Lavi in Commerce

Brendan SweeneyLLB BCom (Melb)

Lecturer, Department of Business Law and Taxation,Monash Universitv

Jennifer O'ReillyLLM (Mon), BSc Dip Ed (Melb)

Lecturer, Department of Business Law and Taxation,Monash University

ButterworthsAustralia

2001

Preface xxìu

Table ofCases Xxv

1 The Australian Legai System 1What Is law? 1

Parllamentary law 2

A very short history of modern Australia 2Federalism 2Jurisdictional difficulties 3

The Corporations Law 3

The Trade Practices Act 4

Finding and referring to an Act of Parliament 4The doctrine of thè separation of powers 5Interpreting a statute 7

Judge-made law 7Stare decisis 7Where do we find thè common law? 8Law reporting and thè Internet 9Common law and equity 9Interpreting thè law f rom a case 11

Types off law 11

The Judlciary, thè courts and thè partles 12A hypothetical dispute 12

Thls book 15Contracts 15Torts and similar statutory obligations 15Agency, partnerships, companies and trusts 16Why study thè law? 16

2 Liabllity for Defective Goods and Services 17Llablllty for negllgence 17

Step 1 — When is a duty of care owed? 18Is there a duty of care owed for pure economie loss ? 19

Step 2 — What standard of care is owed? 22Negligent design of goods 22

Negligent produetion of goods 23

Negligerne in thè packaging ofproducts 24

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Proper labelling ofproducts 24

Negligence in delivery ofservices 25

Unexplained accidents — thè doctrine o/res ipsa loquitur 25

Step 3 — Causation and remoteness of damage 26

Contributory negligence 26

Disclaimers ofliability 26

The Trade Practices Act — damages for defectlve goods 27What is thè purpose of Part VA? 27

What are thè elements of a breach of Part VA? 27Why does thè defendant have to be a 'corporation'? 28What is a 'manuf acturer'? 28What is meant by thè expressions 'goods' and 'supply'? 29What is thè meaning of 'detective goods'? 29Does Part VA compensate for ali types of losses caused by

a detective good? 30Damage must be caused by thè detective good 30What are thè defences under Pt VA? 30Can a manufacturer exclude liability for detective goods by putting

a notice to that effect on thè label? 31

Contributory acts or omissions 31

Other matters 31

Answers to *Wtiat's your verdlct?' cases 34

Liability for Defective Advice andInformation 36The problem stated 36

Traditional actions for misrepresentation 36

Modern developments in thè law of misrepresentation 36Note on terminology 37

Summary of choices available to a representee 37

Remedles for misrepresentation 38Common law remedies 38

Statutory remedies 38

Damages for fraud 38Elements of f raud 38

Step 1: Was thè representation a false statement offact? 39

Step 2: Did thè representation induce thè contract? 40

Step 3: Was thè misrepresentation fraudulent? 41

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Contents

Negligent misrepresentation 42Step 1 — When is a duty of care owed for negligent advice? 43

A duty ofcare con be owed when giving advice or supplying information 43

A duty ofcare will often exist between parties to a contract 44

To whom do auditors owe a duty of care? 44

Australian courts have also defined thè duty ofcare narrowìy 46

Duty ofcare will depend on a variety offactors 47

Step 2 — What standard of care is owed? 48

Step 3 — Remoteness of damage 48

Can a disclaimer remove thè duty ofcare? 49

The Trade Practices Act 1974 (Cth) 50Section 52 does noi apply to ali representors 50

Financial services 51

The Fair Trading Acts 51

Firms are liablefor conduct ofdirectors, employees and agents 51

Conduct must be 'in trade or commerce' 51

Does section 52 require proof offraud or negligence? 52

What kinds of conduct can be misleading or deceptive? 53

Silence as misleading conduct 53

Opinions and section 52 54

Promises, predictions and section 52 55

Mere puffs 57

Exclusion clauses and disclaimers 57

Remedies for breach of section 52 58Damages are only awarded if thè misrepresentation caused thè loss 58Did thè representee reasonably rely on thè deceptive conduct? 58Calculation of damages 59Damages may be awarded against company's employees or agents 59Declaration that thè contract is void 59Varying thè terms of thè contract 60Injunctions 60Criminal misrepresentations 60

