MLC101 LAW FOR COMMERCE 2022
SEMINAR 6 ANSWER GUIDES
Topic 5: Termination and Breach of a Contract
Textbook Chapter 11 (Tutorial activities Question 10, p. 223)
Eunice has a successful printing and copying business. She goes through a lot of paper each
day and relies heavily on the prompt, daily delivery of quality paper from her supplier, Alex.
A term of the contract of delivery (there’s a contract) states that delivery of paper to Eunice
must occur each day at 7.00 am. On Wednesday, Alex telephones Eunice to inform her that
he is changing his delivery route and will be delivering paper to her premises every second
day at 4.00 pm. This does not suit Eunice at all, and she would like to terminate the
contract.
Advise her.
ANSWER GUIDE
ISSUE: The broad issue is whether Eunice can terminate the contract between her and Alex.
The specific issue is whether the term is a condition or a warranty.
RULES: A condition is of fundamental importance that goes to the root of the contract: DTR
Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423. Breach entitles innocent party
to rescind and/or claim damages: Associated Newspapers Ltd v Bancks (1951) 83 CLR 322.
A warranty is of a less important term of the contract (is subsidiary/collateral to the main
purpose of the contract): Bettini v Gye (1876) 1 QBD 183. Breach entitles innocent party to
damages only. There is no right to terminate.
APPLICATION: Prompt questions:
•
•
Taking the facts into account, is the term a condition or a warranty?
“She goes through a lot of paper each day and relies heavily on the prompt, daily
delivery of quality paper from her supplier” and “delivery of paper to Eunice must
occur each day at 7.00 am”. Eunice stated that it is important for her, therefor it will
be considered as a condition
Would Eunice have entered into the contract if she knew Alex would not comply
with the term? She wouldn’t probably enter into the contract because she need a lot
of paper and she rely on the daily everyday delivery so much
•
•
•
Was there a ‘time is of the essence’ clause in the contract? no, but because she
relied on the daily delivery, if the delivery was late she will be negatively affected by
it
Does the breach go to the root of the contract? yes, Eunice clearly state or showed
how important is the daily delivery
Would Eunice be able to terminate the contract? yes, because it’s a breach of
condition, she will be able to terminate and/or seek damages.
CONCLUSION: Going by the analysis, state whether Eunice can terminate the contract.
(Notes: In the light of Eunice’s needs, it is unlikely she would have entered into the contract
unless assured of substantial compliance by Alex. Therefore, although not ‘of the essence’,
the time clause would probably be regarded as going to the root of the contract.)
Topic 5: Remedies
Textbook Chapter 12 (Tutorial activities Question 10, p. 238)
Jerry opens a delicatessen specialising in selling sandwiches and rolls to health-conscious
university students. He signs a one-year contract with Vogel Breads to supply him with
bread made from organic wheat. On 1 April 2020, an outbreak of a virus contaminates much
of the organic wheat crop. Supplies cannot resume for a month. Jerry tries to find another
supplier but is unable to do so. As a result, Jerry has to close the business for the month,
losing $25,000 in profit. He is also unable to fulfil a contract to supply the bread at a
national scout jamboree that coincidentally is scheduled for that week. Jerry loses $120,000
on that contract. Jerry wishes to terminate the contract with Vogel Breads and sue for
damages.
(a)
Advise the parties whether Vogel has committed a breach of the contract, allowing
Jerry to terminate and sue for damages, and
(b)
advise Jerry what damages he may be entitled to?
ANSWER GUIDE AND PROMPTS
(a) Whether Vogel Breads has committed a breach, allowing Jerry to terminate and sue for
damages
ISSUE: The issue is whether the failure to deliver ‘organic wheat’ for one month allows Jerry
to terminate and/or seek damages for breach or can Vogel excuse himself by claiming the
outbreak of the virus as a frustrating event.
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RULES: Consider the rules regarding breach (refer to para [11.260] on p. 212 of textbook),
and termination by frustration in brief (refer to pp. 214 to 221 of textbook). Support them
with relevant case law, if any, and state the available remedies.
Prompts: Hints/Key questions to be considered:
• Does breach occur?
• Does the failure to perform need to be deliberate?
• Can breach occur if one party, though willing, is unable to perform?
• Regarding frustration, do events that cause inconvenience or cause one party to
incur increased costs or reduced profits considered as frustrating?
Talk about the element of breach by frustration, and does it pass all the limitation.
Condition or warranty?
APPLICATION: Using the rules and the key questions stated above, analyse whether there is
a breach or frustration.
Prompts:
• To evaluate whether it is a termination by frustration, how long is the contract
affected for? Would that count as frustration?
• If not, would it be breach?
Vogel is willing but unable to perform the basic contractual obligation due to the outbreak
of a virus contamination. However, this is the case only for one month within a twelvemonth contract. Although the contract is breached, it is unlikely to have been repudiated.
The result is that Jerry would be able to sue for the breach, but he would not be permitted
to terminate the contract.
A frustrating event automatically terminates the contract and discharges the parties from
their obligations, so that the losses suffered by Jerry would not be compensable. However,
events that cause inconvenience or cause one party to incur increased costs or reduced
profits are not frustrating events: Tsakiroglou & Co v Noblee Thorl GmbH [1962] AC 93.
Further, there is no frustration where the change that occurred is not for a sufficiently long
period in relation to the contract: National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC
675. Thus, it is unlikely that the outbreak of the virus would be regarded as a frustrating
event, as the supplies only stopped for a month. It is more likely to be regarded as
unfortunate event that reduced Vogel’s profits, but not one that has radically transformed
the contract, as the granting of the injunction did in Codelfa Construction Pty Ltd v State Rail
Authority of NSW (1982) 149 CLR 337 or the destruction of the hall did in Taylor v Caldwell
(1863) 3 B & S 826; 122 ER 309. The contract would not have been frustrated.
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CONCLUSION: Going by the analysis state whether the contract is breached or there is
frustration and, consequently, what remedies Jerry has at his disposal?
The contract has not been repudiated or frustrated and so Jerry cannot terminate the
contract.
has been breached and so Jerry can sue for damages.
(b) What damages would Jerry be entitled to?
ISSUE: The basic legal issue is what damages Jerry is entitled to receive. Can he recover both
$25000 loss of profit and $120,000 loss on the contract or either of them or none?
RULES: State what the object of an award of damages is (see Tabcorp Holdings Ltd v Bowen
Investments PL (2009) 236 CLR 272). Discuss the rules regarding remoteness of damages –
two limbs of Hadley v Baxendale (1854) 9 Exch 341:
(a) losses arising naturally: i.e., ‘a serious possibility’ ‘a real danger’ and ‘not unlikely’: H
Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1 QB 791.
(b) losses should be within contemplation of the parties at the time the contract was made.
Another relevant case law is Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1942]
2 KB 528. Also, discuss whether there is an obligation on the innocent party to mitigate the
losses he or she suffers as a result of the breach: Payzu Ltd v Saunders [1919] 2 KB 581.
APPLICATION: Prompts:
•
•
•
Taking the rules into account, do Jerry’s losses satisfy the object of award of
damages? Do they satisfy the ‘but for’ test? yes
Are the losses (either or both) too remote from the breach as per the two limbs test
laid down in Hadley v Baxendale?
If not, which of the losses ‘arises naturally’ from the breach (first limb) and which
one is a ‘special loss’ (second limb)? Why is it so? And did Jerry attempt to mitigate
his losses? If yes, how?
CONCLUSION: Going by the analysis, state which of the losses Jerry would be able to
recover and why.
