Commercial Law Notes
70327
Spring 2011
Table of Contents
Introduction to Commercial Law ............................................................................................................ 5
Property rights ................................................................................................................................. 5
Finance ............................................................................................................................................ 5
Payment systems ............................................................................................................................. 5
The contract of sale ......................................................................................................................... 5
Consumer protection ....................................................................................................................... 6
Property, ownership and possession ............................................................................................... 6
Possession: ...................................................................................................................................... 6
Scope of Commercial Law .............................................................................................................. 7
The Nature of Property ................................................................................................................... 7
Characteristics of Property .............................................................................................................. 7
Transfer of Personal Property ......................................................................................................... 7
Real and Personal Property: ............................................................................................................ 7
Distinction between Ownership and Possession: ............................................................................ 7
The Principles applied in the “finding” cases ................................................................................. 8
Personal Property ............................................................................................................................ 9
Bailment ................................................................................................................................................ 11
Nature of Bailments ...................................................................................................................... 11
Classification of Bailments ........................................................................................................... 12
Parties to a Bailment ..................................................................................................................... 12
Essential Elements ........................................................................................................................ 12
Transfer of Possession .................................................................................................................. 12
Obligation to Redeliver ................................................................................................................. 12
Duties of Bailee ............................................................................................................................. 13
Reasonable Care ............................................................................................................................ 14
Duties of a Bailor .......................................................................................................................... 14
Bailment and Contract .................................................................................................................. 14
The Effect of Statutes .................................................................................................................... 15
Sub-Bailment ................................................................................................................................ 15
Exclusion of Liability.................................................................................................................... 15
Termination of Bailment ............................................................................................................... 16
Special Types of Bailee................................................................................................................. 18
Agency .................................................................................................................................................. 26
Definition ...................................................................................................................................... 26
Classification of Agents ................................................................................................................ 26
Creation of Agency ....................................................................................................................... 26
Nature and Scope of Agent’s Authority ........................................................................................ 26
Key cases on agent’s authority...................................................................................................... 26
Representation ............................................................................................................................... 27
To find ostensible authority in Peter ............................................................................................. 27
Breach of Warranty of Authority .................................................................................................. 28
Negligence and Agency Law ........................................................................................................ 28
Employees’ representations and s 52 TPA ................................................................................... 28
Threshold between actual and ostensible authority ...................................................................... 28
Ratification .................................................................................................................................... 28
Overview of authority issues......................................................................................................... 29
Duties of an Agent ........................................................................................................................ 29
An agent may have a fiduciary relationship with the principal .................................................... 29
Not to make a secret profit ............................................................................................................ 29
Rights of Agents............................................................................................................................ 30
Right to Indemnity ........................................................................................................................ 30
Liabilities of Agents ...................................................................................................................... 30
The distinction between bailment and agency .............................................................................. 30
Factors and Mercantile Agents ..................................................................................................... 30
Guarantees and Payment Methods ........................................................................................................ 31
Definitions ..................................................................................................................................... 31
Guarantee of both payment and performance ............................................................................... 31
Not necessarily a personal obligation ........................................................................................... 31
Guarantor and disclosure obligations ............................................................................................ 32
The Nature of a Guarantee ............................................................................................................ 32
Goodwin principle......................................................................................................................... 32
Goodwin rationale ......................................................................................................................... 32
Not unusual facts ........................................................................................................................... 32
Why would a lender require a guarantor? ..................................................................................... 33
NB bank’s duty of confidence ...................................................................................................... 33
Vitiating Factors ............................................................................................................................ 33
Statutory Protections ..................................................................................................................... 34
Construction of guarantee ............................................................................................................. 34
Discharge of the guarantor ............................................................................................................ 34
Indemnity ...................................................................................................................................... 34
Construction of indemnity clauses ................................................................................................ 35
Security Interests over Personal Property: the Personal Property Securities Act 2009 (Cth) .............. 35
What is security?? ......................................................................................................................... 35
Security Interests over Personal Property ..................................................................................... 35
Security at Common Law ............................................................................................................. 36
Terminology in PPSA ................................................................................................................... 36
PPSA Rationales ........................................................................................................................... 37
Exclusions from the PPS (s 8)....................................................................................................... 37
Definition of Security Interest s 12 (1) ......................................................................................... 37
Deemed Security Interests s 12(3) ................................................................................................ 38
PPS Leases s 13............................................................................................................................. 38
Exceptions s 13(2) ......................................................................................................................... 39
General Rules s 18 ........................................................................................................................ 39
Security Agreements s 20 ............................................................................................................. 39
Enforceability against Third Parties .............................................................................................. 40
Attachment s 19 ............................................................................................................................ 40
Perfection s 21 ............................................................................................................................... 41
Perfection by Registration ............................................................................................................. 42
Registration Particulars ................................................................................................................. 42
Perfection by Possession ............................................................................................................... 43
Interest that is not Perfected .......................................................................................................... 44
Default Priority Rules ................................................................................................................... 44
Waller v NZ Bloodstock Ltd [2006] 3 NZLR 629........................................................................ 45
Purchase Money Security Interest (PMSIs) .................................................................................. 46
Default Priority Summary ............................................................................................................. 47
Continuous Perfection s 56 ........................................................................................................... 48
Taking Free Pt 2.5 ......................................................................................................................... 48
Enforcement Ch 4 ......................................................................................................................... 48
Introduction to Commercial Law
Property rights
We’ll be looking at rights arising out of dealing with property, that is legal rights which might arise
out of the fact of ownership or simply possession; or rights or obligations arising out of the transfer of
ownership or possession. The law of bailment for example gives rise to rights and obligations simply
from the transfer of possession from one person to another. A look at the law of finding and the law of
gifts introduces you to rights arising out of possession.
Finance
We’ll also consider the provision of finance which underpins commercial transactions. Lenders prefer
a borrower to have some incentive to pay back a loan. This can be in the form of creating a right in
favour of the lender against the property which is the subject of a transaction, or some other asset. In
practical terms this may involve a transfer of title, or maintaining possession or having some other
enforceable right in relation to property. This incentive to repay a loan by having some right against
property we can classify as a security.
If debt is unsecured then there is no property which can be disposed of in favour of the creditor to
meet that debt. If property secures a debt then a creditor or lender may be better protected against
default.
The recent so called GFC demonstrated how critical finance is to commercial transactions. One focus
of this course then is the connection between property rights and the qualification of those rights when
the property is subject to finance.
In 2011 property subject to a lender’s rights will need to be registered pursuant to the Personal
Property Securities Act 2009 (Cth) and while not a current obligation it’s essential that students
understand the ramifications of the new legislation.
Payment systems
As well as finance it is important to consider payment systems. How will money in a transaction be
transferred? These days it’s too easy to think about payment in terms of either the physical transfer of
cash from one person to another or the use of some sort of card (ie the electronic equivalent).
However with the latter, there are banks as intermediaries with various obligations to a seller, a buyer,
an account holder, a card holder based on law or contract.
We are not going to look at the complexities of the electronic transfer of funds but at paper based
negotiable instruments. While few of you now will have direct experience of cheques nevertheless
they are still in use and are a good basis for understanding how payment systems work. Issues such as
the connection between a debt and the provision of a service, the interplay between law and contract
and liabilities in relation to fraud are also relevant to an understanding of issues which arise in EFT
(electronic funds transfer). It’s also important to acknowledge that EFT cannot do everything a
negotiable instrument can do.
The contract of sale
As well as looking at rights arising out of property and the securing finance against property we will
also revisit contract. Disposal or transfer of property is going to involve a contract. There are two
aspects of the contract we will be looking at:
1. The implication of terms into particular types of contract
2. The law in relation to representations in pre-contractual negotiations.
The Sale of Goods Act 1923 (NSW), the Fair Trading Act 1987 (NSW) and Trade Practices Act 1974
(Cth) and now the Australian Consumer Law provide variously for the implication of terms into
contracts for the sale of goods (i.e. transfer of title in property) and the provision of services. We will
look at how the implication of these terms impacts on a seller or service providers obligations and
whether or not the implied terms can be contracted out of.
There will also be a focus on what is described as deceptive trade practices or what will be more
familiar to you as misleading or deceptive conduct. The focus will be on statements made to induce a
party into entering into a contract and remedies where the inducement is based on misleading or
deceptive conduct.
Consumer protection
In Australian law there is an overlap between consumer protection and commercial law. As a
consumer may be defined by what is bought rather than the entity which is purchasing, commercial
enterprises can enjoy the benefit of consumer protection law—whether it’s in connection with
unsuitable goods or misrepresentations. So while we deal with consumer protection issues in this
subject they are directly relevant to commercial transactions.
The disparate topics of Commercial Law should be seen as a way of approaching a variety of legal
aspects of a commercial transaction.
For example:
• A commercial transaction may have its objective the transfer of ownership of property or the
provision of a service which involves the temporary transfer of possession of property
•
There may be a contract for the transfer of property or the provision of a service—there may be
terms statutorily implied into the contract which requires that the goods or services are suitable
for the purpose identified to the provider
•
The pre-contractual negotiations may have involved a misrepresentation which might give rise to
a statutory remedy for the aggrieved party
•
If the provision of a service might involve the transfer of possession of property (eg dry cleaning
or vehicle servicing) there may be rights which arise from the possession of the property which
may need to be identified
•
The transaction may be subject to finance where one of the lender’s conditions is the asserting of
a right over property as an incentive for the repayment of the debt
•
The payment for the goods or service may take a number of forms—whether it’s cash, cheque or
EFT a variety of legal obligations may arise—not simply between the buyer and the seller but
between these parties and the intermediary banks
Property, ownership and possession
• Contrast property rights (in rem) v personal rights (in personam)
• Property rights enforceable against the world
• Ownership may include right to use, sell, give away, put into a trust, use as security for a loan,
share with co-owners, leave in will
• To possess property means to have exclusive control over the item: Parker v British Airways
Board
• Types of possession de facto, legal, right to immediate possession.
Possession:
• Possession involves a form of legal title even by finding or by theft [Costello [2001]]
• Personal property may typically be transferred by delivery
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Mere possession does not transfer ownership (title), unless intention to abandon by true owner
Possession may be defended against all but the true owner (Armoury v Delamirie)
Scope of Commercial Law
• Commercial law governs commercial transactions – agreements and arrangement b/w professions
for the provision and acquisition of goods, services and facilities in the way of trade
• Consumers still benefit from commercial law
• Range of common law doctrines (e.g. bailment) - increasingly statute based e.g. ACl, Personal
Property Securities Act
The Nature of Property
• Property has two meanings: either an object or thing which is capable of being owned by a person
or the proprietary rights to that object or thing
• The thing may be tangible or intangible
Characteristics of Property
• Property is about relations between persons in relation to things- private property must at least
involve the right of the owner to exclude others from doing something in respect of the object of
ownership
Transfer of Personal Property
• Typically by delivery
• Gift of personal property:
o Intention to give by donor (relinquish dominion over item)
o Acceptance by donee
o Delivery
• Knapp v Knapp [1944] - gift of car to wife by husband, no transfer of registration.
• Flinn v White [1950] – gift of piano by father to daughter, remained in common custody= no
delivery
Real and Personal Property:
• Real property comprises land and all things embedded in the land or attached to it such as
minerals, trees and buildings. They are indestructible, immoveable, unique, appreciates
• All interests in land are real except for leases which are classed as personalty
• Personal property is all property that is not real property and includes tangible things that are
movable such as a car, books etc and are generally referred to as chattels or choses in possession
• Personal property also includes intangibles which do not exist in physical form but have economic
value such as intellectual property rights, debts and shares- these are choses in action since they
are not physical possessions but give rise to rights that are enforceable by taking legal action.
They are impermanent, moveable, temporal, fragile, often depreciates in value, common/not
unique
Distinction between Ownership and Possession:
• A person has possession of an object at law if he or she has control of it and intends to retain that
control.
• Ownership and possession often coexist but they may also be vested in different persons.
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•
•
A person in possession of an object has rights which are recognised at law even where that person
is not the owner
Possession confers a right to retain control of an object against any other person except the person
who has rights of ownership in the object.
Possession is good against all the world except the true owner- Armory v Delamirie (1722):
o Chimney sweep’s boy found a jewel and offered it to a jeweller for sale
o Jeweller refused wither to pay a price acceptable to the boy or return it
o Held: jeweller was liable to the boy for the value of the jewel
o “The finder of the jewel though he does not by such finding acquire an absolute property
or ownership, yet he has such a property as will enable him to keep it against all but the
rightful owner” ! Pratt CJ
The Principles applied in the “finding” cases
• Articles found in, or attached to land:
o Where an article is found in or attached to land then as between the owner or possessor of
the land and the finder of the articles, the owner or lawful possessor of land has better
title.
o Hannah v Peel
o South Staffordshire Water Co v Sharman [1896]:
" Plaintiff water company owned land containing a pool and employed defendant
to clean it. A workman found two gold rings in the mud at the bottom of the pool.
He gave the rings to the police who could not find their true owner and later
handed them back to him
" Held: the plaintiff company, as owner of the land containing the pool, was
entitled to the rings
o Waverley Borough Council v Fletcher [1996]:
" While usigna metal detector in a public park owned by the plaintiff, the
defendant found a valuable medieval gold brooch
" Held: the plaintiff local authority was entitled to the brooch. The defendant’s
right as a member of the public to engage in recreational pursuits in the park did
not confer on him a superior right to the brooch.
" The defendant’s digging and removal of property in the land were acts of trespass
that, together with metal detecting, were not recreational pursuits permitted under
the terms by which the park was owned.
