S1
2018
Australian Commercial Law
EXAM NOTES
HARRY EDWARD MARTIN
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TOPIC 1: INTRODUCTION & AGENCY
1 DEFINITION OF AGENCY
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Agency is the relationship existing between two parties whereby one (the agent) is authorised by the other (the
principal) to do, on the principal’s behalf, certain acts which affect the principal’s rights and duties in relation to
3rd parties.
The mere use of the word “agent” is not conclusive of the existence of an agency relationship in law (Internationa
Harverster v Carrigan’s Hazeldene) – The law is concerned with substance, not mere form.
1.1 CLASSIFICATION OF AGENTS
A general classification of agents is as follows:
Special agents
General agents
Universal agents
A special agent is one who is appointed for the performance of some special act, or to represent the
principal in some particular transaction, such act or transaction not being in the ordinary course of
the agent’s trade, profession, or business as an agent (e.g. P appoints A his agent for the purpose of
procuring a truck; the only authority given to A as agent is that necessary to procure a truck)
A general agent is an agent who has authority
Ø To act for the principal in all matters, or in all matters concerning a particular trade or
business, or of a particular nature; or
Ø To do some act in the ordinary course of their trade, profession or business as an agent on
behalf of the principal (e.g. where a solicitor or broker is employed as such)
A universal agent is one whose authority is unlimited to do such things which the principal may do
through the instrumentality of another.
Such types of agents are rare and, when they do exist, they are appointed by extensive powers of
attorney.
2 CREATION OF AGENCY
The relationship of principal and agent may be created in the following ways:
2.1 EXPRESSLY
2.1.1 BY DEED
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The appointment of an agent by deed (that is, instrument under seal) is necessary where the agent is required to
execute any instrument under seal on behalf of their principal, in which case the document creating the power is
term a power of attorney.
A power of attorney is often given where principal is going abroad and desires to leave another in charge of their
affairs.
2.1.2 BY WRITING
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An agent is often appointed in writing. In some cases, the appointment is required by statute to be in writing (e.g.
in most States agents employed to sell or buy land and agents employed to sell or buy businesses cannot sue for
remuneration unless the appointment of the agent is in writing)
2.1.3 BY WORD OF MOUTH
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A verbal offer followed by acceptance in writing or verbally is sufficient to conclude a contract of agency for most
purposes other than those mentioned above. In practice, it is usually desirable that the appointment of an agent be
in writing.
2.2 HOLDING OUT OR ESTOPPEL
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The agency relationship may arise between two persons by virtue of one, by words or conduct “holding out” that the other
is their agent or permitting the latter to do so.
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Where P, either by words or conduct, leads others to believe that A is P’s agent, then P will not be allowed to
subsequently deny the authority of A to acts as P’s agent where a 3rd person has entered into an agreement with A
on the faith of the representation that A was the agent of P (Freeman & Lockyer v Buckhurst)
Whether one person has led 3rd parties to believe that another person is their agent is a Q of fact to be decided
upon by the circumstances of each particular case (Crabtree-Vickers v Australian Direct Mail)
2.3 RATIFICATION
The relationship of agency may also arise as a result of “ratification”.
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Where one person acts on behalf of another, without having authority to do the particular act, the person on
whose behalf the act is done may, by “ratifying” it”, render the act as valid and effectual as if it had been done by
their unduly authorised agent.
This may arise where an agent has exceeded their authority (e.g. estate agent enters into a K for a lease for a term
longer than the principal stipulated, the principal may adopt the transaction and thus bind themselves to the
unauthorised act of the agent)
In order that the ratification may be effectual, the following rules should be observed:
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The acts must have been done as agent for and on behalf of the supposed principal (Howard Smith v Varawa)
The ratification may only be by a principal who was in existence at the time of the making of the contract.
Ø NB: where a nonexistent co. purports to K and the co. is within a reasonable time subsequently formed,
the co. may then ratify the K (s 131(1) Corps Act)
The principal must have the capacity to make the K both at the date of the K and at the date of ratification
Ratification must be of the whole K. A principal cannot ratify that which is beneficial and reject the remainder
(Cox v Mosman)
Ratification must be with “full knowledge” of what has been done so that “the inference may properly be drawn
that the principal intended to take upon” themselves “the responsibility for such acts: (Marsh v Joseph)
Ø “Silence or acquiescence” is not ratification unless there is “proof of a knowing acceptance” that may be
regarded as assent (Lederberger v Mediterranean Olives Financial)
Where the rules above are satisfied, ratification operates retrospectively (‘go back in time’ – as if P had entered K on day
A purported to) to validate the previously unauthorised act. The position is the same as if the agent had been vested with
authority at the outset.
2.4 OPERATION OF LAW
An agency can arise by operation of law, that is, irrespective of assent or intention, in two main situations; namely, in cases
of:
2.4.1 AGENCY OF NECESSITY
An agency of necessity arises in an emergency situation which allows one person to bind another without the authority of
that other. Four factors are essential to establish such an agency of necessity:
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A person must have been entrusted with another’s property;
An immediate expense must be required for the preservation of the property, or there must be some commercial
necessity for the action, that is, there must be an emergency;
It must be “commercially impossible, or extraordinarily difficult, … to communicate with the owner” of the
property (Sachs v Miklos)
The agent must act bona fide in the interest of the principal
Case example of agency by necessity
Great Northern Railway Co v
Swaffield (1874) LR 9 Exch 132
P railway co. agreed to deliver D’s horse to particular railway station. On arrival, no-one
to take possession of horse on D’s behalf. P’s stationmaster sent horse to nearby stable,
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P paid stable keeper his charges.
Held: P had acted reasonably in placing horse in alternative stable. Entitled to recover
from D the expense incurred in doing so.
2.4.2 AGENCY ARISING BY COHABITATION
The law presumes an agency of cohabitation arises where a wife/unmarried partner cohabitating with her husband has
authority to pledge his credit for necessaries in all domestic matters ordinarily entrusted to a wife.
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Man can rebut the presumption of such authority by: showing that he had expressly warned the tradesman not to
supply his wife/de facto wife; or expressly forbidden her to pledge his credit or provided her with allowance to
pay for necessaries (Debenham v Mellon)
NB: In NSW, SA, ACT & NT this CL doctrine has been abolished.
3 NATURE & SCOPE OF AN AGENT’S AUTHORITY
The P will only be bound by those acts of the A which fall within the scope of the A’s authority. The P will not be affected by
what the A does in excess of their authority, unless the P subsequently ratifies the unauthorised act of the A.
The authority of an agent may be:
3.1 ACTUAL AUTHORITY
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The general nature and effect of the actual authority of an agent was explained by Diplock LJ in Freeman & Lockyer
v Buckhurst Park Properties as follows:
“An ‘actual’ authority is a legal relationship between P and A created by a consensual agreement to which they alone are parties. Its
scope is to be ascertained by applying ordinary principles of construction of Ks, including:
Ø any proper implications from the express words used;
Ø the usages of the trade; or
Ø the course of business between the parties.
To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the A.
Nevertheless, if the A does enter into a K pursuant to the ‘actual’ authority, it does create K rights and liabilities between the P and the
contractor”
3.1.1 ACTUAL EXPRESS AUTHORITY
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The express authority of an A is the authority the P has expressly given the A in words or writing (e.g. where P
gives the A specific instructions to enter into a K on the Ps behalf to particular piece of land at stipulated price)
3.1.2 ACTUAL IMPLIED AUTHORITY
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The A may have a further implied authority to do whatever is necessarily incidental to carrying out the Ps express
instructions (e.g. where an A is expressly authorised to buy certain shares, the A will also have implied authority
to do everything in the usual course of business to complete the transaction)
Where a person employs a particular type of A to carry out some act on behalf of the P, the A will have the usual
authority which agents of that particular profession normally have to carry out their functions (e.g. when board of
Ds of a co. appoints one of their number to be MD – “they thereby impliedly authorise him to do all such things as
fall within the usual scope of that office” - Hely-Hutchinson v Brayhead Ltd)
Case example of actual implied authority
Hopcroft v Edmunds (2013) 116
SASR 191
Rs accountant sent a SHs agreement to the As for signature. The Rs did not sign the
agreement. The As argued that the accountant had authority to make an offer on the Rs
behalf by sending the K for their signature.
Held: the accountant did not have actual authority to bind the Rs. The Rs had told their
accountant “do whatever [is] necessary” – such instruction related only to ascertaining
the necessary actions and preparing the necessary documents, not binding the Rs.
3.2 APPARENT (OR OSTENSIBLE) AUTHORITY
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Apparent (or ostensible) authority is “the authority of an A as it appears to others” (Lord Denning in Hely-Hutchinson v
Brayhead Ltd)
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Where a P represents either by words or conduct that an A has authority to K on the Ps behalf, the P will be bound
by those acts of the A which fall within that represented authority.
The P may specifically represent to the 3rd party that a person has authority to act on the Ps behalf (e.g. where the
P tells the 3rd party that a particular person has been authorised to negotiate for the purchase of goods on behalf
of the P)
The representation can also be by conduct (e.g. the P permitting a person to act in the management or conduct of
the Ps business to lead the 3rd party to believe that such person has authority to K on Ps behalf)
If a P allows or acquiesces in an A occupying a particular position (e.g. board of Ds of a co. permits one of the Ds to
act as MD) the A will have apparent or ostensible authority (Freeman & Lockyer v Buckhurst Park Properties)
Apparent authority extends to all the usual authority of a particular position (e.g. company secretary
administrating leasing) (Panorama Developments)
An employer may hold out that an employee has authority if the employer/P permits the employee to act in a
particular way (e.g. in signing documents without taking appropriate precautions) (Pacific Carriers)
The apparent authority of a solicitor includes authority to compromise a dispute on behalf of their client.
o Client will generally be bound by a compromise entered into – notwithstanding that the solicitor’s actual
authority to compromise on behalf of the client had been withdrawn (Waugh v HB Clifford & Sons)
o No authority if it would be unconscionable for the party seeking to enforce to rely on it (Buseska v Sergio)
Case example of apparent (ostensible) authority
Acquiesce to a managing director
Freeman & Lockyer v Buckhurst K & H formed the D co. to acquire and develop land. Board of Ds comprised K, H and a
Park Properties
nominee of each. The development of land was left to K who, with the knowledge of the
board of Ds, acted as MD although he was never appointed. K employed P firm of
architects who later sued the co. for payment of their fees.
Held: CoA: D co. was liable for Ps fees. The K of employment entered into by K with the
Ps fell within the scope of Ks apparent or ostensible authority – it was the kind of K
which was within the usual authority of a MD.
Company secretary
Panorama Developments
Company secretary has apparent authority to hire vehicles and the co. is bound to pay
(Guildford) Ltd v Fidelis
the cost of such hire even where the vehicles are used for the secretary’s own purposes.
Furnishing Fabrics Ltd [1971] 2
QB 711
Employees with little oversight
Pacific Carriers Ltd v BNP
“… equipping an officer of a co. with a certain title, status and facilities … The holding
Paribas (2004) 218 CLR 451
out might result from permitting a person to act in a certain manner without taking
proper safeguards against misrepresentation”.
In those circumstances it may be unjust to permit the employer to depart from a
reasonable assumption based upon that misrepresentation.
4 DUTIES OF AN AGENT
Every A owes certain duties to their P which vary in degree according to the nature of the agency or according to the
express terms of the K of agency. These duties include the:
4.1 DUTY TO FOLLOW PRINCIPAL’S INSTRUCTIONS
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The primary duty of every A is to follow the Ps instructions, written or verbal. An A must comply with the
provisions of the K of agency before they will be entitled to remuneration.
Failure to comply, except where instructions illegal, will render the A liable for the loss suffered by the P as a
result of the breach.
4.2 DUTY TO ACT IN PERSON
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Every A must act in person, there is no authority to delegate their duties as A to another. This is expressed in law
by the maxim “Delegatus non potest delegare”, that is, a person to whom authority has been given cannot delegate
that authority to another.
Owing to the exigencies of business, this rule is relaxed – the authority of an A to delegate their duties may be
implied in the following situations:
Where by the usage of a trade an A usually acts through other agents (e.g. a country solicitor may employ a city
agent whose acts will bind the client)
Where the duties to be performed by the A are purely ministerial, and do not involve the exercise of any discretion
or skill on the part of the A in person (e.g. collecting rents)
Where from the nature of the transaction it is clear that the parties intended, or may be reasonably presumed to
have known, that it might be necessary to act through a sub-agent
Where unforeseen circumstances arise which necessitate the agent delegating. The necessity must be urgent and
the sub-agent must be appointed with discretion
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4.3 DUTY TO ACT IN GOOD FAITH
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The A is under a duty in all cases to act in the interests of the P and must not allow their own interest to conflict
with those of the principal (fiduciary obligation)
Case example duty to act in good faith
Lintrose Nominees Pty Ltd v
King [1995] 1 VR 574
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Purchaser had bought property from vendor on the advice of A to whom purchaser had
paid a fee for the advice. Unknown to purchaser, the A had been retained by the vendor
to market the property.
Held: VSC: Purchaser entitled to rescind the K of sale with the vendor. “The vendor
could not properly sell its property through it’s A, knowing that the A was retained to
advise the purchaser on the purchase, without knowing also that the dual allegiance of
the A was disclosed to the purchaser”
Directors must exercise powers and duties in good faith in the best interests of the corporation and for a proper
purpose (s 181(1) Corps Act)
4.4 DUTY TO MAKE FULL DISCLOSURE OF ANY PERSONAL INTEREST
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An A must disclose to the P all the material circumstances of which they are aware which might influence the P in
entering into any negotiation.
o If the A fails to make disclosure, they are not entitled to commission (Dargusch v Sherley Investments)
o Any profit received by the agent resulting from non-disclosure is recoverable by the P on learning the
true facts (Walden Properties v Beaver Properties)
Continuing obligation: After termination of their employment, A under continuing obligation not to use
information acquired in the course of agency in manner prejudicial to interests of P (Robb v Green)
4.5 DUTY NOT TO MAKE A SECRET PROFIT
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An A must not use their position to make a gain for themselves without the knowledge and assent of the P. James
LJ in Parker v McKenna said:
“No A in the course of his agency in the matters of his agency can be allowed to make any profit without the knowledge of his principal;
… that rule is an inflexible rule, and must be applied inexorably by this court, which is not entitled, in my judgement, to receive
evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact, by reason of the dealing of the
A”
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Directors of co.’s are As of their co.’s and are under a duty not to make a secret profit (Regal Hastings v Gulliver)
Directors must also give notice of any material personal interest that relates to the affairs of the co. to other
directors (s 191(1) Corps Act)
Directors must not improperly use information gained by virtue of their role either (s 183(1) Corps Act)
If an A seeks to act for both parties – must make full disclosure to each party and obtain assent of each party
(Fullwood v Hurley)
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4.6 DUTY TO EXERCISE REASONABLE CARE & SKILL
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An A who is employed for remuneration is presumed to have and is bound to exercise such skill, care and
diligence in their performance as is usual or necessary for the ordinary or proper conduct of the profession or
business.
Failure to exercise the requisite care, skill and diligence in carrying out the terms of the K of agency renders the A
liable to the P for the loss sustained by the A as a result of the As breach of duty.
Case example duty to exercise reasonable care, skill and diligence
Mitor Investments Pty Ltd v
General Accident Fire & Life
Assurance Corp [1984] WAR
365
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Insurance broker instructed by client to obtain unqualified insurance cover against
damage caused by storm and flood. Unknown to client, broker obtained insurance cover
excluding flood caused by the sea. Subsequently, client suffered loss as result of flooding
by sea, and insurance broker avoided liability by virtue of this exclusion clause.
Held: Broker liable because of his failure to exercise reasonable care and skill in
effecting the insurance.
Directors must exercise their powers and duties with degree of care and diligence that a reasonable person
would exercise if they were a D or officer of a corporation (s 180(1) Corps Act)
4.7 FURTHER DUTIES
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Further duties of the A are:
Maintain property
Separate property
Maintain records
Confidentiality
To take such care in keeping the property (includes money) of the P as a reasonable prudent person
would take in caring for their own property;
To keep all moneys and property of the P separate from their own;
To keep separate accounts of all dealings on behalf of the P, and to have such accounts ready for
inspection by the P, and, subject to the As right of lien, to hand over to the P all moneys, papers and
documents relating to the Ps affairs; and
To preserve confidentiality in all matters coming to their knowledge whilst acting as agent (WeldBlundell v Stephens)
5 RIGHTS OF AGENTS
5.1 RIGHT TO REMUNERATION
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The amount of remuneration for an A depends upon the agreement made between the P and A. In commercial
transactions remuneration often takes the form of a % commission on the value of the transaction.
In order to determine the As right to commission, the terms and circumstances of the appointment must be
examined as the A may be entitled only if they complete the sale, or in lighter circumstances, simply brings the
parties together.
5.1.1 AGENT MUST BE EFFECTIVE CAUSE OF SALE
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The A must have been the means whereby two contracting parties were brought together and entered into a
legally binding K (Luxor (Eastbourne) v Cooper) (That is to say, the A must have been the effective cause of sale)
Case example agent must be effective cause of sale
L J Hooker Ltd v W J Adams
Estate Pty Ltd (1977) 138 CLR
52
Rasmussen & Russo Pty Ltd v
Gaviglio [1982] Qd R 571
Adams co. owner of property in Sydney – engaged real estate agent to find purchaser for
it. Hooker introduced property to Company A. Adams found Company B. Both
companies secretly entered into JV agreement to buy, and property sold to Company B.
Hooker sued for commission.
Held: HC held Hooker not entitled as had not been effective cause of sale, nor of any sale
of any interest in the property to Company A.
Agent 1 provided buyer that could not obtain finance. Agent 2 provided buyer that did
obtain finance.
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Held: Not entitled to commission as was break in necessary causal connection between
A’s actions and the actual sale.
5.1.2 ESTATE AGENT’S ENTITLEMENT TO COMMISSION
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Where the agency agreement provides for the payment of commission on the estate agent “finding a purchaser” or
“introducing a person who shall become a purchaser”, the A is not entitled to commission unless they introduce a
purchaser who, at the vendor’s price and on vendor’s terms:
Is ready and willing to purchase;
Is able to purchase; and
In fact purchases by entering into a binding K to purchase (Gerlach v Pearson; Turnbull v Wightman)
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Where the K of agency provides for payment on occurrence of some other event, A will be entitled to commission
when this event occurs (Max Christmas Real Estate v Schumann Marine) (e.g. on a person being “introduced to the
property” and “as a result” purchase occurs)
Right of commission arises upon payment by P, not entering into contract of sale (R J Mabarrack v King)
Should vendor refuse to complete the sale, A still entitled (Christie Owen & Davies v Rapacioli)
5.1.1 STATUTORY RESTRICTIONS ON RIGHT TO REMUNERATION
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Buy/sell land/businesses à appointment must be in writing: An A is debarred by statute from suing for
commission unless the As appointment is in writing signed by the person to be charged – applies to As employed
to sell or buy and land/businesses (ss 49A, 50 Estate Agents Act 1980 (Vic))
5.2 RIGHT TO INDEMNITY AND REIMBURSEMENT
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Every A is entitled to be indemnified against all losses and liabilities sustained, and to be reimbursed for all
expenses lawfully incurred in the carrying out of the Ps instructions.
NB: “lawfully” – where the A acts outside scope, or engages in unlawful act, or suffers loss through negligence or
default, A has no claim to be indemnified or reimbursed.
5.3 RIGHT OF LIEN
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An A has a lien on such property of the P as comes into the As hands for the due payment of all expenses and
remuneration lawfully incurred by the A in transacting the Ps affairs
NB: The transactions must relate to the property over which the A desires to exercise a lien. The A may have a
general lien extending to all claims arising out of the agency either by express K or by usage.
6 LIABILITIES OF AGENTS
6.1 LIABILITY OF AGENT TO PRINCIPAL
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General position is that A is an intermediary employed to negotiate some transaction on behalf of one person with
another to effect a K between them.
Where the A disobeys the Ps instructions, A will be liable for loss suffered by the P as a result of the breach of the
K of agency – and liable to make good the damage suffered (Mitor Investments v General Accident Fire & Life
Assurance)
6.2 LIABILITY OF AGENT TO 3RD PARTIES
The As liability towards 3rd parties depends upon the As method of contracting and in particular as to whether:
6.2.1 NAME OF PRINCIPAL DISCLOSED
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a)
Where the A discloses the name of the P, the K is deemed to be that of the P, and the A is not liable on the K except:
Where the A Ks outside the scope of their actual or apparent authority, A will be liable to 3rd party in damages for
breach of warranty of authority;
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b)
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The A agrees to be liable;
Usage or custom makes the A liable;
The A Ks by deed in their own name; or
Where the P is in fact non-existent
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Where a person professes to contract on behalf of a principal and P is non-existent, presumed to have intended
to K personally. These words are critical; if person were to sign document, not as an A, but, in effect, as the P, the
rule would have no operation.
Case example professes to contract on behalf of a principal
Kelner v Baxter (1866) LR 2 CP
174
Black v Smallwood (1966) 117
CLR 52
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Promoters of co. entered K to buy goods, K being signed “on behalf of the proposed
[Company] Pty Ltd”.
Held: As the K was not contingent upon co. being formed, the only persons who could
be liable were the promoters.
K for sale of land signed “[Company] Pty Ltd, Robert Smallwood, J Cooper, Directors”.
Held: The two persons who purported to sign the K as directors put their signatures on
the K not as agents but as part of the act of authenticating the signature for [Company].
Did not profess to act as agents and thus not liable
The test therefore is – where the intention is the the K be made by the co., and the person who signs “For and on
behalf of” the co. does does not purport to K as A, they will not be personally liable (Miller Associates (Australia) v
Bennington)
S 119 Corps Act
S 131(1)
A company comes into existence upon registration.
If a person purports to enter a K on behalf of a co. before it is registered, the co. becomes bound if they
do become registered + ratifies the K within time agreed
S 131(2)
If no time agreed, within a reasonable time after K entered into
Person is liable to pay damages to other party if the co. is not registered/does not ratify within reasonable time. The
amount of damages is the amount co. would be liable to pay if co. had ratified and then not performed at all. Court may
order:
S 131 (3)
[a] pay all or part of the damages that the person is liable to pay;
[b] transfer property that the co. received because of the K to a party to the K; or
[c] pay an amount to a party to the K.
6.2.2 EXISTENCE BUT NOT NAME OF PRINCIPAL DISCLOSED
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Where the A discloses the fact that a P exists but not the name of the P, the A’s liability, provided he or she
contracts as agent, is similar to the cases where the name of the P is disclosed.
If a 3rd party Ks knowing there is a P and yet does not ascertain the Ps name, the 3rd party cannot sue the A (Marsh
& McLennan v Stanyers)
6.2.3 EXISTENCE OF PRINCIPAL NOT DISCLOSED
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The undisclosed P or A can sue or be sued on the K, unless the K between the A and 3rd party expressly or
impliedly excludes the rights of persons other than the agent to be a party to the K (Maynegrain v Compafina
Bank)
The principles applying to undisclosed Ps were summarised by Lloyd Lloyd in Siu Yin Kwan v Eastern Insurance Co:
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An undisclosed P may sue and be sued on a K made by an A on his behalf, acting within the scope of his actual
authority;
In entering into the K, the A must intend to act on the Ps behalf;
The A of an undisclosed P may also sue and be sued on the K;
Any defence which the 3rd party may have against the A is available against his P;
The terms of the K may, expressly or by implication, exclude the Ps right to sue, and his liability to be sued.
6.3 BREACH OF WARRANTY OF AUTHORITY
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Where an A represents, either expressly or impliedly, that they have authority to enter into a particular
transaction and a 3rd party relies on that representation of authority, the A is taken to warrant that such
representation is true.
Where representation is untrue: A is liable in damages for breach of warranty of authority.
The measure of damages is actual loss sustained by the 3rd party, it will be no defence that the A acted innocently
or in mistake as to the precise extent of authority conferred (Yonge v Toynbee)
NB: A not liable where 3rd party knew of As lack of authority (Weigall & Co v Runciman & Co)
6.4 LIABILITY OF PRINCIPAL & AGENT FOR MISREPRESENTATIONS
Liability of P/A for misrepresentation has arisen in the following circumstances:
Misrepresentation of
property
Negligent
misrepresentation
Vicarious liability
MDC
Where an A engaged to sell property, will normally fall within scope of As ostensible authority to
describe the nature & quality of the property. Where As representations are untrue, P liable to
purchaser for loss suffered arising from misrepresentation (Aliotta v Broadmeadows Bus
Service)
Where an A made negligent misrepresentation which was relied upon by purchaser, A will be
liable in damages to the purchaser for loss suffered (e.g. real estate A for the vendor of business
liable to purchaser for negligent misrepresentations made as to earnings of business) (Roots v
Oentory Pty Ltd)
P is vicariously liable for a tort committed by an A where A acted within scope of
actual/apparent authority (e.g. vendor of a building was held vicariously liable to purchaser for
damages because of negligent misrepresentation made by the Vs A as to the “lettable” floor
space of the building) (Thompson v Henderson & Partners)
Representations made also constitute MDC (s 18 ACL)
6.5 LIABILITY OF PRINCIPAL & AGENT FOR WRONGFUL ACTS
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An A is liable for their tortious acts but the P will also be liable for any tort committed where A acted within scope
of authority
P also be liable for fraudulent conduct committed within scope of As authority.
Case example liability of P for As wrongful acts
Royal Globe Life Assurance Co
Ltd v Kovacevic (1979) 22 SASR
78
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Insurance A persuaded K to enter into certain life assurance proposals. K paid A an
initial premium, given receipt from book provided by insurance co. Months later, A
approached K and invited him to invest $2,000 with insurance co. – which K did. A
misappropriate money and disappeared – sought to sue insurance co. for the $2,000.
Held: A had received the money from K in course of his employment, accordingly liable
for As fraud
The fraud may also be the fraud of the P in instructing the A that a certain fact is true – P will be liable.
NB: not permissible to “add together” the knowledge of the P and A, where both are innocent, in an action for
fraudulent misrepresentation.
Case example cannot “add together” knowledge of P & A to amount to fraud
Armstrong v Strain [1952] 1 KB
232
S was a member of firm of estate agents employed by D to sell bungalow. S made a
statement which was untrue, but which he believed to be true. D vendor knew that
statement was untrue, but did not authorise S to make the statement and did not know
he was going to make it.
Held: Purchaser unable to recover against D as no fraudulent intention established
on the part of either S or the D.
7 TERMINATION OF AGENCY
The time when, and the circumstances upon which, the relationship of P and A will end depend upon the terms of the
original K of agency.
11
7.1 PERFORMANCE OR COMPLETION OF AGENCY
Ø
Where the A is appointed either for the performance of one specific act, or for duration of definite period, then
authority of A will extent only until such act has been done/period expired.
7.2 IMPOSSIBILITY OF PERFORMANCE
Ø
Where becomes impossible for the A to carry out their obligations (e.g. where subject matter of agency is
destroyed) the authority of the A must cease there and then (e.g. where building which an agent has been
instructed to sell is destroyed by fire)
7.3 AGREEMENT
Ø
Whilst the agency is still current both the P and A must mutually agree to its termination.
7.4 REVOCATION
The right of the P to revoke the As authority may be limited or affected by the rights of:
7.4.1 RIGHTS OF 3 RD PARTIES
Ø
P may be liable to 3rd parties even after the P has validly revoked the authority of the A, where such parties have
had previous dealings with the A and continue to deal with the A without notice of the withdrawal of As authority.
7.4.2 RIGHTS OF THE AGENT
Ø
Ø
The right of the P to revoke the authority of their A may be limited by the Ps obligation to indemnify the A
against any loss or damage the A may have suffered as a result of their employment.
The A may be entitled to claim for loss of commission in certain cases (e.g. P cannot capriciously or without
reasonable grounds refuse to enter into a K of agency when the A has found and introduced a purchaser ready,
willing and able to buy at the stipulated price) (George Trollope & Sons v Martyn Bros)
7.5 BY DEATH
Ø
Ø
Ø
Death of either P or A terminates agency immediately.
The death of P terminates authority, despite the fact that A may not be aware of the death (because As authority to
draw on Ps bank account terminates on Ps death (Noonan v Martin))
Consequently, A becomes personally liable to 3rd parties for having made any K entered into by the A after the
death of P.
7.6 BY INSANITY
Ø
If insanity has overtaken either P or A, the K of agency is at an end (Yonge v Toynbee)
7.7 BANKRUPTCY
7.7.1 OF THE AGENT
Ø
Bankruptcy of the A determines their authority, except where the bankruptcy does not affect their capacity to K as
agent. Thus, where the duties of the A are merely formal, the As bankruptcy would not necessarily affect their
authority.
7.7.2 OF THE PRINCIPAL
Ø
Bankruptcy of the P also determines the relationship of P and A. However, an A, even after notice of Ps
bankruptcy, may do such acts as are necessary to complete some transaction which was already binding on the P
before the bankruptcy.
7.8 RENUNCIATION BY THE AGENT
12
Ø
The A may renounce the agency at any time but must compensate the P for any loss occasioned by such
renunciation.
8 PARTICULAR TYPES OF AGENTS
8.1 FACTORS & MERCANTILE AGENTS
Ø
Ø
A factor is considered at CL to be an agent employed to sell goods, the possession or control of which has been
entrusted to the factor’s care by the P.
A mercantile agent is an agent having in the customary course of his business as such A authority either to sell
goods, or to consign goods for the purpose of sale or to buy goods, or to raise money on the security of goods” (ss
65-72 Goods Act 1958 (Vic))
8.2 DEL CREDERE AGENTS
Ø
Ø
A del credere agent undertakes the payment for goods accepted by the customers he or she procures upon the
buyer’s failure to pay; a del credere A does not guarantee that customers will not repudiate contracts in some
other manner (e.g. such as by refusal to accept goods)
Such an A is usually paid an extra commission known as a del credere commission.
8.3 BROKERS
Ø
Ø
A broker is an A who buys and sells goods for a P without being entrusted either with possession or control o the
goods or of their documents of title.
Often a broker does little more than bring the parties together, and when a K is concluded takes their commission
and entirely drops out of the transaction.
8.4 PARTNERS
Ø
Each partner is a general A of the other with regard to partnership matters, and the partnership is bound by any
act done by one if its members in the course of the firm’s business, unless the partner so acting has in fact no
authority to act for the firm, and the person with whom the partner is dealing either knows that they have no
authority or believe him to be a partner.
8.5 DIRECTORS
Ø
Directors must act together as a board. Directors are As for their co. and a co. is liable in respect of all Ks made on
its behalf by directors acting within the scope of the authority given to them by the rules of the co.
8.6 ESTATE AGENTS
Ø
The term “estate agent” is used in statutes to include As entrusted with the duty of buying or selling land, or of
buying or selling businesses, on behalf of Ps.
8.7 AUCTIONEERS
Ø
An auctioneer is an A for the sale of property at a public auction.
9 STATUTORY REGULATION OF AGENTS
Ø
Auctioneers & estate agents must be licensed (s 12 Estate Agents Act 1980 (Vic))
13
14
TOPIC 2: PARTNERSHIPS
10 NATURE OF PARTNERSHIP
10.1 MEANING OF PARTNERSHIP
Ø
“the relation which subsists between persons carrying on a business in common with a view of profit” (s 5
Partnership Act 1958 (Vic))
A partnership implies two things:
1
2
A business being carried on in common; and
Such business being carried on with a view to profit
Case example partnership
Canny Gabriel Castle Jackson
Advertising Pty Ltd v Volume
Sales (Finance) Pty Ltd (1974)
131 CLR 321
Ø
Ø
F & V agreed to assign ½ interest in contracts and profits – and to perform as a joint
venture.
Held: The agreement between F & V constituted “joint venturers in a commercial
enterprise with a view to profit” or partners in the joint venture.
NB: Partnership arises when proposed partners take first steps to implement their business plan, not once actual
trading commences (Khan v Miah)
NB: Partnerships do not have to actually make profits, just a view to profit (M Young Legal v Zahid)
10.2 DETERMINATION OF EXISTENCE OF PARTNERSHIP
The most important factors to be taken into account in determining whether or not a partnership exists are:
[a]
[b]
The intention of the parties, as ascertained by the court after viewing the whole of the facts of each case; and
Participation in the net profits of a business accompanied by an agency relationship between the parties
Ø
1
2
3
[a]
[b]
[c]
[d]
[e]
S 6 Partnership Act 1958 (Vic) provides that in determining whether or not a partnership exists, regard shall be
had to the following rules:
Joint or part ownership or joint tenancy, or tenancy in common whether or not the owners or tenants share the
profits, does not of itself create a partnership as to anything so held or owned.
The sharing of gross returns whether the persons sharing such returns have or have not a joint or common right
or interest in any property from which the returns are derived, does not of itself create a partnership.
The receipt by a person of a share of the profits of a business is prima facie evidence that they are a partner in
the business, but the receipt of such a share does not itself make that person a partner in the business, and in
particular the following circumstances do not of themselves make such person a partner:
The receipt of a debt by instalments or otherwise from the profits;
The receipt of remuneration by a servant or agent of a person engaged in business, by a share of the profits
of that business;
The receipt by a spouse or child of a deceased partner of an annuity out of the profits;
The receipt of interest varying with the profits, or of a share of the profits in consideration of an advance.
