Analysing Legal Issues
Sydney and Melbourne
Including discussion problems, previous exam / assignment
questions, and Markers’ Comments
Suggested Steps
In approaching a legal problem, there are a number of general steps which can usefully be
followed. They may sound self-evident but, in our experience, failure to remember them often
gives rise to unnecessary mistakes.
The list set out here is not by any means exhaustive. People learn in differing ways and you
may well wish to add other steps into the process. If you do, why not share them and post
them to the forum? You may well find it a useful learning experience to explain your ideas to
others and of course you may pick up helpful ideas if others do the same!
An outline of the steps is given by way of summary and is followed by a more detailed
explanation.
Step 1
Understand the facts
Step 2
Understand the question(s)
Step 3
Organise your time and approach
Step 4
Identify the legal issues
Step 5
Identify the legal principles
Step 6
Apply legal principles to facts
Step 7
Reach a conclusion
Step 8
Review
Old exam papers, (which went on to become assignments) and Markers’ Comments follow
this overview.
1
Step 1 - Understand the facts
Read through the whole of the question set by the examiner (or, in an actual
transaction, the brief of the facts compiled by your manager/yourself).
Think carefully about the purpose of reading through the question/brief.
You should be trying to gain a general understanding of what is happening.
You should therefore read initially for sense- what is this all about? You may in
fact have to read through the question/brief several times before you feel ready
to start thinking about your response.
What should you be looking for as you read through the factual scenario?

what has happened?

how has it happened?

who are the parties involved?

what have they done/not done?
In the exam you will not be allowed during the reading time that precedes the
start of the exam to highlight or otherwise write on your question or answer
paper. This reading time should be used to settle yourself and to start thinking
about what you are required to do.
Once you can start writing, you may find it useful to draw a diagram/flow-chart
etc to represent the facts relevant to solving the particular question(s). This can
help you sort the facts into some order which can form the basis for your
discussion.
Step 2 - Understand the question(s)
Identify specifically the question(s) you are asked to resolve by your
examiner/manager.
This is very important. There is nothing to be gained by writing all you know
on a particular subject. Your examiner/manager wants to know what is relevant
to the resolution of the particular problem posed.
In an assignment or exam you may be given a number of specific questions eg
is a contract between A and B enforceable? is A liable for any breach of duty?
Alternatively, you may be asked a more general question eg what is the extent
of legal risk for B in this transaction?
Where you are faced with specific questions, it is advisable to deal with each
separately. Sometimes students start their answer with a general discussion of
general principles and then refer back to this general discussion when they
subsequently address the particular question. Danger lies in this approach as it
may lead to some of the specific issues being overlooked. The preferred
approach is to consider those general principles in the context of the analysis of
the specific question.
Step 3 - Organise your time and approach
Having now an understanding of what you are required to do, consider how you
will manage your time.
Make sure in an exam that you do not run over the time allotted for a particular
part of the question. If you haven't finished, it is better to move on to another
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part and try and complete it and then, if you have some spare time, go back to
the unfinished part.
Consider also whether to start writing now or whether to work out Steps 4-7 in
your head, making notes as you go along, and then start writing. Which you do
depends on time available and your preferred personal approach.
Step 4 - Identify the legal issues
Determine and explain what legal issues arise in the questions you identified in
Step 2.
There are often several issues that arise in determining a question. If, for
example, you were asked to determine whether A was in breach of any duty,
the legal issues to be discussed would include whether there was a contractual
duty, a fiduciary duty, a duty of care or other duty.
Step 5 - Identify the legal principles
Identify the legal principles relevant to solving the legal issues you identified in
Step 4.
You will need to be able to select the particular relevant legal principles.
In identifying these, think carefully of the structure. The law does have a logic,
albeit of its own! You will find the structure of the relevant principles set out in
the Notes. For example, in dealing with a contractual issue, you will need to
consider:

Who can I deal with?
-
capacity and
-
authority;

When do I have a deal?

have the parties reached an agreement?
-

is that agreement enforceable?
-

offer/acceptance/certainty;
intention/consideration/ lack of vitiating factors/form
by whom is that agreement enforceable?
Step 6 - Apply legal principles to facts
Analyse how the legal principles identified in Step 5 are applied to the facts.
You need to show how the principles you have identified apply to the particular
facts. It is not sufficient simply to conclude, for example, that there is no offer
and hence no agreement. You need to explain what an offer is in legal terms
and consider the extent to which the criteria for an offer are met on the facts
given.
Very often the facts are ambiguous. Hence you need to look at the issue from
differing perspectives: eg the arguments for a particular action being an offer;
the arguments for it not being an offer.
3
Always support your arguments by reference to the facts. The facts selected
provide the necessary evidence for the credibility of your argument.
Step 7 - Reach a conclusion
The initial temptation may well be to sit on the proverbial fence! Your
examiner/manager, however, wants an answer to the question asked.
The conclusion must be reasoned, based on the arguments discussed. Having
set out (in Step 6) the various possible arguments, indicate which line of
argument you prefer and why.
Step 8 - Review
Stop writing! Read back through your answer/advice to make sure you are
satisfied with your response.
Confirm, in accordance with the various steps:

it addresses the questions asked;

it demonstrates your understanding of the legal issues and how to resolve
those issues by:

showing appropriate selection of the relevant facts;

showing appropriate selection of the relevant principles;
-
it provides a logical outcome by:

applying relevant principles to relevant facts;