• Articles found on the land:
o Where an article is found unattached on land, then between the owner or lawful possessor
of land and the finder of the article, the owner or lawful possessor of hte land has a better
title only if he or she exercised such manifest control over the land as to indicate an
intention to control the land and anything that might be found on it.
o Where there is no evidence of manifest intention then the finder will be entitled to
possession as against the occupier in the event that the true owner cannot be found.
o Thus, where the customer of a shop found a roll of banknotes on the shop floor, the
customer was held entitled to the banknotes as against the shopkeeper: Bridges v
Hawkesworth (1851)
o Parker v British Airways Board [1982]:
" Plaintiff aircraft passenger found a gold bracelet on the floor of the executive
lounge at Heathrow Airport. He handed the bracelet to an employee of the
defendant which was the licensee of the premises. The owner of the bracelet was
never found and the defendant sold it. The finder sued for the value of the
bracelet.
" Held: no evidence that the Board had manifested an intention to exercise control
over all things that might be upon or in the premises the finder had a better right
to possession of the bracelet.
Chairperson, National Crime Authority v Flack (1998)
" The occupier of the premises was held entitled to the return of a briefcase
containing $433,000 found by police during a search under warrant.
Articles found in the course of employment:
o Where an employee finds good in the course of employment, the general principle is that
they belong to the employer: City of London Corp v Appleyard [1963]
o Where the employment is not the cause of the finding but merely incidental to it, it has
been held that the employee is entitled to the goods as against the employer.
o Byrne v Hoare [1965]:
" Plaintiff, Qld policeman, was performing special duty at a drive in picture theatre.
While walking towards the area he was to supervise, he found a small ingot of
gold. He claimed it against the crown
" Qld SC: finding the ingot, he was in the same position as any other passer-by and
that the performance of his duties was no the real or effective cause of the
finding- he was entitled to ingot.
o
•
Personal Property
• Acquisition of Ownership:
o Ownership of property can be acquired in various ways:
• By purchase:
o In the case of the sale of tangible personal property there is a contract for the
sale of goods
o In the case of sale of intangible personal property such as debt or copyright,
statutory provisions may require compliance with certain formalities.
• By gift:
o Ownership may be acquired by gift.
o The person who makes the gift is the donor and the person who receives is
the donee
o For a valid gift, the donor must intend to make an unconditional transfer of
rights to the property
o There must be delivery of the property, handing it over to the done and
thereby giving up control and possession of it.
• By will or descent:
o Personal property may be left to a person by will or passed to a person
according to the riles of intestacy where a person has died leaving property
but without having made a will
o Legislation sets out rules that apply to intestate’s next of kin
• By taking possession of abandoned property:
o Ownership may be acquired by taking possession of abandoned property with
the intention of excluding others, but the owner must have intended to
abandon it, that is relinquish ownership permanently
o Moorhouse v Angus &Robertson (No 1) Pty Ltd [1981]:
o Held that the plaintiff author of short stories published by the
defendant had not abandoned his ownership fo the original
typewritten manuscripts of the stories, although he did not request the
return of the original manuscripts for some years after publication.
Publishers were liable for loss of the manuscripts.
• Co-ownership of Personal Property:
o Two or more persons may own personal property together
o Where they do they will hold property either as joint tenants or tenants in common
o Calabrese v Miucco [1984]
A husband and wife originally held a savings bank account as joint tenants,
and on severance of the joint tenancy held the funds in the account as
common.
Personal Property as security:
o Personal property can be security for the payment of debt.
o A mortgage over personal property can be given, allowing the mortgagee to take
possession of the goods and sell them in the event of default by the mortgagor under the
contract for loan of money
o Where security over personal property is given in writing, it will usually constitute a bill
of sale and must be registered under the relevant bills of sale or other chattel securities
legislation.
Bailments:
o Bailment is the legal relationship arising from the transfer of possession of personal
property from on person (the bailor) to another person (the bailee) under the
circumstances that when the purpose for which the goods were bailed has been fulfilled,
the bailee is under a duty to return the property to the bailor or deliver them according to
the bailor’s instructions.
o The subject of bailments does not involve the transfer of ownership in personal property
but rather the legal incidents arising from the temporary transfer of possession to a
person who is not the owner.
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Armory v Delamirie (1722) 93 ER 664 (rights of finder, distinction between ownership and
possession—rights arising out of possession)
Button v Cooper [1947] SASR 286 (establishing possession based on circumstances)
Costello v Chief Constable of Derbyshire Constabulary [2001] 3 All ER 150 (possessory rights
of a thief)
Dewar v Dewar [1975] 2 All ER 728 (gifts and donative intention)
Douglas v Hello Ltd [2005] EWCA Civ 595 (distinction between a proprietary and a contractual
right—a contractual right is only enforceable by parties to the contract)
Flinn v White [1950] SASR 195 (common custody, delivery—where the purported subject matter
of a gift remains in common custody it may be difficult to demonstrate that delivery has perfected
the gift)
Horsley v Phillips Fine Art Auctioneers (unreported NSWSC 3211/92 5 Sept 1995) (expression
of donative intention and common custody)
In re Cole [1964] 1 Ch 175 (delivery of gifts and the issue of common custody—necessity of
delivery to wife where husband owned all the property)
Knapp v Knapp [1944] SASR 25 (intention of donor and demonstration of acceptance by donee)
Munday v ACT (1998) 99 LGERA 312 (scavengers as finders; characterising abandonment)
National Crime Authority v Flack (1998) 86 FCR 16 (assumption of residential occupier’s
intention to exercise control)
Parker v British Airways Board [1982] 1 QB 1004 (rights of occupier)
Rawlinson v Mort (1905) 21 TLR 774 (gifts and delivery)
South Staffordshire Water Co v Sharman [1896] 2 QB 44 (in or attached to land—borderline
examples)
Tamworth Industries Ltd v A-G [1993] 3 NZLR 616 (degree of manifest intention to exercise
control)
Waverley Borough Council v Fletcher [1996] QB 334 (found items in or attached to land)
Winter v Winter (1861) 4 LT 639 (possession prior to gift)
Tooher J ‘Jubilant Jamie and the Elephant Egg: Acquisition of Title by Finding’ (1998) 6
Australian Property Law Journal No 2 117
Pollock & Wright An Essay on Possession in the Common Law (Clarendon Press Oxford
1888)
Bailment
Bailment is the common law which governs the obligations which arise when possession of property
is transferred temporarily from one person to another with the expectation it will be returned. While
bailment might be considered by students an arcane area of marginal interest it is central to dealings
with property. When someone temporarily transfers property to another, bailment obligations may
arise. Useful illustrations are: parking a car in a commercial car park, leaving a car at a mechanic’s to
be serviced, leaving clothes to be dry cleaned, storing goods or hiring goods. In contract law when
you looked at exclusion clauses, often what were being excluded was obligations which arose from
bailment law. Each time you park your car at a car park or leave dry cleaning or hire goods you will
be notified of exclusions because bailment obligations may apply. Because bailment obligations in
commercial circumstances are usually dealt with in a contract we don’t think about them, but in
drafting contracts we have to know what the common law obligations are so they can be addressed.
Statutes and bailment
Contracts which involves the temporary transfer of possession from one person to another, for
example the hiring of a good, may be subject to statute which implies a term that the good is suitable
for a specific purpose and that this implied term cannot be contracted out of. See for example the Fair
Trading Act 1987 (NSW) s 40L, 40M; Trade Practices Act 1974 (Cth) ss 4B (definition of consumer),
61, 71, 74.
Contract, statute and bailment
One of the difficulties of this topic is once it has been found there is a bailment situation and prima
facie obligations arise, the operation of contract and statute need to be considered. Bailment
obligations can be excluded by contract but statute may in certain circumstance invalidate exclusion
clauses.
When assessing a bailment circumstances questions which need to be asked will include:
• Is there a bailment as defined by common law?
•
Is there a contract?
•
Does the existence of a contract qualify the common law obligations?
•
Is the bailment contract subject to statute?
•
What are the obligations?
•
Has there been a breach of bailment obligations?
Nature of Bailments
•
In order for a bailment to be formed, there must be a transfer of possession of goods from one
person to another person without any intention on the part of the bailor to transfer the ownership
of the goods to the bailee
•
Bailee receives goods for the purpose of fulfilling instructions of the bailor which may be to keep
the goods in safe custody or carry the goods from place to another etc.
•
The requirement of transfer of possession distinguishes bailor/bailee from licensor/licensee.
•
A licence or permission to use a premise for the purpose of temporarily storing goods does not
involve a transfer of possession - Greenwood v Council of the Municipality of Waverley (1928):
o A man left his clothes in a council locker at the beach and was given a disk to identify the
locker.
o He came back, the attended opened the allotted locker and his clothes were gone.
o He sued the council claiming a bailee/bailor relationship and therefore a duty of care but
it was held the council was not a bailee since possession of the clothes had not passed to
the council so no duty of care existed.
• Authority is unclear in regard to whether parking a car in an attended parking lot or parking
station constitutes a bailment. The trend of the UK is to regard the position as merely
licensoe/licensee
•
Australian courts however, are more inclined to find a transfer of possession (bailment)
particularly where some card or ticket has to be presented before getting the vehicle: Council of
the City of Sydney v West (1965); Walton Stores Ltd v Sydney City Council (1968)
Classification of Bailments
• Traditional classification of bailments originated with Lord Holt in Coggs v Bernard (1703),
namely:
o The deposit of goods for gratuitous safekeeping by the bailee
o The delivery of goods to a bailee for work to be done on the goods for the benefit of the
bailor without reward
o The delivery of goods by way of gratuitous loan for use by the bailee
o The deposit of goods for safekeeping for a reward
o The delivery of goods to have something done to them for reward
o The delivery of goods for use by the bailee for reward
o The delivery of chattels to held as security for a loan
• The distinction between gratuitous bailment and bailment for reward is relevant in considering the
extent of the duty of care owed by a bailee to the bailor and the rights/liabilities of the bailor and
bailee against third parties.
Parties to a Bailment
• Bailor- party who gives possession of goods to another
• Bailee- takes possession, but not ownership
• Sub-bailee- takes possession from the bailee
• Bailee for reward (like consideration)
• Gratuitous bailee (no consideration e.g. finding lost goods, holding goods for a friend)
• Coggs v Bernard- common examples of bailment
Essential Elements
• Hobbs v Petersham Transport Co Pty Ltd (1971):
“Bailment comes into existence upon a delivery of goods of one person, the bailor into the
possession of another person, the bailee, upon a promise, express or implied, that they will be redelivered to the bailor or dealt with in a stipulated way” ! Windeyer J
Transfer of Possession
• Distinguishing bailment from license:
o Greenwood v Waverly Council- not bailment but rather license to use locker- no
attendant present
o Ultzen v Nicols [1984] – bailment over coat taken by waiter in restaurant where waiter
made request and selected place for safekeeping
o Ashby v Tolhurst [1937] – car space was license not bailment as there was no control
over car, requirement to show ticket as requested ! contrast this with Sydney CC v West
Obligation to Redeliver
• If the bailee is not obliged to return the goods, then no bailment has been created- compare
contract sale.
o No bailment where goods may be substituted (Chapman Bros v Verco Bros & Co (1933)
49 CLR 406- wheat unmarked, obligation to return equivalent only)
• Goods may be returned in changed form: Pangallo East Killara
Duties of Bailee
• Duties of a Bailee for Reward:
o To take reasonable care of the good- the onus is on the bailee to prove that the loss or
damage was not the result of their failure to take reasonable care
" Pitt Son & Badger Ltd v Proulefco SA (1984) - the bailee stored bales of wool in
an old timber building with an inadequate fence to keep out intruders. HC held
the bailee was liable for breach of his duty to take reasonable care of the wool
when it was destroyed in fire deliberately lit by an intruder who came in via the
inadequate fencing.
" Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd (1994) - The
plaintiff left a car with the defendants for repair. Overnight thieves entered
through the skylight and drove the car out. After the break-in, security bars were
put over the skylight and an alarm system installed. The Court held that the
defendants were liable to the plaintiff for the loss of the vehicle as they failed to
discharge the onus. Precautions to secure premises should have been taken
earlier. However, leaving keys in the ignition did not itself constitute failure of
reasonable care.
o The bailee is not obliged to take every conceivable or possible precaution to prevent the
loss of goods! it is to act reasonably
o The standard of care required is to use such care as a careful vigilante person would
exercise in the custody of their own property of the like character and in the like
circumstances- Nibali v Sweeting & Denney (WA) Pty Ltd (1989) Aust Torts Reports
80-258
o A bailee’s primary duty is to redeliver the goods to the bailor or as the bailor directs
o Jackson v Cochrane [1989] 2 Qd R 23- the owner of a caravan gave possession of it to a
motor dealer to sell on consignment. The motor dealer allowed three strangers to tow it
away believing it was on the authority of the owner when it wasn’t. It was held the motor
dealer was liable.
o Not to depart from the scope of the bailment
" This may turn bailee into insurer
" Mitchell v Ealing London BC (failure to redeliver goods on argued date turned
the gratuitous bailee into an insurer)
o To return the goods or deal with them as directed
" Bailment for reward can only be terminated by scope of the bailment
" Gratuitous bailment is terminated on demand
o To not dispute the bailor’s title to the goods
" Subject to ius tertii (third party has better title than bailor)
" Bailee liable for acts of employees (CW Martin)
" Not more onerous merely because reward rather than gratuitous or reward.