Answer guide: The object of an award of damages is to compensate the innocent party for
his losses, putting them in the position they would have been in had the breach not
occurred: Tabcorp Holdings. The basic question is whether either or both kinds of losses are
too remote from the breach: Hadley v Baxendale. In this problem, it is clear that the normal
loss of profit that Jerry incurred when he was forced to shut down the shop ($25,000) would
be a loss “arising naturally” (first limb) from a breach like this (i.e., “a serious possibility” “a
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real danger” and “not unlikely”: Parsons). However, the $120,000 loss is a “special” loss
(second limb) and would only be recoverable if Jerry had brought it to the notice of Vogel. It
appears that there is no evidence that he did so. Thus, Jerry would be able to recover
$25,000 damages, but not the $120,000 loss: Victoria Laundry v Newman Industries.
It is important to note when discussing damages that there is an obligation on the innocent
party to mitigate the losses he or she suffers as a result of the breach: Payzu v Saunders.
Jerry has attempted to mitigate by seeking an alternative supplier.
Topic 5: Remedies
Textbook Chapter 12 (Tutorial activities Question 11, p. 238)
The Princess Ruby sets off from Sydney on a cruise around the South Pacific. On the third
night, several passengers fell ill and were found to have COVID-19. The ship headed back to
Sydney and the infected passengers were quarantined in the ship’s hospital. It subsequently
emerges that the Captain was aware that a crew member had symptoms but decided to not
to take any action because he did not want to ruin the trip. The cruise company admits
liability for breach of an implied term in the contract and offers compensation for the cost of
the trip. However, the passengers seek your advice as to whether they can claim damages:
(a) for the loss of enjoyment and pleasure that resulted from the breach; and
(b) punitive damages to punish the cruise company for the gross negligence of its captain.
ANSWER GUIDE
ISSUE: The issues are whether the passengers can be compensated for disappointment and
whether punitive or exemplary damages will be awarded against the captain in the law of
contract.
RULE: The general rule is that damages are not recoverable for disappointment, distress,
injured feelings or mere inconvenience. However, where the distress or disappointment
arises from breach of an express or implied term that the promisor will provide the promisee
with pleasure and enjoyment, such damages are recoverable: Jarvis v Swans Tours Ltd [1973]
QB 233; Baltic Shipping Co v Dillon (1993) 176 CLR 344; Moore v Scenic Tours [2020] HCA 17.
APPLICATION: The exception to the general rule applies to our facts because the contract is
intrinsically about pleasure, i.e., a holiday cruise. It is therefore likely that the passengers
will be compensated for the loss of enjoyment on their cruise and the quarantine that was
endured as a result of the captain’s breach. However, no punitive damages are available for
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breach of contract. This is because the captain did not engage in any intentional malicious
behaviour in relation to the breach. On the facts, he did not take any action about the crew
member who had symptoms because he did not want to ruin the trip for the passengers.
CONCLUSION: The passengers can claim damages for the loss of enjoyment and pleasure
that resulted from the breach, but not punitive damages.
SEMINAR 7 ANSWER GUIDES
Topic 6: Consumer Protection
Textbook Chapter 13 (Tutorial activities Questions 42 and 43, p. 318)
42. Alice Plump needs to lose some weight. She sees a half-page newspaper advertisement
by Skinny is Cute (SIC) Pty Ltd. The advertisement reads “Lose up to 10kg of weight for a
$10 program fee”. In small print, at the foot of the advertisement, are the words
“Purchase of food is an additional cost”. In the centre of the advertisement is a photo of
JH, a famously skinny model, looking very skinny and referred to as “one of the
program’s ambassadors”. The advertisement also states (again in small print) that some
of the meals are gluten free. Alice is excited and visits SIC’s city centre to sign up. To her
disappointment, an employee tells her that to join the weight loss program she will
have to sign up for their weekly meals (at a minimum cost of $150 per week). Alice is
further disappointed when she discovers that none of SIC’s meals are gluten free. She
also reads in an article in the newspaper that JH is, in fact, not an ambassador of the
program.
Advise Alice of her rights under the ACL.
ANSWER GUIDE
ISSUE: What are Alice’s rights under the ACL?
RULE: Section 18 of the Australian Consumer Law provides: A person must not, in trade or
commerce, engage in conduct that is misleading or deceptive or is likely to mislead or
deceive.
The test for determining whether the conduct is misleading is whether or not a reasonable
member of the target audience would be led into error: ACCC v TPG Internet Pty Ltd [2020]
FCAFC 130; ACCC v Turi Foods Pty Ltd [2013] FCA 665; ACCC v Reckitt Benckiser (2016) FCA
424.
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Section 29(1) prohibits a wide range of specific forms of false or misleading
representations, in trade or commerce, in connection with the supply of goods and
services. The relevant misrepresentations are:
•
s 29(1)(a): misleading representation that goods are of a particular standard,
quality, value, grade, composition or model or have had a particular history or
particular use; -
•
s 29(1)(e) to (g): misleading representation regarding a testimonial and
sponsorship;
•
s 29(1)(i): misleading representation regarding the price of goods and services.
APPLICATION: Prompts
• What is the misleading conduct here?
• Would an ordinary or reasonable person of the class (on our facts, those persons
seeking to lose weight) be misled by the advertisement under s 18?
• Can the small print at the foot of the advertisement dispel the misleading conduct?
• Is it possible to argue that a reasonable person would conclude that the entire cost
could not possibly only be $10 program fee?
• If there’s a breach of both s 18 and s 29, are the penalties the same?
(In this Application section, you should discuss the following:
- s 29(1)(i): The advertisement is likely to constitute misleading or deceptive conduct –
to lose weight there is not only a $10 membership fee, but an additional cost to
purchase food on a weekly basis. The small print at the foot of the advertisement is
not sufficiently prominent to dispel the misleading conduct: TPG.
-
s 29(1)(a): Also misleading is that the frozen meals are gluten free (Reckitt Benckiser)
and;
-
s 29(1)(e) to (g): that JH is an ambassador of the program.
-
S18 – each of the above breaches of s29 is also a breach of s18
Remedies
A breach of s 18 results in the award of damages,
but a breach of s 29 carries pecuniary penalties and may result in criminal prosecution
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CONCLUSION: Your conclusion should be consistent with your analysis.
43. After her disappointments at SIC, Alice now considers buying an exercise bike. She visits
“Beta Bikes” and approaches the sales assistant, Marcia. After a long discussion, Marcia
recommends the “Upgraded Amateur Choice” model as suitable for Alice’s needs. She
particularly recommends it because it has pedal straps that reduce the risk of slippage
while riding. Alice is persuaded and purchases the bike for $1,200, taking note of the
packaging which reads “Upgraded Amateur Choice – the superior exercise bike for
amateurs”. Soon after purchasing the bike, while exercising, the pedal straps snap and
Alice falls on the floor breaking her hip. She spends some time in hospital and is off
work for two months. Alice returns to the store and seeks a refund. Marcia shows her a
clause in the contract she signed, which reads:
The liability of Beta Bikes is hereby limited to the repair or replacement of
goods. In no event shall Beta Bikes be liable other than for the repair or
replacement of goods.
Advise Alice Plump of her rights, if any, under the consumer guarantees in the ACL.
ANSWER GUIDE
ISSUE: Whether Alice is protected under the consumer guarantees regime in the ACL. More
specifically, whether Alice a consumer and which sections of the consumer guarantees have
been breached. There is also the issue of whether the exclusion clause is enforceable and
remedies.