However, a K providing for this interest must be in writing + signed by all parties, otherwise a partnership
may exist;
The receipt of a portion of the profits of a business in consideration of the sale of the goodwill of such
business.
Case example where partnership held not to exist
Sutton & Co v Grey [1894] 1 QB
285
Where a sharebroker agreed to pay a person part of the commission earned in
consideration of introductions. The arrangement provided for the A to bear half the loss
caused through his introductions.
15
Keith Spicer Ltd v Mansell
[1970] 1 WLR 333
Two persons agreed to go into business worked together to form a co. One party, prior
to incorporation of the co. and without the other’s authority ordered goods intended to
be used by the co.
Held: not partners since they had merely worked together to form a co. and had not
been “carrying on a business with a view of profit”.
10.3 JOINT VENTURE & PARTNERSHIP
A “joint venture” is created whenever two or more people enter into an agreement to exploit a business opportunity with
respect to a particular project or undertaking (e.g. development of land, exploitation of minerals or patent rights)
Ø
Ø
Pros of a JV: Popular way of gathering together resources, experience & funds to undertake a commercial
venture. May pursue the benefits of joint involvement without the unlimited liability that is a characteristic of a
partnership.
This can be done if they structure their venture so to avoid taking on the features of a partnership:
Case example JV avoiding characteristics of a partnership
Cox v Coulson
[1916] 2 KB 177
Held: Not a partnership. While gross takings were divided between them, each party had to
discharge his own separate liabilities in respect of the venture.
Party 1
Party 2
Ø Travelling expenses;
Ø Theatre rent & outgoings;
Ø Remuneration of actors;
Ø Costs of lighting;
Ø Cost of appliances
Ø Cost of playbills
Additionally, neither of them had authority to bind the other: no agency between them.
10.4 DIFFERENCES BETWEEN PARTNERSHIP & LIMITED LIABILITY COMPANY
A limited liability co. is an association of persons usually incorporated under the Corporations Act 2001 (Cth). A
partnership differs from a limited liability co. in the following respects:
Maximum # members
Liability
Legal entity
Going concern
Management
Capital interest
Partnership
20
Unlimited
Not separate legal entity
Dissolution upon death/bankruptcy
All partners
Assignable shares, needing approval
Limited Liability Co.
No limit
Limited
Separate legal entity
Perpetual succession
Board of directors + executive Ds
Assignable shares without approval
10.5 DIFFERENCE BETWEEN PARTNERSHIP & CO-OWNERSHIP
S 6 Partnership Act 1958 (Vic) provides that co-ownership (“CO”) “does not of itself create a partnership”, and thus it is
important to know whether persons are partners or Cos. The main differences between the two concepts are:
Arising by
Partnership
Carrying on business in common +
sharing profits & losses
Agreement
Transferring interest
Agency
Need approval of other partners
Partners are As of other partners
Activity
Co-ownership
Doesn’t necessarily involve this
May arise through other means (e.g. beneficiaries
under a will)
May do so at will
COs not necessarily As of other COs
10.6 FORMATION OF PARTNERSHIP
Ø
Ø
A partnership is created by agreement. The agreement may be oral, written, under seal or inferred from
course of dealing adopted or agreed upon by all partners.
Capacity to enter into a K of partnership is governed by the law of K but minors are in a special position.
10.7 NUMBER IN PARTNERSHIP
16
Ø
Ø
Under S 115 Corps Act the maximum number of persons who may form a partnership for the acquisition of gain is
20.
This is excepted for certain professions:
Profession
Actuaries
Medical practitioners
Patent attorneys
Sharebrokers
Stockbrokers
Trade mark attorneys
Ø
Max #
50
50
50
50
50
50
Profession
Architects
Pharmaceutical chemists
Veterinary surgeons
Legal practitioners
Accountants
Max #
100
100
100
400
1000
Consequence of becoming too large: Become an “outsize partnership” liable to a criminal penalty ($900),
however agreement is not invalid and the enforceability of Ks is not affected.
10.8 CAPACITY TO BE A PARTNER
Certain types of persons have restricted capacity to enter into partnership. The most important of these are persons of
unsound mind and minors.
10.8.1 PERSONS OF UNSOUND MIND AS PARTNERS
Ø
Ø
Ø
A person of unsound mind is capable of entering into partnership during a period of sanity.
To escape liability as a partner it must be proved that:
o they were of unsound mind when they entered into the partnership; and
o the party with whom they entered the partnership knew this.
Otherwise the partner who is of unsound mind is both capable of binding the firm as a partner and of being bound
by their co-partners.
10.8.2 MINORS AS PARTNERS
Ø
Ø
A minor (e.g. person under 18 years of age) may be a partner although generally it is not a satisfactory
arrangement for the other partners.
If a minor partner enters into Ks on behalf of the firm, he binds the adult partners but he is not liable for
partnership debts as far as their private assets are concerned.
10.9 FIRM NAME
Registration of the firm name is required under the Business Names Registration Act 2011 (Cth).
Ø
[a]
[b]
[c]
The particulars requiring registration include the business name, the general nature and principal place of the
business, and in respect of every individual partner there must be disclosed:
Their given names and surnames;
Their usual residence; and
Any other business occupation that they follow.
Ø
A change or alteration in the constitution of the firm must also be registered.
11 R’SHIP OF PARTNERS: AMONG THEMSELVES
In most partnerships, an agreement, usually written, details the major terms of the partnership relation. However, to the
extent that the agreement does not cover aspects of the relationship and does not exclude the statutory terms, the
relationship will be governed by the implied terms detailed in the partnership legislation.
11.1 THE AGREEMENT
It is desirable that at least the following matters be covered in a written partnership agreement:
17
[a]
[b]
[c]
[d]
[e]
[f]
[g]
[h]
[i]
The names of the partners and the firm name;
The nature of the business;
The term of the partnership;
The capital to be introduced by each partner;
Provisions for proper accounts and their audit;
The authority of partners;
Provision as to the division of profits;
Arrangements as to partners’ drawings;
Arrangements as to partners’ salaries;
Ø
[j]
[k]
[l]
[m]
[n]
[o]
[p]
[q]
Provision regarding interest on capital;
Arrangements as to interest on advances;
Arrangements as to interest on drawings;
Provisions regarding death or bankruptcy of a partner;
Details regarding the retirement of a partner;
The amount to be paid to an outgoing partner;
Valuing goodwill upon death or retirement of a partner
Any special restraints to be observed by partners.
These rights and duties of partners may be varied at any stage during the partnership – with the consent of all
partners (such consent being express or implied) or in any manner as specified in the agreement.
11.2 IMPLIED TERMS
Subject to any contrary agreement express or implied by the partners, the following rules per s 28 Partnership Act
determine the rights, duties & interest of partners:
1
2
3
4
5
6
7
8
9
All partners entitled to share equally in the capital & profits of the business, and must contribute equally towards the
losses sustained by the firm.
Ø The Act provides for equality of profits, notwithstanding unequal capital contributions. This recognises that
partners may contribute person value to the firm aside from monetary contribution.
The firm must identify every partner in respect of payments made and personal liability incurred by those partners:
[a]
In the ordinary and proper conduct of the business of the firm; or
[b]
In or about anything necessarily done for the preservation of the business or property of the firm.
A partner making for the partnership any actual payment or advance beyond the amount of capital they have agreed
to subscribe is entitled to a 7% interest rate.
A partner is not entitled before the ascertainment of profits to interest on the capital subscribed by them.
Every partner may take part in the management of the partnership business.
Ø Unless specifically provided by agreement, one partner has no more authority than the other.
No partner is entitled to remuneration for acting in the partnership business.
Ø This provision is often varied by the Agreement but unless so provided the partners must give their services
gratuitously.
Ø Where a partner neglects to meet their commitments and burdens their other partners, those others
entitled to claim damages to compensate for consequences of breach of partnership agreement (Wang v
Rong)
No person may be introduced as a partner without the consent of all existing partners.
Ø It is not uncommon to find the Agreement varying this to a simple majority of partners.
Any difference arising as to ordinary matters may be settled by a simple majority of partners.
The partnership books are to be kept at the place of business, and may be freely inspected by all partners.
11.3 EXPULSION OF PARTNER
Ø
Ø
A majority of partners cannot expel a partner unless power to do so has been conferred by express agreement
between the partners (s 29 Partnership Act)
If such a power has been conferred by the Agreement, it must be exercised in utmost good faith by all the partners
whose concurrence is necessary.
11.4 FIDUCIARY OBLIGATION
Ø
Ø
A fiduciary relationship of trust and confidence exists between partners, giving rise to a fiduciary duty of full
disclosure towards each other for all matters concerning the firm.
The partners are bound to exercise utmost good faith in their dealings with one another, and this obligation
does not end until the final settlement of accounts on winding up (Chan v Zacharia)
Case example fiduciary obligations persisting beyond dissolution
18
Chan v Zacharia (1984) 154
CLR 178
Ø
Ø
Ø
Dissolution of medical partnership – one of its more valuable assets was lease of
surgery premises, with rights of renewal. P1 suggested that option should be exercised,
but P2 negotiated a new lease of the premises in his own name.
Held: Nothing to rebut the EQ presumption that lease had been obtained due to prior
lease, and that P2 was bound to account to the partnership in respect of the renewal. CT
over new lease.
Partner has obligation of full disclosure to other partners (s 32 Partnership Act)
Every partner must account to the firm for benefits derived by virtue of partnership connections without consent
of other partners (s 33 Partnership Act)
Partner must account to firm for any profits derived from business activities of same nature as that of
partnership’s activity (s 34 Partnership Act) (c.f. profits derived from activities beyond scope of partnership)
11.5 RETIREMENT OF PARTNER
Ø
Ø
Where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the
partnership at any time by giving notice of intention to the other partners (s 30 Partnership Act)
The dissolution takes place from date specified in notice of intention, and if no date specified, the date notice given
11.6 REVOCATION OF GUARANTEE BY CHANGE IN FIRM
Ø
A continuing guarantee given by or to a partnership, despite any agreement to the contrary, is revoked as to
future transactions if the constitution of the partnership changes (s 22 Partnership Act)
11.7 CONTINUANCE OF BUSINESS AFTER EXPIRATION OF TERM
Ø
Where a partnership that was originally fixed-term continues beyond this term, the rights and duties of the
partners remain the same as they were at expiration – however the partnership becomes a ‘partnership at will’
11.8 PARTNERSHIP PROPERTY
Partnership property must be used exclusively for the purposes of the partnership and in the manner set out in the
Agreement (s 24 Partnership Act).
Partnership property consists of
[a]
Property originally brought into the partnership;
[b]
Property acquired whether by purchase or otherwise on account of the firm or for the purposes and in the course
of the partnership business;
[c]
Property acquired with the firm’s money unless the contrary intention of the parties appears from the
transactions; and
[d]
The goodwill of the business.
Ø
Ø
NB: The right of a partner to sell the property of a partnership cannot be limited by stipulation between the
partners, unless the purchaser has express notice of the limitation (Montefiore v Smith)
C.f. co-owners: where COs use shared profits from land to buy more land, they do so not as partners, but as COs in
that new land too (s 24 Partnership Act)
A person’s property may become partnership property, however the inference from the conduct of the partners must
plainly lead to the result (Kelly v Kelly), improvements are not sufficient in and of themselves (Harvey v Harvey)
11.9 PARTNERSHIP LAND TREATED AS PERSONALTY
Ø
Where part of the partnership property is in land, it is treated as between the partners and also between
heirs/representatives of a deceased partner as personal property (as opposed to real property) (s 26 Partnership
Act) (e.g. Testator leaves personal property A, and real property to B – A would receive the interest in the
partnership land)
11.10 GOODWILL
19
Ø
Ø
The goodwill of a partnership business is, in the absence of a contrary agreement, to be sold upon the dissolution
of a partnership for the benefit of all partners.
Provisions for goodwill: When a partner retires he is entitled to his share of the goodwill. To avoid disputes or
the necessity of selling the business to determine the value, provision should be contained in Agreement as to
basis upon which value is to be estimated.
11.11 CHARGING A PARTNER’S SHARE
Partnership property is not liable to be seized for the private debt of a partner and may only be made liable on a
judgement against the partnership.
Ø
A creditor who has obtained a judgement against the partner (not the partnership) may however obtain an order
charging that partner’s interest in the property & profits with the amount of the debt & interest.
12 R’SHIP OF PARTNERS: AMONG 3 R D PARTIES
Each partner is an A of the firm and their other partners. Furthermore, the acts of every partner bind the partnership
unless: (s 27 Partnership Act)
[a]
The partner exceeds their authority (agency notes – see Topic 1) and the person with whom the partner is dealing
knows that the partner has exceeded their authority; or
The person with whom the partner is dealing does not know or believe them to be a partner.
[b]
Ø
Where a partner has no actual authority + 3rd party is not aware of partnership, a K entered into is not binding on
a co-partner (Construction Engineering v Hexyl)
12.1 APPARENT OR OSTENSIBLE AUTHORITY
The authority of a partner may be implied. Such authority extends to all matters necessary for carrying on the business of
the firm in the usual way in which businesses of the like are carried on.
Certain acts partners are entitled to perform is as follows:
[a]
[b]
[c]
[d]
To sell any goods or personal chattels of the firm;
To purchase on account of the firm any goods of a kind necessary for or usually employed in the business carried
on by it (e.g. purchasing farming machinery on time payment for business of farming – Molinas v Smith)
To receive payment of debts due to the firm, and give receipts or releases for them;
To engage employees for the partnership business
12.1.1 FURTHER ENTITLEMENTS IF A “TRADING PARTNERSHIP”
[e]
[f]
[g]
[h]
Accept, make, and issue bills of exchange and other negotiable instruments in the name of the firm;
Borrow money on the credit of the firm;
For that purpose pledge any goods or personal chattels belonging to the firm; and
For the like purpose give an EQ mortgage, by deposit of deeds or otherwise, of real estate or chattels real
belonging to the firm (cannot give legal mortgage)
12.2. AUTHORITY NOT IMPLIED
A partner has no implied authority to bind the firm by deed (as such authority must be given by deed) and a partner
also has no implied authority to give a guarantee in the name of the firm; or to bind the firm by a submission to
arbitration.
13 LIABILITY OF PARTNERS
13.1 LIABILITY IN CONTRACT TO 3RD PARTIES
Each partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a
partner.
20
Ø
NB: Partners may, among themselves, make any arrangements they choose as to the sharing of the liabilities for
partnership obligations but, as regards 3rd parties, all members of the partnership are liable for the obligations of
the firm.
13.2 LIABILITY OF INCOMING PARTNER
A person admitted into an existing firm does not become liable for debts or obligations contracted before they became a
partner (s 21 Partnership Act).
Ø
Ø
However, liabilities may be incurred where it is specifically agreed upon (e.g. where it is agreed to release a
retiring partner from the firm’s debts and substitute an incoming partner)
Such a K, however, cannot be enforced by a 3rd party (e.g. a creditor) against the incoming partner unless the 3rd
party was a party to the K.
13.3 LIABILITY OF RETIRING PARTNER
A partner who retires from a firm does not thereby cease to be liable for partnership debts incurred before their
retirement.
Ø
Ø
However, a retiring partner may be discharged from existing liabilities by agreement to that effect between
themselves and the members of the firm as newly constituted and the creditors.
This agreement may be express or inferred from the course of dealing between the creditors and the firm as
newly constituted (s 21 Partnership Act)
Such an agreement is called a tripartite agreement – the creditors (P1) will agree to release the retired partner (P2) and
the continuing partners (P3) will accept liability.
13.3.1 GIVE NOTICE OF RETIREMENT
A partner should give notice of their retirement to all that have dealings with the firm – debts subsequently incurred postretirement will still bind the partner as those 3rd parties are entitled to treat all apparent members of the old firm as
members until they have notice.
Ø
Ø
The mere alteration of names on the letterhead and receipt of communications is insufficient, unless it spells out
in clear terms that there has been an alteration to the partnership (Hamerhaven v Ogge)
Advertisement: Advertising is typically insufficient for giving valid notice, however notice of dissolution will
suffice in Victoria if it is an advertisement in a local newspaper in each district in which the business is carried on.
13.4 LIABILITY FOR “HOLDING OUT” AS A PARTNER
A person who represents themselves, or allows themselves to represented as, a partner is liable as partner to anyone who
has faith on this representation.
This operates in cases where:
[a]
A person has by words or by conduct represented themselves or knowingly allowed themselves to be represented
as a partner of the firm; and
Another person has given credit to the firm; and
The person has so given credit on the faith of the representation (Lynch v Stiff)
[b]
[c]
13.5 LIABILITY FOR WRONGS
Partners are liable jointly and severally for the wrongful act or omission of any partner acting in the ordinary course of
business of the firm, or with the authority of their co-partners (ss 14, 16 Partnership Act)
Ø
(Take a look at nature and scope notes in Topic 1: Agency)
S 15 Partnership Act specially provides for the liability of the firm where the money or property of a 3rd person has been
received and misapplied by a member of a partnership. A partnership must make good any loss occasioned:
21
[a]
Where one partner acting within the scope of their apparent authority receives the money or property of a 3rd
person and misapplies it; and (liability here depends on whether the P who misapplies had express or apparent
authority to receive)
Where a firm in the course of its business receives the money or property of a 3rd person and the money or
property so received is misapplied by one or more partners while it is in the custody of the firm (liability here
depends on whether the receipt of the money/property was in the ordinary course of the business of the firm or
not)
[b]
Case example partnership liability for wrongs
Lloyd v Grace, Smith & Co
[1912] AC 716
Managing clerk of firm of solicitors acting within scope of his authority interviewed
client concerning investment alteration. Induced C to sign papers that enabled him to
misappropriate property.
Held: Firm responsible for the fraud committed by their representative in the course of
his employment.
13.6 LIABIITY FOR MISAPPLICATION OF TRUST MONEYS
If a partner improperly employs trust property in the business or on account of the partnership, the other partners are not
liable to the persons beneficially interested, unless they were aware of the breach of trust.
Ø
This relates only to the private affairs of the P, that is where the P is a trustee in a personal capacity and not as
member of the partnership. The trust money may be followed and recovered from the firm if still in its possession
or under firm control (s 17 Partnership Act)
14 DISSOLUTION OF PARTNERSHIP
Any change in membership effects a dissolution of the existing partnership since it destroys the identity of the firm.
Ø
“It is a fundamental principle of the law of partnership that any change in the membership of the partnership,
whether occurring as a result of the retirement, expulsion, death or otherwise of a partner, effects a dissolution of
the partnership” (Buss JA in Atwell v Roberts)
The addition of a new partner also effects the dissolution of the former partnership and the creation of a new partnership.
Ø
“The transfer of a share to a non-partner inevitably breaks the continuity of the firm, thus constituting a new firm
or partnership of those members of the former partnership who remain, together with the newcomer”
(McPherson J in SJ Mackie v Dalziell Medical Practice)
A partnership may be dissolved by the following: ‘operation of law’, ‘by partners’ and ‘by the court’.
14.1 OPERATION OF LAW
Ø
A partnership is dissolved by the happening of any event which makes it unlawful for the business of the firm to
be carried on, or for the members of the firm to carry on in partnership (e.g. where one member becomes by
outbreak of war resident in alien territory) (s 38 Partnership Act)
14.2 BY PARTNERS
Ø
[a]
[b]
[c]
[d]
Subject to any agreement between the partners, a partnership is dissolved:
If entered into for a fixed term, by the expiration of that term;
If entered into for a single adventure or undertaking by the termination of that adventure or undertaking (e.g. a
partnership entered into for the purpose of salvaging a shipwreck would be terminated by the recovery & disposal
of the wreck);
If entered into for an undefined time (e.g. partnership at will), by any partner giving notice of intention to
dissolve. The partnership is dissolved as from the date mentioned in the notice as the date of dissolution – if no
date mentioned, as from the date of the communication.
By the death, bankruptcy or insolvency of any partner. If a partner gives valid notice of dissolution but dies
22
before the expiration of that notice, the partnership is dissolved by death and not by the notice; or
At the option of the other partners, if any partner allows their share of the partnership property to be charged for
their separate debt.
[e]
14.3 BY THE COURT
On application by a partner the court may order a dissolution of the partnership in any of the following cases:
[a]
When a partner has been declared to be of unsound mind and incapable of managing their affairs, or is shown to
the satisfaction of the court to be of permanently unsound mind.
When a partner, other than the partner suing, becomes in any other way permanently incapable of performing
their part of the partnership contract.
When a partner, other than the partner suing, has been guilty of such conduct as in the opinion of the court, regard
being had to the nature of the business is calculated to prejudicially affect the carrying on of the business.
When a partner, other than the partner suing, willfully or persistently commits a breach of the partnership
agreement, or otherwise so conducts themselves in matters relating to the partnership business that it is not
reasonably practicable for the other partner or partners to carry on the business in partnership with them (e.g.
continuous quarreling; consistently keeping accounts incorrectly (Knight v Bell))
When the business of the partnership can only be carried on at a loss. Every partnership is entered into with a
view to profit and if it can only be carried on at a loss the whole purpose of the partnership fails, and it may be
dissolved.
Whenever in any case circumstances have arisen which, in the opinion of the court, render it just and equitable
that the partnership be dissolved (s 39 Partnership Act)
[b]
[c]
[d]
[e]
[f]
14.4 CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP
Ø
After dissolution of partnership, partner retains authority to bind the firm and the other rights and obligations so
far as necessary to wind up the affairs of the partnership & complete unfinished transactions (s 42 Partnership
Act)
Case example continuing authority of partners at dissolution
Boghani v Nathoo [2012] BUS
LR 429; [2011] EWHC 2101
(Ch)
Partnership at will between B & N – involved in hotel development. At dissolution, firm
constructing two multi-million pound hotels. B argued hotels should be sold
“as is” whereas N claimed accounts should not be settled until “completed”.
Held: As the Ks were assignable and there was a market for such contracts, the “hotels”
should be sold.
14.5 APPORTIONMENT OF PREMIUMS ON DISSOLUTION
Ø
Ø
[a]
[b]
A partner may pay a “premium” for the privilege of being admitted to the partnership.
Where a partner pays a premium to enter for a fixed-term, and the partnership is dissolved before the expiration
of that term, the court may order a refund of the premium. However, will not order a refund of premium if:
The dissolution is wholly or chiefly due to the misconduct of the partner who paid the premium; or
The partnership has been dissolved by agreement containing no provision for a return of premium (s 44
Partnership Act)
14.6 RIGHTS ON DISSOLUTION THROUGH FRAUD OR MISREPRESENTATION
Ø
[a]
[b]
[c]
Where a person is induced to become a partner through fraud or misrepresentation, the partner so induced is
entitled to rescind the K of partnership, and also has the right:
To a lien on surplus partnership assets following payment of partnership liabilities, for any moneys paid for the
purchase of a share in the partnership or capital contributed;
To become a creditor for any payments made in respect of partnership liabilities; and
To be indemnified by the person guilty of the fraud/misrepresentation against all debts and liabilities of the firm (s
45 Partnership Act)
23
14.7 APPLICATION OF PARTNERSHIP PROPERTY ON DISSOLUTION
Ø
A partner may, on termination of the partnership, apply to the court for a decree dissolving the partnership and to
appoint a receiver to wind up the business and affairs of the firm (s 43 Partnership Act)
14.8 RIGHTS OF OUTGOING PARTNER TO SHARE PROFITS MADE AFTER DISSOLUTION
Ø
Ø
Where there is no final settlement of accounts, a partner is entitled at their option to such share of the profits
made since dissolution as the court considers attributable to their share of the partnership assets.
Alternatively, they may elect to have interest on their share of the partnership assets at 7% p.a. (s 46
Partnership Act)
Case example rights of outgoing partner to share of profits
Fry v Oddy [1999] 1 VR 557
O retires in 1994 – was equal partner in a 9-partner firm. Firm did not pay out his
interest in firm, he sued.
Held: Firm dissolved by O’s retirement, entitled to value of his share in firm + 1/9 of the
profits of firm in subsequent years, after an allowance of $130,000 per year for the
profit contributions of each continuing partner.
14.9 FINAL SETTLEMENT OF ACCOUNTS ON DISSOLUTION
Ø
1
2
Subject to any agreement between partners as to their rights and liabilities, the following rules must be observed:
Losses must be met first out of profits, then capital, then by the partners if necessary in the proportion in which they
were entitled to a share of the profits;
Assets, if any, contributed by the partners to make up any losses must be applied in the following manner and order:
[a]
Paying debts and liabilities of the firm to persons who are not partners in the firm;
[b]
Paying to each partner rateably what is due by the firm to them for advances (as distinguished from capital)
[c]
Paying to each partner rateably what is due from the firm to them in respect of capital; and
[d]
Paying to each partner the residue – in the proportion to which profits are divisible (s 48 Partnership Act)
14.10 RIGHTS OF ASSIGNEE OF SHARE OF PARTNERSHIP
Ø
Ø
An assignee of a share of a partnership is only entitled to their share of the profits (includes their share if a
dissolution occurs: Luton investments v Davreal)
They are not entitled to the following:
o To interfere in the management or administration of affairs;
o To require an account of partnership transactions; or
o To inspect the partnership books (s 35 Partnership Act)
15 LIMITED PARTNERSHIPS
Ø
At least one partner will have unlimited liability, and the other limited liability. The limited partners must not take
part in the management of the business of the firm and to to extent they do – will be liable as if the partner was a
general partner.
The advantages of a Ltd partnership for commercial purposes over an ordinary partnership, corporation or trust are seen
to include:
[a]
[b]
The comparative simplicity of the formal requirements for the formation of a limited partnership;
The advantage of conferring limited liability without having to achieve this via a Ltd liability company under the
Corporations Act 2001 (Cth);
The absence of a limit on the maximum number of limited partners; and
The ability of the partners to utilise income tax losses incurred by the partnership.
[c]
[d]
15.1 REGISTRATION
Ø
A limited partnership must be registered. An application for registration must include:
24
o
o
o
A statement signed by all the partners setting out particulars as to firm name;
the registered office; the name and address of each partner; whether each partner is a limited or general
partner;
A statement in relation to each limited partner that their liability to contribute is limited to the amount
specified in the statement.
15.2 INCIDENTS OF LIMITED PARTNERSHIPS
Ø
[a]
[b]
[c]
[d]
[e]
Subject to the terms of any agreement to the contrary between the partners in a limited partnership:
Any differences arising as to ordinary matters connected with the firm’s business are to be decided by a majority
of the general partners;
A limited partner may assign their share with the consent of the general partners;
A person may be admitted as a partner without the consent of any limited partner;
The other partners are not entitled to dissolve the partnership if a limited partner has suffered their share to be
charged for a debt; and
A limited partner is not entitled to dissolve the partnership by notice.
25
26
TOPIC 3: SALE OF GOODS (DOMESTIC)
16 CONTRACT OF SALE OF GOODS
16.1 FORMATION OF THE CONTRACT
A contract of sale of goods is a K whereby the seller transfers or agrees to transfer the property in goods to the buyer for
a money consideration called the price (s 6 Goods Act).
Ø
The ordinary elements of a K must be present (e.g. offer, acceptance, consideration), but there must also in every
contract for the sale of goods be present three main matters; goods, money consideration, transfer of property.
16.1.1 GOODS
Includes: The term goods include all chattels personal other than things in action and money. It includes:
Ø
Ø
Ø
Ø
Ø
Ø
Emblements (industrial crops such as wheat, potatoes and hay);
Things attached to or forming part of land which are agree to be severed before K of sale (s 3 Goods Act)
Clothes, food, motor cars, machinery, furniture and growing crops.
Timber is also included, if it is to be cut down before the title of it is to pass to the buyer.
A K for the removal and relocation of a house in its entirety has been held to constitute goods (Symes v Laurie)
Computer hardware and physical software cases (Toby Construction Products v Computer Bar Sales)
Doesn’t include: The term does not include:
Ø
Ø
Ø
Land or any interest in land;
Shares or debentures;
Software packages supplied for online download (Gammasonics Institute v Comrad Medical)
16.1.2 MONEY CONSIDERATION
There must exist some money consideration for the sale. If the goods are given away for free or transferred by means of
barter, that is, exchanged for other goods, the Sale of Goods Act would not apply to the transaction.
16.1.3 TRANSFER OF PROPERTY
Transfer of property is mean the transfer of ownership in the goods. The principles of property or ownership in goods are
considered at [18 Transfer of Property] below.
16.2 CAPACITY TO BUY & SELL
Ø
Where ‘necessaries’ are sold to minors, or to persons who by reason of mental incapacity or drunkenness are
incompetent to K, they must pay a reasonable price (s 7 Goods Act)
16.3 SALE & AGREEMENT TO SELL
The term “contract for the sale of goods” includes:
Ø
Ø
A sale of goods (an executed contract); and
An agreement to sell goods (an executory contract)
16.3.1 “SALE”
Ø
Ø
Ø
Ø
A “sale” occurs where the ownership of the goods is transferred to the buyer at the time of the K (e.g. B goes to
sports store, purchases cricket bat – thing sold immediately becomes property of B)
Goods are agreed upon at the time of sale and there is nothing further required to transfer the ownership.
Rights of seller: the seller has a right to sue the buyer for the price of the goods.
Rights of buyer: the buyer has the right to sue the seller for damages if the seller defaults, and also for conversion
if the seller wrongfully disposes of the goods.
27
16.3.2 “AGREEMENT TO SELL”
Ø
Ø
Ø
Ø
An “agreement to sell” arises where the ownership of the goods is to be transferred at a future time, or subject to
some condition – becoming a sale when this time or future condition is fulfilled.
NB: A K to sell unascertained goods is not a sale, but an agreement to sell (Jansz v GMP Imports)
Rights of seller: the seller has a right to sue the buyer for damages in the event of default.
Rights of buyer: the buyer, where the seller defaults, can only sue for damages as the property in the goods has
not passed to the buyer.
16.4 CLASSIFICATION OF GOODS
The goods which form the subject matter of a K of sale may be: existing; future; specific; or unascertained goods.
16.4.1 EXISTING GOODS
Ø
Existing goods are those owned or possessed by the seller at the time of the K (e.g. a particular car)
16.4.2 FUTURE GOODS
Ø
Future goods are those to be manufactured or acquired by the seller after the making of the K of sale. It is also
necessary to observe the meanings of “specific” and “unascertained” goods.
16.4.3 SPECIFIC GOODS
Ø
Specific goods (s 3 Goods Act) are goods identified and agreed upon at the time the K of sale is made (e.g. a specific
piece of Dresden china)
16.4.4 UNASCERTAINED GOODS
Ø
Unascertained goods are goods sold under a description where no particular goods were identified and agreed
upon at the time the K was made (e.g. a K for the sale of generic goods – 100 tons of best-quality wheat)
16.5 THE PRICE
The price may be fixed by the K or in some manner agreed upon, or by dealings between the parties.
Ø
If no price stated, the buyer must pay a reasonable price. What is reasonable is a question of fact dependent upon
the circumstances of each particular case (s 13 Goods Act)
16.6 FORMALITIES
There are no special formalities in Victoria to be observed before a K of sale becomes enforceable. Such a K may be made
in writing, by word of mouth, or by implication from the conduct of the parties (s 9 Sale of Goods (Vienna Convention) Act)
17 TERMS OF THE CONTRACT
17.1 CONDITIONS IMPLIED IN CONTRACTS OF SALE
The Sale of Goods Act implies certain important terms in all Ks for the sale of goods, unless the circumstances of the K are
such as to show a different intention. The terms implied are: conditions as to title; correspondence with description;
quality; fitness of goods supplied.
17.1.1 CONDITION AS TO TITLE
There is an implied condition on the part of the seller that they have a right to sell the goods, and in the case of agreement
to sell, they will have a right to sell at the time agreed (s 17 Goods Act)
Ø
Ø
Non-compliance with having title means buyer permitted to a refund (Rowland v Divall)
If receive title after the sale, but before the buyer attempts to rescind – is valid K (Patten v Thomas Motors) (this is
because the subsequently acquired titled cures the defect)
28
The following warranties as to title are also implied by the Sale of Goods Act:
Ø
Ø
That the goods are free from any charge or encumbrance in favour of any 3rd party not declared or known to the
buyer before or at the time when the K is made;
That the buyer will have and enjoy quiet possession of the goods. This amounts to an indemnity against eh
consequences of defective title.
17.1.2 CORRESPONDENCE WITH DESCRIPTION
There is an implied condition that the goods will correspond with the description (s 18 Goods Act)
Ø
Ø
Ø
Ø
For this condition to apply the goods must be sold “by description” (Varley v Whipp) – even if buyer has seen
goods but still relies on description (Beale v Taylor)
NB: Applies to private sales
NB: Note the important distinction between statements re: identity (are part of description) c.f. statements re:
quality (not part of description) (Ashington Piggeries v Christopher Hill)
Where sold by description + sample – must correspond with both description and sample (s 18 Goods Act)
Case example correspondence with description
Elder Smith Goldsbrough Mort
Ltd v McBride [1976] 2 NSWLR
631
P was owner of bull bought by M for stud purposes. Bull subsequently proved to be
sterile. M had bid $21,000 for bull, value of bull for slaughtering purposes only $500.
Held: The sale was sale by description – description being a “breeding bull”.
