\nwhole. Although the duty simply requires a director to genuinely believe that they
\nare acting in the best interests of the Co, that does not mean that the duty is wholly
\nsubjective (i.e. that all a director needs to do is believe that they are acting in the
\nbest interests of the Co). In ASIC v Adler [2002] NSWSC 171 the court held that
\nthe duty has an objective element, and will be breached if no reasonable director
\ncould believe that the conduct in question was in the best interests of the Co.
\nIn ASIC v Adler [2002] NSWSC 171, Adler, who was a director of HIH and also
\nan officer of HIHC, its wholly-owned subsidiary, engineered an unsecured $ 10m
\nloan from HIHC to a company called PEE, which he controlled. $ 4m of that
\nmoney was then used by PEE to buy shares in HIH in order to prop up its price
\n(thereby benefiting Adler, who was a shareholder in HIH), $ 4m was used to buy
\nshares at above-market price from companies controlled by Adler, and $ 2m was
\nlent to Adler on an unsecured basis. The making of the $ 10m loan was clearly
\nnot in the best interests of HIH or HIHC.
\nThe interests of the Co = the interests of the shareholders as a whole \u2013 i.e. it does
\nnot mean the interests of particular groups of shareholders.
\nRemember that in some circumstances, directors are required to take into account
\nthe interests of creditors when they make decisions, in that if they permit the Co to
\nbecome insolvent, the Co may be liquidated by creditors seeking to recover what
\nthey are entitled to. Furthermore, under s 588G creditors may in certain
\ncircumstances recover losses from directors, as is discussed later in this Topic.
\nThe equivalent statutory duty is the duty to act in good faith found in s 181.
\nIn whose interests do directors of two competing Cos or nominee directors act?
\nIn theory, directors can sit on the boards of rival Co\u2019s, as was held in Bell v Lever
\nBros Ltd [1932] AC 161. In reality, however, their positions are likely to become
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\nuntenable, as they obviously cannot use or disclose information about one Co in
\ntheir capacity as director of the other, and so they would have to resign from one
\nCo or the other.
\nNominee directors \u2013 that is directors who are appointed to a board to represent the
\ninterests of a particular shareholder \u2013 eg those of a majority holding Co in its
\nsubsidiary \u2013 are also in a difficult position.
\nIn Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66
\na holding Co. nominated three directors to the board of a subsidiary in
\nwhich it had a majority shareholding. The directors used their position to
\nstrangle the subsidiary. The court held that a nominee director should
\nuphold the interests of the Co. to whose board he has been appointed, not
\nthose of the appointor. The three directors were found to be in breach of
\ntheir duty to the subsidiary. Note also that in this case the court found that
\nthe holding Co. was acting oppressively in its capacity as shareholder of the
\nsubsidiary.
\nNote however that the onus is on the person alleging that the directors are
\nacting in the interests of the holding Co rather than the subsidiary and that
\nthese conflict – in Re Broadcasting Station 2GB Pty Ltd [1964-1965]
\nNSWLR 1648 the court held that even where nominee directors appointed
\nby Fairfax Ltd to represent their interests as shareholders of a subsidiary
\nradio station, 2GB Pty Ltd, had not informed the other directors of 2GB Pty
\nLtd of negotiations being conducted by Fairfax to seek continuation of
\nsubsidiary\u2019s licence, those directors had not acted oppressively, because
\neven though the nominee directors were acting in the interests of Fairfax
\n(the holding Co), their acts were also in the best interests of the subsidiary
\nradio station.
\nNote also that the director of a Co which is part of a group may not subordinate
\nthe interests of the Co to those of the group as was held in Walker v Wimborne
\n(1976) 137 CLR 1, an application of the Salomon principle.
\nThis principle becomes particularly important where directors try to move
\nfunds from a healthy Co in the group to another which is in difficulty – in
\nJenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 it was held to be
\noppressive conduct where directors had moved funds in this way to the
\ndetriment of E Ltd.
\nIt may however be that it is in the interests of a Co that it Helps the rest of
\nthe group – in Equiticorp Finance Ltd v BNZ (1993) 11 ACLC 952 the court
\nheld that where the dominant director in the group had transferred funds
\nfrom two Co\u2019s to a related Co, his act was permissible because (i) it was for
\nthe benefit of the two Co\u2019s that the group survived, (ii) the two Co\u2019s would
\nbe compensated for their loan (i.e. interest was payable), and (iii) the
\nholding Co guaranteed the loan.
\nFinally, under s 187 of the CA, a director of a wholly owned subsidiary is
\npermitted to act in interests of holding Co where
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\n(i) the subsidiary\u2019s constitution expressly permits this,
\n(ii) the director acted in good faith in best interests of holding Co, and
\n(iii) the subsidiary was not insolvent when the director acted, nor did the
\ndirector\u2019s action make the subsidiary insolvent.
\nC. Duty to exercise powers for proper purpose
\nA director must exercise powers for a proper purpose. It is possible for a director
\nto subjectively believe an act to be in the best interests of a Co and yet for the act
\nnot to be for a proper purpose, eg to issue of shares to shareholders who are
\nfriendly to the board in order to avoid a takeover by those who are not. The
\nconstitution may specify what the proper purposes for the exercise of various
\npowers are, but failing this, one must be guided by the case law.
\nMost cases re exercise of powers have arisen in respect of issue of shares, but note
\nthat any exercise of power by directors, including entry into contracts (eg
\npurchase of an unneeded asset even if at fair value), can raise the issue of
\nimproper purpose.
\nNote however that even if the issue of shares is not tainted by an attempt by a
\ndirector to advance his own interests, it may still be an improper use of powers, as
\nin Hogg v Cramphorn Ltd [1967] Ch 254:
\nCourts require that powers be exercised for a proper purpose – that purpose
\nbeing determined on an objective basis by the courts. In Hogg v Cramphorn
\nLtd [1967] Ch 254 the board authorised the issue of shares with special
\nvoting rights. Its purpose was to defend the Co from a take-over \u2013 their
\nbona fide belief that this was in the best interests of the Co was not
\nchallenged, but the court held that even if the board believed the issue to be
\nin the best interests of the Co, the purpose of issuing shares is not to retain
\npower but to raise capital.
\nIn Howard Smith v Ampol Petroleum Ltd [1974] AC 821 the directors of M
\nLtd issued shares to H Ltd. At the time, A Ltd, which was another
\nshareholder of M Ltd, was buying up shares on the market with a view to
\ntaking over M Ltd. A Ltd challenged the issue of shares to H Ltd. The
\ndirectors of M Ltd claimed the purpose was to raise capital, but this claim
\nrejected by the court: M Ltd had plenty of capital and it was clear that the
\nprimary purpose to remove A\u2019s majority and to defeat its takeover bid. The
\ndirectors\u2019 statement that they bona fide believed that this course of action
\nwas in the best interests of the Co was irrelevant.
\nIn Whitehouse v Carlton Hotel Pty Ltd (1987) 5 ACLC 421 where a father,
\nwho was director of the Co, had issued shares to his sons in order to prevent
\ntheir mother having majority voting power and had then sought to revoke
\nthe issue when his sons turned against him, the court held that his initial
\nshare issue had been invalid, holding that the use of a power for an improper
\npurpose will be invalid even if the directors genuinely believe the exercise
\nto have been in the best interests of the Co.
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\nIt may be that the directors issue shares for more than one motive – some proper,
\nsome improper. In such circumstances one has to determine whether the main
\npurpose was unlawful or not. This is done by applying the \u2018but for test\u2019.
\nIn Whitehouse v Carlton Hotel (1987) 5 ACLC 421 the court held that
\nwhere there are a number of motives for a share issue, the issue will be for
\nan improper purpose where the impermissible purpose was causative in the
\nsense that \u2018but for\u2019 its presence, the issue would not have taken place.
\nThe \u2018but for\u2019 test was also applied in Darvall v north Sydney Brick and Tile
\n(1989) 16 NSWLR 260 where the court adopted a similar approach where
\nthe directors arranged a joint venture with an outsider, consideration for
\nwhich would be the outsider offering a better price for the Co\u2019s shares than
\nhad been offered by another Co making a takeover bid. The court found
\nthat entry into the joint venture for the purpose of allowing shareholders the
\nchoice of alternative bid which the directors bona fide believed to be in the
\nbest interests of the Co did not infringe the proper purpose rule. Note that in
\nthis case: (i) the director\u2019s strategy did not involve the issue of more shares
\nand thus the dilution of existing shareholders rights, (ii) the directors did not
\nintervene to prevent a takeover, merely to present the shareholders with
\nanother takeover offer and (iii) the joint venture would, even leaving aside
\nthe takeover issue, have been entered into by the board because they
\ngenuinely believed it to be in the best interests of the Co.
\nRemember also that shares will be issued for a proper purpose when issued as
\npayment for property by the Co or to employees – ie raising capital is not the only
\npossible proper motive.
\nA director may be liable for board\u2019s improper use of a power if he knew of the
\nother director\u2019s act and yet failed to intervene. In Permanent Building Society
\nLtd v Wheeler (1994) 12 ACLC 674, the board authorised the purchase of land at
\nover-value \u2013 the motive being to provide vendor with money to meet obligations
\nto other Cos of which board members were also directors. These directors plus
\nthe one who failed to intervene found to have breached their duty as directors \u2013
\nsee s 79 of the CA, which defines what \u2018participation\u2019 means.
\nThe statutory duty to act for proper purpose is found in s 181.
\nD. Duty to retain unfettered discretion
\nUnder the common law, a director must retain their discretion to act in the best
\ninterests of the Co (this duty is also contained in s 181). This means that they
\ncannot enter into any agreements to exercise their powers in accordance with the
\nwishes of a 3rd party.
\nThe position of nominee directors has already been discussed.
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\nE. The duty of care, skill and diligence
\nThis duty differs from the others in that it arises from the law of negligence. The
\nissue of what standard of care to impose on directors involves balancing of
\npreservation of Co assets and risk-taking.
\nWhat does the case law reveal re the standard of care required of directors?
\nThe old, and now superseded approach is exemplified by Re City Equitable
\nFire Insurance Co Ltd [1925] Ch 407 in which directors had lent company
\nfunds on an unsecured basis. The court that the level of care expected
\ndepended on qualifications and skill of the particular director. It held that a
\ndirector was entitled to delegate powers and to assume that delegates were
\nacting lawfully, and in this case were entitled blindly to sign cheques
\npresented by the delegates. The court also held that directors not obliged to
\ngive constant attention to Co – directors who didn\u2019t attend meetings were
\nnot responsible for what occurred.
\nThe position now however is far more onerous that in the days of City Equitable.
\nIn Daniels v Andersen (1995) 13 ACLC 614 a Co (AWA Ltd) had sued its
\nauditors for negligence in not informing the board of suspect foreign
\nexchange deals it had noticed. The auditors claimed contributory
\nnegligence on the part of the Co (on the basis that the negligence of the
\nCEO were the acts of the Co). The court found contributory negligence and
\nheld that directors are expected to familiarise themselves with the Co and be
\nsatisfied that the business is being run properly. Ignorance and failure to
\ninquire are not a protection against negligence. The duty of care is not
\nlimited by a director\u2019s knowledge and experience – ie don\u2019t become a
\ndirector unless you are capable – and directors are required to obtain an
\nunderstanding of the financial position of the Co by reviewing statements
\neven though they may not be able to audit them. Non-executive directors
\nare not exempt from owing a duty of care to the company. Directors cannot
\njust rely on information provided to them by delegates – they must make
\ninquiries if this is warranted by the situation, although if they do make such
\ninquiries but are misled by those they could be expected to trust then they
\nwill not be liable (see s 189 of the CA). The board must meet as often as is
\nnecessary to carry out its job properly and directors should attend regularly
\n(note that in Vrisakis v ASC (1993) 11 ACSR 162 it was held that a director
\nshould attend all meetings unless exceptional circumstances prohibited him
\nfrom doing so, and see also s 300(10) which requires that in the case of
\npublic Co\u2019s the the directors\u2019 report must state how many meetings each
\ndirector attended).