developing principles logically and consistently.
Check also:
-
it is clearly and grammatically written, making it easily
comprehensible to your examiner/boss;
-
primary and secondary
acknowledged.
sources
are
properly
cited
and
If not satisfied, make the appropriate changes.
4
Past paper 1
Exam paper 2nd semester 2011.
The exam paper then became the Assignment for 1st semester 2012.
The facts are set out, and then the questions and Markers’ Comments for Part A and Part B.
Facts
Cath Ryan is the CEO of an engineering company called Engineering Solutions Ltd (ESL)
which develops and sells technological solutions for alternate energy supplies.
In February 2010 Cath met Andrew Hill at an engineering conference. Andrew had just been
appointed managing director of Light On Limited. Over lunch and dinner conversations at the
conference Cath and Andrew saw that there were many similarities between the areas within
which their companies worked. Andrew agreed with Cath that ESL and Light On should share
ideas about possible new products if they agreed that the product could be commercially
successful. They exchanged business cards and a variety of marketing documents about their
companies. Andrew wrote on the back of one of the marketing documents he gave to Cath
that for any project they worked on together Light On would require at least a 50% interest in
the project. On the front of that document was a reference to Light On being an expert in the
area of rechargeable batteries.
In May 2010 Cath was told by Liz Lou, ESL’s head of research, that she had found a way to
increase the absorption of sunlight by rechargeable batteries. The process was quite simple
and involved only a small change to the current chemicals used in rechargeable batteries. If
the new rechargeable batteries were marketed well Liz was convinced that this could allow
ESL to dominate the market in Australia, and potentially the world, for rechargeable batteries.
In particular Liz thought that this product could sell very well in Europe where the market for
rechargeable batteries was just beginning to expand. Liz and Cath gave this new product the
name ‘Turn the Light On’ (TLO).
Cath was keen to keep this discovery confidential until final tests could be carried out. ESL’s
bank, Old Bank Limited (OB) refused to lend further funds to ESL for the project. To raise
funds to manufacture and market TLO Cath approached New Bank Ltd (NB), a bank ESL had
not used before. On 4th June she met with Alan Smith, one of NB’s senior managers
specialising in lending to new customers. At the meeting she:
a)
gave a detailed background of ESL, and explained that she had created ESL
following her very successful career as an electrical engineer with a large multi-national
corporation. She said that of all the new products she had been involved with in her career,
she considered TLO the most likely to succeed internationally. To support this view she gave
Alan a report prepared by an independent expert, Sarah Collie, showing the increased demand
for rechargeable batteries in the 10 largest European cities from 2008 - 2010.
b)
explained that an expected carbon tax in Australia would promote the use of products
such as TLO; and
c)
to further impress Alan she gave him one of Andrew’s business cards and one of the
brochures Andrew had given her about Light On. She explained that Light On and ESL
worked closely together and that Light On could be called on for support at any time during
this project.
Alan didn’t tell Cath that he held shares in Light On and that he was impressed by Light On’s
performance. He thought that Light On was already involved in the deal given the similar
names and the documents from Light On. He was keen to approve the loan to ESL as he
assumed this deal would increase his dividends from Light On. He was impressed by Cath
and felt comfortable that this deal should go ahead.
5
At the end of the meeting Alan gave Cath a set of NB’s lending terms (headed ‘The Terms’)
and set out NB’s requirements for security. He said he approved the loan.
On 6th June Cath e-mailed Alan and said:
“Thank you for the successful meeting on 4th June.
We agree to borrow $800,000 from NB for 18 months on the terms set out, and at the interest
rate determined on the basis of The Terms. We will provide, as requested, security of:
i) legal mortgages over all our machines, computers and other fixed equipment;
ii) legal mortgages over all shares held by us as investments from time to time; and
iii) a floating charge, plus negative pledge, over all our cash on deposit with Old Bank
Limited.”
On 8th June Alan sent copies of the e-mail, plus his own internal forms, to the various
departments of NB involved in opening a new account, lending funds, and taking security.
Formal loan and security documents were signed by Cath on behalf of ESL and following the
return of the documents to NB $800,000 was transferred into a new account for ESL on 16th
June. Cath immediately transferred the funds to ESL’s account with OB and employed 2 new
engineers to help Liz finalise TLO. By December Liz was confident that the product was
ready for manufacture and distribution.
In March 2011 Cath decided to take a big risk and focused all of ESL’s resources on TLO.
Large shipments were dispatched to all capital cities in Australia and a number of distributors
throughout Europe. Cath was so busy with the marketing and distribution of TLO that she had
not been following the concern over the new financial crisis developing in Europe.
In July 2011 ESL’s Finance Director, Julia Black, became concerned that sales of TLO were
well below those expected by Cath. In addition ESL was not being paid by most European
distributors. Julia warned Cath that ESL should reassess its marketing plans and consider
leaving the European market until the economy improved there. Cath thought that Julia was
over-reacting and relied on Liz and Sarah’s expert views of TLO In September Julia advised
Cath that OB was refusing to allow ESL access funds currently on deposit with OB, saying
that as ESL appeared to be insolvent they were exercising their rights over the funds.
Accordingly ESL was unable to make loan repayment to NB in September or October, or
make any other payments.
Questions – it is now 31st October 2011
PART A Questions
1
a) Was there an enforceable loan contract on 6th June 2010? [10 marks]
b)
What legal duties (other than contract) would ESL owe NB by 6th June? Have any of
those duties been breached? When answering this part of the question discuss only relevant
duties studied in LRF. [10 marks]
Markers’ Comments Part A
These Comments set out issues which were relevant to Part A of the assignment. A good
answer followed the structure that had been used in class, namely:
•
explain the relevant law;
•
apply the law to the relevant facts, looking at arguments for and against the law
applying to those facts; and
•
come to a brief conclusion.
6
It was important to remember that there was no one ‘correct’ answer to many of these issues
(although there were many wrong answers!). It was possible to consider the facts in a number
of ways. The essential issue was to demonstrate a sound understanding of the law and an
ability to apply that law to a set of facts. It was possible to come to a number of different
conclusions.
Students who did not explain the relevant law, and/or who failed to adequately discuss how
the law applied to the facts, suffered in relation to grading of their assignment.
The word limit for the assignment was 3,000 words. Assignments over this word limit were
penalised, in general ½ mark per 250 words.
All students recognised that the appropriate way to answer question 1 was to work through
the ‘contractual checklist’ as we had done in class. Some of the issues were straightforward
and could be dealt with briefly while others required much greater discussion to allow some
form of conclusion to be reached. Question 2 required a consideration of the law of relevant
duties studied in this course.
To the extent that there were not enough facts this needed to be stated. In the real world it is
important to know when you might not have all necessary facts as this could be a source of
risk.
The questions and our comments are set out below:
Q1 a) Was there an enforceable loan contract on 6th June 2010? [10 marks]
Who are the parties?
The parties to the possible contract are Engineering Solutions Ltd (ESL) and New Bank Ltd
(NB). Some students also considered that Light On Limited might be a party on the basis of a
possible partnership between ESL and Light On Limited although there were not enough facts
to allow further discussion of this.
Students varied in their views on who would want to enforce the possible contract.
It was possible to view the facts from either perspective, as long as the issue was considered
and arguments were consistent. On one view, as at 6 June, both parties wanted to enforce it,
ESL wanted to receive the loan and NB wanted the lending business.
Capacity
In the absence of conflicting facts, it was possible to assume that all the companies were
Australian companies incorporated under the general companies’ legislation and that
accordingly s 124 of the Corporations Act applied to give them the capacity to enter into the
contract.
Authority
A good answer began with an explanation of the relevant law on authority – the law on actual
express, implied and ratified authority and to the extent relevant, ostensible authority and
statutory assumptions.
Given that students took different views as to which party would want to enforce, different
arguments could be raised as to whether ostensible authority and the statutory assumptions
applied to either agent.
NB’s agent - Alan
7
Alan was a senior manager specialising in lending to new customers.
The first issue to consider was whether he had actual express authority to commit NB to the
possible loan. By applying the test to the facts it was clear that there were not enough facts to
decide the scope of his express authority. He may, or he may not, have actual express
authority. Some students erroneously thought that express authority could “only” be conferred
by the employment agreement. It was important to be aware that just because you did not
have all of the facts this did not mean that he didn’t have the authority. Following on from
actual express authority it was also not possible to determine what implied authority he may
have arising from any express authority.
It was then appropriate to consider whether Alan may have actual implied authority arising
from his appointment to his position. Most students noted that while you were not told his
actual title you were given a job description. This alone did not indicate the scope of his
authority. Some assumed that a person in that position would have authority to do some acts
in relation to the loan approval process. Acts after 6th June were not relevant. Those who
discussed later acts argued in a number of ways as to how those facts showed what authority
he may have had on the 6th – for example his ability to send out instructions. There were no
conclusive facts.
In relation to ratification there were no acts at 6th June which were relevant.
If it was considered that ESL wanted to enforce the loan on 6th June ESL would raise
arguments about Alan’s ostensible authority. Here the issue was whether NB had held out
Alan to ESL as having the necessary authority. Alan had a job description but it was not clear
what ESL had been told about Alan. Although Alan seemed to think that he had the necessary
authority, he could not hold himself out, and therefore his views could not give him ostensible
authority.
Similar issues arose in relation to the statutory assumptions. The most useful assumption is set
out in s129 (3) which would allow ESL to assume that Alan had the same authority as was
given to people in his position in similar companies (banks). The issue was whether this
would allow ESL to assume that Alan had authority to approve a loan of $800,000 to new
customer. If it was argued that such an assumption could be made the effect of s 128 (4)
needed to be considered. Some students seemed to think that s 129(3) gave unlimited
authority rather than linking it to “powers and duties customarily exercised or performed by
that kind of” officer. Some students seemed to confuse the concepts of CEO, Managing
Director and Director.
Some students sought to rely on s125 and s198C (a replaceable rule only and only applicable
to a Managing Director), but these only deal with “indoor management” and ways to
overcome restrictions on the manner of exercise of a power.
ESL’s agent
Cath was ESL’s CEO.
There were no facts as to the actual express authority she had been given. Some students
suggested that as she had created ESL she would have given herself the necessary authority to
run all aspects of the company’s business. There were no facts to support this. The absence of
facts means that she may, or may not, have the necessary express authority and it was equally
not clear whether she did or did not have the necessary implied authority.
Many students argued that there would have been wide authority implied from her
appointment as CEO. Some equated CEO with MD, and argued that she would have implied
authority to perform the day-to-day activities of ESL. Whether borrowing $800,000 was the
usual day-to-day activity of ESL was not clear. There were no facts to support that view.
8
As at 6th June there had been no act of ratification.
If NB had wanted to enforce the loan it could argue both ostensible authority and the statutory
assumptions. On the facts the only representation that ESL had made was to give Cath the
title CEO. There were no facts as to any further holding out by ESL and all of Cath’s
statements about herself could not be used to give her authority.
In relation to the statutory assumptions, again the most useful was s 129 (3) if CEO’s in
similar companies could borrow amounts of $800,000 without anyone else signing off. If it
was argued that such an assumption could be made the effect of s 128 (4) needed to be
considered.
Is there an agreement?
When discussing these issues it was important to remember that an offer can only be accepted
by an offeree. Some students became confused and had the same party making the offer and
the acceptance.
The first step was to explain the tests for these terms and to then apply the tests to the facts.
Offer
There were various views as to whether there was an offer on the facts. Some students
considered that Alan made an offer on the 4th June as he was impressed by Cath, felt
comfortable that this deal should go ahead, gave her a set of NB’s lending Terms and said that
he approved the loan. For this to be an offer the test for ‘offer’ needed to be satisfied:
•
NB was willing to enter into the loan;
•
all of the necessary terms for the loan were known; and
•
NB wanted to be bound as soon as ESL accepted.
Alan may have been willing to proceed on 4th June when he handed Cath the Terms but it
was not clear that NB was willing to be bound to that point.
Some students considered that key terms were not yet known and suggested that, in particular,
the amount of the loan was not known on 4th June. Other students assumed that the amount of
the loan and all other key terms were discussed on 4th.
Most students considered that NB was not willing to be bound on 4th if Cath had said ‘yes’,
although some suggested that if all the necessary terms were known NB wanted to be bound
at that time.
Some students suggested that NR did want to be bound, but then in their consideration of duty
of care and reliance, inconsistently suggested that NB had time to do its own due diligence
which it could not have done if it was already bound.
Acceptance
If there had been an offer on 4th students then considered whether the offer from NB had
been accepted.
Most students who found an offer on the 4th were satisfied that Cath’s e-mail was a final and
unqualified acceptance of that offer. If this was to be an acceptance many students considered
the impact of legislation on this, in particular what is now s14A of the Electronic Transaction
Act, noting the need, in general, for an acceptance to be communicated.
Some suggested, however, that in reply to Alan’s offer on the 4th Cath’s e-mail was a counter
offer. For this to apply all parts the test for ‘offer’ needed to be satisfied by the e-mail.
If there had not been offer by NB on 4th some students considered whether Cath’s e-mail was
the first offer. On the facts there was no acceptance of that possible offer.
9
Certainty
Although many students decided that the terms for the loan were certain, it was correct to
point out that you were not given a copy of the Terms, and therefore it was not possible to
decide if the terms for the loan were certain.
Intention
It was first necessary to explain the nature of an intention to be legally bound. In the absence
of facts to show that the parties had stated what their intention was at the time of the
discussion of the possible loan, it could be presumed, given the commercial nature of the
conversation that both ESL and NB intended to be legally bound.
It was then important to review the facts to determine if there were facts that might rebut that
presumption. Note also that for it to be an “offer”, an intention to be bound” immediately” on
acceptance was required. Some students also identified the issue of whether there was an
intention to be immediately bound or whether the dealings were “subject to contract”
Consideration
It was necessary to explain the test for consideration – some benefit, etc to one side, or some
loss, etc suffered by the other.
On the facts it was easy to find consideration. NB gave a promise to lend and ESL gave a