Condition implied into K – M entitled to recover from P the price paid less bull’s value
for slaughtering purposes.
17.1.3 MERCHANTABLE QUALITY
There is an implied condition that goods are of merchantable quality, provided that – if buyer has examined the goods,
there is no implied condition as regards defects which such examination ought to have revealed (s 19 Goods Act)
Ø
Ø
Ø
Merchantable quality: goods are commercially saleable under the description they were sold; fit for a purpose
for which goods of that description are normally used, having regard to price paid and circumstances of the sale
(Henry Kendall & Sons v William Lillico & Sons)
NB: For this condition to apply the goods must be sold “by description” – broadly interpreted by the courts (Grant
v Australian Knitting Mills)
NB: Condition not implied where examination beforehand would have revealed defects (Thornett & Fehr v Beers)
Case example merchantable quality
David Jones Ltd v Willis (1934)
52 CLR 110
Aqua-Marine Marketing Pty Ltd
v Pacific Reef Fisheries
(Australia) Pty Ltd (No 5)
[2012] FCA 908
W went to shoe department – asked for comfortable pair of walking shoes. Heel of one
of shoes came off and broke her leg. Evidence showed shoes were a “very bad job”.
Held: Shoes had been bought by description – been breach of implied condition of
merchantable quality.
Prawn wholesaler purchased prawns from prawn farmer for on sale to Woolworths.
Prawns supplied not suitable. Wholesaler had tasted 3 prawns out of 50-ton
consignment = superficial examination.
Held: Condition implied as examination beforehand was superficial, would not have
revealed defects.
17.1.4 FITNESS FOR PURPOSE
There is an implied condition that the goods are reasonably fit for the purpose they are intended to be used as (s 19 Goods
Act)
Ø
Ø
NB: from strict reading of provision, it would appear this implied condition is only relevant where the buyer
makes known his particular purpose for the use of the goods.
However, the seller must have a general idea about the ordinary purpose of the goods’ use.
Grant v Australian Knitting Mills
G purchased woolen underwear from M. After wearing the garments, G developed acute
29
Ltd (1936) 54 CLR 49
McWilliams Wines Pty Ltd v
Liaweena (NSW) Pty Ltd [1988]
ASC 55-695
skin disease.
Held: Goods were not reasonably fir for their only proper use and G entitled to
damages.
P winemaker bought 500,000 corks from D cork merchant. Found that significant
proportion of bottles sealed with these corks had been contaminated – unsaleable.
Held: Breach of implied condition of fitness – given background between the parties
and general knowledge about use of corks.
17.1.5 SALE BY SAMPLE
Where a sale is by sample only, there is an implied condition that:
[a]
[b]
[c]
The bulk will correspond with the sample in quality;
The buyer will have reasonable opportunity of comparing the bulk with the sample; and
The goods will be free from defect rendering them un-merchantable which would not be apparent on reasonable
examination of the sample (s 20 Goods Act) (remember Aqua-Marine Marketing where person tasted 3 prawns out
of 50-ton consignment)
17.2 EXCLUSION OF THE TERMS IMPLIED BY THE SALE OF GOODS ACTS
Implied terms may be express or impliedly excluded/varied by the parties to a K of sale (s 61 Goods Act)
Ø
NB: Onus is on the party seeking to rely on the exclusion clause to demonstrate that the clause excludes their
liability (Victorian Alps Wine v All Saints)
17.3 WHEN A CONDITION IS TO BE TREATED AS A WARRANTY
Where a K of sale is subject to a condition to be fulfilled by seller, buyer may waive the condition/elect to treat breach as
breach of warranty and not grounds for repudiation (s 16 Goods Act)
17.4 CAVEAT EMPTOR
Ø
There are no CL implied conditions – the maxim caveat emptor à ‘buyer beware’ – applies.
18 TRANSFER OF PROPERTY
It is necessary to consider the following matters connected with the transfer of goods:
[a]
[b]
[c]
[d]
The distinction between property in and possession of goods;
The rules covering the transfer of the ownership or property in goods;
The right of reserving disposal, that is, the seller deferring the transfer; and
The risk of loss of or injury to goods
18.1 PROPERTY AND POSSESSION
Ø
Ø
Property relates to ownership or title;
Possession refers to the custody or control of goods.
Thus one person may have possession of certain goods, while another has the property in, or ownership of, such goods
(e.g. A leaves damaged car with B for repair)
18.2 TRANSFER OF OWNERSHIP OR PROPERTY IN GOODS
The primary rule for ascertaining when the ownership of goods passes to the buyer is:
[a]
[b]
In the case of specific or unascertained goods à property passes at such time as the parties intend it to pass,
taking into account: terms; conduct; circumstances.
In the case of unascertained or future goods à no property can pass unless and until the goods become
30
ascertained (ss 21-22 Goods Act)
18.2.1 RULE 1
Ø
Ø
Where there is an unconditional K for the sale of specific goods in a deliverable state, the property in the goods
passes when the K is made (immaterial whether the time of payment or the time of delivery, or both, are
postponed)
Deliverable state: when they are in such a state that the buyer is bound under the K to take delivery of them.
18.2.2 RULE 2
Ø
Where there is a K for the sale of specific goods, and seller is bound to do something to the goods for the purpose
of putting them in deliverable state, property does not pass till thing is done and buyer has notice of it (thus no
immediate passing of property)
18.2.3 RULE 3
Ø
Where there is a K for the sale of specific goods in deliverable state, but the seller is bound to weigh, measure test
or do some other act with reference to the goods for purpose of ascertaining price, property does not pass till such
thing is done and buyer has notice of it (thus no immediate passing of property)
18.2.4 RULE 4
Ø
Where goods are delivered to the buyer on approval, or on “sale or return”, the property in them passes to the
buyer:
o When the buyer signifies their approval or acceptance – adopting the transaction; or
o If the buyer doesn’t signify, if the buyer retains the goods for a determined/reasonable time (question of
fact)
18.2.5 RULE 5
18.3 RESERVATION OF RIGHT OF DISPOSAL
The seller may by the terms of the K or appropriate reserve the right of disposal of the goods until certain conditions are
fulfilled (s 24 Goods Act). The property in the goods do not pass until the conditions imposed by the seller are fulfilled.
18.3.1 “ROMALPA” CLAUSES
Romalpa clause: A clause preserving the rights of the seller in respect of the goods until the seller has been paid in full.
Ø
The purpose of a clause such as this is to enable the seller to recover the goods in the event of the buyer’s
insolvency and thereby prevent the goods from becoming part of the property/assets of the buyer available for
distribution among other creditors.
Case example ‘Romalpa Clause’
Rondo Building Services Pty Ltd
v Casaron Pty Ltd [2003] 2 Qd R
558
Hardy Wine Co Ltd v Tasman
Liquor Traders Pty Ltd (2006)
95 SASR 21
Clause provided that buyer was permitted to sell, but until purchase price was paid, the
buyer acted as agent for seller when selling goods. Also provided the proceeds of sale
would be held in separate account in trust, and the buyer’s obligations only discharged
once the full price was held in separate account.
Change in delivery arrangements between Supplier, Wholesaler, and Business had no
effect upon romalpa clause. Wholesaler became insolvent, hadn’t paid for 8
consignments.
Held: In the absence of payment, title over the wines had not passed and Supplier
retained title
18.3.2 RISK
The risk of loss prima facie passes with property.
31
Ø
Unless otherwise agreed, the goods remain at the seller’s risk until the property is transferred to the buyer, but
when property is transferred to the buyer, the goods are at the buyer’s risk whether delivery is made or not (s 25
Goods Act)
Goods destroyed
before entering K
Goods destroyed
after entering K
Parcels of specific
goods
Parcels of
unascertainable
goods
Delay in delivery of
goods
The loss of specific goods which have been destroyed at the time of entering agreement falls upon
the seller and the K is void (s 11 Goods Act)
The loss of specific goods which have been destroyed after the time of entering agreement,
without fault on part of seller or buyer, the agreement is thereby avoided (s 12 Goods Act)
A K for sale and delivery of indivisible parcel of goods may be avoided if part of the goods is not
forthcoming (e.g. sale of 700 bags of Chinese nuts was avoided when it was found only 591 bags
(Barrow, Lane & Ballard v Phillip Phillips & Co))
Ø Rationale: “the result is that the parties were K’ing about something which, at the date of
the K, without knowledge or fault of either party, did not exist. To compel the buyer … to
take 591 bags would be to compel him to take something which he had not K’ed to take,
and would in my judgement be unjust” (Wright J in Barrow, Lane & Ballard)
A K for sale and delivery of unascertainable goods cannot be avoided if the goods are not
forthcoming. The seller would be required to find other goods to tender in performance of the K.
(e.g. sale of 7 tons of Chinese nuts – I don’t care if you can only find 6.4, get more)
Where delivery delayed through fault of either buyer or seller, goods are at risk of the party in
fault as regards loss occurring (Allied Mills v Gwydir Valley Oilseeds)
Ø K of sale of linseed meal. Property passing to buyer at time of making K of sale. In breach
of K, seller declined to deliver – goods destroyed in seller’s warehouse by fire.
Ø Buyer relieved of liability to pay for goods, also entitled to recover damages for seller’s
failure to deliver since buyer forced to buy equivalent goods at higher price (Allied Mills v
Gwydir Valley Oilseeds)
19 TITLE OF TRANSFEREE
General rule is that transferee cannot obtain better title to such goods than that of the transferor. This is the nemo dat
quod non habet maxim – “no-one can pass to another a better title than he himself has”.
There are however certain exceptions to the nemo dat rule, namely:
Ø
Ø
Ø
Ø
A sale where the owner is estopped from denying the authority of the seller;
A sale by a mercantile agent or a sale under special CL or statutory power of sale;
A sale by a person having a voidable title; or
A sale by a seller or buyer in possession after the sale.
19.1 ESTOPPEL
Where the owner of goods is by their conduct precluded from denying the seller’s authority to sell, the buyer obtains
good title (s 27 Goods Act)
Ø
Ø
To permit goods to go into the possession of a person in circumstances which make it appear that such person has
authority to sell the goods may estop the owner from upsetting the purchase (e.g. such as where mortgagor of car
represents that car no longer has mortgage over it – and the mortgagee sells the car – where in fact the car did
mistakenly still have a mortgage over it) (Big Rock v Esanda Finance)
NB: Merely parting with possession not sufficient representation – in Big Rock the financier had written a letter
stating the mortgage was complete.
19.2 SALE BY MERCHANTILE AGENT OR BY PERSON UNDER SPECIAL POWER
When goods are sold by a mercantile agent to a person who takes them bona fide, such person obtains good title –
notwithstanding the principal may have revoked the A’s authority to sell.
19.3 SALE UNDER A VOIDABLE TITLE
32
Where seller has voidable title (e.g. title gained through fraud) but the title has not been avoided at time of sale; the buyer
acquires good title provided in good faith and without notice of seller’s defect of title (s 29 Goods Act)
19.4 SALE BY SELLER OR BUYER IN POSSESSION AFTER SALE
19.4.1 SALE BY SELLER IN POSSESSION
The bona fide purchaser of goods from a seller who has continued in possession of the goods after their sale to the original
purchaser – will acquire good title as against the original purchaser (Pacific Motor Auctions v Motor Credits)
19.4.2 SALE BY BUYER IN POSSESSION
The bona fide purchaser of goods from a buyer who obtained possession of the goods with the consent of the original
seller obtains a good title to them.
20 PERFORMANCE OF THE CONTRACT
It is the duty of the seller to deliver and of the buyer to accept and pay for them (s 34 Goods Act). Delivery can be actual or
constructive.
20.1 RULES AS TO DELIVERY
The following are general rules as to delivery of goods under K of sale (ss 36, 39 Goods Act)
[a]
If seller agrees to deliver goods to buyer’s premises and, without negligence, delivers there to person apparently
authorised to receive and person misappropriates goods, the loss must fall on buyer not seller (Galbraith & Grant v
Block)
Where goods are to be delivered but no time fixed, the seller is bound to send within reasonable time;
Where the goods at time of sale are in possession of 3rd person, there is no delivery unless 3rd person
acknowledges to buyer that they hold the goods on buyer’s behalf;
Demand or tender of deliver must be made at a reasonable hour;
Unless otherwise agreed, expenses of putting goods into deliverable state must be borne by seller;
Where seller is authorised or required to send goods to buyer, deliver of goods to a carrier for the purpose of
transmission to buyer is, prima facie, deemed to be delivery of the goods;
Seller must make the arrangements with the carrier for transit – if not buyer may decline to treat the delivery as
delivery to themselves;
If goods to be transported by sea transit, duty of seller to notify buyer of sea transit so buyer may insure goods –
and if defaults in giving notice to buyer it will be seller’s risk during sea transit;
When seller ready and willing to make delivery, but buyer refuses to take delivery within reasonable time, buyer
liable to reasonable charge for care & custody + loss occasioned;
Preceding rule does not affect rights of seller under contract law – repudiation.
[b]
[c]
[d]
[e]
[f]
[g]
[h]
[i]
[j]
20.2 CONSTRUCTIVE OR SYMBOLICAL DELIVERY
Delivery need not be actual, but constructive. To be valid, constructive delivery must have the effect of immediately
subjecting the goods to the control of the person to whom delivery has to be made (e.g. such as a bill of lading, delivery of
documents of title)
20.3 DELIVERY OF WRONG QUANTITY OR MIXED GOODS
Delivers less
than
Delivers more
than
Mixed goods
Ø
Where seller deliver less than, buyer may reject, but if accepts the goods must pay for them at the K rate
(s 37 Goods Act)
Where seller delivers more than, buyer may accept the goods and reject the excess, or reject the whole,
or accept the whole and pay for them at K rate
Where the seller delivers mixed goods with different description, buyer may accept the goods and reject
the random goods, or reject the whole (London Plywood v Nasic Oak)
NB: Where the excess or shortfall is trifling or negligible and not sufficient to influence a buyer, the variation is not
a ground for rejecting the K.
33
20.3.1 INSTALMENT DELIVERIES
If the default in instalment delivery is only a slight breach and does not amount to repudiation, then buyer may seek claim
for compensation but not repudiation of whole K.
Consider:
Ø
Ø
The ratio quantitatively which the breach bears to the K as a whole; and
The degree of probability or improbability that such a breach will be repeated (Maple Flock v Universal Furniture)
20.4 FOB & CIF CONTRACTS
Ø
Ø
FOB: ‘Free on Board’
CIF: ‘Cost, Insurance & Freight’ – are two K types commonly used in connection with Ks for the sale of goods to be
carried by sea or shipped to the buyer.
Where the goods have been quoted “FOB” it is the seller’s duty to put the goods on board the ship at the port and to pay all
expenses incurred in doing so, buyer being responsible for subsequent charges such as freight & insurance.
Ø
It is the duty of the seller to notify the buyer of the shipment to enable the buyer to insure, otherwise godos are at
the seller’s risk (s 39 Goods Act)
Where the goods have been quoted “CIF” it is the sellers duty to: (Wimble, Sons & Co v Rosenberg & Sons)
[a]
[b]
[c]
[d]
Make arrangement for the transport of the goods;
Ship the goods paying the costs thereof;
Effect upon the terms current in the trade an insurance of the goods and to pay the premium; and
Tender, within a reasonable time, the shipping documents to the buyer (e.g. bill of lading, policy of insurance,
invoice)
Ø
The primary difference between CIF Ks and ordinary Ks rests in the fact that performance of the bargain in the
former is primarily to be fulfilled by deliver of documents and not by the actual physical delivery of goods by the
vendor.
20.5 “ACCEPTANCE” OF THE GOODS
A buyer is deemed to have accepted the goods when: (s 42 Goods Act)
[a]
[b]
The buyer intimates to the seller that they have accepted them; or
The goods have been delivered to the buyer and the buyer does any act in relation to them which is inconsistent
with the ownership of the seller (e.g. the buyer re-sells them); or
Ø The buyer is not deemed to have accepted the goods until they have had a reasonable time to inspect
them (s 41(1) Goods Act)
The buyer retains the goods after the lapse of a reasonable time without intimating to the seller that they have
rejected them
[c]
21 REMEDIES FOR BEACH OF THE CONTRACT OF SALE
The Goods Act deals separately with:
Ø
Ø
The remedies of the unpaid seller; and
The remedies of the buyer for the seller’s breach of the K of sale.
21.1 REMEDIES OF THE UNPAID SELLER
The seller of goods is deemed to be an unpaid seller where:
Ø
The whole of the price has not been paid or tendered; or
34
Ø
The bill of exchange or other negotiable instrument has been received as conditional payment, and the condition
has not been fulfilled by reason of the dishonor of the instrument or otherwise (s 45 Goods Act)
The unpaid seller has [2] classes of rights: rights against the goods, and rights against the buyer.
21.2 RIGHTS OF UNPAID SELLER AGAINST: THE GOODS
The unpaid seller may have the following rights against the goods:
[a]
[b]
[c]
[d]
A lien (when ownership has passed to the buyer but possession is with the seller);
Withholding delivery (when ownership and possession are still with the seller);
Stoppage of goods in transit (when ownership has passed to the buyer but possession is not with either party); or
Resale (when ownership may be with either party but possession is with the seller).
21.2.1 LIEN
Ø
[a]
[b]
[c]
The unpaid seller may exercise their lien when: (s 3 Goods Act)
The goods have been sold without any stipulation as to credit; or
The goods have been sold on credit but the term of credit has expired; or
The buyer becomes insolvent.
Ø
[a]
The unpaid seller will lose their lien when:
The goods are delivered to a carrier for the purpose of transmission to buyer, without reserving the right of
disposal of the goods; or
The buyer or their agent lawfully obtains possession of the goods; or
By waiver.
[b]
[c]
21.2.2 WITHHOLDING DELIVERY
Ø
Where the buyer defaults and neither the ownership nor possession of the goods has passed to the buyer, the
unpaid seller has a right of withholding delivery of the goods.
21.2.3 STOPPAGE IN TRANSITU
Ø
[a]
[b]
[c]
An unpaid seller has the right of stopping the goods in transit when:
They have parted with possession of the goods; and
They are still in transit; and
The buyer becomes insolvent.
21.2.3.1 Duration of transitu
The Goods Act contains the following rules, as it is often difficult to determine whether the goods are still in transit: (s 51
Goods Act)
[a]
[b]
[c]
[d]
[e]
[f]
[g]
Goods deemed in course of transit from time they are delivered to carrier until the buyer/agent of buyer takes
delivery of them;
If buyer/agent of buyer obtains delivery before their arrival at appointed destination, transit is at an end;
If, after arrival at appointed destination, carrier acknowledges to buyer/agent of buyer that carrier holds goods on
buyer’s behalf and continues in possession, the transit is at an end;
If the goods are rejected by buyer and carrier continues in possession of them, transit is not deemed to be at end
even if seller refused to receive them back;
When the buyer owns the carrier, it is a question depending on the circumstances of the particular case;
Where the carrier wrongfully refuses to deliver the goods to the buyer, transit deemed to be at an end;
Where part delivery of goods has been made the remainder may be stopped in transitu, unless the part delivery
evinced an intention to give up possession of the whole of the goods.
21.2.3.2 How stoppage in transit is effected
35
The unpaid seller may exercise the right of stoppage in transitu ether by taking actual possession of the goods or by giving
notice of their claim to the carrier.
Ø
When notice of stoppage in transitu is given by the seller to the carrier, the carrier must redeliver and expenses be
borne by seller (s 52 Goods Act)
21.2.3.3 Defeat of stoppage in transitu
If a document of title has been lawfully transferred to a buyer and that buyer transfer by way of sale, to a BFPFVWN, then
the unpaid seller’s right of lien or stoppage in transitu is defeated (s 53 Goods Act)
21.2.4 RIGHT OF RESALE
The unpaid seller has a right of resale of the goods where: (s 54 Goods Act)
[a]
[b]
The goods are of a perishable nature; or
The seller exercises the right of lien or stoppage in transitu and gives notice to the buyer of their intention to
resell, and the price is not paid or tendered within a reasonable time; or
The seller has expressly reserved a right of re-sale in case the buyer should make a default
[c]
Ø
The right of resale has the effect of rescinding the K of sale and the seller is entitled to recover damages (RV Ward
v Bignall)
Case example right of resale
Wherry v Watson [1991] ASC
56-048
P1 agreed to buy Ds car for $35, gave $3k cheque deposit which was dishonored due to
admin error. After this, D sold car to P2 for $37k. Both Ps claimed order for SP of their
Ks for the purchase of car.
Held: Dishonor of cheque entitled D to terminate and sell car to P2.
21.3 RIGHTS OF UNPAID SELLER AGAINST: THE BUYER
The unpaid seller has certain rights against the buyer for:
Ø
Ø
the price of the goods; or
for damages for non-acceptance of the goods
21.3.1 ACTION FOR THE PRICE
Ø
Ø
Where the property in goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the
goods, the seller may sue the buyer for the price (s 55 Goods Act)
NB: Where price is payable on certain day, irrespective of whether property in goods has passed, seller may sue
the buyer for price.
21.3.2 DAMAGES FOR NON-ACCEPTANCE
Ø
Ø
Where buyer wrongfully neglects or refuses to accept and pay for goods, seller may sue for damages for nonacceptance. Measure of damages is the estimated loss directly and naturally resulting in the ordinary course of
events from the buyer’s breach of K (s 56 Goods Act)
NB: if there is an available market (market available from day-to-day in which goods might be sold at then
current/fair price at will of vendor: Eclipse Motors v Nixon) then measure of damages is prima facie difference
between K price and market price at time when goods ought to have been accepted (Onesteel Manufacturing v
BlueScope)
21.4 REMEDIES OF THE BUYER
The buyer’s remedies against the seller may be considered under the following:
Ø
Ø
Repudiation of the contract;
Damages for breach of warranty of quality;
36
Ø
Ø
Damages for non-delivery; and
Specific performance.
21.4.1 REPUDIATION OF THE CONTRACT
Ø
The buyer is entitled to rescind the K and reject the goods where there is a breach of condition or evidence of an
intention or unwillingness to substantially perform the K.
The right of repudiation may be lost to the buyer where:
[a]
[b]
[c]
The buyer has waived the breach of condition or elected to treat it only as a breach of warranty;
The K of sale is not severable and the buyer has accepted the goods or part of them; or
The K is for specific goods and the property in them has passed to the buyer
21.4.2 DAMAGES FOR BREACH OF WARRANTY OF QUALITY
Ø
Ø
While breach of warranty does not give right to terminate K, it does give right to maintain action for damages (s
59 Goods Act)
The measure is “the estimated loss directly and naturally resulting in the ordinary course of events from the
breach”
21.4.3 DAMAGES FOR NON-DELIVERY
Ø
Ø
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an
action against the seller for damages for non-delivery (s 57 Goods Act)
The measure is “the estimated loss directly and naturally resulting in the ordinary course of events from the
breach”
21.4.4 SPECIFIC PERFORMANCE
22 AUCTIONEERS AND AUCTION SALES
22.1 DUTIES OF AUCTIONEERS
It is the duty of an auctioneer to:
[a]
[b]
[c]
[d]
[e]
[f]
[g]
Hold a license and act in person;
Sell for money only, in the absence of instructions to the contrary;
Sell to a 3rd person
Accept the highest bona fide bid where the auctioneer sells without reserve;
Account for the proceeds of goods sold;
Not to deliver goods sold until paid for, nor allow any deduction from the price, unless authorised to do so by the
principal; and
Keep full records of sales.
22.2 WARRANTIES BY AUCTIONEERS
When an auctioneer sells goods, they impliedly give the following warranties:
[a]
[b]
[c]
[d]
Their authority to sell;
That they know of no defect in the principal’s title;
To give possession against the price paid; and
That such possession will not be disturbed by the principal or the auctioneer.
22.3 MOCK AUCTIONS
In Victoria, legislation prohibits the making of dummy bids at auctions for the sale of motor vehicles (s 50D Motor Car
Traders Act).
37
38
TOPIC 4: SALE OF GOODS (INTERNATIONAL)
23 APPLICABILITY OF THE VIENNA SALES CONVENTION
23.1 PRELIMINARY ISSUES
Where a K for sale of goods is entered into (e.g. between an Australian business and a foreign business) the K may be
governed by the Vienna Sales Convention (“VSC”)
Ø
Ø
This treaty entered into force for Australia on 1 April 1989 and is implemented in Victoria by s 86 Goods Act.
In the event of inconsistency, the Convention prevails over any other law in force in Victoria (s 87 Goods Act)
(such as provisions concerning conditions and warranties under the ACL: s 68 ACL)
Countries party TO the Convention (et al)
US
France
China
South Korea
Japan
Canada
Russia
Italy
Germany
Spain
Brazil
New Zealand
Countries NOT party to Convention
UK
India
Indonesia
Malaysia
South Africa
23.2 APPLICATION OF THE CONVENTION
The Convention applies to Ks for sale of goods between individuals or co.’s whose places of business are in different
countries: (Art 1(1) VSC)
[a]
[b]
Ø
Which are parties to the Convention; or
Where under private international law the applicable law is that of a party to the Convention
The Convention applies only to Ks concluded on or after the date that the Convention entered into force for the
countries concerned (1/4/89 in Australia)
23.3 MATTERS NOT GOVERNED BY THE CONVENTION
The Convention expressly provides that it does not apply to certain types of sale. These are: (Art 2 VSC)
Will not apply
[a]
Goods bought for personal, family or household use, unless the seller had no actual or constructive knowledge of
such use;
[b]
Auction sales;
[c]
Sales by authority of law;
[d]
Sales of stocks, shares, investment securities, negotiable instruments or money;
[e]
Sales of ships, vessels, hovercraft or aircraft; and
[f]
Sales of electricity
[g]
Distributorship Ks, which “typically create a framework for future sales of goods but do not lay down precise and
quantity terms” (Amco Ukrservice v American Meter)
Will not apply: if condition occurs
[h]
Ks for supply of goods to be manufactured or produced, where the buyer undertakes to supply a substantial part
of necessary materials; (Art 3(1))
[i]
Ks in which main part of obligations of seller consists of the supply of labour (Art 3(2))
23.4 EXCLUSION OF APPLICATION OF THE CONVENTION
Parties may expressly exclude application of the Convention (Art 6), however cannot merely provide that law be governed
by law of another jurisdiction since Convention may be law of that other jurisdiction (BP Oil Internatioal v Petroecuador)
Ø
NB: need to specify what other law will apply (American Mint v GOSoftware)
39
23.5 INTERPRETATION OF THE CONVENTION
Interpretation of the Convention must be had with regard to its international character and of the need to promote
uniformity in its application (Art 7(1))
Ø
Ø
Thus should not be interpreted in light of domestic legal concepts (Smallmon v Transport Sales Ltd)
Need observance of good faith in international trade (Art 7(1)). Note: this only applies to interpretation and not
to rights and duties under the K.
24 FORMATION OF THE CONTRACT
The elements of a K under the VSC are different from those at CL. Agreement (offer & acceptance) and intention to be
bound are elements, however consideration is not necessary for formation of a VSC K.
A K is concluded when an acceptance of an offer becomes effective under the Convention (Art 23)
24.1 OFFER
An offer must be sufficiently definite (e.g. indicate the goods and expressly or implicitly fix or make provision for
determining price and quantity) and indicate an intention to be bound
Ø
Ø
Ø
Ø
An offer must be interpreted according to the offeror’s intention as perceived by the offeree.
A proposal not addressed to a specific person constitutes an invitation to make offers, unless the maker clearly
indicates a contrary intention (Art 14(2))
Becomes effective when reaches offeree (Art 15(1))
Withdrawal may occur before or at the same time as the offer – even if irrevocable offer (Art 15(2))
24.2 ACCEPTANCE
An acceptance is a statement or conduct indicating assent to an offer (Art 18(1))
Ø
Ø
Ø
Ø
Silence or inactivity does not constitute acceptance (Art 18(1))
Acceptance is effective the moment it reaches the offeror - but is not effective if the offer was open for a limited
time, or if not time fixed, after a reasonable time (Art 18(2)) (reasonable = common sense, circumstances etc)
Unless circumstances indicate the contrary, oral offers must be accepted immediately (Art 18(2))
Acceptance that attempts to modify is not an offer but a counter-offer, and rejects the initial offer (Art 19(1))
Acceptance that alters, but does not ‘materially alter’ the terms is valid, unless the offer objects without undue delay
(Art 19(2)).
Ø
The following are material alterations: alterations to price, payment, quality, quantity of goods, place and time
of delivery, dispute settlement (Art 19(3))
24.3 EXCLUSION OF FORMATION PROVISIONS
Parties may declare that they will not be bound by these provisions, even though they are party to the Convention (Art 92)
24.4 THE ROLE OF PAROL EVIDENCE
Ø
Ø
Subjective test: Statements and other conduct is to be interpreted according to the party’s intent where the other
party knew, or could not have been unaware, what that intent was (Art 8(1))
Objective test: If other party did not know or could have been unaware of that intent, statements and other
conduct are to be interpreted according to reasonable person of the same kind (Art 8(2))
Parol evidence allowed c.f. Australian CL where it cannot be used if parties intend K to be entire agreement.
24.5 WRITING
40
A VSC K need not be concluded in writing or evidence by writing and contains no form requirements. K may be proved
by any means, including witnesses (Art 11)
24.6 MODIFICATION OR TERMINATION
A K may be modified or terminated by agreement between the parties (Art 29(1))
Ø
Ø
A written K which provides that modification/termination must be in writing will only be terminated if it is,
indeed, in writing (Art 29(2)) (hence, an oral modification will be ineffective where K expressly states must be in
writing: Graves Import Co v Chilewich International)
Modification does not require consideration.
24.7 TRADE USAGES
25 CONFORMITY OF THE GOODS
Seller must deliver goods which are of quantity, quality and description required by the K. The goods must be in the
containers or packaging required by the K (Art 35(1))
In the absence of contrary agreement, goods do not conform to the K unless they: (Art 35(2))
[a]
Are fit for the purposes for which goods of the same description would ordinarily be used; (the standard for [a]
and [b] is that of the seller’s, not buyer’s, country)
Are fit for any particular purpose expressly or impliedly made known to the seller at the time the K was
concluded, except where the buyer did not rely, or it was unreasonable to rely, on the seller’s skill and judgement;
Possess the qualities of goods which were provided to the buyer by the seller as a sample; and
Are packaged in the manner usual for such goods or, if there is no usual manner, in a manner adequate to
preserve and protect the goods
[b]
[c]
[d]
Case example fit for purpose
Smallmon v Transport Sales Ltd
[2012] 2 NZLR 109
Cortem SpA v Controlmatic Pty
Ltd [2010] FCA 852
Australian transport co. purchased trucks from NZ co. Purchaser unable to register
trucks in QLD due to non-compliance with legislative requirements.
Held: NZCA seller not liable as did not know or ought to have known of requirements.
Would have known if ‘special circumstances’, those being: (held: no special circ.)
Ø Seller has branch in buyer country;
Ø Long-standing commercial relationship;
Ø Seller frequently exports to buyer country.
Italian electricity junction box did not meet Australian regulatory standards.
Held: Not unfit for purposes for which goods of the same description would have
ordinarily been used in Italy (seller country)
25.1 EXAMINATION OF THE GOODS
The buyer must examine the goods for nonconformity within the shortest period practicable (Art 38(1)).
Ø
Ø
Ø
For carriage of goods – examination will be deferred until goods have arrived (Art 38(2))
The buyer cannot rely on the nonconformity if they do not notify the seller of the nonconformity within a
reasonable time after discovery/after when it ought to have been discovered (Art 39(1))
The buyer’s right to rely on nonconformity expires after 2 years (Art 39(2)) unless guarantee provides otherwise.
26 3 R D PARTY CLAIMS
The seller must deliver goods which are free from any right or claim of a 3rd party, unless the buyer agreed to take the
goods subject to that right or claim (Art 41)
Ø
Must also be free from any right or claim based on intellectual property (Art 42(1))
41
27 PERFORMANCE OF THE CONTRACT
27.1 PAYMENT
The buyer must pay the price for the goods (Art 53), and includes taking any steps required to enable payment to be made
(Art 54)
Downs Investments Pty Ltd v
Perwaja Steel SDN BHD [2002]
2 Qd R 462
Ø
Ø
K provided that buyer would pay by a letter of credit. Buyer did not obtain letter of
credit.
Held: QLDSC – failure to obtain letter of credit constitute breach of Article 54, since the
obligation to pay including the taking of steps required to enable payment to be made.
A buyer must pay when the seller places the goods at the buyer’s disposal (Art 58(1))
If the K involves carriage of the goods, the seller may dispatch the goods on terms that they will not be handed to
buyer except upon payment (Art 58(2)).
27.2 DELIVERY
Ø
[a]
[b]
The seller must deliver the goods and transfer property in the goods (Art 30). The place for delivery may be
specified, if no place specified, the obligation to deliver consists: (Art 31)
If carriage of the goods is involved – in handling the goods to the first carrier for dispatch to the buyer;
If carriage of the goods is not involved, where the K relates to specific goods, or to unidentified goods to be drawn
from a specific stock, and at the time the K was concluded the parties knew that the goods were at a particular place
– in placing the goods at the buyer’s disposal at that place; or
In other cases – in placing the goods at the buyer’s disposal at the seller’s place of business at the time the K was
concluded.