\nNote that one cannot become a non-executive director on the basis that one
\nwill be a \u2018sleeping director\u2019, not involved in the Co\u2019s affairs. In Sheahan v
\nVerco [2001] SASC 91 it was held that the duty of care imposes a minimum
\nlevel of responsibility on all directors, including the responsibility to ask
\nquestions of management.
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\nThe conduct of a non-executive director who has special skills will be tested
\naccording to what would be reasonable conduct by a director with such
\nskills \u2013 Gold Ribbon (Accountants) Pty Ltd v Sheers [2005] QSC 198; and
\nalso that the Chairman of the board is, because of his \/ her general oversight
\nposition, affixed with a higher standard of care than an ordinary nonexecutive
\ndirector \u2013 ASIC v Rich [2003] NSWSC 85.
\nExecutive directors, and indeed any officers vested with executive
\nresponsibilities are, because of their day to day management role within the
\nCo, expected to display a higher level of care than non-executive directors
\nin relation to their particular area of responsibility \u2013 see Vines v ASIC [2007]
\nNSWCA 75 where it was held that officers of GIO acted negligently in
\npreparing a profitability statement of the insurance Co when they omitted
\ninfo relating to anticipated liabilities arising out of a hurricane which they,
\nas executives, ought to have taken into account. The court also held that
\nVines, the CFO, had been negligent in blindly accepting the advice of other
\nofficers when a reasonable person would have taken steps to verify the info
\nin the circumstances the Co faced.
\nA Co will be able to bring an action in tort to recover losses by a negligent
\ndirector. Failure of Co to act will lead to statutory derivative action as in
\nDaniels v Daniels [1978] 2 WLR 73, where the directors controlling a Co.
\nsold an asset to one of them at undervalue. A huge profit was made by the
\ndirector on resale. The court held that minority shareholders were entitled
\nto bring a derivative action on behalf of the Co against the directors to
\nrecover the loss sustained by the Co (ie, the difference between what the
\nproperty was worth and what the directors sold it for).
\nSection 180(1) sets out the equivalent statutory obligation in relation to the duty
\nof care and diligence. It provides that a director or other officer must exercise
\ntheir powers and discharge their duties with the degree of care and diligence that a
\nreasonable person would exercise if they were a director or other officer in the
\ncorporation\u2019s circumstances and occupied the office held by and had the same
\nresponsibilities within the corporation as the director or officer. An example of
\nsuch a breach is provided by
\nASIC v Adler [2002] NSWSC 171, where it was held that Williams, who
\nwas a director of both HIH and its subsidiary HIHC, breached his duty of
\ncare to both Co\u2019s when he allowed HIHC to lend PEE, a Co controlled by
\nAdler, $ 10m on an unsecured basis without any appraisal of the transaction,
\nwhich, objectively speaking, was clearly detrimental to HIHC.
\nApart from breaching the duty of care and diligence through reckless business
\ndecisions, directors can also find themselves liable for breach of the duty if they
\nallow the company to make misleading statements to the public. This is shown by
\nASIC v Macdonald (No 11) (2009) 71 ACSR 368, in which ASIC successfully
\nbrought civil penalty proceedings against directors of James Hardie who had
\napproved the release of a statement to the effect that the company had set up a
\nfund to cover liabilities for asbestos-related claims. The release of the statement
\nwas found to be negligent in that the directors had ignored expert advice that the
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\nfund was inadequate to cover liabilities. The reason that misleading statements to
\nthe market amount to a breach of the s 180(1) duty of care to the corporation is
\nbecause they potentially make the corporation liable to the public and also harm
\nits financial interests and reputation. Liability of directors to investors arises
\nunder different provisions and is dealt with in Module 22.
\nThe duty of care is qualified by the business judgment rule contained in s 180(2).
\nIt operates in relation to the duty of care and diligence as it exists under both the
\nCorporations Law and the common law. The concept of the business judgment
\nrule is designed to give directors a measure of protection by recognising that
\ndirectors are required to be entrepreneurial and make commercial decisions which
\nsometimes with the benefit of hindsight were not the best decisions. The business
\njudgment rule creates a presumption that a director will have fulfilled the duty of
\ncare and diligence if 4 things are satisfied:
\n(i) the judgment is made in good faith and for a proper purpose,
\n(ii) the director does not have a material personal interest in the subject matter
\nof the judgment,
\n(iii) the director informs him \/ her self about the subject matter of the judgment
\nto the extent they reasonably believe to be appropriate, and
\n(iv) rationally believe that the judgement is in the best interests of the
\ncorporation \u2013 note that the belief is taken to be rational unless it is one
\nwhich no reasonable person in that position would hold, in other words, the
\nonus is on the person challenging the conduct to prove that it was not
\nreasonable.
\nThe requirement that directors inform themselves about the subject matter has the
\neffect of casting a positive duty on directors to be active rather than passive in
\ncarrying out their duties. This is illustrated by ASIC v Adler [2002] NSWSC 171,
\nwhere it was held that neither Adler nor Williams had a defence under s 180(2) in
\nrelation to the loan made by HIHC (of which Williams was a director and Adler
\nan officer) to PEE, controlled by Adler: Adler had a personal interest in the
\ndecision, and Williams had not reasonably informed himself of the risks involved
\nin the transaction, as he had not referred the transaction to the Co\u2019s investments
\ncommittee.
\nNote that the s 180(2) defence applies only to actions for breach of the duty of
\ncare and not to actions for breaches of other directors\u2019 duties.
\nIn addition to the s 180(2) business judgment rule, directors can also take
\nadvantage of
\nSection 189, which states it will be taken to be reasonable for a director rely
\non information given by another director or committee of directors or
\npersons whom the director believes on reasonable grounds to be reliable and
\ncompetent, provided that the director acted after making an independent
\nassessment of the facts concerned (bearing in mind the level of the
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\ndirector\u2019s knowledge and expertise). Not making inquiries and leaving
\neverything to the MD or Co officers will not suffice to provide a defence for
\ndirectors under s 189 as was held in Sheahan v Verco [2001] SASC 91.
\nSimilarly, if a reasonable director would have thought it was prudent to
\nenquire into the accuracy of the information being given, then failure to do
\nso will mean that the s 189 defence is not available \u2013 ASIC v Flugge (2016)
\n119 ACSR 1.
\nSection 190(1) states that a director is responsible for the acts of a delegate
\nbut that under s 190(2) a director is not responsible where he believed on
\nreasonable grounds and after making such inquiry as circumstances
\nrequired, that the delegate was reliable and competent \u2013 ie delegates must be
\nmonitored.
\nNote that whereas breach of the other statutory duties can lead to criminal
\nliability, this is not the case in respect of breach of the duty of care, which is
\nexcluded from the ambit of s 184 (the criminal liability provision).
\nF. The duty to avoid insolvent trading
\nSection 588G imposes a statutory duty on directors to prevent insolvent trading \u2013
\na departure from Salomon in that it makes directors liable for Co\u2019s debts in certain
\ncircumstances.
\nUnder s 588G(1) liability arises where:
\nthe person was a director at the time the debt was incurred
\nthe Co was then insolvent or was made insolvent by the liability
\nthere were reasonable grounds for the director to suspect insolvency
\nthe debt was incurred after the section came into force.
\nProof of liability and of the existence of a defence is on a balance of probabilities.
\nNote that under s 588G(1)(b) a debt will be taken to have caused insolvency when
\nit + other debts incurred simultaneously caused insolvency, even though it, as an
\nindividual debt, wouldn\u2019t have had that effect. \u2018Inability to pay debts\u2019 is not a
\nsimple matter of proof that a creditor\u2019s debt has not been paid \u2013 in Metropolitan
\nFire Systems Ltd v Miller (1997) 23 ACSR 699 it was held that the court must
\nlook at the Co\u2019s overall financial position and determine whether it is suffering
\nfrom a temporary lack of liquidity or is in fact non-viable.
\nLiability arises only if there were reasonable grounds for suspecting that the
\ninsolvency existed or would be created by the debt.
\nFor the director to be liable he must have been aware that there were reasonable
\ngrounds for suspecting insolvency or a reasonable person in a like position in a Co
\nin the Co\u2019s circumstances would have been so aware \u2013 an objective test of
\nstandard of director of ordinary competence \u2013 see Metropolitan Fire Systems Ltd v
\nMiller (1997) 23 ACSR 699 and ASIC v Plymin [2003] VSC 123.
\nSection 588H provides 4 defences to directors:
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\ns 588H(2) – an expectation of solvency on reasonable grounds – the director
\ncan prove facts which provide reasonable grounds for expecting the Co to
\nbe solvent (i.e. which contradict s 588G(1)(c)). Because the expectation has
\nto be \u2018reasonable\u2019 in the circumstances, the court will take into account not
\nonly what the director did know but also what he ought to have known – i.e.
\nthe director who takes no steps to inform himself of Co affairs (and thus
\ndoes not know that it is trading while insolvent) cannot rely on the defence –
\nMorley v Statewide Tobacco Services Ltd (1992) 10 ACLC 1233.
\ns 588H(3) – reasonable reliance on a delegate – the director can escape
\nliability if he reasonably believed that a competent person was responsible
\nfor supplying him info relating to solvency, reasonably believed that person
\nwas fulfilling their responsibility (this requires monitoring of the person),
\nand expected, on the basis of that person\u2019s info, that the Co was solvent.
\nNote that the defence requires directors to inquire as to financial reporting
\nwhen they join a Co – they must have some level of involvement and
\nknowledge of what goes on – Metropolitan Fire Systems Pty Ltd v Miller
\n(1997) 23 ACSR 699. See also ASIC v Plymin [2003] VSC 123 where the
\ncourt held that Elliott, non-exec director of Water Wheel Mills, was not
\nentitled to plead that he had left the running of the Co to its MD and was
\ntherefore not required to enquire into its solvency, as a reasonable person in
\nElliott\u2019s position would have realised that the MD was not reliable because
\nhe was not complying with board requirements for the provision of financial
\ninfo.
\ns 588H(4) – justifiable non-participation in Co affairs at the time the debt
\nwas incurred – eg illness, going on leave, non-involvement because of
\npersonal interest (s 195).
\ns 588H(5) – taking all reasonable steps to prevent Co incurring the debt –
\nnote that under s 588H(6) one of the factors the court will examine is
\nwhether the director took steps to have an administrator appointed. If this
\nfails, the director\u2019s best course is to resign.
\nThe remedies for insolvent trading are as follows:
\nSection 588G is a civil penalty provision (s 1317E(1)(e)) and so a civil
\npenalty may be imposed (s 1317G) as well as criminal liability if the
\nelement of dishonesty is present (s 588G(3)).
\nIn addition, when a civil penalty order is applied for, the court may order
\nthe director to pay compensation to the Co in the amount of the debt which
\nthe Co\u2019s creditor has lost due to the Co\u2019s insolvency whether or not it makes
\na civil penalty order – s 588J(1). This money will then be used to satisfy the
\ndebt owed to the creditor.
\nNote the power of a court under s 206D to prevent a person managing any
\nfuture Co where they were involved, within the last seven years, in two or
\nmore companies which failed and where the management of a Co caused it
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\nto fail, and s 206F in terms of which ASIC can prohibit future management
\nof corporations where the Co of which the person was a director was subject
\nto an adverse liquidator\u2019s report.