promise to borrow on the terms.
It is important to note that all that is necessary is an exchange of promises. It is not necessary
to have the actual money, for example, transferred. Failure to transfer the funds would be a
breach, not a failure of consideration.
Vitiating Factors
When considering vitiating factors it was necessary to decide which party wanted to enforce
the possible loan contract.
If NB wanted to enforce the possible loan and ESL did not NB would not raise any issues
which would allow it to rescind. If, however, NB did not want to enforce the possible loan
and ESL did, NB could raise the vitiating factors of fraud and misrepresentation. If it was
considered that those issues were relevant it was necessary to explain the tests and to then
apply the tests to the facts.
Students took different views. Most who considered these issues decided that the issues raised
at c) in the facts – the statements about the relationship between ESL and Light On – were not
correct. On that basis, and given that Cath knew that the claims were not correct, this satisfied
the test for fraud. It was also appropriate to consider that this was a fraudulent
misrepresentation.
On the 6th June, if all other issues on the contractual checklist were satisfied, these vitiating
factors would allow NB to set the contract aside.
Some students erroneously thought that ESL could rely on its misrepresentation to rescind.
Only the innocent party could rescind, and it may elect not to. One reason that it might have
wished to rescind at this point would have been if it had become aware of the
misrepresentation before it made the loan. It was not necessary to prove actual damages at
this point to elect to rescind
Form
No special form is required for a loan contract.
10
Conclusion
To conclude the discussion it was appropriate to consider whether all of the issues on the
contractual checklist had been satisfied on 6th June. This conclusion depended on the
discussion of the individual issues in the answer.
1 b) What other legal duties would ESL owe NB by 6th June, and have breached [10 marks]
To answer this question well it was necessary to show an understanding of the relevant duties
which may have arisen on the facts. Again it was necessary to explain the relevant tests and to
then consider whether those tests applied to the facts.
Duty of Care
The test for the existence of a duty of care, where only financial loss is involved, as explained
in the Esanda case could be used to determine whether or not ESL had taken on a duty of care
to NB. Here it was necessary to consider whether ESL had assumed a responsibility to NB
when Cath provided information to Alan on the 4th June, and whether it was reasonable for
NB to rely on this information for the purpose of making a lending decision. In addition it
could be considered whether NB was in some way vulnerable to ESL.
The question only asked about possible legal duties owed by ESL. It was therefore not
relevant to discuss possible duties of care owed by other parties.
On the facts Alan, on behalf of NB, was impressed by the information presented by Cath. He
was also impressed by the suggested relationship between ESL and Light On.
Was ESL, through Cath, assuming a responsibility to NB? There were different views on this.
Some students assumed that Cath was doing no more than any possible borrower would do:
set out information to encourage NB to lend. Other students considered that Cath’s
presentation was designed to give NB all the necessary information it needed to lend to ESL.
The report by an ‘independent expert’ added to this view. This suggested to some students
that ESL was assuming responsibility to NB.
The next issue was whether NB was relying on ESL, and in particular, whether it was
reasonable for NB rely on Cath’s presentation. Again it was possible to argue both ways.
Given that Cath was keeping details of the product secret it may not have been possible for
NB to do any investigation of the product. Cath seemed to have given a very well structured
presentation and, as she claimed to be an expert, some students decided it was reasonable for
NB to rely on what Cath had said for the purpose of making a lending decision. The other
view was that NB was a bank, and has expertise for making lending decisions. It was not
reasonable for a bank to make a lending decision just on the basis of Cath’s presentation,
particularly as ESL was a new customer.
Finally some students considered whether NB was vulnerable to ESL. On the facts there was
no vulnerability.
As there were valid arguments for and against the existence of a duty of care it was
appropriate to consider whether, if there was a duty, that duty had been breached. To do this
the test for breach needed to be explained, and then applied to the facts. How would a
‘reasonable’ borrower behave in the situation ESL was in? While a borrower would present
strong arguments about the attractiveness of the possible loan, most students were of the view
that Cath’s description of the relationship between EL and NB was not correct and a
‘reasonable’ borrower would not have said the things she said.
11
The issue of damages needed to be considered. Most students pointed out that on 6th June NB
had not suffered a loss. Some considered the later facts. It was possible to argue that the
breach on 4th June did not cause the later loss.
Fiduciary
The tests for the existence of a fiduciary relationship needed to be explained. If it was decided
that the relationship did not arise this could still be discussed briefly, to explain why there was
a conclusion that there was no fiduciary relationship.
Most students were very confident that there was no fiduciary relationship. Some students
referred to the Notes for Session 6 stating that a banker/customer relationship is generally not
regarded as fiduciary (see para [5.2.1]). Please note that this refers to a bank owing a
customer fiduciary duties, not a customer owing a bank fiduciary duties. Also note that just
because a presumption does not apply, this doesn’t mean that it can’t arise on particular facts.
As there was no presumed fiduciary relationship, the Hospital Products’ test could be
considered. Most students decided that this test did not apply because there was no large
imbalance of power in ESL’s favour and NB was not vulnerable to ESL. It was appropriate to
conclude that ESL did not owe NB fiduciary duties.
If it had been decided that the relationship did arise it was necessary to decide if there had
been a breach. It could then be decided that Cath’s comments about Light On were a breach
of the duty to act in good faith toward NB.
Misleading and Deceptive conduct
The statutory prohibition against misleading and deceptive conduct needed to be considered.
Some students noted that it was contained in both the new Australian Consumer Law and the
ASIC Act. It was appropriate to note that the prohibition extended to conduct that was
misleading and deceptive and also conduct that was only ‘likely’ to mislead or deceive.
This duty arises automatically if persons (defined as corporations and human) are acting in
trade or commerce, and accordingly the discussion needed to focus on the possible breach of
the duty.
The conduct which required discussion was ESL’s conduct up to and including 6th June. In
general students focused on Cath’s conduct in the meeting with Alan and in particular when
she said that ‘Light On and ESL worked closely together and that Light On could be called on
for support at any time during this project’. Students were confident that this was at least
likely to mislead NB about the involvement of Light On.
Other conduct was also relevant and a good answer noted, for example, the name ESL gave
the new product – Turn the Light On. This name was very similar to Light On’s company
name. Some considered that the similarity was at least likely to be misleading or deceptive.
Other students considered that the 2 names might only lead to confusion for NB and not be
misleading (referencing the ‘Google’ case and the McDonald’s case – Session 6 Notes paras
[6.3.1] and [6.3.2].
Finally other conduct by ESL may have breached the prohibition. It was not known whether a
carbon tax would promote use of TLO, it was not known if Sarah Collie’s report was
accurate, or if Cath’s other statements were correct. For example, when she said “she
considered TLO the most likely to succeed internationally” was this really her view, or was
she ‘just’ promoting her application for the loan? It was not necessary that Cath intended to
mislead or deceive, it is an objective test: was NB likely to have been misled or deceived by
all that ESL said or did through its agent?
12
Some students raised s181 etc in relation to statutory duties under the Corporations Act.
These are irrelevant as they impose duties on Cath personally and do not impose duties on
ESL.
Susan Edwards
Grahame Cooper
March 2012
Part B
Facts
As for Assignment A
Questions:
For the following questions identify any relevant contracts and assume that they are
enforceable.
1
Discuss relevant issues to decide whether NB could, for the property secured as set
out in Cath’s e-mail:
i)
take possession or sell under the current law; or
ii)
if the Personal Property Securities Act had come into operation one month before all
of the facts, dispose of the secured property.
[12 marks]
2
Has Cath taken on legal duties (other than contract) to anyone on these facts, and if so
have any of the duties been breached? [8 marks]
Markers’ Comments
These Comments set out issues which were relevant to Part B of the assignment. As always a
good answer followed the structure that had been used in class, namely:
•
explain the relevant law;
•
apply the law to the relevant facts, looking at arguments for and against the law
applying to those facts; and
•
come to a brief conclusion.
Many students struggled with the application of the law; in particular when considering
arguments ‘for and against’. This aspect of the analysis is the most important as it shows that
you not only understand the law but that you can appreciate that there may be relevant
arguments for and against the law applying to the facts.
If there were not enough facts this needed to be stated. It was not appropriate to invent facts.
It was important to realise that the absence of facts could be a source of risk.
Given that you knew the distribution of marks between the 2 questions it was important to
allocate the appropriate number of word to each question. This was easy with a word doc, and
will be critical in the exam.
13
The word limit for the assignment was 3,000 words. Assignments over this word limit were
penalised, in general ½ mark per 250 words.
The questions and my comments are set out below.
1
Discuss relevant issues to decide whether NB could, for the property secured as set
out in Cath’s e-mail:
i)
take possession or sell under the current law [in October 2011]; or
ii)
if the Personal Property Securities Act had come into operation one month before all
of the facts, dispose of the secured property.
[12 marks]
Important perspective:
With all issues it is important to consider the ‘big picture’ and the details. Be careful not to
get so caught up in the detail that you lose sight of the big picture. An example of the loss of
perspective is the way many students approached question 1. All students knew that it was
necessary to work through the 2 security checklists. Before you began with the detail,
however, it was important to stand back and look at the facts. I do this with the help of a
diagram. You may have another way which helps you understand what has happened.
•
•
•
•
•
There was a borrower and 2 lenders.
OB had lent money in the past and NB had lent money recently.
NB had taken security. There were no facts that OB had taken security.
OB was of the view that ESL was insolvent.
OB was refusing to allow ESL to access funds it had on deposit with OB.
The question asked about the enforceability of security. There were a number of relevant
issues. The key ones were debt, security, default and insolvency. When answering the
question by working through the detail, those 4 issues were relevant and all 4 needed to be
discussed.
Old law
Nature of security
The facts set out 3 securities from Cath’s e-mail:
i) legal mortgages over all our machines, computers and other fixed equipment;
ii) legal mortgages over all shares held by us as investments from time to time; and
iii) a floating charge, plus negative pledge, over all our cash on deposit with Old Bank
Limited.
The starting point was to explain the nature of each type of security.
All students knew that a legal mortgage required the transfer of the legal title of the property
to the mortgagee, while giving the mortgagor an equity of redemption. The formalities to
transfer legal title for the machines, computers and other fixed equipment were different from
those for the transfer of shares and a good answer explained the requirements for each. While
all students knew that it was possible to transfer the legal title in the various types of property
some students considered that this was not necessarily the most appropriate security. The
question did not ask whether there were better types of security on these facts.
14
A small number of students questioned whether the ‘fixed equipment’ had become part of
buildings and therefore should be dealt with under real property law. If that approach was
taken the fixed equipment would have been outside the scope of the course.
The facts stated that formal loan and security documents were signed by Cath on behalf of
ESL.
Most students assumed that the security documents Cath signed were enough to transfer legal
title to the machines, computers and other fixed equipment as all that was needed was an
enforceable contract.
More was required to transfer title to shares. There were no facts as to whether the formalities
for the transfer of legal title to shares had been complied with. Only a few very good answers
noted that the agreement to give a legal mortgage over ‘all shares held by us as investments
from time to time’ could not transfer legal title to shares held at the time of the transaction or
in the future. Actions had to be taken to put NB onto the register of shareholders for each
company for whose shares NB had been given a legal mortgage. Until that happened NB
would, at best, have an equitable mortgage. This applied both to shares currently held and to
any future shares acquired. As soon as shares were acquired by ESL NB would have an
equitable mortgage over those shares. This security would only become a legal mortgage if
further steps were taken to put NB was on the registers of shareholders.
A floating charge over all cash on deposit with Old Bank Limited created a security which
identified, by contract, a class of property over which NB could exercise rights upon
crystallisation. The negative pledge was a contractual promise not to do something; in
particular it could be assumed that ESL had promised that it would not create further security
which would rank equally or in priority to the floating charge for the cash on deposit.
All students recognised that this was an appropriate security given the nature of the property –
a debt which would fluctuate over time.
Registration
In general students understood the requirements set out in the Corporations Act in relation to
registration and in particular the provisions of section 262.
The legal mortgage over machines, computers and other fixed equipment was registrable
under para (d).
If a legal mortgage over shares was created it would not be registrable as it satisfied para (g)
(ii). If an equitable mortgage was created, arising from the formal security document, it would
generally be registrable unless created as described under paras (i) or (iii), which was not
supported by the facts.
The floating charge was registrable under para (a). When created in the same document as the
floating charge the negative pledge was also able to be registered.
There were no facts as to whether any of the registrable securities had been registered.
Competing securities
There were no facts as to any other grant of security by ESL.
The facts stated that ‘OB was refusing to allow ESL access funds currently on deposit with
OB, saying that as ESL appeared to be insolvent they were exercising their rights over the
funds.’ Students dealt with this in different ways. Some students spent a lot of time
considering various possible securities which OB might have taken which would allow it to
15
refuse ESL access to the funds. While it was possible to consider that OB might have a
floating charge (the most popular suggestion) there were no facts to support this.
The most likely reason that OB could ‘refuse access’ was a set off under section 553 C of the
Corporations Act (as discussed in Notes Session 10 para [2.35] and Session 12 para [2.6.2]
and as set out at the end of Session 12) on the basis that OB was claiming ESL was insolvent.
If ESL was insolvent set off was compulsory under s 553 C. This was consistent with all of
the facts. If OB had the benefit of a statutory set off due to ESL’s insolvency it would have
the ability to set off the amount ESL owed OB before giving NB rights over the balance of
the funds.
Remedies
It was only possible to enforce a remedy if ESL was in default. The facts stated that ‘ESL was
unable to make loan repayment to NB in September or October’. This was clear evidence of a
breach of the loan agreement. It was also necessary for the floating charge to crystallise and
most assumed that the default under the loan was a crystallising event.
The next issue was whether NB’s securities were enforceable. Only a few good answers