RULES: In order for the consumer guarantees to apply, Alice must be a “consumer”: s 3(1) –
a person acquires goods as a consumer if the amount payable does not exceed $100,000
(previously $40,000) or if they are of a kind ordinarily acquired for personal, domestic or
household use or consumption).
Under s 54 of the ACL, goods must be of acceptable quality – fit for common purpose,
acceptable in appearance and finish, free of defects, safe and durable (s 54(1)).
When considering what ‘acceptable’ means, factors will include price, statements made
about the goods etc: s 54(2).
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Under s 55(1), goods must be fit for a disclosed purpose. Disclosed purpose refers to the
consumer making known to the supplier that the goods must be fit for a particular purpose,
and the consumer relies, and it is reasonable for the consumer to rely, on the supplier’s skill
and judgment: s 55(2).
Under s 64 – exclusion/limitation clauses are void.
S 260(a) – a major failure occurs where a reasonable consumer fully acquainted with the
nature and extent of the failure would not have acquired the goods.
S 260(e) – major failure if the goods are unsafe.
S 259(3) – If major failure, consumer may reject goods or recover compensation for any
reduction in the value of the goods below the price paid.
S 259(4) – A person can seek compensation for reasonably foreseeable loss caused by the
breach (which could include her injuries, hospital costs and loss of income).
S 64(1) – A term that purports to exclude, restrict or modify the application of statutory
guarantees is void.
APPLICATION: On the facts, Alice is a consumer, as the bike costs less than $40,000. The
bike is not of acceptable quality, as it is not free from defects. Thus, s 54 of the ACL is
breached. Further, Alice has made her purpose known to Marcia when purchasing the bike
from Beta Bikes (the facts state after a long discussion), and she does in fact rely on Marcia;
it is reasonable for her to do so, given that she is a sales assistant. The disclosed purpose
required the bike to have straps to ensure her feet would not slip while peddling, which it
did. Therefore, the s 55 guarantee has also likely been breached.
Under s 260, the breaches of ss 54 and 55 constitute major failure. The goods are not of
acceptable quality because they are unsafe: s 260(e). Alice would not have bought the bike
if she knew of the defects. As it is a major failure, Alice may reject goods or recover
compensation for any reduction in the value of the goods below the price paid: s 259(3).
Marcia has shown Alice a limitation clause. Under s 64, liability cannot be limited to repair
and replacement in a contract such as this. Thus, the statutory guarantees apply.
Alice will be able to seek compensation for reasonably foreseeable loss caused by the
breach (which could include her injuries, hospital costs and loss of income): s 259(4).
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CONCLUSION: Alice can exercise her rights under ss 54, 55, 64, 259 and 260 of the ACL as
indicated above.
45. Tenzin and Lobtse are Mongolian students studying at an Australian university in
Melbourne. Under the terms of a student visa, they are allowed to work for 40 hours a
fortnight. They both sign a contract with Kleen Cleaners and begin work of cleaning
toilets in a 10-storey office block in the CBD. For two months, they have not been paid.
They speak to the manager who informs them that under the contract they signed, they
agreed that the first three months was a “training period” for which there was no
payment. Tenzin and Lobtse consult you. It is true that the contract does in fact contain
this term, but (a) they did not read it and (b) they received no training during that
period.
Please advise them.
ANSWER GUIDE
ISSUE: The main issue is whether Tenzin and Lobtse can take action for breaches of the ACL.
RULE:
S31: “A person must not engage in conduct that is liable to mislead persons as to the
availability, nature, terms or conditions, or any other matter relating to employment
offered by the person or another person.”
S20 of the Australian Consumer Law (ACL), a person must not, in trade or commerce,
engage in conduct that is unconscionable, within the meaning of the unwritten law from
time to time.
(This means that the common law rules apply, which were established in the Amadio case
(Commercial Bank of Australia Ltd v Amadio):
The weaker party, must prove:
▶ They were under a special disadvantage in relation to the transaction so that they
could not decide what was in their best interests; and
▶ The other party knew, or should have known, of the disadvantage; and
▶ Nevertheless, took advantage of their superior position.
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(Subsequent cases such as Louth, Kakavas and Garcia further develop the rule established in
the Amadio case and these should be referenced only if the given facts indicate that they
are relevant, which is not the case here)
Consider also the legal principles under the law of contract:
(a) whether the term is in fact included in the contract that they signed but did not read (see
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 [see para 9.260]);
(b) whether the failure to offer training in the unpaid period is a repudiatory breach for
which they terminate and seek damages (see chapter 11).
Note:
- S18 does not apply as ‘trade or commerce’ does not encompass employment
situations. (S18 “A person must not, in trade or commerce, engage in conduct that is
misleading or deceptive or is likely to mislead or deceive”)
- s21 does not apply because employment is not “supply of goods & services” (s21
prohibits unconscionable conduct in connection with provision of goods or services)
Remedies:
S31 is an “unfair practices provision”. Contravention of the “unfair practices” provisions
may give rise to an action for:
(a) a criminal penalty: ss 151– 168;
(b) a pecuniary penalty: s 224(1);
(c) an injunction: s 232;
(d) damages: s 236; and
(e) other orders (eg rescission or variation of contracts): ss 237 and 243.
Contravention of the unconscionable conduct provisions does not give rise to a criminal
offence. However, a pecuniary penalty may be imposed (see [13.940]). Civil remedies, for
example, an injunction, or damages for the loss suffered.
APPLICATION: Prompts:
Students to discuss
CONCLUSION: Students to discuss
SEMINAR 8 ANSWER GUIDES
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Textbook Chapter 14 (Tutorial activities Question 19, p. 364)
Kitchen Magician is a company that manufactures and sells kitchen appliances that have
become very popular with the Australian public. The company’s current and most popular
model is the KM55, which is able to chop food, blend food and cook food, among other
features. Kitchen Magician has sold 100,000 KM55 appliances to both household and
commercial users in Australia.
Most KM55 appliances work exactly as they should, but a small number of customers have
had very bad experiences. In a small number of the appliances, the vibrations produced as
the KM55 chops and blends food cause the lid to come off the appliance during operation.
As a result, hot food sprays out – this has damaged other property in the homes of KM55
owners and has also caused burns to people who were near the malfunctioning appliances.
About 200 KM55 machines, out of the 100,000 sold in Australia, have been affected. The
impacts on customers have ranged from minor (minor property damage) to major
(extremely severe burns).
Kitchen Magician’s investigations have shown that the issue arises due to a very small fault
in production, appearing in only a small number of appliances. During the product
development phase, Kitchen Magician had arranged for full testing of a sample of the KM55
appliances before releasing the KM55 for sale to the public and no faults were detected.
However, if a larger number of appliances had been tested, the fault would have been
identified. More extensive testing would have increased Kitchen Magician’s costs
significantly and delayed the release of the product into the market.
Advise Kitchen Magician whether it is liable, in the tort of negligence, for the property
damage and physical injury caused by the faulty KM55 appliances?
(Note: You have been asked to discuss the tort of negligence. Therefore, do not refer to any
consumer protection legislation.)
ANSWER GUIDE
ISSUE: The broad issue is whether Kitchen Magician (KM) is liable for property damage and
physical injury caused by their faulty product. The specific issue is whether all the elements
of negligence are satisfied. There is also the issue of whether there are defences available to
KM.
RULES:
Whether a Duty of Care was owed
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•
Manufacturer of products and consumer, relating to the quality of goods is an
established category of duty of care: Donoghue v Stevenson [1932] AC 562 (the
neighbour principle for duty of care).
Was that Duty of Care Breached?