\nG. The duty to avoid a conflict of interest
\nAs fiduciaries, directors must avoid any situation where a conflict of interest
\nmight arise between them and the Co.
\nAberdeen Railway Ltd v Blaikie (1854) 1 Macq 461 – B was a director of
\ncompany purchasing furniture and a partner of the firm selling it \u2013 the price
\nwas fair but the mere possibility of unfairness vitiated the contract.
\nFrom a statutory point of view, such a breach of the fiduciary duty may involve a
\ncontravention of s 181 (duty to act in good faith), s 183 (improper use of
\ninformation) and s 182 (improper use of position).
\n(i) Having an interest in a company contract
\nThe most obvious example of conflict of duty is where a director has an interests
\nin a contract entered into by the Co – i.e. stands inside the Co as director and
\noutside the Co as the 3rd party with whom it is contracting.
\nIn Transvaal Lands Co v New Belgium (Transvaal) Land & Development
\nCo [1914] 2 Ch 488, S and H were directors of Transvaal Lands, both also
\nhad shares in New Belgium. S advised Transvaal Land\u2019s board to buy
\nshares owned by New Belgium. Both were found to have breached their
\nfiduciary duty by not revealing their interest. It was immaterial that S had
\nnot voted on the contract.
\nThe CA imposes disclosure requirements on directors in respect of material (ie
\nexcludes trifling interests) financial interests in respect of the affairs of the Co:
\nUnder s 191(1) a director who has such an interest must make disclosure to
\nthe board when such an interest arises, subject to the exclusions in s 191(2)
\n\u2013 e.g. interests which arise because the director himself is a shareholder (i.e.
\nin the Co to which he would disclose) interests arising from the director\u2019s
\nremuneration by the Co, interests arising merely because director is
\nguaranteeing a loan to the Co.
\nStanding notice may be given under s 192 \u2013 eg where the Co regularly
\ncontracts with an entity in which the director has an interest.
\nContravention of ss 191 and 192 do not affect the validity of any transaction
\n\u2013 ss 191(4) and 192(7), (compare with the common law in Abderdeen
\nRailway) but breach constitutes an offence by the director.
\nNote that ss 191 and 192 supplement and do not replace the common law \u2013 s
\n193 \u2013 thus statutory disclosure may not suffice to exempt a director from
\nliabilities at common law (eg where disclosure may need to be made to
\nshareholders as well).
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\nA director is restricted in relation to voting on contracts in which he has a material
\ninterest.
\nIn the case of public companies, s 195(1) prohibits directors from voting or
\nbeing present when matters which would need disclosure under s 191 are
\nconsidered.
\nThe board may however vote to permit the director to attend and vote – s
\n195(2).
\nProvision exists for general meeting (s 195(4)) or ASIC (s 195(3)) to grant
\npermission to vote if a quorum of the board cannot be mustered.
\nFailure to comply with s 195 does not invalidate any transaction \u2013 s 195(5)
\nbut is a breach of the CA by the director.
\nIn the case of Pty Companies – replaceable rule s 194 permits directors to be
\npresent and vote if they have disclosed their interest under s 191, and the
\ndirector may retain any benefit from the transaction and the Co may not
\nvoid the transaction because of the director\u2019s interest.
\n(ii) Related party transactions \u2013 public companies
\nIn the case of public companies, special additional rules contained in Pt 2E of the
\nCA apply where a related party of the Co receives a financial benefit from the Co
\nor from an entity which the Co controls
\nThe rule in s 208(1) is that the approval of the members must be obtained in
\naccordance with procedures in ss 217-227 for the giving of a financial benefit to a
\nrelated party. Note also that the approval must be given within 15 months prior to
\nthe benefit.
\nThe key concept in relation to conflicts of interest is \u2018financial benefits\u2019, defined
\nin s 229(3), as including:
\ngiving finance or property
\nbuying, selling or leasing an asset
\nacquiring or supplying services
\nissuing shares or granting options
\ntaking up or releasing the person from an obligation
\nNote that the reality not the legal form will be looked at and that no regard will be
\npaid to any consideration given for the benefit even if that consideration was
\nadequate \u2013 s 229(1). Note also that indirect \/ informal ways of giving a benefit
\nare covered \u2013 s 229(2).
\nWho is a \u2018related party\u2019 to whom a Co may not give a benefit? This is defined
\nvery broadly in s 228 as including:
\n(a) a controlling entity of the Co
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\n(b) directors of a the Co or its controlling entity, and such a director\u2019s spouse,
\nde facto, parent or child
\n(c) an entity controlled by a related party
\n(d) an entity which was a related party during the previous 6 months
\n(e) an entity acting in concert with a related party
\nCertain financial benefits (listed in ss 210-216) are exempt from the s 208
\nrequirement.
\nThe only way in which a non-exempt financial benefit can be given is under
\nauthority of a resolution of a general meeting under passed within 15 months
\nbefore the benefit was given, in accordance with the procedures prescribed by ss
\n217-227. Note that under s 224, if the related party is a shareholder, they may not
\nvote at the meeting.
\n(iii) Making a personal profit from one\u2019s position as a director
\nA director\u2019s fiduciary duty extends to situations other than those in which the
\ndirector or a related party is contracting with the Co. The requirement that there
\nbe no conflict of interest also applies where the director uses his position in the Co
\nfor his own benefit. This applies whether the Co is harmed or not.
\nIn Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 a Co wanted to buy
\ncinema but lacked capital. The directors provided the capital required and
\ntook shares in the Co. Subsequently there was a change in ownership of the
\nCo. The directors profited from their share of the sale price. The new
\nowners successfully reclaimed the directors\u2019 profit on behalf of the Co \u2013 the
\nprofit was held to be incidental to, and derived from, their office-holding.
\nThe rule in Regal (Hastings) seems harsh in that the Co actually benefited from
\nthe directors having invested money in it, so as to enable the Co to buy additional
\ncinemas and which caused its shares to be more attractive to potential purchasers.
\nPerhaps nowadays the courts would exercise their s 1318 discretion to relieve the
\ndirectors of liability for breach of the statutory duties.
\nSections 182 (improper use of position) and 183 (improper use of information) are
\neffectively a statutory embodiment of the rule, in that it prohibits improper use of
\nposition by directors, officers or employees in order directly or indirectly to
\nmake a gain for themselves or someone-else (irrespective of whether the Co
\nsuffers harm), or
\nharm the Co.
\nThere are many examples of circumstances in which improper use of information
\nor position can occur:
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\nImproper use of position obviously occurs where a director is paid a bribe or
\nsecret commission – in Boston Deep Sea Fishing & Ice Co v Ansell (1888)
\n39 Ch D 339 it was held that a director had used his position for improper
\npurpose where he had been paid a \u2018commission\u2019 by a shipbuilder when the
\nCo of which he was director had contracted with it to build ships, and when
\nhe received a bonus in his capacity as shareholder in two other companies
\nwhen he had caused Boston to contract with them. In such circumstances,
\nthe director must surrender his profit to the Co of which he is a director.
\nIn Furs Ltd v Tomkies (1936) 54 CLR 583 an MD was required to account
\nfor amounts paid to him when he entered an employment contract with the
\npurchaser of part of the Co\u2019s business. Tomkies had a conflict of interest in
\nthat he was negotiating the employment contract with the purchaser of part
\nof the business of the Co of which he was director. He was required to
\nsurrender his profit to Furs Ltd \u2013 note that it was irrelevant that Furs Ltd
\nsuffered no harm.
\nIn ASIC v Adler [2002] NSWSC 171, Adler was found to have improperly
\nused his position as a director of HIH and an officer of its subsidiary HIHC,
\nto engineer an unsecured loan by HIHC to PEE, a Co he controlled, which
\nPEE then used to benefit Adler. Note that Adler also breached his duties to
\nPEE in that he used his position as a director of PEE to get it to buy shares
\nthat he held in other Cos at far more than they were worth.
\n(iv) The corporate opportunity doctrine
\nA director cannot take up an opportunity which belongs to the Co. According to
\nthe strict equitable rule in Regal Hastings v Gulliver, an opportunity can never be
\nexploited by the director if it is learned of through being a director. In applying
\nthe Regal Hastings rule, the courts have said as follows in circumstances where
\ndirectors have taken corporate opportunities:
\nIt does not matter that Co would not have obtained the contract – in Green v
\nBestobell Industries Pty Ltd [1982] 1 WAR 1 the court held that where G
\nhad used knowledge he had obtained of B Ltd\u2019s bid for a hospital
\nconstruction project ( help with nursing paper writing from experts with MSN & DNP degrees) and had won the contract for his own Co, he had still
\nbreached his duty even though B Ltd would not have got the contract which
\nwas won by a wholly unrelated Co.
\nIn Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162 a
\ngas board said they wouldn\u2019t contract with Co that Cooley worked for, but
\nwould contract with him personally. He feigned illness to retire and took
\nthe contract. He was held liable to surrender profits \u2013 ie the duty persists
\neven after ceasing to be a director.
\nMore recently in Australia the court in Gemstone Corp of Australia Ltd v
\nGrasso (1994) 13 ACSR 695 held that the fact that a Co is unable to exploit
\nan opportunity does not entitle the director to take it.
\nBut when does a corporate opportunity rightfully belong to the Co? In Canadian
\nAero Services Ltd v O\u2019Malley (1973) 40 DLR (3d) 371 a director was in the
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\nprocess of negotiating an aerial survey contract in Guyana. He resigned, formed
\nhis own Co and too the contract for himself. The court held him liable to his
\nformer Co, saying that a Co can recover if director takes for himself a \u2018maturing
\nbusiness opportunity that the Co. is actively pursuing\u2019 (at 382 of report). The test
\nin Canadian Aero has been applied and expanded in the following cases:
\nPacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 328 – a shipping Co.
\nwas considering the purchase of second vessel. The director resigned,
\nformed his own Co. and chartered a vessel to carry cargo on the same route.
\nThe court distinguished between specific and global opportunities \u2013 ie,
\nwhereas it would have been permissible for the director to resign and form
\nhis own shipping company which was not competing in the same market,
\nhere he was trying to take a route that he had learned of only through being
\na director of the Co .
\nThe leading case in Australia is SEA Food International Pty Ltd v Lam
\n(1998) 16 ACLC 552, in which the court held that the test to be used in
\ndetermining whether an opportunity belongs to a Co is whether there is a
\nsufficient link between the opportunity taken by the director and the nature
\nand extent of the Co\u2019s current operations and those in which it might
\n\u2018reasonably be expected to expand\u2019 in the future.
\nDoes it matter whether the Co does not wish to take the opportunity \u2013 can it
\nrelinquish it to the Director ?
\nIt is clear that in Australia the consent of the board alone is not enough
\n(although that is still required) \u2013 the director must make disclosure to and
\nreceive permission from, the shareholders \u2013 Furs v Tomkies (1936) 54 CLR
\n583 – see the section below relating to disclosure of interests and
\ncondonation.
\nNote also that if the director is also a shareholder, he \/ she may note vote his
\nor her shares at the meeting of shareholders (Cook v Deeks [1916] 1 AC
\n554).
\nNote that such permission from the shareholders will be invalid if the
\ndirector does not disclose all relevant information, as was held in Southern
\nCross Mine Management Pty Ltd v Evensham Resources Pty Ltd [2005]
\nQSC 233.
\nIn Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 an MD was found
\nnot liable for profit from mining licences that Co. had decided not to exploit
\nand which he disclosed to them he would take up – in this particular case
\nunanimous assent by directors happened to also be unanimous assent by
\nshareholders \u2013 the court emphasised all depends on facts of the case – if
\ndirectors hold all shares, unanimous assent by board will be valid, because
\ntheir assent amounts to assent by all shareholders and so there is obviously
\nno fraud on minority.