discussed the relevance of insolvency to remedies. If it had been decided that there was
uncertainty about the registration of registrable securities it was important to note that the
failure to register resulted in the securities being void in a liquidation.
It was then necessary to consider whether NB could sell or take possession of the property
secured.
In relation to the machines, computers and other fixed equipment, and the shares, all students
knew that holding a legal mortgage gave NB the power to sell subject to dealing with the
equity of redemption. If the security had been created in a deed (in Victoria) NB could sell
free of the equity of redemption. If the security had not been created in a deed foreclosure
would be necessary. If NB only had an equitable mortgage the power of sale could arise from
express agreement, implied if created in a deed or by judicial sale. The equity of redemption
could be dealt with in the same manner as for legal mortgage.
Not all students remembered that possession can only be taken of tangible property, here the
machines, computers and other fixed equipment. Accordingly it was not possible to take
possession of shares. Most students explained that under a legal mortgage possession was an
automatic right. For any other security the right to possess needed to have been agreed
between the parties.
If the floating charge over the cash on deposit had crystallised NB would be able to sell
(assign) if it had the right from express agreement, if it was implied if the security had been
created in a deed or by judicial sale.
PPS
Security interest
Here it was necessary to explain the concept of a ‘security interest’ and to decide if each of
the securities offered by Cath satisfied the test as set out in section 12. All students were sure
that each of the securities listed by Cath satisfied the test for a security interest and many took
comfort that the relevant securities were described in the provisions of subsection 12 (2).
Attachment
16
All students knew that attachment was necessary and most referred to the rules for attachment
as set out in subsection 19 (2). On the facts students were satisfied that the grantor (ESL) had
the necessary rights in the collateral and that ESL was both given value and did an act by
which the security interest arose.
Enforcement against third parties
Some students noted that the security interests would be enforceable against third parties as
ESL had signed the formal loan and security documents.
Perfection
As with the old law perfection was important on the facts as ESL appeared to be insolvent.
Most students knew that if the security interests had not been perfected the security interests
could not be enforced against a liquidator.
The main rule for perfection is set out in section 21 and it gives three ways to perfect security
interests: registration, possession or control. It was necessary to apply the tests to the facts to
decide whether each security interest had been perfected.
As with the old law there were no facts as to whether the interests had been registered so
either was possible. Possession was not possible as there were no facts that ESL had given
NB possession of the tangible property – ie the machines, computers and other fixed
equipment. The only possibility on the facts for control was the security interest over the
shares if there was a transfer of title under the legal mortgage.
Competing securities
As with the discussion of the old law there were no facts that other securities had been
granted by ESL. To the extent that this answer required the same issues discussed as under the
old law this could be referred to and not repeated.
The facts said that OB was ‘exercising their rights over the funds’ and while it was again
appropriate to consider how those rights arose it was not appropriate to invent facts. If OB
had taken a security interest over the cash on deposit that security was perfected by control.
However, there were no facts that such a security had been taken. If OB had not taken a
security interest the possibility of set off under section 553 C was again relevant. As ESL
appeared to be insolvent set off would arise by operation of law. Again NB would only be
able to exercise rights after OB set off what it was owed by ESL.
Remedies
The question only asked about disposal. The Notes set out the process of the various notices
to be given, first to seize the various collaterals and to then dispose. Students showed a good
understanding of there formalities.
2
Has Cath taken on legal duties (other than contract) to anyone on these facts, and if so
have any of the duties been breached? [8 marks]
All students knew that the 3 key duties Cath could owe, other than contract, were duty of
care, fiduciary duty and the statutory duty not to mislead or deceive. These duties could be
owed to ESL or third parties. In addition Cath would owe ESL duties under the Corporations
Act. The duties could be considered in any order. The common law duties of duty of care and
fiduciary duty could be discussed in conjunction with statutory duties arising under the
17
Corporations Act or separately as I have done below. Under either approach it was necessary
to recognise that they were different duties with different tests for existence and breach.
A good answer first explained the test for each duty, and then applied the test to the facts to
decide to whom Cath that duty. If Cath owed a duty it was then necessary to explain the test
for breach and to apply that test to decide if the duty had been breached.
Duty of care
The starting point was the test as set out in Esanda, and expanded by vulnerability.
ESL
It was clear to most students that Cath owed ESL a duty of care under the Esanda test as it
was reasonable for ESL to rely on Cath and that she had assumed a responsibility to ESL
based on her role as CEO. Most also considered that Cath’s position within ESL resulted in
ESL being, to some degree, vulnerable to Cath.
The test for breach was whether a reasonable CEO in Cath’s position would have acted as she
had acted.
There were two major events which were relevant:
1)
the negotiation of the loan with NB and in particular the information Cath gave Alan;
and
2)
the development and marketing of TLO.
Would a reasonable CEO have told Alan the things she had given that this might give rise to
liability for ESL (as explored in Assignment A)? Would a reasonable CEO have focused so
much attention on the development of a product that she ignored relevant information about
the market and dismissed advice from the FD as over-reacting? Or would a reasonable CEO
focus on a product which had the possibility to ‘dominate the market in Australia, and
potentially the world, for rechargeable batteries’?
A good answer discussed arguments for and against the possible breach before coming to a
conclusion.
Some students noted that a director could also owe her company an equitable duty of care,
breach of which gave rise to equitable remedies.
Other parties
Did Cath owe a duty of care to any other parties?
It was not appropriate to repeat the law already explained, although some students referred, in
addition, to the Williams case.
Most students considered that Cath’s involvement with NB might give rise to a duty of care.
For Cath to take on a duty of care to NB the relevant facts to be considered were those
surrounding the negotiation of the loan. Was it reasonable for NB to rely on Cath, particularly
given her explanation of her expertise and opinions, or should NB have acted on its own due
diligence and not rely exclusively on Cath? Was Cath taking on responsibility to NB during
the negotiations? Was NB in some way vulnerable to Cath?
If it was decided that Cath did owe a duty of care to NB it was necessary to consider whether,
on the facts, she had breached that duty by failing to perform to the standard of the reasonable
CEO of a borrower.
18
Some students considered whether Cath may have taken on a duty of care to any other party.
LOL was the most likely party but there not enough facts to explore this in any depth.
Fiduciary duty
A good answer explained the 2 ways a fiduciary relationship can arise: either from the
relationship itself, or under the common law test as set out in Hospital Products.
ESL
On the facts it was clear that Cath was either a director or officer of ESL and that the
relationship automatically caused Cath to owe fiduciary duties to ESL . The three fiduciary
duties needed to be considered, and then applied to the facts to decide if there had been a
breach.
Most students were confident that Cath hadn’t been in a situation of conflict although some
considered that her ego may have caused her to pursue her own goals at the expense of ESL.
Again most were confident that she hadn’t made a profit at the expense of ESL although some
questioned whether she might have been offered a bonus for the deal.
The duty which was of most concern was the duty to act in good faith. While a number of
students considered that she was always acting in a way to benefit ESL others were concerned
about the two issues discussed under ‘duty of care’; ie the way she had negotiated the loan
and more importantly her failure to focus on relevant issues dealing with the development and
marketing of TLO. Does a CEO act in good faith if she dismissed advice from the FD as overreacting? Does she act in good faith if she focuses on a product which had the possibility to
‘dominate the market in Australia, and potentially the world, for rechargeable batteries’?
Having considered the issues and looking, where relevant, at arguments for and against, it was
necessary to decide if Cath had or had not breached her fiduciary duties to ESL.
Other parties
It was clear from the facts that Cath was not in a relationship with any other party which
could automatically give rise to fiduciary obligations, or satisfy the common law test set out
in Hospital Products.
Some students noted that toward the end of the facts ESL was approaching insolvency and
this could give rise to extended duties for directors.
Corporations Act
ESL
The relevant duties are set out in sections 180 – 183. Sections 180 and 181 only apply to
directors and other officers.
Students were confident that, in the absence of facts indicating that Cath was a director, she
satisfied the test for ‘officer’ in s 9 of the Corporations Act given that she ‘(i) makes or
participates in making decisions affecting the whole (or a substantial part) of the corporations’
business; or (ii) has the capacity to affect significantly the corporation’s financial standing’.
She therefore owed ESL all duties in sections 180 – 183.
The duty under section 180 is similar to the common law duty of care and the earlier
discussion of that duty was therefore relevant. Many students noted, however, that there was a
special statutory defence under subsection 180 (2). It was not sufficient to simply copy the
provisions; a discussion was necessary to decide if Cath could use the defence. The key area
where she would have difficulty was para c) - did she inform herself about the subject-matter
to the extent she reasonably believed to be appropriate. Cath’s response to Julia’s warnings
may prevent her using the defence as the word ‘reasonably’ imposes an objective standard.
19
Section 181 is a statutory version of a fiduciary duty, and the discussion on the common law
duty could be referred to for this discussion.
Most students were confident that sections 182 and 183 were not breached on the facts.
Other parties
As Cath was not a director or officer of any other company this was not relevant.
Misleading and deceptive conduct
ESL
There were no relevant facts.
Other parties
All students knew that the statutory duty not to mislead or deceive was relevant in relation to
Cath’s dealings with NB. The duty was automatic as Cath was involved in ‘trade or
commerce’.
There were a number of Cath’s behaviors which breached the prohibition including the
information Cath gave NB in the meeting about ESL’s relationship with LOL. The use of the
name ‘Turn the Light On’ was also potentially misleading.
A number of students used the structure set out in the ‘Google’ case (Australian Competition
and Consumer Commission v Trading Post Australia Pty Ltd). For Cath to be in breach it
was not necessary that she intended to mislead or deceive, and it was not necessary that NB
suffer as a result of Cath’s conduct.
Some students considered other behaviour and raised the possibility that she may have
breached the duty to others, in particular LOL.
Susan Edwards
Grahame Cooper
April 2012
Past paper 2
Exam paper first semester 2011.
The exam paper then became the Assignment for 2nd semester 2011.
The facts are set out, and then the questions and Markers’ Comments for Part A and Part B.
Facts
Renoir Ltd is an art dealer who specialises in Australian art work. One of its subsidiaries,
Dobell Pty Ltd, was incorporated to acquire and display Australian paintings. Renoir’s main
source of income is dividends from Dobell.
Robyn Turner was appointed as Renoir’s Managing Director three months ago. She has just
received an e-mail from Australian Bank Limited (AB) dated 24th May 2011 which says:
20
“This is to advise that Dobell Pty Ltd has defaulted under the 10 year $5 million loan we
provided to it in July 2005. The last 2 repayments have not been paid. This is an event of
default under the loan.
We called in the loan one week ago. The outstanding amount has not been paid. Under the
terms of your security with us dated 16th July 2009 we now call on that security and advise
that if you do not pay the outstanding balance of $2,522,036 dollars within 14 days we will
sell all of the issued shares in Dobell.”
Robyn immediately reviewed Renoir’s involvement with AB. She learnt that:
1) At the time AB lent funds to Dobell in 2005 Dobell agreed to give AB equitable mortgages
over all art work Dobell acquired from time to time.
2) Dobell failed to make its loan repayment to AB on 25th June 2009 and AB threatened to
call in the loan.
3) On 28th June 2009 Dobell’s Finance Director, Alex Orange, sent an e-mail to Paul Jones,
Renoir’s MD at the time. It said that Dobell was trying to acquire some art by a new and
promising artist. The funds raised by showing that work around Australia, and overseas, were
anticipated by Alex to generate enough money to pay off all current debt for the Renoir
group. Alex warned that there were currently some problems with AB but that he was
confident that he would resolve the issue. Paul e-mailed back saying that the new art sounded
exciting, and that any problem with AB should be resolved quickly.
4) A large number of e-mails about the default passed between Alex and Wendy Wu, a
manager in the Security Department at AB in late June 2009. Alex had asked for a suspension
of the loan repayments until Dobell’s temporary cash flow problems improved. Wendy
refused this request. She said that she didn’t have authority to agree to such a proposal.
Wendy then e-mailed Alex on 2nd July 2009 and said:
“I have instructions from Head Office to deal with AB customers’ loan defaults. I am to either
call in the loan or take additional security from the customer over its assets valued at least at
150% of the outstanding amount. However, I will agree not to call in the Dobell loan if I can
get security from Renoir.
To resolve this matter I require, within 7 days, Renoir’s agreement to the security terms
attached. Formal documents will follow. If the security is not provided, all artwork held by
Dobell will be sold immediately. As the market for art work at the moment is the worst in 80
years it is not expected that the sale of the art will cover the outstanding loan balance. We will
then recover the outstanding balance from the Renoir group of companies, and, if necessary,
have relevant companies placed into liquidation. In addition I will instruct our legal team to
take action against all directors of all companies in the Renoir group.”
The additional security required was a transfer of all Renoir’s shares in Dobell to AB, and an
agreement that, for the balance of the term of the loan, all dividends and other amounts paid
to AB as a shareholder of Dobell were to be set off against Dobell’s outstanding loan.
5) The next document in the file was the formal security document signed by Wendy on
behalf of AB. It set out the security terms as required by Wendy and a new undertaking by
Renoir that it would pay any legal or other costs incurred by AB in enforcing the security.
There was also a note by Alex which said that, given the threats from AB and the need to
resolve this issue for the sake of the Renoir group, he had agreed to this deal as he thought
this was the only way to keep the group solvent. He wasn’t sure that AB could do the various
things set out Wendy’s e-mail, but he wasn’t going to spend money taking legal advice. As he
was a director of Dobell he didn’t want to risk being sued personally, or expose the other
directors to such a risk.
6) The transfer of shares was recorded in Dobell’s share register.
21
7) Robyn also learnt that in January 2011 Dobell had required some short term funding to
arrange an exhibition of some of its indigenous artwork at the Sloane Galleries in London so
as to capitalise on recent interest. Dobell obtained a 6 month loan from Sydney Bank Ltd
(Sydney), a bank which had sent Dobell its marketing documents. Sydney claimed to be the
leading bank in the small loans segment of the Australian market and promoted its ‘no fuss’
approach to lending by not requiring security. Sydney was willing to lend Dobell the
$500,000 it required at a very attractive interest rate. Sydney’s loan manager, John Easy,
asked Alex if Dobell had granted security over any of its assets and Alex assured him that