• Duties of a Gratuitous Bailee:
o Modern trend to treat as the same as bailee for reward
" WGH Nominees Pty Ltd v Tomblin (1985) 39 SASR 117- plaintiff jeweller had
insisted that the defendant husband T take a particular ring to show his wife. On
his way home T went to a hotel where the ring was apparently stolen from his
coat. The jeweller sued T for damages for negligence. Having regard to the
totality of circumstances it was held that T had not been negligent and
accordingly was not liable to the jeweller for the loss of the ring
o A gratuitous bailee who negligenetly fails to return the goods within a reasonable time of
demand being made for them will be liable for their loss to the bailor: Mitchell v Ealing
London Borough Council [1979]
" Graham v Voigt (1989) 89 ACTR 11- a landlady was held liable for failing to
return a former boarder’s possessions, including a number of valuable stamp
albums, which had been left for eight months. She failed to deliver the goods and
•
could not show that they had been lost without negligence or default on her part
and she was held liable for their value
o Where the goods under a gratuitous bailment are damaged, it has been held that the onus
is on the bailee to show that he or she took reasonable care of them while they were in
their possession: McComb v Martin Box Marine Holdings Pty Ltd (1992) 8 SR (WA)
193.
Liability of Bailee for Employees and Agents:
o When a bailee entrusts an object for reward to an employee for safekeeping and it is lost
as a result of the employees negligence, the bailee is liable even where it is shown that a
reasonable person in the circumstances would have entrusted such an article to an
employee.
o A bailee is therefore liable for their own negligence and vicariously liable for the
negligence of their employees: Makower, McBeath & Co Pty Ltd v Dalgety & Co Ltd
[1921] VLR 365; Morris v CW Martin & Sons Ltd [1966] 1 QB 716
o A bailee whose employee or agent sells the goods that were entrusted to the bailee is
liable to the owner of the goods unless an exception clause in contract exists: Rick Cobby
Haulage Pty Ltd v Simsmetal Pty Ltd (1986) 43 SASR 533.
Reasonable Care
o Tottenham Investments
o Nature of goods (value) shapes obligation
" Tottenham
" WGHNom v Tomblin
" Martin v LCC
o Cost paid, knowledge of threat also relevant
o Onus on bailee to show no negligence
Duties of a Bailor
• Where a bailment for reward is for a fixed term, there is a duty not to interfere with bailee’s
possession of the goods until the expiry of the period of bailment (depends on term of bailment)
o Bailor may be liable for trespass, conversion and breach of contract
o Not liable if bailee warned- gratitutitous bailment is revocable at the will of the bailor
(Pivovaroff)
o Inform bailee of dangers they are aware of which the bailor is aware, whether the
bailment is gratuitous or for reward- a gratuitous bailor has a duty “to communicate to the
borrower defects in the article lent of which he is aware, and if either deliberately or by
gross negligence he does not discharge this duty, he is liable for injury resulting to the
borrower”: Coughlin v Gillison [1899] 1 QB 145 at 149.
o Where the bailee accepts possession of the goods after being sufficiently warned of their
dangerous qualities, the bailor will not be liable for subsequent loss or damage suffered
by the bailee:
o Pivovaroff v Cherbabaeff (1978)
o Comply with terms of bailment (E.g. payment of agreed fee)
o
• Bailee has a lien over goods to secure payment
Bailment and Contract
• Contract determines scope of bailment and nature of duties and liabilities
• Exclusion clauses (Sydney CC v West)
• Implied term in bailments for reward (hiring) that goods reasonably fit for purpose
o Cottee v Franklins Self-Serve Pty Ltd – Franklins was liable to injuries caused by a
trolling toppling over when its wheel broke.
•
Bailment may be broader than contract
o Modifies privity rule by conferring rights agasint 3rd parties
o Baliee may sue 3rd party for damages caysed to bailed goods as possession is title against
the wrongdoer (The Winkfield [1902])
o Bailee may sure even if the bailor suffered no loss (Goodwin- bailor paid out in
insurance, bailee could still sure for value of damage) - bailee must account for damages
to bailor.
The Effect of Statutes
• Implied terms
• Business contracts (may exclude implied terms under SOGA)
• Consumer contracts:
o SOGA (NSW)
o Australian Consumer Law
Sub-Bailment
• Occurs where a bailee transfers possession of goods to 3rd party for a particular purpose, subbailee must be aware they are bailee. A duty is owed by the sub-bailee to the original bailor to
take reasonable care of goods entrusted to their possession:
o Morris v CW Martin & Sons Ltd [1966] 1 QB 716
" Facts
• The plaintiff sent her mink stole to a furrier for cleaning (B)
• B explained that he did not provide the service and with the plaintiff’s
consent forwarded the mink to the defendant dry cleaners (sub-bailees)
• The mink was stolen by the employee entrusted with cleaning it, although
the defendant had not themselves been negligent either in failing to take
proper steps to safeguard the mink or in employing the particular
employee
" HELD:
• The sub-bailee was liable to the bailor for unauthorised theft of the mink
by their employee, notwithstanding the absence of a contractual
relationship between the original bailor and sub-bailee.
o The sub-bailee can only rely on the terms of the contract between the bailee and the subbailee if the owner has expressly or impliedly consented to the bailee making a subbailment containing such terms in an action against the owner.
• May be permitted or prohibited by head bailment
• Sub-bailee owes same bailment duties to head bailor
• Rights may be varied by contract
• CW Martin- exclusion clause cannot be relied on by cleaner as “customer” was head bailee not
fur owner
• The Pioneer Container [1994] 2 AC 324-shipping bailment (without limitation clause) allowed
sub-bailment on any terms, subsequent sub-bailment contained exclusive jurisdiction clause
which bound head bailor
Exclusion of Liability
• A bailee may try to limit or exempt liability for negligence in a contract of bailment
o Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Aust) Pty Ltd (1966) 115
CLR 353- Interstate transport company which regularly employed a subcontractor to pick up
goods around Melbourne and transport them to the appellant’s central depot. On the day the
subcontractor collected the respondent’s goods he finished his round at 5:40 (after closing of
depot) and took his loaded truck home as directed by the appellant on previous occasions. In early
hours of the morning a fire broke out damaging the respondent’s goods. In an action for damages,
HC held that it was implicit in the contract between A and R that the latter’s goods would be taken
to and received by the depot at the conclusion of the subcontractors pick-up. The act of taking the
goods home constituted such an unauthorised departure or deviation from the terms of the contract
between A and R as to preclude the A from relying on the exemption clause in the contract which
purported to exempt it from liability.
Statutory Obligations where Services are provided to a Consumer
• The effect of exclusion clause has been the creation of statutory provisions to protect “consumers”
in respect of the quality of the work or services so provided.
• The ACL ss 60 and 61 provide:
60. If a person supplies, in trade or commerce, services to a consumer, there is a guarantee
that the services will be rendered with due care and skill.
61.
(1) If:
(a) a person (the supplier) supplies, in trade or commerce, services to a
consumer; and
(b) the consumer, expressly or by implication, makes known to the supplier
any particular purpose for which the services are being acquired by the
consumer; there is a guarantee that the services, and any product resulting
from the services, will be reasonably fit for that purpose.
(2) If:
•
•
(a) a person (the supplier) supplies, in trade or commerce, services to a
consumer; and
(b) the consumer makes known, expressly or by implication, to:
(i) the supplier; or
(ii) a person by whom any prior negotiations or arrangements in
relation to the acquisition of the services were conducted or made;
the result that the consumer wishes the services to achieve; there is a
guarantee that the services, and any product resulting from the
services, will be of such a nature, and quality, state or condition, that
they might reasonably be expected to achieve that result.
These provisions cannot be excluded where the services are of a kind ordinarily acquired for
personal, domestic or household use or consumption subject to s 64(1), 64 A(2) and 64 A(3)
Services is broadly defined in s 2(1)
Termination of Bailment
By expiry of the term
! Bailment will terminate when the period for which the foods were bailed expires
! The bailment will terminate when the purpose for which the bailment was created has been
fulfilled
By demand of a gratuitous bailee, at any time – Parastatidis v Kotaridis
! In the case of gratitutous bailments, the bailment may be determined at any time by the bailor:
Parastatidis v Kotaridis [1978]
By wrongful act of the bailee
! Where the bailee commits a wrongful act of such a nature as to jeopardise the title of the bailor to
the goods or otherwise to amount to a repudiation of the transaction, such as purporting to sell the
goods, the bailment may be terminated
! The bailment will not automatically terminated but the bailor had an option whether to terminate
it
Anderson Group Pty Ltd v Tynan Motors Pty Ltd (2006)
! Facts:
o Anderson hired a valuable car under a hire-purchase agreement with finance company
Esanda
o The agreement provided that Anderson would not part with possession of the car unless
Esanda gave prior written consent
o Anderson told Esanda that it had decided to sell the car and was given a payout figure by
Esanda
o Esanda did not give its prior written consent to the sale
o Anderson brought the vehicle to a car yard from which it was stolen
o Esanda then sought to repossess the vehicle
o Anderson sued the car yard for breach of duty as a bailee
! C of A Held:
o A repudiation of a simple bailment terminates the bailment
o But where there is a bailment within a contract a bailee does not forfeit their right to
immediate possession by any dealing that is unwarranted by the bailment
o Here there was a bailment of the vehicle to Anderson under contract (the hire purchase
agreement)
o A term providing for the way in which the bailee’s right of possession could be
terminated would need to be expressed in the “clearest express terms”
o Term that allows termination by notice for breach of any term of the bailment will not be
construed to have effect of terminated the bailee’s right to possession
o An act would need to be “very serious” to justify termination of the bailment, “virtually a
disclaimer of the contract of bailment”
o Conversion was not necessarily sufficient to justify termination.
o Here there was no attempt to defraud Esanda
o Accordingly, Anderson had a right to immediate possession of the vehicle and had
standing to sue the car yard in bailment
Re-delivery of the goods to the bailor
! At common law the owner of a bailed chattel cannot use force to repossess the chattel since the
bailee’s possession was not wrongful from its inception: Toyota Finance Australia Ltd v Dennis
(2002)
! In that case it was held that the lessor of a car was not entitled to use force in repossessing the car
from a lessee who wrongfully refused to return the vehicle
! In some jurisdictions legislation has provided that limited force may be used in repossessing a
chattel
Rights against third parties
! If a third party commits a wrongful act against the chattel bailed, for example wrongfully takes
possession of it, the bailor has the right to sue the third party in tort for damages for conversion if
the bailment is a bailment at will
! Bailee is also entitled to bring an action against a tortfeasor who has negligently cause damage to
the bailed chattel while the chattel was in the bailee’s possession
! Such an independent cause of action arises because the bailee’s possession is good against any
tortfeasor: Goodwin v Ron Heath Tyre Service (SA)Pty Ltd (1999)
! Where the bailment is for reward, the bailor’s right to possession of the goods is suspended, and
accordingly the general position is that only the bailee can sue the third party for the wrongful
interference with the goods
! Interference with the goods adversely affects the bailor’s reversionary interest, for example where
the goods are destroyed or permanently damages so that they will not be returned to the bailor in
good order at the expiry of the bailment, the bailor may bring an action against a third party:
Penfold Wines Pty Ltd v Elliot (1946)
! Where the bailee wrongfully disposes of the goods such an act entitles the bailor to terminate the
bailment; if the bailor does so, he or she will have an immediate right to possession of the goods
enabling the bailor to sue not only the bailee but also the third party in an action for conversion
Transfer of ownership to the bailee
Destruction of the goods
! A bailment is terminated when the subject matter of the bailment is lost or destroyed, or by reason
of some change in its nature becomes incapable of use for the purposes of the bailment
Special Types of Bailee
! At common law a bailee is under a duty to take reasonable care of the goods entrusted to their
possession
! In two cases, namely that of the common carrier of goods and the innkeeper the common law
imposes a strict liability to make good any loss of goods of the bailor, the effect of which is to
make good any loss of the goods of the bailor, the effect of which is to make the common carrier
or innkeeper an insurer of the goods in their possession
Common Carriers
! A common carrier of goods is one whose business it is, and who holds themselves out as willing
to carry goods from place to place for anyone who thinks fit to employ the carrier
! The principles are:
o The person must carry on business as a carrier and must simply be a casual carrier
o If the carrier reserves the right to accept or reject the transport of good irrespective of
whether the vehicles are full or not, they are not a common carrier: James v
Commonwealth (1939)
o It is always a question of fact whether a person is or is not a common carrier. The holding
out of being a common carrier may be express or implied by a course of business or other
conduct
Private Carriers
! A private carrier does not hold themselves out as willing to convey the goods of any person who
chooses to employ them and usually considered the terms and nature of every offer before
deciding whether to accept it
! Not necessarily liable if goods are lost or damaged as they are not insurers of the goods but the
onus is on them to prove that the damage was not cause through their neglect: Hobbs v Petersham
Transport Co Pty Ltd (1971)
! They are liable for damages if the loss is caused through their neglect, unless the contract of
carriage specifically exempts them from liability
Cowper v JG Goldner Pty Ltd (1986)
! Facts:
o Defendant company contracted to carry the plaintiff’s valuable mare by road from SA to
NSW
o On arrival the mare was found to be seriously ill from travel sickness and died a few days
later
o The plaintiffs sued for damages for loss of the mare
! Held:
o Defendant had not discharged the onus of proving that the death of the mare had not
resulted from a failure to take reasonable care in inspecting the mare during the course of
the journey
o The defendant was therefore liable in negligence for the loss
Duties of a Common Carrier
! The duties of a common carrier are:
o To carry the goods they profess to handle for any person who offers to pay the usual
charge
o To carry goods by the usual routs and not to deviate unnecessarily
o To deliver the goods without any unreasonable delay. The carrier is excused from any
loss resulting through a delay in delivery caused by the consignee
o To carry out the instructions of the consignor for delivery to the consignee
! There is a duty imposed on the consignor of the goods to take reasonable precaution when
sending dangerous articles and to give notice of their dangerous nature to the carrier
Liability of a Common Carrier
! At common law, common carriers of goods are liable for any loss or damage, whether due to their
negligence or not, that may result to the goods whist the goods are in their control
! Carrier is an insurer for the safe carriage of the goods, which liability begins from the moment the
carrier accepts the goods for carriage until they are delivered to the destination to which the
carrier has contracted to carry them
! Exceptions to this are loss or damage caused through “acts of God”, the acts of the Queen’s
enemies, an inherent fault or deterioration of the goods or faulty and defective packaging: Gould v
SE & C Rly Co [1920]
Statutory Limitations on Liability of a Common Carrier
! NSW: Common carriers Act 1902 (NSW)
o S 4: Common carrier by land is not liable for the loss of valuable items such as gold,
silver, bills and notes, silks, furs, jewellery, watches, paintings etc, if the value exceeds
$20 per package, unless at the time of delivery the carrier, the value and nature of the
article as are declared by the consignor and a special rate specified in a conspicuous
notice on the carrier’s premises is paid
o S 7: No other public notice or declaration made by the carrier is deemed to limit or affect
their common law liability
S 9 (c): these provisions do not affect any special contract made between the carrier and
consignor for varying the carrier’s common law liability provided that such a contract is
signed by the condignor
! Legislation in other state except Qld is similar
! Qld: Carriage of Goods by Land (Carriers’ Liabilities) Act 1967 (Qld):
o Effectively abolished the special status and responsibilities of a common carrier by road
within the State
o Legislation was repealed by Carriage of Goods by Land (Carriers’ Liabilities) Repeal Act
1993 (Qld)
o Current position in Qld would therefore appear to be that neither the common law
principles concerning common carriers apply, nor is there any State legislation limiting he
liable of a common carrier for the loss of, or damage to, goods which are carried
o Apart from a situation where the ACl may apply, the liability of the carrier will be
determined on general principles of bailment, tort and contract
o The position appears to be that the carrier will be liable to the owner of the goods if the
carrier fails to take reasonable care of them, subject to any limitation on that liability by
terms of the contract between owner and carrier
o
Rights of a Common Carrier
! To be paid their charges in advance before they carry the goods
! To claim alien on the goods until their charges are paid
! To refuse to carry the goods in certain cases, where:
o The goods are not of a class the carrier professes to carry (Cowper v JG Goldner Pty Ltd
(1986))
o The goods are improperly or insufficiently packed
o The carrier’s vehicles have no available space; or
o The destination is not within the carrier’s usual route or radius
Carriage of Goods by Rail
! Legislation in NSW and Qld provides that the relevant State railway authority is not a common
carrier (Transport Administration Act 1988 (NSW), s 91; Transport Infrastructure Act 1994
(Qld), s 137.)