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\n(v) Misuse of corporate information
\nThe fiduciary duty not to misuse Co info will often overlap with corporate
\nopportunity rule.
\nSection 183 is this aspect of the fiduciary duty in statutory form.
\nNote that a director may misuse Co info when trading in its shares, in which case
\nthe insider trading provisions will also be relevant \u2013 as an example of which one
\ncan cite ASIC v Vizard [2005] FCA 1037, where Vizard used information
\nobtained as a non-executive director of Telstra to his own advantage, establishing
\na front Co to buy and sell shares in Telstra, the price of which he knew would be
\naffected by decisions by Telstra.
\nAlthough in theory a director can sit on the boards of competing companies, in
\nreality it will be very difficult for a director to avoid a conflict of interest given
\nthat they would have to act in the best interests of each company. A director
\nobviously cannot use or disclose information about one Co in their capacity as
\ndirector of the other. In Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR
\n238 the court held that a former employee may use and disclose general
\ninformation and skills for the benefit of subsequent employers, but that
\nconfidential information, such as trade secrets, may not be used or revealed.
\nH. Disclosure of interests and condonation
\nTo what extent can a director avoid liability under the conflict of interest
\nprovisions (and other breaches of directors\u2019 duties) by prior disclosure, and to
\nwhat extent can the Co condone after the fact breaches which were not disclosed
\nbefore they occurred?
\n(i) Relief from liability under the common law
\nWhere a director seeks prior permission to breach one of the fiduciary duties or
\nseeks ratification of a past breach, then the following common law rules apply:
\n\uf0b7 Under the common law, director must disclose to the shareholders and have
\nGM ratify, as was held in Furs v Tomkies (1936) 54 CLR 583. Such
\nratification (prospective or retrospective) can be effective.
\nShareholders must be fully informed for their consent to be validly obtained
\n– Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd
\n[2005] QSC 233 \u2013 the consent of shareholders for lease of mining
\nequipment from another Co in which their CEO had an interest was invalid
\nbecause he had misrepresented the details of the contract.
\n\uf0b7 However ratification by the GM will prima facie not be effective if it is a
\nfraud on the minority or is oppressive. A prime example is where a director
\nobtains some benefit at the expense of the Co in circumstances where he or
\nshe is also a shareholder in the Co. Such a director may not use his or her
\nvoting power to condone his or her own breach of duty. This would be
\n\u2018fraud on the minority\u2019:
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\nIn Cook v Deeks [1916] 1 AC 554 three directors of railway Co. knew a
\ncontract would be beneficial to it, but formed their own Co. to enter into
\ncontract! The court held that they had misappropriated Co. property (i.e. the
\nopportunity), ordered to surrender profit. The action was not ratifiable – a
\nmajority cannot strip Co. of assets. In Australia such conduct could be
\nremedied by s 237 derivative action, because s 239(1) provides that
\nratification by members does not in itself prevent s 237 action being
\nbrought, but note that it is a factor the court must take into account in
\ndetermining liability \u2013 s 239(2).
\nIn Hannes v MJH Pty Ltd (1992) 10 ACLC 400 the court held that only a
\nvote of disinterested shareholders could validate a director\u2019s breach of
\nduties (in this case issue of shares for an improper purpose).
\nNote also that ratification by shareholders will be ineffective in the particular
\ncircumstance of insolvency, as here the Company must consider the interests of
\ncreditors – in Kinsela v Russel Kinsela Pty Ltd (1996) 4 NSWLR 722 the court
\nheld that the shareholders could not ratify the directors\u2019 failure to consider the
\nrights of creditors. The Co was approaching insolvency; the directors transferred
\nits business and leased some of its property to family members on terms
\nadvantageous to them. This was designed to ensure that when Co went into
\nliquidation creditors would obtain little value and family could continue to occupy
\npremises during lease. The court invalidated lease as a breach of duty to creditors
\nwhich family shareholders could not ratify. Note also that the Directors will be
\nliable under s 588G if they allow the Co to trade while insolvent.
\nA Co or its related body corporate cannot indemnify officers and auditors or
\nexempt them from liability to the Co – s 199A.
\nIn addition, under s 199B Co or related corporate body cannot pay officers\u2019
\nliability insurance premiums for wilful breach of duty to the Co or for a breach of
\nss 182 or 183 (but insurance for breach of duty of care \u2013 s 180 \u2013 can be paid for).
\nNote that the courts may relieve an officer from common law liability for
\nnegligence, default, breach of trust or breach of duty where it appears that they
\nacted honestly and ought fairly to be excused – s 1318(1).
\n(ii) Relief from liability for breach of statutory duties
\nWhereas the GM may be able to condone breaches of common law and fiduciary
\nduties (subject to the rule about fraud on the minority), different considerations
\napply in respect of the statutory duties:
\nIf the directors receive advance authorisation to engage in conduct which
\nwould amount to a breach of ss 182 and 183, their conduct would not
\nconstitute \u2018improper\u2019 use of information or position and so the sections will
\nnot have been breached.
\nIf however the directors breach the provisions without authorisation, the Co
\nis not able to condone breaches of the statutory duties, as these are
\nmandatory civil penalty provisions.
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\nHowever, where the Co has condoned the parallel general law duty, the
\ncourts may well exercise their 1317S discretion to grant relief from the civil
\npenalty provisions, and the Co\u2019s condonation may disentitle it from seeking
\ncompensation under s 1317H for breach of statutory duties.
\nI. Remedies
\nVarious remedies can be brought against directors who breach their duties to the
\nCo.
\nThe ss 180-183 statutory duties are civil penalty provisions, and under s 1317J(1)
\nASIC can apply (1) for a declaration of contravention (s 1317E) and (2) a
\npecuniary penalty order (s 1317G).
\nASIC can also obtain a s 206C disqualification order, which would prevent the
\ndirector or officer from being involved in the management of any corporation for
\na specified period.
\nThe Co or ASIC can also apply for a s 1317H compensation order to recover
\ndamages on behalf of the Co under s 1317J(1) and (2) (whether or not a pecuniary
\npenalty order is made). Note that because s 185 states that the statutory directors\u2019
\nduties regime complements and does not replace the general law, s 1317H
\nrepresents an alternative avenue for compensation by the Co, which could elect to
\nproceed under the common law instead (see below).
\nBreaches of the statutory duties of good faith, best interests, proper purpose and
\nuse of information or position (but not the duty of care) will lead to criminal
\nliability \u2013 s 184 \u2013 when recklessness or intentional dishonesty are proved.
\nCriminal proceedings may be initiated even if a civil penalty order has been
\nobtained (s 1317P), but note the provision re the exclusion of evidence used in the
\ncivil penalty action (s 1317Q).
\nIf a civil penalty order has not been sought and a criminal prosecution is
\nsuccessful, civil proceedings cannot subsequently be instituted (s 1317M),
\nhowever if the prosecution is unsuccessful, civil penalty civil penalty proceedings
\ncan be launched (s 1317N).
\nNote that a court can grant relief from liability in proceedings (other than criminal
\nproceedings) for breach of the statutory duties where the director acted honestly
\nand it is fair that they should be relieved of liability \u2013 s 1317S.
\nIn cases where one seeks to enforce the duties, the s 1324 injunction is available.
\nExercise
\nRegional Air Transport Ltd (hereafter referred to as \u2018RAT Ltd\u2019),
\noperates a regional airline which serves the ACT and NSW,
\nconducting flights, using small propeller-driven aircraft, between
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\nCanberra, Sydney, Newcastle, Bathurst and Wagga Wagga. RAT
\nLtd has 4 Directors \u2013 Jack, Jill, Victoria and Rhett, each of whom
\nown 20% of the shares. The remaining 20% of the shares is split
\nbetween small investors. RAT Ltd has very large capital reserves
\nand is looking for new routes.
\nRhett is manager of the Canberra office of RAT Ltd, and is in
\ncharge of the airline\u2019s day to day operations. Rhett is sent by RAT
\nLtd to attend a conference in Darwin on small-airline operation.
\nWhile attending one of the conference functions he meets Ashley,
\nwho is Section Chief of the NSW Civil Aviation Authority (CAA).
\nAshley tells Rhett that the CAA is about to offer an air transport
\nlicence for the Newcastle \u2013 Coffs Harbour Route.
\nOne of Rhett\u2019s functions is the approval of invoice payments of
\nmore than $ 100 000. This he does by signing an authorization form
\nwhich is attached to the contract that the payment relates to. One
\nFriday afternoon, Melanie, who works in the company\u2019s accounting
\ndepartment, presents Rhett with an authorization form for $ 500
\n000. There is no contract attached to it. Rhett wants to get to the
\ngolf course, and does not bother to enquire about the absence of a
\ncontract.
\nRhett soon resigns from the board of RAT Ltd, and shortly
\nthereafter sets up his own airline, Sunair Ltd, to fly between
\nNewcastle and Coffs Harbour. A few weeks later, Gerald O\u2019Hara,
\nManaging Director of RAT Ltd, reads an article in the Sydney
\nMorning Herald which states that Sunair Ltd has just made a profit
\nof $ 1million on the Newcastle-Coffs Harbour route. Gerald also
\nfinds out that Rhett is the major shareholder in Sunair. He is also
\ninformed by RAT\u2019s auditors that Melanie has been defrauding the
\ncompany over the past year, that the $ 500 000 cheque did not relate
\nto any company contract and was in fact deposited into Melanie\u2019s
\npersonal account. She has now drawn the money and is unlocatable
\n\u2013 it is thought that she fled to Argentina. The board now
\napproaches you for advice on the legal issues arising out of Rhett\u2019s
\nconduct.
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\nTopic 21 Corporate finance: shares and debentures
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Be aware of the different types of finance available to
\ncompanies;
\n2. Appreciate the distinction between equity finance (shares)
\nand loan finance (debentures);
\n3. Understand the nature of shares and the rights attaching to
\nthem;
\n4. Understand the differing rights that attach to different
\nclasses of shares and, in particular, the rights in relation to
\nwhich shares may be preferent;
\n5. Appreciate that dividends may be paid only out of profits;
\n6. Understand the circumstances in which the prohibition on
\ninsider trading applies and the remedies available when
\ninsider trading occurs;
\n7. Understand the nature of debentures;
\nA. Introduction
\nThis topic (sample nursing essay examples by the best nursing assignment writing service) aims to introduce and explain the various types and sources of capital
\navailable to companies and provide an understanding of how this capital must be
\ntreated.
\nAll companies require funding to carry on their activities.
\nIn general terms this funding is made up of two types of capital, equity and debt.
\nB. Sources of company finance
\nCompanies can fund their activities from two main sources:
\nEquity is share capital. A company limited by shares obtains equity by the issue
\nof shares in return for contributions of capital from members. A company has the
\npower to issue shares (s.124(1)(a))
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\nDebt is capital obtained by borrowing money privately (e.g. from a bank) or
\npublicly (e.g. from members of the public in return for debentures in the
\ncompany). Interest will be paid on this money.
\nSection 92 of the CA uses the generic term \u2018securities\u2019 to refer both to equity
\nsecurities (shares) and loan securities (debentures and notes).
\nC. Shares
\nThe share capital of a Co the amount of money (in cash or other value) the
\nmembers have paid, or have promised to pay, to the Co.
\nSection 117(2)(k) requires that when a Co is formed, ASIC must be advised of
\nwhat shares it has issued. This becomes an on-going obligation to report changes
\nin shareholding throughout the life of the Co – s 254X(1).
\nD. Classes of shares
\nA Co can divide its shares into different classes: Birch v Cropper (1889) 14 App
\nCas 525.
\nSection 246F(1) – ASIC must be given notice of division of shares into classes.