[c]
Ø
[a]
[b]
[c]
The date for delivery is also regulated by the Convention – seller must deliver the goods: (Art 33)
On the date specified by the K; or
Within any period of time specified by the K, unless the circumstances indicate that the buyer is to choose a date; or
In any other case, within a reasonable time after entry into the K.
27.3 PASSING OF RISK
The risk in respect of goods sold in transit passes to the buyer from the time the K was concluded (Art 68)
Ø
Loss or damage to the goods, after risk transferred to buyer, does not discharge the buyer’s obligation to pay
unless the loss or damage is caused by the seller’s act or omission (Art 66)
27.4 PRESERVATION OF THE GOODS
If the buyer delays in taking delivery of the goods, the buyer must take reasonable steps to preserve the goods – the seller
may retain the goods until the buyer reimburses the seller for reasonable expenses (Art 85)
Ø
A party who is bound to preserve may sell them elsewhere provided the other party has unreasonably delayed
in taking possession or paying price or preservation costs – provided reasonable notice of intention to sell has
been given (Art 88(1))
27.5 ADDITIONAL TIME (NACHFRIST)
27.6 EXEMPTION FROM PERFORMANCE
A party is not liable for failure to perform due to an impediment beyond their control which they could not reasonably be
expected to have avoided or overcome or to have taken into account (Art 79(1))
42
Ø
Ø
Ø
Ø
NB: A K becoming unprofitable does not constitute an impediment relieving a party from performance.
The effect of impediment is as long as the impediment exists (Art 79(3))
If the failure is due to a 3rd person engaged to perform the K, the exemption exists only if both the party and 3rd
party fulfil the main condition above (Art 79(2))
The defaulting party must within a reasonable time, or within time when they ought to have known of
impediment, notify the other party – lest they be liable for damages (Art 79(4))
27.7 ANTICIPATORY BREACH
A party may suspend performance of their obligations if, after entry into K, it becomes apparent that other party will not
perform a substantial part of their obligations as a result of: (Art 71(1))
[a]
[b]
A serious deficiency in their ability to perform or creditworthiness; or
Their conduct in performance or preparation.
Ø
Party suspending performance must immediately give notice and must continue with performance if provided
with adequate assurance regarding performance (Art 71(3))
27.8 FUNDAMENTAL BREACH
A fundamental breach is that which would substantially deprive a party of what they are entitled to expect under the K
(Art 25)
Ø
Ø
NB: non-payment is a common form of fundamental breach (e.g. think not providing letter of credit to pay for
goods as in Downs Investments v Perwaja Steel)
Consequence: The consequence of a fundamental breach is that the party may claim avoidance (see below)
28 REMEDIES
28.1 BUYER’S REMEDIES FOR BREACH BY THE SELLER
If the seller fails to perform an obligation, the buyer may:
[a]
Exercise rights provided by the VSC (require performance; require nonconformity be remedied; avoid
contract; reduce price); and
Claim damages (Art 45(1))
[b]
Ø
NB: The exercise of other remedies does not preclude a right to claim damages (Art 45(2))
28.2 SELLER’S REMEDIES FOR BREACH BY THE BUYER
If the buyer fails to perform an obligation, the seller may:
[a]
Exercise rights provided by the VSC (require performance, avoid the contract, make a necessary specification
for the buyer); and
Claim damages (Art 61(1))
[b]
Ø
NB: The exercise of other remedies does not preclude a right to claim damages (Art 61(2))
28.3 AVOIDANCE OF THE CONTRACT
The VSC does not provide for automatic avoidance. A K is avoided only after a declaration to that effect by a party. Until
this declaration, the K remains in force (ICC Case No 8574 of 1996)
Ø
Effect of avoidance: Avoidance releases both parties from K obligations, subject to payment of damages – but has
no effect on contractual stipulations regarding dispute settlement (Art 81(1))
28.3.1 AVOIDANCE BY EITHER PARTY (BUYER OR SELLER)
43
If there is a fundamental breach, party may give notice of intention to claim K avoided (Art 72(1))
Ø
Ø
A declaration of avoidance is effective only if notified to the other party (Art 26)
Notice need not be given if other party has declared they will not perform (Art 72(3))
28.3.2 AVOIDANCE BY THE SELLER
The seller may declare the K avoided if buyer’s failure to perform is a fundamental breach (Art 64(1)(a))
If the buyer has paid the price, the seller loses the right to declare the K avoided except: (Art 64(2))
[a]
[b]
[c]
[d]
In respect of the buyer’s late performance, before the seller becomes aware that performance has taken place; or
In respect of any other breach, within a reasonable time;
After the seller knew or ought to have known of the breach; or
After the end of any nachfrist extension, or after the buyer has declared that they will not perform their obligations.
28.3.3 AVOIDANCE BY THE BUYER
The buyer may declare the K avoided: (Art 49(1))
[a]
[b]
If the seller’s failure to perform their obligations amounts to a fundamental breach; or
In a case of non-delivery, if the seller does not deliver the goods during any nachfrist extension.
Where the seller has delivered the goods, the buyer loses the right to declare the K avoided unless they do so:
[a]
[b]
In respect of late delivery, within a reasonable time after they have become aware that delivery has been made; or
In respect of any other breach, within a reasonable time after they knew or ought to have known of the breach, or
after expiration of any nachfrist extension.
Ø
NB: A buyer may only declare an entire K void if the failure to make delivery/nonconformity amounts to a
fundamental breach.
28.3.4 AVOIDANCE OF INSTALMENT CONTRACTS
Ø
Ø
A fundamental breach of a single instalment will give rise to the party may declare that part of the K void (Art
73(1))
Where reasonable grounds to believe that future instalments will be fundamentally breached too, party may
declare whole K void and give notice (Art 73(2))
28.4 RECOVERY OF DAMAGES
Damages are to provide the equivalent of the benefit of the bargain (Delchi Carrier v Rotorex Corp)
Ø
Ø
Includes lost profits – but cannot exceed the amount of benefit the party foresaw to obtain at the commencement
of the contract (Art 74)
Must be calculable with “sufficient certainty” (Delchi Carrier v Rotorex Corp)
28.5 RECOVERY OF INTEREST
If a party has failed to make payment or any other sum is in arrears, the other party is entitled to recover interest on such
amounts (Art 78)
Ø
Rate of interest: The VSC makes no provision for the % rate of interest. This is typically determined in line with
domestic laws.
28.6 SPECIFIC PERFORMANCE
Specific performance is determined according to domestic law (Art 28)
28.7 RESTITUTION
44
A party who has performed the K, either wholly or in part, may claim restitution of what they have supplied or paid under
the K (Art 81(2)) The buyer loses the right to declare the K avoided if it is impossible to return the goods substantially in
the condition in which they were received (Art 82(1))
However, the right to declare the K avoided remains:
[a]
[b]
[c]
If the impossibility of restitution is not due to the buyer’s act or omission;
The goods have perished or deteriorated as a result of the examination of the goods; or
If the goods have been sold in the normal course of business or have been transformed by the buyer in the course of
normal use before discovery of the lack of conformity (Art 82(2))
45
46
TOPIC 5: NEGOTIABLE INSTRUMENTS
Negotiable Instruments (“NI”): Certain commercial instruments have acquired a quality of negotiability enabling the
holder to pass them from hand-to-hand by simple delivery so as to give a BFPFVWN good title to the instrument.
The characteristics of NI are:
Ø
Ø
Ø
Ø
Ø
The title to them passes by mere delivery, or, where they are payable to “order”, by indorsement followed by
delivery;
No notice of such transfer need be given to the party liable on the instrument;
A holder can sue in their own name;
Consideration and bona fides are presumed; and
A holder in due course does not take the instrument subject to equities, that is, subject to defences available to
prior parties, and in fact may obtain a better title than the transferor.
The types of NI are:
Ø
Ø
Ø
Bills of exchange; (Bills of Exchange Act 1909 (Cth))
Cheques; and (Cheques Act 1986 (Cth))
Promissory notes.
Comparison of BoEs, Promissory notes and Cheques
Bills of Exchange
Drawn by the drawer on the drawee.
Drawer generally the creditor, in
favour of a payee (can be drawer or 3rd
party).
An order to pay, drawn on debtor or
bankers.
2/3 parties involved, Drawer, Drawee
and Payee.
Acceptance necessary before drawee
becomes liable.
Acceptor is primarily liable.
May be accepted or paid supra protest.
Time for payment may be on demand,
at sight or some fixed or determinable
future time.
Necessary to note and protest foreign
bills in the event of dishonour.
Failure of a holder to present the bill
for payment discharges the drawer
and indorsers.
There are certain cases when
presentment is excused.
Promissory Notes
Made out by a debtor (maker).
Cheques
Drawn by the drawer (debtor) in
favour of payee (creditor)
A promise to pay.
An order to pay, drawn on a bank or
other financial institution only.
3 parties involved, Drawer, Financial
institution and Payee.
No acceptance involved.
2 parties only, Maker and Payee.
No acceptance is involved as maker is
automatically liable.
Maker is primarily liable.
N/A
On demand or at some fixed or
determinable future time, but not after
sight, as it is made out by the debtor.
Noting and protesting not necessary,
even of foreign notes.
Failure to present for payment does
not discharge the maker.
Failure to present discharges the
indorsers.
Drawer of cheque is primarily liable.
N/A
Payable on demand.
Noting and protesting not necessary.
Failure to present for payment does
not necessarily discharge the drawer.
Failure to present within a reasonable
time, discharges the indorsers.
30 BILLS OF EXCHANGE
Bill of Exchange: A bill of exchange (“BoE”) is an instrument or document drawn up by P1 (the drawer) ordering P2 (the
drawee) to pay a particular sum of money (usually in return for goods sold or moneys lent) either to P1, or to some 3rd
person – P3 (the payee).
47
Ø
Ø
On P2 accepting the bill (agreeing in writing on the bill to pay the sum at the time specified in the bill), P1 will
transfer the bill to P3, who may in turn negotiate the bill to some other person to whom he or she is indebted and
so on.
The person in possession at time of maturity (the holder) will then present the bill to P2 for payment.
30.1 USES AND ADVANTAGES OF BILLS OF EXCHANGE
The advantages of using BoE’s are:
1
Money, no matter how large the amount involved, may be safely transferred from place to place as the transaction
involves book entries rather than the handling of cash;
A bill may be discounted. This involves selling the bill to a bank (e.g. X may give Y a BoE due in 6 months. Y, not
desiring to wait that long may discount the bill subject to his bank being satisfied as to the financial risk. The bank
will credit Y’s account with the amount of the bill less a discount. If X does not meet bill on maturity, Y will be held
responsible to bank for full amount, since, as part of discounting, Y must ‘indorse’ the bill; Y would thus be liable
as an indorser)
By giving a bill, a debtor not only agrees to pay the debt either on demand or at some fixed date, but gives their
creditor documentary evidence of the amount owing. The creditor could sue on the bill if the debtor dishonoured
it at the due date.
A bill of exchange may be drawn payable to another party (e.g. A owes B $500, B owes C $500; B may draw a bill
on A for $500 and make it payable to C)
Bills may be transferred and thus “C” in the above example may transfer it to one of his creditors for the purpose
of arranging a settlement of an amount due.
2
3
4
5
30.2 ANALYSIS OF DEFINITION OF BILL OF EXCHANGE
Definition: A BoE is an unconditional order in writing addressed by one person to another signed by the person giving it,
requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a certain sum of
money to or to the order of a specified person, or to bearer (s 8(1) BoE Act)
Ø
Bill
30.2.1 “UNCONDITIONAL ORDER IN WRITING”
Ø
A BoE must be an order to pay money and it must not stipulate any conditions. An instrument which merely
expresses a request for payment is not a BoE.
30.2.2 “ADDRESSED BY ONE PERSON TO ANOTHER”
Ø
A bill is drawn by the drawer and addressed to the drawee. The drawee must be named or otherwise indicated in
a bill with reasonable certainty (s 11(1) BoE Act)
30.2.3 “SIGNED BY THE PERSON GIVING IT”
Ø
A BoE must be signed by the drawer, or some duly authorised person on their behalf. Where the drawer’s
signature is forged, or put on the bill by someone without authority, he or she will not have “signed” the bill as
required by the BoE Act.
30.2.4 “PAY ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME
Ø
A bill is payable on demand: (s 15(1) BoE Act)
[a]
If it is expressed to be so payable, or is payable at sight, or on presentation; or
[b]
If not time for payment is expressed
Ø
A bill is payable at a determinable future time which is expressed to be payable: (s 16 BoE Act)
[a]
At a fixed period after date or sight; or
[b]
On or at a fixed period after the occurrence of a specified event which is certain to happen, though the
time of happening may be uncertain.
30.2.5 “A SUM CERTAIN IN MONEY”
48
Ø
The sum payable is considered certain although it is required to be paid: (s 14(1) BoE Act)
[a]
With interest or bank charges; or
[b]
By stated instalments; or
[c]
By stated instalments, with a provision that upon default in payment of any instalment the whole shall
become due; or
[d]
According to an indicated rate of exchange, or according to a rate of exchange to be ascertained as directed
by the bill
Ø
Where 2 sums are stated, the sum to be ordered to be paid is the lesser sum (s 14(2) BoE Act)
Case example “sum certain in money”
Rosenhain v CBA (1922) 31 CLR
46
Held: bill payable with “interest rate at the rate of 8% p.a. until arrival of payment in
London to cover” = invalid.
Not certain because of the difficulty in determining the exact date the funds would
arrive in London.
30.2.6 “TO THE ORDER OF A SPECIFIED PERSON OR TO BEARER”
Ø
Ø
Where the bill is not payable to bearer, the payee must be named or otherwise indicated in the bill with
reasonable certainty (s 12(1) BoE Act)
Where the payee is a fictitious or non-existing person, bill may be treated as payable to bearer (s 12(3) BoE Act)
30.3 ORDER OR BEARER BILLS
A BoE may be made payable to bearer or to order.
Bearer
Order
A bearer bill does not require indorsement to be negotiated to another person, mere delivery being
sufficient;
Ø A bill is payable to bearer when so expressed or when the only or last indorsement is in blank (s
13(3) BoE Act).
An order bill must be indorsed before being negotiated. (see 35.2 - effect of transfer without indorsement)
Ø A bill is payable to order when:
[a] It is so expressed; or
[b] It is expressed to be payable to a particular person and does not contain words prohibiting
transfer (s 13(4) BoE Act). A bill expressed simply “Pay C Cameron” is payable to C Cameron or his
order.
30.4 IMMATERIAL FACTS OMITTED
Ø
[a]
[b]
[c]
A BoE is not invalid by reason only that immaterial facts have been omitted. In particular, it is not invalid if: (s
8(4) BoE Act)
It is not dated;
It does not specify the value give, or that any value has been given for it; or
It does not specify the place where it was drawn, or the place where it is payable.
30.5 DATE OF BILL
Ø
An undated bill is still valid; however, if a bill is dated, such a date is prima facie deemed to be the true date (s
18(2) BoE Act)
49
30.6 SIMPLE FORM OF A BILL OF EXCHANGE
No 76
$50,000
Due 4/1/17.
Sydney 4/10/16
Three months after date
pay C Cameron or order
the sum of Fifty Thousand
Dollars.
To: Albert Anderson.
Bruce Brown
Ø
When Albert Anderson “accepts” the above bill (mere signature is sufficient), he will write across the fact of it
“Accepted” and indicate the bank where it is payable. His signature will appear underneath his acceptance as
follows:
Accepted, payable at
Commonwealth Bank of Australia, Sydney.
Albert Anderson.
31 PARTIES TO A BILL OF EXCHANGE
Primarily there are three parties to a BoE:
Ø
Ø
Ø
Drawer: The drawer is typically the creditor of the drawee.
Drawee: The drawee is usually the debtor, and writes their acceptance on the bill.
Payee: The payee is the person whom the drawee is required by the bill to pay.
Subsequent to the drawing of a bill, other persons that may be connected are:
Ø
Ø
Ø
Ø
Ø
Indorser: The holder of an order bill may desire to negotiate it to some other person and this is done by means of
an indorsement plus delivery.
Bearer: The person in possession of a bill or note which is payable to bearer (s 4 BoE Act)
Holder: The payee or indorsee of a bill or note who is in possession of it, or the bearer thereof (s 4 BoE Act)
Holder for value: Embraces two classes of holder:
[a]
Any holder who has given value for the bill;
[b]
Any subsequent holder after value has been given
Holder in due course: A holder in due course is a person who has taken a bill:
[a]
complete and regular on the face of it;
[b]
before it is overdue;
[c]
without notice of dishonour (if any);
[d]
in good faith and for value; and
[e]
without notice at the time the bill was negotiated to them of any defect in the title of the person who
negotiated it (s 34(1) BoE Act)
31.1 GENERAL POSITION OF PARTIES
The holder of a bill is the person primarily enforcing their rights on a bill.
31.2 LIABILITY OF PARTIES
The drawee of a bill, after accepting it, is the person primarily liable on it. The obligations of all parties are as follows:
Ø
[a]
[b]
The Acceptor/drawee by accepting it: (s 59 BoE Act)
engages that they will pay it according to the tenor of their acceptance; and
is precluded from denying to a holder in due course the genuineness of the drawer’s signature and the existence
and capacity to act of the drawer and payee. The acceptor is not precluded from denying the validity of
indorsements.
50
Ø
[a]
The Drawer by drawing it: (s 60(1) BoE Act)
engages that on due presentment it will be accepted and paid according to its tenor, and that if it is dishonoured
they will compensate the holder or any indorser who is compelled to pay it, provided that the requisite
proceedings on dishonour are duly taken; and
is precluded from denying to a holder in due course the existence of the payee and their then capacity to indorse.
[b]
Ø
[a]
The Indorser by indorsing it: (s 60(2) BoE Act)
engages that on due presentment it will be accepted and paid according to its tenor, and that if it is dishonoured
they will compensate the holder or a subsequent indorser who is compelled to pay it, provided that the requisite
proceedings on dishonour are duly taken; and
is precluded from denying to a holder in due course the genuineness of and regularity in all respects of the
drawer’s signature and all previous indorsements; and
is precluded from denying to their immediate or subsequent indorsee the validity of the bill and their title to it.
[b]
[c]
31.3 PERSONS SIGNING IN A REPRESENTATIVE CAPACITY
Where a person signs for or on behalf of a principal, they must write “Accepted for and on behalf of” and not just
“Accepted”. Else, they will be personally liable (s 31(1) BoE Act)
Ø
In determining whether an A is personally liable, having regard to their method of signing the bill, the
construction most favourable to the validity of the instrument is adopted (s 31(2) BoE Act)
Case example signing in a representative capacity
Elliot v Bax-Ironside [1925] 2
KB 301
BoE drawn on a co. and accepted by the co. and was also indorsed o the back “Fashion
Fairs Exhibition Ltd A B and C D, directors”.
Held: The directors were personally liable on the grounds:
Ø that if the indorsement was to be treated as that of the co., it gave no greater
validity to the bill than was already contained in the acceptance, so that such
construction should not be adopted;
Ø that the addition of the words “directors” to the signatures must be treated as a
word of description only and not as excluding liability; and
Ø that the surrounding circumstances showed that the directors intended to
guarantee payment.
31.4 “BACKING” A BILL
A person may “back” a bill by signing it and will be liable to the amount of the acceptor fails to pay (s 61 BoE Act)
Ø
The practical use of this is to provide another layer of credit to the bill so as to alleviate concerns about the
acceptors ability to pay/capacity to dishonour the bill.
31.5 ACCOMMODATION BILLS
Accommodation bills are typically ancillary to ordinary BoEs and are used for the specific purpose of financing.
Ø
An accommodation party is liable on the bill to a holder for value – immaterial whether they knew such party to
be an accommodation party (s 33 BoE Act)
31.6 TRANSFEROR BY DELIVERY
Where the holder of a bill payable to bearer negotiates it by delivery without indorsing it, he or she is called a “transferor
by delivery”.
Ø
[a]
Transferors by delivery are not liable on the instrument except to the extent of their warranty to their immediate
transferee, being the holder for value, to whom they warrant that: (s 63 BoE Act)
the bill is what it purports to be;
51
[b]
[c]
they have a right to transfer it; and
at the time of transfer they are not aware of any fact which makes the bill valueless.
32 MATTERS AFFECTING LIABILITY ON A BILL
32.1 LEGAL CAPACITY
Ø
A minor is not liable on a BoE even if it is given for necessaries (Re Soltykoff; Ex parte Margrett) c.f. capacity for
minors in contract law.
32.2 SIGNATURE AND DELIVERY ESSENTIAL TO LIABILITY
Ø
[a]
Signature: As a general rule, a drawee/acceptor is not liable unless they sign, however special exemptions are
provided, namely: (s 28 BoE Act)
where a person signs a bill in a trade or assumed name, he or she is liable on the bill as if it had been their own
name; and
the signature of a firm is equivalent to the signature of the names of all persons liable as partners in that firm.
Ø NB if a personal signature is used to accept on behalf of a partnership, this will not bind the other
partners, only the person (Geo Thompson v Vittadello: Wife personally liable after signing her name on bill
drawn to partnership between Wife & Husband)
[b]
Ø
Delivery: Delivery is also essential before liability is incurred – it is the “transfer of possession, actual or
constructive, from one person to another” (s 4 BoE Act)
o NB: Delivery must be with authority (e.g. if the bill is signed, but before delivery it is stolen, they are not
liable on it)
32.3 FORGED OR UNAUTHORISED SIGNATURE
Ø
Ø
Where a signature on a bill is forged or placed without authority – the signature is wholly inoperative (s 29 BoE
Act)
NB: An acceptor is precluded from denying to a HIDC the genuineness of a drawer’s signature (s 59 BoE Act) and
an indorser is precluded from denying to a HIDC the genuineness of the drawer’s signature and of all previous
indorsements (s 60(2) BoE Act)
32.4 PROCURATION SIGNATURE
Procuration signature: Operates as notice that the A has but a limited authority to sign, and the P is only bound if the A in
so signing was acting within authority (s 30 BoE Act). The person seeking to enforce the validity of the signature is put on
notice to make reasonable inquiries.
“per pro Wm Carlisle,
Mabel Cowper.”
Ø
It would bind Wm Carlisle only if Mabel Cowper was acting within the actual limits of her authority.
32.5 INCHOATE INSTRUMENTS
Inchoate instrument: Is one which is incomplete in one or more particulars.
Ø
Ø
Ø
Prima facie a blank stamped paper delivered with a signature operates as an authority to fill it up as a complete
bill for any amount the stamp duty will cover (s 25(1) BoE Act)
Where material particulars are missing, person in possession has prima facie obligation to complete in any way he
or she thinks fit (s 25(2) BoE Act)
NB: Document must evidence an intention to be converted into a BoE (Wilmink v Westpac; Atkinson v
Commissioner of Taxation)
32.6 FRAUD, DURESS & ILLEGALITY
52
Fraud, duress and illegality operate identically to contract law, and serve to vitiate and make inoperative a BoE.
32.7 CONSIDERATION FOR A BILL
There must exist valuable consideration to support a BoE.
Ø
[a]
[b]
Valuable consideration for a bill may consist of: (s 32(1) BoE Act)
any consideration sufficient to support a simple contract; or
an antecedent debt or liability
Ø
NB: Special rules regarding construction apply when the bill has been negotiated and the holder is seeking to
enforce rights against parties other than those with whom he or she ahs directly dealt (discussed below)
33 POSITION OF HOLDER; HOLDER FOR VALUE; HOLDER IN DUE COURSE
33.1 RIGHTS OF A HOLDER
The holder of a bill has the right to: (s 42 BoE Act)
Ø
Ø
Ø
Ø
present it for acceptance and payment;
negotiate it and give a valid discharge;
sue on the bill in their own name; and
enforce payment against all parties liable on the bill.
33.2 PRESUMPTIONS AS TO VALUE
Ø
[a]
A holder of a bill is assisted by certain presumptions as to value. These are: (s 35(1)(2) BoE Act)
that every party whose signature appears on a bill is prima facie deemed to have become a party to the bill for
value; and
that every holder of a bill is prima facie deemed to be a holder in due course
[b]
Ø
This is relevant as while B may transfer to C for value, C may sue if it was transferred from A to B for value.
33.3 WHERE HOLDER’S TITLE IS DEFECTIVE
A holder’s title may be defective because they obtained the bill or the acceptance of it by fraud, duress or illegal
consideration.
Ø
NB: Need not be actual knowledge, constructive knowledge of defect sufficient to put on notice.
33.4 ADVANTAGES OF A HOLDER IN DUE COURSE
The three essential elements of a holder in due course are: (s 34(1) BoE Act)
1
2
3
that the person took in good faith;
that they took for value; and
that they had no notice at the time the bill was negotiated to them of any defect in the title of the person
negotiating it.
A summary of advantages is as follows:
Defects of title
and personal
defences
Delivery
Derivative title
A HIDC holds the bill free from defects of title and person defences of prior parties & may enforce
payments against all parties liable on the bill (s 43 BoE Act)
Delivery is conclusively presumed as regards all prior parties so as to make them liable to a HIDC (s
26 BoE Act)
A holder who derives title through a HIDC (not themselves being a party to any fraud or illegality)
53
Estoppel
(acceptor)
Estoppel
(drawer and
indorser)
Indorser
Inchoate
instruments
Material
alteration
Notice of
dishonour
Negotiation of
dishonoured bill
Wrong date
Renunciation
has all the rights of a HIDC (s 34(3) BoE Act)
The acceptor is precluded from denying to a HIDC the existence and capacity of the drawer and the
genuineness of the drawer’s signature. The accept is not precluded from denying the validity of
indorsements (s 59 BoE Act)
The drawer is precluded from denying to a HIDC the existence and capacity of the payee.
The indorser is precluded from denying to a HIDC the genuineness and regularity of the drawer’s
signature and of all previous indorsements (s 60 BoE Act)
Any person signing a bill otherwise than as a drawer or acceptor is liable as an indorser to a HIDC (s
61 BoE Act)
Where a person signs an inchoate instrument in order that it be converted into a BoE, they will be
liable to a HIDC as if the blanks had been filled up within a reasonable time and strictly in accordance
with the authority given (s 25 BoE Act)
Where a material alteration on a bill is not apparent, a HIDC can insist on payment according to its
original tenor (s 69 BoE Act)
A HIDC is not prejudiced by a prior omission to give notice of dishonour by non-acceptance (s 53 BoE
Act)
The rights of a HIDC are not affected by notice of dishonour of a bill which is not overdue (s 41 BoE
Act)
A HIDC is not affected by the insertion of the wrong date by a prior holder (s 17 BoE Act)
A HIDC is not affected by a holder’s renunciation of the liability of a prior party if he or she is without
notice of such renunciation (s 67 BoE Act)
33.5 EFFECT OF A FORGED INDORSEMENT
The rights of a person who appears to be a HIDC do not hold in the case of a forged indorsement. Parties coming after the
forgery have rights and liabilities inter se (s 29 BoE Act)
34 NEGOTIATION OF BILLS
Ø
Ø
A bill payable to bearer is negotiated by delivery; whilst
A bill payable to order is negotiated by the indorsement of the holder completed by delivery (s 36 BoE Act)
A negotiable bill continues to be negotiable until it has been: [a] restrictively indorsed; or [b] discharged (s 41 BoE Act)
34.1 NEGOTIATION TO A PARTY ALREADY LIABLE
Where a bill is negotiated back to a party already liable, the person previously liable cannot enforce payment against the
intervening parties.
Ø
Example: A indorsed a bill to B, B indorsed to C, C to D, and D back to A. The intervening parties are B, C and D,
and would not be liable to A, as A is already liable to them.
35 INDORSEMENTS
A BoE drawn to order is negotiated by [1] indorsement of the holder; and [2] completed by delivery (s 36(3) BoE Act) In
order to operate as a negotiation, an indorsement must comply with the following: (s 37 BoE Act)
Signature
Entire bill
Multiple
partners
Timing of
multiple
indorsements
Minor defect
It must be written on the bill and be signed by the indorser. Mere signature sufficient.
It must be an indorsement of the entire bill. A partial indorsement (purports to transfer part of the
amount payable) does not operate as a negotiation of the bill.
Where a bill is payable to the order of two or more persons who are not partners, all must indorse
(unless one has the authority of the others to indorse as agent).
Where two or more indorsements on bill, each indorsement is deemed to have been made in the order in
which it appears on bill, unless contrary approved.
Where payees or indorsees are wrongly designated or names misspelt, may indorse bill as therein
described (or use proper signatures)
54
35.1 CLASSES OF INDORSEMENTS
Indorsements may be divided into the following classes:
Blank
Special
Restrictive
Conditional
Sans Recours
Where no indorsee is named, only the signature of the indorser is given (e.g. “E Jones”)
Where an indorsee is named in addition to the signature of the indorser (e.g. “Pay A Brown, (signed) E
Jones”) (s 39 BoE Act)
Where further transfer of the bill is restricted (e.g. “Pay D only, (signed) E Jones”) (s 40 BoE Act)
Where the indorsement contains some condition (e.g. “Pay Clive Jones upon my election as Auditor of
the Australian Company Ltd, (signed) E Jones”) (s 38 BoE Act)
An indorsement having the effect of negotiating the bill but negating the liability of the indorser (e.g.
“Sans Recours, (signed) E Jones”). There is no recourse to the indorser in the event of the bill being
dishonoured (s 21 BoE Act)
35.2 TRANSFER OF ORDER BILL WITHOUT INDORSEMENT
Where the holder of a bill payable to order transfers it for value without indorsing it, the transferee gets such title as the
transferor had in the bill plus a right to have the indorsement of the transferor (s 36(4) BoE Act)
35.3 FORGED INDORSEMENT
36 ACCEPTANCE
The acceptance of a bill is the signification by the drawee of their assent to the order of the drawer (s 22(1) BoE Act)
Ø
Ø
Acceptance must be written on the bill and signed, signature alone being sufficient (s 22(2)(a) BoE Act)
Acceptance may be withdrawn before delivery of acceptance has taken place (Bank of Van Diemen’s Land v Bank of
Victoria)
36.1 TYPES OF ACCEPTANCE
An acceptance is either: general; or qualified acceptance (s 24(1) BoE Act)
36.1.1 GENERAL ACCEPTANCE
Ø
A general acceptance is one in which the drawee assents without qualifications to the order of the drawer (s 24(2)
BoE Act).
36.1.2 QUALIFIED ACCEPTANCE
Ø
A qualified acceptance in express terms varies the effect of the bill as drawn and may be classified as: (s 24(3) BoE
Act)
Conditional
Partial
Local
Qualified as
to time
Acceptance
by some
Ø
One which makes payment by the acceptor dependent on the fulfilment of a condition (e.g. “Accepted
payable when goods are sold”);
An acceptance to pay part only of the amount for which the bill is drawn;
An acceptance to pay only at a particular or specified place (e.g. “Payable only at CBA, Head Office”)
A bill drawn for two months accepted “payable in three months”; or
Accepted by some of the drawees only (e.g. a bill drawn to A, B and C, accepted by A and B only)
The holder may refuse a qualified acceptance and treat the bill as dishonoured (s 49(1) BoE Act)
36.2 WHERE PRESENTMENT NECESSARY
General rule: Presentment is not necessary in order for the drawer and indorsers of the bill to be liable. However,
presentment is necessary where the bill: (s 44 BoE Act)
55
[a]
[b]
[c]
is payable after sight, so that the maturity date may be fixed;
expressly stipulates that it must be presented for acceptance;
is drawn payable elsewhere than at the residence or place of business of the drawee
36.3 TIME FOR ACCEPTANCE
A bill may be accepted: (s 23(1) BoE Act)
[a]
[b]
before it has been signed by the drawer, or while otherwise incomplete;
when it is overdue, or after it has been dishonoured by a previous refusal to accept, or by non-payment.
36.4 RULES FOR PRESENTATION FOR ACCEPTANCE
A bill is considered duly presented for acceptance when presented in accordance with the following rules: (s 46(1) BoE
Act)
[a]
[b]
the presentment must be made at a reasonable hour on a business day and before the bill is overdue;
where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all
(unless one has authority to accept as agent for all);
where the drawee is dead, presentment may be made to their personal representative;
where the drawee is bankrupt, presentment may be made to her or him or to their trustee or assignee; or
where authorised by agreement or usage, presentment may be made through the post.
[c]
[d]
[e]
36.5 PRESENTMENT FOR ACCEPTANCE EXCUSED
Presentment is excused and a bill may be treated as dishonoured by non-acceptance, where: (s 46(2) BoE Act)
[a]
[b]
[c]
the drawee is dead, bankrupt, fictitious or incapable of contracting by means of a bill;
presentment cannot be effected after the exercise of reasonable diligence; or
acceptance has been refused on some other ground, although the presentment has been irregular.
Ø
When a bill is duly presented for acceptance and is not accepted within customary 24 hours, the person
presenting it must treat it as dishonoured by non-acceptance – if they don’t = lose the right of recourse against the
drawer and indorsers (s 47 BoE Act)
37 PAYMENT
General rule: A bill must be duly presented for payment in order for the drawer and indorsers to be liable on it,
presentment of payment is not necessary to make the acceptor liable.
