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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
v
Law in commerce
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
vi
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
vii
Law in Commerce
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
vili
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
Ix
Law in commerce
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
x
Contents
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
xl
Law in commerce
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
xll
Contents
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
xlll
Law in commerce
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
xv
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
xvl
Contents
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
xvil
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
xvlll
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
xlx
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
xx
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
xxl
Law in commerce
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
xxll