\n(i) Ordinary shares
\nOrdinary shares will normally have the following rights
\n\uf0b7 the right to share equally in any declared dividends
\n\uf0b7 the right to vote at general meetings
\n\uf0b7 the right to be repaid capital on winding up (if there is any left)
\n\uf0b7 the right to share in surplus on winding up
\n(ii) Preference shares
\nA company can issue shares which are preferent in relation to dividend payment,
\nrepayment of capital on liquidation or payment of any surplus on liquidation. A
\nshare can be preferent in relation to one or all of these rights, but note that
\npreference share rights are interpreted restrictively, and that a share is preferent in
\nrelation to one right, it is presumed not to be preferent in relation to all others.
\nThus a preference right has to be expressly stated to exist. The following are the
\nrights attaching to preference shares:
\n\uf0b7 A share that is preferent as to voting rights gives the holder more than one
\nvote per share.
\n\uf0b7 Shares that are preferent in relation to dividend are entitled to a guaranteed
\ndividend based on a fixed percentage of the issue price of their shares (NB:
\nassuming that a dividend is declared). This is a preferential right to be paid
\nahead of other shareholders. If the company is not making a lot of profit,
\nthe preference shareholders may be paid while the ordinary shareholders
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\nmay receive little or no dividend. In a good year, however, ordinary
\nshareholders may receive a larger dividend that the preference shareholders.
\n\uf0b7 Shares that are preferent in relation to repayment of capital enjoy priority
\nfor repayment of capital before other shareholders when the Co is wound
\nup.
\n\uf0b7 Shares that are preferent in relation to payment of surplus capital receive a
\ndefined percentage of any surplus capital that may be left once the face
\nvalue of all shares has been paid to investors upon winding up.
\nIn addition to these rights, preference shares can also be
\n\uf0b7 participating or non-participating. Preference shares that are preferent as to
\ndividend and \/ or capital repayment will, if they are participating
\npreference shares have the right to receive an dividend and \/ or an ordinary
\nshare in capital repayment along with individual shareholders as well as
\ntheir preferential entitlements \u2013 in effect, they get two bites of the cherry.
\nHowever remember that preference in relation to a particular right is
\npresumed to be exhaustive, and in accordance with this rule, shares are
\npresumed to be non-participating: Will v United Lankat Plantation Co Ltd
\n[1914] AC 11, Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd
\n[1949] AC 462.
\n\uf0b7 cumulative or non-cumulative as to dividend. If a company does not pay
\ndividends in a particular year, holders of cumulative preference shares are
\nentitled to have the right to be paid arrears of dividends in subsequent years
\nahead of ordinary shareholders. Preference shares are presumed to be
\ncumulative if nothing is stated.
\nA Co may issue redeemable preference shares \u2013 i.e. shares that can be bought
\nback after a specified time (s 254A(3)). They may be redeemable:
\n(a) at a fixed time or on the happening of a particular event; or
\n(b) at the company\u2019s option; or
\n(c) at the shareholder\u2019s option.
\nA Co may also issue convertible preference shares. These shares carry
\npreferential rights for a period of time and then revert to ordinary shares at the end
\nof that period.
\nE. Dividends
\nA dividend is that part of a Co’s profits it decides to distribute to members.
\nUnder s 254U(1) the directors may declare dividends.
\nHowever, even once a dividend has been announced, it is not a binding debt and
\ncan be reversed at any time before the due date for payments 254V(1) (unless the
\nconstitution provides for a binding declaration – ss (2))
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\nIn Burland v Earle [1902] AC 83 it was held that shareholders cannot force a Co
\nto use profits to pay a dividend if it has made a profit \u2013 it is a decision at the
\ndiscretion of the board.
\nThe key rule relating to dividends is contained in s 254T(1), which states that a
\ncompany may not pay a dividend unless:
\na. the company\u2019s assets exceed its liabilities immediately before the dividend
\nis paid and the excess is sufficient for the payment of the dividend;
\nb. the payment of the dividend is fair and reasonable to the company\u2019s
\nshareholders as a whole; and
\nc. the payment of the dividend does not materially prejudice the company\u2019s
\nability to pay its creditors.
\nUnder s 254T(2) whether a company\u2019s assets exceed its liabilities is determined in
\naccording with accounting standards.
\nNote that requirement (a) is designed to ensure that the company\u2019s assets exceed
\nits liabilities both before and after the dividend is paid.
\nRemember also that under s 588G(1), the payment of a dividend can amount to
\ninsolvent trading \u2013 ie where the payment of a dividend occurs while a Co is
\ninsolvent, or in circumstances where the payment pushes it into insolvency, s
\n588G will be breached and the directors will be personally liable for the debt
\nincurred by the Co.
\nF. Insider trading
\nThe problem of insider trading, where a person who is privy to confidential
\ninformation obtained from within a company uses the information to buy or sell
\nshares to the disadvantage of the other contracting party, arose in an early case
\nabout directors\u2019 duties:
\nIn Percival v Wright [1902] 2 Ch 421 shareholders in a Co offered to sell shares to
\nthe Co\u2019s directors. The directors were already negotiating to sell their own shares
\nat much higher price but did not inform shareholders, and made a huge profit at
\nthe shareholders\u2019 expense. The shareholders were however unable to recover
\ndamages from the directors. Although the directors would have been liable to pay
\ntheir profit to the company, as they had made a profit as result of their position as
\ndirectors, such duties they owed were owed to the Co and not to the shareholders,
\nand so they could not recover.
\nAlthough it may often be that directors use their inside information in this way,
\ninsider trading can obviously be engaged in by anyone who discovers confidential
\ninformation.
\nThe insider trading provisions seek to deal with these deficiencies in the law.
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\nFirst, the CA contains a very broad definition of inside information in s 1042A,
\nwhich defines inside information as information
\n(i) not generally available which
\n(ii) would reasonably be expected to affect price – i.e. it is an objective test and
\na breach of insider trading laws does not require proof that the trader
\nsubjectively knew the info was not generally available – Hannes v DPP (No
\n2) [2006] NSWCCA 373.
\nThe primary prohibition is contained in s 1043A(1) an insider (that is, someone
\nwho has inside information \u2013 the term does not relate to whether the person has
\nany position inside the Co) – may not purchase or sell shares in Co while the
\ninformation is not publically available. An example of the prohibition in action is
\nprovided by R v Rivkin [2003] NSWSC 447. Rivkin was told by McGowan, CEO
\nof Impulse Airlines, that Qantas was about to acquire control over Impulse, thus
\nremoving one of its competitors. Rivkin then purchased shares in Qantas, which
\nwent up in value when its acquisition of Impulse became public. Rivkin was
\nconvicted of breaching s 1043A(1). For liability to arise, it is not necessary to
\nshow that the insider\u2019s decision to buy or sell shares was because they were in
\npossession of the information \u2013 mere possession of the information is enough to
\ngive rise to the prohibition against trading, as held in R v Farris (2015) 107 ACSR
\n26).
\nThe second prohibition is that an insider may not get any-one else to trade in
\nshares on his or her behalf.
\nThe third prohibition relates to \u2018tipping\u2019 – s 1043A(2) prohibits one (tipper) from
\npassing on inside info to another (tippee) whom he reasonably knows would be
\nlikely to use info to trade. Note that it does not matter whether the tippee used
\nthe info or not.
\n\u2018Information not readily available\u2019 is defined in s 1042C, which says that
\ninformation is readily available if it is readily observable or has been made known
\nin a way readily ascertainable to investors for a period permitting its
\ndissemination among them \u2013 i.e. the law does not penalise research into sources
\nthat anyone could access.
\nInformation has an effect on price if a reasonable investor would think that it
\nwould \u2013 s 1042D
\nNote that s 1042G deems corporations to know what their officers found out in the
\ncourse of their employment, similar re partnerships \u2013 s 1042H.
\nExcluded from definition of info (most important exclusions):
\nthe insider\u2019s own intention to trade (which could itself affect price) \u2013 s
\n1043H.
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\ncircumstances where a \u201cChinese wall\u201d is in place in a Co (s 1043F) or
\npartnership (s 1043G) \u2013 an administrative arrangement preventing transfer
\nof inside information.
\nBreach of prohibitions against trading and tipping are criminal offences \u2013 s 1311
\nand Sch 3.
\nDefences under s 1043M
\nthat the information was generally available
\nthat the other party to transaction knew or ought reasonably to have known
\nthe info (so was not taken advantage of).
\nCivil liability is imposed by s 1043L: Anyone who suffers loss as a result of
\ninsider trading may recover damages from inside trader \u2013 explained in s 1043L as
\nthe difference between what would have been paid had the other party known the
\ninside info.
\nNote overlap with ss 182 \/ 3 where the inside trader is also a Director – the Co will
\nalso be able to recover the director\u2019s profit using s 1317H \u2013 in other words, the
\ndirector will be liable twice.
\nG. Misleading or deceptive conduct
\nApart from insider trading, the Act prohibits a number of other types of
\nmisconduct relating to share trading in ss 1041A \u2013 1041I. Perhaps the most
\nimportant of these is the prohibition in s 1041H against misleading or deceptive
\nconduct in relation to a \u2018financial product\u2019 (defined very broadly in s 763A as
\ncovering virtually any type of investment).
\nThe effect of this is to make any person who engages in such conduct liable under
\ns 1041I to any person who suffers a loss as a result of relying on that statement.
\nThe typical example being where a company issues a misleading statement to the
\nmarket which leads to investors buying shares, as in ASIC v National Exchange
\nPty Ltd (2003) 47 ACSR 128. This can lead to the company being liable to the
\ninvestors, and the directors in turn being liable to the company under s 180(1) for
\nits losses because by permitting the statement to be issued, the directors would be
\nbreaching their duty of care to the company.
\nH. Debentures
\nWhen a Co raises loan finance it issues debentures. A debenture is defined in s 9
\nof the Act as a chose in action (that is, a right to bring a legal action) that includes
\nan undertaking by a body corporate to repay a loan \u2013 in simple language, an
\nacknowledgement of debt.
\nA critical issue for lenders to a company is whether the company is providing
\nsecurity for the loan \u2013 that is, whether the company is conferring on the
\nborrower(s) a right in property owned by the company. If a loan is unsecured, the
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\nlender ranks equally with other creditors, which obviously provides no protection
\nfor the borrower. The answer is for the Co to use its property as security for its
\nborrowings, which it can do by virtue of s 124(1)(f) of the CA.
\nThe issue of debentures is regulated by Ch 2L. In order for lenders to have clarity
\nas to the basis upon which they are lending money to a Co, s 283BH regulates the
\nuse of terminology by a Co by providing that a debenture can be described by the
\nborrowing Co as a \u2018mortgage debenture\u2019 only if it is secured by a mortgage over
\nland, and as a \u2018debenture\u2019 only if it is secured by personal property. In all other
\ncircumstances the debt finance must be referred to as an \u2018unsecured note\u2019 or an
\n\u2018unsecured deposit note\u2019.
\nThe fact that a debenture is secured by a publicly registered interest over land or
\npersonal property means that anyone buying or taking any other interest in an
\nasset from a Co in circumstances where a lender has a registered interest over the
\nasset has only themselves to blame if the holder of that interest successfully
\ninitiates proceedings to get the purchaser to give up the property. In other words,
\na lender who secures a loan to a Co by taking a registered interest over its assets
\ncan get hold of the property even if it has been alienated by the Co to a 3rd party.
\nFor this reason, it is crucial before buying a substantial asset from a Co, or taking
\nsome other interest in the property, to check the public register of mortgages as
\nwell as the register of interests maintained under the Personal Property Securities
\nAct 2009 (Cth) so as to make sure that a lender does not have a prior interest in the
\nproperty. If, for example, bank A lends money to a Co, and the debt is secured by
\nan interest over vehicles owned by the Co, and that interest is registered under the
\nPPSA, and then bank B lends money to the Co, accepting security over those
\nsame vehicles without checking the PPSA register, if the Co defaults on the debt,
\nbank A can have the cars sold and take as much of the proceeds as is required to
\ncover its loan, leaving bank B with whatever is left.