! In Victoria the Transport Act 1983 (Vic), s 49 formerly provided that the State rail authority was
not a common carrier. That provision was repealed by the Transport (Amendment) Act 2000
(Vic), s 9.
! In South Australia an industry participant is not a common carrier: Railways (Operations and
Access) Act 1997 (SA), s 17.
! Even where the respective Acts declare the Railways Commissioner to be a common carrier there
are frequently provisions which give the Commissioners special exemptions. It is common to
have by-laws which limit the amount of the Commissioner’s liability, or the time within which
claims must be made, or impose special conditions as to declaration of the nature of the goods and
payment of increased charges.
! As to railways controlled by the Commonwealth government, the Australian National Railways
Commission Act 1983 (Cth), s 72 provides that the Commission is not a common carrier.
Carriage of Goods by Air
! The Commonwealth Civil Aviation (Carriers’ Liability) Act 1959 (Cth) gives effect to the
Warsaw Convention (as amended), which deals with international carriage by air.
! The limitation of liability under the Convention applies only to carriage by air, which does not
include any travel by land outside the airport: Siemens Ltd v Schenker International (Australia)
Pty Ltd (2004) 216 CLR 418.
! The failure of an airline to warn of the risk of deep venuous thrombosis (DIV) does not constitute
an ‘accident’ under the Convention. An accident is “something external to the passenger”: Povey
v Qantas Airways Ltd (2005) 223 CLR 189.
! The Civil Aviation (Carriers’ Liability) Act 1959 (Cth) also contains provisions applicable to
carriage wholly within Australia and its Territories (except wholly intrastate carriage) and to such
carriage between Australia and places outside Australia to which the Warsaw Convention does
not apply: Pt V.
! With respect to international carriage, the Act imposes on a carrier a liability which is virtually
absolute because of the limited defences available to it for death of or injury to passengers and
loss of, damage to and delay in delivering baggage and cargo. In each case upper limits are
prescribed. Liability to compensate beyond these limits occurs only if the carrier has been guilty
of wilful misconduct or fails to issue a ticket or consignment note in a prescribed form.
! Part IV of the Act has been adopted in all States for intrastate carriage: Civil Aviation (Carriers’
Liability) Act 1967 (NSW); Civil Aviation (Carriers’ Liability) Act 1961 (Vic); Civil Aviation
(Carriers’ Liability) Act 1964 (Qld); Civil Aviation (Carriers’ Liability) Act 1962 (SA); Civil
Aviation (Carriers’ Liability) Act 1961 (WA); Civil Aviation (Carriers’ Liability) Act 1963 (Tas).
! In respect of intrastate or Pt IV carriage, the liability of a carrier for death or injury is absolute
but limited to a stated amount.
! Provision is also made for compensation for loss of or damage to baggage, again to prescribed
limits.
! The Act provides for the making of regulations to cover loss of or damage to cargo but to date no
such regulations have been made.
! The Act, in respect of all carriage, renders null and void any provision in a contract of carriage
which tends to relieve a carrier of liability or to fix limits lower than those laid down in the Act.
! There is nothing to prevent carriers from voluntarily agreeing to higher limits of liability.
Innkeepers
! An innkeeper is essentially a person who holds themself out as providing accommodation for
travellers in the course of their journeys.
! A common example of an innkeeper in more modern terminology is the hotel-keeper.
! Where an innkeeper without just cause refuses to receive and lodge a traveller, an action is
maintainable against the innkeeper without proof of special damage: Constantine v Imperial
London Hotels Ltd [1944] KB 693.
! The premises operated by an innkeeper are called a “common inn”. In Australia most licensed
hotels would technically be common inns.
! On the other hand a “private” or residential hotel is not generally a common inn. It would seem
that a motel is an “inn” in this context since the function of motels is to provide accommodation
and food on a casual basis for travellers in the course of their journeys: see Turner v Queensland
Motels Pty Ltd [1968] Qd R 189, where the point appears to have been conceded without
argument, and Irving v Heferen [1995] 1 Qd R 255 at 261.
! \In Victoria, a motel is specifically included in the definition of “inn” for the purposes of the
Carriers and Innkeepers Act 1958 (Vic), s 26.
! At common law innkeepers are insurers of the goods of their guests and may be liable for loss
even in the absence of negligence on their part: Williams v Linnitt [1951] 1 KB 565.
! An innkeeper is not liable for an act of God (for example, a storm). An innkeeper is strictly liable
for the loss of the goods of their guest, but is only liable for damage to the goods of a guest where
such damage was caused by negligence on the part of the innkeeper or the innkeeper’s employees:
Winkworth v Raven [1931] 1 KB 652 at 657.
! The common law differentiates between a “guest” and a “lodger”.
! A person who stays at an inn or hotel, regardless of the length of such person’s stay but so long
as he or she retains the character of a traveller, is a guest.
! If a person arranges for accommodation for a definite period at an agreed rate he or she is termed
a lodger.
! The strict liability of an innkeeper for the goods of a guest does not apply in respect of the goods
of a lodger or boarder: Ex parte Coulson; Re Jones (1947) 64 WN (NSW) 215 at 218.
! What is meant by special contract in this context is some contract whereby a person is received
on terms other than those on which the owner of an inn holds out that they will receive all
travellers, who are willing to pay a price adequate to the sort of accommodation provided: Turner
v Queensland Motels Pty Ltd [1968] Qd R 189 at 200.
! The distinction can be illustrated by the case of Daniel v Hotel Pacific Pty Ltd[1953] VLR 447:
o The plaintiff, D, booked accommodation in advance at the defendant’s hotel at a holiday
resort.
o D subsequently arrived at the hotel where he claimed the accommodation on the terms of
the prior booking.
o Without the booking D would not have been received at the hotel except in the event of a
cancellation.
o D, at the invitation of the defendant’s employee, put his money in the hotel safe.
o The safe was kept locked in the hotel office which was itself locked at night. During the
night, thieves entered the hotel and stole the safe.
o It was held that D was not a guest but a lodger and therefore the hotel was not strictly
liable for the loss of D’s money.
o The hotel, as a bailee, owed D a duty to take reasonable care of goods entrusted to it but
it was held that on the facts there had been no breach of that duty
! It has been held that a prior booking of accommodation and the booking of accommodation for a
specified period, although relevant matters to consider, do not conclude the question whether a
person occupying accommodation at an inn is a guest or a lodger which is a question of fact
depending in each case on the contract between the parties: Theeman v Forte Properties Pty Ltd
[1973] 1 NSWLR 418.
Statutory Limitations on Innkeepers
New South Wales
! The Innkeepers Act 1968 (NSW), s 7 limits an innkeeper’s liability for the loss of, or damage to,
a guest’s property to $100, unless:
(a) the cause of the loss or damage was some default, neglect or wilful act of the innkeeper or
their employee; or
(b) the property was deposited with the innkeeper or their employee expressly for safe
custody, or the innkeeper refused to receive the property for safe custody.
! The innkeeper only obtains this statutory protection if a notice is displayed near the reception
office and in the guest’s room notifying the guest of the limitation on the innkeeper’s liability.
! Where a guest deposits jewellery expressly for safe custody, the innkeeper will be liable for the
full value of the jewellery if it is subsequently lost or stolen, notwithstanding that the guest did not
indicate the value of the jewellery at the time of depositing it: Theeman v Forte Properties Ltd
[1973] 1 NSWLR 418.
! The Act exempts an innkeeper from liability for vehicles and any property left in them unless the
cause of the loss or damage was some default, neglect or wilful act of the innkeeper or her or his
employee: s 6.
! The Liquor Act 1982 (NSW), s 100 provides that premises to which a hotelier’s licence relates are
a common inn and accordingly, the provisions of the Innkeepers Act 1968 (NSW) applies to such
premises.
Victoria
! The Carriers and Innkeepers Act 1958 (Vic), ss 26 – 31 contains analogous provisions to those in
the New South Wales Act, except that in Victoria the liability of an innkeeper for property
deposited by a guest for safe custody, or for property which the innkeeper failed or refused
without reasonable excuse to receive for such custody, is limited to $2,000.
! However, no limitation applies where the cause of the loss or damage was some default, neglect
or wilful act of the innkeeper or her or his employee.
Queensland
! The Traveller Accommodation Providers (Liability) Act 2001 (Qld) modifies the common law
position of strict liability.
! An accommodation provider’s liability for loss of a guest’s property is limited to $250 per room
per day despite the amount of the loss or the number of guests who suffer loss in that room: s
12(2).
! An innkeeper’s common law defences are preserved: s 12(3).
! This limitation does not apply if the loss is caused by the fault of the accommodation provider or
if various conditions relating to notice to guests of the statutory limitation of liability are
breached: ss 13(2),15.
! In the case of property accepted for deposit in safe custody, the relevant limitation of liability is
$50,000: s 14.
South Australia
! Formerly, the Licensing Act 1967 (SA), s 120 limited the liability of a licensed publican for goods
brought onto the premises by a guest to $60, except where the goods were lost or damaged
through the publican’s default or neglect, or the goods were deposited expressly for safe custody.
! However, that Act was repealed by the Liquor Licensing Act 1985 (SA) which did not contain any
corresponding limiting provision.
! The 1985 Act was repealed by the Liquor Licensing Act 1997 (SA), which also does not contain
any corresponding provision.
Western Australia
! The strict common law liability of an innkeeper was abolished in Western Australia by the Liquor
Act 1970 (WA), s 173(1).
! The Liquor Act 1970 (WA) was in turn repealed by the Liquor Licensing Act 1988 (WA), s 176.
! The Liquor Licensing Act 1988 (WA), s 107 provides that a “licensee” is not liable,beyond such
amount as may be “prescribed”, to a “lodger” for loss or damage to the property of the lodger
while the property is on the licensed premises, unless:
(a) the property was lost or damaged due to the wilful act, default or neglect of the licensee or
a person in the employment of the licensee;
(b) the property was entrusted to the licensee expressly for safekeeping and the lodger
complied with the requirements of the licensee with respect to safekeeping; or
(c) the licensee did not, at the time the lodger brought the property onto the licensed premises,
have displayed, in a manner easily visible to potential lodgers, a notice indicating that liability
for loss or damage to the property of the lodger may be limited to the prescribed amount.
! A “licensee” is defined as meaning a person who holds a licence or permit under the Act, and a
“lodger” is “a person residing, whether casually or permanently, on the premises”: s 3(1).
Tasmania
! The Civil Liability Act 2002 (Tas) modifies the common law position of strict liability.
! An accommodation provider is only liable to compensate a guest for the loss, destruction or
damage of property in three circumstances.
! The first circumstance is where the damage was attributable to the negligence or deliberate or
reckless act or default of the accommodation provider or its staff.
! The second circumstance is where the property is deposited for safe custody and is damaged
therein.
! The third circumstance is where the accommodation provider does not conspicuously display a
sign describing these limitations upon liability: s 49A(3).