The Australian securitles and investmentsCommlsslon Act 60Financial Services 60

unconscionable transactions 61Unconscionable conduct in equity 61Remedies for unconscionable conduct in equity 62Pressure to strengthen unconscionable conduct provisions 62

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Damages for unconscionable consumer transactions 62

Unconscionable conduct under thè TPA s 51AB —consumer contracts 62

Damages for unconscionable business conduct 63When is a transaction unconscionable? 64

Answers to 'What's your verdlct?' cases 65

L Making thè Contract: Of f er andAcceptance 66The importance of contracts to business 66

What is a contract? 67

Does a contract have to be in writing? 67

Intention 68

Remedies 68

Termination of thè contract 68

Damages 68

Specific performance 69

Injunction 69

Recovery of thè contract price 69

Agreed damages clauses 69

Offer 70

Meaning of 'offer' 70

An offer, or merely an indication of a present intention? 71

An offer or an invitation to treat? 72

Retail displays 72

Catalogues 73

Advertisements 74

Auctions — who makes thè offer? 75

Tenders — who makes thè offer? 75

Standing of fers 77

An offer or merely part of thè negotiations? 77

The fate of thè offer 77

Wlthdrawlng thè offer 78

Can an offer be revoked after acceptance? 78

Can an offer be revoked before acceptance? 78

Is it necessary to teli thè offeree about thè revocation? 78

Who must teli thè offeree that thè offer has been revoked? 79

Is it possible to revoke a unilateral offer? 79

Is it possible to have an offer that cannot be revoked? 79

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Contents

Rejecting an offer 80

What is thè effect of rejecting an offer? 80

Offeree's conduct may indicate rejection 80

Counter offer amounts to a rejection 80

Asking for clarification of thè terms of thè offer is not a counter-offer 81

Acceptance of thè offer 82

Only thè offeree may accept 82

Acceptance must be final and unqualified 82

The problem of thè battle of thè forms 83

Acceptance must be communicated to thè of f eror 84

Communicating acceptance to a large company 84

Communicating acceptance over thè Internet 85

When is express communication of acceptance not necessary? 85

Acceptance and thè postai rule 86

What evidence is required for thè postai rule to operate? 86

The method and timing of thè acceptance 87

Can acceptance be communicated by someone other than thè offeree? 87

Lapse of offer 88

Lapse of an offer due to thè death of offeror or offeree 88

Lapse of an offer due to time 88

Lapse of an offer due to thè failure of a condition precedent 88

The agreement must be 'certain' 88

Is an 'agreement to agree' binding? 89

Is an agreement to negotiate binding? 89

Is an agreement made 'subject to contract' binding? 89

Other conditional agreements 90

Answers to iMhaf s your verdict?' cases 91

5 Making thè contract — intention andConsideration 93Intention to contract 93

Domestic agreements 93

Commerciai agreements 94

Are letters of comfort binding? 96

Are 'Heads of Agreement' and 'Letters of Intent' binding? 97

Agreements 'subject to contract' 98

'Without prejudice' agreements 99

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conslderation 99What is a deed? 99Consideration 99

What is consideration? 100

Examples of consideration 100

Consideration must movefrom thè promisee 101

The joint promisee rule 102

Privity of contract 102Exceptions to thè privity of contract rule 103

Consideration may not be past 103An exception to Roscorla v Thomas 104

Consideration doesn't have to be adequate 104Consideration must be sufficient 105Illusory promises are not consideration 105Settling disputes — giving up a legai claim may be consideration 106The problem of renegotiating contracts — promising to perform

an existing contract is not good consideration 107A modern development? 108Renegotiating a debt 108

Exceptions to Foakes v Beer — compositions with creditors 109Exceptions to Foakes v Beer — part payment by a third party 109

Is promising to perform a contractual duty owing to athird party good consideration? 110