\nExercise
\nCapital Technologies Ltd (CT Ltd) is an electrical engineering
\ncompany. It is listed on the ASX. Its research department has
\ndeveloped a new type of battery. The research is presented to a
\nBoard meeting on 1 July. It is agreed that a public announcement
\nabout the battery will be made on 15 July.
\nOn 2 July, Don Trump, a director of CT Ltd, telephones his stock
\nbroker and buys 10 000 shares in CT Ltd from Sean Young at the
\ncurrent market price of $ 2.00 each. That same night, he tells his
\nfriend Gordon Gecko, who he knows is a regular trader in shares,
\nabout the new battery but Gecko does not act on the information.
\nUpon the public announcement of the news about the battery, the
\nprice of shares in CT Ltd climbs to $ 22.00 each.
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\nA few weeks later, another shareholder, Sam Speed, who is an
\namateur scientist, reads an article in the latest issue of
\nthe International Journal of Chemistry which is available in his
\nlocal library which says that an acid which Sam recognizes is one
\nused in the batteries made by CT Ltd, is unstable. He sells his
\nshares to Frank Jones for $ 22.00 each. Subsequently, when news
\nreaches the market that customers of CT Ltd are complaining that
\nthe batteries have stopped working due to the unstable acid, the
\nprice of shares in CT Ltd falls to $ 15.00 each.
\nAdvise as to the liabilities arising from these facts, citing relevant
\nlegal authority.
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\nTopic 22 Fundraising by public companies
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Understand the obligation that public companies have under
\nCh 6D of the Corporations Act 2001 (Cth) to make
\ndisclosure of various matters to the market when raising
\nfunds from the public;
\n2. Appreciate what exemptions there are in relation to the
\nobligation to provide disclosure;
\n3. Understand the nature prospectuses and their contents;
\n4. Understand the restrictions relating to shares issues;
\n5. Appreciate the purpose and operation of the prohibition
\nagainst hawking and the consequences of its breach;
\n6. Understand the restrictions on advertising of offers of
\nsecurities;
\n7. Determine what the criminal and civil liabilities are for a
\nbreach of the rules contained in Chapter 6D.
\nA. The obligation to provide disclosure
\nCompanies raise money by issuing shares and debentures. Only public companies
\ncan raise money from the public \u2013 s 113.
\nChapter 6D of the CA seeks to protect the investing public by requiring disclosure
\nof information to investors.
\nSection 700(1) refers to the broad definition of \u2018securities\u2019 in defining what
\nfinancial products Ch 6 D applies to. This definition includes interests in
\nmanaged investment schemes as well as options to acquire securities.
\nNote that s 700(2) makes Ch 6D applicable to both offers and invitations to make
\nan offer.
\nThe extent to which disclosure is required essentially depends upon who is
\nreceiving the invitation \/ offer and the size of the offer.
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\nVideo
\nThe basic provision is s 706 which states that an offer of securities requires
\ndisclosure unless one of the s 708 exemptions apply. The s 706 requirement is
\ngiven force by the following:
\nAn offer of securities without prior lodgement of the appropriate disclosure
\ndocument with ASIC is an offence under s 727(1).
\nSimilarly, any form which can be used by the public to respond to \/ make an
\noffer for securities must be accompanied by a disclosure document or
\nappear in it \u2013 breach being an offence \u2013 s 727(2).
\nNo person may issue or transfer securities requiring lodgement of a
\ndisclosure document unless the application was on a form which the issuer \/
\ntransferor believed on reasonable grounds to have been accompanied by a
\ndisclosure document \u2013 s 723(1).
\nIt is an offence to offer securities in a body that does not yet exist \u2013 s 726.
\nWhat types of offer are exempt under s 708? Most important are:
\nSection 708(1) \u2013 (7) small scale offerings, where the Co will not have issued
\nsecurities to more than 20 people or for more than $ 2 million in the past 12
\nmonths);
\nSection 708(8) – offers to \u2018sophisticated investors\u2019. Under this exception, offers
\nmay be made without disclosure to investors who are assumed to be experienced
\nenough to take the risk of making such investment decisions. This exception
\napplies where the amount payable on acceptance is $ 500 000 or more, or the
\namount payable plus any amounts previously paid by the investor for securities in
\nthe Co is $ 500 000 or more, or the investor has net assets of $ 2.5m or gross
\nincome for the last 2 financial years of $ 250 000 pa.
\nSection 708(10) – offers to experienced investors through licensed dealer. This
\nexemption applies where the offer is made through a licensed dealer to a person
\nwhom the dealer believes on reasonable grounds has the experience to assess the
\ninvestment and provides the investor with a written notice to that effect (e.g. Co
\nplaces shares with a broker who then contacts his clients).
\nSection 708(13) and (14) – offers to existing share or debenture holders.
\nIf disclosure is required, then the type of disclosure document to be used depends
\nupon the circumstances of the offer. Four types of disclosure document are
\ncontemplated by the CA :
\nprospectuses
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\nshort form prospectuses
\nprofile statements
\noffer information statements
\nfor the purposes of this subject, we will look at prospectuses, which are the most
\nimportant type of disclosure document.
\nA disclosure documents must be lodged with ASIC \u2013 s 718.
\nAll directors must give written consent to the lodgement \u2013 s 720 \u2013 and thereby
\nbecome liable for its contents.
\nDisclosure documents may be circulated to investors as soon as lodgement has
\ntaken place, but note that in the case of non-quoted securities (that is, securities
\nnot listed on the ASX) no offers can be accepted or securities issued until at least
\n7 days after lodgement (extendable to 14 days by ASIC) \u2013 s 727(3).
\nB. Prospectuses
\nThere is certain specific information which must be disclosed in all prospectuses \u2013
\nlisted in s 711(1) \u2013 (8) \u2013 pertaining to details of the offer, the identity of persons
\ninvolved in the offer, the expiry date of the offer (note offers cannot be accepted
\nmore than 13 months after prospectus is published ss (6)).
\nIn addition to this specific information, a prospectus must comply with the general
\ndisclosure requirement in s 710(1) of containing all information which an investor
\nor his \/ her advisor would reasonably require to make an informed assessment of
\nmatters laid out in the table in s 710.
\nMisleading or deceptive statements or omission of information from a disclosure
\ndocument amounts to a contravention of the CA \u2013 s 728(1), and is an offence on
\nthe part of the Co if investors are materially disadvantaged \u2013 s 728(3).
\nNote that for purposes of s 728 liability, forecasts (ie predictions) which turn out
\nnot to be correct will be regarded as misleading if the person making them did not
\nhave reasonable grounds for the prediction (s 728(2)).
\nPersons who suffer loss as a result of misleading or deceptive statements or
\nomissions can recover under s 729.
\nNote that under s 729(1) such recovery can be from the Co, its Directors and
\nanyone (such as accountants and expert consultants) whose reports are included in
\na disclosure document with their consent.
\nIf a prospectus (or any other disclosure document) has been lodged and it is then
\nrealised that it is in some way misleading or deceptive or there is an omission, or
\nthat new circumstances have arisen which means that other information would
\nhave been included had they obtained when the original document was issued then
\na supplementary or replacement document must be lodged with ASIC \u2013
\ns 719.
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\ninvestors must either have their money returned to them or be given 1 month
\nto decide whether to take shares (or keep them if already issued) after
\nreceiving the replacement document \u2013 s 724
\nThe general disclosure requirement is relaxed in respect of listed disclosing
\nentities who must make continuous disclosure under ASX rules because they are
\nsubject to \u201cenhanced disclosure\u201d (ED) requirements \u2013 alternate disclosure
\nrequirement for them under s 713, which requires only that such disclosure as is
\nreasonably required by an investor \/ professional advisor must be given \u2013 the
\nmatters in the table of s 710 are not required, as the market knows these already.
\nC. Restrictions on the issue of securities
\nIf securities are offered subject to the condition that none will be issued unless a
\nminimum number are subscribed for, then
\nmoneys received before the minimum is reached must be held in trust be the
\nissuer (s 722)
\nno shares must be issued until the minimum target is reached ( s 723(2)) and
\nif it is not reached, subscribers must have their money refunded or must be
\ngiven a new prospectus revising the offer and giving them one month to
\ndecide whether to withdraw the offer, or must be issued with the shares but
\nbe given a new prospectus and one month to return the securities for a
\nrefund \u2013 s 724.
\nIf the disclosure document states that the securities will be listed on a stock
\nexchange and that does not happen within three months of the date of the
\ndocument, the issue is void and refunds must be sent to subscribers \u2013 s 723(3).
\nA prospectus expires (becomes stale) after 13 months \u2013 ss 711(6). If securities
\nare issued in respect of applications received after expiry, the issuer must either
\nrefund investors their money or give them 1 month to withdraw their applications
\n\u2013 s 725(3).
\nD. Hawking of securities
\nSection 736(1) is designed to protect pressurisation of members of the public, by
\nprohibiting offers of securities during unsolicited meetings or telephone calls.
\nIt covers both issue of new securities and sale of existing ones, and offers to
\npurchase as well as invitations to offer.
\nExemptions apply where the offer wouldn\u2019t need disclosure because
\nthe \u2018sophisticated investor\u2019 exemption applies \u2013 s 708(8)
\nthe professional investor exception would apply \u2013 s 708(11)
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\nthe offer is of securities listed on the ASX made on the telephone by a
\nlicensed dealer
\nthe offer is made even of unlisted securities to an established client by a
\nlicensed dealer
\nAn issue or transfer of securities consequent upon a breach of the anti-hawking
\nprovision can be rescinded by the purchaser \u2013 s 738.
\nE. Liabilities
\nAn investor who has suffered loss after purchasing shares where prospectus was
\nfalse, misleading or incomplete can use the common law of misrepresentation to
\nobtain
\nrescission
\ndamages in tort for misrepresentation
\nIn the alternative to the above common law remedies, the CA imposes statutory
\ncivil and criminal liability \u2013 these are now used in preference to the common law:
\n(i) Criminal liability
\nIt is a criminal offence on the part of the Co and individuals involved to breach s
\n727 by
\nmaking an offer or distributing an application form for securities without
\nlodging a disclosure document
\nmaking offers other than with a form accompanying a disclosure document
\nor
\naccepting applications for unlisted securities within the 7 day cooling off
\nperiod given by s 727(3)
\nSection 728(1) prohibits the offer of securities under a disclosure document which
\nis misleading or deceptive or omits information which it should contain \u2013 note
\nthat this applies both where the document was misleading or deficient ab initio or
\nto continuing to offer securities where new circumstances requiring the inclusion
\nof new info have arisen.
\nBreach of s 728 is a breach of the CA, and is also a criminal offence when the
\nbreach is materially adverse from the point of view of the investor \u2013 s 728(3).
\nNote however that the offence is committed only by the \u201cperson\u201d issuing or
\ntransferring securities, i.e. the Co issuing securities.
\nUnder s 739(1) ASIC may issue a stop order prohibiting offers, issues and sales of
\nsecurities when it believes that s 728 has been breached.
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\n(ii) Civil liability
\nSection 729 gives investors are given a right to compensation for loss or damage
\nresulting from a breach of s 728. An example of such liability is provided by
\nCadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309,
\nwhere the plaintiff purchased shares issued at $ 0.50 each on the basis of a
\nprospectus which contained forecasts about the respondent company\u2019s financial
\nperformance which were misleading and deceptive under s 728 (in that there was
\nno reasonable basis for those predictions \u2013 see s 728(2)). The plaintiff
\nsubsequently sold the shares at a market value of $ 0.11 each. The court awarded
\nthe plaintiff damages in the amount of the loss they had made.