Australian Capital Territory
! Chapter 11 of the Civil Law (Wrongs) Act 2002 (ACT) mitigates the common law strict liability
of traveller accommodation providers.
! The Act defines “traveller accommodation” as accommodation provided for the use of the
travelling public as part of a commercial transaction: s 145(1).
! The term includes backpacker establishments, bed and breakfast establishments, hotels, motels,
resorts and serviced apartments: s 145(2).
! The liability of a traveller accommodation provider for loss or damage to a guest’s property is
limited to the limitation amount: s 151(2).
! The limitation amount is set by regulations under the Act: s 144.
! Despite the limitation upon strict liability at common law, the accommodation provider is able to
invoke any defences available under the common law: s 151(3).
! The term “property” does not include a motor vehicle brought onto the grounds by the guest: s
149(2).
! This limitation of strict liability does not apply if the loss or damage to the guest’s property is
caused by the fault of the accommodation provider, or occurs while the property has been placed
in safe custody with the accommodation provider, or occurs while the property is left (at the
accommodation provider’s request) at a place outside of the guest’s room: s 152(1).
! The limitation upon strict liability also does not apply if the accommodation provider did not
conspicuously display the statutory notice about the limitation in the reception area or room: ss
152(2), 154(1).
! A copy of the notice may also be given to the guest instead of being displayed in the room: s
154(2).
! The statutory notice is set out in Sch 1 of the Act.
Northern Territory
! The Accommodation Providers Act 1981 (NT) contains similar provisions to those outlined above
in relation to New South Wales, except that the statutory limitation on an accommodation
provider’s liability in the absence of negligence, etc, is $200, or another amount provided by
regulation.
! An “accommodation provider” is the operator of an “accommodation establishment”.
! The term “accommodation establishment” is defined to include not only a common inn or other
establishment held out as providing, without special contract, sleeping accommodation to a person
presenting themselves, but also any premises used for the purpose of providing board and
lodgings for members of the public as a commercial enterprise, including a boarding house,
guesthouse and lodging house; s 3(1).
! The term does not include a caravan park or board and lodgings provided through mobile homes,
tents or cabins.
Innkeeper’s Lien
! At common law an innkeeper (including a motel proprietor) has a lien on the goods of a traveller
or guest upon a debt for accommodation or services being incurred by the guest.
! The lien attaches to the goods of a traveller or guests which are situated in the inn and gives the
innkeeper the right to take the goods peaceably into their possession and retain them until the debt
is paid.
! However, the lien does not entitle the innkeeper to search through a guest’s belongings and
appropriate part of t hem, for example by removing money from a guest’s wallet: Irving v Heferen
[1995] 1 Qd R 255.
! The innkeeper’s common law lien carries with it no power of sale but merely a right to detain the
goods.
! In New South Wales and Victoria an innkeeper has no right of lien over a guest’s vehicle, and in
the Northern Territory a hotel-keeper has no right of lien over a vehicle or property left in or used
in connection with such
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Ashby v Tolhurst [1937] 2 KB 242 (licence and possession distinction)
Chapman Bros v Verco Bros (1933) 49 CLR 306
Council of the City of Sydney v West (1965) 114 CLR 481 (custody and control, bailment and
contract)
Cottee v Franklins Self-Serve Pty Ltd [1997] 1 Qd R 469 (unilateral contract and bailment)
Coughlin v Gillison *1899+ 1 QB 145 (bailor’s duty to communicate defects)
Derbyshire Bldg Co Pty Ltd v Becker (1962) 107 CLR 633 (fit for purpose, plaintiff’s knowledge
of defect)
Edwards v Amos (1945) 62 WN (NSW) 204 (jus tertii)
Goodwin v Ron Heath Tyre Services (SA) Pty Ltd (1999) 74 SASR 508 (bailee’s rights against
tortfeasor)
Greenwood v Municipal Council of Waverley (1928) 28 SR (NSW) 219 (possession and bailment)
Hobbs v Petersham Transport Co Pty Ltd (1971) 124 CLR 220 (definition of bailment; onus of
proof where bailed goods are damaged or lost; distinction between establishing reasonable care of
goods and absence of breach of contract)
Houghland v RR Low (Luxury Coaches) Ltd [1962] 2 All ER 159 (distinction between respective
duty of gratuitous and contractual bailment—ie bailment for reward—gross negligence and
reasonable care artificial distinction)
Martin v LCC [1947] KB 628 (jewels in care of hospital—what is reasonable care?—the need to
look at circumstances—nature of goods)
Mitchell v London Borough of Ealing [1979] QB 1 (duty of gratuitous bailee—if duty breached
bailee becomes an insurer ie responsible for any loss or damage no matter how caused)
Morris v CW Martin & Sons Ltd [1965] 2 All ER 725 (sub-bailment—transfer of possession
from bailee to third party with authority of bailor—obligations of sub-bailee to bailor)
The Pioneer Container [1994] 2 All ER 250 (sub-bailment on terms—the qualification of
obligations owed by sub-bailee to bailor based on contract between bailor and bailee)
Pivovaroff v Chernabaeff (1978) 21 SASR 1 (bailor’s liability discharged by warning)
Tinsey v Dudley [1951] 2 KB 18 (importance of custody and control in characterising bailment—
distinction between a bailment and a licence to store goods on property)
Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd (1994) Aust Torts Reports 81-292
(obligation to take all steps which are reasonable in the circumstances)
Ultzen v Nichols [1894] 1 QB 92 (importance of custody and control in determining existence of a
bailment)
WGH Nominees v Tomblin (1985) 39 SASR 117 (onus of proof—circumstances of a gratuitous
bailment)
The Winkfield [1902] P 42 (damages—significance of possession—rights of bailee—against the
wrongdoer possession is title)
Uncollected Goods Act 1995 (NSW)
Agency
Definition
Agency is the relationship between two parties where one (the agent), with the authority of the other
(principal), can bind that other in a legal relationship with a third party.
Classification of Agents
• Special agents: specific role, a one off transaction
• General agents: a class of transaction—involvement in a particular trade or business
• Universal agent: unlimited authority to do all a principal may do—eg power of attorney
Creation of Agency
• Express
o By deed
o By writing
o By words
• Estoppel—representation
• Ratification—retrospective
Nature and Scope of Agent’s Authority
• Actual authority
o Express actual authority
o Implied actual authority
• Apparent or ostensible authority
Key cases on agent’s authority
• Ostensible: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
• Implied: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
• Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975)
133 CLR 72
• Freeman & Lockyer
o Facts: Company formed for purchase of property. No managing director appointed.
Company board acts as though K is managing director. Without express authority of the
board K engages architects for DA.
o Held: Company liable for fees—ostensible authority of K
• Per Diplock LJ
It must be shown:
(a) Representation made that agent had authority to enter transaction;
(b) Representation made by person with actual authority;
(c) Contractor induced by such representation to enter into the contract, ie, there is reliance on the
representation; and
(d) Company had capacity to enter into such an agreement pursuant to its articles.
[NB operation of ss 128,129 Corporations Act 2001 see for example Story v Advance Bank (1993) 31
NSWLR 722 (applying previous legislation)]
Representation
• ‘The representation which creates “apparent” authority may take a variety of forms of which the
commonest is representation by conduct, ie, by permitting the agent to act in some way in the
conduct of the principal’s business with other persons.’ per Diplock at 644
• Hely-Hutchinson v Brayhead
o Facts: R chairman and chief executive of Brayhead. R acted as de facto managing director
with board’s acquiescence. R provides guarantee and indemnity to managing director of
related company in breach of statutory obligations to Brayhead.
o Held: R had implied authority from the board of Brayhead to enter into contracts.
o Per Lord Denning MR [Roskill J] held that Mr Richards had ostensible or apparent
authority to make the contract, but I think that his findings carry with them the necessary
inference that he had also actual authority, such authority being implied from the
circumstance that the board by their conduct over many months had acquiesced in his
acting as their chief executive and committing Brayhead to contracts without the
necessity of sanction from the board.
Implied and ostensible overlap
• It is implied when it is inferred from the conduct of the parties and the circumstances of the case,
such as when the board of directors appoint one of their number to be managing director. They
thereby impliedly authorise him to do all such things as fall within the usual scope of that office.
Actual authority, express or implied, is binding as between the company and the agent, and also
as between the company and others, whether they are within the company or outside it.
• Ostensible or apparent authority is the authority of an agent as it appears to others. It often
coincides with actual authority. Thus, when the board appoint one of their number to be managing
director, they invest him not only with implied authority, but also with ostensible authority to do
all such things as fall within the usual scope of that office.
• Hely-Hutchinson All ER @ 102
o Per Lord Wilberforce
…it is legitimate to go on and consider, over and above the powers that he had as
chairman, what the actual circumstances of the relationship between him and the board of
directors may show. Looked at in that way, it seems to me clear from the findings of the
judge that Mr Richards in fact impliedly had authority to do what he did by these two
agreements.
• Crabtree Vickers
o Facts: Family business—Bruce Sr, director; Bruce Jr managing director; Peter (Bruce Jr’s
brother) no designation. Peter enters into contract for printing press and signs against
company printed order form per Bruce Jr.
o Held: Bruce Jr had no authority to purchase therefore Peter could not have ostensible
authority.
‘The signature of the order itself is very strong evidence [of BM Jr exercising ostensible
authority ]. It was signed in the name of Bruce McWilliam Jr. However, the finding that
Bruce Mc William Jr did not give actual authority to Peter to sign the order in his name
prevents a finding that the contract was made on the ostensible authority of the managing
director.’
To find ostensible authority in Peter
• Bruce McWilliam Jr had to have actual authority to make representation
• He only had ostensible authority
• Further issues:
o Conduct of company
o Breach of agent’s warranty of authority
o Negligence of company in allowing agent to misrepresent authority (see Watts article).
Breach of Warranty of Authority
• Collen v Wright (1857) 120 ER 241
a person, who induces another to contract with him as the agent of a third party by an
unqualified assertion of his being authorised to act as such agent, is answerable to the person
who so contracts for any damages which he may sustain by reason of the assertion of
authority being untrue
see further: Faulkner ‘Breach of Agent’s Warranty of Authority: An Altogether Anomalous
Cause of Action’ (2000) 74 ALJ 464
• Currently damages for loss of bargain however if no misrepresentation no bargain at all
Negligence and Agency Law
• See Watts article—‘The Creep of Negligence into Agency Law in Australia’ (2005) 26 ABR 185
• See also Essington Investments in supplementary readings
[46]Although this was not spelt out in argument before this Court, in my opinion the principle
in these cases is that the principal has created a substantial risk that other persons may be
misled if the person entrusted with the relevant document does something unauthorised with
that document. If the principal has acted unreasonably in creating the risk and/or allowing it
to continue, then it may be found that the principal has "permitted" a representation to be
made on the basis of the document in question.
• See also Pacific Carriers Ltd v BNP Paribas [2004] HCA 35
Employees’ representations and s 52 TPA
• Houghton v Arms [2006] HCA 59
[35] Mr Arms was engaging in trade and commerce under the name “Australian Cellar Door”
and by means of the auscellardoor web site. He enlisted WSA to provide services and advice
for the purposes of his business. It was the business of WSA to provide such advice and
services. It is not to the point that Mr Houghton and Mr Student themselves were not business
proprietors or that their activities were an aspect or element of the trade or commerce of WSA
(and of Australian Cellar Door) but not of “their” trade or commerce. Mr Houghton and Mr
Student nevertheless engaged in conduct in the course of trade or commerce and were thus
within the ambit of the FT Act.
Threshold between actual and ostensible authority
• Sometimes ostensible authority exceeds actual authority.
• For instance, when the board appoint the managing director, they may expressly limit his
authority by saying he is not to order goods worth more than £500 without the sanction of the
board. In that case his actual authority is subject to the £500 limitation, but his ostensible
authority includes all the usual authority of a managing director. The company is bound by his
ostensible authority in his dealings with those who do not know of the limitation. He may himself
do the “holding-out”. Thus, if he orders goods worth £1,000 and signs himself “Managing
Director for and on behalf of the company”, the company is bound to the other party who does not
know of the £500 limitation… per Denning MR Hely-Hutchinson v Brayhead [1967] 3 All ER 98
at 102
Ratification
• Mckeand v Thomas [2006] NSWSC 1028
‘Where someone has purported to enter a contract on behalf of a principal, at a time when
they do not have actual authority to enter that contract on behalf of the principal, it is open to
the principal to ratify the entering of the contract. If ratification occurs, the person who
entered the contract is treated as having had authority to do so, at the time of entering the
contract. In other words, the ratification relates back to the time of making the contract…
‘Before a person can ratify a contract which has been purportedly entered in their name, that
person must have full knowledge of the material circumstances, or else must intend to adopt
the entering of the contract regardless of what the material circumstances might be
‘The onus of proving the elements of a ratification rests upon the person who asserts that
there has been a ratification…Per Cambell J
Overview of authority issues
• Actual—agreement between principal and agent (ie contract)
– Express: specific authorisation—expressed in words
– Implied: authority attached to office or position; or inferred from conduct of parties or
course of business
• Ostensible/apparent—representation between principal and third party
– ‘Principal’ must have actual or implied authority for representation to be binding
– Principal estopped from denying responsibility
– NB companies—agent acting within ambit of office; no need to check articles of
association
• NB ‘ostensible authority…may in some cases coincide with, and in most cases overlap the
question of implied authority’. Per Lord Wilberforce Hely-Hutchinson [1967] 3 All ER 98 at 105
Duties of an Agent
• to follow the principal’s instructions
• to act in person (not delegate responsibility)
• to act in good faith
• to make a full disclosure of any personal interest
• to not make a secret profit
• to exercise reasonable care and skill
An agent may have a fiduciary relationship with the principal
• ‘He puts himself in such a position that he has a temptation not faithfully to perform his duty to
his employer… [W]here an agent entering into a contract on behalf of his principal, and
without the knowledge or assent of that principal, receives money from the person with whom he
is dealing, he is doing a wrongful act, he is misconducting himself as regards his agency… and
that gives to his employer… power and authority to dismiss him from his employment as a person
who … is shown to be incompetent of faithfully discharging his duty to his principal.’ Boston
Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339
Not to make a secret profit
• Real Estate Services Council v Alliance Strata Management Ltd (NSW CA 40099 of 1994)
first, that for a fiduciary such as an agent to receive a commission for which he does not
account is…a grave breach of his duty…
secondly, if full disclosure is made, and an informed consent given by the person to
whom the fiduciary duty is owed, the commission may be retained without impropriety
by the fiduciary…
thirdly, if the fiduciary, before embarking on his fiduciary occupation, stipulates for the
retention of commissions as the price of his occupation, the rules governing fiduciaries
have got nothing to do with the receipt of commissions…Per Meagher JA
Rights of Agents
• Right to remuneration
• Right to indemnity and reimbursement
• Right of lien
Right to Indemnity
• New Zealand Farmers' Co-operative Distributing Company Limited v National Mortgage And
Agency Company Of New Zealand Limited [1961] NZLR 969 Default as a result of agent’s lack
of care and skill defeats right to indemnity.
o Facts: livestock purchaser ignorant of grading of quality of Rams
o Held: ‘In my opinion a default which consists in a lack of knowledge which the agent is
held out to possess is fundamental and defeats a right to reimbursement of expenses
which would never have been incurred if that knowledge had been possessed.’
o NB distinction between right to reimbursement and liability for lack of reasonable care
and skill.