37.1 RULES AS TO PRESENTMENT FOR PAYMENT
A bill is duly presented for payment which is presented in accordance with the following rules: (s 50(2) BoE Act)
1
2
3
4
5
6
Where bill is not payable on demand, presentment must be made on the day it falls due;
Where bill is payable on demand, presentment must be made within reasonable time after its issue (to render
drawer liable) and within reasonable time after indorsement (to render indorser liable);
Presentment must be made at a reasonable hour on business day at the proper place;
A bill is presented at the proper place:
Ø when presented at the place (if any) specified on the bill;
Ø where no place specified, if presented at address of the drawee or acceptor given in the bill;
Ø where no place of payment or address given, if bill presented at the drawee’s or acceptor’s place of
business, if known, and if not, at drawee’s or acceptor’s ordinary residence;
Ø in any other case, if presented to the drawee or acceptor wherever they can be found, or if presented at
their last known place of business or residence.
Where bill presented at the proper place, and after the exercise of reasonable diligence no person authorised to
pay or refuse payment can be found, no further presentment to the drawee or acceptor is required;
Where bill is drawn upon or accepted by two or more persons who are not partners, and no place of payment is
56
specified, presentment must be made to them all;
Where the drawee or acceptor is dead, and no place of payment is specified, presentment must be made to the
drawee or acceptor’s persons representative if the latter can be found with reasonable diligence;
Where authorised by agreement or usage a presentment through the post is sufficient.
7
8
37.2 EXCUSES FOR DELAY IN PRESENTMENT
Delay is permitted where delay is caused by circumstances beyond the control of the holder and not imputable to the
holder’s default, misconduct, or negligence (s 51(1) BoE Act)
Ø
Once cause of delay ceases, must present within reasonable time.
37.3 PRESENTMENT FOR PAYMENT DISPENSED WITH
Presentment for payment is dispensed with: (s 51(2) BoE Act)
1
Where, after exercise of reasonable diligence, presentment cannot be effected. The fact that the holder has
reason to believe that the bill will be dishonoured on presentment does not dispense with the necessity for
presentment
Where the drawee is fictitious person.
As regards the drawer: where the drawee or acceptor is not bound as between themselves and the drawer to
accept or pay the bill, and the drawer has no reason to believe that the bill would be paid
As regards the indorser : where the bill was accepted or made for the accommodation of that indorser and the
indorser has no reason to expect that the bill will be paid if presented.
By waiver of presentment by a particular party, express or implied.
2
3
4
5
37.4 TIME OF PAYMENT
A bill that is not payable on demand falls due for payment on the last day of the time of payment fixed by a bill (s 19(1) BoE
Act). In working out the time of payment, the following rules apply:
1
Where bill is payable at fixed period after date, after sight, or after the happening of specified event, time of
payment is determined by excluding the day from which the time is to begin to run and by including the day of
payment;
Where bill is payable at fixed period after sight, the time begins to run from the date of the acceptance and from
the date of the noting or protest if the bill be noted or protested, or for non-delivery (s 19(2) BoE Act)
The term “month” in a bill means a calendar month. A bill payable three months from 1 December would be
payable 1 March unless the latter is a “non-business day” – in which case pay on the next business day following (s
98(2) BoE Act)
2
3
Ø
A non-business day is a Sunday, Good Friday, Christmas Day, or a bank holiday (s 98(3) BoE Act)
38 DISHONOUR
A bill may be dishonoured by non-acceptance or by non-payment.
Ø
Consequence of dishonour: When a bill is dishonoured an immediate right of recourse against the drawer and
indorsers accrues to the holder, in addition to the holder’s right against the acceptor.
38.1 DISHONOUR BY NON-ACCEPTANCE
A bill is dishonoured by non-acceptance when: (s 48 BoE Act)
[a]
[b]
it is duly presented and acceptance is refused or cannot be obtained; or
presentment for acceptance is excused, and the bill is not accepted.
38.2 DISHONOUR BY NON-PAYMENT
A bill is dishonoured by non-payment when: (s 52 BoE Act)
57
[a]
[b]
it is duly presented for payment, and payment is refused or cannot be obtained; or
presentment for payment is excused, and the bill is overdue and unpaid.
38.3 TO WHOM NOTICE IS GIVEN
In order that the holder of a dishonoured bill may retain their rights against the drawer and indorsers, it is necessary to
give such parties notice of dishonour.
Ø
Ø
Failure to gives notice of dishonour discharges drawer and indorsers from liability (s 53 BoE Act)
Contents of notice: No special form needed, but should identify the bill and state that it has been dishonoured
through non-acceptance/non-payment in according with the following rules (below at 38.4)
38.4 RULES AS TO NOTICE OF DISHONOUR (“NOD”)
A summary of the rules for a notice of dishonour: (s 54 BoE Act)
[a]
A NoD given to any party liable on the bill operates for the benefit of all subsequent parties to the recipient of the
notice;
The notice may be given in writing or by personal communication;
The return of a dishonoured bill is deemed to be sufficient notice of dishonour;
A written notice need not be signed, and an insufficient written notice may be supplemented and validated by
verbal communication;
It may be given either to the party or to their agent;
Where the party is dead, notice must be given to their personal representative;
Where the party is bankrupt, notice must be given to her or him or to their trustee or assignee;
Where there are two or more drawers or indorsers who are not partners, notice must be given to each of them,
unless one of them has authority to receive as agent for the others;
Where party to a bill receives due NoD, he or she has, after the receipt of such notice, the same period of time for
giving notice to antecedent parties as the holder has after the dishonour; and
Where NoD is duly addressed and posted the sender is deemed to have given due NoD notwithstanding any
miscarriage by the post office.
[b]
[c]
[d]
[e]
[f]
[g]
[h]
[i]
[j]
38.5 REASONABLE TIME FOR NOTICE
The NoD must be given within a reasonable time after the actual dishonour of the bill. NoD is deemed to have been given
within a reasonable time: (s 54(1) BoE Act)
Same
residence
Different
residence
if given in time to reach the recipient on the day after the dishonour of the bill (where both parties reside
in the same place); or
where the parties reside in different places, if the notice is sent off on the day after the dishonour of the
bill, or if there is no convenient hour of post on that day then by the next post
38.6 EXCUSES FOR DELAY IN GIVING NOTICE
Delay can be excused where the cause of delay is beyond the control of the party giving notice and not imputable to their
default, misconduct or negligence (s 55(1) BoE Act)
Ø
The excuse ceases when the cause of delay reasonably ceases.
38.7 DISPENSING WITH NOTICE OF DISHONOUR
NoD is dispensed with as regards the holder’s right against: (s 55(2) BoE Act)
All previous
parties
Any previous
parties
The drawer
when notice cannot be given after the exercise of reasonable diligence, or it does not reach the drawer or
indorser sought to be charged;
by waiver express or implied;
in the following cases, namely, where:
Ø the drawer and drawee are the same person;
58
the drawee is a fictitious person or a person not having capacity to contract;
the drawer is the person to whom the bill is presented for payment;
the drawer or acceptor is, as between themselves and the drawer, under no obligation to accept
or pay the bill;
Ø the drawer has countermanded payment;
in the following cases, namely, where:
Ø the drawee is a fictitious person or a person not having capacity to contract, and the indorser
was aware of the fact at the time he or she indorsed the bill;
Ø the indorser is the person to whom the bill is presented for payment; and
Ø the bill was accepted or made for their accommodation.
Ø
Ø
Ø
The indorser
38.8 MEASURE OF DAMAGES
Where a bill is dishonoured, the measure of damages against the parties to the bill is: (s 62 BoE Act)
[a]
[b]
the amount of the bill;
interest on the bill from the time of presentment for payment if the bill is payable on demand, and from the
maturity of the bill in any other case; and
the expenses of noting and protesting where such are necessary.
[c]
39 NOTING & PROTESTING
Noting & protesting are procedures adopted when BoEs are dishonoured and for this purpose the services of a public
notary are utilised.
Ø
By “noting” is meant the minute made by a public notary on a dishonoured bill at the time of its dishonour. The
formal notarial certificate as to dishonour is called the “protest” and is based upon the noting.
40 DISCHARGE
A BoE is discharged by:
[a]
[b]
[c]
[d]
[e]
payment in due course;
acceptor becoming holder;
waiver;
cancellation;
alteration in a material particular.
40.1 PAYMENT IN DUE COURSE
When a bill is paid at or after its maturity to the holder in good faith and without notice of any defect in their title to the
bill, it is discharged (s 64(1) BoE Act).
Ø
An accommodation bill is not discharged until it is paid by the party accommodated, that is, the real debtor (s
64(3) BoE Act)
40.2 ACCEPTOR BECOMING THE HOLDER
When the acceptor of a bill becomes the holder of it at or after its maturity, in her or his own right, the bill is discharged (s
66 BoE Act)
40.3 EXPRESS WAIVER
When the holder of a bill at or after its maturity absolutely and unconditionally renounces her or his rights against the
acceptor, the bill is discharged.
Ø
Ø
The renunciation must be in writing, unless the bill is delivered up to the acceptor (s 67 BoE Act)
Must demonstrate an intention to renounce (Silk Bros Interstate Traders v Security Pacific National Bank)
59
40.4 CANCELLATION
Where a bill is intentionally cancelled by the holder or their agent, and the cancellation is apparent on the bill, the bill is
discharged (s 68 BoE Act)
Ø
Where it is a mistake or done without authority, the cancellation is inoperative.
40.5 ALTERATION OF BILL
Where a bill is materially altered without the assent of all parties liable, it is avoided except as against a party who has
themselves made, authorised or assented to the alteration, and subsequent indorsers.
Ø
Ø
The alteration must be apparent, for if it is not the holder may avail themselves of this and enforce payment
according to the bill’s original tenor (s 69(1) BoE Act)
What is “apparent”: where inspection of the bill makes evidence that its text has undergone change (Automobile
Finance v Law)
The Act provides a non-exhaustive list of definite cases as being material alterations: (s 69(2) BoE Act)
[a]
[b]
[c]
[d]
[e]
any alteration of the date;
alteration as to the sum payable;
alteration of the time of payment;
alteration of the place of payment; and
where a bill has been accepted generally, the addition of a place of payment without the acceptor’s assent.
41 ACCEPTANCE FOR HONOUR
An acceptance for honour (“AFH”) is a party not already liable on a dishonoured bill coming forward and accepting it for
honour.
An acceptance for honour supra protest, in order to be valid, must: (s 70 BoE Act)
[a]
[b]
be written on the bill and indicate that it is an acceptance for honour; and
be signed by the acceptor for honour.
41.1 LIABILITY OF ACCEPTOR FOR HONOUR
The AFH is liable to the holder, and to all parties subsequent to the party for whose honour they have accepted (s 71 BoE
Act)
Ø
[a]
[b]
[c]
[d]
The AFH of a bill by accepting it engages that on due presentment he or she will pay the bill according to the tenor
of her or his acceptance, provided:
it is duly presented by the drawee;
it is not paid by the drawee;
it is protested for non-payment; and
he or she receives notice of these facts.
41.2 EFFECT OF PAYMENT FOR HONOUR
Where a bill has been paid for honour all parties subsequent to the party for whose honour it is paid are discharged, but
the pay for honour is subrogated to the rights and duties of the holder as regards the party for whose honour he or she
pays and all parties liable to that party.
Ø
Where a holder rejects an AFH supra protest, they lose their right of recourse (s 73 BoE Act)
41.3 REFEREE IN CASE OF NEED
60
Referee in case of need: The drawer/indorser may insert the name of a person to whom the holder may resort in case the
bill is dishonoured by non-acceptance/non-payment (s 20 BoE Act)
Ø
A RICON is not bound to accept and become an acceptor for honour.
42 MISCELLANEOUS MATTERS
42.1 CONFLICT OF LAWS
The validity of the bill is determined by the law of the place where the K was made (s 77 BoE Act)
43 PROMISSORY NOTES
A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging
to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person
or to bearer (s 89 BoE Act)
Ø
NB: The key difference from a BoE therefore is that it is the debtor who issues, not the creditor (the drawer in a
BoE)
43.1 DELIVERY NECESSARY
A promissory note is inchoate and incomplete until delivery to the payee or bearer (s 90 BoE Act)
43.2 LIABILITY OF MAKER
The maker of a promissory note by making the note: (s 94 BoE Act)
[a]
[b]
engages that he or she will pay it according to its tenor; and
is precluded from denying to a HIDC the existence of the payee and her or his then capacity to indorse.
43.3 JOINT AND SEVERAL NOTES
A promissory note may be made by two or more makers and they may be liable on the note jointly, or jointly and severally
according to its tenor (s 91 BoE Act)
Ø
Ø
“I promise to pay” + signed by 2 or more persons = joint and several note;
“We promise to pay” + signed by 2 or more persons = joint note.
43.4 PAYABLE ON DEMAND
Where a note payable on demand has been indorsed, it must be presented for payment within a reasonable time of the
indorsement. If not, indorser discharged (s 92 BoE Act)
43.5 PRESENTMENT OF NOTE FOR PAYMENT
Where a promissory note is made payable at a particular place, it must be presented for payment at that place in order for
the maker to be liable (s 93 BoE Act)
43.6 BILLS OF EXCHANGE PROVISIONS APPLICABLE TO NOTES
The following provisions as to bills, do not apply to notes, namely, provisions relating to: (s 95 BoE Act)
[a]
[b]
[c]
[d]
presentment for acceptance;
acceptance;
acceptance supra protest;
bills in a set.
Where a foreign note is dishonoured, protest of the note is unnecessary.
61
62
TOPIC 6: GUARANTEES
44 NATURE OF A CONTRACT OF GUARANTEE
For the existence of a K of guarantee, three parties are required:
1
2
3
the party promising to do something (the principal debtor);
the party to whom such promise is made (the creditor); and
the party undertaking to be answerable (the guarantor or surety) should the promisor fail to adhere to their
promise.
Ø
NB: The contract may be guaranteed by more than 1 guarantor or surety, in which case liability may be joint and
several. These sureties are referred to as “co-sureties”.
44.1 TYPES OF GUARANTEES
A K of guarantee should be distinguished from K of indemnity. The reasons for distinguishing between these are:
[a]
the requirement in certain States that a guarantee be evidenced in writing which does not apply to an indemnity
(As noted in Tipperary Developments v WA)
a guarantor’s liability is treated as being co-extensive with that of the principal debtor so that if the principal K is
void or unenforceable, the guarantor will generally be discharged from liability, whereas under a K of indemnity
the indemnifier will still be liable to the creditor (Yeoman Credit v Latter)
[b]
The essential distinction is: (Canty v PaperlinX Australia)
Ø
Ø
K of indemnity: the person giving the indemnity is primarily liable whether or not a 3rd party makes default;
K of guarantee: the person giving guarantee is secondarily liable for the default of the principal debtor.
NB: A true guarantee “involves a secondary obligation. A true indemnity involves a primary obligation” (Burchett J in Re
Taylor; Ex parte Century 21 Real Estate)
44.1.1 CONDITIONAL GUARANTEES
Definition: If guarantor promises that if certain even occur, he will pay a sum of money.
Effect of conditional guarantee is that guarantor becomes liable in debt (liquidated sum) once those event happen (e.g.
guarantee obliging guarantor to meet instalment payments if PD fails to pay – no obligation unless and until debtor fails to
pay).
Ø
Creates a liquidated sum owing (a debt) – entitled PC to claim for liquidated damages.
44.1.2 PERFORMANCE GUARANTEES
Definition: Guarantor promises 3rd party will perform a specific obligation.
Effect of performance guarantee: Failure of 3rd party to perform obligations makes guarantor liable in damages
(unliquidated sum) for breach of 3rd party promise.
Ø
Creates an unliquidated sum owing (a right to debt) – entitled PC to claim for unliquidated damages.
44.2 FORMALITIES COMPLIED WITH?
To be an effective guarantee the agreement … must be in writing and signed by the person to be charged – or by a person
lawfully authorised in writing by that person to sign such an agreement (s 126(1) Instruments Act)
44.3 CONSIDERATION FOR GUARANTEE
A K of guarantee (unless under seal), like all simple K’s, requires consideration to support it (Coghlan v SH Lock)
63
Ø
The consideration must move from the creditor; consideration moving from the debtor to the surety is
insufficient.
Examples of sufficient consideration:
1
An original granting of credit (e.g. a loan of money or supplying of goods) to the debtor by the creditor at the
request of the guarantor would be consideration.
If the creditor gives the debtor extra time for payment because of the guarantee; or agrees to defer suing for the
debt at the request of the surety would be consideration
Ø NB: Where a new further guarantee is expressed to be given in consideration of a bank “providing
banking accommodation” but no new financial accommodation is provided, the guarantee will be
unenforceable – because, it merely covers the continuation of an existing credit facility or arrangement
(Mackay v NAB)
The consideration may be a payment by or on behalf of the creditor to the surety.
2
3
44.4 GUARANTEE NOT A CONTRACT UBERRIMAE FIDEI
A K of guarantee is not a K “uberrimae fidei” – that is, of the utmost good faith. Cool.
44.5 FIDELITY GUARANTEES
Guarantees need not always be given in respect of indebtedness for goods or services or for money lent.
Fidelity guarantees: Sometimes it is necessary to find a surety who will agree to guarantee the integrity or good
behaviour of a person who is entrusted with an office or position of trust.
Ø
NB: In the case of fidelity guarantees, all material facts must be disclosed, otherwise the guarantor can avoid the K
(London General Omnibus)
45 LIABILITIES AND RIGHTS OF GUARANTORS
A guarantor is liable to the creditor only:
Ø
Ø
Ø
where the debtor has made default; or
fails to perform their promise; or
to discharge their liability – within the time limited by the K.
45.1 GUARANTEES & MINORS
If the principle K is void the K of guarantee is void (because the liability of a guarantor depends on an existing enforceable
liability in the principal debtor).
Ø
Big red flag for Ks with minors therefore – however NB in Victoria a guarantor of a minor’s obligations as
purchaser under a K of sale is liable as if the purchaser was not a minor at the time the K was made. However, the
guarantee must carry a prominent statement that the guarantor may not have a right o recovery from the
purchaser (s 32(3) ACL)
45.2 EFFECT OF BREACH OF DUTY BY CREDITOR
Where a creditor is in breach of a duty owed to the debtor, this will be taken into consideration in determining the liability
of a guarantor.
Ø
NB: Clauses that expressly prohibit set-offs or counterclaims do not preclude a claim going to the validity of the
guarantee (Capital Finance v Airstar)
45.3 CONTINUING GUARANTEES
Continuing guarantee: is a guarantee that s given to secure a series of future transactions to be enter into between the
principal debtor and the creditor.
64
45.4 GUARANTEES BY MARRIED WOMEN OF THEIR HUSBAND’S DEBTS
If a married woman’s consent to become a guarantor of her husband’s debt, and this is procured without her fully
appreciating its essential effect, and the creditor does not inform the wife of her obligations, the guarantee mat be set aside
(Yerkey v Jones affirmed in Garcia v NAB)
45.5 RIGHTS OF GUARANTOR AFTER PAYMENT OF DEBT
After the payment of the debt the guarantor has the following rights:
1
2
to recover from the principal debtor all moneys so paid (Mason CJ in Sunbird Plaza v Maloney)
to have all securities in the hands of the creditor assigned to the guarantor and generally, as far as possible, be
placed in the same position as the creditor (Bofinger v Kingsway Group)
to recover contribution from her or his co-sureties.
3
45.6 RIGHTS OF CO-SURETIES AMONG THEMSELVES
One surety will be called upon to pay the debt and then this surety has a right of contribution (“RoC”) from the cosureties (Gibbs CJ in Mahoney v McManus)
Ø
Ø
Ø
To have a RoC co-sureties must have guaranteed the same debt or the obligations of the same debtor (NB: Willis v
Teparyl where original guarantee related to whole term of the lease, while new guarantee related to remainder of
the lease)
A RoC arises in law or equity and not based on a K provision.
In the absence of an agreement to the contrary, all sureties are liable to contribute equally to the common debt
(Lavin v Toppi)
46 DISCHARGE OF GUARANTOR
Conduct on the part of the creditor which materially alters the surety’s obligations will discharge the surety (Ankar v
National Westminster Finance)
Ø
The guarantor must consent to any variation which alters their rights, unless the change is insubstantial and does
not prejudice the grantor’s rights (Gibbons v Pozzan)
A guarantor will be discharged in the following cases:
1
2
3
4
5
When the creditor gives a discharge to the principal debtor either upon payment or otherwise (Hancock v Williams)
When the creditor materially varies the original agreement without consent (Egbert v National Crown Bank)
Ø Onus is on the creditor to show that the variation “could not have in any circumstances have increased the
risk” run by the guarantor (Willis v Teparyl)
If it is a term of the arrangements leading to executing a guarantee that there will be a 2nd guarantor, and the cosurety doesn’t end up executing a guarantor, the 1st guarantor is discharged (Gattellaro v Westpac)
Where a guarantee is given on a condition, any failure in performance of the condition operates to discharge the
surety (Williams v Frayne)
When the creditor relinquishes or loses the benefit of any security held by the creditor, the guarantor’s liability will
be reduced by the value of the security (Brennan J in Buckeridge v Mercantile Credits)
46.1 EFFECT OF BANKRUPTCY OF THE DEBTOR
The making of a sequestration order against the debtor, or an order of discharge in bankruptcy (s 153(4) Bankruptcy Act)
does not act as a release of the surety.
46.2 EFFECT OF DEATH OF SURETY
The death of a surety does not discharge their estate from liability for past transactions under the K.
46.3 REVOCATION OF THE GUARANTEE
65
Whether guarantee can be revoked depends on whether consideration is divisible or indivisible:
Ø
Ø
Where consideration divisible: the guarantee is revocable as regards liability to accrue in the future (Coulthart v
Clementson)
Where consideration indivisible: the guarantee cannot be revoked by notice (Re Crace; Balfour v Crace)
47 VITIATING FACTORS – RENDERING THE GUARANTEE K UNENFORCEABLE
47.1 UNCONSCIONABLE DEALING – CL: S 20 ACL
Unwritten law – principle: There should be an unconscionable taking advantage by one party of some disabling
condition or circumstance that seriously affects the ability of the other party to make a rational judgment as to his
or her own best interests (Mason & Deane JJ in CBA v Amadio)
47.1.1 SPECIAL DISADVANTAGE
It is important to qualify what is a special disadvantage:
Ø
Ø
The qualifying word special before disadvantage is intended to emphasise that the disabling condition or
circumstance is one which seriously affects the ability of the innocent party to make a judgement as to his own
best interests (CBA v Amadio)
May be a situational disadvantage deriving from particular features of a relationship between actors in the
transaction such as the emotional dependence of one on the other (Louth v Diprose; Bridgewater v Leahy)
Case examples special disadvantage
CBA v Amadio
Kakavas v Crown
Melbourne
Amadio (old people), took guarantee with bank due to their son – spoke little English + were
OLD people. Defaulted, owed $240k not $50k.
Held: UCD – gross inequality in bargaining power + bank certainly ought to have been aware
of fact that Amadios had no idea concerning the terms of the guarantee.
K was pathological gambler. Brought claim to recover $20.5m from Crown, alleging s 20 UCD
on basis casino took advantage of his SD (gambling addiction)
Held: No UCD – no SD as wagers were standard gambling transactions, and he was able to
make own rational decisions + the casino was not knowingly victimising K.
47.1.2 “STRONGER PARTY TAKES ADVANTAGE OF THIS”
Must also prove that stronger party had knowledge of special disadvantage:
Ø
Ø
Ø
Circumstances which may constitute a special disability may take a wide variety of forms and are not susceptible
to being comprehensively catalogued (Kakavas v Crown Melbourne)
Strong party must be aware of, or ought to be aware of the weak party’s special disadvantage and take unfair
advantage of it (Louth v Diprose)
NB: not unconscionable just because took advantage of superior bargaining position (need more than this)
o A difference in bargaining power does not amount to a ‘special disadvantage’ (ACCC v Oceana
Commercial)
47.1.3 “IN CIRCUMSTANCES NOT CONSISTENT WITH GOOD EQUITY & CONSCIENCE”
The overriding aim of all EQ principle is the prevention of unconscionable behaviour – a term which can be seen to
encompass duress, UI and unconscionable dealing as such (HCA in ABC v Lenah Game Meats)
So what is unconscionable?
Ø
Ø
Something not done in good conscience and is irreconcilable with what is right and reasonable (ASIC v National
Exchange)
Conduct which attracts a sufficient level of judicial opprobrium to support the grant of relief based on principles
set out in specific EQ doctrines established by courts of equity (ACCC v CG Berbatis Holdings)
66
Ø
NB: Distinguish between what is ‘unconscionable’ and what is ‘unfair or unjust’ – Spiegelman J suggested
unconscionability required a “high level of moral obloquy”.
47.2 UNDUE INFLUENCE
UI Focuses on the free and voluntary nature of guarantor entering into the guarantee – look to the quality of consent by
the weaker party.
Presumptive categories of ascendancy (which raise the presumption of UI): (Garcia; Johnson v Buttress)
Include
Parent to child
Lawyer to client (Westmelton v Archer & Schulman)
Doctor to patient
Priest to disciple (Hartigan v Krishna)
Husband to wife (Yerkey v Jones)
Don’t include
Financial advisor to client
Teacher to student
Child to parent
Rebutting the presumption of UI: prove that P entered into the K as result of free exercise of will and informed
judgement (Hartigan v Krishna)
Ø
NB: Independent advice received?
67
68
69
70
TOPIC 7: INSURANCE
48 FORMATION OF A CONTRACT OF INSURANCE
48.1 THE PROPOSAL FORM
What a proposal form is: A person intending to take out insurance fills out a form which contains a series of questions
intended to provide sufficient information to enable the insurer to assess the nature of the risk.
Ø
The proposal form is the offer, acceptance of which forms the K of insurance (though the terms may regard the K
not formed till the payment of a premium or issue of formal policy)
48.2 THE POLICY
The policy is the document which embodies the terms of the K agreed upon by the insured and the insurer.
48.3 COVER NOTES
A cover note is an interim K of insurance which provides immediate temporary protection to the person proposing to
insure until completion and acceptance of the proposal form.
49 BASIC CONCEPTS OF INSURANCE LAW
The basic concepts of insurance law are:
[a]
[b]
[c]
[d]
insurable interest;
duty of good faith;
duty of disclosure;
misrepresentation
49.1 APPLICATION OF THE INSURANCE CONTRACTS ACT 1984
Act does not apply to K’s of: (s 9)
Ø
Ø
Ø
Ø
Ø
Reinsurance;
Private health insurance;
Marine insurance;
Worker’s compensation; or
Compulsory 3rd party motor vehicle insurance
49.2 INSURABLE INTEREST
The Insurance Contracts Act 1984 (Cth) provides that a person need not have an insurable interest to seek relief under a
K of insurance (s 16)
Ø
Where an insured has suffered pecuniary or economic loss as result of insured property being destroyed or
damaged, insurer is not relieved of liability because insured’s lack of legal or EQ interest in property (s 17)
49.2.1 LIFE INSURANCE
Ø
A K of life insurance is not void merely because the insured did not have an interest in the ‘subject matter’ of the K
at the time of entering (s 18(1))
49.3 DUTY OF GOOD FAITH
An insurance K is a K of the utmost good faith. Thus, implied term of good faith in respect of any matter arising under or
in relation to the K (s 13(1)). Non-compliance = breach (s 13(2))
Ø
NB: Obligation extends beyond dishonesty (CGU Insurance Ltd v AMP Financial Planning)
71
Ø
May require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own
interests – must act consistently with commercial standards of decency and fairness (Gleeson CJ and Crennan J
in CGU Insurance Ltd v AMP Financial Planning)
49.4 DUTY OF DISCLOSURE
Statutory duty. Requires a person intending to take out insurance to disclose to the insurance company any matters
known to the insured to be relevant to the insurance. Moreover, s 21 provides that:
[1]
An insured has a duty to disclose to the insurer, before the relevant K of insurance is entered into, every matter that
is known to the insured, being a matter that:
[a] the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if
so, on what terms; or
[b] a reasonable person in the circumstances could be expected to know to be a matter so relevant having regard
to factors including, but not limited to:
[i] the nature and extent of the insurance cover to be provided under the relevant K of insurance; and
[ii] the class of persons who would ordinarily be expected to apply for insurance cover of that kind.
Ø
Ø
‘knows’ - is a strong word. It means considerably more than ‘believes’ or ‘suspects’ or even ‘strongly suspects’ (HC
in Permanent Trustee Australia v FAI General Insurance)
‘matter relevant to the decision of the insurer whether to accept the risk’ – this phrase requires disclosure only
of a matter which has bearing on the nature and extent of risk involved as opposed to disclosing matters relevant
to the insurer’s decision (HC in Permanent Trustee Australia v FAI General Insurance)
49.4.1 DISCLOSURE OF PRIOR CRIMINAL OR DISHONEST CONDUCT
Prior criminal or dishonest should be disclosed under s 21 as it extends to the “moral hazard” of honesty and integrity
which an insurer would consider a relevant matter (Naomi Marble v FAI General Inurance)
49.4.2 MATTERS NOT REQUIRED TO BE DISCLOSED
The insured is not required to disclose matters that:
[a]
[b]
[c]
[d]
diminishes the risk;
is of common knowledge;
the insurer knows, or in the ordinary course of business ought to know; or
as to which compliance with the duty of disclosure is waved by the insurer.
Ø Waiver: Insurer deemed to have waived compliance if, in response to Q on proposal form, insured failed to
answer the question, or gave an obviously incomplete or irrelevant answer to it (s 21(2), (3))
49.4.3 INSURER TO INFORM INSURED OF DUTY OF DISCLOSURE
The insurer must inform the insurance, before the the K entered into, in writing, of the duty of disclosure (s 22(1)(a), (d))
Ø
Failure to inform insured of duty of disclosure means insurer may not exercise a right in respect of a failure to
comply with the duty of disclosure (s 22(5))
49.4.4 DUTY OF DISCLOSURE EXTENDS TO CHANGE IN CIRCUMSTANCES PRIOR TO RENEWAL OF
CONTRACT
The insured is under a duty to disclose any change in circumstances that increases the risk insured against prior to each
renewal of the insurance (ss 21(1) and 11(9))
Case example duty to disclose when a change in circumstance
Alexender Stenhouse v Austcan
Investments
K insured business premises. Use of premises changed from selling waterbeds to
include their manufacture = increased fire risk.
Held: HC - There had been a non-disclosure by the insured to which the remedied
provided to the insurer by s 28(3) applied.
72
49.4.5 STATUTORY LIMITATIONS ON AN INSURED’S DUTY OF DISCLOSURE IN RESPECT OF AN “ELIGIBLE
CONTRACT OF INSURANCE”
49.4.6 REMEDIES FOR NON-DISCLOSURE
49.4.6.1 General insurance
Innocent non-disclosure: Where the insured’s failure to disclose is innocent, the insurer is not entitled to avoid the
contract (s 28(1), (3))
Ø
However, the liability of the insurer for a claim is reduced to the amount that would place the insurer in the same
position had the non-disclosure not occurred (e.g. if insurer would have charged higher premiums, entitled to
reduce the claim by the amount of that additional premium)
Fraudulent non-disclosure: Where the insured’s failure to disclose is fraudulent/intentional, the insurer is entitled to
avoid the contract (s 28(2))
49.4.7 LIABILITY OF CO-INSUREDS
Where two or more persons are co-insureds, the duty of disclosure applies to each and hence even if only one is
responsible for fraudulent non-disclosure, the insurer will be able to void the K per s 28(2) (High Court in Advance
Insurance v Matthews)
49.4.7.1 Life insurance
Where the non-disclosure does not relate to the age of the life insured, the position is as follows:
[1]
Where the insurer would have entered into the policy even if the insured had made full disclosure, the insurer will
have no remedy (s 29(1))
If the failure to disclose was fraudulent the insured may avoid the policy (s 29(2))
In a case of an innocent non-disclosure, if the insurer would not have entered into the K on any basis if the duty of
disclosure had been complied with, the insurer may avoid the policy within 3 years after the policy was entered into
(s 29(3))
If the insurer has not avoided the K under (2) or (3), the insurer may, by notice in writing, vary the sum insured in
accordance with a formula prescribed in s 29(4).
[2]
[3]
[4]
49.5 MISREPRESENTATION
General rule: A statement is not a misrepresentation unless the insured knew, or a reasonable person could be expected
to have known, that the statement would have been relevant to the insurer’s decision whether to accept the risk and, if so,
on what terms (s 26(2)) – onus on insurer to prove (Plasteel Windowns)
Ø
Even if statement is untrue, if it was made on basis of belief of truth that is reasonable, statement will not be
misrepresenting (s 26(1)) – onus on insured to prove (Plasteel Windowns)
49.5.1 REMEDIES FOR MISREPRESENTATION
The remedies are the same as that for non-disclosure.
49.6 COVER NOTES
Where an insured has submitted a proposal to the insurer for a contract of to replace the interim cover which has not yet
expired, the insurer will remain liable under that interim K until: (s 28(2))
[a]
[b]
[c]
the insured enters into another K of insurance intended to replace the interim K;
the cover note is cancelled; or
the insured withdraws the proposal, whichever is the earliest.
73
50 THE POLICY AND ITS TERMS
The policy contains the terms and conditions, the risks insured against, sets out circumstances in which compensation will
be paid, and describes the things which the insured must do or refrain from doing.