\nNote that the table in s 729 makes liable not only the issuer of the securities (ie the
\nCo) but also its directors and others involved in the contravention. Persons whose
\nstatements are included with their consent in a disclosure document (eg
\naccountants etc) will be liable for any loss arising from that statement (ie their
\nliability is limited to the material they were responsible for).
\n(iii) Defences
\nDefences are available to those prosecuted under s 728(3) or sued under s 729 as
\nfollows:
\nSection 731 relates to prospectuses and provides a defence of due diligence
\nis available to a person who made all reasonable inquiries and believed on
\nreasonable grounds that a statement was not misleading or deceptive or that
\nthere were no omissions.
\nSection 733 provides a general defence of reliance in respect of all
\ndisclosure documents, to the effect that a person will not be liable under s
\n728 where they can show that they reasonably relied upon information given
\nby someone-else provided that that person was not a director employee or
\nagent (s 733(1)). Note that a person acting in their professional capacity is
\nnot an agent \u2013 s 733(2). It is important to note here that if the company
\nsuccessfully disclaims liability on the basis of reliance on information
\nprovided by a person, then if a statement or information from that person
\nwas included in the prospectus, then that person will become liable under ss
\n728 \u2013 729.
\nExercise
\nUnited Industries Corporation Ltd is a company with a diversity of
\nbusiness interests. On 1 July 2003 its board resolves to open a
\nchain of hotels, and to raise capital to do this by issuing shares. On
\n4 July 2004 Brad Cooper, its Managing Director, telephones his
\nfriend, Camilla Cash and offers her $ 600 000 worth of shares. He
\nalso phones Bob Broke and offers him $ 100 000 worth of shares.
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\nBoth Camilla and Bob accept these offers, but in light of
\nsubsequent events now wish they had not and want their money
\nback. On 30 July 2004 United Industries issues a prospectus which
\nincludes the following statement:
\nWe confidently predict that a minimum of 50 000 people will
\nuse our hotels\u2019 facilities within the first year and that this
\ndivision of our company will be making a profit within two
\nyears.
\nUnfortunately United Industries did not mention in their prospectus
\nthe fact that their application for liquor licences for their hotel chain
\nwas still being considered by the State Liquor Licensing Board,
\nwhich grants the licences 18 months after the hotels open. Because
\nthey have been unable to serve liquor during this period, the hotels
\nare not yet profitable, and shares in United Industries plummet in
\nvalue, and so many investors lose their money.
\nAdvise United Industries Ltd on its liabilities arising out of these
\nfacts, citing full authority for your answer.
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\nTopic 23 Liquidation
\nLearning Objectives
\nAfter completing this topic (sample nursing essay examples by the best nursing assignment writing service), you should be able to:
\n1. Understand the concept of \u2018external control\u2019 and the
\ndifference between receivership, administration and
\nliquidation;
\n2. Understand the different circumstances in which liquidation
\nmight occur;
\n3. Trace the process by which a creditor can apply for
\ncompulsory winding up of a company on insolvency;
\n4. Understand the role and powers of a liquidator;
\n5. Identify the ways in which a liquidator can increase the
\ncapital available to a company to satisfy creditors by
\npursuing claims on behalf of the company;
\n6. Understand the nature of voidable transactions, in particular
\nuncommercial transactions and unfair preferences;
\n7. Understand the rights of creditors when liquidation is taking
\nplace;
\n8. Apply the order of when assets of a company are being
\ndistributed;
\n9. Understand the nature of voluntary liquidation and the
\ncircumstances when it takes place;
\n10. Appreciate that a company ceases to exist upon
\nderegistration.
\nA. External control
\nThere are various circumstances in which a company falls under external control
\nbecause it is unable to meet its liabilities. Such control may be exercised by a
\nreceiver, administrator, provisional liquidator or liquidator.
\nInsolvency practitioners can act as receivers, administrators or liquidators. They
\nmust be registered with ASIC under s 1282.
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\nReceivership occurs when a secured creditor appoints receiver to enforce a
\nsecurity interest which the creditor has over assets of the Co. If the interest relates
\nto all of a Co\u2019s assets the receivership is a general receivership, if it relates to a
\nspecific asset it is a particular receivership. The receiver controls the company for
\nas long as is required to sell off the secured property.
\nVoluntary administration occurs when the board of a company suspects that it
\nmight be insolvent, and decides to put the company under administration. This
\nmeans that an administrator is appointed to take control of the company and report
\nto the creditors whether it should
\n\uf0b7 be allowed to carry on trading;
\n\uf0b7 come under long term administration regulated by a Deed of Company
\nAdministration (an agreement between the creditors and the company); or
\n\uf0b7 be wound up.
\nNote that once a company decides to call in an administrator, the board effectively
\nsurrenders control of the company to the creditors, because they decide, in light of
\nthe administrator\u2019s report, what the fate of the company might be. Voluntary
\nadministration is often taken by directors who are uncertain as to whether their Co
\nis solvent and want to take steps to avoid possible s 588G liability.
\nB. Liquidation (winding up)
\nWinding up can occur either compulsorily or voluntarily.
\nCompulsory winding up (winding up resisted by the Co) occurs by application to
\ncourt
\non grounds of insolvency (Pt 5.4), or
\non other grounds (s 461).
\nVoluntary winding up (acquiesced in by Co) can take two forms
\nmembers\u2019 winding up (if the Co is solvent). or
\ncreditors\u2019 winding up (if the Co is insolvent).
\nC. Compulsory winding up on insolvency
\nCompulsory winding up commences when a creditor applies to court to have the
\nCo wound up.
\nWhen is a Co insolvent? Under s 95A insolvency = inability to pay all one\u2019s
\ndebts as and when they fall due. The court does not simply focus on a company\u2019s
\nfinancial position on a particular day, but rather The takes into account:
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\ndebts currently due, and those due in near future, project ( help with nursing paper writing from experts with MSN & DNP degrees)ing into the future
\nfor a common-sense period, and taking prospective debts and contingent
\nliabilities into account (s 459D)
\nthe date when debts are due, taking into account a course of conduct by a
\ncreditor that has given a period of grace beyond when debts fall due
\nassets – but taking into a\/c whether those assets are readily saleable – only
\nassets realisable within a short time will be taken into account
\nwhat credit can be realisable by unsecured borrowing is not usually taken
\ninto account
\nthe terms upon which the Co itself extends credit – the extent to which debts
\nowed to a Co are an asset is obviously affected by this.
\nIn certain circumstances listed in s 459C(2), the CA presumes a Co to be insolvent
\n\u2013 ie the onus will be on the Co to prove that it is not insolvent if any of the
\nfollowing events have occurred within the three months preceding the application
\nby the creditor:
\nthe Co fails to comply with a statutory demand to pay a debt of > $ 2 000
\nexecution of a judgment debt is unsatisfied or
\na receiver was appointed in order to enforce a security interest over
\ncirculating assets
\nFailing a statutory presumption, the applicant must prove Co\u2019s insolvency \u2013
\ns 459P.
\nIn determining whether the Co is insolvent, the court can take into account
\ncontingent and prospective liabilities – s 459D(1): any obligation (including a
\ncontract, trust or judgment) requiring that the Co pay money immediately, at a
\nfuture date, or on an event which may or may not happen.
\nif liability is on a certain date or an event certain to happen it is prospective.
\nif the event is uncertain (e.g. where Co has stood guarantor for a 3rd party) \u2013
\nit is contingent.
\nNote that court\u2019s power is discretionary \u2013 the court may decide not to take into
\naccount contingent liabilities which have only a remote possibility of arising –
\nBrooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61.
\nOnce a Co is being wound up, provable debts include all claims, not just present,
\nprospective and contingent liabilities and will extend to claims arising under the
\nlaw of torts and contracts (eg a claim arising out of an event which has occurred
\nand which the claimant alleges gave him an action in tort against the Co, or a
\nclaim for damages for breach of a contract which the Co will now not be able to
\nperform).
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\nWho can apply for winding up in insolvency under s 459P?
\nthe Co in general meeting
\na director or the board (with leave of court under s 459P(2)) so as to avoid
\ns 588G liability \u2013 they could choose the less drastic step of administration,
\nbut may prefer to wind up if they see no hope of solvency
\ncreditors (who are the applicants in 99% of cases)
\na contributory (with leave) \u2013 defined by s 9 as including any present
\nmember holding fully or part paid shares, as well as any past member still
\nliable to pay
\na liquidator or provisional liquidator (appointed under voluntary winding up
\nwhere it becomes apparent that it is preferable to proceed by court winding
\nup)
\nASIC (with leave)
\nreceivers.
\nD. Compulsory winding up on other grounds
\nWinding up is also available on the following grounds under s 461:
\nthe Co resolves by special resolution that it be wound up by court
\nthe just and equitable ground \u2013 s 461(1)(k) \u2013 see the discussion in the Topic
\non members\u2019 remedies
\nwhere the affairs of Co are being conducted by directors in their own
\ninterests
\nwhere the affairs of Co are being conducted in an unfair, prejudicial or
\ndiscriminatory manner (also available under s 232)
\nwhere an ASIC investigation concludes that it is in interests of public,
\nmembers or creditors to wind up or where Co has no members.
\nE. Procedure for compulsory winding up
\nPt 5.7B frequently mentions specific periods before the \u2018relation-back day\u2019, which
\nis defined in s 9 as the day application for winding up was filed.
\nThe date of the beginning of winding up is the day the court order is given, except
\nwhere liquidation was preceded by administration, in which case the date of the
\nadministrator\u2019s appointment is the date liquidation is taken to have started:
\ns 513A.
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\nA provisional liquidator can be approved at the filing of the winding up
\napplication where necessary to protect Co assets pending hearing of application \u2013
\ns 472(2).
\nIf the court decides to grant the liquidation application, the provisional liquidator
\nis confirmed as liquidator.
\nThe consequences of the liquidation order are as follows:
\nthe liquidator takes control of Co, the directors\u2019 powers are suspended
\n(s 471A)
\ndividends cannot be declared
\nunpaid capital can be called
\ndispositions of Co property and executions against it are invalid (s 468)
\nproceedings against the Co cannot be continued or begun (s 471B)
\nemployees are discharged (unless their services are retained by the
\nliquidator)
\ntransfers of shares are void as against Co (s 468)
\nCo documents must reflect that it is \u201cin liquidation\u201d (s 541).
\nLiquidation replaces creditors\u2019 individual rights with a right to claim against
\nliquidator to be paid out of Co assets.
\nCreditors lodge proof of their claim with liquidator, who either accepts or rejects
\nit in whole or in part, subject to appeal by creditor to court under s 1321.
\nF. The role of the liquidator
\nThe liquidator must
\ntake possession of Co assets
\nrealise (i.e. sell) the assets
\ndetermine claims against Co
\napply Co assets towards the costs of liquidation and claims brought by
\ncreditors
\ndistribute anything left after satisfaction of claims (likely to be nothing if the
\nCo is insolvent)
\ndissolve the Co
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\nThe liquidator must notify ASIC of his appointment \u2013 s 537.
\nThe directors must give to the liquidator a report on the company\u2019s affairs, its
\nassets and liabilities \u2013 s 475.
\nThe liquidator must investigate the company\u2019s affairs, including any illegalities
\nand must lodge a preliminary report with ASIC \u2013 s 476.
\nThe liquidator must keep books of account \u2013 s 531, and must lodge six-monthly
\naccounts with ASIC \u2013 s 539.
\nThe liquidator must do everything in his power to increase Co assets, and may
\nbring proceedings on behalf of the Co \u2013 s 477(2).