State the two-step breach of duty test in the Wrongs Act 1958 (Vic), s 48; Wyong Shire
Council v Shirt (1980) 146 CLR 40:
Step 1: S 48(1)(a) and (b) was the risk (of harm/injury) foreseeable and not
insignificant; and
Step 2: S 48(1)(c) whether a reasonable person (in the defendant’s position) would
have taken precautions.
The factors to consider as to how a reasonable person would have responded are:
s 48(2):
(a) Probability of the risk of harm/injury: Bolton v Stone [1951] AC 850;
(b) Gravity of the harm/injury: Paris v Stepney Borough Council [1951] AC 367;
(c) Burden of eliminating the risk Woods v Multi-Sport Holding Pty Ltd (2002) 208 CLR
460; and
(d) Utility of the defendant’s conduct: Watt v Hertfordshire County Council [1954] 1
WLR 835
Causation
s 51(1)(a) – Test or element of ‘factual causation’ – the ‘but for’ test, i.e., that the damage
was caused by the defendant’s negligence;
Remoteness (of damages)
s 51(1)(b) – ‘Scope of liability’, whether the damage was too remote.
Defences
Contributory negligence: S 26 allows for a reduction in damages to the extent of the
plaintiff’s own negligence.
APPLICATION:
Duty of care
It is reasonably foreseeable that both personal and commercial customers will be impacted
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by KM’s supply of the KM55 appliance into the market. It is reasonably foreseeably that
KM’s customers will be affected by the conduct of KM. A duty of care most likely exists.
Breach of duty of care
Step 1:
S 48(1)(a) and (b): The risk is foreseeable and not insignificant because the lid comes off the
appliance during operation and hot food sprays out.
Step 2:
S 48(1)(c): In deciding whether a reasonable person (in the defendant’s position) would
have taken precautions, we look at the factors in the Wrongs Act s 48(2) and Wyong:
(a) The probability of the harm is very low – only about 200 appliances out of the
100,000 sold are subject to the fault. This is a rate of 1 in 500. KM can argue that
their situation is similar to Bolton v Stone, which involved a low probability of harm.
(b) The gravity of the harm is high, if injury were to occur. On the facts, in some cases,
extremely severe burns have resulted. However, it can also be low because there are
some instances where only minor property damage has occurred.
(c) The burden of eliminating the risk also seems to be high. KM has arranged for full
testing of a sample of the appliances, and more extensive testing would have
increased its costs, and also caused delays in launching the KM55 into the market.
Given the average rate that the fault occurs across the population of the appliances,
KM may have had to test approximately 500 appliances in order for the fault to
appear. KM may argue that their situation is similar to Woods v Multi-Sport Holding,
where it was held that the burden of eliminating the risk was too high due to the
costs or impracticality.
(d) There is no social utility on KM’s part in not conducting tests on a larger number of
appliances, so this factor is not relevant.
Note: These factors do not carry equal weight. The court will look at the facts when deciding
which factor is more important. Thus, answer could go either way. You will have to balance
the above factors and argue your case.
Causation
No causation issue arises here because the ‘but for’ test would be satisfied. But for Kitchen
Magician’s negligence in manufacturing the KM55, the property damage and personal
injuries would not have occurred.
Remoteness would also be satisfied – the damage is of a kind that is reasonably foreseeable
given the type of good (kitchen appliance) at issue.
Defences
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If KM is held liable in negligence, no defences will be available to them. This is because the
facts state that the problem that the small number of customers faced was due to a fault in
the production. Nothing on the facts suggest that the customers were operating the
appliance incorrectly.
CONCLUSION: Your conclusion depends on your analysis as to whether KM has breached
their duty of care.
Textbook Chapter 14 (Tutorial activities Question 20, p. 364)
Pauline graduates from the KL Horticultural College in 2019 with a major in floristry.
Immediately after graduating, she sets up her own cut flower business (“Blossoms”). In early
2020, things were going well, and she contemplates expanding the business. She meets with
Daniel Sloan, an accountant and financial adviser. They discuss Pauline’s expansion plans,
and Daniel agrees to review her financial situation and prepare a business plan.
A month later, they meet again. After Daniel has examined her financial position and
researches the cut flower market, he advises Pauline that she is in a sound position to
expand and recommends that she borrow money to set up a store in an upmarket part of
town. Pauline relies on him and decides to act on his advice. In March, she goes to Eastpac
and asks to borrow $30,000. After Eastpac examines the financial statements prepared by
Daniel, it agrees to lend Pauline $30,000. Pauline then signs a five-year lease, purchases
some equipment and hires a web-design firm to design her web page.
Shortly after this, things turn sour. Daniel admits he did not adequately factor in her preexisting debts, underestimated the significant establishment costs associated with setting up
a business in the upmarket area and the extent to which online florists have eroded the
traditional retail market. Pauline has to terminate the lease (and pay six months’ rental) and
defaults on the Eastpac loan. She has already spent $7,500 of her own money on the web
page and other costs. Eastpac is faced with significant losses on the loan as much of the loan
was unsecured.
Advise Pauline and Eastpac about their prospects of success in an action against Daniel in
the tort of negligence. (Do NOT discuss causation and remoteness.)
ANSWER GUIDE
ISSUE: The broad issue is whether Pauline and Eastpac will succeed in their action against
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Daniel in the tort of negligence. The specific issue is whether Daniel owes Pauline and
Eastpac a duty of care for negligent statements causing economic loss and if so, whether the
duty has been breached. Also, whether a defence was available.
RULE:
Duty of care
A person who gives information or advice to another in a serious matter or business matter
is under a duty to use reasonable care when that person knows, or ought to know, that:
-
the recipient may or will act on it, and
it is reasonable for the plaintiff to rely on the information. (Cite a case, Mutual Life
and Citizens’ Assurance Co Ltd v Evatt OR San Sebastian v Minister Administering).
Duty of Care to Third Parties
The mere fact that it is foreseeable that someone (such as lenders or investors) might rely on
the statements is not enough. The plaintiff needs to show the reasonableness of that
reliance: Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 (Esanda).
(Note: In Esanda, A is auditor for B. C lent money to B in reliance on B’s audited accounts. B
went into receivership. C sued A for negligent auditing. Held: Auditor did not assume
responsibility for providing the information to Esanda. There was nothing to suggest that it
was reasonable for Esanda to act on the audited reports without further inquiry.)
Breach of duty (see answer guide for question 19 above).
Defences
Peer professional defence
Assuming a duty of care exists and that duty has been breached, Daniel is entitled to the
protection of the Wrongs Act 1958 (Vic), s 59 where/if he acted in a manner that is widely
accepted in Australia by peer professional opinion as being competent professional practice:
Mules v Ferguson [2015] QCA 5.
Contributory Negligence - Wrongs Act 1958 (Vic), s 26 allows for a reduction in damages to
the extent of the plaintiff’s own negligence (based on what court believes is just and
equitable).
APPLICATION:
Duty of Care
16
To Pauline:
Daniel was giving advice to Pauline in a serious/business matter, as she was planning to
expand her business. Since Daniel was an accountant and financial adviser, it was reasonably
foreseeable that Pauline would rely on that advice and act on it. It is highly likely that Daniel
owes Pauline a duty of care.
However, the same cannot be said of Eastpac.
To Eastpac
Applying the case of Esanda, it would not be reasonable for Eastpac to rely on Daniel’s
financial statements because Daniel did not assume responsibility for Eastpac using his
statements. Thus, no duty of care is owed to Eastpac.
Breach of the Duty of Care
There is a breach of duty of care in relation to Pauline because the risk of financial loss is
foreseeable and not insignificant if Daniel’s financial advice was negligent. The burden of
eliminating the risk was low, as all Daniel had to do was take more care when preparing the
financial statements.