Is performing a public duty good consideration? 110Promissory estoppel 110

The common law can lead to unfair results 110How did promissory estoppel develop? I l iPromissory estoppel and contract law 112Promissory estoppel is important where no contract exists 112What are thè elements of promissory estoppel? 112

The promisor's responsibility for thè promisee's assumption 113

Why is detrimental reliance important? 113The leading case — Waltons Stores (Interstate) v Maher 114

What ìessons should we learnfrom Waltons Stores (Interstate) v Maher? 115

The remedy in cases of estoppel 115

Parties to thè contract 116Minore 116Agents 116Partnerships 117Corporations 117

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Persons with mental disabilities; intoxicated persons 117Assignment of contractual rights 117

Answers to 'Whafs your verdict?' cases 118

6 Express Terms of thè Contract 120The problem stateri 120Ascertaining thè evldence 121

The parol evidence presumption 121Post-contractual statements are not terms 122Past dealings may be Important in determinine

thè terms 123Slgned documents are often binding 123When is a person not bound by his or her signature? 124

The document didn't appear to be contractual 124

Estoppel 124Orai agreement to thè contrary 125Misrepresentation 125Condition precedent 125The document does not accurately record thè agreement 125Equitable doctrines 125

When are unsigned terms incorporated intothè contract? 126

The reasonable notice test 126

Is thè document contractual in nature? 127

Is thè terni unusual? 127

Were there any conflicting statements or promises? 128

Ticket cases 129

When are orai representatlons binding? 129Which statements are promissory? — thè reasonable bystander test 130

Guidelines for applying thè reasonable bystander test 131

Was there a wriitcn document? 131

How mudi Urne lapsed betuven statement and contract? 132

Hoic important was thè statement to thè deal as a whole? 132

What u>ords were used? 133

Did either party have special knowledge? 133

Some cxamples ofthe reasonable bystander test 133

Collateral warrantles 134When does a collateral contract apply? 136A collateral warranty must be promissory 136A collateral warranty must not be inconsistent with thè main contract 137

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The meaning of a term 138

The reasonable person test 138The parol evidence rule 138

The importance of a term 139

unenforceable terms 139

Terms in restraint of trade 140Exemption clauses 141

How do thè courts approach exemption clauses? 141Step 1 — Is thè exemption clause a term of thè contract? 141

Post-contractual 141

A course ofpast dealings between thè parties 142

An exemption clause contained in a signed document will often be binding 142

An unsigned exemption clause will be binding if 'reasonable noticehas been given 143

Step 2 — Does thè exemption clause cover thè breach? 144

The contra proferentum rule 144

The negligence rule 145

Exemption clauses are to be understood according to their naturai and

ordinary meaning 146

Fundamental breach presumption 146

Thefour corners presumption 147

Answers to "Whars your verdict?' cases 151

Appendix — a sample of a written contract 155

implied Terms 156Terms Implled by thè courts as a matter of law 157

Contracts between prof essional persons and their clients 157Contracts for work and materials 157Other service contracts 158Hire contracts 159Employment contracts 159Landlord/tenant 159

Terms implied by thè courts as a matter of fact 160Terms implied on thè basis of a course of past dealings 160Terms implied as a result of custom or trade usage 161Terms implied in order to make thè contract effective 162

implied terms In contracts for services 164Implied terms at common law 164

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implied terms under thè Trade Practlces Act 164When does thè Trade Practices Act apply? 164

Step 1 — Is thè service prolùder subject to thè TP A ? 165

Step 2 — Who is a consumer under thè Trade Practices Act? 165

Step 3 — Were thè services supplied in thè course of business? 166

What is thè meaning of services? 166

Is thè contract one for thè supply of services or goods? 167

What are thè implied warranties under thè Trade Practices Act? 167

Can thè implied terms be excluded? 169

Can thè service provider Iimit liability? 169

The seller cannot rely on a limitation clause ifit would not befair and reasonable to do so 169

Remedies 170

The Australian Securities and investmentsCommission Act 1989 (Cth) 170What is a financial service? 170