\nHe \/ she has extensive powers under s 477, and may sell Co assets \u2013 s 477(2)(c).
\nThe liquidator may carry on Co business, but note s 477(2B) – restriction on
\nagreements ending or obligations to be discharged > 3 months after being entered
\ninto. Such agreements need the consent of the court or of a creditors\u2019 meeting.
\nThe liquidator must also get creditor or court approval if he \/ she wishes to
\ncompromise (ie settle) a claim that the company has against a 3rd party that is
\nvalued at > $ 20 000 \u2013 s 477(2A).
\nThe liquidator may use assets to fund winding up costs \u2013 s 512.
\nThe liquidator may apply to court to restrain the departure of a Co officer from
\nAustralia or for the taking of property of Co into safekeeping \u2013 s 486A.
\nUnder s 486B (even more drastic than s 486A) , ASIC, a liquidator or provisional
\nliquidator can apply for order arresting person who is about to leave Australia in
\norder to avoid paying money owed to Co, being examined, complying with court
\norder under Ch 5, or who has concealed Co property or who has destroyed,
\nconcealed or removed Co books.
\nThe liquidator is agent of the Co, and is subject to liability as fiduciary, under ss
\n180-184.
\nSection 600F prohibits suppliers of essential services (electricity, water, gas) from
\nterminating supply to a Co while it is under liquidation.
\nG. Funds available for distribution
\nOnly assets beneficially owned by Co at the time of the liquidation order or which
\ncome into the Co\u2019s ownership after the order are available for distribution.
\nThere are various avenues open to the liquidator to increase the company\u2019s assets
\n\u2013 and thus provide a larger pool from which to pay creditors. These avenues
\ninclude:
\ninvalidation of voidable transactions (Pt 5.7B – see below)
\nLAW504 Modules
\n194
\nsuing directors (including de facto and shadow directors) for damage to Co
\nunder s 180-184 or s 598 (which imposes liability for fraud, negligence,
\ndefault, or breach of trust causing loss to Co)
\nsuing directors for insolvent trading under s 588G
\nrecovering Co property or compensation from constructive trustees (eg 3rd
\nparties receiving property knowing that directors were breaching fiduciary
\nduty or participating in breach of duty)
\ndisregarding invalid security interests (s 588FJ, s 588FP)
\nmaking calls on partly-paid shares
\n(i) Voidable transactions
\nVoidable transactions can be set aside by a s 588FF order, applied for by the
\nliquidator.
\nUnder s 588 FC the liquidator must show under that the transaction was an
\n‘insolvent transaction’, which means that it was
\nan unfair preference or
\nan uncommercial transaction
\nentered into when the company was insolvent, or which made the
\ncompany insolvent.
\nAn unfair preference is defined in s 588FA(1) as a transaction between the Co and
\ncreditor where the creditor receives more for unsecured debt than would have
\nbeen received in winding up
\nAn uncommercial transaction is defined in s 588FB(1) as one which reasonable
\nperson in Co\u2019s position would not have entered into, taking into account the
\nbenefit and detriment to Co and other parties. The object of this provision is to
\nreverse any depletion of Co assets caused by transactions at under value – eg
\nexcessively generous retirement package for a director or sale of an asset at
\nundervalue.
\nIt is obviously important for the purposes of s 588FC for the liquidator to work
\nout precisely when the company became insolvent. This requires a careful
\nexamination of its records. However, Helpance is provided by two presumptions
\nin s 588E that:
\nIf the company is proved to have been insolvent at any time during the 12
\nmonth period preceding relation-back day, it is presumed insolvent since
\nthat time.
\nA company is also presumed to be insolvent for any period that it does not
\nmaintain statutorily-required accounting records as required under s 286.
\nLAW504 Modules
\n195
\nNot all uncommercial transactions and unfair preferences are invalid – there is also
\na time requirement: Under s 588FE the liquidator must also show that entry into
\ntransaction was within a statutorily prescribed period, which is
\n6 months before the relation-back day in the case of unfair preferences (s
\n588FE(3))
\n2 years before the relation-back day in the case of uncommercial transactions
\n(s 588FE(2))
\nUnfair preferences and uncommercial transactions are not the only type of
\ninsolvent transaction that can be voided. Even longer periods apply to three other
\ntypes of insolvent transaction, which can be reversed if they occurred
\n4 years prior to the relation-back day in cases where the transaction was with a
\nrelated entity of the company (s 588FE(4)) or was a director-related transaction
\n(s 588FDA(1))
\n10 years prior to the relation-back day if the liquidator can prove that the
\ntransaction was entered into for the purpose of defeating a creditor\u2019s claim (s
\n588FE(5)).
\nAs stated above, the ‘relation-back’ day is the day the application for winding up
\nwas filed with the court.
\nHowever, if winding up was preceded by (i) voluntary winding up (ii)
\nadministration or (iii) administration under deed of Co arrangement, then the day
\nof the passing of the resolution for winding up or the day the he administrator was
\nappointed = both the relation back day and the day of commencement of winding
\nup (s 588FE(2A)).
\n(ii) Void security interests
\nUnder s 588FJ a security interests registered within less than six months before
\nrelation back day is not enforceable against the Co.
\n(iii) Money not available to settle creditor\u2019s claims
\nproperty subject to a security interest or lien
\nmoneys being held on trust by the Co \u2013 the liquidator must identify trust
\nassets and deal with them separately.
\nmoneys paid to Co by insurer to satisfy a 3rd party\u2019s claim against Co \u2013
\ns 562.
\nLAW504 Modules
\n196
\n(iv) Unfair loans
\nThe liquidator can reverse any unfair loans made to the Co \u2013 s 588FE(6). An
\nunfair loan is defined in s 588FD as a loan in respect of which interest or charges
\nwere extortionate.
\nH. Lodgement of claims
\nCreditors lodge proof of claims and seek to have the liquidator accept them.
\nA claim must have arisen before the date of winding up (or the date an
\nadministrator was appointed).
\nUnder s 553B, penalties or fines owing to the Crown do not enjoy priority –
\ncreditors shouldn\u2019t be penalised by Co\u2019s wrongdoing.
\nDebts owed to members not payable unless their shares are fully paid \u2013 s 553A.
\nNote however that this section applies only to shareholders in their capacity as
\nshareholders. In Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232 the High
\nCourt held that where a shareholder had a claim against a Co arising out of a
\nmisrepresentation by the Co which induced the shareholder to purchase shares,
\nsuch a claim arose before the person became a shareholder and was thus not a
\nliability to them in their capacity as shareholder. The shareholder therefore
\nranked equally with other creditors in respect of this claim.
\nSet off of debts owed by a creditor to the Co is governed by s 553C \u2013 a creditor
\nmay claim only any excess owed to him by Co once his debt to it has been
\ncounted.
\nAfter secured creditors (ie holders of security interests over non-circulating
\nassets) are paid, the order of priorities set by s 556 applies:
\ncosts of liquidation
\nemployees\u2019 claims (paid pro rata if there is insufficient money to satisfy all –
\ns 559) and claims of persons who lent money to cover employee\u2019s
\nentitlements (s 560). Note the limitations on amounts payable to directors in
\ntheir capacity as employees under s 556(1) \u2013 salaries up to a cap of $ 2 000
\n(s 556(1A)), leave entitlements up to a cap of $ 1500 (s 556(1B)).
\nunsecured creditors the general rule of priority is the pari passu rule, which
\nmeans that all debts rank equally and if the company\u2019s assets are insufficient
\nto satisfy all claims, creditors share the assets pro rata \u2013 s 555 (eg, if the
\ncompany has assets worth $ 1 million and debts of $ 4 million, each
\nunsecured creditor will get 25c of each dollar they are owed)..
\nThe court may set a final date for proof of claims – s 485(1).
\nAny surplus then distributed to members. Moneys remaining unclaimed are paid
\nto ASIC – s 544(1).
\nLAW504 Modules
\n197
\nI. Voluntary winding up
\nA voluntary winding up is one concurred in by the Co \u2013 ie it takes place without
\nan order of court.
\nIf the Co is solvent, the winding up is controlled by the members, who appoint the
\nliquidator. This is what would happen if a solvent Co has achieved the objective
\nit was established for, and the shareholders want to realise their investment.
\nIf a Co is insolvent and the members agree to wind it up, the process is controlled
\nby the creditors, who appoint the liquidator.
\nThe voluntary winding up commences with a special resolution by the
\nshareholders under s 491.
\nIf a Co was under administration, then the creditors may vote to implement
\ncreditors\u2019 voluntary winding up after receiving the administrator\u2019s report (ss 439C
\nor 445E). Thus, by putting a Co into administration, the board is impliedly
\nconsenting to the possibility that the creditors might turn it into a liquidation. In
\nsuch circumstances winding up is deemed to have started when the administrator
\nwas appointed \u2013 ss 513B and C.
\nJ. Deregistration
\nAfter any type of liquidation, the Co ceases to exist as an entity on deregistration
\napplied for by the liquidator \u2013 s 601AD(1).
\nExercise
\nBlue Star Hotels Ltd operates a chain of hotels in NSW and
\nVictoria. Its directors are Tom Sharp, Charles Dickens and Mary
\nWollstonecraft. On 1 April Taylor\u2019s Linen Hire Ltd presented a
\ndemand to Blue Star in respect of a $ 2 500 laundry bill owed by
\nthe hotel group. Blue Star was unable to meet this debt. On the
\nbasis of this insolvency, Taylor\u2019s Linen Hire then filed an
\napplication for winding up on 23 April. The application was
\nsuccessful, and Ivan Trump was appointed as liquidator under a
\nwinding up order granted on 1 May. Ivan has requested that the
\ndirectors meet with him on 5 May and provide him with a report on
\nthe company\u2019s affairs. Advise him as to what impact the following
\nfacts have on the liquidation, giving full authority for your answer:
\nOn 12 April Blue Star registered a circulating asset security
\ninterest in favour of Wholesale Liquors Ltd, securing a debt of $
\n100 000 owed to Wholesale for wine supplied by it in February and
\nMarch.
\nOn 2 April the Board of Blue Star, in an attempt to deal with its
\ncash-flow problems, borrowed an amount of $ 200 000 from
\nLAW504 Modules
\n198
\nGrasping Bank, paying the bank an application fee of $ 50 000 and
\nagreeing to a 25% per annum interest rate.
\nLeonard Royce, who is in charge of the fleet of limousines run by
\nthe hotel, tells Ivan that the contract with Ultra Lube Ltd, which
\nservices the vehicles, is up for renewal. Ultra-Lube requires that its
\nclients sign a maintenance contract that is of a minimum of 4
\nmonths\u2019 duration.
\nIvan has found the following in Blue Star\u2019s files: a contract dated 1
\nFebruary for the purchase of 25 ivory chess sets from Dunhill
\nOrnaments Ltd (which Blue Star would sell in gift shops in its
\nhotels) on terms of payment after 6 months, and a letter dated 21
\nApril varying the terms of the contract by adding to it a new clause
\nin terms of which Blue Star agreed to transfer ownership in the
\ngoods back to Dunhill, and to sell them on consignment from
\nDunhill at 20% commission.
\nIvan has also discovered a receipt for a one-way ticket for a flight
\nwhich leaves for Argentina on 3 May, booked by Mary
\nWollstonecraft, who has so far refused to co-operate with Ivan.
\nTom, Charles and Mary are owed $ 20 000 each in respect of salary
\nand $ 5 000 each in respect of leave entitlements. The hotel chain\u2019s
\n500 employees are owed $ 1 000 000 in respect of salaries and $ 40
\n000 in respect of leave entitlements.<\/p>\n","protected":false},"excerpt":{"rendered":"
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