Liabilities of Agents
• Liability of Agent to Principal
– Breach of contract—not following instructions
– Negligence—not exercising reasonable care and skill
• To third parties
– Where principal disclosed- no liability unless agent operates outside of authority
– Undisclosed principal—agent may be personally liable or both agent and principal
joint liability
The distinction between bailment and agency
• Petrifond Midwest Ltd v Esso Resources Canada Ltd (1996) 42 Alta LR (3d) 157
• Adopting principles in Fridman’s Law of Agency
o An agent performs a service for his principal; he represents him to the outside world; he
can acquire rights for his principal and subject his principal to liabilities…
o First, the bailee does not represent the bailor. He merely exercises, with the leave of the
bailor (under contract or otherwise), certain powers of the bailor in respect of his
property. Secondly, the bailee has no power to make contracts on the bailor's behalf; nor
can he make the bailor liable, simply as bailor, for any acts he does.
Factors and Mercantile Agents
• Sell goods on behalf of the principal without revealing the existence of the principal.
• Has possession of the goods
• Factors (Mercantile Agents) Act 1923 (NSW)
5(1) Where a mercantile agent is entrusted as such with the possession of any
goods… any sale pledge or other disposition of the goods made by the agent in the ordinary
course of business of a mercantile agent shall, subject to the provisions of this Act, be as valid
as if the agent were expressly authorised by the owner of the goods to make the same
Read- Sydney Water v Makucha
Formation
Authority
Duties
Liabilities
•
Turner 28th ed chapt 21 [21.20]-[21-490]; 13 [13.20]-[13.860]
Agency
• Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975)
133 CLR 72
• Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
• Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
• Sydney Water Corp v Makucha [2010] NSWSC 114
• Toll (Fgct) Pty Ltd v Alphapharm Pty Ltd (2004) 211 ALR 342
Guarantees and Payment Methods
Definitions
Guarantee:
o a contractual obligation to pay another’s debt when they’re in default. It’s a secondary
obligation—only arises in the event of default.
‘...a collateral contract to answer for the debt, default or miscarriage of another who is or is
contemplated to be or to become liable to the person to whom the guarantee is given’
Sunbird Plaza Pty Ltd v Maloney (1988) 77 ALR 205 per Mason J [collateral contract: an
independent promise connected to the main contract]
Indemnity
o To protect another against loss or make up another’s loss. 1 primary obligation—the
liability is part of the principle contract.
An indemnity is a promise by the promisor that he or she will keep the promisee harmless
against loss as a result of entering into a transaction with a third party. Sunbird Plaza per
Mason CJ
.
Guarantee of both payment and performance
• Guarantee usually associated with debt default
• Guarantee can also be performance of contract
• Where there is an outstanding debt guarantor can be sued for liquidated amount
• Where contract not performed guarantor can be sued for damages for breach of contract (see
Sunbird)
Sunbird Plaza Pty Ltd v Maloney (1988) 77 ALR 205
• Defendants guarantee company purchaser’s performance in purchase of Gold Coast home unit
($148,500). Deposit of $14,850 paid on exchange. Purchase not completed, vendor wins order for
specific performance, sues guarantors for damages for breach of contract
• Held: technicality—loss of bargain damages available only if contract is at an end; specific
performance award meant contract has not been terminated
Not necessarily a personal obligation
• Liability may be limited by attachment to property by way of, for example, charge or mortgage.
i.e. the loan is secured by assets of the guarantor (See Re Conley [1938] 2 All ER 127. NB
application of PPSA.
•
There is a transaction which in substance secures payment or performance of an obligation (PPSA
s 12).
Guarantor and disclosure obligations
• A contract of guarantee not a contract of utmost good faith (uberrimae fidei)
• Insurance contracts are contracts of utmost good faith
o Both insurer and insured rely on honesty and good faith to assess risk and understand
disclosure obligations
• Lenders only seek guarantors because they do not have absolute faith in borrower
The Nature of a Guarantee
• Not a contract of utmost good faith
• No general duty on lender to inform guarantor of material fact relevant to risk
• Lender under a duty to disclose information which was ‘not naturally to be expected’
Goodwin v The National Bank of Australasia (1968) 117 CLR 173
• Facts: 82yo woman becomes surety for son and daughter-in-law; mortgages house; did not know
that a week before bill of mortgage drawn up her son had become surety for a third party
• Argued non-disclosure was a misrepresentation
• In the same way pre-existing debt not necessary to disclose, obligation as surety in the same class.
Goodwin principle
• [lender] bound to disclose to the intending surety anything which has taken place between the
bank and the principle debtor ‘which was not naturally to be expected’, or as it was put by
Pollock M.R., in Lloyd's Bank Ltd v. Harrison (1925) ...‘the necessity for disclosure only goes to
the extent of requiring it where there are some unusual features in the particular case relating to
the particular account which is to be guaranteed’.”
Goodwin rationale
• The reason why a creditor is bound to reveal to an intending surety anything in the transaction
between himself and the debtor which the surety would expect not to exist is that a failure to make
disclosure in those circumstances would amount to an implied representation that the thing does
not exist. Per Gibbs CJ relying on Lee v Jones (1864) 17 CB (NS) 482 in Amadio at (ALR) 407.
Not unusual facts
• the unsatisfactory character of a previous account of the borrower
• the fact that the borrower is suspected of fraud
• the fact that a borrower’s bankrupt husband was entitled to draw on a guaranteed bank account
and that the drawer had ordered the cheques not to be paid
• details of the financial position of the borrower including the amount of any existing
• indebtedness, details of previous defaults or the borrower’s credit rating
• the fact that an overdraft was being consistently exceeded or that cheques were being dishonoured
• details of the creditworthiness of a co-guarantor, even where that co-guarantor had no assets
• the fact that the borrower has given guarantees to third parties, thereby exposing the borrower and
the guarantor to an additional contingent liability
List from Australian Finance Law MSJ 5th ed
Why would a lender require a guarantor?
• Commercial Bank of Australia Ltd v Amadio (1983) 46 ALR 402
A surety who guarantees a customer's account with a bank will not expect that the account
has not been overdrawn or that the bank is satisfied with the customer's credit, for the
probable reason why the bank requires the guarantee is that the customer has been
overdrawing his account, and wishes to do so again, and that the bank is not satisfied with his
credit. Per Gibbs CJ
NB bank’s duty of confidence
• Commercial Bank of Australia Ltd v Amadio (1983) 46 ALR 402
The general rule, therefore, is that a bank is not obliged to disclose to the surety matters
affecting the credit of the customer...Indeed, a bank might well commit a breach of the duty
of confidence which it owes to its customer if it did disclose matters of that kind. Per Gibbs
CJ
BUT
• Bank had colluded with customer to maintain the façade of prosperity of the customer’s business
• Arrangement with customer was to increase overdraft and then quickly eliminate overdraft
facility. This would have only been of temporary benefit to the company and solely benefited the
bank.
• For Gibbs CJ this was sufficient to render guarantee unenforceable
Vitiating Factors
• Unconscionable conduct—exploitation of special disability
• Undue influence—quality of consent
Commercial Bank of Australia Ltd v Amadio (1983) 46 ALR 402
• Facts: Guarantors elderly Italian couple with poor English. They went guarantor for their son’s
business believing the business was successful. The bank’s loan was secured by a mortgage on
their property. The business was in fact in serious financial difficulty. The bank arranged matters
to create the impression that the business was in a better financial state than it actually was. The
bank was anxious to keep the business and had a commercial arrangement with the business in
any case.
• Held:
o Gross inequality of bargaining power
o Unconscionable conduct—bank took unconscientious advantage of position of guarantors
o Guarantors had special disability—elderly, poor command of English, Mr Amadio
suffered severe memory loss
Wife’s equity—Garcia v National Australia Bank Ltd [1998] HCA 48
• Wife guarantees debts of husband’s gold broking business
• Wife was not under a special disability as per Amadio—she was a shareholder and director.
• Court considered application of Yerkey v Jones (1939) 63 CLR 349: ‘Nothing but independent
advice or relief from the ascendancy of her husband over her judgment and will would suffice’
Garcia v National Australia Bank Ltd [1998] HCA 48
• Held: The marriage relationship is such that one, often the woman, may well leave many, perhaps
all, business judgments to the other spouse...Sometimes, with not the slightest hint of bad faith,
the explanation of a particular transaction given by one to the other will be imperfect and
incomplete, if not simply wrong. That that is so is not always attributable to intended deception,
to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation
because of emotional involvement. It is, at its core, often a reflection of no more or less than the
trust and confidence each has in the other.
Statutory Protections
• Australian Consumer Law s 18 (and state and territory Fair Trading Act equivalents)
• Consumer Credit Code (credit is, or is intended to be, provided wholly or predominantly for
personal, domestic or household purposes)
• Australian Securities and Investments Commission Act 2001 Pt 2 Div 2
o 12BF. Unfair terms of consumer contracts
o 12DA. Misleading or deceptive conduct
• Contracts Review Act 1980 (NSW)
For TPA s 52 see for example Nolan v Westpac Banking Corporation (1989) 98 FLR 226 (application
assumed not argued)
Construction of guarantee
• Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88 (Privy Council)
• Such a document falls to be construed strictly; it is to be read contra proferentem; and, in case of
ambiguity, it is to be construed in favour of the surety
• See also Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549
Discharge of the guarantor
• Payment of outstanding debt
• Variation of contract
• Breach of contract by lender
• See Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 (breach
of conditions by lessor discharged obligations)
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd
• At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and
that ambiguous contractual provisions should be construed in favour of the surety.
• The doctrine of strictissimi juris provides a counterpoise to the law's preference for a construction
that reads a provision otherwise than as a condition.
• A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the
surety and so the provision should be interpreted as a condition, or perhaps as an innominate term,
instead of a mere warranty.
• Facts (from CLR head note):
o A surety guaranteed the performance of a hirer under a contract for the hire of machinery
[secured by $125k deposit].
o By cl. 8 of the guarantee the owner of the machinery agreed to notify the surety if the
hirer proposed to sell or assign its interest in the machinery.
o By cl. 9 the owner agreed to notify the surety if the hirer was in default under the
contract, whereupon the surety and the owner would confer about the course of action the
owner would take pursuant to the default.
o The owner committed breaches of both clauses.
Indemnity
• An indemnity is a promise by the promisor that he or she will keep the promisee harmless against
loss as a result of entering into a transaction with a third party. Sunbird Plaza per Mason CJ
Construction of indemnity clauses
• Indemnity clauses are provisions that purport to exempt one party from civil liability which the
law would otherwise impose upon it.
• They are provisions that shift to another party the civil liability otherwise attached by law to the
first party.
• Self-evidently this is a serious thing to do or to attempt to do.
• Where such indemnities are said to arise out of contracts which are ambiguous or unclear, it is not
unreasonable that their provisions should be construed so that any uncertainty is resolved
favourably to the party thereby burdened by legal obligations that would not otherwise attach to it.
Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28 at [68]
Reading:
• Turner 28th ed ch 20; 23; 24
• Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 70 ALR 641
• Behan v Obelon Pty Ltd [1984] 2 NSWLR 637 (duty of disclosure)
• Commonwealth Bank of Australia v Amadio (1983) 151 CLR 447 (duty of disclosure in
guarantees—unconscionable dealing)
• Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88 (contract of guarantee and consideration)
• Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1 (priorities—new mortgage
as against earlier charge)
• Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245; 77 ALR 205 (the nature of a guarantee—
distinction between guarantee and indemnity)
• Tricontinental Corp Ltd v HDFI Ltd (1990) 21 NSWLR 689 (1983) 151 CLR 447
Security Interests over Personal Property: the Personal Property
Securities Act 2009 (Cth)
What is security??