Is thè financial service provider subject to thè ASIC Act? 171

Is thè financial service acquirer a consumer? 171

Were thè financial services supplied in thè course of a business? 171

What terms are implied? 172

Can thè terms be excluded or liability? 172Remedies 172

Answers to "Whars your verdict?' cases 173

8 Contracts for Sales of Goods 175introductlon 175

Development of legislation designed to protect consumers 175

The Trade Practlces Act 1974 (Cth) 175When does thè Trade Practices Act apply? 175

Step 1 — Is thè seller subject to thè Trade Practices Act? 176

Step 2 — What is a consumer contract under thè TP A? 176

Step 3 — Was thè sale in thè course of business ? 178

Step 4 — Was thè sale at auction? 178

What terms are implied by thè Trade Practices Act? 178

Correspondence with description 179

Merchantable quality 179

Fitness for a particular purpose 180

Correspondence with sample 181

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Remedies for breach of implied terms 182

Damages 182

Can thè buyer return thè goods? 182

Terms implied by thè Trade Practices Act cannot be excluded 182

Can liability for breach of thè implied terms be limited? 183

The seller cannot rely on a limitation clause ifit would not befair and

reasonable to do so 183

lion-consumer contracts 184What is a non-consumer contract within thè meaning of thè

Coods Act? 184What terms are implied by thè Goods Act? 185

Correspondence with description 186

Fitnessfor purpose 186

Merchantable quality 187

Correspondence with sample 188Can thè seller exclude or limit liability for breach of thè

implied terms? 189

What are thè remedies? 189

The Implied term of merchantable quality 189

The tests for merchantable quality 189

The indicators of merchantable quality 190

How is merchantable quality affected by thè buyer's inspection of

thè goods? 192

The implied term of fitness for a partlcular purpose 192

The buyer must rely on thè seller's skill and judgment 192

Buyer's purpose may be a matter of inference 193

The buyer's reliance must be reasonable 194

The Implied term of correspondence with description 194

Description is not a reference to produci quality 194

When are goods sold by description? 194

The buyer must rely on thè description 195

The implied term of correspondence with thè sample 197

Other matters affecting sales of goods 197

Ascertaining thè contract price for thè goods 197

Delivery and payment 198

Acceptance 198

Passing of property in thè goods 198

Passing of risk in thè goods 199xlv

Contents

Answers to nwhat's your verdlct?' cases 200Appendix 1 — Summary of thè Acts 202Appendix 2 — comparative Table 203

Remedies 206in what ways may a contract be brought to an end? 206Termination 207

Termination by performance 207

Termination by agreement 207

Termination by a term of thè contract 207

Termination by frustration 207

Termination for breach of contract 209

When is a term a condìtion ? 209

A term may be made a conditimi by thè words used 210

Statutory implied conditions 210

Time clauses in mercantile contracts 211

Time clauses in other contracts 211

Time can be made a condition by serving a notice 211

Terms referring to quality are normally ivarranties 212

Where damages are an adequate remedy, thè term is often a warranty 212

Termination for serious breach of an intermediate term 212When is a breach of an intermediate term a serious breach? 212

Termination for repudiation 213What is meant by a 'substantial repudiation'? 213

Termination for anticipatory breach 213Anticipatory breach — no termination 214

The procedure for termination 214The effect of an election to terminate 215The effect of an election to affirm thè contract 215

Rescisslon 216Rescission for misrepresentation 216What is thè effect of rescission on thè contract? 216What is thè difference between rescission of thè contract and

termination of thè contract? 216Howis a contract rescinded? 216Rescission is not permitted if thè contract has been affirmed 217Rescission is not permitted if substantial restitution is not possible 217Rescission is not permitted if thè legai rights of an innocent

third party will be adversely affected 218The rule in Seddon's case 219

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Law in Commerce

Rescission for unconscionable conduct 219Rescission for duress 219Rescission for undue influence 221