50.1 TERMS CONSTRUED CONTRA PROFERENTUM
General rule: In the case of ambiguity, the courts will generally construe terms in the policy contra proferentum (that is,
against the insurer who is responsible for their drafting)
50.2 EXCLUSION CLAUSES
The policy may contain exception or exclusion clauses which qualify the general risk covered by the policy (e.g. exclude the
liability of the insurer for damage caused by certain specified causes)
Case example exclusion clauses
Bashtannyk v New India
Assurance
Clayton v Mutual Community
General Insurance
Daniel v Accident Insurance
Mutual Holdings
E.C. in motor vehicle insurance policy excluded liability where the vehicle “is being
used whilst in an unsafe condition”.
Held: Although tires unsafe in wet conditions, they were safe in conditions of accident
(dry road) hence insurer could not avoid liability.
Joint policy between husband and wife. Husband commits suicides by igniting petrol
fumes in car while it is parked in garage – burns the garage and house. Claim rejected by
insurer on basis of “deliberate or intentional acts committed by you”
Held: Exclusion clause did not apply since suicide and subsequent damage cannot be
regarded as the deliberate or intentional causing of damage to the insured’s premises.
Ø NB: Lost on other grounds – damage as result of unlawful act clause = breach of
Criminal Law Consolidation Act s 85.
Reckless driving & excessive speed. Claim rejected on grounds that policy does not
cover loss, damage or liability arising from: (a) Your willful or deliberate act.
Held: Claim upheld – had not been shown that the A had directed his will or
deliberation to causing damage to another vehicle.
50.3 PROXIMATE CAUSE OF LOSS
The onus is on the insured to establish that the loss is covered by the terms of the policy – only where the risk insured
against was the “proximate” cause of the loss that the insurer will be liable to indemnify the insured.
50.4 PROVISIONS OF THE INSURANCE CONTRACTS ACT 1984
The Insurance Contracts Act 1984 contains several important limitations on the right of an insurer to avoid liability for
a claim on the ground of breach of a warranty or condition of the policy (see below)
50.4.1 INSURER MAY NOT REFUSE TO PAY CLAIMS IN CERTAIN CIRCUMSTANCES
Provided the act or omission could not reasonably be regarded as being capable of causing or contributing to a loss, the
insurer may not refuse to pay all or part of the claim by reason only of that act or omission.
Australian Associated Motor
Inusrers v Ellis
Car insurance policy – you must not make or cause to be made any modification of your
car without our written consent. Breached condition, fitted “mag” wheels – involved in
accident while driving.
Held: Insurer may not refuse to pay as the accident was not attributable to the fitting of
the “mag” wheels.
50.4.2 APPLICATION OF S 54 TO “CLAIMS MADE AND NOTIFIED” PROFESSIONAL INDEMNITY POLICIES
Professional indemnity policies indemnify professional people (accountants, lawyers, architects, engineers, directors of
companies and real estate agents) against liability arising from their negligent acts or omissions.
74
Under the umbrella terms of professional indemnity policies is “claims made” & “claims made & notified” policies:
Claims made
Claims made &
notified
Where the policy is expressed to provide indemnity in respect of claims made against the professional;
Where the policy is expressed to provide indemnity in respect of claims made against the professional
+ the claim against the professional or person be notified or reported to the insurer during the period
of insurance.
50.4.3 PRE-EXISTING DEFECTS OR DISABILITIES
An insurer cannot rely on such a provision to the extent that the insured was not aware of, and a reasonable person in the
circumstances could not be expected to have been aware of, the defect or imperfection (s 46)
50.4.4 STANDARD COVER
The Act makes provision for standard cover to be given by certain categories of insurance contract (ss 34-36). The
categories of insurance K, prescribed events and minimum cover are specified in the Insurance Contracts Regulations 1985
(Cth).
50.4.5 NOTIFICATION OF UNUSUAL TERMS
An insurer cannot rely on provisions that are not usually included in a policy unless, before entering K, insurer clearly
informed insured in writing of those provisions (s 37).
Ø
These types of unusual terms are those that are not standard cover provisions discussed [above]
50.4.6 FRAUDULENT CLAIMS
As insurance K is a K of utmost good faith, at CL insurer is able to avoid the whole K in the event of a fraudulent claim
being made.
General rule: Where a fraudulent claim is made, insurer cannot avoid the K but may refuse to pay the claim.
Ø
The court has the power to order insurer to pay amount that is “just and EQ” provided that only a “minimal or
insignificant” part of the claim is made fraudulently and non-payment of the remainder would be “harsh and
unfair” (s 56)
Gugliotti v Commercial Union
Assurance Co of Australia
Insured deliberately answered falsely questions in claim concerning consumption of
alcohol by driver of a vehicle involved in accident.
Held: Insurer entitled to refuse payment as “the fraud tainted the whole claim”
(Fullagar J)
50.4.7 ARBITRATION PROVISIONS (ARE VOID)
Provisions requiring disputes be referred first to arbitration are void. An agreement to submit to arbitration is valid if
made after the dispute has arisen (s 43)
50.5 THIRD PARTY BENEFICIARIES
50.5.1 GENERAL INSURANCE
Third party beneficiary is a person who is not a party to the K but is specified or referred to in the K, whether by name or
otherwise (s 11(1))
Ø
Ø
Ø
A TPB under a K of general insurance has a right to recover from the insurer the amount of any loss they have
suffered even though they are not a party to the K (s 48(1))
A TPB has the same obligations to the insurer as they would if they were the insured (s 48(2))
The insurer has the same defences against a TPB as they would have against an insured (s 48(3)) (e.g. if there has
been a non-disclosure or misrepresentation by the insured, the insurer can rely on this as a defence under a claim
by a TPB)
75
CBA v Baltica General Insurance
Co
An insurance K noted CBA as mortgagee of property (CBA = TPB). Property damaged by
fire. Insurer declined indemnity to insured because of non-disclosure + relied on this to
deny indemnity to bank.
Held: Insurer could rely on non-disclosure by insured as defence to CBA’s claim
pursuant to s 48(3) [above].
Where the insured has died or cannot be found: The 3rd party may bring an action against the insurer directly (s 51)
Murray’s Transport NSW v CGU
Insurance
Vero Insurance v Rail
Corporation
Ø
A dies when car collides with B’s truck, A is at fault.
Held: B entitled to recover directly from A’s motor vehicle insurer
A dies when car collides with B’s train on a level crossing, A is at fault.
Held: B entitled to recover directly from A’s motor vehicle insurer
NB: Also covers the liability of a TPB.
50.5.2 LIFE INSURANCE
A TPB who has a claim over money payable under a K of life insurance may bring action without intervention of the
policyholder (s 48A)
Ø
NB: Applies only to Ks of life insurance effected on the life of one but expressed for the benefit of another.
50.6 EFFECT ON AN INNOCENT CO-INSURED OF THE FRAUDULENT CONDUCT OF ANOTHER CO-INSURED
The question of the effect on innocent co-insured for the fraudulent conduct of another co-insured depends on whether
joint policy or composite policy.
Ø
Ø
Joint policy the interests of the co-insureds is joint (treated as one)
Composite policy the interests of the co-insureds is several (separate)
50.6.1 POSITION UNDER A JOINT POLICY OF INSURANCE
In a joint policy of insurance, the fraudulent conduct of one co-insured will generally prevent innocent co-insured from
recovering under the policy.
Ø
A characteristic feature of joint insurance is that interests of the joint insured are treated as one. Accordingly, the
inability of one to claim because of fraud extends to the other (MMI General Insurance v Baktoo)
50.6.2 POSITION UNDER A COMPOSITE POLICY OF INSURANCE
In a composite policy of insurance, the fraudulent conduct of one co-insured will not prevent innocent co-insured from
recovering under the policy.
50.7 EXPIRY, RENEWAL AND CANCELLATION OF INSURANCE CONTRACTS
50.7.1 NOTIFICATION OF EXPIRY OF A CONTRACT OF GENERAL INSURANCE
In the case of renewable insurance cover (e.g. house and car insurance) the insurer must notify insured in writing of the
date at least 14 days before expiry of the policy (s 58)
Ø
Ø
Failure to serve notice results in automatic extension – no premium payable, unless insured makes a claim
under it.
NB: An interim K of insurance (such as this auto-renewed K) may be cancelled at any time by the insurer (s 60(4))
50.7.2 CANCELLATION OF A CONTRACT OF GENERAL INSURANCE
The Act sets out the grounds on which an insurer may cancel a K of general insurance. These include circumstances where,
on the part of the insured, there has been: (s 60(1))
[a]
[b]
a breach of the duty of utmost good faith;
a breach of the duty of disclosure;
76
[c]
[d]
[e]
misrepresentation before the K was entered into;
failure to comply with a provision of the K;
a fraudulent claim made under the K or under some other K of insurance in operation at the time.
Ø
NB: An interim K of insurance (such as a cover note) may be cancelled any time by the insurer (s 60(4))
50.7.3 CANCELLATION OF A CONTRACT OF LIFE INSURANCE
The insurer may cancel a K of life insured if the insured has made a fraudulent claim under that K. However, the Court is
empowered to ameliorate the effect of this provision in circumstances of fraudulent conduct: (s 59A(2))
[a]
[b]
[c]
disregard the cancellation;
order the insurer to pay an amount (if any) that is just and EQ in the circumstances;
order the insurer to reinstate the K.
Ø
NB: Policy rationale for allowing court to disregard provision – the need to deter fraudulent conduct in relation to
insurance (s 59A(5))
50.7.4 NOTICE OF CANCELLATION
The insurer is required to give the insured written notice of the proposed cancellation (s 59) and must follow this
procedure (s 63(1)). The notice will not operate to cancel the K immediately, but will take effect at the earlier of the
following times:
[a]
[b]
at the time the insured enters into another K of general insurance intended to replace the K;
whichever is the latest of the following times:
[i] 4pm on the third business day after the notice was given to the insured;
[ii] the time, if any, specified in the K; or
[iii] the time, if any, specified in the notice.
50.7.5 REASONS TO BE GIVEN FOR REFUSAL TO ACCEPT INSURANCE, FOR CANCELLATION, OR FAILURE
TO RENEW
On receiving a written request from an insured, an insurer is to provide written reasons why it:
Ø
Ø
Ø
Ø
refused cover;
cancelled the contract; or
failed to renew it; or
offered insurance on less advantageous terms.
A penalty of $5,000 is imposed for failure to give reasons (s 75)
50.8 INDEMNITY PRINCIPLE
Indemnity Principle: The insurer will indemnify the insured for the loss the insured has suffered up to the amount stated
in the policy.
Ø
Ø
Applies to general insurance K’s;
Doesn’t apply to life insurance K’s (as these are K’s to pay the insured/representative a certain sum of money on
the happening of some specified event)
50.9 DOUBLE INSURANCE AND CONTRIBUTION
Double insurance: Where the insured takes out policies in two or more companies which have the effect of over-insuring
their property.
Ø
Ø
Where DI has been effected, the insured may elect from which insurer or insurers to recover, but such insurer is
entitled to an adjustment with the other insurers under the doctrine of contribution (s 76)
NB: This is because each insurer must cover the risk which has given rise to the claim.
77
Conditions that nullify insurance due to double insurance are void: A term in a K of general insurance limiting or
excluding the insurer’s liability because the insured entered into some other K of insurance is void (s 45)
50.10 RIGHT OF SUBROGATION
Doctrine of subrogation: The insurer on payment of the claim is entitled to any rights the insured may have against the
person who caused the loss through their negligence (the insurer “stands in the shoes” of the insured)
51 INSURANCE AGENTS AND BROKERS
51.1 DISTINCTION BETWEEN EMPLOYEES, AGENTS AND BROKERS
Employees
Agents
Brokers
An employee is exclusively bound to a single insurer
An insurance agent is are also usually bound to a single insurer, but some may have overlapping
arrangements with different insurers
An insurance broker is not tied to an individual insurer but runs an independent business
51.1.1 INSURANCE EMPLOYEES AND AGENTS
The insurer will generally be responsible for the negligent and fraudulent acts of its agent, where for example, the agent:
[a]
fails to pass on to the insurer a disclosure made to the A by the insured or makes a misrepresentation to the
insurer, knowing the true facts; or
misrepresents the terms of insurance cover to an intending insured.
[b]
Ø
A person who carries on financial services business must hold a financial services license (s 911A Corps Act).
Insurers who provides services to retail clients and brokers must be registered as financial services licensees.
51.1.2 INSURANCE BROKERS
A broker is an intermediary who deals on behalf of their clients with a number of insurers.
51.1.2.1 Duty of a broker to exercise reasonable care and skill
A broker owes a CL duty to their C to exercise reasonable care and skill (e.g. in arranging appropriate and effective
insurance cover for the C) (Claude Ogden v Reliance Fire Sprinkler)
Ø
Ø
That “the C’s policy is suitable for the purpose for which it is sought” (Horsell International v Divetwo per McColl
JA)
To warn the insured about their obligations under the insurance K and take reasonable steps to make sure cover
remains effective (e.g. by sending a reminder notice to renew or pay outstanding premiums)
Eagle Star Insurance Co Ltd v
National Westminster Finance
Australia
Hemms Cassell & Associates v
Nasr
Insurance arranged through broker to insure valuable stallion for $1m. Horse died.
Claim made but avoided on grounds of non-disclosure & misrepresentation as result of
broker’s failure to exercise reasonable care and skill in completing proposal form.
Held: Broker liable to insured for the whole amount for which stallion had been
insured.
On advice of broker, P failed to disclose poor driving record in proposal form. Vehicle
stolen and damaged beyond repair. Insurer rejected P’s claim on grounds of nondisclosure.
Held: P entitled only to nominal damages ($1). P failed to prove that broker’s advice
caused him to be without the benefit of effective insurance and accordingly, failed to
prove broker’s advice had caused him loss.
51.1.2.2 Effect on broker of settlement of claim between insured and insurer
General rule: Where insured and insurer reach settlement following a breach by broker of duty to exercise reasonable
care and skill, broker will be liable to the insured for the difference between the amount of the settlement and the sum
the insured would have recovered under the insurance K had there been no breach (Unity Insurance Brokers v Rocco
Pezzano)
78
51.1.2.3 Effect of payment by insurer and insured to an insurance agent or broker
Insured paying premiums: If K of insurance is arranged by financial services licensee (e.g. an agent or broker), payment
to the licensee of money payable under insurance K (e.g. a premium) is a discharge, as between the insured and the
insurer of the the liability to pay that money (s 985B(1) Corps Act)
Insurer paying claims: Payment of money payable under the insurance K by the insurer (e.g. a claim) to a financial
services licensee (e.g. an agent or broker) is not a discharge of insurer’s liability in respect of that money (s 985B(3) Corps
Act)
Ø
NB: Condition that purports to alter these sections [above] are void (s 985(5) Corps Act)
52 PARTICULAR CLASSES OF INSURANCE
52.1 FIRE INSURANCE
A fire insurance K is a K of indemnity. The insured is entitled to recover provided they have suffered a pecuniary or
economic loss as result of damage or destruction to the property insured.
The insurer, instead of paying amount of loss to insured, may apply the moneys due towards reinstating the damaged
building or replacing the goods or other property lost.
Ø
NB: Insured not entitled to recover more than amount of actual loss or damage (Policy reason: to minimise the
possibility of a person committing arson)
52.1.1 STANDARD COVER FOR HOME BUILDINGS & HOME CONTENTS INSURANCE
Standard cover provisions in the Insurance Contracts Regulations 1985 (Cth) reg 10 provide that the “prescribed events”
(that is, the risks) insured in respect of home building insurance are as follows:
[a]
[b]
[c]
[d]
the destruction of, or damage occurring to, the home building on the site, being destruction or damage that is caused
by or results from [i]
fire or explosion;
[ii]
lightning or thunderbolt;
[iii]
earthquake;
[iv]
theft, burglary or housebreaking or an attempt to commit theft, burglary or housebreaking;
[v]
a deliberate or intentional act;
[vi]
bursting, leaking, discharging or overflowing of fixed apparatus, fixed tanks or fixed pipies used to hold or
carry liquid of any kind;
[vii] riot or civil commotion;
[viii] an action of a person acting maliciously;
[ix]
impact by or arising out of the use of a vehicle (including an aircraft or a water borne craft);
[x]
impact by [A] space debris or debris from an aircraft, rocket or satellite;
[B] an animal (other than animal kept on site or domestic animal);
[C] a falling tree or part of a tree; or
[D] a television or radio aerial that has broken or collapsed; or
[xi]
storm, tempest, flood (within meaning of reg 29D), the action of the sea, high water, tsunami, erosion or land
slide or subsidence;
accidental damage that is breakage of any fixed glass, fixed shower base, fixed basin, fixed sink, fixed bath, fixed
lavatory pan or fixed cistern;
loss by theft, burglary or housebreaking;
the insured or a member of the insured’s family ordinarily residing with the insured incurring a liability as owner or
occupier of the home building to pay compensation or damages to some other person.
52.1.1.1 Meaning of “flood”
Flood: The covering of normally dry land by water that has escaped or been released from the normal confines of a lake,
river, creek, reservoir, canal, dam or another natural watercourse (reg 29D Insurance Contracts Regulations 1985 (Cth))
79
52.1.1.2 Exclusions
There are certain exclusions from liability under the standard cover provisions in respect of home buildings insurance.
These include: (reg 11 Insurance Contracts Regulations 1985 (Cth))
[a]
[b]
[c]
[d]
[e]
depreciation;
wear and tear, rust or corrosion;
the actions of insects or vermin;
destruction or damage, or the incurring of a liability as a result of [i]
the expropriation of the home building;
[ii]
war or warlike activities;
[iii]
the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by
radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel;
[iv]
the use of the homebuilding for the purposes of a business, trade or profession; or
[v]
tree lopping or felling by the insured or a person acting with the express or implied consent of the insured; or
destruction or damage intentionally caused, or a liability intentionally incurred by [i]
the insured; or
[ii]
a member of the insured’s family ordinarily residing with the insured, or a person acting with the express or
implied consent of any of them;
Ø
NB: Ceiling of $2,000,000 in respect of public liability (that is, liability to 3rd parties)
52.2 “AVERAGE” CLAUSE
There may be a “subject to average” clause – where the property insured is of a higher value than the sum for which it is
insured, “then the insured shall be considered as being their own insurer for the difference, and shall bear a rateable
proportion of the loss accordingly.
Ø
NB: Fire insurance not subject to average unless it so provides.
52.3 LIFE INSURANCE
Life insurance: An undertaking to pay a made out specified amount, with or without bonuses, upon the happening of an
event (e.g. death of named person or attainment of certain age)
52.3.1 SUICIDE
A life company may only avoid a life policy on the ground that the person whose life is insured committed suicide if the
policy expressly provides excludes liability in case of suicide (s 228 Life Insurance Act 1995 (Cth))
52.4 PERSONAL ACCIDENT & SICKNESS INSURANCE
The insured secures an income during the period in which they are prevented by injury from earning it. Generally limited
to 26 or 52 weeks – may also be a lump sum compensation for injuries received (e.g. loss of a limb or eye)
Ø
Standard cover is prescribed in regs 17-20.
52.5 WORKERS’ COMPENSATION INSURANCE
Employers are to pay compensation to employees for injuries sustained by them in the course of their employment, and
further requires that employers insure against their liability to pay such compensation.
Ø
NB: The Insurance Contracts Act 1985 (Cth) does not apply to workers’ compensation insurance and is covered
independently by the Accident Compensation Act 1985 (Vic) & Accident Compensation (WorkCover Insurance) Act
1993 (Vic).
52.6 PUBLIC LIABILITY INSURANCE
80
Public liability insurance indemnifies the insured against legal liability in respect of death/damage/injury to persons or
property where such damage is caused in the course of carrying on the insured’s business or trade by the negligence of the
insured or any person for whose negligence the insured is liable.
52.7 THIRD PARTY MOTOR VEHICLE INSURANCE
Compulsory 3rd party motor vehicle insurance covers the legal liability of the motorist in respect of personal injuries to
members of the public, including passengers of the vehicle.
Ø
Ø
It does not indemnify the owner for damage, fire or theft in relation to their own vehicle, nor for damage to the 3rd
party’s vehicle or their property.
NB: The Insurance Contracts Act 1985 (Cth) does not apply to 3rd party motor vehicle insurance and is covered
independently by the Transport Accident Act 1986 (Vic), Pt 3.
52.8 COMPREHENSIVE CAR INSURANCE
Comprehensive car insurance policies not only indemnify an insured against damage to, or loss of, their own vehicle but
also in respect of negligent damage to a third party’s vehicle or other property.
Ø
Standard cover is prescribed in regs 5-8.
52.9 PROFESSIONAL INDEMNITY INSURANCE
Professional indemnity insurance is effected for professional people (doctors, lawyers, accountants, insurance brokers
etc) to cover potential legal liability resulting from their own negligence, or that of their partners or employees, in the
performance of their professional duties..
52.10 CONSUMER CREDIT INSURANCE
Consumer credit insurance is designed to provide security to the insured against the risk of becoming unable to pay
credit instalments due to accident, illness, and, in some policies, unemployment.
Ø
Standard cover is prescribed in regs 21-24.
52.11 TRAVEL INSURANCE
Travel insurance provides cover in respect of losses (e.g. loss of deposit, travel & accommodation costs) resulting from
the cancellation of travel arrangements for medical or other reasons.
Ø
Standard cover is prescribed in regs 25-28.
81
82
TOPIC 8: SECURITY INTERESTS OVER PERSONAL PROPERTY
54 THE NATIONAL REGULATION OF CONSUMER CREDIT
54.1 THE NATIONAL REGULATION OF CREDIT
The general regulatory provisions of the National Consumer Credit Protection Act 2009 (Cth) are considered under the
following headings: [below]
Ø
Ø
Ø
Ø
A national licensing scheme for all credit providers;
Responsible lending conduct;
Consumer remedies;
Sanctions for non-compliance.
54.1.1 A NATIONAL LICENSING SCHEME FOR ALL CREDIT PROVIDERS
54.1.1.1 The licensing scheme
A person engaging in a “credit activity” must obtain an Australian Credit License (ACL) from ASIC (s 29 NCC)
A person engages in a “credit activity” where the person is the: (s 6 NCC)
[a]
[b]
[c]
[d]
[e]
credit provider under a credit K;
lessor under a consumer lease;
mortgagee under a mortgage; or
beneficiary under a guarantee
provides “credit assistance” to a consumer or “acts as an intermediary” (s 7 NCC)
Ø credit assistance is defined broadly to providing actual assistance to suggesting to a consumer that they
apply for a particular credit K (s 8 NCC)
Ø
NB: You do not need a license if you are acting as an A and the P has a license.
54.1.1.2 General conduct obligations of licensees
A person is required to conduct their business in accordance with a number of specific conduct standards. These include
obligations to: (s 47 NCC)
[a]
[b]
[c]
[d]
[e]
ensure that credit activities are engaged in efficiently, honestly and fairly;
have in place adequate arrangements to ensure that Cs are not disadvantaged by any conflict of interest;
comply with any licensing conditions;
comply with credit legislation and take reasonable steps to ensure its representatives do so;
maintain competence to engage in credit activities it is authorised to provide, and ensure that its representatives
are adequately trained and competent to engage in those activities;
have an internal dispute resolution procedure that is compliant with standards and requirements made or
approved by ASIC;
be a member of an approved external dispute resolution scheme;
have adequate compensation arrangements for loss or damage resulting from a breach of its obligations;
have adequate and documented arrangements and systems to ensure compliance with its obligations;
have adequate resources to engage in credit activities and have adequate risk management systems; and
comply with any additional obligations prescribed by the regulations.
[f]
[g]
[h]
[i]
[j]
[k]
Ø
NB: Must lodge to ASIC annual compliance certificate (s 53 NCC)
54.1.2 RESPONSIBLE LENDING CONDUCT
The Act introduces responsible lending requirements for all licensees to try to ensure consumers have the capacity to
meet the financial obligations under their credit Ks.
54.1.2.1 Assessment of unsuitability of contracts
83
A licensee will need to meet the statutory responsible lending obligations where it is either:
[a]
[b]
A credit provider, that is, it enters into credit Ks with consumers or increases the credit limit of a credit K; or
A credit assistance provider in that it:
[i] assists a consumer to apply for a credit K with a credit provider or an increase in a credit limit of a credit K; or
[ii] suggests that a consumer enter into a credit K with a credit provider, or increase the limit of a particular credit
K.
The credit provider is required to assess whether the K will be unsuitable for the consumer (ss 128, 129 NCC). If the K
is found unsuitable, the licensee is prohibited from entering into a credit K or increasing the credit limit (s 133 NCC)
A credit K will be unsuitable for a consumer if it is likely that: (s 131 NCC)
[a]
the consumer will be unable to comply with their financial obligations under the K or could only do so with
substantial hardship (presumed if consumer would have to sell principal place of residence in order to satisfy K’s
obligations); or
the K will not meet the consumer’s requirements or objectives
[b]
Ø
Ø
Assessment must be < 90 days before providing the credit (s 128 NCC)
o Extended to < 120 days for purchase of residential property secured by mortgage (reg 26 NCC
Regulations)
Copy of assessment must be given to consumer if requested (s 132 NCC)
54.1.3 CONSUMER REMEDIES
Most remedies should be resolved through the internal and external dispute resolution mechanisms which a licensee is
required to have in place under the Act (s 47 NCC)
Ø
Ø
Ø
May seek order for compensation for loss or damage (s 178 NCC)
May seek order for to vary or declare K void (s 179 NCC)
May seek order to vitiate a debt owing (s 180A NCC)
54.1.4 SANCTIONS FOR NON-COMPLIANCE
Civil penalties such as:
Ø
Ø
Ø
injunctions (s 177);
compensation orders (s 178); and
adverse publicity orders (s 182)
Also, ya know, criminal penalties mate.
55 THE NATIONAL CREDIT CODE
55.1 APPLICATION OF THE NATIONAL CREDIT CODE
The scope of application is very wide. It applies to all personal (that is, non-business) credit with certain limited
exceptions. More particularly, it applies to all forms of consumer credit (including loans of money, acquisition of goods on
credit terms, credit cards and housing loans) and covers all credit providers (including banks, credit unions, building
societies, retail stores and all other who provide credit in the course of business)
55.2 CREDIT TO WHICH THE CODE APPLIES
The code applies only if there is a “credit contract”. This arises if the following four requirements are satisfied: (s 5(1)
NCC)
[a]
[b]
the debtor is a natural person; (also strata corporation, home unit body corporate)
the credit is provided “wholly or predominantly” for PDH purposes or to purchase, renovate, improve or refinance a
residential property for investment purposes;
84
[c]
[d]
a charge is made for providing the credit; and
the credit is provided in the course of a business.
Ø
NB: Credit amount must > $50 (reg 52 NCC Regs)
55.2.1 THE DEBTOR MUST BE A NATURAL PERSON (S 5(1)(A) NCC)
The NCC applies only to credit provided to natural persons. This means the Code does not apply to credit provided to a
company.
55.2.2 THE CREDIT MUST BE PROVIDED WHOLLY OR PREDOMINANTLY FOR PDHUC OR FOR A
RESIDENTIAL INVESTMENT PROPERTY (S 5(1)(B) NCC)
Ø
NB: Credit provided for other investment purposes is not regulated by the code, only residential (s 5(3) NCC)
55.2.2.1 Meaning of “predominant” purpose
In deciding predominant purpose for which credit is provided, the NCC states that it is: (s 5(4) NCC)
[a]
[b]
the purpose for which more than half of the credit is intended to be used; or
if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which
the goods or services are intended to be most used
Example: If credit is obtained to purchase a vehicle to be used partly for personal and partly business purposes, and
vehicle used mostly for business, the Code does not cover. If used for personal, the Code does cover.
55.2.3 A CHARGE MUST BE MADE FOR THE CREDIT (S 5(1)(C) NCC)
If no interest charge, or other fee, is charged for providing the credit, then the credit provided will not be regulated by the
NCC.
55.2.4 THE CREDIT MUST BE PROVIDED IN THE COURSE OF A BUSINESS (S 5(1)(D) NCC)
The credit must be provided in the course of business in providing credit (e.g. a bank, finance company, credit union) or as
part of, or incidental to, any other business of the credit provider (e.g. retail store proving credit facilities to its customers)
55.3 THE CODE WILL NOT APPLY TO:
The exceptions where the Code will not apply are:
[a]
[b]
[c]
[d]
[e]
[f]
[g]
[h]
[i]
short-term credit (e.g. credit provided for < 62 days, credit fees < 5% amount of credit, and interest rate < 24%p.a.)
the provision of credit if, before the credit was provided, there was no express agreement for the provision of
credit (e.g. cheque account is overdrawn with no expressly agreed overdraft facility or when a savings account falls
into debt)
continuing credit Ks where the only charge is a periodic or other fixed charge which does not vary according to
the amount of credit provided
credit provided under a bill facility (e.g. bills of exchange or promissory notes) by an authorised deposit-taking
institution (e.g. bank or credit union)
the payment of insurance premiums by instalments even though the instalments exceed the total of the premium
that would be payable if the premium were paid in lump sum;
the provision of credit on the security of goods by a pawnbroker provided that if the debtor is in default, the
pawnbroker’s only recourse is against the goods provided as security
Ø NB: Provisions empowering Court to reopen unjust transactions (ss 76-81 NCC) apply to provision of credit
by pawnbrokers (s 6(9) NCC)
the provision of credit by the trustee of the estate of a deceased person by way of an advance to a beneficiary;
employee loans; and
margin loans.
85
55.4 FORMALITIES AND CONTENTS OF CREDIT CONTRACTS
The credit K must comply with form and contents requirements as prescribed by the Act and regulations (s 18 NCC)
55.4.1 PRE-CONTRACTUAL DISCLOSURE
The credit provider must give the prospective debtor a pre-contractual statement (which may be the proposed K
document) setting out: [a] the financial details of the proposed credit K; and [b] an information statement of the debtor’s
statutory rights and obligations.
55.4.2 FORM OF CREDIT CONTRACT
Option 1: Be in writing, signed by the debtor and the credit provider; or
Option 2: Be in writing, signed by the credit provider constituting an offer to the debtor that is accepted in accordance
with the terms of the offer (s 14 NCC)
55.4.3 CONTENTS OF CREDIT CONTRACTS
The following matters must be disclosed in all credit Ks (s 17 NCC)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
16
The credit provider’s name;
The amount of credit to be provided and the persons or bodies;
If the amount of credit is not ascertainable, the maximum amount of credit agreed to be provided, or the credit limit.
Where credit provided for sale of land or goods by instalments, K must include desc. of land/goods and its price;
Percentage (%) rate of interest payable under the K ;
The method of calculation of interest charges payable under the K;
The total amount of interest charges payable to the extent that they are able to be ascertained;
If > 1 repayment is to be made, the amount of the repayments and, if ascertainable, the number of repayments and
the total amount of the repayments;
A statement of the credit fees and charges that are payable under the K;
A statement by which the debtor will be informed of any potential percentage rate variations;
The frequency wit which the statements of account are to be provided to the debtor;
A statement of default rates of interest when payments are in default;
A statement that enforcement expenses may become payable under the credit K (if any) in event of breach;
If mortgage, a statement of description of property proposed to be subject to the mortgage;
Particulars of commissions paid by or to the credit provider;
Any other information or warning required by the regulations.
55.4.4 DEBTOR TO BE GIVEN COPY OF THE CONTRACT
Where a K document is to be signed by the debtor and returned to credit provider, the debtor must be given a copy to keep
(s 20(1) NCC) within 14 days after it is made (s 20(2) NCC)
55.4.5 TERMINATION OF THE CONTRACT BY THE DEBTOR BEFORE CREDIT HAS BEEN OBTAINED
Debtor may give notice to terminate the K after K entered into but before credit provided. Provider entitled to retain fees
and charges incurred before termination (s 21 NCC)
55.4.6 PROHIBITED FEES OR CHARGES
Provisions which exceed the amount which may be charged by the Code are void – amount paid recoverable by the debtor.
Fees and charges must be authorised by the credit K, if not – amount recoverable (s 23 NCC)
55.5 CIVIL PENALTIES FOR CONTRAVENTIONS BY CREDIT PROVIDERS
Civil penalties for contravention of the Code must be brought within 6 years (s 123 NCC)
55.5.1 “KEY REQUIREMENTS”
86
Key requirements are those ‘Contents of Credit Ks’ discussed under s 17 NCC. The following discussion of civil penalties
applies only to a breach of these requirements.
55.5.2 THOSE WHO MAY APPLY FOR THE IMPOSITION OF A CIVIL PENALTY
An application to the court for an order of a civil penalty on a credit provider may be made by: (s 112(1) NCC)
[a]
[b]
[c]
[d]
the debtor; (cannot seek civil penalty if credit provider or ASIC has made a prior application (s 112(2) NCC))
the credit provider;
a guarantor; or (cannot seek civil penalty if credit provider or ASIC has made a prior application (s 112(2) NCC))
the ASIC
The court must by order declare whether or not a ‘key requirement’ (under s 17 NCC) has been breached, then it may
make an order requiring the credit provider to pay an amount as a civil penalty (s 113(1), (2) NCC)
55.5.3 EFFECT OF AN APPLICATION FOR A CIVIL PENALTY BY THE DEBTOR OR A GUARANTOR
The maximum civil penalty cannot exceed the amount of interest charges payable under the credit K, however a greater
amount may be imposed if the court is satisfied that the debtor has suffered a loss (s 114 NCC)
Ø
Ø
The penalty may be set-off against the debtor’s debts to the credit provider (s 115(1) NCC);
NB: If no amount owing to credit provider, penalty is a debt owing to the debtor.