there were no securities. Alex had forgotten about the equitable mortgages over the art work
as that had been agreed a long time ago. Sydney’s only additional requirement was that
Sydney have the right to display Dobell’s art work to the value of $1 million in Sydney’s
buildings until the loan was fully repaid. John explained that this was an example of the
creative and ‘no fuss’ approach Sydney was bringing to bank transactions. The funds were
advanced when Dobell sent the signed loan agreement to Sydney. Five of Dobell’s paintings
were given to Sydney and were displayed in Sydney’s offices.
Robyn is concerned about a number of issues.
Assume that it is now May 2011.
Part A questions
Consider some of the legal risks which these facts raise by answering the following questions:
1.
Is the security agreement between Renoir and AB over the shares in Dobell an
enforceable contract? [14 marks]
For the next question you should identify any contracts which are necessary for your analysis
and then assume that they are enforceable.
2.
Has Alex taken on a duty of care or a fiduciary duty to anyone on these facts? Has he
breached any of those duties? [6 marks]
Part A
Marker’s Comments
These Comments set out issues which were relevant to Part A of the assignment. A good
answer followed the structure that had been used in class, namely:
•
explain the relevant law;
•
apply the law to the relevant facts, looking at arguments for and against the law
applying to those facts; and
•
come to a brief conclusion.
It was important to remember that there was no one ‘correct’ answer to many of these issues
(although there were many wrong answers!). It was possible to consider the facts in a number
of ways. The essential issue was to demonstrate a sound understanding of the law and an
ability to apply that law to a set of facts. It was possible to come to a number of different
conclusions.
Students who did not explain the relevant law, and/or who failed discuss how the law applied
to the facts, suffered in relation to grading of their assignment.
22
All students recognised that the appropriate way to answer question 1 was to work through
the ‘contractual checklist’ as we had done in class. Some of the issues were straightforward
and could be dealt with briefly while others required much greater discussion to allow some
form of conclusion to be reached.
Question 2 required a consideration of the law of duty of care and fiduciary duty, both the
existence of the duty and possible breaches.
To the extent that there were not enough facts this needed to be stated. In the real world it is
important to know when you might not have all necessary facts as this could be a source of
risk.
The questions and my comments are set out below:
1)
Is the security agreement between Renoir and AB over the shares in Dobell an
enforceable contract? [14 marks]
Who are the parties?
The parties to the possible contract are Renoir and AB.
Most students identified that AB was the party wanting to enforce the possible contract.
Capacity
In the absence of conflicting facts, it was possible to assume that Renoir and AB were
Australian companies incorporated under the general companies’ legislation and that
accordingly s 124 applied to give both the capacity to enter into the contract.
Authority
A good answer began with an explanation of the relevant law on authority – the law on actual
express, implied and ratified authority and to the extent relevant, ostensible authority and
statutory assumptions.
AB’s agent
Wendy was a manager in the Security Department at AB. The relevant question was whether
she had authority to bind AB to the possible security contract with Renoir.
By applying the test for actual express authority to the facts it was clear that there were no
facts showing what Wendy’s express authority was. This did not prove that she did or did not
have actual express authority to take the security from Renoir; it just meant that we did not
know from the facts.
Accordingly it was also not possible to determine what implied authority she may have
arising from the express.
Most students considered whether Wendy may have actual implied authority arising from her
appointment to her position. While it could be noted that Wendy had been appointed a
manager in the Securities Department and that this might give her authority to take security,
there were no facts to suggest that she could do so without anyone else signing off. Some
students noted that she was only ‘a manager’ and that Wendy herself advised that her
authority was limited – she said that she didn’t have authority to suspend the loan repayments
and had ‘instructions from Head Office to deal with customer defaults’. It was not clear from
the facts that the proposed security from Renoir complied with Wendy’s ‘instructions’ as it
did not come from ‘the customer’ and there were no facts that it was for at least 150% of the
outstanding amount. Many students raised uncertainty about the authority of the person at
23
‘Head Office’ who gave Wendy instructions. A good answer also noted that Wendy could not
hold herself out as having the necessary authority, so that her statements in her e-mail on her
authority could not be relied upon alone.
Finally a good discussion should have considered ratification. On the facts there was possible
ratification: the Dobell loan was not called in, and the shares in Dobell were transferred to
AB, along with the dividends. While there was no clear act by AB which adopted Wendy’s
entry into the contract, many students considered that the surrounding facts, and the passage
of almost 2 years, indicated that the entry into the contract had been ratified by AB.
As Renoir did not want to enforce the possible security contract, issues of Wendy’s possible
ostensible authority or issues in relation to the statutory assumptions were not relevant.
Renoir’s agents
Alex was Dobell’s Finance Director. If the relevant law had previously been explained it was
not appropriate to repeat the explanation.
It appeared from the facts that Alex had negotiated the possible security contract between
Renoir and AB, and accepted the offer of security on behalf of Renoir. It was therefore
necessary to identify facts which could show whether Alex had authority to bind Renoir to the
possible security contract. This involved applying the tests for the different types of authority
to the facts.
There were no facts to show whether Alex had actual express authority to bind Renoir to the
terms of the possible contract.
Some students considered the exchange of e-mails between Alex and Paul, and in particular
Paul’s comment that ‘any problem with AB should be resolved quickly’. A good answer
noted that these words were very general and vague and did not state that Alex had authority
to enter into the particular security contract with AB on behalf of Renoir. Accordingly it was
possible to end the discussion of Paul’s statement at that point, and look for other possible
sources of authority.
Some students took the view that Paul’s statement was sufficient to be a delegation to Alex to
enter into the security contract. If this approach was taken it was then appropriate to discuss
whether Paul had the necessary authority to be able to delegate to Alex. The facts stated that
Paul was Renoir’s Managing Director. There were no other facts about his possible authority.
In the absence of facts about Paul’s express authority some students considered that he might
have implied authority arising from his appointment as the Managing Director. If this
argument was used it was then necessary to consider the scope of authority he might have,
and whether the nature of the contract with AB was part of the day-to-day business of Renoir.
A good answer noted that the absence of facts left the issue of authority open; ie it was not
possible to assume that Alex did or did not have the necessary authority. It may be, for
example, that Alex had been appointed Renoir’s agent at some time earlier to deal with
security issues. There were no facts on which to base a discussion.
The third type of actual authority, ratification, needed to be considered. The facts stated that
Renoir’s shares had been transferred to AB. On that basis dividends would be paid to AB. As
this transfer happened almost 2 years earlier Renoir would be aware of this. These facts
provided a basis for ratification. While it was not possible to refer to a single act by Renoir to
adopt Alex’s conduct, many students considered that there were enough facts to support the
argument.
24
Some students also considered ostensible authority and the statutory assumptions. Although
these issues were relevant as AB wanted the contract to be enforceable there were no facts to
show that Renoir had held Alex out as having authority to bind Renoir to the contract. Using
the statutory assumptions was also unsuccessful - Alex was not a director of Renoir, and
there were no facts that Renoir had held Alex out as an officer or agent prior to this deal.
Is there an agreement?
Offer acceptance and certainty
A good answer began by explaining the tests for these terms, either by quoting directly the
tests in the Notes, or by using the student’s own words. It was then necessary to apply each
test to the facts.
Offer
Most students argued that the offer came from Wendy on behalf of AB. There was some
uncertainty as to the nature of the offer. Although Wendy’s e-mail of 2nd July attached the
‘security terms’ it could be argued that this e-mail did not satisfy the test for ‘offer’ as AB
was not yet willing to be bound. This could be shown by the ‘formal document’ which was to
follow the e-mail, and the new term, suggesting that AB only intended to be legally bound
when Renoir accepted the terms set out in the formal document.
Acceptance
On the facts it was not clear when there had been a ‘final and unqualified assent’ by the
offeree – Renoir. The facts at point 5 said that there was a note from Alex saying that he had
agreed to the deal. There were no facts as to how this had happened. Some students argued
that he had signed a copy of the ‘formal document’ and returned it to AB, but this was an
assumption.
In the absence of facts many students noted that an acceptance can be made by conduct and
that the transfer of the shares to AB could be acceptance by conduct.
Certainty
There were no facts on the certainty of the offer which was accepted. The full formal
document was not attached to the assignment. It was therefore only an assumption that the
formal document was, or was not, certain.
Is the agreement enforceable?
Intention
In general students knew that in the absence of a clear statement as to the parties’ subjective
intention it was appropriate to start with the presumption that, as the transaction was
commercial, the parties intended to enter into a legal relationship.
It was then necessary to consider whether there were facts to rebut the presumption. Some
students noted that Alex had been reluctant to enter into the security contract, and argued that
this rebutted the presumption. Others treated this as information showing that there was not a
rebuttal; in fact it showed how seriously Alex had treated the decision to accept.
Consideration
Again it was appropriate to begin with an explanation of the legal test and then to apply the
test to the facts. As AB wanted the promise of security to be enforceable AB needed to show
that it gave consideration to enforce Renoir’s promise of security. On the facts AB’s
consideration was giving up its right to call in the loan in exchange for the security.
Vitiating factors
Most students noted that Renoir did not want to be bound to the security. They then went on
to look for arguments that the contract was void or voidable. It should be noted, however, that
25
if there were vitiating factors which could cause the contract to be voidable, it was too late to
rescind the contract.
The 2 key areas discussed were possible misrepresentations/ fraud and undue influence/duress
by AB. It was important to consider the effect on the principal – Renoir – rather than just the
agent, Alex.
Most students considered that Wendy’s email at point 4 of the facts showed AB using its
position of power over Renoir to cause Renoir to provide the security. Views differed as to
whether this was a wrongful act or threat/ illegitimate pressure/unlawful threats or an
improper use by an ascendant person of such ascendancy. While some students considered
that the facts satisfied the test/s, others argued that this was just hard negotiation by a bank.
Some students considered that Wendy’s email misrepresented AB’s power and ability to
impose remedies, and/or that this was fraudulent. Views varied on these issues. Given the
nature of the statements some students again argued that this was just tough bargaining by
AB.
Form
There was no form requirement for this type of security contract, although some students
pointed out that the share transfer may have required a written document.
Instructions for question 2 said:
For the next question you should identify any contracts which are necessary for your analysis
and then assume that they are enforceable.
2. Has Alex taken on a duty of care or a fiduciary duty to anyone on these facts? Has he
breached any of those duties? [6 marks]
This question required an explanation of the tests for the existence of a duty of care, fiduciary
duty and for a breach of each duty. Having explained the law it was then necessary to
consider whether Alex had taken on the duties, and if so, had he breached any of them.
Duty of care
A good answer recognised that a duty of care can arise in a number of ways, including under
the Esanda test and s 180 of the Corporations Act. It was then necessary to explain the
relevant law.
Dobell:
On the facts Alex automatically owed s 180 duty of care to Dobell. Having recognised this
many students then considered whether Alex may have breached the duty, or whether the
defence in s 180(2) was available. On the facts some students considered that Alex had not
made his decision ‘in good faith and for a proper purpose’ as he didn’t take legal advice and
was in part motivated to save himself from being sued.
In addition, most students discussed Alex’s common law duty of care and/or equitable duty of
care. The test for breach could then be applied, with a discussion on whether Alex had
performed to a reasonable standard.
Renoir:
The law under s180 was relevant in relation to Renoir if it was considered that Alex satisfied
the test for ‘officer’ of Renoir.
26
The instructions said that it was to be assumed that all contracts were enforceable, and this
indicated to most students that Alex was Renoir’s agent.
As an agent Alex would take on a common law duty of care to Renoir. This could be
discussed in the context of Alex (agent) owing a duty of care to Renoir (the principal). Here
the argument would be on the basis that it could be reasonable for Renoir to rely on its agent.
Other parties
Some students argued that Alex may have taken on a duty of care to other parties, in
particular Sydney Bank and/or AB. On the facts it was difficult to argue that Alex had taken
on a duty of care to either of those companies. There were no facts showing an assumption of
responsibility or reasonable reliance. If it had been argued that a duty existed it was then
necessary to consider whether there had been a breach of that duty; had Alex performed to a
reasonable standard?
Fiduciary duty
A good answer recognised that a fiduciary duty can arise in a number of ways: under the
common law and under s 181 of the Corporations Act. It was then necessary to explain the
relevant law.
Dobell
As Dobell’s Finance Director, Alex automatically owed Dobell fiduciary duties under the
common law, and also under s 181 of the Corporations Act. Many students concluded that
Alex had breached his fiduciary duty to Dobell because he allowed his personal interest to be
in conflict with his duty to Dobell and he failed to take advice in a situation where he
considered that the deal with AB had problems.
Renoir
The same issues arose for Renoir as Alex had acted as Renoir’s agent and/or was an officer,
which was automatically fiduciary.
Other parties
There were no facts to support a fiduciary relationship between Alex and either Sydney Bank
or AB.
Susan Edwards
August 2011
Part B
Facts
Same as for Part A
Questions
Assume that it is now May 2011.
For these questions you should identify any contracts which are necessary for your analysis
and then assume that they are enforceable.
1) In the transaction between Sydney and Dobell what legal duties, other than contractual
duties, has each of Sydney and Dobell taken on to each other and which duties, on these facts,
might each have breached?
[7 marks]
27
2) a) Under the existing law, if AB cannot recover the full amount of its loan from Dobell,
can it sell some or all of the art work? Consider the nature of the security, registrability and
competing securities when answering.
b) Assume that the PPS had come into force one month before all of these transactions had
been entered into, and that all relevant securities had attached.
Could AB retain some or all of the art work? Consider the nature of the securities, perfection
and priority when answering.
[13 marks]
Part B
Marker’s Comments
The assignment was marked out of 20 and marks ranged from 9 to 19.
As always, these Comments provide an overview of the issues that were available for
discussion in an answer. No one answer was expected to cover all issues.
While most students acknowledged the sources for direct quotes or paraphrasing, some
students failed to do this, or only did so rarely. Acknowledging the source of material is an
academic requirement.