Defences
Peer professional defence
It is highly unlikely that he will be able to rely on the s 59 defence that he has acted in a
manner widely accepted by peer professional opinion as being competent, professional
practice. His peers would have factored in Pauline’s pre-existing debts and other relevant
factors when preparing the statements.
Contributory Negligence
However, Daniel may argue that Pauline contributed to her loss by failing to take reasonable
precautions against a foreseeable risk of injury. On the facts given there is not sufficient
evidence to suggest Pauline should have sought a second opinion. Nevertheless, if she has
contributed to her loss, the court may apportion damages according to the percentage of
blame she must bear for the loss.
CONCLUSION: Pauline will succeed in an action against Daniel in the tort of negligence, but
Eastpac will not, because no duty of care is owed to it.
17
SEMINAR 9 ANSWER GUIDES
Topic 8: Agency
Textbook Chapter 15 (Tutorial activities Question 9, p. 389)
Ricardo is the senior curator and ground manager at Noora Noora Golf Club Resort, a
luxury facility in north Queensland owned by Gabba Pty Ltd. Noora Noora has been under
financial pressure since the Global Financial Crisis affected the flow of Japanese tourists. The
Board cut budgets and informed Ricardo that he could not enter into any contracts valued
at over $10,000. Despite this instruction he proceeded to negotiate a landscaping contract
with Willow Landscaping that was valued at $13,000. An associated water feature cost an
extra $4000. When work commenced the CEO asked Ricardo what was happening. Ricardo
informed him of the landscaping project but did not mention the water feature. After
considering the circumstances, the CEO tells Willow to proceed. Soon after the Board
understands the totality of the commitment.
Advise the Board of its rights and obligations.
ANSWER GUIDE
ISSUE: The broad legal issue is whether Gabba is bound by the acts of Ricardo. The specific
legal issues are what types of authority Ricardo had to enter into the contract with Willow
Landscaping for the value that he did. What course of action can the Board and Willow
Landscaping take?
RULES:
Apparent/Ostensible Authority
Discuss in brief the rules regarding actual authority and apparent authority along with the
following relevant case law - Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd
[1964] 2 QB 480. (Apparent authority – where a principal represents either by words or
conduct that an agent has authority to contract on the principal's behalf, the principal will
be bound by those acts of the agent which fall within that represented authority: Freeman
& Lockyer).
Ratification
Where the principal confirms a contract made without authority, he is said to have ratified
the contract.
Elements:
18
1. The acts must have been done as agent for and on behalf of the supposed principal
2. The ratification may only be by a principal who was in existence at the time of the making
of the contract.
3. The principal must have the capacity to make the contract both at the date of the
contract and at the date of ratification.
4. Ratification must be of the whole contract. A principal cannot ratify that which is
beneficial and reject the remainder.
5. 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.
Provided the ratification complies with the above rules, it operates retrospectively to
validate a previously unauthorised act so it is as if the agent had been vested with authority
at the outset.
PROMPTS:
• Going by the rules and the facts of the case what express actual authority did
Ricardo have?
• Did he exceed that authority?
• If yes, would Gabba be bound by Ricardo’s acts?
• If yes, how would they be bound by it? Did Ricardo have apparent authority? Can
Willow Landscaping enforce the contract with Gabba based on Ricardo having
apparent authority?
• Or, can Gabba ratify Ricardo’s actions? What are the criteria for ratification? Do the
facts of the case meet those criteria?
Application
Apparent authority
Gabba held out that Ricardo had authority for the transaction by appointing him as senior
curator and ground manager. Nothing in the facts indicates that the third party was aware
of any limitations on Ricardo’s authority.
Ratification
The CEO of Gabba was unaware of the totality of Ricardo’s purchase and so ratification
would not be possible.
CONCLUSION: Willow Landscaping can enforce the contract with Gabba based on Ricardo
having apparent authority. Ratification would not be possible
19
PRACTICE EXAM QUESTIONS
1. Johnny contracted to supply Sally with floral arrangements for Sally’s restaurant.
Johnny miscalculated the cost and subsequently wrote to Sally advising her that he
would be unable to supply at the contract price. Sally replied that she would get her
flowers elsewhere, made arrangements with Wendy, and later sued Johnny for the
difference between the contract price and what she had to pay Wendy.
Advise Johnny whether Sally will succeed.
ANSWER GUIDE
ISSUE: Whether Johnny has breached the contract; whether Sally is entitled to
damages; and the duty to mitigate loss.
RULE:
Anticipatory Breach
When one party foresees or is informed that the other will breach the contract, the
innocent party can immediately terminate and/or sue for damages.
Damages
Remoteness
Damages must arise naturally from the breach. Thus, they are not recoverable for losses
that are too remote: Hadley v Baxendale (1854) 9 Exch 341.
Mitigation
A person claiming damages must take all reasonable steps to mitigate the loss caused
by the breach: Payzu Ltd v Saunders [1919] 2 KB 581.
APPLICATION:
Sally has decided to accept Johnny’s breach, and her damages are the difference in
what she pays Wendy and would have had to pay Johnny, provided that what she buys
from Wendy is equivalent to what she would have got from Johnny (i.e. same sort of
flowers). The damages are therefore not remote & can be claimed: Hadley v Baxendale.
Sally has mitigated her loss by obtaining flowers from someone else
CONCLUSION: Sally can rescind the contract for anticipatory breach and claim damages
from Johnny, being any difference in price between what Wendy paid and what she
would have paid Johnny.
20
2. Michele purchases a new printer for her offset printing and publishing business for $25,000.
Before purchasing the machine Michele clearly states that she requires a machine that is capable
of doing 200 copies per minute
She was assured by the representative that the Cannon 4XX could accomplish this rate. After
delivery Michele discovered, to her dismay, that it could do no more than 100.
Advise Michele of any rights she may have under the consumer guarantees regime in the ACL.
ANSWER GUIDE
ISSUE: Whether Michele is a consumer under the ACL and whether any of the consumer
guarantees are breached.
RULE: Consumer defined in s 3(1) of the ACL as goods or services not exceeding $100 000 or
goods ordinarily acquired for personal, domestic or household use.
The consumer guarantees under the ACL include goods being of acceptable quality (s 54) and
fit for purpose (s 55).
There is also a guarantee that the manufacturer will comply with any express guarantee
made in relation to the goods (s 59(1)).
Where it’s as major failure, a consumer may reject the goods (s 259).
A major failure occurs where a reasonable consumer fully acquainted with the nature and
extent of the failure would not have acquired the goods: s 260(a); and where the goods are
unfit for a disclosed purpose and cannot be easily remedied to fit that purpose: s 260(d).
APPLICATION: Michele is a consumer under the ACL as the printer was less than $100,000.
The printer is probably of acceptable quality as it is fit for all purposes commonly purchased
for. On the facts, there were no defects evident. Thus, there is unlikely a breach of s 54.
However, Michele made it known to the supplier that she required 200 copies per min. Thus,
the circumstances showed that she relied on the skill of the supplier and was assured that
the printer would be suitable. Thus, she has a strong case for arguing a breach of s 55 in that
the printer was not fit for the purpose made known despite being fit for general use.
It is also possible for Michele to argue s 59, that she was induced into the purchase by
express statement by the representative.
Michele can argue major failure since she would not have bought the printer if she knew the
21
printer could not print 200 copies per minute, and because the printer probably cannot
easily be modified to allow it to print more pages per minute.
CONCLUSION: Michele can potentially pursue remedies under s 259 of the ACL by rejecting
the printer.
3.