55.5.4 EFFECT OF AN APPLICATION FOR A CIVIL PENALTY BY THE CREDIT PROVIDER OR GOVERNMENT
CONSUMER AGENCY
The amount of the civil penalty is capped at $500,000 where applied for by credit provider or government consumer
agency (s 116 NCC)
55.5.5 ASSESSMENT OF THE AMOUNT OF CIVIL PENALTY
The court has regard to the “prudential standing” of the credit providing institution (s 113(3) NCC) which means its
“financial capacity to meet its current commitments to borrowers and, beyond that, to serve the future needs of its
members” (Lee J in Re Polish Community Credit Union)
Also has regard to: (s 113(4) NCC)
[a]
[b]
[c]
[d]
[e]
[f]
[g]
[h]
[i]
the conduct of the credit provider and debtor before and after the credit K was entered into;
whether the contravention was deliberate or otherwise;
the loss or other detriment (if any) suffered by the debtor as a result of the contravention;
when the credit provider first became aware, or ought reasonably to have become aware, of the contravention;
any systems or procedures of the credit provider to prevent of indemnify contraventions;
whether the contravention could have been prevented by the credit provider;
any action taken by the credit provider to remedy the contravention or compensate the debtor or to prevent future
contraventions;
the time taken to make the application and the nature of the application;
any other matters the court considered relevant;
55.5.6 PENALTIES FOR OFFENCES UNDER THE CODE
The following acts of non-compliance carry with it a penalty of 100 penalty units ($18,000):
[a]
[b]
[c]
[d]
contravention of the financial disclosure requirements (s 22 NCC)
the imposition of prohibited fees and charges (s 24 NCC)
issuing non-compliant statements of account (s 33 NCC); and
failing to provide notice of changes to the K (ss 64-68 NCC)
55.6 RELATED MORTGAGES
55.6.1 GENERAL PROVISIONS
87
Ø
Ø
Ø
Ø
Ø
Ø
Mortgage must be in writing, signed by the mortgagor to be enforceable (s 42 NCC);
Mortgagor must be given copy of mortgage doc. within 14 days after it is made (s 43 NCC);
Mortgage must describe or identify the property subject to mortgage or will be void (s 44(1) NCC);
Provision that charges over all property is void (s 44(2) NCC);
Mortgagor must be a debtor under a credit K else mortgage will be unenforceable (s 48 NCC)
Mortgage is void to extent that amount secured exceeds the sum of liabilities incurred under credit K +
reasonable enforcement expenses for enforcing mortgage (s 49 NCC)
Mortgages over future property are generally void, subject to the following exceptions: (s 45 NCC)
[a]
where the mortgage relates to property that is to be acquired wholly or partly with the credit provided under the
credit K secured by the mortgage;
the property is described or identified in the mortgage; or
goods acquired in replacement for, or as additions to, other goods subject to the mortgage.
[b]
[c]
55.6.1.1 Prohibited securities
Certain types of property are prohibited from having security being taken over them: (s 50 NCC)
[a]
[b]
[c]
wages or salary or benefits under a superannuation scheme;
goods that are essential household property; or
goods that are property used by the mortgagor in earning income by personal exertion if the goods do not have a
total value greater than the relevant limit ($2,600 indexed according to CPI (reg 6.03B(2) Bankruptcy Regulations
1996))
Also cannot secure an obligation under credit K by cheque, bill of exchange or promissory note (s 50(7) NCC)
55.7 ASSIGNMENT OR DISPOSAL OF MORTGAGED PROPERTY BY MORTGAGOR
Mortgagor must not assign or dispose of property that is subject to a mortgage, without first acquiring consent of the
credit provider or court.
The court may authorise a mortgagor to dispose of the property if: (s 51 NCC)
[a]
[b]
the credit provider fails within a reasonable time to reply to a request for consent to do so by the mortgagor; or
consent is unreasonably withheld, or unreasonable conditions are attached to the consent.
The credit provider may require the mortgagor to remedy all defects or breaches relating to the credit K before disposal (s
52 NCC)
55.8 RELATED GUARANTEES
Not examined.
55.9 ENFORCEMENT OF CREDIT CONTRACTS, MORTGAGES AND GUARANTEES
55.9.1 DEFAULT NOTICE
Credit provider cannot begin proceedings against a debtor in relation to a credit K unless has provided the debtor with a
default notice allowing for 30 days to remedy (s 88(1) NCC). If default is remedied within period specified in notice, K or
mortgage is reinstated (s 89 NCC)
Contents of notice must include: (s 88(3) NCC)
Ø
Ø
Ø
Actions necessary to remedy the default;
Information as to repossession and sale of mortgaged property where security has been taken; and
The rights of the debtor or mortgagor in enforcement proceedings.
Default notice need not be given where: (s 88(5) NCC)
88
[a]
the credit provider believes on reasonable grounds that it was induced by fraud to enter on the part of the
debtor/mortgagor;
the credit provider has made reasonable attempts to locate the debtor or mortgagor without success;
the court authorises the credit provider to begin enforcement proceedings;
that urgent action is necessary to prevent the disposal of the secured goods.
[b]
[c]
[d]
55.9.2 DIRECT DEBIT DEFAULT
If debtor authorises payment by direct debit and default occurs, credit provider must give debtor a direct debit default
notice < 10 business days of default occurring (s 87 NCC)
Ø
The direct debit default notice informs the debtor that a repayment has been dishonoured and to contzct to make
arrangements for payment.
55.9.3 NEGOTIATION OF POSTPONEMENT OF PROCEEDINGS
Debtor is permitted to negotiate a postponement of commencing proceedings, unless the amount of credit > $500,000.
Credit provider must < 21 days respond to this request to negotiate with their decision (s 94 NCC)
Ø
Where the credit provider declines to negotiate, debtor may apply to the court for a determination of
postponement (s 96 NCC)
55.9.4 ENFORCEMENT OF MORTGAGES - REPOSSESSION
A credit provider will require security for performance of a debtor’s obligations under a credit K (e.g. money borrowed
from finance co. to buy car, finance co. may take a mortgage over the car entitling the co. to repossess and sell the vehicle
in event of default)
55.9.5 LIMITATIONS ON TAKING POSSESSION OF MORTGAGED GOODS
Credit provider may ordinarily take possession of mortgaged goods in event of default.
Limits on ability to repossess: Credit provider cannot take possession of mortgaged goods without consent of court if the
amount owing under the credit K:
[a]
[b]
is < 25% of the amount of credit provided under the K; or
$10,000 – whichever is lesser (s 91(1) NCC)
Ø
Ø
NB: Does not apply to continuing credit K’s; or
NB: If the credit provider believes on reasonable grounds that the debtor has removed or will dispose of the
secured good (s 91(2) NCC)
55.9.6 PROCEDURE AFTER TAKING POSSESSION OF GOODS
Within < 14 days after taking possession of goods, credit provider must give the mortgagor written notice containing: (s
102(1) NCC)
[a]
[b]
[c]
the estimated value of the goods;
the enforcement expenses incurred and their rate of accrual (e.g. costs of repossession, storage costs); and
a statement of the mortgagor’s rights and obligations in the form set out in the regulations (reg 88 Form 14)
Ø
NB: Mortgagor must act < 21 days after notice or credit provider may sell the goods. Must not dispose of the
goods during this 21-day period (s 102(2) NCC)
55.9.7 SALE OF REPOSESSED GOODS BY CREDIT PROVIDER
Where the right of sale arises, the mortgagor may sell the goods as reasonably practicable for the “best price reasonably
obtainable” (s 104(1) NCC). Must credit the mortgagor with the proceeds less any amount the credit provider is entitled to
deduct (s 104(2) NCC). If the proceeds do not cover the credit amount, debtor still liable.
89
Ø
NB: If not “best price reasonably obtainable” – court may order credit provider to credit mortgagor with payment
exceeding the net proceeds of sale (s 106 NCC)
Credit provider entitled to deduct from the proceeds the following amounts: (s 105 NCC)
[a]
[b]
[c]
the amount currently secured by the mortgage, not being more than the amount to discharge the K;
the amount payable to discharge prior mortgages to which the goods were subject;
the amount payable to discharge subsequent mortgages to which the goods were subject and which the credit
provider had notice; ad
reasonable enforcement expenses.
[d]
55.9.8 MORTGAGOR MAY APPLY TO REGAIN POSSESSION OF MORTGAGED GOODS
If credit provider takes possession in contravention of the National Credit Code (i.e. re: notice requirements), court may
order return possession of the goods to mortgagor & make consequential orders to return parties to position before credit
provider took possession (ss 108-110 NCC)
55.9.9 SURRENDER OF MORTGAGED GOODS
Debtor may give notice of intention to return the goods to credit provider, or require the credit provider to sell if they are
in credit provider’s possession if: (s 85(1) NCC)
[a]
a credit K takes the form of a sale of goods by instalments and title in the goods does not pass until all the
instalments are paid;
the credit provider has a mortgage over the goods of the debtor.
[b]
On sale, the proceeds are to be dealt with in an identical manner to s 105 NCC [above] (s 85(7) NCC) and written notice is
to be provided to the debtor stating the gross amount realised on sale (s 85(9) NCC)
55.9.10 ENDING OF CREDIT CONTRACT BY DEBTOR
A debtor or guarantor is entitled to pay out the credit K at any time (s 82(1) NCC). The amount to be paid out is the total of
the following amounts: (s 82(2) NCC)
[a]
[b]
the amount of credit;
the interest charges and all other fees and charges payable by the debtor to the credit provider up to the date of
termination;
reasonable enforcement expenses; and
early termination charges, if provided for in the K
[c]
[d]
55.10 CHANGES TO CREDIT CONTRACT ON GROUNDS OF HARDSHIP
Relief is available to debtors suffering from hardship. A debtor who considers they will be unable to meet their
obligations under a credit K may give a credit provider a “hardship notice” of the debtor’s inability to meet those
obligations (s 72(1) NCC)
Ø
Ø
After giving notice, credit provider has < 21 days to give notice to debtor requiring specified information of
hardship (s 72(2) NCC)
If credit provider does not change terms after hardship notice, debtor may apply to court to change terms of the
credit K (s 74 NCC)
Case example hardship notice
McNally v ANZ Banking Group
Home loan. Hardship notice provided after one of applicants went to prison + birth of
baby & health problems.
Held: Successful before the NSW Fair Trading Tribunal to have their home loan varied
on grounds of hardship.
55.11 REOPENING UNJUST TRANSACTIONS
90
Court may reopen a transaction where it is satisfied that at time of entering, mortgage or guarantee was “unjust” (s 76(1)
NCC) (meaning unconscionable, harsh or oppressive (s 7(8) NCC)).
Ø
NB: A debtor/guarantor must make application to court to reopen < 2 years after credit K has concluded (s 80(1)
NCC)
55.11.1 MATTERS TO BE CONSIDERED BY THE COURT WHETHER TO REOPEN
The court may have regard to the following: (s 76(2) NCC)
[a]
[b]
[c]
[d]
[e]
[f]
[g]
[h]
[i]
[j]
[k]
[l]
[m]
[n]
[o]
[p]
the consequences of compliance, or non-compliance, with the provisions of the K, mortgage or guarantee;
the relative bargaining power of the parties;
whether or not at the time the K, mortgage or guarantee was entered into or changed, its provisions were the
subject of negotiation;
whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any
of the provisions of the K, mortgage or guarantee or the change;
whether or not any of the provisions of the K, mortgage or guarantee impose conditions that are unreasonably
difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the
K, mortgage or guarantee;
whether or not the debtor or guarantor, or a person who represented them, was reasonably able to protect their
interests because of their age or physical or mental condition;
the form of the K, mortgage or guarantee and the intelligibility of the language in which it is expressed;
whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor
or guarantor;
the extent to which the provisions of the K, mortgage or guarantee, or change, and their legal and practical effect
were accurately explained to the debtor, mortgagor or guarantor and whether or not they understood those
provisions and their effect;
whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair
tactics on the debtor, mortgagor or guarantor;
whether the credit provider took measures to ensure that the debtor or guarantor understood the nature and
implications of the transaction and, if so, the adequacy of those measures;
whether at the time the K, mortgage or guarantee was entered into or changed, the credit provider knew, or cold
have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with
its terms or not without substantial hardship;
whether the terms of the transaction or the conduct of the credit provider is justified in light of the risks
undertaken by the credit provider;
whether a mortgage had been created over a prohibited security (e.g. goods that are essential household
property);
the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to
result from excessive interest charges, the rate of interest payable in comparable cases;
any other relevant factor.
55.11.2 COURT ORDERS ON REOPENING TRANSACTIONS
Where court orders a transaction reopened, it has wide power to adjust rights and obligations including: (s 77 NCC)
[a]
[b]
[c]
[d]
reopening an account already taken between the parties;
relieving the debtor and any guarantor from payment of any amount in excess of such amount as the court considers
to be reasonably payable;
setting aside either wholly or partly, or revising or altering an agreement or mortgage given in connection with the
transaction; and
ordering that the mortgagee take such steps as are necessary to discharge the mortgage.
55.11.3 COURT MAY REVIEW UNCONSCIONABLE INTEREST AND OTHER CHARGES
On application of debtor/guarantor, the court may annul or reduce the following fees and charges where it is satisfied they
are unconscionable: (s 78(1) NCC)
91
[a]
[b]
[c]
[d]
a change in the annual % rate under a credit K;
an establishment fee or charge;
a fee or charge payable on early termination of a credit K; or
a fee or charge for a prepayment of an amount under a credit K.
55.11.4 APPLICATIONS BY ASIC
ASIC may make identical applications under the same provisions as a debtor/guarantor where it considers it in the public
interest to do so (s 79 NCC)
55.12 OTHER PROVISIONS OF THE CODE
55.12.1 “CONTRACTING-OUT” PROHIBITED
A provision that seeks to avoid or modify the NCC is void (s 191(1) NCC)
Ø
Ø
Credit provider that uses such provision liable to 100 penalty unit fine ($18,000) (s 191(3) NCC)
Indemnity for liability under the Code is not void and not cannot be declared void on grounds of public policy (s
192 NCC)
55.12.2 CONTRAVENTION DOES NOT MAKE THE CREDIT CONTRACT ILLEGAL
A credit K is not illegal, void or unenforceable because of a contravention of the NCC unless Code contains express
provision to that effect (s 193 NCC)
56 THE NEW PERSONAL PROPERTY SECURITIES LEGISLATION
56.1 INTRODUCTION
Personal Property Securities Act 2009 (Cth)
56.2 OVERVIEW OF THE LEGISLATION
56.3 THE MAIN CONCEPTS OF THE ACT
56.3.1 THE MEANING OF SECURITY INTEREST
Security interest: An interest in personal property provided for by a transaction that in substance secures a payment or
performance of an obligation (s 12(1) PPSA)
Examples of security interest include: (s 12(2) PPSA)
a chattel mortgage
conditional sale agreement
hire-purchase agreement
lease of goods
pledge
trust receipt
consignment
fixed charge
floating charge
assignment or transfer of title securing an obligation
Additionally, the PPSA is deemed to extend to three classes of transaction: (s 12(3) PPSA)
1
2
3
transfers of accounts and chattel paper;
commercial consignments of goods; and
certain leases and bailments of goods.
56.3.2 ENFORCEABILITY, ATTACHMENT AND PERFECTION OF SECURITY INTERESTS
Ø
NB: Personal property is known as collateral if it is the subject of a security interest.
56.3.2.1 Attachment
92
A security interest is enforceable against a grantor in respect of particular collateral when it attaches to the collateral (s
19(1) PPSA). A security interest is attached to collateral when: (s 19(2) PPSA)
[a]
[b]
the grantor has rights in the collateral, or has the power to transfer rights in the collateral to a secured party; and
either value is given for the security interest or the grantor does an act by which the security interest arises.
56.3.3 ENFORCEABILITY AGAINST 3 RD PARTIES
A security interest will be enforceable against a 3rd party if the security interest is attached and one of the following
applies (s 20 PPSA)
[a]
[b]
[c]
the secured party has possession of the collateral;
the secured party has perfected the security interest by control; or
a security agreement is evidenced in writing that is:
[i]
signed by the grantor; or
[ii] adopted or accepted by the grantor by an act or omission that reasonable appears to be done with the
intention of adopting or accepting the writing and contains;
[iii] a description of the particular collateral; or
[iv] a statement that a security interest is taken in all of the grantor’s present and after-acquired property.
56.3.3.1 Perfection
A security interest is perfected when the secured party has done all they can do to protect their security interest from
competing security interests. This is done when the interest is attached to the collateral and: (s 21 PPSA)
Registered
Possession
Control
the security interest is registered in the Personal Property Securities Register; or
the secured party has possession of the collateral (other than as a result of seizure or repossession); or
for certain kinds of collateral (such as bank accounts and investment instruments – shares/debentures) the
secured party has control of the collateral
56.3.4 PRIORITY BETWEEN SECURITY INTERESTS
Priority is relevant when the same personal property is subject to two or more security interests. If the debtor defaults, the
rules determine the order of priority in which collateral is to be applied to meet the claims of the various secured parties.
A perfected security interest has priority over an unperfected security interest
Ø
A perfected interest has priority over an unperfected in the same collateral (s 55(3) PPSA) (e.g. a security interest
which has been registered in the PPS Register will take priority over one which has not)
Priority between unperfected security interests
Ø
Priority between unperfected security interests is determined by the order of attachment of the interests so that
the first unperfected interest to be attached takes priority (s 55(2) PPSA)
Priority between perfected security interests
Ø
Ø
Priority between perfected security interests is determined by the time that perfection occurred (s 55(4) PPSA)
(e.g. one takes possession before another registers their interest – possession takes priority)
NB: The Act confers “super-priority” on interests perfected by control – interests perfected by control have
priority over all other security interests in the same collateral perfected by registration or possession (s 57(1)
PPSA)
93
94
TOPIC 9: BANKRUPTCY (PERSONAL INSOLVENCY)
The purpose of the law of bankruptcy has been explained as follows: (D Rose, Lewis’ Australian Bankruptcy Law)
“It is now generally accepted in the Australian community that, when a person is unable to pay their debts
and is in a hopeless financial position, the law should enable proceedings to be taken, either by the debtor or
by a creditor, so that most kinds of the debtor’s property can be taken and used to pay the creditors in
proportions to the amounts owed to each of them.
It is generally accepted too that, unless the debtor has been guilty of some dishonesty, extravagance or other
improper conduct in financial matters, the law should enable the debtor to be freed from the burden of
accumulated debts so that the debtor can make a fresh start.
It is the modern law of bankruptcy that gives effect to these generally accepted principles.”
57 ADMINISTRATION OF THE ACT
57.1 GENERAL ADMINISTRATION
Ministerial responsibility for the administration of the Bankruptcy Act 1966 (Cth) is vested in the Cth AG, the Minister for
Justice & the Minister for Consumer Affairs.
57.2 INSPECTOR-GENERAL IN BANKRUPTCY
The Inspector-General in Bankruptcy (“IGiB”) is appointed by the Minister (s 16 Bankruptcy Act). The duties are to make
such inquiries and investigations as the Minister may director, or as the IGiB thinks fit with respect to the administration
of, or the conduct of a trustee in relation to a bankruptcy, personal insolvency agreement or administration under the Act.
Ø
NB: The IGiB has wide powers of investigation to carry out these duties (s 12 Bankruptcy Act)
57.3 OFFICIAL TRUSTEE AND OFFICIAL RECEIVERS
The Official Trustee in Bankruptcy is a body corporate (s 18(1) Bankruptcy Act).
Ø
When a person becomes a bankrupt, their property vests, for administrative purposes, in the Official Trustee
unless and until a registered trustee is appointed in which event the bankrupt’s estate will vest in the registered
trustee (s 58(1) Bankruptcy Act)
The Official Receiver’s function is to act for and on behalf of the Official Trustee. May exercise the same powers and
functions as the Official Trustee in the name and on behalf the Official Trustee (s 18(8), s 8AA Bankruptcy Act)
57.4 REGISTERED TRUSTEES
Upon becoming bankrupt a person’s property vests forthwith in the registered trustee who has consented to act as such
for the purposes of the petition on which the bankruptcy took place (s 156A(3) Bankruptcy)
Ø
Ø
If no registered trustee, the bankrupt’s property vests in the Official Trustee (s 58(1) Bankruptcy Act)
The registered trustee’s duty is to the creditors, not the bankrupt.
57.5 COMMON INVESTMENT FUND
N/A
57.6 COURTS EXERCISING BANKRUPTCY JURISDICTION
The Federal Court + Federal Circuit Court have concurrent jurisdiction in bankruptcy. This jurisdiction is exclusive of all
other courts except the High Court (s 27(1) Bankruptcy Act)
95
57.6 APPLICATION OF THE ACT
The Bankruptcy Act 1966 (Cth) applies to all debtors, incl. persons who are not Australian citizens and members of
Parliament.
However, a sequestration order is not to be made against, nor a debtor’s petition presented by: (s 7 Bankruptcy Act)
[a]
[b]
a corporation; or
a partnership of association registered under a law of the Cth or of a State or Territory which provides for winding
up.
This means (e.g. that a Ltd company could not be made bankrupt under the Bankruptcy Act 1966 since the Corporations Act
2001 (Cth) under which the company was formed provides the necessary machinery for its liquidation)
57.6.1 MINORS
The Bankruptcy Act applies to debtors whether or not they have attained the age of 18 years (s 7(1A) Bankruptcy Act).
Ø
NB: However, a minor can only be declared bankrupt in respect of debts which are legally enforceable against the
minor.
57.6.2 PERSONS OF UNSOUND MIND
A person of unsound mind may be made bankrupt as regards debts contracted when of sound mind. In such
circumstances they act through a person authorised or empowered by law to act for them (s 308(c) Bankruptcy Act)
57.6.3 PERSONS IN PRISON
A person in prison has no protection against bankruptcy.
57.6.4 PARTNERSHIPS
A creditor of a partnership may present a petition against the whole partnership if the creditor is entitled to present a
petition against any one of the members of the partnership in respect of a partnership debt.
Ø
They may present the petition against any member or members of the partnership without including the others (s
45 Bankruptcy Act)
A debtor’s petition against a partnership may be presented by all the partners or by a majority of the partners who are
resident in Australia (s 56 Bankruptcy Act)
Ø
A member of a partnership who has executed a personal insolvency agreement must not join in presenting a
petition against the partnership unless the agreement has been set aside or termination or all obligations
discharged or the court gives the member permission to present the petition (s 56A(3) Bankruptcy Act)
58 SCOPE OF THE ACT
The Act prescribes the following courses as the means by which proceedings may be initiated to administer a debtor’s
property under the provisions of the Act.
58.1 BANKRUPTCY ON CREDITOR’S PETIITON
Initiated by one or more creditors on a petition to the court (It is the proceeding usually adopted when the creditors take
the initiative, particular when the debtor is recalcitrant or fraudulent or amount at stake is large)
The petition is considered by the court which, if it thinks fit, will make a sequestration order against the estate of the
debtor, whereupon the debtor becomes a bankrupt (s 43(2) Bankruptcy Act)
58.2 BANKRUPTCY ON DEBTOR’S PETITION
96
Initiated by an insolvent debtor who presents a debtor’s petition together with a statement of affairs verified by affidavit
to the Official Receiver.
On acceptance of the debtor’s petition by the Official Receiver, the debtor automatically becomes a bankrupt (s 55
Bankruptcy Act)
Ø
A debtor who has executed a personal insolvency agreement is not, except with leave of the court, entitled to
present a petition against themselves unless the agreement is finished (set aside; terminated; obligations
concluded) (s 55(6) Bankruptcy Act)
58.3 ADMINISTRATION IN BANKRUPTCY OF ESTATES OF DECEASED DEBTORS
The Act provides for bankruptcy proceedings against the estate of a deceased debtor and enables their assets to be
administered under the rules of bankruptcy (Pt XI Bankruptcy Act)
58.4 ARRANGEMENTS WITH CREDITORS OUTSIDE BANKRUPTCY
The Act contains provision for a simple form of insolvency administration for low-income debtors outside bankruptcy
known as “debt agreements” in Pt IX (ss 185, 186 Bankruptcy Act)
Common-sense reason: A debtor may take the initiative and offer to come to some arrangement with creditors to pay off
their debtors and the creditors may in turn be willing to accept such arrangement and refrain from making the debtor
bankrupt
59 BANKRUPTCY PROCEEDINGS – PETITIONS FOR BANKRUPTCY
A debtor may petition: The bankruptcy of a debtor may be brought about by the debtor presenting a petition to the
Official Receiver. On acceptance of the debtor’s petition by the Official Receiver, the debtor automatically becomes a
bankrupt (s 55 Bankruptcy Act)
The Official Receiver may reject a debtor’s petition if: (s 55(3AA) Bankruptcy Act)
[a]
[b]
it appears that, if the debtor did not become a bankrupt, the debtor would be likely (either immediately or within
reasonable time) to be able to pay all the debts specified in the statement of affairs; and
at least one of the following applies:
[i] it appears that the debtor is unwilling to pay one or more debts to creditors, or is unwilling to pay creditors in
general; or
[ii] before the current petition was presented, the debtor previously became a bankrupt on a debtor’s petition at
least 3 times, or at least once in the period of five years before presentation of the current petition.
More often, a creditor petitions: The creditor may initiate bankruptcy proceedings against a debtor – the creditor asks
the court to make a sequestration order against the estate of the debtor. If the court makes the sequestration order, debtor
thereupon becomes bankrupt (s 43(2) Bankruptcy Act)
Creditors can only present bankruptcy petitions where ALL the following conditions are satisfied: (ss 43(1), 44
Bankruptcy Act)
[a]
[b]
[c]
the debt owing by the debtor to the creditor amounts to > $5000 and such debt is a liquidated sum (i.e. fixed or
certain amount);
the debtor committed an act of bankruptcy (as defined in s 40) < 6 months before the presentation of petition;
at the time when act of bankruptcy committed, debtor had connection with Australia of residential or business kind,
namely;
[i]
was personally present or ordinarily resident in Australia;
[ii] had a dwelling-house or place of business in Australia;
[iii] was carrying on business in Australia, either personally or by means of an agent or manager; or
[iv] was a member of a firm or partnership carrying on business in Australia by means of a partner, A or manager.
97
60 ACTS OF BANKRUPTCY: S 40
In order for a creditor to present a petition, creditor must also show that debtor committed an act of bankruptcy < 6
months before presentation of petition.
The purpose of s 40 is to give a creditor a right to petition where the debtor starts disposing of assets with the intent of
defeating creditor interests.
The Act specifies that a debtor commits an act of bankruptcy in each of the following cases: (s 40(1) Bankruptcy Act)
Starts
paying
creditors
Start
assigning,
transferring,
incurring
obligations
Attempt to
depart/hide
[a]
if in Australia or elsewhere they make a conveyance or assignment of their property for the benefit of
their creditors generally… (if they start paying off creditors)
The conveyance of assignment must be of the whole or substantially the whole of the debtor’s property.
[b] if in Australia or elsewhere – (if they start distributing assets to defeat creditors)
[i]
they make a conveyance, transfer, settlement or other disposition of their property or of any part
of their property;
[ii] they create a charge on their property or on any part of their property;
[iii] they make a payment; or
[iv] they incur an obligation, that would, if they became a bankrupt, be void as against the trustee.
NB: Void dealings against the trustee are:
Ø certain “undervalued transactions” (s 120 Bankruptcy Act)
Ø transfers to defeat creditors (s 121 Bankruptcy Act); and
Ø dealings by debtors having the effect of giving some creditors a preference over others (s
122 Bankruptcy Act)
[c] if, with intent to defeat or delay their creditors:
[i]
they depart or remain out of Australia;
[ii] they depart form their dwelling-house or usual place of business;
[iii] they other absent themselves; or
[iv] they begin to keep house [that is, shutting oneself away to avoid creditors]
Case example acts of bankruptcy
Barton v DCT (1974) 131 CLR
370
Puels v Exelerate Funding Pty
Ltd (2005) 214 ALR 616
B, company director, left for Paraguay. No prior reservation, no forwarding address, no
notice to officers of company.
Held: HC order made for sequestration of debtor’s estate. Had departed or remained
out of Australia (s 40(1)(c)(i)) with intent to defeat/delay creditor interests.
Debtor suddenly leaves meeting, did not return. Didn’t return calls or messages.
Held: FFC order made. Had absented himself as under (s 40(1)(c)(iii))
60.1 BANKRUPTCY NOTICE
The most commonly used “act of bankruptcy” to found a creditor’s petition is a debtor failure to comply with a bankruptcy
notice. The procedure is:
1
2
3
Creditor, who has obtained final judgement, applies to the Official Receiver for issue of a bankruptcy notice;
Bankruptcy notice is serviced on the judgement debtor. Requires debtor to:
Ø Pay; or
Ø Secure payment of; the amount owing under judgement debt within time stipulated (typically 28 days)
Failure to comply with notice constitutes an act of bankruptcy
60.1.1 FORM OF BANKRUPTCY NOTICE
The notice should be in Form 1 per Reg 4.02 Bankruptcy Regulations 1996: (failure to do so may result in notice being held
invalid by the court and thus ineffective to ground an act of bankruptcy: Re Wong; Ex parte Kitson)
NB: Formal defect’s will not invalidate proceedings unless court considers “substantial injustice” has been caused by
defect that cannot be cured (s 306(1) Bankruptcy Act)
98
Ø
Ø
Failure to attach copy of final judgement or order will be invalid as omission could mislead the debtor (Curtis v
Singtel Optus)
Overstating of amount actually due will invalidate notice as it misleads the debtor (Re Williams; Ex parte Alberton
Electrical) (provided the debtor gives notice to the credit under s 41(5) within time given for payment)
60.2 HEARING OF CREDITOR’S PETITION
The next stage is the court hears the creditor’s petition. At the hearing, the court requires proof of: (s 52(1) Bankruptcy
Act)
[a]
[b]
[c]
the matters stated in the petition;
service of the petition; and
the fact that the debt is still owing.
Ø
Ø
[a]
[b]
If it is satisfied with proof of those [above], may make a sequestration order against estate of the debtor.
If not satisfied with proof of those [above], or is satisfied by the debtor of [below], may dismiss petition (s 51(2)
Bankruptcy Act)
that they are able to pay their debts; or
that for other sufficient cause a sequestration order ought not to be made
60.3 EFFECT OF A SEQUESTRATION ORDER
Where, after hearing creditor’s petition, the court makes a sequestration order, the effect of the order is as follows:
[a]
[b]
[c]
the debtor becomes a bankrupt and continues a bankrupt until they are discharged or the sequestration order is
annulled (s 43(2) Bankruptcy Act)
[i]
the property of the bankrupt (not being after-acquired property) vests forthwith in the Official Trustee (or
registered trustee if they exist); and
[ii] after-acquired property of the bankrupt vests, as soon as it is acquired by or devolves on the bankrupt, in the
Official Trustee (or registered trustee if they exist); and (s 58(1) Bankruptcy Act)
no creditor to whom the bankrupt is indebted in respect of any debt provable in in bankruptcy can enforce any
remedy against the person or property of the bankrupt, nor commence legal proceeding without leave of the court (s
58(3) Bankruptcy Act)
60.4 PROCEEDINGS AFTER A SEQUESTRATION ORDER
60.4.1 STATEMENT OF AFFAIRS
A debtor against whose estate a sequestration order is made must < 14 days from the date on which they are notified of
the bankruptcy to: (s 54(1) Bankruptcy Act)
[a]
[b]
file with the Official Receiver a statement of their affairs; and
furnish a copy of the statement with the trustee.
Ø
Must be a joint statement if joint debtors who are made bankrupt (s 52(2) Bankruptcy Act)
A bankrupt debtor must give their trustee their books + passport (s 77 Bankruptcy Act)
60.4.2 MEETINGS OF CREDITORS
The purpose of meeting is to consider how to deal with the bankrupt’s property. Bankrupt has duty to attend and give such
information as is necessarily requested (s 77(1)(c)-(d))
The trustee is to convene a meeting of the creditors of a bankrupt:
[a]
[b]
[c]
whenever the creditors so direct by resolution;
whenever so requested in writing by > 25% in value of the creditors; and
whenever so requested in writing by 10-25% in value of the creditors, and sufficient security for the cost of
holding the meeting has been lodged (Sch 2 s 75-15(1) Bankruptcy Act)
99
whenever the trustee so desires (Sch 2 s 75-25(1) Bankruptcy Act)
60.4.3 DISCOVERY OF THE BANKRUPT’S PROPERTY AND EXAMINATION
Power of discovery: The Federal Court/Federal Circuit Court/Registrars are empowered on application of creditor to
summon the bankrupt (or any “examinable person”) to give evidence concerning the bankrupt (and their “examinable
affairs”) and to produce books that are in possession (s 81 Bankruptcy Act)
Examinable persons are people who: (s 5(1) Bankruptcy Act)
Ø
Ø
Ø
are known or suspected to be in possession of property of the bankrupt;
are believed to be indebted to the bankrupt; and
who may be able to give information about the bankrupt’s examinable affairs.