“The general concept of security involves a transaction whereby a person to whom an
obligation is owed by another person called the ‘debtor’ is afforded, in addition to the
personal promise of the debtor to discharge the obligation, rights exercisable against some
property of the debtor in order to enforce discharge of the obligation”
Sykes and Walker, The Law of Securities, 5th ed, p3
Security Interests over Personal Property
! Any secured transaction can be broken down into two distinct elements:
o The Primary obligation(s)
" What the parties agree to pay or perform subject to the terms of the agreement
o The secondary/derivative obligation(s)
" The security interest
! If the primary obligation can be satisfied there is no need to look toward the security interest.
! A security interest can attach to collateral (i.e. assets-which may include investment instruments).
! A security over an asset may be used to ensure that a loan is repaid in full.
! A security can also be seen as a risk management device for protecting an investment, or ensuring
payment for a service or performance of an obligation.
! Distinguish between a contractual obligation to repay (debt) and a right over property (as security)
! May be combined in one instrument (secured debt)
! Multiple security interests may be given by a grantor (debtor) over collateral-this creates a priority
contest
Security at Common Law
! Non-Possessory (subject to registration as opposed to possession)
•
Mortgage - (Traditionally, title passed at outset)
By definition, a mortgage is ‘a security created by contract for the payment of
a debt already due or to become due, or of a present or future advance,
effected by means of an actual or executory conveyance of real or personal
property, charging the mortgaged property with the payment of the money
secured.’
•
Charge - (No passing of title required)
Bestows proprietary rights upon the chargee (that is, the party benefiting from
the security interest) to appropriate an asset or class of assets should the
chargor (that is, the party owing the obligations) default on obligations owing
to them.
! Possessory:
•
Lien – (No right of sale to redeem money)
A contractual lien can be defined as an instrument that entitles a party to retain
possession of encumbered property until a debt incurred with respect to such
property has been paid.
•
Pledge – (Right of sale – otherwise known as a ‘pawn’)
Using a pledge to take security operates through use of a bailment whereby the
pledgor leaves property with the pledgee.
! Under Common Law there were issues trying to fit interests into these categories and
many were developed to move around the common law therefore development of PPSA
! Problems under CL are:
o Inconsistency of interpretation;
o Different rules amongst different Australian States and Territories;
o Considerable burden on judicial system;
o Unnecessary complexity;
o Encouragement of evasive drafting techniques;
o Unpredictability;
o Conceptual difficulty;
o Legal and regulatory reforms ineffective;
o Registers overlap;
Terminology in PPSA
! Debtor - (party who owes money or performance of the primary obligation)
! Grantor - (party who gives security interest to the secured party but need not be the
debtor, e.g. a guarantor)
! Security interest – (Interest satisfying s 12(1) of the PPSA)
! Secured party - (party who obtains a security interest over collateral)
! Collateral - (personal property that is subject to a security interest)
! Can also give rise to proceeds - security interest will automatically attach to proceeds
(s32)
! Financing statement - (PPS registration form)
! Security agreement - (agreement or act creating a security interest between a debtor and
secured party or a writing evidencing such an agreement- this is does not have to go on
the register)
! Takes effect according to its terms (s18(1))
PPSA Rationales
! Irrelevance of title
o Nemo dat quod non-habet is non-determinative
o PPSA approach applies to resolve priority disputes (see s 55)
! Substance as opposed to form
o s 12(1) – security interest no longer restricted to mortgages, charges, liens and
pledges.
o ss 12(3), 13 – Also consider ‘deemed’ security interests
! Preservation of commercial realities and existing law
o Where possible, the PPSA seeks to preserve what is commercially accepted
practice in Australia.
! Primacy and predictability of the PPS Register
o Operates similar to the Torrens register.
o Priority based on what information would be available to a reasonable third party
searcher.
! Consumer Protection
o See Pt 2.5 and Ch 4 of the PPSA – See also, Exp. Memorandum [4.32] in relation
to the National Credit Code
Exclusions from the PPS (s 8)
! Real Property interests (including fixtures)
! Statutory security interests (eg arising under tax laws)
! Security interests that arise by operation of law (eg liens)
! Set-off arrangements
! Special purpose trusts (Quistclose trusts)
! Note: In addition to the exclusions, the PPSA only applies to security interests taken over
personal property and not with general dealings of personal property.
Definition of Security Interest s 12 (1)
! Section 12 Meaning of security interest
s12 (1)
A security interest means an interest in personal property provided for by a transaction that,
in substance, secures payment or performance of an obligation (without regard to the form of
the transaction or the identity of the person who has title to the property).
! The following elements act as guidance to aid the definition in s 12 :
1. The security interest must be CONSENSUAL;
2. The security interest must relate to personal property;
3. The security interest must bestow some form of PROPRIETARY RIGHT;
4. The security interest must secure payment or performance of an obligation or
obligations.
! Consent - essentially means, by way of agreement between the parties.
! Proprietary rights – mean rights in relation to property. Need not be OWNERSHIP rights,
possession is a form of proprietary right. Remember, a grantor can only grant security over the
rights they have – if they have no proprietary rights over collateral they wish to create a security
interest over – a security interest cannot arise.
! Subsection 12 (2) gives examples of security interests :
(a) a fixed charge;
(b) a floating charge;
(c) a chattel mortgage;
(d) a conditional sale agreement (including an agreement to sell subject to retention of title);
(e) a hire purchase agreement;
(f) a pledge;
(g) a trust receipt;
(h) a consignment (whether or not a commercial consignment);
(i) a lease of goods (whether or not a PPS lease);
(j) an assignment;
(k) a transfer of title;
(l) a flawed asset arrangement
Deemed Security Interests s 12(3)
! S 12(3) A security interest also includes the following interests, whether or not the
transaction concerned, in substance, secures payment or performance of an obligation:
(a) the interest of a transferee under a transfer of an account or chattel paper;
(b) the interest of a consignor who delivers goods to a consignee under a commercial
consignment;
(c) the interest of a lessor or bailor of goods under a PPS lease.
! Note: these interests need not satisfy the s 12(1) test to be caught by the PPSA – they are
deemed by the act to be security interests and thus the PPSA applies to them.
! Further, the enforcement provisions pursuant to Ch 4 of the PPSA however do not apply
to interests which satisfy s 12(3) or 13 without satisfying s 12(1)
PPS Leases s 13
! S 13(1) A PPS lease means a lease or bailment of goods:
(a) for a term of more than one year; or
(b) for an indefinite term (even if the lease or bailment is determinable by any party
within a year of entering into the lease or bailment); or
(c) for a term of up to one year that is automatically renewable, or that is renewable
at the option of one of the parties, for one or more terms if the total of all the terms
might exceed one year; or
(d) for a term of up to one year, in a case in which the lessee or bailee, with the
consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted)
possession of the leased or bailed property for a period of more than one year after
the day the lessee or bailee first acquired possession of the property (but not until the
lessee’s or bailee’s possession extends for more than one year);
! NOTE: The ‘one year requirement’ is reduced to 90 days for collateral which may or
must be described by serial number – s 13(1)(e). Such collateral is defined by section 10
and the Personal Property Security Regulations 2010 (Cth).
Exceptions s 13(2)
! Section 13(2) However, a PPS lease does not include:
(a) a lease by a lessor who is not regularly engaged in the business of leasing goods;
or
(b) a bailment by a bailor who is not regularly engaged in the business of bailing
goods; or
(c) a lease of consumer property as part of a lease of land where the use of the
property is incidental to the use and enjoyment of the land; or
(d) a lease or bailment of personal property prescribed by the regulations for the
purposes of this definition, regardless of the length of the term of the lease or
bailment.
! This is designed to aid the PPSA as it is designed to prevent commercial parties from
utilising different instruments to achieve security interests. It is not designed to impose
onerous requirements on parties who never purport to create a security interest.
! Financing or operating instruments:
o Operating or ‘true’ instruments do not create a security interest, for e.g. a lease
where the lessor allows the lessee to take possession of certain property however
there is never an intention at any point that the lessee will or might become the
owner.
o Financing or ‘security’ instruments are those which can be classified as
‘security’ interests – such as a lease where the lessee has an option to purchase the
leased goods at the end of the lease term.
o There will be cases where instruments exhibit both ‘operating’ and ‘financing’
characteristics.
o If in doubt, the most prudent advice is to assume the PPSA applies and comply
with it.
General Rules s 18
Section 18 General rules about security agreements and security interests
(1) A security agreement is effective according to its terms.
(2) A security agreement may provide for security interests in after-acquired
property.
(3) A security interest in after-acquired property attaches without specific
appropriation by the grantor.
(4) A security agreement may provide for future advances.
(5) A security interest is taken to secure reasonable expenses in relation to the
enforcement of the security interest, unless the parties agree otherwise.
Security Agreements s 20
! A security agreement need not be in writing to be enforceable as between the debtor and the
secured party.
! This however defeats the purpose of taking security, that is, we are seeking rights against the
world at large (rights in rem) – thus there is a general writing requirement:
Written security agreements
s 20(2) A security agreement covers collateral in accordance with this subsection if:
(a) the security agreement is evidenced by writing that is:
(i) signed by the grantor (see subsection (3)); or
(ii) adopted or accepted by the grantor by an act, or omission, that reasonably appears to be
done with the intention of adopting or accepting the writing; and
(b) the writing evidencing the agreement contains:
(i) a description of the particular collateral, subject to subsections (4) and (5); or
(ii) a statement that a security interest is taken in all of the grantor’s present and afteracquired property; or
(iii) a statement that a security interest is taken in all of the grantor’s present and afteracquired property except specified items or classes of personal property.
Enforceability against Third Parties
! Once the writing requirement is satisfied:
Section 20(1) A security interest is enforceable against a third party in respect of particular collateral
only if:
(a) the security interest is attached to the collateral; and
(b) one of the following applies:
(i) the secured party possesses the collateral;
(ii) the secured party has perfected the security interest by control;
(iii) a security agreement that provides for the security interest covers the collateral in
accordance with subsection (2).
Attachment s 19
! Attachment required for enforceability
Section 19(1) A security interest is enforceable against a grantor in respect of particular collateral
only if the security interest has attached to the collateral.
! Attachment rule
Section 19(2) A security interest attaches to collateral when:
(a) the grantor has rights in the collateral, or the power to transfer
secured party; and
rights in the collateral to the
(b) either:
(i) value is given for the security interest; or
(ii) the grantor does an act by which the security interest
arises.
! Note: attachment occurs when rights over the collateral are obtained by the grantor (unless s
19(3) applies)
! If a security interest sufficiently ATTACHES to the underlying collateral it is enforceable as
between the grantor and the secured party.
! A security interest will only be enforceable against a third party (in other words, as against the
world at large) however, if it is PERFECTED.
Perfection s 21
! Section 21(1) A security interest in particular collateral is perfected if:
(a) the security interest is temporarily perfected, or otherwise
perfected, by force of this
Act; or
(b) all of the following apply:
(i) the security interest is attached to the collateral; [that is section 19 is satisfied]
(ii) the security interest is enforceable against a third party; [that is section 20 is satisfied]in writing
(iii) subsection (2) applies
! Section 21(2) This subsection applies if:
(a) for any collateral, a registration is effective with respect to the collateral; or
(b) for any collateral, the secured party has possession of the collateral (other than possession as a
result of seizure or repossession); or
(c) for the following kinds of collateral, the secured party has control of the collateral: - don’t need to
know control
(i) an ADI account;
(ii) an intermediated security;
(iii) an investment instrument;
(iv) a negotiable instrument that is not evidenced by a certificate;
(v) a right evidenced by a letter of credit that states that the letter of credit must be presented
on claiming payment or requiring the performance of an obligation;
(vi) satellites and other space objects.
! The idea behind ‘perfecting’ a security interest is essentially to put the world at large on notice of
all existing security interests over personal property.
! This is important for at least two reasons:
o
Firstly, subsequent secured parties can make an informed decision regarding whether to
advance further funds to a particular party or not; and
o
Secondly, end users of property (i.e. purchasers like you and I) can find out if property is
otherwise encumbered and in some instances, who the true owner of the property is (take
motor vehicles as an example).
! If you are putting all prudent third party searchers on notice of your existing security interest it
follows that you should be entitled to retain priority from the time perfection is satisfied
(provided the perfection is valid and effective).
Perfection by Registration
! Perfection by registration is covered by Pt 5.3 of the PPSA – commencing with s 150.
Section 150 - Registration-on application
(1) A person may apply to the Registrar to register a financing statement with respect
to:
(a) a security interest; or
(b) personal property prescribed by regulations made for the purposes of
paragraph 148(c).
(2) A person may apply to the Registrar to register a financing change statement to
amend a registered financing statement.
(3) The Registrar must register the financing statement or financing change
statement in accordance with the application, but only if:
(a) the application is in the approved form and
(b) the fee (if any) determined under section 190 has been paid; and
(c) the Registrar is not satisfied that the application is:
(i) frivolous, vexatious or offensive, or contrary to the public interest;
or
(ii) made in contravention of section 151 (belief about security
interest); and
(d) the registration would not be prohibited by the regulations
Section 151 Registration--belief about security interest
Requirements for collateral to secure obligation etc.
(1) A person must not apply to register a financing statement, or a financing change
statement, that describes collateral, unless the person believes on reasonable grounds
that the person described in the statement as the secured party is, or will become, a
secured party in relation to the collateral (otherwise than by virtue of the registration
itself).
Civil penalty:
(a) for an individual--50 penalty units;
(b) for a body corporate--250 penalty units.
Note:
See Part 6.3 (Civil penalty proceedings).
Registration Particulars
! The PPSA is quite specific and prescriptive in this regard.
! See legislation extracts pg 35
Collateral Descriptions
! The PPSA Regulations outline collateral descriptions in clauses 2.2, 2.3 and 2.4, see pg 39 of the
Legislation Extracts
! If you are taking a security interest over a discrete class or over discrete classes of collateral (such
as a particular motor vehicle or piece of furniture) you should aim to be as descriptive as possible
in your collateral description when lodging a financing statement.