Murray Floating Havens (MFH) leases houseboats to holiday goers on the Murray river.
The Lee family decide that they would like to rent ‘The Palace’, which is the most
luxurious houseboat in MFH’s fleet. Mr Lee signs a contract with MFH for hire of ‘The
Palace’ for two weeks in April, 2022. A week into their holiday, the Lees find that the
motor of the Palace has started to leak fuel. They try to call MFH but being a Sunday,
MFH are not contactable. The Lees decide to dock in Echuca to ask for assistance with
the leak, concerned that it might be something very serious. They manage to employ
the services of Xtreme Boat repairs, who inform the Lees that they should not be
continuing on their holiday with such a dangerous leak, and the repair was an
emergency. Xtreme Boats repair the leak and the Lees are able to continue on their
holiday.
Advise MFH whether they will be required to pay for the repair of the engine. (Do
NOT discuss contract principles.) (Note: This is an exam question from T2 2020.)
ANSWER GUIDE
ISSUE: Whether MFH will be required to pay for the repair of the boat, and whether an
agency by necessity is created when the Lees are forced to have the boat repaired.
RULE: The common law recognises that an emergency situation may occur which allows
one person to bind another without the authority of the other. In such a case, an agency of
necessity arises, not through any contract or agency agreement but from the relationship
of the parties in the particular case. Four factors are essential to establish such an agency
of necessity: Great Northern Railway Co v Swaffield (1874) LR 9 Exch 132.
1. A person must have been entrusted with another’s property.
2. There must be some commercial necessity for the action (i.e., an emergency).
3. It must be impossible or extraordinarily difficult to contact the owner of the property.
4. The agent must act bona fide in the interest of the principal.
22
APPLICATION: The Lees were entrusted with the houseboat and the repair of the boat was
essential, as XBR made it very clear that the leak was an emergency. The Lees were not
able to contact MFH, so they were compelled to take action and the repair was in the
interest of MFH. All the elements appear to be present, and therefore, it is likely that an
agent of necessity was created and MFH will be obliged to pay for the repair of The Palace.
CONCLUSION: MFH will be required to pay for the repair of The Palace due to an agency by
necessity being created.
SEMINAR 10 ANSWER GUIDES
Topic 8: Partnership
Textbook Chapter 16 (Tutorial activities Question 19, p. 422)
Linda and Mary operate a hair salon as partners. To set up the business, Linda contributed 70%
of the money. All ongoing costs were contributed to equally. In their written partnership
agreement, it is stated that all profits, debts and liabilities are to be distributed equally
between the partners. After operating the business for several years, Linda terminates the
partnership. Linda claims that she is entitled to 70% of the profits from the sale of the
business. Mary, however, argues that capital profits are to be shared equally.
Discuss.
ANSWER GUIDE
ISSUE: The main legal issue is how the profits will be distributed among the partners after
the termination of the partnership - whether they will be distributed according to the
capital contributed by the partners or equally.
RULES: When the partnership agreement does not cover a particular issue, the Partnership
Act determines the rights, duties and interests of partners – Popat v Schonchhatra (1997) 3
All ER 800. (Popat case)
The Partnership Act (s 28) provides for equality of profits notwithstanding that capital has
been contributed unequally.
APPLICATION: On the facts, the partnership agreement stated that all profits, debts and
liabilities are to be distributed equally between the partners. In any case, the Partnership
Act provides for equality of profits notwithstanding that capital has been contributed
unequally. This recognises the fact that partners may contribute a personal value to the firm
apart from the monetary value of any capital paid in.
23
CONCLUSION: Linda has to share the profits equally.
Textbook Chapter 16 (Tutorial activities Question 20, p. 422)
Greg, Allan and George are partners in a small law firm specialising in family and property
law, and share a large city office where they operate their business. Their partnership
agreement states that all profits, debts and liabilities of the firm are to be shared equally
amongst partners. Greg sometimes conducts client meetings from his home office in the
evenings and on weekends. He also offers these clients additional legal services such as wills
and estate planning. He does not share the profits from these transactions with his business
partners.
Is Greg required to account for these profits under the Partnership Act?
ANSWER GUIDE AND PROMPTS
ISSUE: The main legal issue is whether Greg has fiduciary obligations/duties towards the
other partners and, as a result, is he required to account for those profits under the
Partnership Act?
RULES: Partnership Act, 1958 (Vic): fiduciary duties
S32
- Duty of partners to render accounts (render true accounts and full information of
all things affecting the partnership)
The other party didn’t know and approved of this
S33
- Accountability of partners for private profits
he didn’t share the profit
S34
- Duty of partner not to compete with firm
Hes competing with the firm because he provide the services in different office and outside
of business hour.
Discuss s 32, s 33 and s 34 of the Partnership Act, 1958 (Vic) and any one of the relevant
cases. E.g., Chan v Zacharia (1984) 154 CLR 178.
APPLICATION: PROMPTS:
Going by the rules do partners have fiduciary obligations towards each other? How long
does the obligation continue? Does it end with dissolution or until the final settlement of
accounts on winding up?
•
As per s 34, is Greg competing with the partnership by providing legal advice? How?
Moreover, is Greg obliged to render true accounts and full information of all things
24
relating to the partnership to Allan and George (s 32)? Is he also obliged to the firm
for any benefit derived by him without the consent of the other partners (s 33)?
CONCLUSION: Going by the analysis determine whether Greg has fiduciary obligations and if
he has breached them and whether he is liable to the other partners, Allan and George,
under s 32, s 33 and s 34.
Textbook Chapter 16 (Tutorial activities Question 21, p. 423)
Jamie and Greg are partners in a firm called Copythat, that leases photocopiers to
commercial businesses. Their partnership agreement states that they are prohibited from
selling toner to clients other than by arrangement with David's business, which sells toner.
An important client asks Jamie to supply toner, which Jamie provides from a private
supplier in India, and does not inform Greg or David. The toner is of poor quality and the
important client sues Copythat for damages, arguing that it was in the scope of their
business to supply toner. Greg argues that as a partner he is not jointly liable since James
acted contrary to their agreement.
Discuss the liability of partners to third parties.
ANSWER GUIDE AND PROMPTS
ISSUE: The broad legal issue relates to the liability of partners, jointly and severally, to third
parties for the acts of any or all of the partners. The specific legal issue is whether Greg is
jointly liable for James’s act (i.e. liability for debt) despite the fact that James lacked actual
authority to do so.
RULES: Discuss s 9 of the Partnership Act 1958 (Vic). Also, discuss the four requirements in
the Partnership Act (relevant cases: Polkinghorne v Holland (1934) 51 CLR 143, Mercantile
Credit Co Ltd v Garrod (1962) 3 AII ER 1103 and Construction Engineering Pty Ltd v Hexyl Pty
Ltd (1985) 155 CLR 54).
(TB p410) All other partners will be bound when one of the partners has acted, without
express authorisation:
▷ the act or transaction was entered into by a partner;
25
▷ the act or transaction entered into must be within the scope of the kind of business
carried on by the firm; yes
▷ the act or transaction must be carried out in the usual way; yes
▷ provided that the partners will not be bound where the other party to the transaction
knows (or believes) the person lacks authority or does not believe they are a partner. Didn’t
know
APPLICATION: PROMPTS:
•
•
•
•
•
Going by the four requirements stated in the rules, was James a partner of
Copythat?
Was the act or transaction entered into within the scope of the kind of business
carried on by Copythat, especially from the point of view of the plaintiff firm?
Was the act or transaction carried out in the usual way?