Examinable affairs of the person mean the person’s: (s 5(1) Bankruptcy Act)
Ø
Ø
Ø
Ø
dealings;
transactions;
property; and
affairs.
60.5 DUTIES OF A BANKRUPT
The duties of the Act are considerable and impose the following: (s 77 Bankruptcy Act)
[a]
[b]
[ba]
[bb]
[bc]
[c]
[d]
[e]
[f]
[g]
forthwith after becoming a bankrupt, give to the trustee:
[i] all books (including books of an associated entity of the bankrupt) that are in possession and relate to any of
their examinable affairs; and
[ii] the bankrupt’s passport, if any; and
attend the trustee whenever the trustee reasonably requires; and
give such information about any of the bankrupt’s conduct and examinable affairs as the trustee requires; and
as soon as practicable after becoming a bankrupt, advise the trustee of any material change that occurred
between the time the bankrupt lodged their statement of affairs and the time the bankrupt became a bankrupt; and
if a material change occurred later, advise the trustee of that change as soon as practicable after the change occurs;
and
attend a meeting of creditors whenever the trustee requires; and
at each meeting of creditors at which the bankrupt is present, give such information about any of the bankrupt’s
conduct and examinable affairs as the meeting requires; and
execute such instrument and generally do all such acts and things in relation to their property and its realisation as
required by this Act or by the trustee or as are ordered by the court upon application of the trustee; and
disclose to the trustee, as soon as practicable, property that is acquired by them, or devolves on them, before their
discharge, being property divisible amongst their creditors; and
aid to the utmost of their power in the administration of their estate.
Consequence of non-compliance may result in arrest of the bankrupt and their committal to prison (s 78(1)(f)
Bankruptcy Act)
Material changes mean changes in particulars that could reasonably be expected to be relevant to the administration of
the bankrupt’s estate (s 77(2) Bankruptcy Act)
60.6 COMPOSITIONS AND SCHEMES BY BANKRUPTS
A debtor who has become a bankrupt may make a proposal to the creditors for: (ss 73-76 Bankruptcy Act)
[a]
[b]
a composition in satisfaction of their debts; or
a scheme of arrangement.
It is the creditor’s decision alone whether to accept the proposal.
100
60.6.1 PROCEDURE
1
2
3
Bankrupt lodges with the trustee a proposal in writing with full particulars (s 73(1) Bankruptcy Act)
The creditors may accept it by passing a special resolution (defined in the Insolvency Practice Rules: Sch 2 s 7550(2)(k) Bankruptcy Act); and
If the creditors accept, the bankruptcy is automatically annulled on the date on which the special resolution passed (s
74(5) Bankruptcy Act)
61 ADMINISTRATION OF THE PROPERTY OF THE BANKRUPT
The matters next requiring attention are:
[a]
[b]
[c]
the types of debts which are provable;
what property of the bankrupt is, and is not, available for payment of debts; and
what general provisions are made for the distribution of property.
61.1 PROOF OF DEBTS
It is necessary for creditors to formally establish their respective debts to the satisfaction of the trustee before being
entitled to share in the distribution of the estate. The procedure is for a creditor to lodge a proof of debt in accordance
with Form 8. (s 84 Bankruptcy Act)
61.2 MUTUAL CREDIT AND SET-OFF
Where the creditor and bankrupt owe each other money, the right of set-off is applied (s 86 Bankruptcy Act)
Two scenarios:
1
2
Bankrupt owing > creditor owing: Set-off; bankrupt owes amount less the amount creditor owes bankrupt (e.g.
bankrupt owes creditor $750; creditor owes bankrupt $500 = bankrupt owes creditor $250)
Bankrupt owing < creditor owing: Set-off; amount the creditor still owes to bankrupt is treated as part of the assets
of the bankrupt (e.g. bankrupt owes $500; creditor owes $750 = $250 debt becomes part of assets of bankrupt)
61.3 SECURED CREDITORS
A secured creditor is still entitled to realise their security notwithstanding the bankruptcy. Alternatively, they may
surrender the security and prove their debt along with the other unsecured creditors.
The courses open to secured creditors are as follows. A secured creditor may: (s 90 Bankruptcy Act)
[a]
[b]
[c]
[d]
rely entirely on security and not lodge a proof of debt at all;
realise their security and prove for any balance due to them after deducting the net income realised (unless the
trustee is not satisfied that the realisation has been effect in GF and proper manner);
surrender their security and prove for the whole of their debt as an unsecured creditor; or
if not realised security, estimate its security value and prove for the balance due to them after deducting the
estimated value.
61.4 PROPERTY AVAILABLE TO CREDITORS
The property available for distribution among the creditors of the bankrupt is the following: (s 116(1) Bankruptcy Act)
[a]
[b]
[c]
[d]
all property that belonged to, or was vested in, the bankrupt at the commencement of the bankruptcy;
Ø NB: see when the commencement of bankruptcy actually is under ‘relation back’ [below].
all property that is acquired by or devolves on the bankrupt after the commencement of the bankruptcy and before
its discharge;
the capacity to exercise, and to take proceedings for exercising, all such powers over property as might have been
exercised by the bankrupt for their own benefit at the commencement of the bankruptcy or before its discharge; and
property or money vested in the trustee by an order of the court, where such property was held by a company, trust
or partnership (provision aimed to prevent sheltering behind a private company/family trust)
101
61.5 COMMENCEMENT OF THE BANKRUPTCY AND THE DOCTRINE OF RELATION BACK
61.5.1 ON CREDITOR’S PETITION
Key question: What is the meaning of the expression “at the commencement of the bankruptcy” (in ‘property available to
creditors’ (s 116(1) Bankruptcy Act))
Doctrine of relation back: If a person becomes bankrupt on creditor’s petition, bankruptcy is taken to have relation
back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy within the 6 months
immediately before the date on which the creditor’s petition was presented (s 115(1) Bankruptcy Act)
When: (s 115(1A) Bankruptcy Act)
[a] a person becomes a bankrupt on creditor’s petition that was based on breach of a bankruptcy notice; and
[b] the time for compliance with the notice was extended; and
[c] the court considers that the application for extension was frivolous or vexatious;
then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the
earliest act of bankruptcy within the 6 months immediately before the date on which the creditor’s petition was
presented.
61.5.2 ON DEBTOR’S PETITION
The bankruptcy of a person as a result of acceptance of debtor’s petition is taken to have relation back to the times
indicated below: (s 115(2) Bankruptcy Act)
Circumstances in which debtor’s petition was presented
or accepted
1 Petition accepted by the Official Receiver under a
direction of the Court
2 Petition presented when ≥ 1 creditor’s petition was
pending against the petitioning debtor, and accepted by
the Official Receiver without a direction from the Court
3 Petition presented when 0 creditor’s petitions pending
but the debtor had committed at least one act of
bankruptcy in the past 6 months, and accepted by the
Official Receiver without a direction from the Court
4 Petition presented when 0 creditor’s petitions pending
and the debtor had not committed any act of bankruptcy
in the past 6 months, and accepted by the Official
Receiver without a direction from the Court
Time to which bankruptcy has relation back and time
of commencement of bankruptcy
Time specified by the Court as the commencement of the
bankruptcy;
Time of commission of the earliest act of bankruptcy on
which any of the creditor’s petitions was based;
Time of commission of the earliest act of bankruptcy within
the 6 months before the petition was presented;
Time of presentation of the petition.
61.6 LIMITATIONS ON THE DOCTRINE OF RELATION BACK
The limits protect bona fide transactions entered into with a debtor prior to bankruptcy.
Nothing in the Act invalidates, in any case where a debtor becomes a bankrupt (s 123(1) Bankruptcy Act)
[a]
[b]
[c]
[d]
a payment by the debtor to their creditors;
a conveyance, transfer or assignment by the debtor for market value;
a K, dealing or other transaction by or with the debtor for market value; or
any transactions to the extent of a present advance made by an existing creditor, if –
[e] the transaction took place before the day on which the debtor became a bankrupt;
[f] the person (other than the debtor) with whom it took place, did not, at the time of the transaction, have notice
of the presentation of a petition against the debtor; and
[g] the transaction was in GF and in the ordinary course of business.
61.7 AFTER-ACQUIRED PROPERTY
102
General rule: ALL property that is acquired or devolves on the bankrupt after the commencement of bankruptcy and
before the discharge vests in the trustee of the bankrupt’s estate (s 116(1)(a) Bankruptcy Act)
Ø
NB: Includes rights of bankrupt as a beneficiary under a will (Silvia v Thomson)
Exception: Transactions between bankrupt and 3rd party in GF and for value are valid interests against a trustee (e.g.
lodging a caveat forbidding registration of instrument affecting land – think Property B) (s 126 Bankruptcy Act)
61.8 CONTRIBUTIONS FROM INCOME OF BANKRUPT
Income the bankrupt derives during their bankruptcy must be contributed towards the bankrupt’s estate (s 139J
Bankruptcy Act)
Ø
Ø
Contribution amount determined by trustee (s 139W Bankruptcy Act) having regard to any information
provided by the bankrupt or other information in trustee’s possession (s 139X Bankruptcy Act)
The bankrupt may apply to vary by written application, demonstrating they will suffer hardship on grounds of:
(s 139T Bankruptcy Act)
o medical need;
o provision of childcare;
o renting in the private rental market;
o cost of commuting to work; and
o changed in household income owing to illness or unemployment
Income is defined broadly, beyond its ordinary definition, and:
Includes: s 139L(a) Bankruptcy Act
[i]
an annuity or pension paid from superannuation, provident, benefit, retirement or ADF;
[ia] an annuity or pension paid from a retirement savings account;
[ii]
an employment termination payment;
[iii] an amount received under a policy of life insurance or endowment insurance;
[iv] an amount received as a beneficiary under a trust to the extent that the amount was paid out of income of the
trust;
[v]
the value of a fringe benefit as defined within the meaning of the FBT Assessment Act 1986 (Cth);
[vi] the value of a loan made by an associated entity, including a loan under which the loan money is not paid to the
bankrupt but is paid or applied at the bankrupt’s direction, and a loan unenforceable at law or in equity;
[vii] the amount of any money, or the value of any other consideration, received by a person other than the bankrupt
from another person as a result of work done by the bankrupt, less expenses (other than capital expenses)
necessarily incurred in connection with the work.
Excludes: s 139L(b) Bankruptcy Act
[i]
child support or child maintenance payment for the maintenance of children of whom the bankrupt has custody; or
[ii]
payments to the bankrupt under legal aid scheme; or
[iii] payment excluded by the regulations.
Ø
NB: The income derived is reduced by any amounts of income tax/child support (s 139N Bankruptcy Act)
61.9 OTHER PROPERTY AVAILABLE TO CREDITORS
Such additional property beyond property at commencement of bankruptcy and after-acquired property (before
discharge) may be available to creditors.
This additional property may result from: [these are explored in greater detail below]
[a]
[b]
[c]
[d]
execution against the debtor’s property prior to their bankruptcy (ss 118-119A Bankruptcy Act)
undervalued transactions (s 120 Bankruptcy Act)
transfers to defeat creditors; and (s 121 Bankruptcy Act)
preferences (s 122 Bankruptcy Act)
103
61.9.1 ADDITIONAL PROPERTY AVAILABLE: PRIOR EXECUTION AGAINST THE DEBTOR’S PROPERTY
Moneys paid from debtor to a creditor due to execution and sale of debtor’s property (less costs of execution), within 6
months before the petition, are available and must be paid to the trustee for redistribution (s 118(1) Bankruptcy Act)
Ø
NB: Once creditor has paid these moneys to the trustee, may prove as an unsecured creditor in the bankruptcy (s
118(3) Bankruptcy Act)
61.9.2 ADDITIONAL PROPERTY AVAILABLE: UNDERVALUED TRANSACTIONS
Transfers of property by a person who later becomes bankrupt are void against the trustee if: (s 120(1) Bankruptcy Act)
[a]
[b]
the transfer took place < 5 years before commencement of the bankruptcy; and
the transferee gave no consideration/consideration less than market value of the property.
Ø That being, market value at the time of transfer (s 120(7)(c) Bankruptcy Act)
Policy: to enable the trustee to recapture the amount of the ‘shortfall in consideration’; not to require the transferee to
pay more for the property than its market value (HC in Vale v Sutherland)
Effect of transfer being void: the trustee must pay the transferee the value of any consideration given by the transferee
(s 120(4) Bankruptcy Act)
The following have no value as consideration: (s 120(5) Bankruptcy Act)
[a]
[b]
[c]
[d]
the fact that the transferee is related to the transferor;
the transferee’s promise to marry or to become the de facto partner of the transferor; or
the transferee’s love and affection for the transferor; or
the grant to a spouse, former spouse or former de facto partner transferor of a right to live at the transferred
property.
61.10 ADDITIONAL PROPERTY AVAILABLE: TRANSFERS TO DEFEAT CREDITORS
Transfer of property by a person who later becomes bankrupt is void as against the trustee if: (s 121(1) Bankruptcy Act)
[a]
[b]
the property would probably have become part of the bankrupt’s estate or would probably have been available to
creditors if the property had not been transferred; and
the transferor’s main purpose in making the transfer was:
[i] to prevent the property from becoming divisible among their creditors; or
[ii] to hinder or delay the process of making property available for division among the creditors.
Main purpose is satisfied if it can reasonably be inferred from the circumstances that at the time of transfer, the transferor
was (or was about about become) insolvent (s 121(2) Bankruptcy Act)
Ø
NB: Must be a ‘reasonable and definite inference’, not merely conflicting inferences of equal probability (Trustees of
the Property of Cummins v Cummins)
Transfer of property includes a payment of money (s 121(9)(a) Bankruptcy Act) as well as mortgage of property (Frost v
Sheehan)
Transfers that are not void against the trustee are if the transferee: (s 121(4) Bankruptcy Act)
[a]
[b]
[c]
gave consideration that was ≥ market value; and
Ø That being, market value at the time of transfer (s 121(9)(c) Bankruptcy Act)
did not know, or could not reasonably have inferred, that the transferor’s main purpose was to
prevent/delay/hinder; and
could not reasonably have inferred at the time of transfer that the transferor was (or was about about become)
insolvent.
Effect of transfer being void: the trustee must pay the transferee the value of any consideration given by the transferee
(s 121(5) Bankruptcy Act)
104
61.10.1 ADDITIONAL PROPERTY AVAILABLE: AVOIDANCE OF PREFERENCES
Where a debtor makes payments/transfers to a creditor with the effect of giving that creditor preference or advantage
over the other creditors, such payment/transfer can be recovered by the trustee from the preferred creditor.
A transfer by a person who is insolvent in favour of a creditor is void against the trustee if the transfer: (s 122(1)
Bankruptcy Act)
[a]
[b]
had the effect of giving the creditor a preference, priority or advantage over other creditors; and
was made in the period that relates to the debtor, as indicated by the following table:
The table:
Description of petition leading to debtor’s bankruptcy
1 Creditor’s petition
2
3
Debtor’s petition presented when ≥ 1 creditor’s petition
was pending against a petitioning debtor or a member
of a partnership against which the debtor’s petition was
presented
Debtor’s petition presented in any other circumstances
Period during which the transfer was made
Period beginning 6 months before the presentation of the
petition and ending immediately before the date of the
bankruptcy of the debtor
Period beginning on the commencement of the debtor’s
bankruptcy and ending immediately before the date of the
bankruptcy of the debtor
Period beginning 6 months before the presentation of the
petition and ending immediately before the date of the
bankruptcy of the debtor
The effect of s 122(1) is that a transfer of property by a debtor to a creditor will be void against the trustee where:
[a]
[b]
[c]
[d]
the debtor was insolvent; [considered below]
the transfer of property was in favour of a creditor of the debtor;
the transfer of property “had the effect of giving the creditor a preference, priority or advantage over other
creditors”; and [considered below]
where (for example, a creditor’s petition was presented) the transfer of property was made in the period beginning 6
months before the presentation of the petition and ending immediately before the date of the bankruptcy of the
debtor.
61.10.1.1 Debtor was “insolvent”
To be “insolvent”, the debtor must be unable to pay their debts as and when they become due and payable (s 5(2)
Bankruptcy Act)
Ø
Have regard to both cash-on-hand but also to moneys that can be procured in a relatively short time – relative to
the nature and amount of the debts (e.g. sale or mortgage, pledge of assets) (Barwick J in Sandell v Porter)
61.10.1.2 “Had the effect of giving the creditor a preference”
Gives preference where is a repayment of whole or part of an existing debt.
Doesn’t give preference where payments are under a “running account” (e.g. for further supplies of goods on credit
terms) (Richardson v Commercial Banking Co of Sydney Ltd)
Ø
NB: Must be an existing creditor. S 122(1)(c) doesn’t apply where the transaction creates new creditors.
61.10.1.3 “Good faith” – DEFENCE FOR CREDITOR RECEIVING ASSIGNMENT
Creditor will be protected if they can establish that they are a payee or purchaser “in the ordinary course of business who
acted in GF and for value (at least market value) (s 122(2)(a) Bankruptcy Act)
61.11 RECOVERY OF MONEYS OR PROPERTY FROM PARTY TO A VOID TRANSACTION
105
The Official Receiver may, by written notice, require a person who has received money/property as result of transaction
void against trustee to pay an amount equal to the money or value of property received.
Recipient of notice may apply to court to contest their liability and have notice set aside (ss 139ZQ-139ZT Bankruptcy Act)
61.12 PROPERTY NOT AVAILABLE TO CREDITORS
The following classes of property are not available: (s 116(2) Bankruptcy Act)
Ø
NB: Shares are distributable (Di Cioccio v Official Tssutee in Bankruptcy)
Trust
property
Household
property
[a]
property held by the bankrupt in trust for another person;
[b]
Sentimental
property
[ba]
Property for
income:
personal
exertion
[c]
Property for
transport
[ca]
the bankrupt’s household property that is:
[i]
of a kind prescribed by the regulations (reg 6.03: kitchen, heating & cooling, bedding &
linen, sufficient household furniture, beds, educational, sporting, recreation items for use
by children/students; and one of each of the following – stereo, radio, washing machine,
dryer, fridge, freezer, telephone, TV, video recorder)
[ii]
identified by a resolution passed by the creditors before the trustee realises the property
personal property of the bankrupt that:
[i]
has sentimental value for the bankrupt; and
[ii]
is of a kind prescribed by the regulations; and
[iii]
is identified by a special resolution passed by the creditors before the trustee realises the
property;
the bankrupt’s property of the bankrupt that is for use by the bankrupt in earning income by
person exertion and:
[i]
does not > $2,600 (reg 6.03B(2))
[ii]
is identified by a resolution passed by the creditors; or
[iii]
is identified by an order made by the court on an application by the bankrupt;
property used by the bankrupt primarily used as transport, the value of which does not > $5,000
(reg 6.03B(4)); or if before the trustee realises the property the creditors determine by resolution a
greater amount, then that greater amount.
subject to ss 128B, 128C and 139ZU (superannuation contributions made to defeat creditors):
[i]
policies of life assurance or endowment assurance in respect of the life of the bankrupt or
their spouse;
[ii]
the proceeds of such policies received on or after the date of bankruptcy;
[iii]
the interest of the bankrupt in:
[A]
a regulation super fund; or
[B]
an ADF; or
[C]
an exempt public sector super scheme.
[iv]
a payment to the bankrupt from such a fund received o or after the date of the bankruptcy,
if the payment is not a pension.
[iva]
a payment to the bankrupt under a payment split where:
[A]
the eligible super plan involved is a regulated super fund, an ADF or exempt super
scheme; and
[B]
the splittable payment involved is not a pension.
[v]
the amount of money a bankrupt holds in a retirement savings account and a payment to
from such account after the date of bankruptcy;
[vi]
a payment to a bankrupt from a retirement savings account received on or after the date of
the bankruptcy;
[vii]
a payment to the bankrupt under a payment split where:
[A]
the eligible super plan involved is a retirement savings account; and
[B]
the splittable payment involved is not a pension or annuity.
any right of action to recover damages or compensation for personal injuries or wrongs to
themselves, spouse or family; or for damages or compensation in respect of wrongful death:
similarly exempt are such damages or compensation actually recovered by the bankrupt, whether
before or after the date of bankruptcy.
106
[d]
Rights of
action &
damages
[e]
[g]
[q]
any right of the bankrupt to recover damages or compensation:
[i]
for personal injury or wrong done to the bankrupt, spouse or family member; or
[ii]
in respect of death of spouse or family member: and any damages or compensation
recovered in respect of such injury
any property that, under an
61.13 POSSESSION AND REALISATION OF PROPERTY BY TRUSTEE
The trustee is required to get in, realise, and distribute the bankrupt’s estate.
The general discretionary powers conferred on a trustee include the power to: (s 134(1) Bankruptcy Act)
[a]
[aa]
[ab]
[ac]
[b]
[c]
[d]
[da]
[e]
[f]
[g]
[h]
[i]
[ia]
[j]
[k]
[m]
[ma]
[n]
[o]
Ø
Ø
sell all or any part of the bankrupt’s property;
accept, with or without terms or conditions, a sum of money payable at a future time as consideration for the sale
of any property of the bankrupt;
lease any property of the bankrupt;
divide among creditors, in its existing form and according to its estimated value, property that, by reason of its
peculiar nature or other special circumstances, cannot readily or advantageously be sold;
carry on a business of the bankrupt so far as is necessary to dispose of it or wind it up;
postpone the winding up of the estate;
prove in respect of any debt due to the bankrupt;
mortgage or charge any of the property of the bankrupt for the purpose of raising money for the payment of the
debts provable in bankruptcy;
compromise any debt claimed to be due to the bankrupt or any claim by the bankrupt;
make a compromise with a creditor in respect of a debt provable in the bankruptcy;
make a compromise in respect of any claim arising out of the administration of the estate of the bankrupt, whether
the claim is made by or against the trustee;
deal with property to which the bankrupt is beneficially entitled as tenant in tail in the same manner as the
bankrupt could deal with it if they were not a bankrupt;
obtain such advice or assistance as the trustee considers desirable relating to the administration of the estate or to
the conduct or affairs of the bankrupt;
refer any dispute to arbitration;
bring, institute or defend any action or other legal proceeding relating to the administration of the estate;
execute powers of attorney, deeds or other instruments for the purpose of carrying the provisions of the Act into
effect; and
employ the bankrupt:
[i]
to superintend the management of the whole, or a part, of the property of the bankrupt;
[ii] to carry on the bankrupt’s trade or business for the benefit of the bankrupt’s creditors; or
[iii] to assist in any other way in administering the property of the bankrupt; and, in consideration of the
bankrupt’s services, make such allowance to the bankrupt out of the estate as the trustee considers
reasonable.;
such allowance out of the estate as the trustee thinks just to the bankrupt/spouse/family member;
superintend the management of the whole, or a part, of the property of the bankrupt; and
administer the property of the bankrupt in any other way.
NB: Trustee may disclaim onerous property (property with too many liabilities); (s 133 Bankruptcy Act)
NB: Trustee may pay off bankrupt’s mortgages with estate (s 136 Bankruptcy Act)
62 DISTRIBUTION OF PROPERTY AND PRIORITY OF DEBTS
The order of payment of debts prescribed by the Act is as follows: (s 109(1) Bankruptcy Act)
Ø
1
NB: The creditors in each classes are paid in full before those in the succeeding class are paid anything. If the
estate is not sufficient to pay in full all creditors in that class, each receives a proportion of the amount due (s
109(11) Bankruptcy Act)
Payments of the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the
107
2
3
4
5
6
7
8
9
bankruptcy, including the remuneration and expenses of the trustee.
In the case of a bankrupt who had signed an authority (under which the debtor authorised a solicitor to be controlling
trustee: s 188 Bankruptcy Act) before the date of bankruptcy, payment of:
[a] the remuneration of the controlling trustee; and
[b] the costs, charges and expenses properly and reasonably incurred by the controlling trustee while the authority
was in force.
In the case of a bankruptcy that occurs < 2 months after a personal insolvency agreement executed by the bankrupt,
the payment of liabilities, commitments and expenses incurred in good faith;
Payment of proper funeral and testamentary expenses in the case of a deceased debtor;
Employee payment amounts (including under a K of employment, but not any forms of leave), not exceeding in the
case of any one employee $3,100 (reg 6.02) due to an employee of the bankrupt being remunerated for services
rendered to or for the bankrupt.
Payment of all amounts due in respect of worker’s compensation where liability for such compensation accrued before
date of the bankruptcy. No priority under this provision to the extent that the bankrupt is indemnified under a K of
insurance (s 109(5) Bankruptcy Act)
Leave payment amounts to employees of the bankrupt in relation to a period before the date of the bankruptcy;
N/A
Payment of:
[a] such preferences, priorities or advantages in favour of any creditor or group of credits as regards any other
creditor or group of creditors; and
[b] such cost, charges and expenses incurred in the interests of the creditors before the date of the bankruptcy, as a
meeting of the creditors, by special resolution, resolves.
62.1 DIVIDENDS
Once the preferential creditors have been paid, the surplus amounts are paid by way of dividend to the unsecured
creditors (s 140 Bankruptcy Act)
Ø
NB: Where the dividend owing to a creditor is < $25 the trustee need not pay the dividend (reg 6.21)
63 DISCHARGE FROM BANKRUPTCY
63.1 AUTOMATIC DISCHARGE AND OBJECTIONS TO DISCHARGE
General rule: Discharge from bankruptcy occurs automatically after 3 years from the date on which the bankrupt filed
their statement of affairs (s 149 Bankruptcy Act)
Ø
Notice of objection may be filed by the trustee with the Official Receiver, which will extend to period to 5 or 8
years depending upon the nature of the objection (ss 149A, 149B Bankruptcy Act)
The grounds of objection to automatic discharge are: (s 149D Bankruptcy Act)
Ø
Ø
[a]
[aa]
[ab]
[ac]
[ad]
[b]
[c]
[d]
[da]
[e]
[f]
[g]
NB: [a]-[h] extends to 8 years;
NB: [j] onward extends to 5 years.
the bankrupt has left Australia and not returned;
any transfer is void against the trustee because of ss 120, 122 – undervalued transactions; preferences
any transfer is void against the trustee because of s 121 – to defeat creditor
N/A
N/A
after the date of bankruptcy the bankrupt managed a co. after disqualification (s 206A Corps Act)
after the date of bankruptcy the bankrupt engaged in MDC in amounts > $3,000
the bankrupt failed to comply with trustee’s request for information on property, income, expected income
the bankrupt provided false or misleading information to the trustee
the bankrupt failed to disclose material particulars of income, expected income
the bankrupt failed to pay contribution amounts as dictated by the trustee
at any time during the 5 years prior, and during, the bankruptcy, the bankrupt:
108
[i]
spent money but failed to explain adequately to the trustee the purpose for which money spent; or
[ii]
disposed of property but failed to explain adequately to the trustee the purpose for property disposed of
while the bankrupt was outside Australia, failed to return by date set by trustee
bankruptcy failed to disclose (whether intentionally or not) material particulars of liability before entering
bankruptcy
[same as [ha]]
N/A
the bankrupt failed to:
[i]
advise the trustee as soon as practicable of any material change occurring between lodging of statement of
affairs and time of bankruptcy (s 177(1)(bb) Bankruptcy Act)
[ii] advise the trustee as soon as practicable after any later change occurs (s 77(1)(bc) Bankruptcy Act); or
[iii] notify the trustee of a change in name or other particulars as required by the Act (s 80(1) Bankruptcy Act)
Ø NB: non-compliance is a strict liability offense (s 80(1A) Bankruptcy Act)
the bankrupt refused or failed to sign document after being lawfully required by trustee to do so
the bankrupt failed to attend a meeting of creditors without obtaining approval of trustee not to attend, or without
reasonable explanation for failure;
the bankrupt failed to attend interview or examination without giving reasonable explanation for failure;
the bankrupt failed to disclose to the trustee the bankrupt’s beneficial interest in any property; and
the bankrupt failed (intentionally or not) to disclose any beneficial interest in any property.
[h]
[ha]
[i]
[ia]
[j]
[k]
[l]
[m]
[ma]
[n]
63.2 EFFECT OF DISCHARGE
Where bankrupt is discharged from bankruptcy, releases them from all provable debts (including secured debts)
except for: (s 153 Bankruptcy Act)
[a]
[aa]
[b]
a debt under a recognisance or bail bond in respect of being prosecuted under law;
liability to pay trustee a contribution from income;
a debt incurred by fraud or fraudulent breach of trust to which bankrupt was party, or a debt obtained forbearance
by fraud; or
liability under a maintenance agreement or maintenance order.
[c]
63.3 ANNULMENT OF BANKRUPTCY
General rule: If the bankrupt’s debts have been paid (the trustee is satisfied) the bankruptcy is automatically annulled on
the date of last payment.
Ø
Bankrupt’s debts mean all the debts that have been proved in the bankruptcy (interest payable, costs, charges) as
well as expenses of administration (remuneration, expenses of trustee) (s 153A Bankruptcy Act)
Court’s power to annul where satisfied that: (s 153B Bankruptcy Act)
[a]
[b]
the sequestration order ought not to have been made; or
the debtor’s petition ought not to have been presented or that it ought not to have been accepted by the Official
Receiver.
Effect of annulment: All sales or dispositions are taken to have been validly done. Trustee may apply property still vests
in the trustee in payment of costs, charges, expenses of the administration (including remuneration and trustee expenses).
The remainder (if any) reverts to the former bankrupt (s 154 Bankruptcy Act)
64 ARRANGEMENTS WITH CREDITORS OUTSIDE BANKRUPTCY
A debtor may enter into certain arrangements with their creditors outside of bankruptcy to avoid some of the
consequences of bankruptcy. These are:
[a]
[b]
Debt Agreement (Pt IX Bankruptcy Act); and
Personal Insolvency Agreement (Pt X Bankruptcy Act) – not filled this out because I’ve hit a wall and fuck it.
64.1 DEBT AGREEMENTS
109
These agreements may be utilised by persons with low levels of debt, few assets and low incomes who cannot afford to
enter into ‘Personal Insolvency Agreements’ under Pt X.
64.1.1 WHEN CAN A PROPOSAL BE SUBMITTED
Debtor’s below a “threshold amount” ($47,374.60 – s 185C(5) Bankruptcy Act) may put forward a “debt agreement
proposal” (‘DAP’) to creditors via the Official Receiver. [See below for where can’t submit proposal]
The procedure is initiated by this proposal, and must: (s 185C(2) Bankruptcy Act)
[aa]
[a]
[b]
[c]
[d]
be in approved form; and
identify the debtor’s property that is to be dealt with under the agreement; and
specify how the property is to be dealt with; and
authorise a specified person to deal with the identified property in the way specified; and
provide that all provable debts under the agreement rank equally and if the total amount paid by the debtor is
insufficient to fully meet those debts, those be paid proportionately; and
provide that a creditor is not entitled to receive more than the amount of the debt; and
provide that the amount of the debt is to be ascertained as at the time when acceptance of the proposal is recorded
in the National Personal Insolvency Index; and
N/A
N/A
be signed by the debtor; and
specify the date on which the debtor signed
[e]
[f]
[g]
[h]
[i]
[j]
Ø
Ø
Ø
NB: Cannot provide for the transfer of property (excluding money) to a creditor (s 185C(2) Bankruptcy Act)
NB: DAP cannot be given jointly by ≥ 2 debtors (s 185C(2E) Bankruptcy Act)
NB: Statement of affairs must be given with DAP (s 185D Bankruptcy Act)
64.1.2 WHEN A PROPOSAL CAN’T BE SUBMITTED
A debtor cannot make a proposal for a debt agreement if: (s 185C(4) Bankruptcy Act)
[a]
[b]
[c]
[d]
the debtor any time in < 10 years has been; a bankrupt (unless annulled), party to a debt agreement, or given an
authority under s 188 (debtor authorising a trustee or solicitor to be controlling trustee)
the debtor’s unsecured debts > $47,374.60; or
the debtor’s income in < 3 years prior has been > $47,374.60; or
the debtor’s after tax income in the year beginning at the proposal time is likely to be > $35,530.95.
64.1.3 EFFECT OF PROPOSAL ACCEPTED BY OFFICIAL RECEIVER
If accepted, the Official Receiver will record the acceptance in the National Personal Insolvency Index (NPII).
Ø
Ø
NB: Debt agreement terminated if debtor becomes a bankrupt (s 185R Bankruptcy Act)
NB: Debt agreement may be voidable by debtor, creditor or Official Receiver if DA did not comply with statutory
requirement or statement of affairs omitted material particular.
While a debt agreement is in force and details entered into NPII, a creditor cannot: (s 185K Bankruptcy Act)
[a]
[b]
[c]
[d]
present a creditor’s petition;
proceed further with an earlier creditor’s petition;
enforce a remedy against the debtor; or
take a fresh step in legal proceedings in respect of provable debt.
64.2 PERSONAL INSOLVENCY AGREEMENTS
64.3 PROCEDURE
110
64.4 MEETING OF CREDITORS
64.5 PROCEDURES UNDER PT X AND ACTS OF BANKRUPTCY
64.6 DUTIES OF SHERIFF IN RELATION TO EXECUTIONS
64.7 OFFENCES
111