Presumption of undue influence in special relationships 221

Presumed undue influence in confidential relationships 221

Actual undue influence 222

Rescission for mistake 222

Rescission for common mistake 222

Rescission for unilateral mistake 223

Contracts can be voidfor unilateral mistake 223

Non est factum 224

Recovery of thè contract price 224Sale of goods 225

Damages 225What is thè purpose of damages? 226

Losses must be caused by a breach of thè contract 226

Agreed damages 227

Plaintiff has a duty to mitigate losses 227

Damages must not be too remote — thè rule in Hadley v Baxendale 227

Thefirst limb ofthe rule in Hadley v Baxendale 228

The second limb ofthe rule in Hadley v Baxendale 229

Calculating thè amount of damages 229

Damages for expectation losses 229

Damages for personal injuries 231

Damages for disappointment, distress, discomfort etc 231

Speclfle performance 233Injunction 234Rectif Ication of thè contract 234Restltution 234

Quantum meruit and partially performed contracts 235

Answers to 'Whars your verdlct?' cases 236

10 Agency 238What is an agent? 238

Agent or independent dealer? 239What are thè indicators of an agency relationship? 239

The functions of an agent 240An agent may make contracts on behalf of thè principal 240An agent may receive moneys on behalf of thè principal 240

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An agent may pay moneys on behalf of thè principal 241An agent may make representations on behalf of principal 241An agent may receive representations on behalf of thè principal 241

Some common commerciai relationships and agency 241Employer/employee 242Independent contractor 242Bailor/bailee 242Partnership 242Supplier/buyer 242Franchisor/franchisee 242

How is an agency created? 242Agency may be created by express agreement 243Agency may be created by implied agreement 243Agency may be created by estoppel 244Agency may be created in cases of necessity 245Agency may be created by cohabitation 245

The agent's authority 246The agent's actual authority 246

The agent's express actual authority 246

The agent's implied actual authority 247

The agent's ostensible authority 248Ostensible authority depends on thè principal's holding out 249

Cases on ostensible authority 250

A person with ostensible authority cannot create ostensible authorityin another person 251

Was thè third party aware ofthe agent's actual authority? 251

Ratiflcatlon 251The rules applying to ratification 251

When con thè third party sue thè principal? 253When can a principal sue a third party? 254

The undisclosed principal rule 254When will thè agent be llable to a third party? 254

Liability of an agent known to be an agent 254

Liability of agent where undisclosed principal 255

The agent acted without authority 255

Breach of warranty of authority 255

Dutles of an agent 256Fiduciary duties 256

Fiduciary duty to account honestly 256

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Law in commerce

Fiduciary duty to avoid a conflict of duty and interest(rule against self dealing) 256

Fiduciary duty not to make secret profits, accept secretcommissions or take bribes 257

Fiduciary duty not to use principal's property or informationfor self gain 257

A principal's duties to an agent 257

Termination of agency 257

Answers to nvhars your verdict?' cases 259

i l partnerships 262Chooslng thè appropriate business structure 262

Types of business organisations 262

Advantages and disadvantages of various business organisations 262

Namlng thè business 263

creation of a partnership 264

Are any formalities required to create a partnership? 264

Definition of a partnership 264

Carrying on business 265

A business or a hobby? 265

Carrying on business or a single venture 265

Carrying on a business in common 267

The problem stated 267

Mutuality ofrights and obligaiions 267

The Partnership Act 1958 (Vie) s6 — thè statutory rules 268

Carrying on business in common with a view of profit 271

Partnerships are contractual relationships 271

Rules governing partners' relationship with each other 272

The contract between thè partners 272

The Partnership Act 272

Partners' duties of good faith 273

Duty to make disclosure 273

Duty to account for benefits derived from dealings with partnership 274

Duty to account for use of partnership assets 274

Duty not to cornpete with partnership 274

Partnership property 274

What is partnership property? 274

What right does each partner have to thè partnership property? 275

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Contents

Liability of partners to third partles 276

Limited partnerships 276

Joint liability for a firm's debts and obligations 277

What does joint liability mean? 277

What are thè firm's debts and obligations? 277

Commerciai partner's norma! authority 278

Ratification 279

The proviso to section 9 279

Joint and several liability for wrongful acts 281

What are ivrongful acts or omissions? 281

When are acts in thè ordinary course of thè business of a partnership? 281

Liability is joint and several 282

Joint and several liability for misapplication of money or property 283Liability by holding out (estoppel) 283