What if it was carried out otherwise? On the facts, did the plaintiff firm know or
believe that James lacked actual authority to supply toner from a supplier other than
David?
Lastly, did the plaintiff firm believe James to be a partner of Copythat?
CONCLUSION – Going by the answers to the questions raised above determine whether the
Greg is jointly liable for James’s act. In other words, determine whether Copythat is liable to
the plaintiff firm for James’ act.
Textbook Chapter 16 (Tutorial activities Question 22, p. 423)
John and Peter are partners in a firm of chartered accountants that specialises in tax
management for wealthy clients. Without John's knowledge, Peter misappropriates millions
of dollars from his clients over many years, secretly adding his name as a beneficiary to
dividends. When the misappropriation is discovered, the clients seek compensation from
John (Peter having disappeared to Mexico).
Advise John whether he is liable.
ANSWER GUIDE AND PROMPTS
ISSUE: The broad legal issue relates to the liability of partners, jointly and severally, to third
parties for the wrongful acts or omissions of any or all of the partners. The specific legal
issue is whether John is jointly and severally liable for Peter’s wrongful act of
misappropriation of a client’s funds.
26
RULES: (TB 414): Partners are liable for any wrongful acts carried out in the ordinary course
of the firm’s business or with partner’s authority: s 14, Partnership Act 1958 (Vic). Such
liability is joint and several: 16, Partnership Act 1958 (Vic).
In deciding whether the wrongful act was committed while the partner was acting in the
ordinary course of business of the firm, it is necessary to identify the nature and scope of
the firm’s business: Polkinghorne v Holland (1934) 51 CLR 143 OR Walker v European
Electronics Pty Ltd (1990) 23 NSWLR 1.
APPLICATION: John and Peter specialise in tax management for wealthy clients. The scope
and nature of the firm’s business permit Peter to commit the fraud, as it will not be unusual
for Peter to manage the distribution of dividends to clients. Peter acted wrongfully when he
misappropriated millions of dollars from his clients over many years by adding his name as
one of the beneficiaries. Peter did not act with John’s authority, but his wrongful act was
carried out in the ordinary course of the firm’s business. Thus, pursuant to ss 14 and 16 of
the Partnership Act, John will be jointly and severally liable for Peter’s fraud.
CONCLUSION –John would be liable for Peter’s wrongful act of misappropriating the clients’
funds.
SEMINAR 11 ANSWER GUIDES
Topic 9: Corporations Law
Textbook Chapter 17 (Tutorial activities Question 29, p. 462-463)
H Pty Ltd is a property development company. It has three directors: Abe (CEO), Bob (CFO)
and Connie (non-executive director). Several months ago, there was an opportunity to
acquire a vacant site in the CBD from Lew Pty Ltd. Abe told the board that in his opinion the
site was suitable for a multistorey apartment development. The Board also relied on
information provided by Bob in a short presentation outlining how the acquisition could be
funded and offering an opinion that the project would be highly profitable. The directors
were unaware that the Heritage Council had restrictions on the height of CBD buildings.
Further, Abe did not inform the Board that Abe and his family have a significant stake in Lew
Pty Ltd.
The project was a financial disaster for H Pty Ltd. It paid too much for the site (given the
planning restrictions) and the costs of borrowing escalated dramatically after the date of
purchase.
Please advise whether:
27
(a)
H Pty Ltd’s directors, including Connie, the non-executive director, breached their
common law or statutory duties in relation to the purchase of the site. Indicate if
there are any relevant defences.
(b)
Abe contravened any provisions of the Corporations Act in relation to the deal with
Lew Pty Ltd. Advise on any possible sanctions.
ANSWER GUIDE
Part (a)
You should consider whether Abe, Bob and Connie breached the common law and s 180
duty of care and diligence. (Note that common law and statutory duties of care and
diligence are similar (because the Corporations Act (CA) basically legislated the duties that
had developed over time under the common law). Therefore, you can focus on the CA duty:
(See textbook paras [17.360] to [17.450]).
You should discuss:
o
Who owes the duty? Answer: Owed by “directors and other officers” (similar to
common law). A non-executive director (as Connie is) still owes a duty of care and
diligence but the standard expected may differ in particular circumstances.
o
To whom is the duty owed? Answer: Owed to the company (i.e., members as a
whole).
S180 – Duty of Care and Diligence
o
Has there been a breach? Answer: Reasonable person test. The court looks at what
was actually done by the “officers” and measure it against what a reasonable person
in a similar position in the company in similar circumstances would have done (see
this applied below). (Same test at common law – the difference is at the penalties
stage – ASIC seeks civil penalties under the CA whereas the company may seek
damages to compensate for loss: see Figures 17.5, 17.6 and 17.7 on pp. 448 to 449.
Then apply to Abe, Bob and Connie. Consider whether, in relation to s 180, the directors
have met the standard: see Daniels v Anderson (1995) 37 NSWLR 438, para [17.370] on p.
441, for details of what a director should do. From case law, it is clear that directors should
meet at least the following standards of care and diligence:
•
•
•
be familiar with the fundamentals of the company’s business;
keep informed about its activities on a continuing basis;
monitor corporate affairs and policies; and
28
•
keep informed about its financial status by regularly reviewing its financial
statements.
There are insufficient facts to decide conclusively whether the opinions of Abe and Bob
that the site was suitable were grounded in proper research, whether they sought advice
and “made proper enquiries”, but it is likely that “a reasonable person in a similar
position in the company in similar circumstances” (this is from the rule, above) would
have made enquiries that would have revealed the Heritage Council’s restrictions.
A non- executive director (usually having particular expertise, not an employee, with no
day-to-day role) still has a duty of care and diligence, particularly in respect of matters that
deal with the non-executive’s field of expertise. This decision is so vital for the company
that she would be expected to be across it.
Defences – s180(2) Business Judgement Rule
You were asked to consider any defences. The only relevant one is the business judgment
rule: see para [17.430] on p. 444. You should consider the criteria (each of which must be
met):
o presumption that directors and other officers have met the requirements of care and
diligence in making a business judgment if they:
•
•
•
•
have acted in good faith and for a proper purpose;
do not have a material personal interest in their decision;
take steps which they believe to be reasonably appropriate to inform themselves
about the subject of the decision; and
rationally believe that the decision is in the best interests of the corporation
Cases: ASIC v Rich; ASIC v Mariner
Likely conclusion (on the given facts) will be that the defence is not available (e.g., the third
criteria, where directors must have informed themselves, would not be met).
Part (b)
We need more facts to determine if the breach of s 191 ultimately affected the decision to
purchase the site. Nevertheless, on the facts, there is a clear breach of s 191. You should
also consider whether Abe, in not revealing the family interest in Lew, has breached the ss
181-183 duties (and equivalent fiduciary duties at common law): paras [17.460] to [17.480]
on pp. 445 to 447and the disclosure provision: You should discuss:
29
(i) the good faith requirement - to discharge their duties in good faith in the best interests of
the company and for a proper purpose: s 181 para [17.460] and ASIC v Adler [2002]
NSWSC 171 para [17.470].
(ii) the duty not to use information or position to gain a benefit: ss 182-3 para [17.480]; ASIC
v Vizard [2005] FCA 1037 para [17.500] and Cummings v Claremont Petroleum NL [1992]
FCA 674 para [17.490].
(iii) the duty to disclose material personal interests in matters that relate to the affairs of
the company: s 191 para [17.540].
The question also asked for advice on possible sanctions.
Penalties and sanctions for breach:
Sections 181-3 are civil penalty provisions enforceable by ASIC. They include civil penalties,
disqualification and compensation for the company. The civil remedies available for the
company include damages and/or rescission of contract. Breach of s 184 involves the same
offences as under ss 181-3 but done with dishonesty or recklessness. Criminal sanctions
including imprisonment and fines.