In the exam, however, it will be sufficient if you just put quote marks around the copied or
paraphrased portions – do not spend time telling me whether the quotes have come from in
the exam.
You were told to identify any contracts which were necessary for your analysis and then to
assume that they are enforceable
Question 1
In the transaction between Sydney and Dobell what legal duties, other than contractual duties,
has each of Sydney and Dobell taken on to each other and which duties, on these facts, might
each have breached? [7 marks]
A good answer identified the relevant duties and explained the legal tests for the existence
and breach of each duty.
It could be assumed that the transaction between AB and Sydney had been created under an
enforceable contract, and that each of Alex and John’s agency contracts with their employers
were enforceable.
Duty of care
Most students were able to explain the relevant test for the existence of a duty of care, based
on the test in the Esanda case. It was then necessary to apply the test to the facts to decide if
either Sydney or Dobell owed this duty to the other, and if so whether there was a breach.
Sydney to Dobell - on the facts Sydney was a bank, while Dobell was a company which
acquired and displayed art. In Sydney’s promotional material Sydney claimed that it was the
“leading bank in the small loans segment of the Australian market”. On this basis it was
possible to argue that it would be reasonable for Dobell to rely on Sydney in relation to
banking matters.
It could be argued, however, that as Dobell had borrowed previously, and had a finance
director to advise on financing matters, Dobell should be able to make its own decisions in
relation to borrowing and providing security, and not rely on Sydney.
Other arguments could be raised as to whether Sydney had taken on a duty to Dobell. If a
duty arose it was necessary to examine the facts to determine if Sydney had breached its duty
28
to Dobell. The test for a breach of duty is whether or not Sydney had performed to the
standard of a reasonable bank in that type of transaction. On the facts Sydney claimed that it
didn’t take security, although it appeared that it was taking some form of security over 5
paintings. If Dobell was entitled to rely on Sydney in relation to its statement about security,
taking security was a breach of Sydney’s duty to Dobell.
Dobell to Sydney – having explained the law it was not necessary to repeat it.
The issue became whether it was reasonable for Sydney to rely on Dobell, and in particular
when Dobell assured Sydney that there were no other securities. Some students considered
that it was reasonable for Sydney to rely on this statement made on behalf of Dobell while
others considered that, as a bank, Sydney should have made its own enquiries. If the equitable
mortgage had not been registered some students said that this fact alone gave rise to a duty as
Sydney may have had no other way to determine whether there were pre-existing securities.
If a duty was owed most considered that the assurance by Alex was a breach of Dobell’s duty.
Fiduciary duties
It was first necessary to explain what a fiduciary relationship was and then explain the two
ways a fiduciary relationship might arise – automatically, or under the common law test in
Hospital Products.
Sydney to Dobell - some students pointed out that although a banker/customer relationship is
not automatically a fiduciary relationship the relationship may be fiduciary if the facts are
consistent with the Hospital Products test. On the facts given it was difficult to find facts
which showed that Dobell was vulnerable to abuse by Sydney.
Dobell to Sydney – again, in general, students were not able to find facts which satisfied the
test.
Misleading and deceptive
A good answer set out the duty and explained that it arose automatically. It therefore applied
to both Sydney and Dobell.
Sydney to Dobell – if any of the statements made by Sydney to Dobell had the capacity to
mislead or deceive Dobell, or be likely to mislead or deceive Dobell, Sydney would be in
breach of this prohibition. Students focussed in particular on Sydney’s statement that it did
not take security.
Dobell to Sydney – using the same test students focused on the assurance by Dobell’s finance
director that there were no other securities created by Dobell.
Question 2
a) Under the existing law, if AB cannot recover the full amount of its loan from Dobell, can it
sell some or all of the art work? Consider the nature of the security, registrability and
competing securities when answering.
Nature of security
The facts stated that AB’s security was an equitable mortgage over all art work Dobell
acquired from time to time.
It was necessary to explain what an equitable mortgage was and the nature of the property
over which it was taken - tangible property (chose in possession). On the facts a security
which transferred equitable title to a lender from time to time as a borrower acquired artwork
was appropriate.
29
Some students asserted that the security was a floating charge. This argument was based on
various assumptions such as that the art work was to be sold from time to time. There was
nothing in the facts to support an assumption that the art work was to be sold by Dobell. The
facts stated: “Dobell Pty Ltd, was incorporated to acquire and display Australian paintings”
As there were no facts to argue that the security was anything other than an equitable
mortgage it could be assumed that AB had equitable mortgages over the art work as acquired.
A good answer correctly noted that an equitable mortgage was a consensual security and that
it could be assumed that it was an enforceable contract.
Finally some students appeared to misunderstand the question. The question only asked about
a possible sale of artwork. It was therefore not relevant to discuss shares.
Registrability
Most students knew that the starting point to determine whether a security was registrable
under the Corporations Act was the definition of ‘charge’ in s 9 of the Corporations Act,
which provided that a ‘charge’ included charges and mortgages. It was then necessary to
decide if AB’s equitable mortgage satisfied one of the tests for relevant property set out in the
nine categories of charges in s 262 (1). On the facts AB’s equitable mortgage satisfied para
(d) – a charge on a personal chattel.
There were no facts as to whether AB had registered its security. In the absence of facts it was
equally possible that it had or had not been registered.
Competing securities
On the facts Sydney appeared to have an interest in 5 of Dobell’s paintings.
It was not clear what the nature of this security was.
Many students considered that a security in the form of a pledge had been created and noted
that possession of the paintings had been given in the context of a loan. This lead to the
assumption that the paintings were intended to provide security. A pledge of paintings was
considered an appropriate form of security over tangible property (chose in possession).
A number of students explored this issue more fully and questioned whether the transfer of
possession of the paintings was intended to be a security (particularly on the part of Dobell
who had been told that Sydney did not require security). If it had not been intended to be
security, it was necessary to decide the rights, if any, that Sydney had over the paintings.
Some students considered that the common law might give Sydney (as a banker) the right to
retain its customer’s property until Sydney was paid out, giving rise to a common law
possessory lien.
If it was assumed that the parties intended to create a security in the form of a pledge then this
was consensual, and any necessary contract could be assumed to be enforceable. If it was
decided that this could be a lien it was not necessary to find an agreement as a lien arises by
operation of the law.
Both a pledge and a lien are not registrable.
If it was assumed that Sydney had a pledge it was then necessary to determine priority
between AB and Sydney for the five paintings in Sydney’s possession. As a pledge is not
registrable the common law rules applied to determine priority between Sydney and AB.
It was clear that if Sydney had a pledge this gave Sydney a legal interest. Sydney would
clearly take priority over all security created after its pledge. The issue was whether it took
priority over AB’s prior equitable mortgage. The common law rules provide that “if the
holder of the legal interest has acquired that legal interest bona fide for value without notice
30
of the earlier equitable interest” it can take in priority to that earlier equitable interest (Notes,
Session 11, para [2.2.1]).
A good answer considered where this test applied to the facts. Sydney would try to show that
it satisfied the test in para [2.2.1]: that it was such a bona fide party, etc.
A number of arguments could be considered. In favour of Sydney it could be argued that it
had asked about security and had been assured by Alex that there was no security. If AB had
not registered its equitable mortgage this would also assist Sydney’s argument that it ranked
first
Against Sydney’s priority position it was relevant to determine whether AB had registered its
equitable mortgages. If the mortgages were registered this would give Sydney notice
(constructive if Sydney had not searched ASIC’s Register) and AB would rank first. If
Sydney had not searched the Register it would also negate its good faith. Some students also
suggested that Sydney’s conduct of saying it did not take security, and then taking possession
of 5 paintings, was a failure to act in good faith which would result in AB ranking first.
After discussing arguments for and against it was necessary to decide whether AB had
priority over the five paintings. In the absence of any facts in relation to the other art work AB
did not have other competing priority issues for all the other art work.
If it had been decided that Sydney only had a lien it was noted that the lien allowed Sydney to
retain possession until paid out, thereby ranking ahead of AB.
Remedies
As AB had an equitable mortgage it was important to deal with the equity of redemption to
allow AB to sell some or all of the artwork free of the equity of redemption. This could be
done either by foreclosure or through the implied statutory power of sale if the equitable
mortgage had been created in writing.
The power to sell the artwork arose either if agreed between AB and Dobell, if implied by
section 109 of the Conveyancing Act 1919 NSW (if the mortgage had been created in
writing), or judicial sale. This power could be exercised over all artwork. If Sydney ranked
first for its 5 paintings Sydney would be paid out first from the proceeds of sale of its
paintings.
b) Assume that the PPS had come into force one month before all of these transactions had
been entered into, and that all relevant securities had attached.
Could AB retain some or all of the art work? Consider the nature of the securities, perfection
and priority when answering.
Nature of the security
Security interests created by the PPS are suitable for all forms of property. An equitable
mortgage satisfies the test for a security interest in s 12 (1).
Some students considered that AB had lent money to Dobell to allow Dobell to purchase the
artwork over which the security interest was granted. While there were no facts to confirm
this, if that was correct AB’s security would be a ‘purchase money security interest’. This was
relevant to priority.
The instructions stated that it was to be assumed that the security interest had attached; it was
therefore not appropriate to discuss whether or not AB’s security had attached.
Perfection
It was appropriate to note that for a security interest to be enforceable against a third party it
should have attached and either be possessed by the secured party, be perfected by control or
the grantor had signed an agreement which adequately described the collateral (s 20 of the
PPS). ‘Control’ is not relevant for art work and on the facts AB did not possess the artwork.
31
Accordingly AB could only enforce against a third party if Dobell had signed an appropriate
agreement. There were no facts although most assumed that AB’s equitable mortgage had
been created in writing and signed by Dobell.
The second step was to consider the main rule for perfection in section 21 of the PPS Act
which requires attachment and then either registration, possession or control. Control is not
appropriate and was therefore not relevant to the discussion.
Again on the facts AB did not have possession and the issue was whether AB’s security
interest had been registered. There were no facts.
Priority
As with question a) above (on the current law) it was possible to decide that Sydney had a
pledge. If it was a pledge it was a security interest as it is one of the examples of a security
interest listed in sub-section 12 (2) of the PPS.
If it was considered that Sydney had a lien this was not a security interest under the PPS
(section 8). It was an interest for Sydney, but it would not be governed by the PPS – just as
liens are not regulated by the Corporations Act.
If it was decided that Sydney had a pledge the above rules for enforceability and perfection
applied. Here Sydney’s pledge had attached, and satisfied both enforceability against third
parties and perfection by being possessed
Priority rules are set out in the Notes for Session 11 on page 25. Using the default priority
rules AB would take priority over Sydney if AB had registered its security interest before
Sydney’s pledge was created. If AB had not registered, or not remained registered, Sydney
would take priority for the 5 paintings.
A specific priority rule for purchase money security interests is set out in para [5.3] d of the
Notes for Session 11. This provides that a purchase money security interest can take priority
over other interests. If either AB or Sydney had such an interest its security would take
priority.
For all other art work there was no competition.
Remedies
The Notes set out the procedure to be followed for AB to retain the art work.
AB must first seize the artwork from both Dobell and Sydney (para [6.4.2]) and then give
notices to retain the art work. If neither Sydney nor Dobell gave notice of objection AB could
retain the art work. In relation to Sydney, it might consent to AB retaining its 5 paintings if
Sydney was paid out the balance Dobell owed it.
--------------------------------Susan Edwards
October 2011
32
Past paper 3
Exam paper second semester 2010.
The exam paper then became the Assignment for first semester 2011.
The facts are set out, and then the questions and Markers’ Comments for Part A and Part B.
FACTS
In 1985 Music Pty Ltd (MPL) was incorporated for the purpose of promoting Australian
music. In 2004 Tom and Jenny Chan purchased all of the issued shares in MPL and were
appointed its only directors. Tom and Jenny are brother and sister.
At a board meeting held shortly after the acquisition of MPL Jenny outlined her plan to
expand MPL’s business into modifying music systems for office buildings through the
development of new digital technology. Tom was an accountant and said that MPL’s financial
position was excellent and he supported the change of direction for MPL. Jenny was an
engineer and understood the technical issues arising from the new technology. She was
appointed Managing Director.
After 1 year of experimenting and testing MPL launched the new system in Sydney and
Melbourne where it was very successful. MPL had acquired a 10 year licence for some of the
software used and a patent for aspects developed by MPL. MPL purchased hardware from
local suppliers, and then modified the hardware to support the software and patented process.
The suppliers of the hardware to MPL used their standard contract terms. These terms
provided that payment must be made within 30 days of delivery. Title to the goods did not
pass until the entire purchase price for each delivery had been paid.
MPL’s business was successful until late 2008 when the GFC resulted in a fall in sales. By
early 2009 MPL had a number of problems. It had no new business and the economy was
predicted to worsen. Tom had retired as an accountant and was no longer involved in the dayto-day activities of MPL, preferring to spend his time writing crime novels.
In February 2009 Jenny approached Mark Jones, MPL’s relationship manager at Old Bank
Ltd (OB), wanting to borrow $600,000 for MPL for 5 years at OB’s lending rate for small
borrowers. Jenny had prepared a document for the meeting setting out MPL’s successes
introducing new technology to Australia and a plan for a new advance in music systems in
lifts. The document contained copies of the most up-to-date accounts for MPL prepared by
Tom and a list of assets over which MPL would grant the following security for the loan:
 a fixed charge over factory equipment, and
 a floating charge plus negative pledge over all hardware owned by MPL from time to
time and all patents and licences granted to MPL.
Mark told Jenny that he would discuss the proposal and get back to her within the next few
days.
After the meeting Mark discussed Jenny’s proposal with Emma, a senior lending manager at
OB. Emma said that the proposal looked good but the value of the licence and patents was
difficult to assess. She also didn’t think that the factory equipment was worth the value the
accounts indicated. Despite these concerns Emma told Mark to take the security offered by
MPL. Even if it was of little value it might look good to other lenders. Emma said that Mark
should proceed only if MPL provided the security set out in Jenny’s document and:
33