! Remember, the idea is that an innocent third party searcher should be able to identify your
security interest over the particular item of personal property encumbered upon conducting the
appropriate search.
Suffix Additions
! Remember also that a security interest can attach to future advances, proceeds and intellectual
property under the PPSA – where this is the case, only one financing statement needs to be
registered however the collateral description should include:
• “and all proceeds”, or
• “and all future advances”, or
• “and all associated intellectual property rights”
where relevant.
For example,
Collateral description:
• Commercial property.
• Motor Vehicle.
• Bobcat X5-50 Tractor and all proceeds.
• Serial number: XXXXX-XXXXX-00
Note: When a template financing statement becomes available we will have more information as to
how to fill out the form to validly register a security interest. For our purposes, complying with the
PPSA and associated Regulations is all that is required.
Perfection by Possession
! An alternative to perfection by registration (i.e. if you are perfected by possession you need not
register [but you might want to and we will discuss why])
Section 24 - Possession
Possession by one party exclusive of possession by others
(1) A secured party cannot have possession of personal property if the property is in the actual or
apparent possession of the grantor or debtor, or another person on behalf of the grantor or debtor.
(2) A grantor or debtor cannot have possession of personal property if the property is in the actual or
apparent possession of the secured party, or another person on behalf of the secured party .
Timing rule for possession of goods transported by common carrier
(3) A grantor or debtor to whom goods are transported by a common carrier acquires possession of
the goods only when the earlier of the following occurs:
(a) the grantor or debtor, or another person at the request of the grantor or
debtor, actually acquires possession of the goods;
(b) the grantor or debtor, or another person at the request of the grantor or
debtor, acquires possession of a document of title to the goods.
! The concept of pre-perfection is available under the PPSA in relation to perfection by registration.
! Pre-registration refers to the lodging of a financing statement prior to the attachment of a security
interest.
! Whilst the interest will not be enforceable unless and until attachment occurs (i.e. the grantor
obtains proprietary rights of the relevant underlying collateral) as soon as this occurs, the interest
immediately attaches and is perfected.
! More importantly, priority is retained (assuming valid and effective registration) from the point
of registration, not the point of attachment.
! Due to the nature of attaching rights under the PPSA, it is meaningless to talk about nonattachment when perfecting by possession as if the secured party in is possession of the collateral,
and the transaction is consensual between debtor and the secured party, attachment must have
occurred.
Interest that is not Perfected
! If a secured party does not perfect their security interest a number of consequences follows, we
will be focusing on the primary consequences:
• All subsequent perfected interests prevail in a priority dispute against the secured
party in question.
• Upon bankruptcy/insolvency – all unperfected security interests vest in the
grantor which effectively nullifies the interest as between the trustee of the estate
or insolvency practitioner and results in the status of the secured party as an
unsecured creditor.
• Remember the term ‘secured party’ does not just mean ‘the bank’ as we have
been discussing it – if the security interest is a ‘deemed security interest pursuant
to s 12(3) or s 13, then the owner/lessor of the personal property is deemed to be
a ‘secured party’ (and treated as such) for PPS purposes.
! All benefits of taking security in the first place will often dissipate however note, where a
subsequent secured party takes priority against the original secured party this does not render the
original interest void or unenforceable.
! The original interest is SUBORDINATED and the secured party retains its rights in personam as
against the debtor.
Default Priority Rules
Section 55 - Default priority rules
(1) This section sets out the priority between security interests in the same collateral if this
Act provides no other way of determining that priority.
Note: For other rules about priorities, see the following:
(a) the remaining provisions of this Part;
(b) Chapter 3 (agricultural interests, accessions and commingling);
(c) Part 9.4 (transitional application of this Act).
Priority between unperfected security interests
(2) Priority between unperfected security interests in the same collateral is to be determined
by the order of attachment of the security interests.
Perfected security interest has priority over unperfected security interest
(3) A perfected security interest in collateral has priority over an unperfected security
interest in the same collateral.
Priority for perfection in other ways
(4) Priority between 2 or more security interests in collateral that are currently perfected is
to be determined by the order in which the priority time (see subsection (5)) for each security
interest occurs.
(5) For the purposes of subsection (4), the priority time for a security interest in collateral is,
subject to subsection (6), the earliest of the following times to occur in relation to the security
interest:
(a) the registration time for the collateral;
(b) the time the secured party, or another person on behalf of the secured party, first perfects
the security interest by taking possession or control of the collateral;
(c) the time the security interest is temporarily perfected, or otherwise perfected, by force of
this Act.
(6) A time is a priority time for a security interest only if, once the security interest is
perfected at or after that time, the security interest remains continuously perfected.
Note: A security interest in the proceeds of original collateral has the same default priority as
the security interest in the original collateral (see subsection 32(5)).
Waller v NZ Bloodstock Ltd [2006] 3 NZLR 629
! Facts:
• Secured creditor had charge over debtor co property
• 2 years later owner of horse (lessor-NZ Bloodstock) leased horse to debtor
• Secured creditor then perfects security interest upon introduction of PPS
• Lessor did not register its security interest in horse under PPS
• Lessor terminated lease and seized horse-secured creditor appointed receiver and sought
to recover horse
! Result:
• Secured creditor had priority over unperfected interest of lessor-even though lessor
owned the horse
• Failing to register a security interest can result in losing rights over the collateral
! [75] “The result follows Parliament’s decision that the kind of leasehold interest retained by NZ
Bloodstock [lessor] should, as a matter of policy, be treated as a mere security interest which
requires registration to be perfected. Since that did not occur, [secured creditor’s] competing
security interest which was duly registered and so perfected took priority.
! The major lessons of the case are twofold:
• the statutory altering of the proprietary rights of a lessor; and
• the crucial importance of registration.
These are policy choices which have been made and significantly alter what would otherwise have
been the position.”
Purchase Money Security Interest (PMSIs)
! A purchase money security interest (or PMSI) provides a ‘super-priority’ under the PPSA such
that a subsequent perfected PMSI prevails over a previously perfected mere/general security
interest.
Section 14 - Meaning of purchase money security interest
General definition
(1) A purchase money security interest means any of the following:
(a) a security interest taken in collateral, to the extent that it secures all or part of its
purchase price;
(b) a security interest taken in collateral by a person who gives value for the purpose of
enabling the grantor to acquire rights in the collateral, to the extent that the value is applied
to acquire those rights;
(c) the interest of a lessor or bailor of goods under a PPS lease;
(d) the interest of a consignor who delivers goods to a consignee under a commercial
consignment.
Exceptions
(2) However, a purchase money security interest does not include:
(a) an interest acquired under a transaction of sale and lease back to the seller; or
(b) an interest in collateral (as original collateral) that is chattel paper, an investment
instrument, an intermediated security, a monetary obligation or a negotiable instrument; or
(c) a security interest in collateral that (at the time the interest attaches to the collateral) the
grantor intends to use predominantly for personal, domestic or household purposes. ! these
will be consumer goods
(2A) Despite paragraph (2)(c), a purchase money security interest includes an interest if:
(a) the interest is covered by subsection (1); and
(b) the interest is in collateral that (at the time the interest attaches to the collateral) the
grantor intends to use predominantly for personal, domestic or household purposes; and
(c) the collateral is of a kind that is required or permitted by the regulations to be described
by serial number.
PMSI Priority s 62
Section 62 - When purchase money security interests take priority over other security interests
Scope
(1) This section sets out when a perfected purchase money security interest that is granted by a
grantor in collateral or its proceeds has priority over a perfected security interest that is granted by
the same grantor in the same collateral, but that is not a purchase money security interest.
Note: This section is subject to section 57 (perfection by control).
Inventory
(2) The purchase money security interest has priority if:
(a) the purchase money security interest is in inventory or its proceeds; and
(b) the purchase money security interest is perfected by registration at the time:
(i) for inventory that is goods--the grantor, or another person at the request of the
grantor, obtains possession of the inventory; or
(ii) for any other kind of inventory--the purchase money security interest attaches
to the inventory; and
(c) the registration that perfects the purchase money security interest states, in accordance
with item 7 of the table in section 153, that the interest is a purchase money security interest.
Note: This subsection is subject to sections 64 (non-purchase money security interest in accounts) and
71 (chattel paper).
Personal property other than inventory
(3) The purchase money security interest has priority if:
(a) the interest is in personal property, or its proceeds, other than inventory; and
(b) the purchase money security interest is perfected by registration before the end of 15
business days after whichever of the following days applies:
(i) for goods--the day the grantor, or another person at the request of the
grantor, obtains possession of the property;
(ii) for any other property--the day the interest attaches to the property; and
(c) the registration that perfects the purchase money security interest states, in accordance
with item 7 of the table in section 153, that the interest is a purchase money security interest.
Note: The period mentioned in paragraph (b) may be extended by a court under section 293.
Perfecting a PMSI
! Like any security interest, a PMSI must be perfected in order to retain priority. The first question
is how do you know if the interest created is a PMSI?
• You apply s 14. In essence you ask yourself: ‘but for’ the action taken by the PMSIholder – would the original secured party have obtained rights in the collateral?
! If the answer is no, then the party providing the collateral holds a purchase
money security interest.
! You indicate a PMSI when you register a financing statement. There will be a check-box for this
purpose.
! Same logic applies regarding perfection of a mere/general security interest – if you fail to perfect,
your interest takes subject to competing interests.
! Also, indicating that a security interest is a PMSI when it is not may render your interest
unperfected – care must be taken in this regard.
Default Priority Summary
! Earlier Perfected vs Later Unperfected - Perfected prevails (s 55(3))
! Earlier Perfected vs Later Perfected - First in time prevails (s 55(4))
! Earlier Unperfected vs Later Unperfected – First in time prevails (s 55(2))
o BUT CONSIDER THAT THIS SHOULD NEVER ARISE IN PRACTICE
o Earlier Unperfected vs Later Perfected – Perfected prevails (s 55(3))
! Earlier PMSI vs Later Perfected – PMSI prevails (s 62)
! Earlier Perfected vs Later PMSI – PMSI prevails (s 62)
! The PPSA is a commercially sensitive statute and whilst the default rules apply in many
cases they will not apply in all cases.
Continuous Perfection s 56
! Irrespective of the security interest (be it a PMSI or general), in order to retain priority from the
point of perfection/registration – it must be continuously perfected.
! Continuous perfection refers to an unbroken chain of perfection (irrespective of the method of
perfection adopted).
Section 56 - How a security interest is continuously perfected
(1) For the purposes of this Act, a security interest is continuously perfected after a particular time if
the security interest is, after that time, perfected under this Act at all times.
(2) A security interest may be continuously perfected after a particular time even if, after that time, it
is perfected in 2 or more different ways:
(a) at any particular time; or
(b) at different times.
Examples: A security interest could be perfected in 2 or more different ways as follows:
(a) by possession and by a registration;
(b) by 2 different registrations.
! If a perfected interest becomes unperfected and subsequently re-perfected, whilst this is not
prohibited by the PPSA – the secured party will only hold a priority interest from the date of reperfection due to a break in continuous perfection.
Taking Free Pt 2.5
! s 43. Taking personal property free of unperfected security interest
! s 44. Taking personal property free of security interest if serial number incorrect or missing
! s 45. Taking motor vehicles free of security interest
! s 46. Taking personal property free of security interest in ordinary course of business
! s 47. Taking personal, domestic or household property free of security interest
! s 48. Taking currency free of security interest
! s 49. Taking investment instrument or intermediated security free of security interest in the
ordinary course of trading
! s 50. Taking investment instrument free of security interest
! s 51. Taking intermediated security free of security interest
! s 52. Taking personal property free of temporarily perfected security interest
! s 53. Rights of secured party and transferee on taking personal property free of security interest
Enforcement Ch 4
! s 111. Rights and duties to be exercised honestly and in a commercially reasonable manner
! s 115. Contracting out of enforcement provisions
• NOTE: Cannot contract out of the enforcement provisions in relation to consumer
property. Remember the consumer protection policy perspective of the PPSA.
! s 119. Relationship with consumer credit legislation
! s 123. Secured party may seize collateral
! s 128. Secured party may dispose of collateral
! s 134. Proposal of secured party to retain collateral
! s 137. Persons entitled to notice may object to proposal
Enforcement Particulars
! Pt 2.4 Div 2 - Proceeds and transfer
! Pt 3.2 - Agricultural interests
! Pt 3.3 – Accessions
! Pt 3.4 - Processed or commingled goods
! Pt 3.5 - Intellectual property
! Ch 9 – Transitional provisions
! Pt 9.5 - Charges and fixed and floating charges
Reading:
• Turner 28th ed chapt 19 [19.900]-[19.1530]
• Alumininium Industrie Vaassen BV v Romalpa Aluminium Ltd *1976+ 2 All ER 552 (reservation
of title, ‘Romalpa’ clause)
• Australian Central Credit Union v Commonwealth Bank of Australia (1991) 4 ACSR 145
• CMG Equity Investments Pty Ltd v Australia and New Zealand Banking Group Ltd [2008] FCA
455
• Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528
• Melewar Steel Ventures Limited v ANZ Nominees Limited [2008] NSWSC 345
• Palgo Holdings Pty Ltd v Gowans [2005] HCA 28; 221 CLR 249; 215 ALR 253 (mortgages and
pledges defined; statutory interpretation)
• Waller v New Zealand Bloodstock Ltd [2006] 3 NZLR 629
• Whitton v ACN 003 266 886 Pty Ltd (in liq) (1996) 42 NSWLR 123;
• Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 30 ACSR 204 (floating
charges)