Leaving thè partnership 284

Debts incurred after death or bankruptcy of partner 285

A retiring partner remains liable for ali partnership debts incurred

whilst stili a partner 286

Assignment of a partnership Interest 286

Termination of a partnership 286

Termination by thè partners 286

Termination by operation of law 286

Termination by supervening illegality 286

Termination by thè courts 287

Partners remain jointly liable for debts even after dissolutionof a partnership 287

Distribution of assets on dissolution 287

Answers to *What*s your verdict?' cases 288

Appendix — Comparative Table 290

12 introduction to company Law 295Hlstorlcal background 296

The nature of a company 297

The powers of a company 297

Section 124(1) pouvrs 298

Types of companies — generai classification 298

Proprietary company 298

Public company 299

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Law in commerce

Types of companies which may be registered 299

Companies limited by shares 299

Companies limited by guarantee 299

Unlimited companies 300

No liability companies 300

Consequences of thè principle of separate identity 300

The rule in Salomon's Case 300

Reglstering a company 302

Steps for registration of a company 302

The company's constitution and rules 302

Implications of thè certificate of registration 303

Managing a company 303When Is a company liable in contract? 303

How does a company sign a contract? 304

When is a company bound by thè actions of its agents? 304

People having dealings with a company may make

certain assumptions 305

Compliance with thè constitution and replaceable rules 306

Reliance may be placed on ASIC records 307

Holding out 307

Customary powers 308

When do thè assumptions not apply? 308

Answers to *Whars your verdict?' cases 310

13 Duties of Directors and Other Officers 312what are thè functions of a director? 312

The source of directors' duties 313

Reasonable care and diligence 313

The business judgment rule 314

Is any particular level of skill required of a director? 315

The level of attendance required 315

The duty to be informed 315

Reliance 315

The duty to act in good falth and for a proper purpose 316

The duty to act in good faith 316

Directors' duty to exercise power for proper purposes 317

The duty not to use inslde Information improperly 317

What kind of information must not be used? 317

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contents

The directors' duty not to improperly usehis or her posltion 318Contracts with thè company 319

The duty imposed on directors to disclose certain interests 320

The consequences of a breach of statutory duty 320Directors' duties at common law 320The section 184 duty — criminal liability 321Who will sue thè directors for a breach of duty? 321

Exceptions to thè rule in Foss v Harbottle 322

A shareholder's right to personal action 322

The insolvent trading rule 322When is a company insolvent? 323

What remedies or sanctions may apply? 323

Defences to section 588G 323

Defence under section 588H(2) 324

Defence under section 588H(3) 324

Defence under section 588H(4) 325

Defence under section 588H(5) 325

Sections 588G and 588H in action 325

Further statutory obligations 327The rules of thè company 327Answers to Ttfhat's your verdict?' cases 328

14 introduction to Trusts 329What is a trust? 330

Definition 330

The essential elements of a trust 330

Parties to thè creation of an express trust 330

Trustee 330

Trust property 331

Beneficiary 331

Duratavi of a trust 332

Trusts compared with other entities 332

Types of trusts 332

Express trusts 332

Discretionary trusts 333

Fixed trusts 333

Unit trusts 333

Operation of a trading trust 335

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Trustees' powers 336Express powers 336Implied powers 336Statutory powers 336

Trustees' duties, rights and llabillties 336Duty of prudence, diligence and honesty 336Personal liability for debts 338The right of indemnity 338Insolvent trading by corporate trustee — directors' liability 339

Beneflclaries' rights and Ilabilities 339

Personal right of action against thè trustee ('right in personam') 339Proprietary right of action in respect of thè trust property

('right in rem') 340Beneficiaries' liability to creditors 340The position of creditors in regard to a trading trust 341

Termination of a trust 341

Index 343

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