if one or more other lenders could be found who would lend no more, in total, than
half the amount of the loan (to ensure that OB retained control); and
if the directors of MPL gave unlimited indemnities for all possible liabilities.
Mark was able to attract two new lenders: NBC Bank Ltd (NBC) and Small Bank Limited
(SB). NBC had said that if the unlimited indemnities could be obtained it would lend
$250,000, and SB indicated that it would lend $150,000. It was agreed that OB should hold
all the security on behalf of the lenders and receive and disburse funds on behalf of the
lenders. Mark was very happy with this outcome as OB would only need to lend $200,000.
Mark contacted Jenny and advised that she and Tom would need to sign some documents in
addition to the security offered by MPL. Mark told Jenny that the security from the directors
would not be called on as MPL had always been a very successful company which led the
way in new technology in Australia. He said that if all the necessary security documents,
together with the loan agreement, were signed and returned to OB within 5 days OB would
make the funds available to MPL by the end of the month. He did not explain that the
directors’ security was an unlimited indemnity.
Jenny accepted Mark’s explanation of the documents and met Mark the next day. On behalf
of MPL she signed the loan and fixed and floating charge documents. Mark gave her the two
directors’ indemnity documents which had been prepared by OB’s legal department. He again
told her that these were just a formality, and would never be called on. He said he needed
both directors’ documents signed and returned before any funds were advanced.
Jenny had dinner with Tom that night and told him that OB had finally agreed to lend
$600,000. She said she would use the funds to acquire new licences to allow MPL to develop
the new product for lifts. She said that she had signed all the necessary documents for the loan
and security, but that there was an extra one from each of the directors acknowledging the
existence of the loan. Tom wasn’t happy to sign any documents but accepted Jenny’s
description and signed it. Jenny then signed hers. Neither Tom nor Jenny read their document.
Jenny delivered both signed indemnities to Mark the next day.
As soon as Mark received the signed indemnities he forwarded copies of all the signed
security and the loan agreements to NBC and SB, and each transferred their share of the funds
to OB. $600,000 was then advanced to MPL on the last day of the month.
Although MPL developed 2 new products which were initially successful, by December 2010
MPL was having cash flow problems and defaulted on its December repayment to OB. You
work for OB. Consider some of the legal risks in these transactions by answering the
following questions:
Part A questions
1) Can OB successfully require Jenny or Tom, or both, to make payment under the
indemnities they signed?
[12 marks]
For the next question please identify any contracts which are relevant to your analysis, and
then assume that each such contract is enforceable.
2) Has Mark or Tom taken on and breached a duty of care to anyone on these facts?
[8 marks]
Part A
34
Marker’s Comments
These Comments provide an overview of the issues that students were expected to
discuss in Part A of the assignment.
In general students used the structure that had been used in class to answer the
questions, namely:

explain the relevant law;

apply the law to the relevant facts, looking at arguments for and against the
law applying to those facts; and

come to a brief conclusion.
Students who did not explain the relevant law, and/or who failed to look at arguments
for and against the relevant law applying to the facts suffered in relation to the
grading of their paper.
All students recognised that the appropriate way to answer question 1 was to work
through the ‘contractual checklist’ in the same way we had done in class. Some of the
issues were straightforward and could be dealt with briefly while others required
much greater discussion to allow some form of conclusion to be reached. To the
extent that there were insufficient facts this needed to be stated.
Question 2 required a consideration of the law of duty of care, both the existence of
the duty and possible breaches.
The questions and comments are set out below:
1) Can OB successfully require Jenny or Tom, or both, to make payment under the
indemnities they signed? [12 marks]
Who are the parties?
The parties to the possible contracts were OB and Jenny and OB and Tom.
The question asked about the indemnities and whether OB could enforce them
against Jenny and Tom. You were not asked about the enforceability of the loan. All
discussion on the loan was therefore not relevant, except to the extent that it could be
referred to as the consideration for the indemnities and /or its role in relation to
possible undue influence. Issues in relation to MPL were also not relevant. Discussion
of irrelevant issues gained no marks.
Capacity
Once the parties were identified this issue was straightforward. In the absence of
conflicting facts, it was possible to assume that OB was an Australian company
incorporated under the general companies’ legislation and that accordingly s 124 of
the Corporations Act applied to give it the capacity to enter into indemnities.
In relation to Jenny and Tom it could be assumed they were over 18 (given the time
periods and qualifications) and in the absence of other facts could be assumed to be of
sound mind.
Authority
35
A good answer began with an explanation of the relevant law on authority – what is
express actual, implied actual and ratified authority.
As Jenny and Tom had not acted through agents it was not appropriate to consider
authority in relation to either.
Students knew that for OB to be able to enforce the possible indemnities it needed to
show that its agents had authority. Jenny and Tom would not want to enforce the
indemnities and therefore issues of ostensible authority and statutory assumptions
under s 129 of the Corporations Act were not relevant.
If, however, there was a discussion of Jenny’s possible authority to act on behalf of
OB in relation to having Tom sign the indemnity, all aspects of authority could be
discussed at this point. Clearly Tom would want to argue that Jenny had authority
from OB, and this would allow a discussion of actual and ostensible authority, and
even statutory assumptions.
OB’s agents
Mark was a relationship manager. It was not clear what his actual authority was, but
his title suggested that he looked after the relationship between OB and customers.
This could be considered to be a different function from taking security in the form of
indemnities.
There were no facts as to Mark’s express actual or implied actual authority before his
discussion with Emma. It was therefore necessary to consider whether he had been
given actual authority to bind OB to the indemnities by Emma ie, a delegated
authority.
Emma was a senior lending manager. There were no facts on her express actual
authority although some students argued that she may have been given at least
implied actual authority on appointment to the position of senior loans manager to
enter into indemnities as part of her day-to-day work of making loans. There were no
facts either way for this, although some students suggested that she would have the
necessary authority as Mark sought her out to discuss the issues, and she gave him
clear instructions on what to do.
It was finally possible to question whether Mark’s actions had been ratified. The
funds were advanced to MPL only after the signed indemnities were received by
Mark and NBC and SB had been advised. This was not a clear act of ratification of
the indemnities; loans can be advanced for a variety of reasons, including on the
signing of the loan and security documents from MPL.
It was possible at this point to consider whether Mark had the necessary authority to
bind OB and whether his conduct, of which Tom and /or Jenny might complain and
raise as a vitiating factor, could be attributed to OB.
Is there an agreement?
Offer acceptance and certainty
A good answer began by explaining the tests for these terms, either by quoting
directly from the tests in the Notes, or by using the student’s own words.
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Offer
Most students considered that an offer came from Mark when he gave Jenny the
indemnity documents. Some students suggested that an offer came when Mark first
told Jenny of the need for extra documents from the directors. Others correctly knew
that at this early stage there was lack of certainty of the terms for the indemnities and
OB would not be willing to be bound at this stage.
When Mark handed the documents to Jenny this was the first time Jenny knew of the
terms. At that stage OB was willing to be bound if Jenny and Tom accepted.
Acceptance
On the facts there was a ‘final and unqualified assent’ by Jenny and Tom when the
signed indemnities were delivered to Mark by Jenny.
Certainty
While the indemnities were prepared by OB’s legal department it was an assumption
that the terms were certain. There were no facts.
Is the agreement enforceable?
Intention
In general students knew that in the absence of a clear statement as to the parties’
subjective intentions it was appropriate to start with the presumption that, as the
transaction was commercial, the parties intended to enter into a legal relationship.
It was then necessary to consider whether there were any facts to rebut the
presumption. Given Mark’s clear statements that ‘the security from the directors
would not be called’ and that the documents ‘were just a formality and would never
be called on’ Jenny and Tom could argue that they did not intend to enter into a
legally binding security. Jenny was reluctant and only did so after Mark advised that
the indemnity wouldn’t be called on. Tom also did not want to sign and only did so
when Jenny told Tom the document was ‘only’ to acknowledge the existence of the
loan. This could be argued to show that Jenny and Tom considered that they were
entering into nothing more than an unenforceable ‘letter of comfort’.
Consideration
Again it was appropriate to begin with an explanation of the legal test and then to
apply the test to the facts. As OB wanted to enforce Jenny and Tom’s promise OB had
to show that it had given consideration in exchange for the promises to indemnify. As
the loan funds were not to be advanced until the indemnities were received it was in
general decided that the promise to lend was the ‘price’ OB paid for the indemnities.
If there was doubt that the loan was consideration for the indemnities some students
suggested that the indemnities may have been in the form of a deed, and therefore OB
could still enforce the promise of indemnity. There were no facts to take this further.
Vitiating factors
As Jenny and Tom did not want to be bound by the indemnities they would look for
arguments that the contracts were void or voidable by reason of the application of one
or more vitiating factors.
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For Jenny or Tom to complain about the manner in which the indemnities were
obtained it would be necessary to show that Mark had the authority from OB to do the
things of which Jenny and /or Tom complained. At this stage Jenny and Tom would
want Mark’s acts to bind OB and they could argue not only actual authority, but also
ostensible authority and statutory assumptions.
The 2 important areas to explore were possible misrepresentations/ fraud by OB’s
agent Mark and any undue influence/unconscionable conduct by him (and also Jenny
as OB’s agent in relation to Tom). These vitiating factors would lead to a
consequence of voidability, i.e, the indemnities being liable to be set aside by Tom
and Jenny.
Mark made two significant statements to Jenny about the indemnities, and failed to
advise at a critical point:
1)
2)
“the security from the directors would not be called on as MPL had always been
a very successful company which led the way in new technology in Australia”,
(“and did not explain that the directors’ security was an unlimited indemnity”);
and
“He again told her that these were just a formality, and would never be called
on”.
.
Most students discussed these issues and the possibility that they could be fraudulent
and /or a misrepresentation. Different arguments were run when considering the tests
for fraud and misrepresentation and their application to the facts, including the nature
of the negotiation and the sophistication of Jenny and Tom.
In relation to possible undue influence or unconscionable conduct students took a
number of different approaches. For there to be undue influence the conduct
complained of needed to be done by an agent of OB. This led to a consideration of
Mark’s role, and Jenny’s role (with Tom). In relation to unconscionable conduct it
was clear on the facts that the ‘Amadio’ test did not apply to Tom or Jenny given their
education and work experience, although some noted Tom’s possible ‘old’ age given
his retirement. There could be a ‘Garcia’ argument that, when Jenny returned Tom’s
signed indemnity to OB, the bank should have been on notice that Tom was in an
emotionally dependent relationship with Jenny, and that OB should have required
Tom to be independently advised. On the current state of the law this argument was
unlikely to succeed.
As emphasised in class, there is not one ‘correct’ answer to these issues, and students
were given credit for a correct explanation of the law and a valid application of the
law to the facts, with the possibility of coming to a number of different conclusions.
Form
There is no form requirement for an indemnity in New South Wales.
Instruction for question 2:
For the next question please identify any contracts which are relevant to your analysis, and
then assume that each such contract is enforceable.
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2) Has Mark or Tom taken on and breached a duty of care to anyone on these facts?
[8 marks]
This question required two parts for a good answer:
1)
2)
an explanation of the test for the existence of a duty of care, and breach
(with damages flowing from that breach); and
an application of the tests to the facts.
Having explained the tests it was necessary to consider each of Mark and Tom’s
relationships, and the possibility that each may have assumed the duties and breached
one or more duties of care.
A number of students became confused when discussing the possible duties. The
question asked about Mark and Tom’s breach. As confirmed on the forum, the issue
was personal liability, and not that undertaken as an agent for any other party.
Mark
To OB:
Mark was a relationship manager at OB. He was therefore clearly an employee of OB.
A good answer began with a recognition that Mark’s relationship with his employer
was the key relationship to consider.
Most students recognised that employment gave rise to the necessary proximity, and
that Mark owed OB a duty of care in relation to his actions as described in the facts. If
a duty was owed it was necessary to consider whether there was a breach of Mark’s
duty – ie a failure to perform to an objective standard of the ‘reasonable’ relationship
manager. Would a reasonable person in Mark’s position have described the
indemnities in the way Mark did, and accept the signed indemnities without, in the
case of Tom, checking on the circumstances and manner in which Tom had signed? In
addition, would a reasonable person comply with Emma’s instruction to ensure that
OB had at least 50% of the debt with MPL?
If Mark’s conduct gave rise to a loss by OB, in particular by not being able to call in
the indemnities, OB could consider claiming against Mark for breach of duty of care.
Corporations Act – s 180 was only relevant if Mark was an officer of OB. There were
various views as to whether Mark could be an officer. If he was, then the statutory
defence in s 180 (2) was also relevant.
To Jenny and/or Tom
For Mark to owe a duty of care to Jenny or Tom the test for duty of care needed to be
satisfied on the facts. While Jenny, and subsequently Tom, may have relied on Mark’s
statements, it was likely that any such reliance would have been on Mark as an agent
of OB rather than personally. There were no facts to suggest that Mark had stepped
outside his role as an agent to assume personal liability.
To MPL, NBC and SBL.
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There were no facts on which to base an argument that Mark had taken on a personal
duty to any of these companies.
Tom
To MPL
As a director Tom owed MPL a duty of care and s 180 was also relevant to impose a
statutory duty of care on Tom. There were very few facts about Tom’s activities other
than he prepared accounts but was not involved in the day-to-day activities of MPL,
preferring to spend his time writing crime novels. It seemed from the facts that Tom had not
been involved in the negotiation of the loan, and was not aware of the content of the loan and
security documents when Jenny had signed them that morning. If his failure to monitor
MPL’s activities had led MPL into its current difficulties Tom could be seen to be in breach
of his duties.
To OB
Some students suggested that Tom may have owed a duty of care to OB as his accounts were
shown to OB in order to obtain the loan. Applying the test of assumption of responsibility and
reasonable reliance it would not be reasonable for a bank to make a lending decision based
solely on accounts prepared by a director of the borrower, and the facts showed that Emma
did not rely on those accounts as she believed that some of the figures were incorrect.
Susan Edwards
March 2011
Part B
Facts
Same as for Part A
Questions
Assume that it is now May 2011.
For these questions you should identify any contracts which are necessary for your analysis
and then assume that they are enforceable.
1) In the transaction between Sydney and Dobell what legal duties, other than contractual
duties, has each of Sydney and Dobell taken on to each other and which duties, on these facts,
might each have breached?
[7 marks]
2)
a) Under the existing law, if AB cannot recover the full amount of its loan from
Dobell, can it sell some or all of the art work? Consider the nature of the security,
registrability and competing securities when answering.
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b) Assume that the PPS had come into force one month before all of these
transactions had been entered into, and that all relevant securities had attached.
Could AB retain some or all of the art work? Consider the nature of the securities,
perfection and priority when answering.
[13 marks]
Assignment Part B
Marker’s Comments
These Comments provide an overview of the issues that students were expected to
discuss in their answer.
As advised in class, and as set out in the instruction sheet for the assignment, all
sources must be acknowledged.
Question 1
Has OB taken on and breached a fiduciary duty to SB or MPL on these facts?
[5 marks]
A good answer began with an explanation of what a fiduciary relationship is, and how
it could arise; both automatically and under the common law test as described in the
Hospital Products case.
The facts reminded many students of issues we considered in Sessions 8 & 9. Some
students attempted to answer by assuming that the transaction was a typical
syndication. This was not appropriate for these facts as they did not fit neatly into
such a structure, in particular as MPL did not appoint OB as its arranger (see para
[4.12.1] in the Notes for Sessions 8 & 9 where the appointment of an arranger is
discussed, including the granting of a mandate).
A good answer considered the facts and whether, on the facts, a fiduciary relationship
could arise between OB and SB, and between OB and MPL.
SB
OB’s relationship with SB could be divided into two time periods – pre and post SB
entering into a contract with OB.
Pre loan
On the facts OB approached SB and NBC asking them to lend. OB had concerns
about the value of the security offered by MPL but did not mention this. NBC said
that it would only lend if OB obtained the unlimited indemnities. It was not clear if
SB also required the indemnities before it would lend.
At this initial stage it was not clear that OB was in a fiduciary relationship with SB.
To the extent that OB was now negotiating the loan and security on behalf of the three
lenders it could be argued that there was an agency relationship, which is
automatically fiduciary. Some students also considered whether the test in the
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Hospital Products case could be relevant to give rise to a fiduciary relationship. On
the facts there was nothing to show that there was a large imbalance of power
between OB and SB or that SB was vulnerable to abuse by OB. They were both banks
and SB would be expected to be able to assess risk on its own behalf.
If it had been decided that a fiduciary relationship did exist it could then be
questioned as to whether there had been a breach of any fiduciary duty. It seemed
from the facts that OB withheld information from SB about the quality of the security.
This could be seen as a failure to act in good faith to SB at that time.
If it had been decided that there was not a fiduciary relationship at that time, there
could be no breach of fiduciary duty.
Post loan
It was agreed by the lenders that OB would hold the security on behalf of the lenders,
and receive and disburse funds on behalf of the lenders. This gave rise to an agency
relationship or a trust relationship, both of which are automatically fiduciary. That
fiduciary relationship only arose when the loan and security contracts were in place.
There were no facts to suggest that at that time OB breached fiduciary duties to SB.
Some students attempted to analyse this relationship by assuming that OB had been
acting as the ‘arranger’ for a syndicate loan. There were no facts to suggest that this
had happened. Some students also tried to fit the facts into a form of ‘participation’. It
was not necessary to do this.
MPL
The difficult issue here was to find any facts which could be relevant to the
establishment of a fiduciary relationship between OB and MPL.
Some students assumed that OB had been appointed by MPL to ‘arrange’ the loan for
it. There were no facts to support this. There were no facts that MPL knew of any
dealings between OB and the two other lenders. There was no mention of a mandate.
A banker/customer relationship was not automatically fiduciary.
Some students attempted to apply the Hospital Products test to the facts. Again there
were no facts to support an argument that there was a large imbalance of power
between OB and MPL, or that MPL was vulnerable to abuse by OB.
In the absence of facts to support a fiduciary relationship arising, there could not be a
breach of a fiduciary duty.
Question 2
A) Under the existing law explain the nature of the securities provided by MPL
over its property, whether they are registrable, any issues of priority (only on
the facts provided), and whether OB can appoint a receiver or take
possession of some or all of the secured property? [9 marks]
Students knew that it was necessary to work through the issues raised in the question,
which took the form of the security checklist used in class.
Nature of the security and the property.
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Here the security was described as a fixed charge over factory equipment and a
floating charge plus negative pledge over hardware, patents and licences. A good
answer explained both the nature of each type of property and each of the 3 types of
security.
How created
As each type of security is created by agreement it was necessary to recognise this,
and then rely on the assumption that the agreement was created in an enforceable
contract.
Registrable
Most students knew the test for a registrable charge and explained why the fixed
charge was registrable under s262 (1) para (d) of the Corporations Act and the
floating charge under para (a). Some students indicated that, as the floating charge
covered, in part, patents and licences, para (e) was also relevant. As the negative
pledge was part of the security creating the floating charge, the negative pledge would
be registered if/when the floating charge was registered. A number of students noted
that there was no evidence of registration of securities as such.
Competing securities
A good answer recognised that on these facts, and under existing law, there were no
competing securities in relation to OB’s securities. There were facts, however, which
could impact on the interests OB took and OB’s remedies.
The facts stated that “the suppliers of the hardware to MPL used their standard
contract terms. These terms provided that payment must be made within 30 days of
delivery. Title to the goods did not pass until the entire purchase price for each
delivery had been paid.” Most students discussed the impact of these provisions.
While they do not satisfy the definition of ‘charge’ in the Corporations Act they do
impact on OB’s ability to exercise rights over the hardware. They could result,
potentially, in MPL only having an equitable title over recently acquired hardware for
which it had not yet paid. The equitable title would arise because of the availability of
the equitable remedy of specific performance; the expectation that the suppliers would
transfer legal title to MPL once MPL had paid the suppliers. MPL’s equitable title
could be subject to the floating charge. Equitable title gives OB less protection than
legal title.
When the floating charge crystallised it became a fixed charge. All property held by
MPL satisfying the description of the property subject to the floating charge would
become immediately subject to that fixed charge. All other property received after
that date would not be subject to OB’s security. The date of crystallisation was
therefore important. Some students suggested it was when MPL defaulted. Others
argued that it could have been earlier.
The suppliers’ legal titles would therefore impact and take priority over any interests
MPL or OB might claim. The legal titles are not registrable.
Remedies
MPL was in default for its December repayment. A good answer recognised that
secured creditors are given the right to exercise remedies only if there has been a
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default under the loan or security agreements. It could be assumed that the failure to
make the December repayment was such a default. In addition, most students assumed
that the loan default resulted in the floating charge crystallising and converting to a
fixed charge. Accordingly the remedies are those for a fixed charge in relation to all
the relevant property.
OB would be able to appoint a receiver in a number of situations: if agreed by the
parties in their original agreement; by implication if the security was created in writing,
and if neither of these were possible, an application could be made to court for an
equitable remedy of appointment of receiver, although it was very unlikely to be
granted on these facts. A receiver could be appointed for all relevant property both
tangible and intangible.
OB could take possession of tangible property if the parties had agreed that OB could
exercise such a remedy. There were no facts to suggest whether such an agreement had
been made. In relation to the hardware the suppliers may be able to take their unpaid
hardware ahead of OB.
B) If the PPS had come into force before these transactions had been entered into,
you may assume that any relevant security interest has attached. Explain the nature
of the securities provided by MPL over its property, any issues of priority (only on
the facts provided), and whether OB can dispose of some or all of the secured
property? [6 marks]
Again it was appropriate to work through the issues raised by the question.
The question told you to assume that the security interests had attached and you were
earlier told to assume that all relevant contracts were enforceable. Accordingly there
were no marks for discussion of those issues.
Nature of the security
A good answer briefly explained that there is only one overall form of security interest
under the PPS. It is suitable for all forms of property in the facts. Fixed and floating
charges are included as security interests (section 12(2)).
Third parties
To ensure that OB’s securities were enforceable against third parties it was necessary to
show, in accordance with s20 of the PPS, that OB had possession, control or a written
agreement describing the security. Clearly on the facts there was such a document.
Perfection
If OB’s securities had attached it was then necessary to know if they had been
perfected. Perfection for the types of property described in the facts can be achieved in
two ways – registration or possession. The facts suggested that OB did not have
possession. It was uncertain whether or not OB had registered its security interests.
Priority
As set out under 2 a) above, the facts stated the terms under which the hardware was
sold. Under the PPS this type of sale gives rise to a security interest. Some students
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considered s 12(2) (d) as the provision under which the security arose as a result of the
retention of title provisions. Others considered that the security interest was a ‘purchase
money security interest’ under s 14 (a).
Again it could be assumed that these securities had attached, and that under the sales
contracts a relevant written agreement had been entered into.
In relation to perfection the facts provided that the suppliers did not have possession of
the hardware following delivery to MPL. It was uncertain whether or not the suppliers
had registered their security interests.
The Notes for Session 11 identified default rules and some specific rules in relation to
priority under the PPS.
If it had been decided that the security interest taken by the suppliers was based on
retention of title the default rules applied. On that basis, as set out in para [5.2], priority
was determined as follows:
a)
b)
c)
between 2 or more unperfected security interests – the order of
attachment
between a perfected security interest and an unperfected security
interest – the perfected security
between 2 or more perfected security interests – by the order of their
‘priority time’ – ie from when ‘continuously perfected’.
If it had been decided that the security interest was a purchase money security interest
para [5.3] set out a specific rule for such a security. This stated that a purchase money
security interest was an exception to the ‘first in time’ rule and would give the suppliers
priority over OB if both or neither of the security interests had been registered.. If only
one party had registered its security that would take priority.
Remedies
Most students knew that it was necessary for OB to first seize collateral before it could
dispose of the collateral. It was appropriate to consider the steps necessary for seizure
and disposal for the different types of property.
May 2011
Susan Edwards
.
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