Note: No longer defence to say acted dishonestly to gain advantage for the corporation:
sections 184(2A) and 184(4).
Textbook Chapter 17 (Tutorial activities Question 30, p. 463)
Joe and Liz are the directors of BuzzMe Pty Ltd, a mobile phone company. Joe had known
that the company was in financial difficulties in December 2019 but had assured his fellow
director it was just a temporary cashflow issue and that the company could trade out of its
difficulties and pay all of its creditors by February 2020. However, it was unable to do so,
and, by April, Liz became concerned about the number of “final demand” notices from
suppliers and asked to see the actual accounts rather than continuing to rely on the
assurances of Joe. It was only then that she realised that the company was insolvent. The
company went into liquidation in May 2020, owing large sums of money to its creditors.
(a)
Advise Liz and Joe whether there may have been a breach of s 588G of the
Corporations Act.
(b)
Assuming for the purposes of part (b) only, that there was a breach of s 588G, advise
them of the remedies and penalties under the Corporations Act for the debts of the
company. In particular, to what extent are they personally liable for those debts?
(c)
Assume that in April, in response to the insolvency problem, Joe and Liz, with the
30
help of their accountant and a professional adviser, develop a plan to restructure
the company in order to improve its financial position. The plan requires the
company to incur debts while insolvent, but it is reasonably likely to lead to a better
outcome for the company than the immediate appointment of an administrator or
liquidator.
In July, to reduce the financial pressure on the company, Joe decides to stop paying
his employees’ super guarantee contributions, intending to pay them back when the
company is on a more solid financial footing. Advise Joe whether he may be able to
seek refuge in the “safe harbour” provided by s 588GA(1) in respect of his actions (a)
in April and (b) in July.
ANSWER GUIDE
Part (a)
The company was regarded as being insolvent in December 2019 (company is solvent
only if it is able to pay debts when owed – s 95A). The liquidator, on behalf of the
company, could bring an action against all directors under s 588G which imposes a
duty on directors to prevent insolvent trading.
All three elements of s 588G(1)(a)–(c) have been met in this case:
(a) a person is a director of a company at the time when the company incurs a debt;
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt (or
debts including that debt); and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent,
or would become insolvent.
You should also consider the relevant defences:
•
•
s 588H(2): there were reasonable grounds to rely on information provided by a
competent and reliable person that the company was solvent;
s 588H(3): when the debt was incurred the person who incurred the debt had
reasonable grounds to suspect, and did believe, that the company was able to pay its
debts.
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Part (b)
There are remedies for creditors and penalties for the directors in the event of a breach of
s 588G (see textbook p. 453):
•
Civil penalty
-
s 588J: Directors can be made personally liable for a company’s debts if they were
incurred at a time the company was trading whilst insolvent;
s 588M: Where the company is wound up, the liquidator may bring proceedings to
recover from director personally such loss as a debt due to the company.
Relevant case: ASIC v Plymin, Elliott and Harrison
•
Criminal penalty
o s 588G(3): Criminal penalties may apply where insolvent trading is considered
to be dishonest.
Relevant case: ASIC v Young
Part (c)
See para [17.560] for this question. This part raises issues around the new “safe harbour”
defence: s 588GA. This defence was introduced in 2017 to lessen the concerns of directors
who try to find a better solution instead of appointing an administrator. This usually
involves, for example, taking steps to obtain expert advice and/or preparing a restructuring
plan.
Their actions in April would likely trigger the defence, but it is not permitted to do what was
done in July (i.e., stop paying super contributions etc).
Wiley Textbook Chapter 13 (Exercise 13.6 p.421)
Jacqui and Bruce are the directors of a company called Karate Australia Ltd which runs a
number of schools teaching students the ancient art of karate. Chuck is a shareholder of
Karate Australia Ltd and has a number of issues concerning the way in which the karate
business is being operated.
(a) Karate Australia Ltd has not called an AGM for two years. Does the company need to
hold regular meetings?
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(b) Chuck believes that there are not enough good karate instructors in Australia and he
wants to change the constitution of Karate Australia Ltd to provide that the company can
only have four karate schools in Australia, thereby maintaining the quality of the schools.
How can he do this?
(c) Jacqui and Bruce have decided to hold a shareholders’ meeting for Karate Australia Ltd.
They want all shareholders to attend. Jacqui and Bruce are concerned, however, since the
shareholders of Karate Australia Ltd are located all over Australia. Jacqui comes up with the
idea that they should conduct the meeting using Skype, but Bruce thinks meetings need to
happen face-to-face with the shareholders. Advise.
(d) Chuck wants to attend the meeting that Jacqui and Bruce have called but unfortunately
he will be working on the day of the meeting. Chuck’s friend Claudia is also a shareholder of
Karate Australia Ltd and says she would be happy to vote on Chuck’s behalf at the meeting.
Advise Chuck.
(e) Karate Australia Ltd is extremely profitable, but it has never paid a dividend, as Jacqui
and Bruce are financially conservative and think the company needs to retain the cash to
have a buffer to protect itself, just in case there is an economic slowdown. Can Chuck force
Jacqui and Bruce to declare a dividend?
(f) Chuck has had enough of the company and now wants to sell his shares to Claudia, who
is willing to purchase them. How can Chuck and Claudia complete this transaction? Would it
make any difference if Karate Australia Ltd were a proprietary company?
ANSWER GUIDE (this question does not require IRAC as each part is relatively short):
(a) All public companies must hold an annual general meeting, Corporations Act section
250N.
(b) Companies have two decision-making organs, the Board of directors and the general
meeting. As a result of the separation, shareholders have little ability to direct how the
company’s business is run. Constitutions can be changed through the calling of meetings
initiated by shareholders (subject to compliance with rules already in place in the
constitution regulating how the constitution may be changed).
Proper purpose
A meeting cannot be held for an improper purpose. If members attempt to requisition a
meeting under s 249D or 249F of the Corporations Act in order to interfere in management
decisions, in violation of the principles discussed in Automatic Self -Cleansing Filter
Syndicate Co v Cunninghame [1906] 2 Ch 34, this is not a proper purpose, and the directors
can ignore the requisition.
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If Chuck called a meeting to bring about an alteration to the number of karate schools, this
would be interference with a management decision, and so the directors can ignore such a
request (for the meeting and for the change to the number of schools)
Directors can ignore any demand by a shareholder made by any means (i.e. apart from
changing the constitution) if the purpose of the change is to interfere with the management
of the company (Automatic Self-Cleaning case).
(c) Corporations Act section 249S allows a meeting to be held in more than one place using
technology that gives members as a whole a reasonable opportunity to participate.
(d) The Corporations Act section 249X provides how Chuck may appoint Claudia to be his
proxy.
(e) Unless the constitution provides otherwise the Corporations Act section 254U gives the
directors the power to determine when, how much and in what form a dividend will be
paid.
(f) A share is a type of personal property called a chose in action and represents a
proportional ownership interest in the company. Shares are able to be transferred by the
member who owns them under section 1070A of the Corporations Act. Provided there is no
restriction in the constitution Chuck and Claude could enter in to a contract to sell and buy
the shares, complete a share transfer, and lodge the transfer with the company for the
directors to decide if they agree with the transfer and if so issue a new share certificate to
Claude. The Corporations Act section 1072G provides that directors may refuse to register
the transfer of shares for any reason however section 1072 G is a replaceable rule for
proprietary companies not public companies.
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